Moody's Corporation · NYSE:MCO
Moody's — Moody's Analytics Webinar: Nordic Banks beyond COVID-19 (September 2020)
51 slides from Moody's's conference presentation, Sep 16, 2020
Slide 1: Nordic Banks beyond COVID-19: Challenges for Credit Risk, Stress Testing and ESG/Climate Risk Integration
Nordic Banks beyond COVID-19: Challenges for Credit Risk, Stress Testing and ESG/Climate Risk Integration 16 September 2020
Slide 2: Agenda
Agenda 1. Brief overview of the outlook for Nordic Banks 2. Credit risk impact of COVID-19 on corporate industries 3. ESG and climate risk focus – credit after COVID-19 4. Q&A Nordic Banks beyond COVID-19 2
Slide 3: Today's Speakers
Today’s Speakers Louise Lundberg – Senior Credit Officer, Moody’s Investors Service Metin Epozdemir, CFA – Risk and Finance, Moody’s Analytics Leonardo Checchi – ESGC & Credit Risk SME, Moody’s Analytics Nordic Banks beyond COVID-19 3
Slide 4: Today's Speakers
Today’s Speakers Louise Lundberg Metin Epozdemir, CFA Leonardo Checchi Senior Credit Officer Risk and Finance ESGC & Credit Risk SME Moody’s Investors Service Moody’s Analytics Moody’s Analytics Nordic Banks beyond COVID-19 4
Slide 5: Part 1: Brief overview of the outlooks for Nordic banks
Part 1: Brief overview of the outlooks for Nordic banks Louise Lundberg, Vice President – Senior Credit Officer 16 September 2020
Slide 6: Access is everything
Access is everything’ @ 3 Expertise Credibility Engagement A comprehensive view of the global markets Over 100 years of experience delivering Meaningful interactions across multiple through our ratings and research forward-looking, independent, stable and channels between our analysts and transparen
Slide 7: Agenda
Agenda 1. Banking sector outlooks for the Nordics 2. Impact on asset quality and profitability 3. Lower for longer interest rates Nordic Banks beyond COVID-19 7
Slide 8: Banking sector outlooks for the Nordics
1 Banking sector outlooks for the Nordics
Slide 9: Overview of Banking System Outlooks
Overview of Banking System Outlooks Most European Banking System Outlooks were changed to negative Banking System Outlook Updates (17 March – 16 April) Source: Moody’s Investors Service Nordic Banks beyond COVID-19 9
Slide 10: Moody's Bank Ratings in the Nordics
Moody’s Bank Ratings in the Nordics As of September 2020 Sweden Aaa - Stable Outlook Norway Aaa - Stable Outlook Banks BCA Long-Term Deposit Outlook Short-Term Banks BCA Long-Term Deposit Outlook Short-Term Bluestep Bank AB (publ) baa2 A3 Stable P-2 DNB Bank ASA a3 Aa2 Stable P-1 Hoist Finance AB (p
Slide 11: Impact on asset quality and profitability
2 Impact on asset quality and profitability
Slide 12: Provisions increased, but from very low levels
Provisions increased, but from very low levels Provisions increased multiple times vs H1 2019 H1 2019 H1 2020 1.0% 10.3x 0.9% 0.8% 0.7% 8.3x 0.6% 11.2x 0.5% 0.4% 10.4x 5.2x 0.3% 0.2% 0.1% 0.7x 0.0% Handelsbanken SEB Swedbank Nordea Danske DNB Note: Provisioning costs as % of credit exposures Source:
Slide 13: Oil and offshore is a troubled segment
Oil and offshore is a troubled segment Provisioning levels including and excluding oil, gas and shipping including oil, gas and shipping provisions excluding oil, gas and shipping provisions 1.0% 0.95% 0.9% 0.8% 0.7% 0.67% 0.6% 0.55% 0.56% 0.5% 0.40% 0.4% 0.38% 0.34% 0.31% 0.3% 0.24% 0.2% <0.2% 0.1%
Slide 14: But an earnings and not a capital event
