Date of Release: 2008-10-28

Nordea Bank AB

DBRS Comments on Interim Results of Nordea

DBRS has commented today that its ratings for Nordea Group (Nordea or the Group) are unaffected following the announcement of the Group’s interim results. DBRS maintains ratings of AA for Senior Unsecured Debt & Deposits and R-1 (high) for Short-Term Debt & Deposits for Nordea Bank AB and its main operating banks. The trend on all ratings is Stable.

Nordea reported net profit of EUR 847 million for Q3 2008, down 5% from the prior quarter and 9% below the year-ago quarter. Net profit for the first nine months of 2008 was EUR 2.6 billion, down 7% year-over-year. DBRS views this performance as strong, considering the challenging market environment. The Group generated robust results during Q3 2008, demonstrating the resilience of its franchise and successful risk management.

Nordea was negatively affected in Q3 2008 by persistent financial turmoil and a deteriorating economic environment across its footprint. These drove lower fee income from asset management, lower deposit-related fees and valuation declines in Nordea’s capital markets business. However, these negative effects were partly mitigated by robust growth in net interest income and lending-related fees, driven by solid volume growth and strong customer activity in capital markets, particularly risk mitigation products. As a result, total operating income in Q3 2008 was unchanged from the prior quarter and 4% higher than in Q3 2007. Higher expenses and loan losses as well as a higher tax charge caused the drop in quarterly net profit, which was still less than for some peers.

The Group reported EUR 50 million in valuation losses for Q3 2008 that affected its income statement. Losses of EUR 20 million were due to the bankruptcy of U.S. investment bank Lehman Brothers Holdings Inc., with another EUR 30 million due to widening credit spreads. Valuation losses also drove a loss of EUR 69 million that Nordea booked directly to equity in the quarter.

Loan losses increased to EUR 89 million in Q3 2008, more than double the prior-quarter level of EUR 36 million. Still, total loan losses for the first nine months of 2008 of EUR 146 million amounted to only 8 basis points of total lending to the public. Impaired loans were 0.40% of lending to the public as of September 2008, modestly up from 0.35% in June and in March. Total allowances covered 58% of impaired loans as of September 2008, compared to 63% in June.

Asset quality in Nordea’s home region of the Nordic countries remains good, although the Group has seen provisions increase and expects a further rise. Impairments have risen quickly to 1.45% of total lending in the Baltics; however, this amount is fully covered by collective allowances and the Baltics account for only 2.7% of Nordea’s total loan portfolio. As the economic environment deteriorates, DBRS expects Nordea’s credit costs to increase, but remain manageable, given the Group’s focus on the relatively wealthy and stable Nordic region and its strong recurring earnings capacity. DBRS will monitor how Nordea’s risk profile evolves, as the Group continues to grow its lending in less mature markets such as the Baltics, Poland and Russia.

Loans and receivables to the public increased by 14% from September 2007 to September 2008, to EUR 272 billion, while deposits and borrowings from the public rose 15% to EUR 155 billion. In Q3 2008, however, Nordea slowed down loan growth and focused on attracting deposits, which was reflected in lending increasing only 1% between July and September 2008, while deposits and borrowings from the public grew by 6% over this period.

DBRS views Nordea’s liquidity as strong, anchored by its stable retail deposit base. The Group has a well diversified funding base across funding instruments and investor base, with access to two large covered bond markets in Sweden and Denmark. While Nordea, like all financial institutions, has been affected by the disruption in interbank markets, the Group retained access to funding markets. Nordea placed an unsecured five-year extendible U.S. dollar note in July and a EUR 500 million subordinated bond in September.

Recent government actions, including from the Swedish government and the Swedish central bank (Riksbank), offer benefits for specific types of financial institution obligations, broaden deposit protection and provide access to capital from the government. DBRS is currently evaluating how these actions affect the ratings of individual banks and their specific obligations at a time when the continuing financial market disruptions and a slowing economy are pressuring banks’ financial fundamentals.

In the view of DBRS, Nordea is sufficiently capitalised, given its diverse, resilient franchise, recurring earnings capacity and quality of capital. DBRS notes, however, that the Group’s core Tier 1 ratio of 7.0% as of September 2008 under Basel II, taking into account transition rules, is lower than for some of its peers. Excluding transition rules, Nordea’s core Tier 1 ratio would have been 7.9%. The Group expects its core Tier 1 ratio to rise to approximately 9% after the application for its internal ratings-based (IRB) approach for the retail credit portfolio is approved.

Note:
All figures are in euros unless otherwise noted.