Investment Research 9 February 2015 Nykredit Bank Q4 14: parent to the rescue as swaps contracts hurt Nykredit Bank s Q4 results dragged on its equity again as interest swap contracts continued to hurt. Parent Nykredit Realkredit remains behind the bank however and has injected DKK2bn of fresh equity. We expect earnings volatility to remain high in the coming period and hence maintain our Marketweight rating. The Q4 results featured another substantial net loss of DKK946m versus a DKK978m net loss in Q3. Once again, fair value adjustments to interest rate swaps were the main reason, with a DKK1,369m negative impact in the quarter, slightly lower than the DKK1,558m hit in Q3. Since 2012, value adjustments to interest rate swaps have cost Nykredit Bank around DKK5.5bn. The bank says that a 1pp increase in interest rates would mean a positive value adjustment of DKK1.4-2.1bn. However, given the further fall in the 30Y interest swap rate from c.1.7% at end-q4 to c.1.2% to date, Nykredit Bank looks set to post another big loss in Q1 15. Loan losses stayed relatively low, however, at DKK100m or 47bp of lending annualised (DKK80m or 36bp in Q3). NII fell 3% sequentially despite lending being up by 4.5%. The CET1 ratio dropped to 12.8% following the loss, which is still a reasonable level but far below the 16.1% at end-2013 and the 21% at end-2012. As a result, parent company Nykredit Realkredit injected DKK2bn of new equity into the bank on 5 February, which will increase the capitalisation by c2pp, according to Nykredit. This is obviously positive and highlights that the owner is standing behind the bank, and we expect it continue to do so. Nykredit Bank has an internal target for CET1 of a minimum 13%. MARKETWEIGHT Sector: Financials, banks Corporate ticker: NYKRED Equity ticker: Not listed Equity book value : DKK12.6bn Ratings: Moody s: Baa2 / S (unsolicited) S&P: A+ / NO Fitch: A / S Analysts: Lars Holm Lars.holm@danskebank.dk +45 45 12 80 41 Thomas Hovard thomas.hovard@danskebank.dk +45 45 12 85 05 Nykredit Bank overview (DKKm) Q4 13 Q3 14 Q4 14 q/q y/y Net interest income 629 614 593-3.4% -5.7% Net interest margin 1.28% 1.27% 1.28% 1.3% 0.0% Fees and commissions 225 216 190-12.0% -15.6% Net gains/losses on items at fair value -247-1,558-1,475-5.3% - Loan losses and provisions -20-80 -100 25.0% - Net profit -5-978 -946-3.3% - Loan loss ratio (ann.) 0.08% 0.36% 0.47% 29.0% -% Problem loans % gross loans 5.49% 5.73% 5.49% -4.1% 0.1% Loan loss reserves % problem loans 72% 75.9% 78.3% 3.2% 8.9% Cost income ratio 96.7% -68.7% -70.4% 2.5% -172.8% Leverage ratio (core capital/total assets) 6.5% 5.7% 5.2% -0.5% -1.2% Common equity Tier-1 ratio (Basel II/III) 16.1% 14.2% 12.8% -1.4% -3.3% Core capital ratio (Basel II/III) 16.4% 14.3% 12.8% -1.5% -3.6% Total capital ratio (Basel II/III) 16.8% 14.7% 13.1% -1.6% -3.7% Source: Company data, Danske Bank Markets Important disclosures and certifications are contained from page4of this report. www.danskeresearch.com
Annualised loan loss ratio 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% -0.2% -0.4% Q2 12 Q4 12 Q2 13 Q4 13 Q2 14 Q4 14 Common equity tier 1 ratio Basel II/III 25% 20% 15% 10% 5% 0% Q4 11 Q2 12 Q4 12 Q2 13 Q4 13 Q2 14 Q4 14 Source: Company data, Danske Bank Markets Source: Company data, Danske Bank Markets On liquidity, the bank reported an LCR ratio of 107% and a deposits surplus of DKK14.9bn, excluding repo lending. Parent Nykredit Realkredit reported a net profit of DKK576m for 2014, down from DKK1,674m in 2013. So, despite the poor performance by the bank, the group was still able to post a net profit. Furthermore, 2013 was boosted by a DKK697m one-off gain. Loan losses fell slightly by 15% to DKK2,351m. CET1 fell to 15.4% from 15.8% in 2013 due to higher REA as a result of both market risk and credit risk increasing. Indicative pricing, ASW 75 Indicative ASW offer (bps) SPAROG '21 (NR/A2) 50 SPAROG '20 (NR/A2) SPAROG '18 (NR/A2) JYBC '17 (A-/NR) MINGNO '19 (NR/A2) SBAB '20 (A/A2) 25 MINGNO '18 (NR/A2) NYKRE '16 (A+/NR) JYBC '15 (A-/Baa1u) SYDBDC '16 (NR/Baa1) SPAROG '17 (NR/A2) SBAB '18 (A/A2) SBAB '16 (A/A2) 0 SPAROG '16 (NR/A2) 2014 NYKRE '15 (A+/Baa2u) 2015 2016 2017 2018 2019 2020 2021 2022 SPAROG '15 (NR/A2) -25 Source: Danske Bank Markets Rating We believe the wider spreads of Nykredit Bank s two senior issuances are a fair reflection of the bank s volatile earnings and the ongoing struggle just to break even on earnings. Hence, we maintain our Marketweight rating. 2 9 February 2015 www.danskeresearch.com