But an earnings and not a capital event Provisions as a % of pre-provision income Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 160% 140% 120% 100% 80% 60% 40% 20% 0% Handelsbanken SEB Swedbank Nordea Danske DNB Note: i For Nordea, excluding AQR-related provisions, provisions / PPI falls to less t
Slide 15: Capital buffers remain robust
Capital buffers remain robust Quarterly evolution of CET1 ratios and requirements CET 1 ratio minimum requirement 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% Q4 2019 Q1 2020 Q2 2020 Q4 2019 Q1 2020 Q2 2020 Q4 2019 Q1 2020 Q2 2020 Q4 2019 Q1 2020 Q2 2020 Q4 2019 Q1 2020 Q2 2020 Q4 2019 Q1 2020 Q2 2020 H
Slide 16: Low for longer interest rates
3 Low for longer interest rates
Slide 17: Central bank policy rates for the Nordic countries fell sharply
Central bank policy rates for the Nordic countries fell sharply % Sweden Denmark Norway Finland 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Note: Sweden: repo rate; Denmark: certificates of deposits; Norway: banks’ overnight deposits; Fi
Slide 18: Net interest margins (NIMs)
Net interest margins (NIMs) NIMs have remained resilient in Sweden and Norway but fallen in Denmark and Finland Sweden Denmark Norway Finland 1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Note: Net interest margin = net interest income
Slide 19: Louise Lundberg contact
Louise Lundberg Vice President – Senior Credit Officer Phone: +46 (0)8 517 712 80 Louise.lundberg@moodys.com moodys.com
Slide 20: Part 2: Impact of COVID-19 on Corporate Credit
Part 2: Impact of COVID-19 on Corporate Credit Metin Epozdemir, CFA – Risk and Finance 16 September 2020
Slide 21: Empirical Patterns
Empirical Patterns Globally, which industries have been impacted most severely? Industries Most Impacted by COVID-19 Industries with Mild Impact to COVID-19 Average Default Probability* 5% 5% Average Default Probability* AIRLINES HEALTH & PERSONAL CARE RETL/WHSL APPAREL & SHOES PHARMACEUTICALS 4% 4%
Slide 22: COVID-19 Impact on Corporate Default Risk
COVID – 19 Impact on Corporate Default Risk Variation across sectors (Sweden) » All Industries across the board has 6.00% AIRLINES seen an increase in risk Sector EDF HOTELS & RESTAURANTS OIL & GAS » Relative riskiness of the industry 5.00% APPAREL & SHOES sectors has changed REAL ESTATE FOOD AND BE
Slide 23: Forecasting Corporate Credit Risk
Forecasting Corporate Credit Risk Industry overlay model to capture the pandemic impact QUARTERLY GDP GROWTH CROSS-SECTIONAL COVID-19 OVERLAY MODEL 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% Range across +100 industry segments US UK Germany Sweden China Source: Moody’s Analytics August Economic Scena
Slide 24: Incorporating Epidemiological Dynamics
Incorporating Epidemiological Dynamics Similarities across segments after controlling for epidemic variation EDF CREDIT MEASURE WINDOWS FOR DIFFERENT COUNTRIES (Global Sample of ~ 46,000 Firms) BASED ON DAILY COVID-19 CASES 200 Canada China 7-day Cumulative New Cases Per 100000 150 Germany South Afr
Slide 25: Expected Defaults: Sweden, Select Industries
Expected Defaults: Sweden, Select Industries: Average One-year Default Probabilities (Dec 2019 to Dec 2020) Sweden Public Firms Germany Public Firms UK Public Firms EDF Baseline Baseline S4 S4 EDF Baseline Baseline S4 S4 EDF Baseline Baseline S4 S4 Industry With C-S With C-S With C-S With C-S With C
Slide 26: Impact on the Composition of Ratings - Sweden
