DBRS Comments on DnB NOR Rights Issue; Ratings Unaffected – Senior at AA, Negative Trend

DBRS has commented today that its ratings for DnB NOR Bank ASA (the Bank) are unaffected following the announcement that its parent, DnB NOR Group ASA (DnB NOR or the Group) intends on raising NOK 14 billion of additional capital through a fully underwritten rights issue. DBRS rates the Bank’s Senior Unsecured Long-Term Debt & Deposit at AA, with a Negative trend.

In its 25 September 2009 announcement, DnB NOR indicated that the NOK 14 billion of ordinary shares will enable the Bank to strengthen its Tier 1 capital base and position it to increase its capacity to grow lending volumes and pursue business opportunities. Moreover, the Bank indicated that its planned capital increase will better position DnB NOR to meet demands for higher capital ratios from investors and regulators.

DBRS views this capital raise positively, as it increases the Company’s capital cushion with ordinary shares, the strongest form of capital. Boosting the capital cushion is important to strengthen the Company’s financial position, given the current difficult operating environment and the Bank’s sizeable exposure in the stressed shipping industry, commercial real estate, and the Baltics. At 30 June 2009, shipping accounted for 12% of net lending, commercial real estate for 10%, and the Baltics for 4.7%, although a portion of the Baltic exposure is borne by the minority partner in DnB NOR’s Eastern European joint venture.

Following the capital injection, the Group’s capital ratios will compare favourably with its Nordic peers. DnB NOR estimates that, after considering the proceeds of the share issue, on a pro forma basis, its Tier 1 ratio will rise to a solid 11.3%, assuming the full implementation of the Internal-Ratings Based (IRB) approach under Basel II and including 50% of period profits. On this basis, the equity Tier 1 ratio (excluding hybrids) will increase to 10.2%. DnB NOR’s leverage ratio (equity to assets) will improve to 5.4% pro-forma.

The fully underwritten rights offering is subject to parliamentary approval for the Norwegian government’s planned participation. The government is DnB NOR’s largest shareholder with a 34% stake and intends to participate for its pro-rata share of the rights issue. The Group’s second-largest shareholder, the Norwegian Savings Bank Foundation (11.4% stake), and the third-largest shareholder, the National Insurance Fund (3.8% stake), have both entered into agreements to participate in the rights issue. The remainder is underwritten by two investment banks.

DBRS views protection of DnB NOR’s franchise strength of paramount importance, as its strong franchise in Norway, its leading market positions across a wide range of financial services, and robust earnings power are key factors underpinning the ratings. DBRS would expect that any deployment of capital will be done in a prudent and measured fashion, given the continued volatility in the capital markets and the still uncertain direction of global economies.

DBRS notes that DnB NOR has confirmed its outlook for loan write-downs of NOK 8 billion to NOK 10 billion in 2009. Of this amount, NOK 3.9 billion have been realised in H1 2009, implying the potential for higher loan write-downs in the second half. The Group also confirmed its outlook for NOK 20 billion of pre-provision earnings in 2010, which is roughly in line with the NOK 9.6 billion run rate in the first half of 2009.

While DBRS positively views the Bank’s anticipated bolstered capital position, the rating Trend is still negative, as DBRS remains concerned about DnB NOR’s credit exposure to the shipping sector, commercial real estate, and the Baltic region. Importantly, the planned capital increase provides DnB NOR additional capacity to absorb unexpected losses which may invade capital. DBRS will continue to monitor the Bank’s performance in this difficult operating environment. Assuming the rights issue is successfully executed, should DnB NOR continue to generate solid earnings and credit quality trends stabilize, the trend could revert back to Stable.

Notes:
All figures are in NOK unless otherwise noted.

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.