DBRS Confirms DNB Bank ASA at AA (low), Stable Trend

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 the AA (low) Senior Unsecured Long-Term Debt & Deposit rating and the R-1 (middle) Short-Term Debt & Deposit rating. The trend on all ratings is Stable. The support assessment remains SA3 and as a result, the final senior debt rating is positioned in line with the AA (low) Intrinsic Assessment (IA).

The ratings reflect the Bank’s strong position in Norway and its international positions in energy, shipping and seafood, as well as the solid earnings generation ability, the good cost control and the low levels of impairment charges. The ratings also incorporate DNB’s good risk profile (despite the recent increase in impairment charges due to the oil-related portfolio), the strong capitalisation levels and the Bank’s funding profile which has a relatively high reliance on wholesale funding, particularly covered bonds.

DNB’s strong domestic franchise is a key rating factor. In Norway the Group serves 2.1 million personal customers and 233,000 corporate customers through its branch network and various digital channels and enjoys significant market shares across the financial services sector. The Group’s market leading domestic position is complemented by its presence in other Nordic countries and the Baltics, and by its global energy, shipping, and seafood businesses.

DNB’s high ratings are underpinned by the Group’s ability to consistently maintain strong and resilient earnings. In recent years, DNB has generated substantial levels of net interest income, while net fee income has also performed strongly. This strong earnings generation ability has been further supported by good expense control and, historically, by low levels of impairment charges. DNB has announced restructuring costs of NOK 1.0-1.2 billion over the 2016-2018 period, mainly related to the modernisation of personal banking in Norway, whilst maintaining its target for a cost-income ratio of below 40.0% towards 2018. DBRS notes that the Group’s reported cost-income ratio for 1H16 was 40.9%.

Impairment charges spiked in 1H16 to NOK 3.5 billion with the increase mainly attributable to the negative pressure on the oil-related portfolios due to the ongoing challenging conditions in the Offshore segment. The Group has given guidance that impairment losses in 2016 are expected to exceed NOK 6 billion and that the cumulative impairment charges for the 2016-2018 period might reach NOK 18 billion. DBRS notes that even at the current increased level impairment charges absorbed a still manageable 22.5% of IBPT (DBRS calculation) in 1H16 and that spill-over effects from the oil segment have not yet been significant in other credit portfolios. However, DBRS will continue to monitor this closely, given the importance of the oil industry to the Norwegian economy and the current high level of DNB’s ratings.

DNB’s asset quality indicators remain solid with gross non-performing and doubtful loans and guarantees of NOK 29.5 billion at end-1H16, or 1.90% of total gross lending (DBRS calculation). Net non-performing and net doubtful loans and guarantees stood at 1.19% at end-1H16, up from 0.76% at end-2015 and 0.96% at end-2014 but lower than 1.50% at end-2011. Given the slowdown in the domestic economy and the challenging conditions in the oil sector DBRS would expect some further deterioration in the Group’s asset quality indicators in the short- to medium-term, however DNB is well placed to weather this. DBRS also notes that the Group’s portfolio shows good diversification with the currently more distressed segments of oil, gas and offshore and shipping accounting for a combined 14% of the total net exposure at default at end-June 2016. DBRS, however, views the risks stemming from the exposure to these sectors as manageable, given DNB’s experience in these areas. At end-June 2016 DNB’s residential mortgage portfolio totalled NOK 846.7 billion, or 44% of the total net exposure at default. DBRS notes that Norwegian house prices, especially in the Oslo area, have continued to increase while in Stavanger (the centre of the oil industry) prices have actually come down. DBRS will continue to monitor these trends and potential impact on asset quality.

DNB has a sound and diverse funding profile, despite the inherent reliance on wholesale funding, and in particular covered bonds. At end-June 2016 the Group had outstanding covered bonds of NOK 424.3 billion and these represented 21% of total funding while customer deposits accounted for 47% of total funding. The Group’s liquidity remains robust and DBRS notes that at end-June 2016 DNB reported a Liquidity Coverage Ratio of 122%, significantly higher than the 100% minimum that DNB is required to hold as a Systemically Important Financial Institution (SIFI) in Norway

DBRS views DNB’s capitalisation as strong. At end-1H16, the Group had a Basel III Common Equity Tier 1 (CET1) ratio, without transitional rules, of 16.5%, up from 16.0% at end-1Q16 and 14.0% at end-1H15. Under Norwegian transitional rules, the Group’s CET1 ratio at end-2Q16 was 15.2%. DBRS notes that DNB is targeting a CET1 ratio of 15.5% from 2017, under the Norwegian transitional rules, including a management buffer. Following the application of an effective counter-cyclical buffer of 1.2% as of October 1, 2016 DNB’s minimum regulatory capital requirement at end-2016 is 14.7%. Given DNB’s strong internal capital generation and the prudent dividend policy DBRS views DNB as well-placed from a capital perspective. The Group’s leverage ratio stood at 6.8% at end-June 2016.

RATING DRIVERS
Given the high level of the rating upwards pressure is unlikely, however, a reduction in wholesale funding reliance whilst maintaining strong profitability and stable credit quality metrics would be viewed positively.

A significant deterioration in asset quality indicators that would hamper profitability and/or an increase in wholesale funding reliance could put negative pressure on the ratings.

Notes:
All figures are in NOK unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2016). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2016), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016) and Critical Obligations Rating Criteria (February 2016). 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, the Norwegian FSA, and company reports. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

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

This rating included participation by the rated entity or any related third party. DBRS had access to accounts, management and other relevant internal documents for the rated entity or a related third party.

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 historical default rates published by the European Securities and Markets Authority (“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: September 18, 2006
Most Recent Rating Update: September 29, 2015

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