DBRS: DNB’s Fundamentals Continue to Improve; Solid Q1 2014

Summary:
• Solid Q1 2014 performance, boosted by a revaluation of the Group’s shareholding in Nets.
• Fundamentals continue to improve with strengthening asset quality and capital ratios.
• DBRS rates DNB Bank ASA at AA with a Stable trend for Senior Unsecured Debt & Deposits.

DBRS Ratings Limited (DBRS) considers the Q1 2014 results of the DNB Group (DNB or the Group) as solid, demonstrating the strength of the franchise and its improving fundamentals. In Q1 2014 the Group reported a net profit of NOK 5.519 billion, boosted by the NOK 913 million positive revaluation of its shareholding in Nets (Nets is a provider of payments, information and digital identity solutions in Northern Europe). Net interest income was down 3% on Q4 2013, mainly due to the lower number of days during Q1 compared to Q4, but was 12% higher versus Q1 2013, mainly due to increasing lending spreads. Although the Group’s cost/income ratio worsened slightly in the quarter to 41.3% (Q4 2013: 40.4%), the Group has made further progress in reducing staff levels with 11,780 total full time positions reported at end-Q1 2014, down from 13,592 at end-June 2012, and already below its end-2014 target of 12,000. Overall the Group aims to keep nominal costs at the same level as 2012 over the medium term; DBRS views this ongoing focus on cost efficiency positively.

DBRS views the Group’s solid asset quality as underpinning the Group’s ratings. In Q1 2014 the Group’s asset quality indicators improved further with the level of impaired loans falling, especially in the shipping and real estate sectors. As of end-2013, net non-performing loans and net doubtful loans and guarantees accounted for 1.19% of total net lending, down from 1.38% at end-2013 and 1.50% at end-2012. In Russia, DNB has a small subsidiary with eight branches, however at end-April an agreement to sell this entity was signed. DNB expects this transaction to complete in Q2 2014 and will realise a small loss.

As of end-Q1 2014, the Group’s capital position remained strong with the Common Equity Tier 1 ratio (according to Basel 3) at 14.2%, up from 13.6% at end-2013 (based on the Group’s interpretation of future regulation), and the Basel 3 leverage ratio at 5.1%. At end-2013, the Group estimated that it needs 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%, yet 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.