DBRS: DNB’s Fundamentals Remain Strong; Robust FY14 Results

Summary:
• Robust performance in 2014 with net profit up 18%
• Fully loaded CET1 ratio estimate increased to 15.1% at end-2014
• DBRS rates DNB Bank ASA at AA with a Stable trend for Senior Unsecured Debt & Deposits

DBRS Ratings Limited (DBRS) views the FY14 results of the DNB Group (DNB or the Group) as robust. Net profit totalled NOK 20.6 billion, up 18% on 2013. On a quarterly basis, in 4Q14 net profit was NOK 5.0 billion, down 12% on 3Q14 and 13% on 4Q13, reflecting lower gains on financial instruments and higher impairment charges.

Net interest income was up 6% on 3Q14 and 8% on an annual basis, mainly due to higher lending and deposit volumes. Net commission and fee income rose 4% on a quarterly basis, reflecting increased asset management, real estate broking and investment banking services activities. The Group’s cost/income ratio for the year improved substantially to 41.9%, from 45.7% in 2013, and DBRS notes the progress towards the 40% cost/income ratio target for 2017.

The Group’s asset quality remains strong with, at end-2014, the net non-performing and doubtful loans and guarantees totaling NOK 17.3 billion, or 0.96% of the portfolio, down from NOK 20.7 billion or 1.38% of the portfolio at end-2013, respectively. Impairment charges for 4Q14 increased notably, reflecting some weakness in the corporates and international customers segment, however, the annual charge for 2014 was NOK 1.6 billion, or NOK 0.5 billion lower than in 2013, primarily due to lower individual impairments and increased reversals in collective impairments. DBRS notes that at end-2014 DNB’s total Exposure at Default (EaD) for the oil-related portfolios amounted to NOK 161 billion, or 8% of the Group’s total EaD, however, DNB assesses over 65% of the portfolio as low risk and 33% as medium risk. 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 and the impact on the wider economy, given the fall in global oil prices.

The Group’s capital position remains robust with, at end-2014, an estimated fully loaded Basel III Common Equity Tier 1 (CET1) ratio of 15.1%, up from 15.0% at end-September 2014 and 13.6% at end-2013. DNB is one of the 3 systemically important financial institutions (SIFI) in Norway and will, therefore, be subject to an additional capital requirement of up to 1% as of July 1, 2015, which will then be increased further to a maximum of 2% as of July 1, 2016. Despite the ongoing regulatory changes, DBRS continues to view DNB as well placed to manage these challenges due to the strong internal capital generation capacity.

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.