Impact on the Composition of Ratings - Sweden Realized through June and projected under S4 with C-S Overlay Launch-Off Current S4 Projected Leisure & Assessmen Recreation 100% 90% t experience material 80% 70% credit quality 60% 50% deterioration under 40% 30% downturn scenario, 20% 10% with almost
Slide 27: Default Probability Assessment and Projection
Default Probability Assessment and Projection Leisure & Recreation Sector – Sweden 11% LEISURE & RECREATION experiences an even more 10% pronounce deterioration under 9% the S4 as compared to the 8% Baseline once the Overlay is accounted for. 7% Current Assessment Annualized Cumulative 6% Baseline w
Slide 28: PD Current Assessment and Projection
PD Current Assessment and Projection Hennes & Mauritz AB Baseline w/o C-S Overlay Baseline with C-S Overlay S4 w/o C-S Overlay S4 with C-S Overlay 1.2% Current Assessment 1.0% 0.8% Annualized Cumulative 0.6% Launch-Off Default Projected PD = 0.07% Probability 0.4% Realized PD = 0.10% 0.2% 0.0% Scena
Slide 29: Remarkable Fiscal and Monetary Response
Remarkable Fiscal and Monetary Response A range of responses with varying timelines and effectiveness The first confirmed COVID-19 case was The first confirmed case was reported on The first confirmed COVID-19 case was First confirmed cases of COVID-19 on reported on January 31, 2020. January 29, 20
Slide 30: Quantifying Targeted Stimulus Across Segments
Quantifying Targeted Stimulus Across Segments Aid Directly Targeting Corporate Segments Aid to Individuals – Consumer Industries Most Severely Impacted by COVID-19 Behavior changes CONSUMER FOOD & BEVERAGE PRODUCTS AUTOMOTIVE CABLE TELEVISION OIL REFINING RETL/WHSL RETL/WHSL CONSUMER OIL, GAS & COAL
Slide 31: COVID-19 Analytics and Data
COVID-19 Analytics and Data Combining Cross Sectional and Fiscal & Monetary Overlays ASSESSING WHAT HAS HAPPENED SO FAR CURRENT INTERNAL Elevated : RATING ASSESSMENT Cross IndustryCOVID-19 Cross-Sectional COVID-19 Overlay OverlayModel Model - default probabilities - expected loss MOST RECENT, REASON
Slide 32: Metin Epozdemir contact
Metin Epozdemir Director, Risk and Finance Phone: +44 (207) 772-1567 Metin.Epozdemir@moodys.com moodysanalytics.com
Slide 33: Part 3: ESG and climate risk focus – credit after COVID-19
Part 3: ESG and climate risk focus – credit after COVID-19 Leonardo Checchi - ESGC & Credit Risk SME 16 September 2020
Slide 34: What is the main challenge on ESG and climate risk?
What is the main challenge on ESG and climate risk? ESG data/ coverage/ methodology Lack of standard/ taxonomy Identification of the right KPIs Physical/ transition risk assessment Integration of ESG-drivers within credit risk Coverage of ESG data on unlisted firms/ SMEs Nordic Banks beyond COVID-19
Slide 35: Moody's Analytics interviewed 50+ institutions
Moody’s Analytics interviewed 50+ institutions To understand ESG/Climate Risk best practices and challenges Overarching issue is the lack of expertise KPIs around the linking of ESG to risk management 61% 53% 47% 39% 25% 12% ESG data/ Lack of Physical/ Integration of coverage/ standard/ transition r
Slide 36: The increasing relevance of ESGC
The increasing relevance of ESGC Pushed forward by COVID event ESG/ Climate Change Paradigm Shift Challenges Over the past 12-18 months, The financial services Despite regional variance in the topic of ESG / climate industry is witnessing a the advancement of change has gained ‘paradigm’ shift; the
Slide 37: Is ESGC a material risk for Nordics banks?
