DBRS: DNB Reports Robust Q2 2014 Results

Summary:
• Robust performance for Q2 2014 despite higher charges for impairments compared to Q1 2014.
• Further improvement in already strong 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) views the Q2 2014 results of the DNB Group (DNB or the Group) as robust, demonstrating the strength of the franchise, and the further improvement in asset quality and capitalisation. In Q2 2014 the Group reported a net profit of NOK 4.654 billion, a 22.5% increase on the same period of 2013. The increase was driven mainly by an increase in lending spreads, and supported by higher business volumes, reduced restructuring expenses and lower impairments. However compared to Q1 2014 net profit was down, mainly due to the revaluation of its shareholding in Nets (Nets is a provider of payments, information and digital identity solutions in Northern Europe) in Q1 2014, but also driven, in part, by the absence of significant reversals, as well as an increase in individual impairments for loans to small and medium-sized enterprises and a rise in collective impairment charges. The increase in collective impairments was partly driven by a certain decline in shipping freight rates and an adjustment in the calculation model. Overall DBRS notes that the Group’s impairment losses continue to be significantly lower than the Group’s estimate of a normalised level.

Net interest income was up 2% on Q1 2014 and 5% year-on-year, mainly due to widening lending spreads and exchange rate movements. Even though the Group’s cost-income ratio worsened slightly during the quarter to 43.8% (Q1 2014: 41.3%), DBRS views positively the fact that DNB’s cost-income ratio for the first half of 2014 stood at 42.5%, significantly lower than the 49.9% of the previous year, and well below the 45% target.

DBRS views the Group’s solid asset quality as underpinning the Group’s high ratings. In Q2 2014, asset quality indicators improved further with the level of impaired loans falling, primarily in the Large Corporates and International division. As of end June-2014, net non-performing loans and net doubtful loans and guarantees accounted for 1.05% of total net lending, down from 1.38% at end-2013 and 1.71% at end June-2013. DBRS notes that the NOK 16.1 billion of net non-performing and doubtful loans and guarantees represents the lowest level since Q3 2011.

During Q2 2014, the Group’s capital position was further improved, with the Common Equity Tier 1 ratio (according to Basel 3) at 14.4%, up from 13.6% at end-2013 and 12.1% at end-June 2012 (based on the Group’s interpretation of future regulation), and the Basel 3 leverage ratio was 5.3%. Despite additional changes to regulatory requirements, including the confirmation that the Group is to be classified as a systemically important financial institution (SIFI) in Norway, as well as changes to mortgage risk-weights, DBRS continues to be of the view that the Group is well placed to manage the impact of the evolving regulatory environment due to the strong internal capital generation, and moderated dividend policy.

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.