DBRS Confirms DnB NOR at AA, Revises Trend to Negative

DBRS has today confirmed all ratings for DnB NOR Bank ASA (the Bank), including the Bank’s AA Senior Unsecured Long-Term Debt & Deposit rating and its R-1 (high) Short-Term Debt & Deposits rating. Concurrently, DBRS has revised the trend on all ratings to Negative from Stable. These rating actions follow the release of Q4 2008 results for DnB NOR Group (DnB NOR or the Group), the holding company of the Bank and its related entities.

The trend change reflects DBRS’s concern about accelerating loan impairments reported by DnB NOR and about the worsening economic environment. The rating confirmation is based on the Group’s resilient franchise, which is anchored by its dominant position in Norway; on DnB NOR’s solid underlying earnings; and on its sound financial profile. Some level of higher loan impairments and writedowns was factored in to the ratings before today’s rating action. However, the rapid rise in impaired loans in Q4 2008 that DnB NOR reported exceeded prior expectations. Moreover, the Nordic economies are deteriorating at a faster pace than previously expected.

Gross non-performing and impaired commitments increased by 67% from September to December 2008 and stood at NOK 16.3 billion at year-end 2008. Impaired commitments increased by more than 2.5 times from December 2007 to December 2008. Net writedowns on loans and guarantees of NOK 2.3 billion almost tripled from September to December 2008. Higher loan losses were partly driven by Danish property loans in the Group’s majority-owned joint venture, DnB NORD. DnB NOR’s economic exposure to DnB NORD is limited to its 51% stake, although DnB NORD is fully consolidated in the Group results. The Group also saw loan losses in its core Norwegian operations rise sharply, albeit from very low levels, driven by impaired loans to small to mid-sized Norwegian businesses.

Moreover, the Norwegian economy has slowed markedly in recent months and remains exposed to the sharp drop in oil prices and the slump in global shipping rates as the energy and shipping industries form a key part of the Norwegian economy. At the same time, most other countries in the Nordic and Baltic regions, where DnB NOR is active, have slipped into recession. Consequently, DBRS expects loan impairments and losses to rise further.

Despite deteriorating market and economic conditions, DnB NOR reported solid results for Q4 2008 and full-year 2008 in the view of DBRS. Quarterly pre-tax operating profit before loan provisions was NOK 5.6 billion, up 28% from the prior quarter and 53% higher than in the year-ago period. Strong corporate lending results boosted results. DBRS expects DnB NOR to continue generating solid pre-provision earnings in coming quarters, but possibly at a lower pace than in 2008.

DBRS continues to monitor closely DnB NOR’s capitalisation, which compares unfavourably with its similarly-rated peers. DBRS views positively the Group’s announcement that its supervisory board will recommend to pay no dividend for 2008. This will improve the Group’s regulatory core (Tier 1) capital ratio, which stood at 6.7% at year-end 2008 under Basel II (including transition rules). DBRS also notes positively that the Norwegian government announced plans on 8 February 2009 to establish a fund mandated to inject up to NOK 50 billion into Norwegian banks. DBRS views DnB NOR as a systemically important bank in Norway that is likely to receive external support in a stress scenario. Consequently, the Bank’s ratings are positioned one notch above their intrinsic strength, consistent with DBRS’s support methodology.

The ratings trend could revert back to Stable should the Group continue to generate sufficient earnings to absorb loan losses and strengthen its capitalisation. Conversely, negative rating pressure may result from outsized loan losses, a weakening financial profile or reduced underlying earnings ability.

Notes:
The applicable methodology is Analytical Background and Methodology for European Bank Ratings, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.