Nordic Investment Bank Ratings Affirmed At 'AAA/A-1+'; Outlook Stable

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1 Research Update: Nordic Investment Bank Ratings Affirmed At 'AAA/A-1+'; Outlook Stable Primary Credit Analyst: Gabriel Forss, Stockholm (46) ; Secondary Contact: Alexander Ekbom, Stockholm (46) ; Table Of Contents Overview Rating Action Rationale Outlook Related Criteria And Research Ratings List MAY 19,

2 Research Update: Nordic Investment Bank Ratings Affirmed At 'AAA/A-1+'; Outlook Stable Overview The Nordic Investment Bank (NIB) recorded strong lending growth in 2016 and fulfilled its mandate, underlining its position as a relevant funding contributor in the Nordic and Baltic regions and supporting its very strong business profile. It maintained its capital ratios and its extremely strong financial profile through sound core earnings and sustained credit quality in its loan book, supporting our assessment of NIB's 'aaa' stand-alone credit profile. We are affirming our long- and short-term issuer credit ratings on NIB at 'AAA/A- 1+'. The stable outlook reflects our expectation that, in the next two years, NIB's solid capital position and robust liquidity will continue to support its extremely strong financial profile, and that the institution will maintain a very strong business profile by making a relevant funding contribution and fulfiling its public policy mandate through the economic cycle. Rating Action On May 19, 2017, S&P Global Ratings affirmed its long- and short-term issuer credit ratings on the Nordic Investment Bank (NIB) at 'AAA/A-1+'. The outlook is stable. Rationale We base our ratings on NIB on our assessment of its very strong business profile and extremely strong financial profile. A rebound in loan disbursements to record high levels in 2016 has resulted in solid earnings. Combined with a focus on lending to public entities, this has cemented the institution's extremely strong capital position, which underpins our assessment of its stand-alone credit profile (SACP) at 'aaa'. Denmark, Sweden, Norway, Finland, and Iceland founded NIB as the Nordic countries' joint international financial institution in Its primary purpose is to promote economic growth in member countries by financing medium- and long-term projects in the private and public sectors that strengthen competitiveness and enhance the environment by promoting green growth initiatives. The five founding member countries enjoy some of the highest per capita incomes of all rated sovereigns. In January 2005, NIB expanded its membership for the first time by inviting Estonia, Latvia, and Lithuania to join. This reflected the new members' economic integration with and geographic proximity to the incumbent Nordic members. The combined shareholding of the newer members amounted to 4.2% of NIB's total capital as of year-end Of NIB's callable capital, 77.2% is pledged by 'AAA' rated member states, comfortably above the ratio of any other rated multilateral lending institution (MLI) peer. MAY 19,

3 NIB's public policy mandate and role in the Nordic and Baltic regions supports our assessment of its very strong business profile. This assessment further reflects NIB's connection to and relationship with its shareholders, our view of the bank's governance and risk management as robust, and its effective track record in all of its major lines of business. Although NIB has relatively limited geographic scope, its shareholders and main countries of operation have strong governance indicators. In addition, NIB has mostly enjoyed preferred creditor treatment for its public sector loans and preferential treatment for its private sector loans. While focusing on its core lending mandates and acting as a complement to capital markets and local private sector financing, NIB has started to gradually expand its product offering, in line with shareholders' requests to extend its lending to small and midsize enterprises (SMEs) through, for example, risk-sharing with local banks. It has also expanded its lending to countries that are not members and offers funding facilities in the Arctic region. These developments appear in line with the shareholder review of the institution's policy relevance, purpose, and business strategy, completed in In this process, the shareholders asserted the relevance of NIB in terms of its position as a long-term funding alternative to environmental and competitiveness-enhancing investments in the region. Moreover, in line with shareholder interest in promoting green initiatives, in 2016, NIB began investing in green bonds of highly rated issuers. It books these investments as lending under its environment mandate. NIB engagement in such investments is made with the intent of using the expertise of the institution to promote the development of the green bond market in the Nordic and Baltic region. We observe that the interest of NIB's shareholders in green initiatives could result in NIB further enhancing its role as a financier of green investments in the region. We would interpret such a development as a sign that shareholder commitment is increasing the institution's policy relevance. For 2017 and 2018, we expect sound growth in total loans outstanding, on the back of continued strong deal flow from public sector entities. NIB recorded record-high disbursement in 2016, with net loan book growth of 6.5% for the full year, up from the 3% growth rate of Notably, of the new loans agreed in 2016, more than half were to new borrowers, reflecting the bank's conscious market penetration. The increase in lending is fueled by strong demand. In 2016, demand predominantly came from the region's local and regional governments, which have significant infrastructure financing needs. In spite of the low interest rates, NIB recorded sound profitability in 2016 due to strong disbursement, combined with an additional boost from one-off gains related to the implementation of two-way credit support annexes (CSAs). As such, the bank continued to pay cash dividends of 55 million, as it has since The dividends distributed in have limited the institution's organic capital growth, in our view. We expect similar dividend payout ratios to continue through 2018, but note that NIB's shareholders have taken a proactive stance on dividends in the past and, in certain situations, have waived the payment of dividends to preserve capital. For example, NIB suspended dividends in after incurring a loss in MAY 19,

