Rating action

Scope Ratings GmbH (Scope) has today assigned AAA long-term issuer and senior unsecured debt foreign-currency ratings to the Nordic Investment Bank (NIB) with Stable Outlooks. Scope has also assigned a foreign-currency short-term issuer rating of S-1+ with a Stable Outlook.

The AAA/Stable rating of the NIB reflects its i) excellent institutional profile, given a strong mandate and proven track record to deliver on it, ii) conservative capital management and sustained profitability, iii) excellent asset quality with negligible non-performing loans, iv) excellent funding profile driven by very high liquidity buffers and excellent market access, and v) excellent shareholder support from its eight Nordic-Baltic shareholders.

Download the rating report.

Key rating drivers

Prudent capital and risk management, sustained earnings support build-up of capital buffers

First, the NIB manages its capital prudently, retaining ample buffers to its statutory and risk-based minimum capitalisation limits. The bank’s main instrument to ensure capital adequacy is a risk-based capital ratio, underpinned by the bank’s Internal Capital Adequacy Assessment Process (ICAAP). Under ICAAP, the bank identifies minimum capital and liquidity needed to cover credit, market, liquidity, and operational risks under stressed scenarios. In addition to idiosyncratic capital needs identified under ICAAP, the bank maintains macro-prudential buffers and a stress test buffer. Altogether, capital resources (adjusted common equity) of EUR 4.2bn at YE 2023 sufficiently covered identified needs of EUR 3.3bn at YE 2023. In addition to its risk-based capital assessment, the bank has two statutory leverage limits. First, adjusted common equity needs to amount to at least 7% of total exposure. Second, adjusted common equity, including callable capital, needs to amount to at least 20% of total exposure. At YE 2023, the bank operated with ample headroom, at 11.1% and 30.9%, respectively.

The bank’s proven track record of generating and retaining earnings further supports its capitalisation profile. Scope adjusted net income, after dividends paid of EUR 63m, was EUR 189m in 2023, significantly up from EUR 142m in 2022, mostly due to a 36% increase in net interest income (including from the bank’s treasury activities). On that basis, the adjusted return on equity, after dividends, was 3.6% in 2023, up from its long-term average of 3.1%. The bank aims to return 20-30% of net profit to shareholders as dividends, with the decision resting with the Board of Governors according to the bank’s dividend payment policy, which ensure that dividend distributions consider the risk position and mandate of the bank, and its non-profit-maximising nature. An exception was 2020, when the bank did not pay dividends given Covid-19 uncertainties.

Excellent portfolio quality given stable operating environment in Nordic-Baltic countries, strong average borrower quality and comprehensive credit enhancements

Asset quality benefits from the bank’s stable operating environment, with most of its loan exposures in highly-rated member countries, including Sweden (AAA/Stable, 30%), Norway (AAA/Stable, 20%) and Finland (AA+/Stable, 19%). Exposure is almost exclusively in member countries, with loans to non-member countries at just 2.8% of the total. The bank had no exposure to the Russian Federation as of YE 2023 (after a loan was fully repaid in July 2023), no exposure in Ukraine, and EUR 8m in loans to Belarus with final maturity in 2027, which is classified as non-performing and fully provisioned for. Most lending is towards non-financial corporates (71%), with another 15.2% to the public sector other than central governments, 7.6% to central governments, and 6.3% to banks.

Further, the bank’s lending benefits from strong credit enhancements. These include the NIB’s preferred creditor status for public sector exposures and multiple forms of credit enhancements for its private-sector lending. Overall, Scope estimates that around 60% of the bank’s lending is well-protected. The portfolio quality assessment also considers uplift via diversification across countries, sectors and counterparties.

The NIB’s portfolio exhibits low exposure to climate credit risk, supported by strong climate-risk management. At project initiation, lending is screened according to the bank’s mandate fulfilment system, exclusion lists as part of its sustainability policy, and against targets to become a net-zero bank by 2050 and its interim, 2030 SBTi emission intensity targets.

Driven by its prudent risk management, underwriting policies and a stable operating environment, non-performing loans (NPLs) are very low, amounting to EUR 9m in 2023 (0.04% of total loans), same as in 2022, and down significantly from EUR 76m at YE 2021. The bank provisions the entire amount of NPLs and provisioning needs for ECL Stage 1 and 2 exposures are modest, at EUR 57m, or 0.3% of total loans.

