DBRS Comments on DnB NOR – Ratings Unchanged at AA, Negative Trend, Following Q1 2009 Earnings

DBRS has today commented that its ratings for DnB NOR Bank ASA (the Bank), the lead operating bank of the DnB NOR Group (DnB NOR or the Group) are unchanged, following the recent announcement of the Group’s interim results through March 2009. DBRS maintains Senior Unsecured Long-Term Debt & Deposit ratings of AA for the Bank and Short-Term Debt & Deposit ratings of R-1 (high). The trend on all ratings remains Negative.

Despite deteriorating market and economic conditions, DnB NOR remained solidly profitable during the first three months of 2009, generating sufficient income to absorb elevated credit losses. Net income of NOK 2.9 billion for the quarter was up 80% from Q4 2008. The profit increase from the prior quarter was driven by improved trading results and a deceleration in write-downs on loans and guarantees from outsized Q4 2008 levels. DBRS sees the first-quarter results as evidence of the Group’s solid underlying earnings and as further demonstrating the overall strength of the franchise.

DnB NOR generated solid net interest income. During the quarter, net interest income of NOK 5.6 billion was supported by moderately higher loan and deposit volumes and expanding lending margins. Margins on customer deposits declined attributed to the intense market-wide competition for deposits. The Group’s combined interest spread was little changed at 1.16% in the quarter, compared to 1.12% in Q4 2008, as higher lending margins and lower deposits spreads almost offset each other. Further, net gains on financial instruments, at fair value, which reflect trading income, more than doubled from the prior quarter to NOK 2.2 billion. Net gains benefited from strong customer demand for hedging products, while fewer banks offered such products in the Nordic region. As a result, market-making spreads widened. Although the strong trading results partially demonstrate DnB NOR’s leading position in Norwegian capital markets, the current market conditions also were a driver in part of the improvement.

The current recessionary environment negatively impacted the quarter’s results. Net write-downs on loans and guarantees remained elevated at NOK 1.6 billion, although were below the prior-quarter level of NOK 2.3 billion. Non-performing and impaired assets (NPAs) increased 16% in Q1 2008; however, the rate of growth decelerated from the previous quarter. Reduced credit provisioning and decelerating growth in NPAs indicate a slower pace of credit quality deterioration, in DBRS’s view. However, given the ongoing global recessionary environment, DBRS still expects credit quality to weaken further in coming quarters, particularly in shipping, commercial real estate, and in the Baltic region. Shipping (11% of total lending) and CRE (15%) comprise sizable portions of DnB NOR’s loan book, while Baltic lending (4.9% of total loans, based on full consolidation of the Group’s 51%-owned joint venture DnB NORD) represents a more limited, but higher-risk exposure. DBRS continues to monitor these exposures closely, as outsized loan losses or accelerating NPAs could cause negative rating pressure, particularly if the Group’s earnings are insufficient to absorb such losses. DBRS views DnB NOR’s credit quality as acceptable, with net NPAs amounting to 1.18% of lending as of 31 March 2009, up from 0.99% at year-end 2008.

The ratings are underpinned by DnB NOR’s resilient underlying earnings generation ability and its leadership position in the Norwegian financial services market. Slightly offsetting these strengths is the Group’s tight capitalisation and its reliance on wholesale funding. DBRS notes that DnB NOR only marginally improved its regulatory capital ratios through internal capital generation and a small reduction in risk-weighted assets, with the Group’s core (tier 1) ratio standing at 6.8% as or 31 March 2009, slightly up from 6.7% at year-end 2008. The core (tier 1) ratio for DnB NOR Bank ASA, the operating bank rated by DBRS, stood at 8.1% at quarter-end, up from 7.8% at year-end 2008, which compares to similarly-rated European bank peers. DBRS views positively the Norwegian government’s decision to create a State Finance Fund which will inject up to NOK 50 billion of capital into banks. DBRS notes that the State Finance Fund adds to the options available to DnB NOR to strengthen its capital position.

DnB NOR’s liquidity profile benefits from its growing customer deposit base of NOK 592 billion as of 31 March 2009. While DBRS views the Group’s reliance on wholesale funding as a weakness, this is partly mitigated by DnB NOR’s ability to raise long-term unsecured funding, as evidenced by recent debt issuance. Moreover, the Norwegian central bank’s swap facility provides a source of stable funding for DnB NOR.

Notes:
The applicable methodologies are Analytical Background and Methodology for European Bank Ratings, Second Edition, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies

This is a Corporate (Financial Institutions) rating.