DBRS Comments on DNB’s 1H12 Results – Senior at AA, Trend Stable; Rating Unaffected

DBRS Ratings Limited (DBRS) has commented today on the 1H12 results of DNB Group (DNB or the Group). DBRS’s ratings of DNB Bank ASA, (the main operating bank), including its Senior Unsecured Long-Term Debt & Deposit rating of AA, are unaffected by the results. The rating trend is Stable. DNB’s results continue to evidence a solid balance sheet, strong revenue generation, resilient profitability, and sound credit performance.

DBRS considers DNB’s ability to generate another half year of solid profits as evidencing the strength of the franchise and the solid earnings generation of the diverse business model. For the six months ending 30 June 2012, the Group’s pre-tax operating profit totalled NOK 8.4 billion, broadly stable to 1H11. Excluding the impact of mark-to-market adjustments on basis swaps, DNB generated a pre-tax operating profit of NOK 9.8 billion, 10% higher than in 1H11. DBRS notes that excluding special items, including the adjustments for basis swaps and net market-to-market on other items, DNB reported its best quarter ever in 2Q12, generating pre-tax operating profit of NOK 4.9 billion. For the half-year, results demonstrated the strength of the Group’s resilient underlying earnings generation ability, with total income (revenues) improving 3% year-on-year to NOK 20.1 billion on positive trends in net interest income. To this end, net interest income for 1H12 rose by 10.1% over the comparable period a year ago to NOK 13.3 billion. The increase reflected strong volume growth and widening lending spreads, which more than offset rising pressures on deposit spreads and significantly higher long-term funding costs. The resilient revenue capacity of DNB underpins the Group’s ability to generate sound levels of earnings to absorb credit losses. Indeed, pre-tax operating profit before write-downs totalled NOK 11.2 billion in 1H12, excluding adjustments for basis swaps, which was more than sufficient to absorb the NOK 1.5 billion in write-downs on loans and guarantees.

DNB continues to enjoy dominant market shares in Norwegian household lending at 27.9%, while its share of lending to Norwegian corporates remains stable at 13.9%. These robust market shares reflect deeply entrenched customer relationships that helped DNB increase lending volumes by 8.3% (excluding exchange rate movements) from 30 June 2011. Impressively, deposit volumes grew by 30.8% over the same period, backed by strong market shares of household (32.7%) and corporate deposits (37.5%). DBRS views the positive momentum in lending volumes and deposits as evidence that the Group is capturing the benefits of its investment in expanding products and services to customers. This, in turn, is driving net interest income growth, positively impacting the financial results.

By business segment, all segments, with the exception of the Insurance & Asset Management, generated double-digit growth in pre-tax operating profit in 1H12. Strong lending growth and improved lending spreads drove the solid performance in Retail Banking and Large Corporates & International (including DNB Baltics & Poland), while DNB Markets benefited from higher income related to foreign exchange and interest rate instruments, which offset lower equity market activity. Performance in the Insurance & Asset Management segment was affected by the weakness in financial markets. Of particular note, DNB Baltics & Poland recorded pre-tax operating profits of NOK 152 million for the half year compared to NOK 43 million in 1H11. DBRS views positively the progress achieved in this segment.

Credit performance trends continued their positive trajectory reflecting favourable economic conditions in the Nordic region partially offset by pressures from the Euro zone. Write-downs on loans and guarantees, at NOK 1.5 billion, for the six month period, declined 30% compared to 2H11. As a percentage of average loan volume, write-downs, remain at a very low 23 basis points (bps). Further evidencing the improvement in overall asset quality, net non-performing and net doubtful commitments totalled NOK 19.3 billion at 30 June 2012 compared to NOK 19.5 billion at year-end 2011. As a percentage of lending, net non-performing and net doubtful commitments amounted to 1.45% of lending at the half-year end, down from 1.50% at year-end 2011. Excluding DNB Baltics and Poland/DnB NORD the ratio would have been 1.09%. The slowing global economy and strong inflow of new shipping capacity, especially in dry bulk, continues to pressure the international shipping market. As a result, the credit quality of DNB’s Shipping, Offshore and Logistics segment has experienced modest deterioration with write-downs in 1H12 totalling NOK 337 million, accounting for 23% of DNB write-downs, while representing only 10.7% of net lending to customers. While performance of the book has weakened, DBRS still views the exposure in this book as manageable, given that pure shipping exposure accounts for only 7.6% of total exposure at default. Moreover DBRS recognises DNB’s long track record of effectively managing shipping portfolios evidenced by the low write-down rates since the onset of the financial crisis.

DBRS views DNB’s funding profile as well-managed underpinned by good access to the capital markets and a growing deposit base. In 1H12 the Group was successful in issuing a total of NOK 90.5 billion of long-term funding in 1H12, including NOK 42.9 billion of senior funding and NOK 47.6 billion of covered bonds. Moreover, despite heightened uncertainty in the capital markets, DNB maintained good access to short-term funding markets. Demonstrating the strengthening of the Group’s funding profile, at 30 June 2012, long-term stable funding sources (which DNB defines as customer deposits, long-term securities, subordinated loan capital and equity) covered 112.8% of customer loans, up from 106% at year-end 2011. At the half year-end, deposits totalled NOK 854 billion, a 15% increase from year-end 2011. As a result, DNB’s ratio of deposits to lending improved to 65.3% at 30 June 2011 from 57.8% at 31 December 2011 evidencing the progress DNB has achieved in improving the balance of its funding profile. DBRS notes that the ratio of deposits-to-lending in DNB Bank ASA was 114.5% at 30 June 2012, which illustrates that those loans not financed through the mortgage subsidiary, DNB Boligkreditt (via covered bonds), are financed with deposits.

In terms of capital, the Group ended the quarter with a common equity Tier 1 capital ratio (Basel II) at 9.6%, including 50% of profit for the period. DBRS notes that on a full Basel II compliance basis, the common equity Tier 1 ratio would have stood at 11.2%. At the Bank, the Tier 1 capital ratio (including 50% of the profit for the period) stood at 11.9%, while common equity Tier 1 ended the quarter at 11.3%.

Notes:
All figures are in NOK unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Peter Burbank
Approver: Alan G. Reid
Initial Rating Date: 18 September 2006
Most Recent Rating Update: 2 March 2012

For additional information on this rating, please refer to the linking document under Related Research.