DBRS Morningstar Confirms DNB Bank’s LT Issuer Rating at AA (low), Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of DNB Bank ASA (DNB or the Bank), including the Long-Term Issuer Rating of AA (low) and the Short-Term Issuer Rating of R-1 (middle). The trend on the Long-Term Issuer Rating remains Stable. The Bank’s Intrinsic Assessment (IA) is AA (low). See a full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of the ratings takes into account DNB’s significant franchise in its home market of Norway as well as its consistent earnings generation capacity, supported by strong operating efficiency and solid asset quality, which translates into a very low average cost of risk. The confirmation also incorporates the Bank’s conservative risk profile, underpinned by a well-diversified loan book with a high degree of collateralization, as well as the Bank’s solid capitalization and ample liquidity. The ratings also consider DNB’s high reliance on wholesale funding, mitigated by the fact that most of the long term funding is accessed through the Nordic covered bond market, which DBRS Morningstar considers to be very stable, as well as the Bank’s continuously growing deposit base.

RATING DRIVERS

An upgrade of the Long-Term Issuer Rating would require lower reliance on wholesale funding, a more diversified business franchise as well as stronger asset quality metrics, while maintaining the current strong earnings and capital profile.

A downgrade of the Long-Term Issuer Rating would require a substantial deterioration of asset quality materially affecting the Bank’s profitability and/or capitalization.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Strong
DNB is the largest bank in Norway with total assets of around NOK 3,536 billion at end-Q1 2023 (EUR 300 billion). The Bank provides universal banking products to retail and corporate clients and enjoys a leading market position in Norway with market shares over 24% and 32% for loans and deposits respectively. In March 2022, DNB completed the acquisition of Sbanken ASA (Sbanken), one of the leading digital retail banks in Norway, to further strengthen its domestic retail segment, complement its activity in the savings area as well as bring more high tech talent into the Bank. DNB's main shareholder is the Norwegian government, which owns 34% of the Bank through the Ministry of Trade, Industry and Fisheries. DNB’s financial targets for the period 2022-2025, include achieving a return on equity (ROE) above 13%, a cost-income ratio below 40% and maintaining a Common Equity Tier 1 (CET1) ratio above 17% while having a dividend pay-out ratio above 50%.

Earnings Combined Building Block (BB) Assessment: Strong/Good
DBRS Morningstar views DNB’s earnings profile as robust and solid supported by a consistent track record of strong operating efficiency (DNB’s average cost to income ratio for the last ten years is 42%) and strong asset quality, that translates into a 17 basis points (bps) average cost of risk for the last ten years. In 2022, DNB reported a net profit of NOK 32,861 million, up 29.6% Year on Year (YoY), benefiting from strong growth in operating income, and an ROE (as calculated by DBRS Morningstar) of 13.3% at end-2022, up from 10.3% in 2021 and 8.1% in 2020. The Bank’s cost to income ratio remained strong at 40% and, despite the significant deterioration in the macroeconomic outlook, the cost of risk remained negative due to a significant provision loan loss reversal in the oil, gas and offshore exposure related to a positive restructuring on offshore customers as well as a better macroeconomic forecast for this specific sector. In Q1 2023, DNB reported net profit of NOK 10,472 million (up 3.7% Quarter on Quarter (QoQ)) driven by higher Net Interest Income (NII), a positive FOREX effect on the AT1 capital as well as much lower loan loss provisions (LLPs) QoQ. The Bank’s cost to income ratio further improved to 34% at end-Q1 2023.

Risk Combined Building Block (BB) Assessment: Strong/Good
DBRS Morningstar views DNB’s risk profile as solid, supported by its well-balanced loan book comprising a large household portfolio (mostly residential mortgages), a diversified corporate loan book by industry and a high proportion of collateralized loans (80% of its loan exposure is collateralized in some form). Total gross customer loans increased by 12% YoY at end-2022 and a further 2.5% QoQ at end-Q1 2023 driven by a strong growth in the financial institutions segment, fishing and farming sectors as well as retail industries. DNB’s exposure towards commercial real estate (CRE) could become a potential concern in the current weaker macroeconomic environment with persistent inflation and rising interest rates. The CRE book’s asset quality, however, remains sound, with Stage 3 exposures accounting for 8 bps of DNB’s total gross loans and commitments at end-Q1 2023. While macroeconomic challenges still remain, DBRS Morningstar notes that the Norwegian economy has proved to be more resilient than initially projected. DNB’s asset quality remained strong at end-Q1 2023 with gross Stage 3 loans accounting for 1.25% of total gross loan book at end-Q1 2023 vs. 1.40% at end-2022, 1.74% at end-2021 and 1.87% at end-2020.

Funding and Liquidity Combined Building Block (BB) Assessment: Good
DBRS Morningstar views DNB's funding and liquidity profile as good and improving. The Bank’s reliance on wholesale funding (38% of total non-equity funding), although much higher than its European peers, is in the lower range when compared to its Nordic peers. In addition, most of its long-term wholesale funding is accessed through covered bonds within the Nordic markets, which we consider to be very stable and resilient. Customer deposits, which remain the largest source of funding for DNB, continued to grow substantially and were NOK 1,521 billion at end-Q1 2023, up 9% QoQ and 64% since end-2018. Consequently, DNB’s net loan-to-deposit ratio (excl. repos (LTD)) stood at 128% at end-Q1 2023, down from 137% at end-2022 and 169% at end-2018. At end Q1 2023, DNB’s liquidity profile remained strong with a Liquidity Coverage Ratio of 145%, a net stable funding ratio of 118% and total liquid assets of NOK 908 billion (up from NOK 682 at end-2022), which adequately helps to cover DNB’s short-term maturities.

Capitalisation Combined Building Block (BB) Assessment: Strong
DNB’s capitalisation is robust, supported by the Bank’s historically high internal capital generation capacity as well as stronger regulatory requirements than its European peers. At end-Q1 2023, DNB reported a Common Equity Tier 1 (CET1) ratio of 18.6%, up from 18.3% at end-2022 due to solid earnings generation. The Bank’s minimum requirement for CET1 ratio was 15.5% at end-Q1 2023, including the full impact from the Norwegian countercyclical buffer (CCyB) that increased back to its pre-pandemic levels of 2.50% and was effective March 31, 2023. This resulted in a comfortable 310 bps capital buffer over the minimum requirement at end-Q1 2023. The Bank expects the implementation of Basel IV to be neutral due to its already high risk weights. DNB continued to report one of the stronger leverage ratios among European banks which stood at 6.5% at end-Q1 2023 compared to 6.8% at end-2022.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/416478

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental, Social, Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at (17 May 2022) https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

Notes:

All figures are in NOK unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations (22 June 2023). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies

The sources of information used for this rating include Morningstar Inc. and Company Documents, DNB Group Annual Report 2022, DNB Group Results Presentation Fourth Quarter 2022 and First Quarter 2023, DNB Group Fourth Quarter 2022 and First Quarter Report 2023, DNB Group Factbook First Quarter 2023, DNB Group Debt Investor Presentation June 2023. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

DBRS Morningstar 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/416477

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Maria Jesus Parra, Vice President, Global FIG
Rating Committee Chair: William Schwartz, Senior Vice President, Credit Practices Group
Initial Rating Date: 18 September 2006
Last Rating Date: 14 July 2022

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