DBRS: Ratings for Nordea Group Unaffected by Q2 Results – Senior at AA
DBRS has commented today that the ratings for Nordea Group (Nordea or the Group) are unaffected following the announcement of the Group’s interim report for the period of January through June 2008. DBRS maintains AA Senior Unsecured Debt & Deposits ratings and R-1 (high) Short-Term Debt & Deposits ratings for Nordea Bank AB and its main operating banks. The trend on all ratings remains Stable.
Nordea reported EUR 3.953 billion in total operating income for H1 2008, up 3% from H1 2007. Net profit was EUR 1.768 billion for H1 2008, down 6% from the year-ago period, as expenses and loan losses increased more than income. Total income at EUR 1.992 billion for Q2 2008 was up 2% year-over-year and on a linked-quarter basis. Quarterly net profit declined 15% year-over-year, but held largely stable (plus 1%) from the previous quarter. Given the difficult market environment, DBRS considers Nordea’s performance as solid, demonstrating the Group’s resilient franchise and its strong earnings power.
Net interest income grew to EUR 1.230 billion in Q2 2008, up 18% from the year-ago quarter and 4% from Q1 2008. Rising loan volumes and stable to slightly higher margins drove the increase. Commission and fee income of EUR 518 million in Q2 2008 declined 5% from the year-ago period. Asset management commissions fell markedly, as Nordea’s assets under management decreased 12% from June 2007, due to lower market valuations and net outflows in retail funds. Rising lending-related fees due to higher loan volumes partly offset the decline.
Income from life insurance and pension services was stable. However, due to negative investment performance in the Life segment of (0.4%) in Q2 2008, Nordea utilized EUR 230 million of its financial buffers to meet the guaranteed return on its life insurance products. While the Life segment retains significant buffer capital of EUR 1.261 billion, DBRS will closely monitor investment performance in the Life segment going forward.
Net gains on items at fair value decreased 41% in Q2 2008 from Q2 2007, to EUR 198 million. The reduction was due to 1) the negative impact of EUR 50 million due to an interest rate hedging position, 2) EUR 20 million of specific valuation losses due to the ongoing credit market turmoil, and 3) the absence of a EUR 45 million extraordinary gain on equity holdings that occurred in Q2 2007. These negative effects related to market turmoil were manageable, given the earnings generated in other parts of Nordea’s diverse franchise.
DBRS views Nordea’s asset quality as sound, with very low loan losses at 0.06% of gross lending in Q2 2008 and impaired loans constituting 0.35% of total lending. However, DBRS notes that non-performing loans have increased to EUR 576 million as of June 2008, up 18% from June 2007 and up 13% from December 2007. Deteriorating asset quality in the Baltics has prompted additions to collective reserves. DBRS expects impairments and loan losses to increase going forward. DBRS is monitoring Nordea’s exposure and the strong loan growth that the Group is generating, albeit from a low base, in the Baltics, Poland and Russia, given increased uncertainty about the economic outlook in the region. DBRS views the risk as manageable as Nordea’s total lending exposure of EUR 12.6 billion to the Baltics, Poland and Russia constitutes only 5% of its total lending, and is well diversified across these countries.
Nordea’s liquidity profile remains sound. The Group continued to issue public covered bonds and unsecured debt in Q2 2008, despite ongoing turmoil in credit markets. The ratio of total lending to total deposits increased to 184% as of June 2008, as lending to the public grew 18% since June 2007, while deposits increased 11%. Excluding assets funded with covered bonds, however, the lending-to-deposits ratio was at 133%. Nordea indicated that it expects slower loan growth for the remainder of the year and that it is focusing on growing deposits. If successfully achieved, DBRS sees these trends easing pressure on the lending-to-deposits ratio going forward.
DBRS views Nordea’s capitalization as sufficient, considering the Group’s sound asset quality and stable, recurring earnings profile. The Group’s regulatory Tier 1 ratio was 7.0% as of June 2008, down marginally from 7.1% a year ago. Excluding transition rules that limit the capital relief from the change from Basel I to Basel II capital rules, the Tier 1 ratio would have been 7.9% under Basel II. Given the continued turmoil in financial markets and the need to maintain strong capital, DBRS will monitor trends in Nordea’s capital ratios and its risk profile.
DBRS views Nordea as systemically important in the Nordic region. As such, DBRS believes that the Group would likely receive some form of timely systemic support in case of need, which underpins an SA-2 support assessment by DBRS. Nordea’s rating is consequently positioned one notch above its intrinsic assessment equivalent.
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All figures are in euros unless otherwise noted.
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