Equity and liabilities –

Capital and funding management

Group Capital and Risk Modelling

Louise Lindgren

12 May 2011

2

Agenda – Capital and funding management

Adapting to the New Normal

Changed environment – new demands

Focus on returns and business efficiency – capital efficiency, cost efficiency

Balance sheet management – minimising total average cost of capital

Capital efficiency

RWA efficiency, management and mitigation

Capital base optimisation – tier 1 capital, tier 2 capital, contingent capital

Funding efficiency

Broad funding base and active management

Funding in relation to assets – pricing of liquidity risk, asset matching

Conclusions

3 3

Adapting to the New Normal

4

Efficient

management of

funding

Efficient

management of capital

Efficient

management of

liquidity

Efficient

management of

assets / income sources

The pressure on a bank’s balance sheet

increases dramatically

Regulators Shareholders

5

Increased capital requirements…

7.5

10.7

2007 Q1 2011

Core Tier 1 capital ratio (excl. Hybrids), %

23

56

2007 Q1 2011

2.3 2.1

3.0

3.7

2007 2008 2009 2010

Liquidity buffer, EURbn

Average bond maturity, years

…as well as liquidity buffer

…and prolonged long-term funding

Changed environment – higher raw material costs

6 6

Nordea focuses on returns and business efficiency

Focus on return on equity (RoE)

Cost efficiency

Business mix and income efficiency

Capital and asset efficiency

Funding and liquidity efficiency

7

Assets Liabilities and equity

Other assets Other liabilities

incl. Life incl. Life

Derivatives Derivatives

Liquidity

buffer

Loans to credit inst. etc Deposits

and

Corporate wholesale funding

and other

lending

Household

mortgage lending Tier 1 and tier 2 capital

Equity - Core tier 1

Off-balance-sheet

commitments

Balance-sheet management

7

Liabilities – efficient management of funding

Diversified sources

Deposits

Pricing, matching

Capital

Risk-weights

Segmentation of assets

Equity and capital instruments

Liquidity

Liquid assets

=> Minimising total average cost of capital

given the new set of requirements

Pricing,

matching

RWA

Liquidity

8

Efficient management of capital

9 9 9

Increased capital efficiency

Impact from new regulations is expected to be offset by mitigating

actions and increased efficiency in risk weights of assets (RWA)

Capital base optimisation

Tier 1 instruments

Tier 2 instruments

Contingent capital

Focus on capital-light products

10

Review of credit risk process

PD: use of rating models, scoring models, risk transfer, rating migration,

default management

LGD: collateral coverage, collateral eligibility

EAD: guarantees, commitments, netting agreements

Nordea IRB roll-out

Currently approved to use IRB Approach for 77% of the total credit portfolio

Review ongoing of further roll-out of remaining portfolios, eg foreign branches

IRB Advanced application for corporate portfolio

Mitigating actions regarding RWA impact, eg CVA risk

Other initiatives

Insurance

Securitisation

Risk-weight (RWA) overview

11

Capital base optimisation – loss absorption in

tier 1 and tier 2 capital under Basel III

=> All tier 1 and tier 2 capital instruments will include

enhanced loss absorption mechanisms

Tier 1

Main terms

Gone concern features –

default absorption

Tier 2

Perpetual

Deeply subordinated

No step-up

Callable after 5 years

No dividend pushers*

Going concern features -

loss absorption

Discretionary non-cumulative coupon deferral

Conversion to equity or principal write down upon breach of trigger

Trigger 5% to 7% core tier 1

Conversion applicable if not already converted

Minimum maturity of 5 years

Subordinated

No step-up

Callable after 5 years

None

* Unclear if CRD IV will allow dividend stoppers

Conversion to equity or write off at the point of non-viability (contractual vs statutory approach, EU directive on resolution)

12

Capital base optimisation –

role of instruments under Basel III

Role in the Capital base

Core tier 1

Tier 2

Comment

Minimum core tier 1

Additional tier 1 capital

Total capital

Capital buffers

SIFI requirements

Additional tier 1

Cost efficient way to cover additional Tier 1 capital requirements

Instrument

Additional tier 1 capital

Total capital

Total capital

CoCos (non-tier 1 or tier 2)

Countercyclical capital buffer?

SIFI requirements?

Cost efficient way to cover total capital requirements

The Basel Committee is still reviewing if CoCos could cover the Countercyclical buffer and any SIFI requirements

=> Tier 1 and tier 2 capital instruments will be

highly interesting for minimising capital cost

Core tier 1 will be the most important form of capital. Shall cover large part of minimum requirements as well as buffer requirements

13 13

11,689 12,82114,313

17,76619,103 19,408

2006 2007 2008 2009 2010 Q1 2011

Dividend payout

Ability to adjust asset growth

without jeopardising returns

CAGR in core equity of 9.1% after

dividend and rights issue

Core tier 1 ratio 10.7% in Q1 2011

Strong capital generation

Core tier 1 capital, EURm

14 14

Efficient management of funding

15

Funding management – business efficiency

15

Focus areas for funding and business efficiency:

Efficient use of diversified funding base for various issues

Use of covered bonds for matching of asset types

Pricing of liquidity cost and risk

Matching between behavioural maturities of assets and liabilities

Management of the economic funding gap measure

Relative pricing attractiveness

=> A diversified funding base important for

minimising average cost of capital

16

Assets Liabilities and equity

Other assets Other liabilities

incl. Life incl. Life

Derivatives Derivatives

Liquid assets Liquidity buffer Deposits from cred inst Short-term

Short-term funding liabilities

Loans to credit inst etc

Deposits from

Corporate the public

and other

lending

Stable Long-term funding Stable

long-term liabilities

assets Household

mortgage lending Tier 1 and tier 2 capital

Equity - Core tier 1

Off-balance-sheet

commitments

Covered bonds

Broad funding base and high portion of

long-term funding and stable liabilities

Asset type

matching

Behavioural

maturities

Pricing of

liquidity cost

17

19 18

27

33

12

2007 2008 2009 2010 Q1 11

17

High activity and good funding name reception

Very good reception of the Nordea

name in all funding markets

Attractive relative pricing

Norwegian and Finnish covered bond

platforms launched in 2010

Major transactions 2011:

USD 2.75bn 144a triple-tranche – 3y, 10y

EUR 3bn EMTN dual-tranche – 2y, 5y

EUR 1bn EMTN Finnish covered bond

USD 2bn 144a covered bond (N Eiend.kr.)

SEK 10bn covered bonds

NOK 6bn Norwegian covered bonds

Large volumes of long-term funding

issued already in Q1 2011

Issued long-term funding,

excl Danish covered bond, EURbn

18 18

Conclusions

19

Key messages

Focus on returns, capital efficiency, funding efficiency

Adapting to the New Normal

Target to minimise average total cost of capital

Enhanced RWA optimisation for capital efficiency

Capital base optimisation – tier 1, tier 2 capital, CoCos

Strong capital generation and capital position

Diversified funding base important for minimising cost of capital

Active funding management, pricing of liquidity risk, matching of assets

Interlink between capital and funding efficiency – risk, rating