DBRS Maintains DNB IA at AA (low); AA / R-1 (high) Ratings Remain Under Review Negative

DBRS Ratings Limited (DBRS) has today maintained DNB Bank’s (the Bank) Intrinsic Assessment (IA) at AA (low). The Bank’s AA Senior Unsecured Long-Term Debt & Deposit ratings and the R-1 (high) Short-Term Debt & Deposits ratings remain Under Review with Negative Implications (URN), with the URN reflecting the action taken on 20th May 2015 to review the systemic support assumptions of 38 European Banking Groups. The ratings on the Bank’s Dated and Undated Subordinated Debt, and the Capital Contribution Securities, have been Confirmed at A and A (low) respectively, with Stable trends.

This action follows a detailed review of the Group’s performance and outlook. The Bank is the main operating entity of the DNB Group (DNB or the Group), Norway’s largest financial group. DNB Bank’s IA reflects its 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 focused 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. DBRS also views positively the long-term nature of the government’s 34% stake in the Group.

Given the current URN high rating level, upward pressure is unlikely. Upward pressure on the IA is also unlikely given the very high rating level. However any further upward pressure would require a substantial reduction in the level of wholesale funding, while maintaining (i) low levels of credit losses, (ii) solid and predictable underlying profitability, and (iii) continued sound capital management. Negative pressure on the IA would likely result from a material deterioration in asset quality measures, a weakening of underlying profitability, reduction in liquidity or capital measures, or a substantial further encumbering of the balance sheet.

DNB continues to generate resilient and strong earnings which is an important factor underpinning the high IA. In 1H15 the Group reported income before provisions and taxes (IBPT) of NOK 16.7 billion, up 18% on 1H14 while net profit totaled NOK 11.6 billion, up 16% on 1H14. DNB remains a very efficient bank with a reported cost-income ratio of 39.7% in 1H15, down from 48.3% in 2009 and 41.9% in 2014. DNB is targeting a cost-income ratio of around 40% in 2017 which DBRS would expect the Group to meet, boosted by the increasing take-up of digital banking. DNB’s robust profitability in recent periods has benefited from generally low provisioning needs and the strength of the domestic Norwegian economy. The reduction in the level of oil investments and the knock-on effects will lead to a slowdown in the Norwegian economy and this could trigger an increase in provisioning requirements, however DBRS expects that DNB’s IBPT will continue to provide a comfortable loss absorption cushion.

With a loan to deposit ratio in excess of 150% DNB continues to have a high reliance on wholesale funding, however, over recent years the Group has managed to strengthen its funding profile by lengthening maturities (including through its covered bond issuance), increasing diversity and reducing its reliance on short-term funding. DBRS views Norwegian covered bonds as a relatively stable source of funding for the DNB Group and at end-June 2015 the Group had covered bonds of NOK 415.6 billion outstanding backed by a NOK 596.4 billion pool of eligible assets making-up 21% of total funding. Although covered bonds have proven to be a relatively stable source of funding DBRS does note that they lead to high level of encumbered assets and thereby reduce the protection of unsecured bondholders in an adverse scenario. At end-June 2015, assets of NOK 429 billion or 19% of total assets were encumbered. DNB’s liquidity remains robust, with liquid assets of NOK 629 billion at end-June 2015. This is 2.25x the NOK 172 billion of outstanding commercial paper in issue at end-2Q15 and the NOK 107 billion of senior debt and covered bond maturities that the Group has up to end-2016.

DBRS views DNB’s overall risk profile as solid, underpinned by its sizeable and robust Norwegian lending portfolio, of which over 40% comprises residential mortgages. Nevertheless the Group’s performance is likely to remain highly correlated with the slowing domestic economy as over 80% of lending, deposits and income stems from Norway. Overall asset quality remains solid with gross non-performing and doubtful loans and guarantees totaling NOK 22.953 billion, or 1.53% of the gross loan portfolio. At end-2Q15, net non-performing and net doubtful loans and guarantees stood at 0.77%, down from 0.96%, 1.38% and 1.50% at end-2014, end-2013 and end-2012, respectively. Given the slowing of the domestic economy DBRS would not expect to see any further significant improvement in this metric, however a material deterioration is not anticipated. The substantial fall in the price of oil over the 18 months, and its negative impact on the value of the NOK, has underscored the exposure of both DNB, and the Norwegian economy to the energy sector. At end-2014 DNB’s exposure at default to oil-related portfolios was NOK 161 billion. This portfolio is well diversified across oilfield services, offshore and oil and gas, and is generally of high quality, however it is unlikely to be immune from the market dynamics. DNB has a strong track record in this sector with low levels of impairments over the last twenty years, however DBRS will continue to closely monitor the performance of these portfolios. In addition, DBRS will seek to identify any secondary impacts on other sectors, such as residential mortgages in oil dependent regions such as Stavanger.

DBRS views DNB as having a strong and improving capital profile, with a Basel 3 Common Equity Tier 1 (CET1) ratio of 15.0% at end-2Q15 and a leverage ratio of 5.8. DNB’s capital ratios have strengthened over the recent years, mainly due to earnings retention. Given the significant earnings generation ability and the prudent dividend policy, DBRS believes that DNB will achieve its target of a minimum 14% CET1 ratio, under the Norwegian transitional rules. At end-2Q15 this was 13%.

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 NOK unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2015). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2015) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include 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

This rating is under review. Generally, the conditions that lead to the assignment of reviews are resolved within a 90 day period. DBRS reviews 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: Roger Lister
Initial Rating Date: 18 September 2006
Most Recent Rating Update: 20 May 2015

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