Background and rationale

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Since the beginning of the financial crises in the summer of 2007 Nordea has managed to stay largely unaffected by the extreme market volatility and has reported very limited negative valuation effects on various financial instruments. Nordea’s systematic approach to managing risk, capital and funding has been an important factor explaining the stable performance.

Nordea’s operating results for 2008, released in a separate press release this morning, demonstrates the continuous strength of the organic growth strategy, where more business with existing customers, both household and corporate customers, was the main driver for the income growth. This reflects Nordea’s well diversified credit portfolio and the high quality of its customer base. Also in the fourth quarter 2008, Nordea reported solid income growth and a strong result before loan losses. Due to the rapid slowdown in the economy the level of reported loan losses has increased, but is in line with expectations considering the severity of the slowdown.

The reported Tier 1 capital ratio, excluding transition rules, was 9.3% as of the end of December 2008. Therefore Nordea has a strong starting position when entering into a more challenging 2009.

Nordea’s Board of Directors and Group Executive Management believes it is responsible to act pro-actively to best position the bank for the risks and the opportunities arising from the prevailing extraordinarily challenging market conditions. In particular, Nordea is seeking to achieve the following objectives, which will be facilitated by the proposed capital strengthening measures:

  • Maintain position as one of the stronger banks in Europe. Nordea aims to be one of the strongest banks in Europe in     terms of profitability, efficiency, capitalisation, liquidity, funding and ultimately shareholder value generation, measured     by total shareholder return (TSR). With European banks raising considerable amounts of capital in response to     investors’ and other stakeholders’ requirements for higher capital ratios, the competitive landscape is changing. The     proposed capital raising is expected to position Nordea as one of the best capitalised banks in Europe. Furthermore,     the capital raising is expected to support Nordea’s current strong credit rating, thereby retaining the current favourable     funding position relative to peers.
  • Establish an additional capital cushion in light of reduced visibility in the market and economic outlook. Nordea is     expecting its capital position to be impacted by the economic downturn, primarily through increased loan losses and     adverse rating migration in the loan portfolio, resulting in higher risk weighted assets. In line with its prudent risk     management policies and in light of an economic outlook which is more uncertain than usual, Nordea believes it is     appropriate to establish an additional capital buffer above its existing target capital ratios to cover such potential     negative effects.
  • Provide flexibility to exploit high credit quality business opportunities arising from the market dislocation. Due to the     deleveraging and general retrenchment by competitors in existing core markets, Nordea sees the potential to     selectively capture high quality opportunities at expanding margins. Such opportunities predominantly include demand     for funding by customers with a solid credit profile who are subject to the general credit shortage in the market. Nordea     believes that its continued support of such high quality customers in the current environment, while applying its usual     stringent risk management policies, will enhance profitability and reinforce long-term customer relationships.
  • Proposed capital strengthening measures provide a fair, transparent market solution. The capital strengthening     measures are fully transparent and secure fair treatment of shareholders through the application of pre-emptive rights.     The proposed Rights Offering and dividend reduction will reinforce Nordea’s capital base with straight equity,     addressing investors’ preference for high quality, Core Tier 1 capital.