Fixed Income Credit Research Thomas Hovard Head of Credit Research +45 45 12 85 05 hova@danskebank.com Louis Landeman TMT, Industrials +46 8 568 80524 llan@danskebank.com Henrik René Andresen Credit Portfolios +45 45 13 33 27 hena@danskebank.com Mads Rosendal Industrials, Pulp & Paper +45 45 14 88 79 madro@danskebank.com Jakob Magnussen Utilities, Energy +45 45 12 85 03 jakja@danskebank.com Brian Børsting Industrials +45 45 12 85 19 brbr@danskebank.com Lars Holm Financials +45 45 12 80 41 laho@danskebank.dk Gabriel Bergin Strategy, Industrials +46 8 568 80602 gabe@danskebank.com Niklas Ripa High Yield, Industrials +45 45 12 80 47 niri@danskebank.com Bjørn Kristian Røed Shipping +47 85 40 70 72 bred@danskebank.com Ola Heldal TMT +47 85408433 olh@danskebank.com Øyvind Mossige Oil services +47 85 40 54 91 omss@danskebank.com Sondre Dale Stormyr Offshore rigs +47 85 40 70 70 sost@danskebank.com Knut-Ivar Bakken Fish farming +47 85 40 70 74 knb@danskebank.com Emil Hjalmarsson Real Estate, Construction +46 8 568 80634 emih@danskebank.com Find the latest Credit Research Danske Bank Markets: http://www.danskebank.com/danskemarketsresearch Bloomberg: DNSK<GO> 3 9 February 2015 www.danskeresearch.com
Disclosures This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S ( Danske Bank ). The authors of the research report are Lars Holm, Senior Analyst, and Thomas Hovard, Chief Analyst. Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analyst s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority (UK). Details on the extent of the regulation by the Financial Conduct Authority and the Prudential Regulation Authority are available from Danske Bank on request. The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts rules of ethics and the recommendations of the Danish Securities Dealers Association. Conflicts of interest Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of highquality research based on research objectivity and independence. These procedures are documented in Danske Bank s research policies. Employees within Danske Bank s Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to Research Management and the Compliance Department. Danske Bank s Research Departments are organised independently from and do not report to other business areas within Danske Bank. Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions. Danske Bank, its affiliates, subsidiaries and staff may perform services for or solicit business from Nykredit and may hold long or short positions in, or otherwise be interested in, the financial instruments mentioned in this research report. The Equity and Corporate Bonds analysts of Danske Bank and undertakings with which the Equity and Corporate Bonds analysts have close links are, however, not permitted to invest in financial instruments that are covered by the relevant Equity or Corporate Bonds analyst or the research sector to which the analyst is linked. Danske Bank, its affiliates and subsidiaries are engaged in commercial banking, securities underwriting, dealing, trading, brokerage, investment management, investment banking, custody and other financial services activities, may be a lender to Nykredit and have whatever rights are available to a creditor under applicable law and the applicable loan and credit agreements. At any time, Danske Bank, its affiliates and subsidiaries may have credit or other information regarding Nykredit that is not available to or may not be used by the personnel responsible for the preparation of this report, which might affect the analysis and opinions expressed in this research report. Within the previous 12 months, Danske Bank has acted as Lead Manager of a public offer of credit bonds for Nykredit Realkredit A/S and Lead Manager of a public offer of covered bonds for Nykredit Bank A/S. As an investment bank, Danske Bank, its affiliates and subsidiaries provide a variety of financial services, including investment banking services. It is possible that Danske Bank and/or its affiliates and/or its subsidiaries might seek to become engaged to provide such services to Nykredit in the next three months. Danske Bank has made no agreement with Nykredit to write this research report. No parts of this research report have been disclosed to Nykredit. No recommendations or opinions have been disclosed to Nykredit and no amendments have accordingly been made to the same before dissemination of the research report. Financial models and/or methodology used in this research report Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be obtained from the authors on request. 4 9 February 2015 www.danskeresearch.com
