DBRS: DNB Reports Strong 3Q14 Results

Summary:
• Strong performance for 3Q14 with IBPT up 13% and net profit up 22%.
• 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 3Q14 results of the DNB Group (DNB or the Group) as strong. In 3Q14 the Group reported income before provisions and taxes (IBPT) up 13% on 2Q14. Net profit in the period was NOK 5.686 billion, a 22% increase on 2Q14 and a 17% increase on 3Q13. The improvement was driven mainly by an increase in lending spreads, supported by higher business volumes, reduced restructuring expenses and lower impairments. Excluding the effect of basis swaps (which the Group uses in connection with its long-term financing of loans), which were positive in 3Q14, net profit was up NOK 317 million on 3Q13. In 3Q14 net interest income was up 4.6% on 2Q14 and 4% year-on-year, mainly due to lower funding costs and exchange rate movements, together with higher lending volumes and improved deposit spreads. The Group’s cost-income ratio remained strong at 40.4%, or 41.8% excluding the impact of the basis swaps.

DBRS views the Group’s solid asset quality as underpinning DNB’s high ratings. In 3Q14, total impaired loans were further reduced and are now at the lowest level since 3Q11. As of end 3Q14, net non-performing loans and net doubtful loans and guarantees accounted for 1.01% of total net lending, down from 1.38% at end-2013 and 1.71% at end June-2013. As a result of the improving asset quality, the impairment charge in 3Q14 was also lower than in 2Q14 and 3Q13. Comparing with 3Q13 the corporates and international segment improved considerably and there was a slight increase for the personal customers segment. The improvement in the impairment charge compared to 2Q14 reflected better performance in loans to large corporates and international customers, as well as reversals on collective impairment losses mainly driven by positive developments in freight rates. DBRS notes that DNB is of the view that the impairment losses remain lower than the normalised level. Given that DBRS expects DNB’s performance to remain highly correlated with the Norwegian economy which has a large exposure to the oil and energy sector, DBRS will continue to closely monitor the performance of the industry.

The Group’s capital position has improved further. At end-3Q14 the estimated fully-loaded Basel 3 Common Equity Tier 1 ratio was 15%, up from 14.4% at end-2Q14 and from 13.6% at end-2013, and the Basel 3 leverage ratio was 5.7%. The Norwegian authorities continue to adopt more stringent capital requirements, including that risk weighted assets cannot be less than 80% of the corresponding Basel 1 requirement. Despite this and other potential changes to regulatory requirements, DBRS continues to view DNB as well placed to manage these challenges due to the strong internal capital generation, and moderated dividend policy of the Bank.

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.