4 We expect NIB's capital ratios to stay solid in coming years, based on maintaining the credit quality of its assets, despite our expectation of moderating profitability from continued low interest rates. In spite of NIB's dividend payouts in recent years, its capital ratios have continued to improve from the extremely strong levels in Our assessment of NIB's extremely strong financial profile factors in its robust capitalization, supported by an S&P Global Ratings' riskadjusted capital (RAC) ratio before adjustments of 26.5% as of year-end It achieved this despite the fact that most of NIB's loans are to the private sector, while most other MLIs have a majority of loans to sovereign or sovereign-guaranteed entities. NIB's RAC ratio stands at 24.7% when we take into account adjustments specific to MLIs under our methodology. These primarily reflect our expectation that MLIs would receive preferred creditor treatment (PCT) from sovereign borrowers, a cap on the risk weight of high-risk exposures, and the geographic diversification of NIB's exposures. These ratios have further improved since 2015, largely because part of the new lending is directed to the public sector, and they underpin our assessment of the bank's financial profile. NIB held a comprehensive liquidity buffer of 11 billion at year-end 2016, equivalent to about 35% of its balance sheet. Even though the bank is exposed to risks through its dependence on wholesale market funding, we believe this is mitigated by liquidity policies stipulating a 12-month liquidity survival horizon and entailing significant levels of high-quality assets in its treasury portfolio. Our liquidity ratios for NIB indicate that the bank would be able to cover all committed lending and debt repayments for at least one year, even under extremely stressed market conditions, without access to the capital markets. We view NIB's comprehensive liquidity positon as important in light of the institution's ongoing move to two-way CSAs on its derivatives counterparty portfolio. This move is well underway and has affected NIB's liquidity and funding strategy. We note that contingent capital flows are prefunded under NIB's liquidity policy and the bank has appropriately increased its treasury assets to balance the liquidity need stemming from additional collateral postings. We expect it to further size up its liquidity holdings as the remaining derivatives counterparties are moved to two-way CSAs in In light of this, we observe the emergence of a more dynamic funding strategy at NIB, resulting in more frequent issuances over a funding year, which is supporting funding ratios. Historically, NIB's benchmark issuance has resulted in episodically short-term financing needs which are uncharacteristic of other highly rated MLIs. The occasional slight funding gaps between NIB's maturing assets and liabilities are improving as the institution expands its issuance profile to cater for the liquidity needs necessary for collateral posting under two-way CSAs. Our 'AAA' rating on NIB is supported by 4.4 billion (1.35x of adjusted common equity) in subscribed callable capital from members rated 'AAA': Denmark, Sweden (unsolicited ratings), and Norway. In our opinion, the callable capital mechanism for NIB is one of the strongest among rated MLIs--funds have already been cleared by national parliaments or governments. Outlook MAY 19,

5 The stable outlook on NIB reflects our expectation that the bank will maintain its extremely strong financial profile and very strong business profile over the next two years and continue to make a relevant funding contribution, fulfilling its public policy mandate through the economic cycle. Furthermore, we expect that support from NIB's shareholders will maintain the adequacy of its internally generated capital and back its lending mandate. If either NIB's business or financial profile substantially deteriorates, we could lower the ratings on NIB. For example, we could lower the ratings if we observed deteriorating governance at NIB, demonstrated by actions such as substantially increasing dividend payment ratios. In addition, if we observed that NIB was unable to match lending offers from the private sector, it could signal that its funding contribution was of diminishing relevance. If the bank's liquidity deteriorated or asset quality weakened markedly, and there was a change in the owners' willingness to support the institution, it would put pressure on the financial profile, and thus on our ratings on NIB. Related Criteria And Research Related Criteria General Criteria: Methodology For Linking Long-Term And Short-Term Ratings - April 07, 2017 Criteria - Governments - General: Multilateral Lending Institutions And Other Supranational Institutions Ratings Methodology - November 26, 2012 Criteria - Financial Institutions - Banks: Bank Capital Methodology And Assumptions - December 06, 2010 General Criteria: Use Of CreditWatch And Outlooks - September 14, 2009 Related Research How Much Can Multilateral Lending Institutions Up The Ante?, April 12, 2016 Supranationals Special Edition 2015, Oct. 8, 2015 How An Erosion Of Preferred Creditor Treatment Could Lead To Lower RatingsOn Multilateral Lending Institutions, Aug. 26, 2013 Ratings List Rating To From Nordic Investment Bank Issuer Credit Rating Foreign Currency AAA/Stable/A-1+ AAA/Stable/A-1+ Senior Unsecured Foreign Currency AAA AAA Foreign Currency A-1+ A-1+ MAY 19,

6 Ratings List Continued... Commercial Paper Foreign Currency A-1+ A-1+ Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at for further information. Complete ratings information is available to subscribers of RatingsDirect at and at spcapitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public Web site at Use the Ratings search box located in the left column. Alternatively, call one of the following S&P Global Ratings numbers: Client Support Europe (44) ; London Press Office (44) ; Paris (33) ; Frankfurt (49) ; Stockholm (46) ; or Moscow 7 (495) MAY 19,

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