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Rating Action:

Moody's affirms NIB's Aaa ratings, maintains stable outlook

23 Apr 2021

Paris, April 23, 2021 -- Moody's Investors Service ("Moody's") has today affirmed Nordic Investment Bank's (NIB) long-term issuer and foreign currency senior unsecured ratings at Aaa. Concurrently, its foreign currency senior unsecured MTN and senior unsecured shelf ratings have been affirmed at (P)Aaa. Its foreign currency commercial paper rating has also been affirmed at P-1, and its other short-term program rating has been affirmed at (P)P-1. The outlook remains stable.

The affirmation of Nordic Investment Bank's ratings reflects the following key drivers:

(1) NIB's very strong asset quality and performance, which continue to balance the bank's elevated leverage ratio;

(2) NIB's very strong liquidity and funding profile;

(3) The continued strong backing for NIB from the bank's very highly rated Nordic-Baltic shareholding governments.

The stable outlook reflects Moody's expectation that NIB's strong asset quality and performance as well as its strong liquidity and funding profile will be maintained, while the increase in leverage observed in recent years will moderate as lending growth slows in the wake of the pandemic. It also reflects Moody's expectation that NIB's highly rated shareholder governments will maintain their strong backing of the institution.

RATINGS RATIONALE

RATIONALE FOR THE AFFIRMATION OF THE Aaa RATINGS

FIRST DRIVER: NIB'S VERY STRONG ASSET QUALITY AND PERFORMANCE, WHICH CONTINUE TO BALANCE THE BANK'S ELEVATED LEVERAGE RATIO

Moody's measures of NIB's asset quality and asset performance remained very strong in 2020, despite the deterioration of the operating environment sparked by the outbreak of the coronavirus. While NIB increased provisioning due to the general deterioration and heightened uncertainty of the macroeconomic environment, the bank recorded no realized loan losses or new non-performing exposures in 2020. The non-performing assets ratio declined slightly to 0.3% last year from an already very low 0.4% in 2019. Moody's does not expect asset performance to materially deteriorate in 2021 as the economic downturn in the Nordic-Baltic region was comparatively moderate in 2020, with the risk of permanent economic scarring thus being more limited, and as NIB's overall asset quality remained very strong in 2020.

Although the economic downturn negatively affected NIB's asset quality in 2020, the overall impact was limited and the bank's weighted average borrower rating remained unchanged at "baa2" -- one of the highest of the MDBs Moody's rates. Moreover, more than 90% of NIB's loan portfolio remained in investment-grade territory. Ninety-seven percent of new loan disbursements in 2020 were made to investment-grade borrowers with the vast majority of new lending undertaken as part of NIB's response to the coronavirus pandemic directed to the three single-A rated Baltic sovereigns. Moody's does not expect that NIB's asset quality will materially deteriorate in 2021 as the economic recovery in the Nordic-Baltic region gets under way.

The strength of NIB's asset performance and quality continues to balance the risks otherwise associated with the bank's elevated leverage ratio. Moody's measure of the bank's leverage increased to 586% in 2020 from 563% in 2019, one of the highest leverage ratios of the MDBs Moody's rates. The increase in leverage was driven by record-high disbursements of €4.85 billion in 2020, as the bank responded to the outbreak of the coronavirus by increasing lending significantly above the €3.4 billion that had been originally planned for the year. Aside from NIB's very strong asset quality and performance, the bank's elevated leverage ratio continues to be balanced by NIB's solid profitability which allows it to consistently accumulate retained earnings that bolster its capital base and moderate leverage. Although the bank continues to face challenges to its treasury income and overall profitability from the low interest rate environment, NIB remains consistently profitable.

SECOND DRIVER: NIB'S VERY STRONG LIQUIDITY AND FUNDING PROFILE

NIB's factor score for Moody's assessment of its liquidity and funding remains very strong at "aa1". This reflects NIB's solid track record of raising funding at favourable rates in a diverse set of currencies and from a group of investors that is diversified both by type and geography. These longstanding features of NIB's credit profile remained essentially unaffected by the outbreak of the coronavirus. To fund its increase in lending to tackle the impact of the pandemic, NIB issued two so-called Covid Response bonds denominated in euros and in Swedish kronor, which attracted significant investor demand.

