DBRS: DNB Reports Strong Q4; Good Cost Control

Summary:
•Full time employee target for end-2014 already met, supports future efficiency.
•Net profit up 16% QoQ driven by lower impairments; Better asset quality indicators due to improvement in the shipping sector.
•DBRS rates DNB Bank ASA at AA with a Stable trend for Senior Unsecured Debt & Deposits.

DBRS Ratings Limited (DBRS) considers the Q4 2013 results of the DNB Group (DNB or the Group) as strong, demonstrating the strength of the customer franchise, stable asset quality and the solid capitalisation of the Group. In the period between end-June 2012 and end-2013 the Group has reduced the total number of full-time employees to 12,016 from 13,592, reaching its 2014 target of 12,000 almost a year early. As a result of this, and despite the more challenging economic environment in Norway, the Group’s cost-to-income ratio (excluding impairment losses for goodwill and other intangible assets) has remained low at 40.4% in Q4 2013. Overall the Group aims to keep nominal costs at the same level as 2012; DBRS views this ongoing focus on cost efficiency positively.

Overall the Group reported a strong performance in Q4 2013. Net profit increased by 16% quarter-on-quarter (QoQ) with revenues rising by 2%. A substantial reduction in the impairment charge, driven in part by the release of provisions due to the improved performance of the shipping sector, also helped to boost profits. Total expenses increased QoQ although this was primarily driven by an impairment charge relating to IT systems in the Baltics, and to goodwill in Russia. Improvement in the shipping sector led to better overall asset quality indicators and the Group’s capital position continues to improve.

DBRS views the Group’s solid asset quality as underpinning the Group’s ratings. In recent years the Group’s asset quality has been relatively stable as the Baltic region improved, however, there has been deterioration in other parts of the loan book, particularly shipping, which at end-2013 accounted for 6.5% of the Group’s total exposure at default. As a result DBRS views positively the improvement in the shipping sector lending in Q4, whilst still noting the challenges that the shipping industry continues to face. As of end-2013, net non-performing loans and net doubtful loans and guarantees accounted for 1.38% of total net lending, down from 1.70% at end-Q3 2013 and 1.50% at end-2012.

As of end-2013 the Group reported an improved capital position with the Common Equity Tier 1 ratio (according to Basel 3) at 13.6%, up from 12.1% at end-2012 (based on the Group’s interpretation of future regulation), and the Basel 3 leverage ratio at 5.3%, up from 4.6% at end-2012. As a result of ongoing regulatory requirements the Group estimates that it will need to raise a further NOK 34 to 40 billion of common equity by end-2016 to reach its Common Equity Tier 1 ratio capital target of 13.5 to 14%. Due to the Group’s internal capital generation, and moderated dividend policy, DBRS views the Group as well placed to manage the impact of the evolving regulatory environment.

DBRS rates DNB Bank ASA at AA with a Stable trend for Senior Unsecured Debt & Deposits.

Notes:
All figures are in Norwegian krone (NOK) unless otherwise noted.

[Amended on December 23th, 2014 to remove unnecessary disclosures.]