Very high liquidity buffers and excellent funding profile

The NIB’s liquidity policies are prudent, and liquidity buffers are sizeable. The bank targets a minimum 12-month survival horizon, i.e. the time the bank would be able to honour liabilities under stressed assumptions, including loan payment disruptions, no capital market refinancing and a decline in asset values of the liquidity buffer. At YE 2023, the bank’s survival horizon was 461 days, well above the bank’s target as well as the minimum levels set by its Board of Directors (270 days) and its Statutes (180 days). To ensure near-term liquidity, maturing investments from the liquidity buffer need to match net cash outflows over the next three months.

This prudent liquidity management results in a sizeable and high-quality liquidity buffer of EUR 14.7bn (37% of total assets) at YE 2023. Assets are mainly invested in EUR, USD and Nordic currencies via short-term money market investments, bank deposits (highly rated), reverse repos with highly rated collateral, fixed-income instruments received as collateral, and fixed-income instruments. At YE 2023, liquid assets included cash & cash equivalents and short-term money market instruments of EUR 5.3bn and debt securities of EUR 9.4bn. For debt securities held in the liquidity buffer, Scope estimates that 94% were rated at least AA- (EUR 8.9bn).

Conversely, Scope estimates liabilities due in the next 12 months at EUR 8.8bn and expected loan disbursements for 2024 at EUR 3.4bn, in line with their level in 2023. Total cash needs thus stood at EUR 12.2bn. On this basis, the liquid assets ratio stood at 116.3% at YE 2023, broadly in line with its multi-year average. Accordingly, the bank could honour all its financial obligations and continue disbursements without capital market funding for over a year.

The NIB’s intrinsic credit profile also benefits from its strong funding access, profile and flexibility. Regular issuances across currencies, maturities and instruments, with annual funding volumes of around EUR 7-10bn, ensure the bank’s benchmark issuer status in the SSA market segment. This is further supported by the favourable regulatory status of its debt securities, being designated as high-quality liquid assets under the Basel framework and LCR level 1 assets with a 0% risk weight under Basel and Solvency II. The bank’s main funding instrument are large benchmark issuances in USD, which is complemented with its other strategic pillars, namely, to be present as an issuer of sustainable bonds and bonds in other major currencies under its EMTN programme (unlimited). The final element is to retain flexibility via tailored issuances, including private placements. In 2023, funding amounted to EUR 7.2bn via 63 transactions in 10 currencies. The bank’s funding flexibility also benefits from its status as a long-standing issuer of environmental bonds. Since 2011, the NIB has raised EUR 8.3bn in environmental and Baltic-Nordic Blue bonds.

Excellent shareholder support given high shareholder ability and willingness to provide support

The ability of the NIB’s shareholders to provide support, if ever needed, is assessed as high. The bank’s Nordic-Baltic shareholders are highly rated, which results in a AAA key shareholder rating, the highest among supranationals. This drives Scope’s assessment of the ability of shareholders to provide financial support, if needed.

Around 77% of capital is subscribed by shareholders rated AAA, 95% of shareholders rated AA- or higher, while all shareholders are rated within investment grade (BBB- or higher). The willingness of shareholders to provide financial support, if ever needed, is assessed as ‘high’. The NIB’s shareholders have increased the authorised capital stock of the bank on multiple occasions, highlighting their commitment to provide the bank with resources to fulfil its mandate.

Moreover, the NIB’s capital call mechanism rests on a strong legal basis. Based on section 4 of the Statutes, the bank’s Board of Directors can call the unpaid portion of its subscribed authorised capital, amounting to around EUR 7.3bn, or around 90% of authorised capital, if deemed necessary for the fulfilment of its debt obligations. To date, no call has occurred. While the Statutes do not specify a call to be honoured on a pro-rata basis, it is anticipated that a call would follow that basis.

