DBRS Confirms DNB Bank ASA at AA, Trend Stable

DBRS Ratings Limited (DBRS) has today confirmed the ratings of DNB Group’s (DNB or the Group) main operating entity, DNB Bank ASA (the Bank), including its Senior Unsecured Long-Term Debt & Deposit rating of AA and the Short-Term Debt & Deposit rating of R-1 (high). DBRS maintains a Support Assessment of SA-2 for DNB which reflects DBRS’s expectation that some form of timely systemic support would be provided to the Group, if needed. The SA-2 assessment leads to a one-notch uplift of the final rating from DBRS’s AA (low) intrinsic assessment for the Bank. The rating trend remains Stable.

The confirmation of the ratings reflects DNB’s dominant position in its domestic market. The Group has strong market shares in all major business lines within the small, but well performing Norwegian economy, and this, together with the focussed international activities, provides the foundation for DNB to generate resilient earnings. The solid earnings generation, as well as the conservative risk profile, and the solid capital and liquidity position underpin the overall high ratings, although DBRS also notes that the Group has a relatively high utilisation of wholesale funding. The Stable trend reflects DBRS’s expectations that the Group will continue to enjoy the benefits of its sound risk management culture, its ample earnings generation ability and its solid capitalisation.

Given the high rating level upward pressure is unlikely. However any further upward pressure would require a substantial reduction in the level of wholesale funding, while maintaining low levels of credit losses, solid and predictable underlying profitability, and continued sound capital management. Deterioration in asset quality measures, a weakening of underlying profitability, reduction in liquidity or capital measures, or substantial further encumbering of the balance sheet could lead to a downward rating pressure.

DNB’s market-leading positions generate a diverse and relatively stable stream of income, resulting in a solid and resilient earnings profile. In 1H14, the Group reported income before provisions and taxes (IBPT) of NOK 14,099 million, 26% higher than 1H13, while net income reached NOK 10,173 million, a 46% increase year-on-year. For the full year 2013 net profit was NOK 17,526 million, 27% higher than 2012. Although the 1H14 results were strong DBRS notes that the net result was boosted by the one-off positive revaluation of the Group’s NOK 913 million shareholding in Nets during 1Q14 (Nets is a provider of payments, information and digital identity solutions in Northern Europe). The Group’s earnings are driven by the Large Corporates and International Customers division, which includes the largest Norwegian corporate customers and all international customers, including the Baltics and Poland, and the Personal Customers division. DNB remains a very efficient bank with a cost-income ratio of 42.5% in 1H14, down from 48.3% in 2009 and 45.7% in 2013. DBRS sees the potential for further improvement given the positive trend on revenues and the Group’s target to keep nominal costs stable costs up to 2016.

Over recent years the Group has managed to strengthen its funding profile by lengthening maturities, increasing diversity and reducing its reliance on short-term funding, however with a loan to deposit ratio in excess of 150% DNB continues to have a high reliance on wholesale funding. The covered bond market has provided a stable source of funding to DNB and at end-June 2014 these bonds constituted 20% of total funding. DBRS acknowledges that covered bonds provide a stable source of funding and can be used with central banks to enhance liquidity but they lead to high level of encumbered assets and thereby reduce the protection of unsecured bondholders in an adverse scenario. At end-June 2014, 18% of total assets were encumbered. DNB’s liquidity remains robust, with liquid assets of NOK 549 billion at end-June 2014, substantially higher than the Group’s outstanding commercial paper and upcoming debt maturities.

DBRS views DNB’s overall risk profile as solid, underpinned by its sizeable and robust Norwegian lending portfolio, of which nearly half comprises of residential mortgages. Nevertheless DBRS notes that the Norwegian economy is small and dependent on a few key sectors, and DBRS expects DNB’s performance to remain highly correlated with the Norwegian economy. In the period since 2008 asset quality metrics have improved as issues in the Baltics and Poland receded, while there has been some deterioration in other parts of the loan book, particularly shipping. As of end-2Q14, net non-performing and net doubtful loans and guarantees stood at 1.05% for the group overall, and at 0.81% excluding the Baltics and Poland. These numbers are down from 1.38% and 1.10% at end-2013 and 1.50% and 1.16% at end-2012, respectively. DBRS anticipates the positive downwards trend to continue, given the stabilisation of the Baltic economies and the successful management of these exposures by DNB so far. The largest sector exposures for the Group, outside residential mortgages, are commercial real estate lending and shipping which together, at end-2Q14, totalled 17% of the total lending portfolio. The Group’s exposure to shipping (6% of the loan portfolio at end-1H14) leaves DNB exposed to the still volatile environment of the international shipping market, however given DNB’s long experience in both commercial real estate and shipping, DBRS views these exposures as manageable.

DBRS views DNB as having a solid and improving capital profile, with a Basel 3 Common Equity Tier 1 ratio of 14.4% at end-June 2014, up from 13.6% at end-December 2013 and 12.1% at end-June 2013. DNB’s capital ratios have strengthened over the recent years, mainly due to earnings retention and the prudent dividend policy. As a result of the ongoing solid internal capital generation ability 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 notes that while the ratings are assigned to DNB Bank ASA, the ratings are based on the overall business and balance sheet strength of the entire DNB Group in order to take into account expected support within the Group’s companies.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other applicable methodologies include the DBRS Criteria: Support Assessment for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013).These can be found can be found at: http://www.dbrs.com/about/methodologies

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

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Ross Abercromby
Rating Committee Chair: Elisabeth Rudman
Initial Rating Date: September 18, 2006
Most Recent Rating Update: April 17, 2013

DBRS Ratings Limited
1 Minster Court, 10th Floor
Mincing Lane
London
EC3R 7AA
United Kingdom
Registered in England and Wales: No. 7139960

For additional information on this rating, please refer to the linking document located at: http://www.dbrs.com/research/236983/banks-and-banking-organisations-linking-document.pdf

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.