reducing, for example, credit risk. Nordea has, however, increased their Tier 1 capital ratio in 2009 through stock issues and this has, to some extent, prepared Nordea for the future and the regulations that will come with Basel III.
Total equity has risen in the last 5 years and especially in 2009. The following section will elaborate on liabilities and equity and analyze further how Nordea has financed itself.
Choice of ratios
To illustrate Nordea‟s capital raising the following figures and ratios have been chosen:
Interest-Bearing Debt
Regulatory Capital
According to Basel II, a bank holding company must have a Tier 1 capital ratio of at least 4%, a solvency ratio (Tier 1 and Tier 2) of at least 8% and an equity ratio of at least 4%. To be well capitalized a bank holding company must have a Tier 1 capital ratio of at least 6%, a solvency ratio of 10%, and an equity ratio of at least 5%.
Tier 1 capital is defined as capital of the same or close to the character of paid-up, capital-eligible reserves and a limited portion hybrid capital loan (perpetual loans) instruments (maximum 30%
of Tier 1)379. Profit may only be included after the deduction of a proposed dividend. Goodwill and deferred tax assets are deducted from Tier 1380. Tier 2 capital is divided into perpetual loans and dated loans. The total Tier 2 amount may not exceed Tier 1381. Dated Tier 2 loans may not exceed half the amount of Tier 1382. Tier 1 capital is an interesting key figure as this figure expresses how sound the capital base of Nordea is. Furthermore, Tier 1 capital expresses how well Nordea is prepared for unexpected events and for the upcoming implementation of Basel III, which is expected to require higher Tier 1 capital. Investors will be interested in this key figure as it shows, to some extent, how much risk is involved in investing in Nordea.
The equity ratio expresses total equity as a percentage of the total liabilities. The key ratio is relevant because it shows the ratio between debt and equity. In other words, it shows the financial gearing in Nordea.
379 Nordea Annual Report 2009, p. 58
380 Nordea Annual Report 2009, p. 58
381 Nordea Annual Report 2009, p. 58
382 Nordea Annual Report 2009, p. 58
The solvency ratio expresses the core capital plus the supplementary capital as a percentage of RWA383. The key ratio is relevant as it shows the risk profile for Nordea which is determined after weighing the bank‟s balance sheet.
Interest-Bearing Debt
Of Nordea‟s total liabilities, the interest-bearing debt accounts for EUR 272,198m in 2007, EUR 309,512m in 2008, and EUR 336,286m in 2009. Of these, deposits by credit institutions and the public accounts for EUR 172,406m in 2007, EUR 200,523m in 2008, and EUR 205,767m in 2009. This accounts to 63% in 2007, 65% in 2008, and 62% in 2009 of Nordea‟s total interest-bearing debt. Table 34 shows the different maturities on the deposits from credit institutions and the public.
Table 34. Deposits
Source: Nordea Annual Reports
As Table 34 illustrates, most of Nordea‟s deposits are payable on demand or have a very short time to maturity, 66% in 2007, 58% in 2008 and 60% in 2009 of the deposits are payable on demand. If the time period is set to maximum 3 months, 91% in 2007, 92% in 2008 and 88% in 2009 of the deposits can be withdrawn. Nordea operates with a relatively short time horizon when it comes to financing the debt. The payable on demand deposits are deposits from credit institutions and can therefore be withdrawn when the client wants to.
383 www.finanstilsynet.dk - Tal & Fakta – Statistik, nøgletal og analyser - Nøgletal
Deposits EURm 2007 % 2008 % 2009 %
Deposits by credit institutions
Payable on demand 6,315 4 14,133 7 8,147 4 Maximum 3 months 19,026 11 35,208 18 32,076 16 3-12 months 3,751 2 1,847 1 9,198 4 Over 1 year 985 1 744 0 2,769 1 Total 30,077 17 51,932 26 52,190 25 Deposits and borrowings from the public
Payable on demand 107,658 62 101,892 51 114,762 56 Maximum 3 months 24,138 14 34,037 17 26,119 13 3-12 months 3,740 2 6,631 3 5,546 3 Over 1 year 6,793 4 6,031 3 7,150 3
Total 142,329 83 148,591 74 153,577 75
Total Deposits 172,406 100 200,523 100 205,767 100
Having the ongoing financial crisis in mind, it is a negative aspect to have such short-term financing, as refinancing can become problematic. Most of Nordea‟s assets are long-term loans or loans based on longer terms than the liabilities and a maturity mismatch exists. Different help packages from European governments have tried to loosen up the interbank markets, so banks have easier access to short-term financing. However, banks are still skeptical when they have to borrow money to each other on the interbank markets. In the case that clients suddenly decide to withdraw money, Nordea can find short-term financing on the interbank market, but higher rates will be paid when borrowing compared to before the financial crisis, and this can result in higher expenses for Nordea.
The shift from short-term financing to long-term financing is easier said than done, as in order to keep deposits on a long-term basis, higher interest rates have to be offered to the depositors. So, long-term financing comes at a cost. As Table 34 illustrates, Nordea has been able to reduce payable on demand deposits significantly from 2007 to 2008, and in 2009, this development have continued for deposits by credit institutions. However, in 2009, the development in deposits from the public that are payable on demand have increased, and Nordea has to pay attention to this.
Regulatory Capital Tier 1 Capital
It is evident from Table 35 that Nordea historically has had an average Tier 1 capital ratio of around 7%. However, in 2009, Nordea raised capital through new share issues, and some of this new capital was used to increase the Tier 1 capital ratio.
