DBRS Comments on DnB NOR’s Q3 2009 Results; Senior at AA, Trend Negative

DBRS has today commented on the Q3 2009 results of DnB NOR Group ASA (DnB NOR or the Group). DBRS’s ratings for DnB NOR Bank ASA, the Group’s main operating bank, remain at AA for Senior Unsecured Long-Term Debt & Deposit and R-1 (high) for Short-Term Debt & Deposit. The trend on all ratings remains Negative.

DBRS views DnB NOR’s results as demonstrating the strength and resilience of its franchise which is a key factor underpinning the ratings. The results also reflect improving general operating conditions, as the Nordic economies have begun to stabilise and in some areas, improved. DnB NOR reported net profit of NOK 1.760 billion for Q3 2009, benefiting from robust earnings and sound asset quality in Norway, where 79% of the Group’s lending is located. Net income was up more than 2.7 times from the depressed prior quarter, which had been negatively affected by market-related one-off charges. Net profit was also 8% higher compared to the year-ago quarter.

Importantly, DnB NOR continues to generate strong earnings before provisions and taxes. Further evidencing the strength of the franchise and the Group’s earnings, generation ability, at NOK 5.0 billion, pre-provision, pre tax earnings rebounded significantly from the depressed Q2 2009 level and were also up 16% from the year-ago period.

Net interest income of NOK 5.7 billion increased slightly quarter-over-quarter. Interest income was supported by modest growth in average lending volume and by rising lending margins which offset declining deposit spreads. Reflecting DnB NOR’s dominant position in Norway, the Group’s two largest business segments, Retail Banking and Large Corporates and International, continue to generate solid profits. However, DnB NORD, the Group’s Eastern European joint venture, remains a drag on earnings. DnB NORD recorded a sizable pre-tax loss of NOK 0.95 billion in Q3 2009 due to elevated credit costs, largely in the Baltics.

DBRS views asset quality outside the Group’s Eastern European joint venture as sound. Overall write-downs on loans and guarantees remained at a moderate level in Q3 2009 at 0.79% of average lending, largely unchanged from the prior quarter. Individual loan write-downs in Norwegian units continued to be modest at 0.29% of average lending in Q3 2009. At DnB NORD, the pace of individual write-downs remained elevated at 4.62% of lending in the quarter, but declined from 5.31% of lending in Q2 2009. Although the quarter-over-quarter decline is an encouraging indication, DBRS remains extremely cautious, as the Baltic region remains under significant economic stress. The risk of noteworthy losses in the Baltics, currency devaluations and changes in the legal structure add negative pressure on the ratings, which is reflected in the Negative trend. DBRS recognises that the size of DnB NOR’s exposure to the Baltics is limited, as Baltic lending in the joint venture DnB NORD at NOK 50.5 billion amounted to 4.5% of total Group lending at 30 September.

As of 30 September 2009, loan write-downs in the sizeable shipping (11% of net lending) portfolio and in commercial real estate (14% of loans) remained at moderate levels. Write-downs on shipping loans increased slightly to 0.7% of net lending (annualized) in Q3 2009 after 0.6% in Q2 2009. Loan write-downs on commercial real estate loans of 0.6% (annualized) were down from the prior quarter. DBRS sees a potential for rising loan write-downs in shipping, given weakened global trade volumes and overcapacity in the industry which are pressuring freight rates

At 30 September 2009, DnB NOR reported a pro-forma Tier 1 ratio of 9.8%, assuming the full implementation of Basel II. Given the still-uncertain environment, DBRS positively views DnB NOR’s recently-announced NOK 14 billion rights issue. The rights issue will strengthen the Group’s loss-absorption capacity by raising ordinary shares, the strongest form of capital. The fully-underwritten rights issue is expected to increase the Group’s Tier 1 ratio to 11.4% on a pro-forma basis, based on the full implementation of Basel II rules and including 50% of period profits. Following the rights offering, the Group’s capital ratios will compare favourably with its Nordic peers.

Despite DnB NOR’s robust performance, the ratings trend remains Negative, reflecting DBRS’s concern about the Group’s credit exposures to the Baltic region, the stressed shipping sector, and in commercial real estate.

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.