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

DBRS Ratings Limited (DBRS) has confirmed the ratings of DNB ASA’s (DNB or the Group) main operating entity, DNB BANK ASA (the Bank), including the AA (low) Long-Term Issuer and the R-1 (middle) Short-Term Issuer Rating. The trend on all ratings remains Stable. The Bank’s Intrinsic Assessment (IA) is AA (low) and the Support Assessment is SA3 and, as a result, the Bank’s final long-term ratings are positioned in line with the AA (low) IA. For a full list of ratings please see the table at the end of the press release.

KEY RATING CONSIDERATIONS
The confirmation of the long-term ratings reflects DNB’s leading franchise in its domestic Norwegian market, as well as the strong and resilient earnings generation ability. The ratings also incorporate DNB’s sound risk profile, robust capitalisation levels, well-managed funding profile, and good liquidity position. While the Group has a relatively high reliance on wholesale funding, about 40% of wholesale funding is from covered bonds which DBRS views as a stable source of funding given the long track record of covered bond performance in Norway.

RATING DRIVERS
DNB is well-placed in the current rating level. However, there could be positive pressure on the IA if the Bank were able to (i) materially reduce its usage of wholesale funding, while maintaining (ii) strong earnings and (iii) strong capitalisation.

Negative pressure on the ratings would likely be driven by (i) a sudden substantial deterioration in asset quality metrics prompted by severe fall in price in the Norwegian residential and commercial property markets, and (ii) a weakening in investor confidence given the high level of wholesale funding.

RATING RATIONALE
DNB is the largest banking group in Norway and its strong domestic franchise is complemented by a meaningful presence in the rest of the Nordic countries, as well as a global franchise in shipping, oil, gas and offshore, and seafood. In recent years, DNB has transformed its Personal Banking services by increasing digital banking services while its large corporate portfolio is currently being rebalanced in favour of personal customers and exposures towards more cyclical sectors are being managed downwards.

DBRS views DNB as having strong and resilient earnings generation ability. Despite the pressure from the low interest rate environment, DNB has managed to maintain significant levels of net interest income over the recent years while net commissions and fee income has also been largely resilient. Furthermore, the earnings generation ability is supported by a tight cost control and strong efficiency levels, with a reported cost-income ratio of 43.2% in 1H18 (2017: 44.2%, 2016: 40.9%). Impairment losses on loans and guarantees are trending downwards, following the spike of NOK 7.4 billion in 2016 that resulted from the worsening conditions in the oil-related, shipping and offshore sectors, with the Group reporting lower impairment charges of NOK 2.4 billion in 2017 and net reversals of NOK 384 million in 1H18. Overall, net profit in 1H18 was up 16% year-on-year as reduced operating expenses and net reversals outweighed a decrease in net other operating income while net interest income was flat.

Asset quality indicators remain solid on the back of good Nordic macroeconomic conditions. Furthermore, in recent years DNB has taken steps to reduce its exposure to cyclical industries, such as shipping and oil, gas and offshore. DNB reduced its cyclical exposure by 34% or NOK 100 billion over the period December 2015 to December 2017 and an additional NOK 20 billion during 1H18. At end-June 2018, DNB’s oil-related exposure at default was NOK 103.8 billion while the shipping exposure stood at NOK 72.8 billion and both portfolios, which represent a combined 9.2% of the Group’s total net exposure at default, appear well-diversified.

DNB’s largest exposures are to mortgages and other personal customers loans, which accounted combined for NOK 978.8 billion, or 52% of the total net exposure at default at end-June 2018. DBRS notes that house prices in Norway peaked in April 2017 and this was followed by a correction of 1.0% on country level, while Oslo prices have fallen 5.7% since the all-time-high peak recorded in February. Nonetheless, this correction did not prompt any deterioration in the quality of the mortgage book, with the provisions taken in 2017 being 57% lower than in 2016, while house prices have increased by 5.5% since the beginning of 2018. DBRS will continue monitoring developments in the housing market and any potential impact on the quality of the Group’s loan book.

DNB has a sound and well-managed funding profile, even though wholesale funding accounts for a higher proportion of total funding than most EU peers. Similar to its main Nordic peers, DNB has a relatively high reliance on capital market funding due to the prevalence of covered bonds for mortgage funding. At end-June 2018, covered bonds constituted 20% of the total funding base of NOK 2,166.6 billion while customer deposits, which DBRS views as providing a solid foundation to the funding profile, accounted for 48% of total funding. DNB’s liquidity remains strong, with the Group reporting a Liquidity Coverage Ratio (LCR) of 131% at end-June 2018 and this was above the 100% minimum that DNB is required to hold as a Systemically Important Financial Institutions (SIFI) in Norway.

The Group’s capitalisation is robust, and that the Group is well-placed to address the evolving EU regulatory requirements. Given the currently higher floor on risk-exposure amounts in Norway, compared to the expected introduction of an output floor of 72.5% of the risk-exposure amounts as of 2022, DBRS views that the impact from upcoming regulatory changes on risk-weighted assets requirements should be negligible. At end-2Q18, the Group had a Basel III Common Equity Tier 1 (CET1) ratio, under Norwegian transitional rules, of 16.2% (net of a share buy-back programme of 1.5% that was launched in June 2018) providing a buffer of 100 bps above a CET1 requirement of 15.2% at end-2017. This compares to a CET1 internal target of 16.1%, including a management capital cushion. The Group’s leverage ratio, under fully phased-in rules, stood at 6.8% at end-June 2018, which positions it as one of the strongest ratios in Europe.

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.

Notes:
All figures are in NOK unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2018). This can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial, Finanstilsynet (Norwegian FSA) and company documents. 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: Vitaline Yeterian, Vice President - Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer - Global FIG and Sovereign Ratings
Initial Rating Date: September 18, 2006
Last Rating Date: August 9, 2017

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