NIB's robust liquidity buffers remain another strength of its credit profile. Moody's key measure of the bank's liquidity, which measures discounted liquid assets against projected net outflows over the subsequent 18-month period, stood at 114% at the end of 2020 -- broadly in line with the median of Aaa-rated MDBs -- and essentially unchanged from 2019. The bank's own measure of its survival horizon stood at 418 days at end-2020, up slightly from a year earlier, while NIB also comfortably meets the key liquidity ratios of the Basel III Accords.

THIRD DRIVER: THE CONTINUED STRONG BACKING FOR NIB FROM THE BANK'S VERY HIGHLY RATED NORDIC-BALTIC SHAREHOLDING GOVERNMENTS

Moody's assess the strength of member support for NIB as being "Very High". This is above all based on NIB's very strong average-weighted shareholder rating of "Aa1" -- the joint highest of all MDBs Moody's rates. Moreover, Moody's upgraded the sovereign rating of Lithuania to A2 with a stable outlook in February this year and the outlook for all eight shareholding governments is currently stable, despite the impact of the pandemic.

Moody's assesses member states' willingness to support the institution beyond their contractual obligations as being "Very High", given the importance of NIB in supporting the Nordic-Baltic governments' efforts to meet their economic and environmental policy objectives. The bank's Board of Governors in March 2020 called for the bank to "support member states' businesses to the widest extent possible to overcome the crisis" leading to record high loan disbursements in 2020. However, in order to bolster NIB´s capital base in the wake of last years unplanned increase in lending, the member states have decided to waive the paying of dividends for 2020.

Contractual support in the form of callable capital remains relatively limited for NIB compared to its Aaa-rated MDB peers. The ratio of callable capital to total debt stood at 25.9% at the end of 2020, compared to the Aaa median of 111%. That said, NIB's callable capital ratio increased somewhat in 2020 as guarantees previously provided under the special Project Investment Loan facility were converted into callable capital as the facility was abolished as part of a broader overhaul of NIB's statutes that entered into force in July 2020.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's expectation that NIB's very strong asset quality and performance as well as its strong liquidity and funding profile will be maintained and remain largely unaffected by the impact of the coronavirus pandemic. We also expect that the increase in leverage observed in recent years will moderate as the pace of lending growth slows after a year of exceptionally high disbursements in 2020 to tackle the economic impact of the pandemic. The stable outlook also reflects Moody's expectation that NIB's highly rated shareholding governments will maintain their strong backing of the institution.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Environmental risks are not material for NIB's rating. NIB's mandate includes the promotion of environmental sustainability, however, environmental risks to its development asset portfolio are limited as Moody's does not generally see such risks as being prominent in the Nordic-Baltic region where the portfolio is concentrated.

Social risks are generally not material for NIB's rating because the Nordic-Baltic region is characterised by social and political stability. However, Moody's regards the coronavirus outbreak as a social risk under Moody's ESG framework, given the substantial implications for public health and safety.

NIB's strong governance is a positive feature of the credit profile. Governance risks are not material to its development asset portfolio given its concentration in the Nordic-Baltic region, which is characterised by a very strong institutional environment.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Downward pressure on the ratings, which are at the highest level on Moody's ratings scale, could result from a material weakening in NIB's asset quality and performance, coupled with a significant increase in leverage over several years, potentially reflecting a combination of a big increase in lending and declining profitability in the context of very low interest rates. A substantial weakening in the bank's liquidity buffers and funding profile would similarly be credit negative. A significant reduction in the strength of member support, for example, because of downgrades of member states' sovereign ratings or the withdrawal of a key member state, would also exert downward pressure on NIB's ratings.

The principal methodology used in these ratings was Multilateral Development Banks and Other Supranational Entities Methodology published in October 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1232238. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Petter Bryman
Asst Vice President - Analyst
Sovereign
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Alejandro Olivo
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Sovereign
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