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Covered Bonds

Crisis Talk — with Ola Littorin, head of long term funding at Nordea

Ola Littorin

Nordea has made extensive use of Nordic currency covered bond markets through the coronavirus crisis and, as spreads have stabilised, has selectively issued senior preferred deals across a broad range of other FX. The bank says it has plenty of time to meet its regulatory funding needs and has no imminent plans to issue subordinated debt given the recent relaxation of capital requirements.

GlobalCapital: How has your funding changed since March 1?

Ola Littorin, Nordea: During March and April we focused on covered bond issuance in the Scandinavian currency markets. The local covered bond markets have demonstrated resilience during this unstable period evidenced by less spread volatility and they maintained core functionality. 

For example, in Denmark we carried out daily taps of our covered bonds throughout March and April. In Sweden we were active in the primary market placing covered bonds with local investors. And in April we resumed issuance in the Norwegian covered bond market.

In the senior unsecured market we abstained from issuance in March given elevated spreads in what was then a dysfunctional market. Our strong liquidity position allowed us to stay away and wait for a more attractive window with tighter spreads and less execution risk.  

Following our Q1 report and programme update, we launched our first senior preferred transaction for the year on May 6 in the form of €1.25bn seven year trade. Later in May we followed up this transaction with senior preferred benchmark trades in Swiss francs as well as in Swedish kronor and Norwegian kroner. 

[Nordea also issued a $1bn senior preferred on June 2.]

We had earlier guided the market for an estimated senior non-preferred funding need of €10bn in total to meet forthcoming MREL [minimum requirements for own funds and eligible liabilities] requirements. This guidance remains unchanged. Having issued €2.7bn already we now have around €7.3bn to do up until the end of 2022. We will revisit this plan in Q1 next year when we expect to receive the final MREL requirement from Single Resolution Board.

Our green bond issuance plans have not changed and we expect to have a regular presence in the market on an annual basis. Last year we raised €750m of seven year senior unsecured funding in green format and we expect to come back to the green bond market again in 2020. We’ve also issued our first green covered bond in the Danish domestic market earlier in the year.

Our full year issuance guidance for 2020 remains unchanged of €20bn-€25bn including covered, senior preferred and senior non-preferred. Approximately half of this we expect to raise in the local markets.

How helpful have the European Central Bank's Targeted Longer-Term Refinancing Operations (TLTRO) and other improvements to Nordic central bank repo facilities been?

For the banking industry in general the TLTRO is helpful as it will be more effective in easing bank lending conditions than further cuts in the deposit rate. Furthermore, with the recent relaxation in collateral rules the ECB is making sure that all banks should be able to participate at the attractive rates offered.

The swift response seen from Nordic central banks in offering liquidity facilities of various kinds have also been helpful as it has alleviated funding pressure in the system and provided stability to the market.

Nordea has selectively participated in central bank facilities offered in the Nordic countries.

Other than central bank funding, do you anticipate a change in the mix of the instruments that make up your market funding?

We don’t expect any major changes to our funding mix as it stands. On the contrary, the recent market turmoil demonstrates the strength and value of our existing funding platforms offering stable and cost-efficient sourcing of funds in our local currencies as well as a diversified global access in all product formats.

How has your balance sheet changed in Q1? Has it grown?

Lending in local currencies increased by €5.5bn in the first quarter. There were some further balance sheet increases caused by fair value of derivatives and repo activities. We’ve not seen material drawdowns of committed facilities by our corporate customers. Deposits increased by €6bn.

What does this means in terms of risk-weighted asset (RWA) growth?

The balance sheet effect during Q1 meant RWA increased by €1.9bn which was driven by increased lending and some market risk volatility but that was partly offset by foreign exchange movements.

Do you have any visibility on how deferred loan payments and non-performing loans are likely to evolve?

It is too early to give an outlook for loan loss provisions as the economic impact of Covid-19 is still very uncertain. We will continue to closely monitor asset quality and exposure during the second quarter and, as part of this assessment, we will update the economic scenarios for our IFRS 9 models and Stage 2 collective provisioning.

What have national regulators and supervisors done to help alleviate these problems? 

Sweden and Demark have reduced countercyclical buffers (CcyB) to 0% from 2.5% and 1% respectively, Norway cut the CCyB from 2.5% to 1% and Finland’s CCyB remains at 0%. Collectively that resulted in a reduction of 1.2% of core equity tier one (CET1) requirements. 

In addition to that, the Finnish Financial Supervisory Authority has in practice reduced the Systemic Risk Buffer to 2% from 3% and the ECB has accelerated the implementation of the reduced need for CET1 capital for Pillar 2R. All of these capital buffer reductions have resulted in a lowering of our CET1 requirement by 2.9%, from 13.1% to 10.2%.

Do you expect to issue more additional tier one and tier two debt following the changes to Pillar 2 requirements?

With reference to our current excess of CET1 we are not planning for such issuance in the near term. In the medium to long term, assuming a stabilisation of the market and Covid-19 situation, we expect to usise this option as part of our capital optimisation strategy.

Have there been any major challenges while from working from home? 

The funding team has largely been working on-site since the outbreak of the crisis. Half the front office treasury team operates from our ordinary offices and the other half from our various disaster sites. This has worked very well and has allowed an easier interaction among the team members. I have worked from home for maybe one or two days during this period.