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Nordea's net interest income could rise, as it aims for higher CET1 ratio

Afterfacing intense pressure from low rates and low volume growth, now expects netinterest income to improve in the second half of 2016.

Yetthe Swedish lender's loans and net interest income were basically flat quarterover quarter in the secondquarter — even though its net profit rose to €996 million from €952million in the year-ago period. Operating profit decreased by about €12 millionto approximately €1.22 billion, despite a one-off gain of €151 million fromthe sale of VISAEurope.

Speakingto analysts during a call after the release of the bank's second-quarterresults, Nordea executives said they expect the Swedish central bank to cut itscurrent interest rate of negative 0.5% in September. Yet they see this as anopportunity to charge more and more customers — particularly business customers— negative rates on deposits, and also to reprice Swedish mortgages as well assmall business loans in Sweden and Norway.

JefferiesInternational analyst Kristin Dahlberg said in an interview: "I do notbelieve interest rates will fall further in Denmark or Sweden." But sheexpects deposit margin pressure to ease and to be offset by margin expansion onmortgages and, to some extent, also on corporate loans, in addition tocontinued loan growth in some segments. Improved net interest income in thethird and fourth quarter of this year therefore appears to be "a realisticambition," she said, as low and stable funding costs also supportstabilization of margin.

CET1 ratio

Onthe call, analysts were particularly concerned about whether Nordea could reachits current regulatory CET1 requirement of 17% plus a management buffer between50 basis points and 150 basis points. A final decision on Nordea's requirementunder the supervisory review and evaluation process (SREP) is expected inSeptember or October, but COO Torsten Hagen Jorgensen indicated that Nordeacould reach 17.5% by year-end through a variety of measures.Nordea executives also admitted that regulators were seeking to liftrisk-weights in the corporate loan book.

Inthe second quarter, Nordea's CET1 ratio improved by 10 basis points quarterover quarter to 16.8% and was bolstered to 17.2% on a pro forma basis.

Dahlbergsaid Nordea may have a variety of ways of achieving its capital ratio targetplus a buffer of 50 basis points given its large balance sheet and spread ofbusinesses and products.

ALondon-based analyst who spoke to S&P Global Market Intelligence oncondition of anonymity sounded a less upbeat note, saying: "They have a50-50 chance of meeting their capital goal. It depends upon the investigationinto the probability of default."

Havingrevised its approach to calculating risk weights, the Swedish FSA recentlysuggested that Nordea has a much greater than anticipated , but the lenderdenied this. However,Nordea admitted that it faces "a more conservative calculation ofprobability of default and the introduction of a maturity floor."

Dahlbergsaid the bank was being asked to move from a counterparty weighting to anexposure weighting in the calculation.

"Itis difficult to say how much that will add to the capital requirement,"she said. "Nordea said that the regulator has indicated a capitalrequirement of 17% to cover everything that they know today, which presumablyincludes some consideration for the additional changes to the PD calculation."

Dahlbergadded that it may be difficult for Nordea to reach the CET1 target organicallywithout making some smaller divestments, exposure reductions or similar changesto the balance sheet structure.

Panama Papers

Nordeahas also investigated its involvement in offshore structures, as revealed by the Panama Papers.The bank was fined by the Swedish FSA for weak controls but said it had notactively participated in helping clients evade tax.

Thisdoes not appear to have a significant financial impact, the London-based bankanalyst said.

Yetit has not helped Nordea's reputation. Its CEO, Casper von Koskull, toldReuters: "Governance and controls have not been in place in the way theyshould. It's unacceptable."