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

DBRS Ratings Limited (DBRS) rates DNB Group’s (DNB or the Group) main operating entity, DNB Bank ASA (the Bank), at AA (low) for the Long-Term Issuer Rating, Long-Term Debt and Deposit Rating, and R-1 (middle) for the Short-Term Issuer Rating and Short-Term Debt and Deposits rating. The Bank’s Intrinsic Assessment (IA) is AA (low) and the Support Assessment is SA3. Please see the table at the end of the press release for full list of ratings.
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 ratings also incorporate DNB’s good risk profile, 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 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 continues to demonstrate strong earnings generation capacity. The Group generated average annual net profit of NOK 19.2 billion (or EUR 2.1 billion) over the last five years in DBRS estimates. This strong earnings generation ability has been supported by solid revenues, very good expense control and, historically, by low levels of impairment charges. While DNB’s costs are increasing on digitalisation and marketing projects, as well as due to the introduction of financial activities tax, the Group is 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 1H17 increased to 44% from 39.7% in 2016. As expected, oil-related industries, shipping, and offshore are driving higher impairments. Total loan impairments for 2016 doubled to NOK 7.4 billion, and absorbed 24% of the NOK 30.8 billion income before provisions and taxes (IBPT), compared to 7% in 2015. However, in 1H17, total impairments were down to NOK 1,159 million (3,495 in 1H16) absorbing just 8.4% of IBPT. The Group has maintained its guidance that the cumulative impairment charges for the 2016-2018 period might reach NOK 18 billion. While spill-over effects from the oil segment continue not to be visible in other credit portfolios, 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 has consistently displayed low level of non-performing loans in spite of its exposures to the oil, offshore and shipping industries. While net non-performing and doubtful reached 1.49% of total net loans at end-2016 (0.76% at end-2015), they were down to 1.35% at end-1H17 (1.19% at end-1H16). 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 15% of the total net exposure at default at end-June 2017. Given DNB’s experience in these areas and the demonstrated contained deterioration, DBRS views the risks stemming from the exposure to these sectors as manageable. Separately, at end-June 2017, DNB’s residential mortgage portfolio grew to NOK 975.2 billion, now 50% of the total net exposure at default. DBRS notes that Norwegian house prices, especially in the Oslo area, have continued to increase while picking up in Stavanger (the centre of the oil industry) after slowing down, and will continue to monitor these trends and potential impact on asset quality.

DNB has a sound and diverse funding profile, despite the inherent usage of wholesale funding, in particular covered bonds. At end-June 2017, the Group had outstanding covered bonds of NOK 455 billion which represented 23% of total funding while customer deposits accounted for 50% of total funding. The Group’s liquidity remains robust and DBRS notes that, at end-June 2017, DNB reported a Liquidity Coverage Ratio of 123%.

DBRS views the Group’s capitalisation as strong, and well-placed to meet the ongoing challenges of the evolving regulatory requirements given current buffers over regulatory minimums, the Group’s track record for solid internal capital generation, and flexibility to access markets. At end-1H17, the Group had a Basel III Common Equity Tier 1 (CET1) ratio, without transitional rules, of 16.0% at end-1H17 compared to 16.5% at end-1H16, and 130 basis points above a 14.7% requirement. Under Norwegian transitional rules, the Group’s CET1 ratio was 15.8% at end-1H17 (15.2% at end-1H16), above the Group’s internal target of 15.5% from 2017 for its CET1 ratio. The Group’s leverage ratio stood at 7.2% at end-June 2017 (requirement of 6%).

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

RATING DRIVERS

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

Negative pressure could arise if there is a reversal in the Bank’s asset quality indicators that would hamper profitability and capital metrics, as well as if there is further encumbrance of the balance-sheet.

Notes:
All figures are in NOK unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017). This can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial and Company Documents. DBRS considers the information available 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 and US regulations only.

Lead Analyst: Vitaline Yeterian, Vice President, Global FIG
Rating Committee Chair: Elisabeth Rudman, MD – Head of EU FIG, Global FIG
Initial Rating Date: September 18, 2006
Last Rating Date: July 14, 2017

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