Table 35. Capital Ratio
Source: Nordea Annual Reports, Orbis database and Danske Markets
The new Tier 1 capital ratio is now 10.2% which is a significant increase from the previous average of around 7% and 6.5% respectively. Nordea has increased the Tier 1 ratio in order to have a financial buffer, but also to be prepared for the new requirements arising from Basel III.
Capital Ratio 2001 2002 2003 2004 2005 2006 2007 2008 2009
Tier 1 Capital Ratio (Including transition rules) 7.3% 7.1% 7.3% 7.3% 6.8% 7.1% 7.0% 7.4% 10.2%
Table 36. Capital Ratio for Nordea's Competitors
Source: Orbis database
Compared to Nordea‟s closets competitors, it is evident from Table 36 that Nordea ranks in the middle of the peer group when measured by Tier 1 ratio in 2009. When measured by average Tier 1 ratio, over the period, the same picture appears. From an investor‟s point of view, this is a signal that Nordea is not the riskiest bank and is less risky than some banks. However, a bank like SEB seems better prepared for future changes and has always operated with high Tier 1 ratios.
Nordea‟s Tier 1 ratio indicates that Nordea seems ready for the new Basel III requirements, and as the bank has performed better and formally made statements and taken action towards Basel III, we expect Nordea to be better prepared than competitors. Furthermore, as mentioned in chapter 3.1, Nordea is among the three best banks in the Nordic segment measured by the NSFR and Nordea is therefore a relatively safe haven from a regulatory perspective384.
Solvency Ratio
As previously mentioned, the solvency ratio expresses the core capital plus the supplementary capital as a percentage of risk-weighted assets. For Nordea Bank Denmark, this figure was, as of mid 2009, 13.2%. In 2008, the figure was 10.5% and 11.9% in 2007385. Nordea is therefore significantly above the requirements. Compared to Danske Bank, Nordea has a higher risk profile as the solvency ratios for Danske Bank were 16.1%, 14.1% and 9.75% for 2009, 2008, and 2007 respectively386. Only in 2007 did Nordea Bank Denmark have a higher ratio than Danske Bank and since then, Nordea has increased its risk profile relatively compared to Danske Bank. This could be due to the fact that Nordea is exposed to more risk, which is reflected in an increased RWA compared to core capital.
384 Deutsche Bank, “Nordea”
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Capital Ratio 2001 2002 2003 2004 2005 2006 2007 2008 2009 Average
SEB n/a n/a n/a n/a 7.5% 8.2% 9.5% 9.5% 13.0% 9.5%
Danske Bank 7.3% 7.6% 7.7% 7.7% 7.3% 8.6% 6.4% 6.9% 11.2% 7.9%
Nordea 7.3% 7.1% 7.3% 7.3% 6.8% 7.1% 7.0% 7.4% 10.2% 7.5%
Swedbank 7.1% 7.1% 7.2% 8.2% 6.5% 6.5% 6.2% 8.4% 10.4% 7.5%
DnB NOR n/a 7.1% 6.8% n/a 7.4% 6.7% 7.2% 6.7% 9.3% 7.3%
Equity
Table 37 shows the development in equity for Nordea. It is apparent that the consolidation in 2008 has not met the same levels as 2007. This is due to the lower net profit for the year. From 2008 to 2009, total equity increased significantly. Total equity increased despite the decreasing profit for 2009. This is mainly attributable to the increase in the share capital.
Table 37. Development in Equity
Source: Nordea Annual Reports
Equity Ratio
From Table 38, it is evident that from 2005 to 2006, Nordea‟s equity ratio increased significantly to 4.4%. This development stagnated from 2006 to 2007 and the ratio dropped to 3.8% in 2008.
From 2008 to 2009, the equity ratio has again increased to 4.4%.
Table 38. Equity Ratio
Source: Annual Reports for Danske Bank, Swedbank, DnB NOR, and Nordea
With a relatively small equity ratio, it seems as though Nordea‟s financial gearing is very high. It is, however, very common for financial companies to operate with a high financial gearing, as they earn small amounts of money on spreads and try to leverage this money in order to increase their profit.
Compared to its peers, Nordea has the second lowest ratio, only Danske Bank has had a lower ratio. Both Swedbank and DnB NOR have had relatively high ratios compared to Nordea and Danske Bank. The overall development in 2009 for the four banks has been an increase in the equity ratio as they try to reduce financial gearing and thereby reduce risk. Equity is a safe haven
Equity EURm 2007 % 2008 % 2009 %
Share capital 2,597 15.1 2,600 14.6 4,037 18.0
Reserves 14,563 84.9 15,203 85.4 18,383 82.0
Profit for the year (included in reserves) 3,130 2,672 2,318 Total 17,160 100 17,803 100 22,420 100
Equity Ratio (%) 2005 2006 2007 2008 2009
DnB NOR 5.4 5.0 5.2 4.4 5.6 Swedbank 4.5 4.6 4.2 4.8 5.0 Nordea 4.0 4.4 4.4 3.8 4.4 Danske Bank 3.0 3.5 2.8 2.8 3.2
during a financial crisis, and often the companies that have the highest amount of equity have a better chance of surviving during a financial crisis. Some banks will even be able to grow during a crisis if they are able to buy assets at an undervalued price. Therefore the term “Cash is King”
is especially justified during a financial crisis.