Risk warning Major risks connected with recommendations or opinions in this research report, including a sensitivity analysis of relevant assumptions, are stated throughout the text. Expected updates This research report will be updated on a quarterly basis following the quarterly results statements from Nykredit. See the front page of this research report for the date of first publication. Recommendation structure Investment recommendations are based on the expected development in the credit profile as well as relative value compared with the sector and peers. As at 31 December 2014 Danske Bank Markets had investment recommendations on 50 corporate bond issuers. The distribution of recommendations is represented in the distribution of recommendations column below. The proportion of issuers corresponding to each of the recommendation categories above to which Danske Bank provided investment banking services in the previous 12 months ending 31 December 2014 is shown below. Rating Anticipated performance Time horizon Distribution of recommendations Investment banking relationships Overweight Outperformance relative to peer group 3 months 30% 33% Marketweight Performance in line with peer group 3 months 54% 41% Underweight Underperformance relative to peer group 3 months 16% 38% Changes in recommendation within past 12 months: Date New recommendation Old recommendation 22 January 2015 Marketweight Hold General disclaimer This research has been prepared by Danske Bank Markets (a division of Danske Bank A/S). It is provided for informational purposes only. It does not constitute or form part of, and shall under no circumstances be considered as, an offer to sell or a solicitation of an offer to purchase or sell any relevant financial instruments (i.e. financial instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or options, warrants, rights or other interests with respect to any such financial instruments) ( Relevant Financial Instruments ). The research report has been prepared independently and solely on the basis of publicly available information that Danske Bank considers to be reliable. While reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and Danske Bank, its affiliates and subsidiaries accept no liability whatsoever for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this research report. The opinions expressed herein are the opinions of the research analysts responsible for the research report and reflect their judgement as of the date hereof. These opinions are subject to change, and Danske Bank does not undertake to notify any recipient of this research report of any such change nor of any other changes related to the information provided in this research report. This research report is not intended for retail customers in the United Kingdom or the United States. This research report is protected by copyright and is intended solely for the designated addressee. It may not be reproduced or distributed, in whole or in part, by any recipient for any purpose without Danske Bank s prior written consent. Disclaimer related to distribution in the United States This research report is distributed in the United States by Danske Markets Inc., a U.S. registered broker-dealer and subsidiary of Danske Bank, pursuant to SEC Rule 15a-6 and related interpretations issued by the U.S. Securities and Exchange Commission. The research report is intended for distribution in the United States solely to U.S. institutional investors as defined in SEC Rule 15a-6. Danske Markets Inc. accepts responsibility for this research report in connection with distribution in the United States solely to U.S. institutional investors. Danske Bank is not subject to U.S. rules with regard to the preparation of research reports and the independence of research analysts. In addition, the research analysts of Danske Bank who have prepared this research report are not registered or qualified as research analysts with the NYSE or FINRA but satisfy the applicable requirements of a non-u.s. jurisdiction. 5 9 February 2015 www.danskeresearch.com
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