Training on sovereign risk credit analysis, October 24

ACRA affirms ААА(RU) to JSC Nordea Bank, outlook Stable

The credit rating of JSC Nordea Bank (hereinafter, the Bank) is based on the very high likelihood of extraordinary support from the Bank’s parent company whose creditworthiness is high. The Bank's standalone creditworthiness assessment (SCA) is high, which is a result of the adequate capital adequacy, risk profile and liquidity and funding assessments.

Nordea Bank is a credit institution that ranks 58th by assets and 31st by equity among Russian banks. The Bank’s beneficial owner (100% shares) is Nordea Bank AB, the parent company of Nordea Group, one of the largest financial corporations in the Northern Europe. The Bank focuses on corporate lending.

Key rating assessment factors

Very high likelihood of shareholder extraordinary support. Nordea Group (hereinafter, Nordea Group), represented by its parent company Nordea Bank AB (hereinafter, the Supporting Institution), is ready to fund and inject capital into the Bank.

The resulting assessment of country risk of the foreign Supporting Institution's jurisdiction of presence (Sweden, Norway, Finland, Denmark) against Russia's country risk and the assessment of the Supporting Institution’s creditworthiness are determined by ACRA as strong.

The tightness of relations between the Bank and its shareholder is also assessed as strong, given that:

  • There is a pronounced operating integration (in particular, the parent company has established a number of Bank’s corporate procedures and risk management standards);
  • The Bank’s board of directors includes mainly representatives of Nordea Bank AB;
  • The Group is the main source of the Bank’s liabilities;
  • The Group issues guarantees on some loans granted by the Bank.

In view of the above, the Bank’s credit rating is on par with that of the Russian Federation.

Medium business profile assessment. A relatively high assessment of the Bank’s franchise is determined by the volume of its capital, the quality of its brand, and the stable customer base. The quality of Bank’s corporate governance that takes into account foreign operating experience is assessed as satisfactory. The conservative development strategy of the Bank looks realistic. The Bank’s ownership structure is transparent, and the Bank’s shareholder boasts strong business reputation. On the other hand, low diversification of the Bank’s operating income sources limits its business profile assessment (the share of non-interest income amounts to approximately 16% of receipts from current operations).

The capital adequacy assessment has been downgraded to adequate following the downgrade in the baseline capital adequacy assessment to satisfactory, because higher dividend payments have pushed the averaged capital generation ratio (ACGR) for the last five years down into the negative zone. On the other hand, capital adequacy ratios of the Bank and its subsidiaries are high (the group of JSC Nordea Bank) (N1.2 was 26.39% as of May 1, 2019; N20.2 of the group was 27.99% as of April 1, 2019), which allows the Bank to withstand a significant (over 500 bps) growth in the credit risk.

Adequate risk profile assessment is based on the high quality of the loan portfolio and its increased concentration on the top 10 groups of affiliated borrowers. Given the high quality of issued loans and the fact that the parent entity provides guarantees for a number of the largest loans, ACRA limits the negative impact of high concentration on the assessment of the loan portfolio quality.

ACRA notes that the creditworthiness of the key borrowers of the Bank is high. The Bank’s loan portfolio contains 0.9% of NPL90+, while the share of loans regarded by the Agency as potentially problem is not more than 2%. The share of loans granted to companies that operate in real estate and construction industries does not exceed 7% of Tier-1 capital.

In ACRA's opinion, the Bank's risk management system matches the specifics and scale of its business. The risk management system satisfies the requirements of the Group; the Bank has introduced up-to-date risk measurement techniques that are used in determining risk appetite. Stress tests have been carried out on a regular basis.

Adequate funding and liquidity assessment stems predominantly from the high volume of liquid and high-liquid assets. The short-term liquidity shortage indicator (STLSI) calculated by ACRA shows that, under the base case scenario, the Bank has RUB 38 bln of excessive liquidity, and in the stress scenario, the liquidity surplus is about 24% of the Bank’s liabilities. ACRA also notes that the funding profile of the Bank is balanced against the current asset profile. The Bank's long-term liquidity shortage indicator (LTLSI) is above 100%, which corresponds to the 'strong' assessment.

The main funding sources of the Bank include, in almost equal shares, funds of credit institutions (mainly, the parent entity and other companies within the Group) and funds of corporate clients. At the same time, the Bank's concentration on funds of the largest lenders/depositors remains high.

Key assumptions

  • The Bank will stick to its conservative business model and maintain the high quality of its loan portfolio;
  • Nordea Bank AB will retain its shareholder and operating control over the Bank;
  • Tier 1 CAR (N1.2) will be above 12% on the 12 to 18-month horizon.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A negative rating action may be prompted by:

  • Negative changes in shareholders' propensity to support the Bank;
  • A loss of shareholder or operating control over the Bank by Nordea Group.

Rating components

SCA: a.

Adjustments: none.

Support: on par with the RF.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating has been assigned under the national scale for the Russian Federation and is based on the Methodology for Credit Ratings Assignment to Banks and Bank Groups Under the National Scale for the Russian Federation, Methodology for Analyzing Relationships Between Rated Entities and Supporting Institutions outside the Russian Federation, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.

The credit rating assigned to JSC Nordea Bank was first published on June 30, 2017. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.

Disclosure of deviations from the approved methodologies. ACRA assessed the Bank’s risk profile factor one notch higher since the risk of high loan portfolio concentration is offset by the fact that the largest loans issued by JSC Nordea Bank are guaranteed by Nordea Bank AB.

The assigned credit rating is based on the data provided by JSC Nordea Bank, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the consolidated IFRS statements of JSC Nordea Bank and the group of JSC Nordea Bank, as well as the standalone financial statements of JSC Nordea Bank, drawn up in compliance with the Bank of Russia Ordinance No. 4927-U of October 08, 2018. The credit rating is solicited, and JSC Nordea Bank participated in its assignment.

No material discrepancies between the provided information and the data officially disclosed by JSC Nordea Bank in its financial statements have been discovered.

ACRA provided no additional services to JSC Nordea Bank. No conflicts of interest were discovered in the course of credit rating assignment.

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