Demonstrated ability to fulfil key mandate

The NIB’s mandate is highly relevant to its eight Nordic-Baltic shareholder governments, supporting Scope’s assessment of shareholders’ willingness to provide support if ever needed. The bank has a dual mandate of financing projects that foster productivity gains and environmental benefits for member countries. The bank also has very limited exposure to non-member countries. The bank’s countercyclical response to the recent shocks of the Covid-19 pandemic, the war in Ukraine, energy and inflationary pressures, has led to high disbursement volumes, underpinning the bank’s role. To increase the impact of its lending, the bank is also gradually expanding its activities to relatively riskier borrowers, including as implementing partner under the InvestEU guarantee programme. The bank is also expanding its activities in the Baltic region, with a regional hub in Riga.

Credit challenge: High leverage, although mitigated by prudent risk and capital management

In line with Scope’s methodology, capital adequacy is assessed under the assumption that the bank operates at maximum capacity as allowed by its statutes. This potential leverage ratio acknowledges the possibility of an expansion of the bank’s activities assuming countercyclical activities per its mandate. Scope notes that the NIB’s leverage is relatively high under the assumption of maximum utilisation of statutory leverage limits but acknowledges that the NIB prudently manages its capital, operating with significant headroom to statutory limits.

The numerator of our capitalisation ratio of EUR 5.3bn at YE 2023 aggregates paid-in capital (EUR 846m), reserves and risk funds (EUR 3,253m) and profit for the year (EUR 251m). This also includes EUR 951m (12.6% of the total) of callable capital, comprising 10% of the EUR 5.55bn callable capital of highly rated shareholders (AA- or above), and 25% of EUR 1.59bn of callable capital already authorised and appropriated. The denominator amounts to EUR 36.8bn, reflecting maximum, potential exposure of around EUR 59bn adjusted for non-lending exposure. The resulting capitalisation ratio of 14.4% at YE 2023 is relatively low in a peer context. The ratio has been broadly stable since 2020 when the bank modernised its capital management and significantly increased its potential lending capacity. Finally, the NIB operates at lower leverage than implied by its statutory limits, as its capitalisation using actual loans outstanding stood at 24.3%, resulting in headroom of about 10pps.

Outlook and rating sensitivities

The Stable Outlook represents Scope’s view that risks to the ratings over the next 12 to 18 months are balanced.

Downside scenarios for the rating and Outlooks are (individually or collectively):

1. Profitability and capitalisation weakened significantly over a sustained period;
    
2. Asset quality deteriorated significantly;
    
3. Liquidity buffers were reduced significantly and durably.

Factoring of environment, social and governance (ESG)

Scope considers ESG sustainability issues during the rating process as reflected in its supranational methodology. ESG factors are explicitly captured in Scope’s assessment of the institutional profile, which Scope assesses as ‘Strong’ for the NIB, and the assessment of potential climate risks under the portfolio quality assessment.

Supranational scorecard

Scope’s supranational scorecard, which is based on clearly defined quantitative parameters, provides an indicative ‘aaa’ rating for the NIB. Additional considerations allow Scope to incorporate idiosyncratic characteristics that cannot be assessed in a consistent and comprehensive manner across all supranationals, but which may still affect the creditworthiness of the issuer.

No adjustment was made to the indicative rating of the NIB.

Given the bank’s excellent governance and cohesive shareholder structure, Scope overwrites the signal from its scorecard, which would otherwise penalise the bank’s concentrated shareholder base.

A rating committee has discussed and confirmed these results.

For further details, please see Appendix II of the rating report.

Rating Committee
The main points discussed by the rating committee were: i) mandate and institutional profile; ii) trends in profitability and capitalisation; iii) asset quality; iii) liquidity policies, buffers and funding profile; iv) shareholder support, including callable capital mechanism; and v) peer comparisons.

Methodology
The methodology used for these Credit Ratings and/or Outlooks (Supranational Rating Methodology, 21 June 2024) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.
 
Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party participation    YES
With access to internal documents                                  NO
With access to management                                           NO
The following substantially material sources of information were used to prepare the Credit Ratings: public domain.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings and Outlooks were not amended before being issued.
 
Regulatory disclosures
These Credit Ratings and Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlooks are UK-endorsed.
Lead analyst: Julian Zimmermann, Associate Director
Person responsible for approval of the Credit Ratings: Alvise Lennkh-Yunus, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 20 September 2024.
 
Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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