Date of Release: 2006-11-28

Nordea Group

Assigns Ratings to Main Banks of Nordea Group at AA and R-1 (high) with Stable Trends

Dominion Bond Rating Service (DBRS) has assigned first-time long-term senior ratings of AA and short-term ratings of R-1 (high), all with Stable trends, to Nordea Bank AB (Sweden) and to the Nordea Group’s (Nordea, or the group) main operating banks: Nordea Bank Danmark A/S, Nordea Bank Finland Plc, and Nordea Bank Norge ASA.

At their high levels, the ratings and their Stable trends are underpinned by the solid credit fundamentals of the entire group, which have been reinforced and are better stabilised in recent years, as Nordea witnessed a visible degree of success in better integrating its several domestic franchises in the Nordic region.

The sound fundamentals are defined by the following factors:
(1) the group’s pan-Nordic franchise, with large market positions in Finland, Denmark, Sweden and Norway
(2) a strategy aimed primarily at retail banking, with good complements in regional corporate and investment banking, asset management and life insurance
(3) superior and well-tested risk management practices, leading to a reassuring degree of loan portfolio granularity, very good asset quality, low and well-controlled market risks and a proactive liquidity management which safely offsets the Nordea banks’ increasing reliance on market funds
(4) strong financial indicators, including superior earnings quality.

Last but not least, the ratings marginally incorporate DBRS’s expectation of some form of timely systemic support for Nordea in the extremely unlikely event of a stress scenario. That said, the Swedish government’s 19.9% stake in Nordea Bank AB’s capital does not in and of itself add any uplift to the ratings, and its transfer from the public sector -- which is currently being contemplated -- would in no way be considered by DBRS as a rating event.

A unique pan-Nordic franchise:
In its current form, Nordea is the result of several domestic and pan-Nordic bank consolidation transactions that occurred in the 1990s and early 2000s. In fact, DBRS considers Nordea as the first example of cross-border horizontal banking consolidation in Europe, offering a business model that has subsequently at times been emulated elsewhere on the Continent, with various degrees of success.

To some extent, the success of Nordea’s consolidation process has been the consequence of the consensus-based Nordic culture, but also of resolute management action in the aftermath of the first cross-border transaction -- that between the Finnish and Swedish banks. Subsequently, however, the integration process has proceeded more slowly for a while, notably following the expansions in Denmark and especially in Norway. In recent years, however, resolute management steps have been taken and the cross-border integration process has achieved a marked degree of success.

Based on the current degree of business, strategic and financial integration among Nordea’s banks, DBRS indicates that the four main operating entities of the group carry the same ratings, defining similar credit-strength parameters. Nordea’s goal is for further integration going all the way to a legal merger, as a “societas Europaea,” among the four banks.

Strong management supported by well-balanced international growth strategy:
“We highly value Nordea management’s skills in balancing the specific strengths of the four banks’ national franchises with well-thought complementarities across the group, leading to positive synergies, better efficiency and effective cross-management,” says Anne Caris, Vice President, who is the lead analyst for Nordea.

DBRS also notes that Nordea has been pursuing a very cautious and well-focus international growth strategy, aiming measured expansion into Poland, the Baltic region and, more recently, Russia. The rating agency adds that it does not view this strategy as very risky, and that it expects Nordea to continue to operate within the same conservative strategic parameters -- avoiding significant foreign acquisitions that would alter its consolidated risk profile.

One important area of strength for the group is risk management:
“We have observed the evolution of risk management at Nordea over many years, and have been impressed by its consistency and very safe track record,” notes Sam Theodore, Managing Director for European bank ratings. The consolidated loan portfolio is well diversified, and several large individual exposures in fact are small fractions of group equity. Problem loans are dealt with at a very early stage. Market risks are very low for a group of Nordea’s size and business breadth, and trading revenues account for a small fraction of consolidated earnings. Reliance on retail financial services assures a high degree of earnings stability and predictability, adds the rating agency.

Well-diversified market funding base:
A relatively higher reliance on market funding is evident in recent years, although this is a trend followed by a large number of European banks faced with the challenge of funding loan portfolio growth. DBRS remarks, however, that Nordea’s market funding base is well diversified by geography, debt instruments and investor base. Short-term market funding remains at a relatively high level, but it is safely offset by a good liquidity cushion steered by proactive and effective liquidity management. In the future, covered bonds will represent an increasingly important source of market funds for Nordea -- a trend that DBRS views as very positive.

DBRS concludes that all the credit fundamentals cited above underpin an AA (low) intrinsic assessment equivalent.

Furthermore, the rating agency views Nordea as systemically important across the Nordic region -- in Sweden, Finland, Denmark and Norway alike. The four countries’ bank regulators’ oversight of Nordea is based on a Memorandum of Understanding agreed in 2003 and which takes note of the cross-border characteristics of the group. DBRS believes that Nordea would be likely to receive some form of timely systemic support in case of real need, which underpins an SA2 support assessment. At AA, the long-term ratings of the Nordea banks are consequently positioned one notch above the intrinsic assessment equivalent. That said, DBRS views the scenario of a financially sound group like Nordea needing any form of support as extremely unlikely for the foreseeable future.

Rating-change drivers:
Referring to rating-change drivers, DBRS notes that Nordea’s long-term ratings could benefit from a materially stronger earnings capacity, mainly from better optimising the customer base and from more dynamic revenue growth as renewed sales efforts gradually materialise. The rating agency adds, however, that such a scenario may be less likely given the increased bank competition in the Nordic market and Nordea’s own culture of avoiding excessive risks.

Conversely, ratings could be negatively affected by (1) a marked shift in strategy, in the sense of materially more aggressive international expansion going beyond the Nordic and Baltic markets, (2) high reliance on short-term market funding not supported by an appropriate liquidity cushion and (3) easing up of the group’s strict risk-management processes.

The following ratings have been assigned:
-- AA for Senior Unsecured Debt & Deposits to Nordea Bank AB, Nordea Bank Danmark A/S, Nordea Bank Finland Plc, and Nordea Bank Norge ASA
-- AA (low) for Subordinated Debt to Nordea Bank AB, Nordea Bank Finland Plc, and Nordea Bank Norge ASA.
-- A (high) for Hybrid Tier 1 Securities to Nordea Bank AB.
-- R-1 (high) for Short-Term Debt & Deposits to Nordea Bank AB, Nordea Bank Danmark A/S, Nordea Bank Finland Plc, and Nordea Bank Norge ASA.
-- R-1 (high) for Nordea Bank AB’s EUR 6 billion ECP Programme.
-- R-1 (high) for Nordea Bank AB’s EUR 6 billion French CP Programme.
-- AA for Nordea Bank AB’s EUR 20 billion EMTN Programme.
-- R-1 (high) for Nordea North America Inc.’s USD 12.5 billion USCP Programme.

DBRS notes that, at this time, it has not assigned ratings to Nordea Hypotek’s mortgage covered bonds.

Nordea AB is headquartered in Stockholm, Sweden, reporting total assets of EUR 329 billion at the end of September 2006. Nordea Bank Danmark A/S is headquartered in Copenhagen, Denmark, reporting total assets of EUR 102 billion at year-end 2005. Nordea Bank Finland Plc is headquartered in Helsinki, Finland, reporting total assets of EUR 124 billion at year-end 2005. Nordea Bank Norge ASA is headquartered in Oslo, Norway, reporting total assets of EUR 39 billion at year-end 2005.

The full report providing additional analytical detail is available by clicking on the link below or by contacting us at info@dbrs.com.

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