Is ESGC a material risk for Nordics banks? North European Nations Are Leaders in Sustainability Overall Sovereign ESG Score 0 10 20 30 40 50 60 70 80 90 100 SWE €? FIN DNK NOR DEU FRA GBR ESP ITA OECD CAN JPN USA CHN Source: Vigeo Eiris, 427, Moody’s Analytics Nordic Banks beyond COVID-19 37
Slide 38: The challenges of building climate-related financial metrics
The challenges of building climate-related financial metrics Identification » Lack of information and weak data quality » Lack of common standards and granular indicators » Inconsistent historical information and coverage » Weak understanding of ESG/climate risk implication » Multiple leading source
Slide 39: Key aspects to consider
Key aspects to consider Moody’s framework targeting the key ESGC challenges FROM CLIMATE RISK TO CLIMATE-RELATED FINANCIAL RISK METRICS 1 Granular ESGC Scores 2 Full coverage 3 Systemic cost 4 Idiosyncratic features » Granular scores and » Identification of » Quantification of the » Estimation of fi
Slide 40: Linking ESGC to credit risk
Linking ESGC to credit risk Credit risk is the key banking risk for a climate-adjusted framework ESG/Climate Risk Metrics • ESG drivers • Emission Level • Energy Usage • Water Usage • Coastal Zone • Transition risk • Emission Intensity • Energy Intensity • Water Intensity • Flood Zone • Physical ris
Slide 41: Linking ESGC to credit risk
Linking ESGC to credit risk Nordic leadership in ESG reflected – but not in all E and S scores assessment Credit risk Sectors with material ESG-default correlation Nordics ENV SOC GOV Wholesale and retail trade, transport, accommodation and food service activities Industry (except construction) Manu
Slide 42: Nordics: A Closer Look at Economic Activities
Nordics: A Closer Look at Economic Activities Nordics: leadership in ESG reflected – but not in all countries/industries Denmark ENV SOC GOV Norway ENV SOC GOV Weak Intermediate Wholesale and retail trade, transport, Industry (except construction) Intermediate accommodation and food service activiti
Slide 43: Linking CC to credit risk
Linking CC to credit risk Nordics: minor GDP implications, but certain sectors can achieve material positive/negative results Climate Scenarios Annualized growth GDP, Finland 2.50 2.00 1.50 % 1.00 0.50 0.00 -0.50 Climate adjustment Climate Change - Global Forecast - RCP 8.5: No Mitigation: National
Slide 44: Linking CC to credit risk: Credit risk forecast
Linking CC to credit risk Nordics: material financial implications don’t necessarily follow climate risk exposure Credit risk forecast Nordic Banks beyond COVID-19 44 Confidential and proprietary – Not to be distributed without the prior written consent of Moody’s Analytics
Slide 45: Linking CC to credit risk
Linking CC to credit risk Nordics: material variability of energy transition scores across the sectors » Economic forecasts from Moody’s Climate Change Nordics Sample (164 firms) Macroeconomic scenarios » GCAM provides Prices, Quantities, Costs, and Carbon emission ET score ET score Max ET Industry
Slide 46: Linking CC to credit risk
Linking CC to credit risk Nordics: it’s not only about sea level rising and precipitation risk in Norway » Economic forecasts from Moody’s Climate Change Macroeconomic scenarios » Water Stress, Floods and Sea level can be material risks for Nordic banks portfolios as such variability can amplify the
Slide 47: Is ESGC a material risk for Nordics banks?
Is ESGC a material risk for Nordics banks? Nordics are leaders in Sustainability & ESG but devil is in the detail ESG/ Climate Change Paradigm Shift Challenges Internal credit risk New business, strategic and Quantify the climate risk assessment / PD might organizational framework need to requires f
Slide 48: Leonardo Checchi contact
Leonardo Checchi Director, ESGC & Credit Risk SME Phone: +44 (780) 053-1816 Leonardo.Checchi@moodys.com moodysanalytics.com
Slide 49: Questions and Answers
Questions and Answers Nordic Banks beyond COVID -19
Slide 50: Thank You
Thank You Nordic Banks beyond COVID -19
Slide 51: Nordic Banks beyond COVID-19
© 2020 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liabilit
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