DBRS Confirms DNB Bank ASA’s Long-Term Issuer Rating at AA (low), Stable Trend

DBRS Ratings Limited (DBRS) confirmed the ratings of DNB ASA’s (DNB or the Group) main operating entity, DNB Bank ASA (the Bank), including its Long-Term Issuer Rating, at AA (low). The trend on all ratings is Stable. The Bank’s Support Assessment is SA3 and the Intrinsic Assessment (IA) is AA (low). See the full list of ratings at the end of the press release.

KEY RATING CONSIDERATIONS
The confirmation of DNB Bank ASA’s Long-Term Issuer Rating at AA (low) reflects the Group’s leading retail and commercial banking franchise in its core market in Norway, as well as its strong franchise in select sectors globally. The ratings also incorporate DNB’s sound asset quality, its robust capital position and its sound earnings generation, which should enable the Group meet the expected increase in capital requirements under the evolving regulatory capital framework in Norway. The ratings also take into account the Group’s sound funding and liquidity position despite its relatively higher reliance on wholesale funding when compared to European peers.

RATING DRIVERS
Positive rating pressure on the Long-Term Issuer Rating could arise if the Bank were able to materially reduce its usage of wholesale funding whilst increasing geographical diversification and maintaining strong capitalisation.

Negative rating pressure on the Long-Term Issuer Rating would likely be driven by a substantial deterioration in asset quality, or if the Bank faces challenges to access wholesale markets due to a weakening in investor confidence.

RATING RATIONALE
DNB is a leading banking group in its core market in Norway, while the Group also has a global footprint in select sectors, such as shipping, offshore, energy and seafood. Over the past few years, DNB has streamlined certain of its operations, including its presence in the Baltics and its non-life insurance offering in Norway, and has significantly enhanced its digital offering. Furthermore, the Group has sizably reduced exposure in more cyclical industries, such as shipping and oil, gas and offshore, with the loan book currently weighing more towards retail clients.

DBRS views that DNB has demonstrated sound earnings generation in recent years. In 1H19, the Group reported a net attributable income of NOK 13.2 billion, up 17% year on year, largely driven by the positive impact from basis swaps and growth in net interest income (NII), which partly reflects repricing effects from the interest rate hikes announced in recent quarters. Bottom line profitability is also supported by the disciplined cost control, despite recent results being influenced by higher investments in IT and compliance costs. The Group continues to have good efficiency levels, with a reported cost-income ratio of 42.0% in 1H19 (FY18: 43.8%), In 1H19, DNB reported loan impairment charges of NOK 766 million, which compares to NOK 384 million net reversals the year before, mainly driven by the Small- and Medium-sized Enterprises and Large Corporates and International segments. However, the cost of risk remain low at 8 basis points (bps) of exposure at default in 1H19.

DNB has a conservative risk profile, as indicated by the diversification of the loan book and the good asset quality. Additionally, in recent years the Group has been reducing its exposure to cyclical industries and has rebalanced its portfolio towards personal customers. DNB’s asset quality remains sound with Stage 3 (as per IFRS 9) net loans and financial commitments of 1.27% of net loans at end-June 2019 (1.58% of gross loans as calculated by DBRS). Mortgages accounted for 45% of the total net exposure at default at end-June 2019, the majority of which are located in Norway. Given house prices in Norway reached all-time high in May 2019, DBRS will continue monitoring developments in the housing market and any potential impact on the quality of DNB’s loan book. Exposure to the more cyclical industries of shipping and oil, gas and offshore has come to represent approximately 8% of DNB’s exposure at default at end-June 2019 having successfully reduced these exposures by 40% or more than NOK 100 billion between end-2015 to end-2018.

DBRS views DNB as having a sound and well-managed funding profile and strong liquidity position. Customer deposits represented the largest source of funding, accounting for around 46% of total funding at end-June 2019. Similar to its main Nordic peers, DNB has a relatively high reliance on capital market funding, primarily covered bonds. These stood at NOK 480 billion at end-June 2019, representing 22% of total funding at that date. DNB’s liquidity remains robust, with the Group reporting a Liquidity Coverage Ratio (LCR) of 146% at end-June 2019, which is well above the 100% minimum that DNB is required to hold as a Systemically Important Financial Institutions (SIFI) in Norway.

DBRS views DNB as having robust capitalisation and to be well-placed to address the evolving capital framework in Norway, which is resulting in increasing regulatory requirements. At end-June 2019, the Group had a Basel III Common Equity Tier 1 (CET1) ratio, under Norwegian transitional rules, of 16.5%, which is 100 bps above the minimum CET1 requirement of 15.5% for end-2Q19. DNB’s minimum regulatory requirement at end-2019 will be impacted by the increase of certain capital buffers in Norway. These include the increase in the countercyclical buffer in Norway from 2.0% to 2.5% from December 31, 2019 and a potential increase in the systemic risk buffer from 3.0% to 4.5% (on domestic exposures) as of the same date, recently proposed by the Ministry of Finance. Nonetheless, the combined impact of the increase in those buffers, which management expects to be 1.3%, will be partially mitigated by the expected removal during 2019 of the Basel I floor in Norway.

The Grid Summary Grades for DNB Bank ASA are as follows: Franchise Strength – Very Strong/Strong; Earnings Power – Very Strong/Strong; Risk Profile – Strong; Funding & Liquidity – Strong/Good; Capitalisation – Very Strong/Strong.

Notes:
All figures are in NOK unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2019). This can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include Company Documents, Finanstilsynet (Norwegian FSA), Norges Bank (Norwegian Central Bank), Regjeringen (Norwegian Ministry of Finance), the European Banking Authority and S&P Global Market Intelligence. 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 no access to 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 and US regulations only.

Lead Analyst: Maria Rivas, Senior Vice President – Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG - Global FIG
Initial Rating Date: September 18, 2006
Last Rating Date: August 7, 2018

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor, London EC3M 3BY United Kingdom
Registered and incorporated under the laws of England and Wales: Company No. 7139960

For more information on this credit or on this industry, visit www.dbrs.com.