DBRS Confirms DNB Bank ASA’s Ratings at AA, Trend Stable

DBRS Ratings Limited (DBRS) today has confirmed the ratings of DNB Group’s (DNB or the Group) main operating entity, DNB Bank ASA (the Bank), including its Senior Unsecured Long-Term Debt & Deposit rating of AA. Today’s confirmation considers DNB’s ability to utilise its solid franchise to deliver resilient earnings backed by a well-managed risk profile, as well as DNB’s sound liquidity and capital profile. DBRS continues to ascribe implicit systemic support to systemically-important banks in Norway, as reflected in its SA-2 Support Assessment designation for DNB. The SA-2 designation reflects DBRS’s expectation that some form of timely systemic support would be provided to the Group, if needed. The SA-2 assessment leads to a one-notch uplift of the final rating from DBRS’s AA (low) intrinsic assessment for the Bank. The rating trend remains Stable. Rating upside from the current level is limited, yet due to DNB’s strong Norwegian focus, the Bank’s risk profile is interlinked with the narrow, yet successful Norwegian economy. Today’s rating confirmation follows a detailed review of the Group’s fundamentals and future prospects.

The ratings reflect DNB’s dominant position in the Norwegian financial services market. Specifically, DNB has a 28% market share in Norway’s retail lending segment complemented by a 33% market share in retail deposits. These shares are augmented by similar market shares across the Norwegian corporate market. Further, DNB has significant shares in insurance and savings products across retail and corporate markets. These market positions provide the basis of DNB’s overall strong franchise, which in turn provides the foundation for DNB to generate resilient earnings. Indeed, DNB has successfully navigated the recent financial crisis without sustaining any quarterly losses. Continuing these trends, DNB generated NOK 17.6 billion of pre-tax operating profits in 2012, compared to NOK 18.4 billion in 2011 and NOK 18.1 billion in 2010. Results in 2012 were supported by rising business volumes and widening lending spreads, particularly on flexible rate mortgages, that helped compensate for still elevated funding costs and nonrecurring charges related to configuring DNB’s new organisational structure. Overall, DBRS views DNB’s solid earnings generation ability backed by a dominant domestic market presence as a very important factor underpinning the overall high ratings. Consequently, DBRS perceives defending strong positions in financial services amid intense competition to be of paramount importance for DNB.

In providing a full range of retail products, DNB benefits from its strong reputation that it has to preserve. One example of the challenge faced by DNB in defending its franchise and reputation is the recent Norwegian Supreme Court ruling requiring DNB to reimburse an investor for misleading on a structured product sale. This was followed by 300 similar customers seeking reimbursement. Similar products were also sold by DNB’s competitors. DBRS will continue to monitor DNB’s progress in resolving this and steps to reduce the risk of such events in the future. However, DBRS has limited tolerance for significant reputational risks at DNB’s current high ratings level.

DBRS considers DNB’s solid credit performance that is backed by DNB’s strong lending profile as verification of the Group’s prudent lending culture and conservative risk appetite, which is also factored into the rating. Provisions on loans and guarantees, at NOK 3.2 billion, were 7.7% lower year-on-year. The reduction from the prior year was achieved despite significant deterioration in the shipping sector, which continues to struggle with persistently weak fundamentals. DBRS notes that while the total shipping sector exposure is nearly 7% of the total loan book, the Group has a successful track record of managing shipping exposures through difficult cycles. Overall, backed by appropriate risk monitoring, mitigation, and remediation policies and procedures, Group-wide provisions totaled a low 24 (basis points) bps of lending for 2012. Reflective of the relative economic stability in the region and the low risk appetite of the Group, credit costs in the Bank’s core Norwegian market remain very low. The Group’s reduced cost of risk was supported by continued improvement in asset quality metrics in DNB Baltics and Poland, which declined from 237 bps in 2011 to 48 bps in 2012.

DBRS perceives DNB as having a well-managed funding profile. The Group continues to enjoy access to the long-term funding markets and in 2012 issued a total of NOK 107.8 billion of long-term funding (of which NOK 60.1 billion were covered bonds). Meanwhile, deposits increased 9.6% in 2012 after growing 15.3% in 2011, as the Group continued to realise the benefits of its efforts to drive deposit growth. As a result, the ratio of deposits-to-lending improved to 62.5%, up from 57.8% in 2011 and 54.8% at year-end 2010. DBRS acknowledges this progress given DNB’s significant utilisation of wholesale funding (55% of total funding), especially covered bonds (approximately 20% of total funding). Nonetheless, DBRS sees the heavy reliance on covered bonds as constraining the ratings.

DNB’s overall solid capital profile has benefitted from solid earnings generation. DNB reported, on a full Basel II compliance basis, a Tier 1 capital ratio of 12.4% at year-end 2012, while the Equity Tier 1 ratio stood at 12.1%. At the Bank, the Tier 1 capital ratio was 11.8%, while Equity Tier 1 ended the year at 11.5%. Further, DNB reported an estimated Basel III Equity Tier 1 capital ratio of 12.1% at year-end 2012. In future, DNB’s capital needs may be impacted by an increase in Norwegian risk weightings for residential mortgages, which could see risk weightings more than double to the 20-35% range. Nonetheless, given the Group’s solid internal capital generation ability, DBRS views DNB as well placed to meet Norway’s proposed staggered regulatory requirements of a Core Equity Tier I ratio of 12%-14.5% by mid-2016.

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 Norwegian krone (NOK) unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria Intrinsic and Support Assessments, Rating Bank Subordinated Debt & Hybrid Capital Instruments with Contingent Risks, and Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments. These can be found at: http://www.dbrs.com/about/methodologies

[Amended July 4, 2014 to reflect actual methodologies used.]

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Peter Burbank
Rating Committee Chair: Roger Lister
Initial Rating Date: 18 September 2006
Most Recent Rating Update: 2 March 2012

For additional information on this rating, please refer to the linking document under Related Research.