DNB NOR Bank ASA

GLOBAL BANKING
AUGUST 2, 2011
CREDIT ANALYSIS
DNB NOR Bank ASA
Oslo, Norway
Summary Rating Rationale
Table of Contents:
SUMMARY RATING RATIONALE
1
KEY ISSUES
2
GROUP STRUCTURE
4
ANALYSIS OF RATING CONSIDERATIONS 5
Discussion of Qualitative Rating Drivers 5
DISCUSSION OF QUANTITATIVE RATING
DRIVERS
9
Discussion of Support Considerations
15
COMPANY ANNUAL STATISTICS
17
MOODY’S RELATED RESEARCH
20
Rating History – Bank Financial Strength Rating
Rating History – Long-Term Deposit Rating
Analyst Contacts:
LONDON
44.20.7772.5454
Janne Thomsen
44.20.7772.1659
Senior Vice President
Janne.Thomsen@moodys.com
Oscar Heemskerk
44.20.7772.5532
Vice President - Senior Analyst
Oscar.Heemskerk@moodys.com
Simon Harris
44.20.7772.1576
Managing Director-Financial Institutions
Simon.Harris@moodys.com
Moody’s rates DnB NOR Bank ASA (DnB NOR) Aa3/P-1/C. The C bank financial
strength rating (BFSR) translates into an unsupported baseline credit assessment (BCA) of
A3 and is underpinned by the bank’s dominant franchise in Norway, good diversified core
earnings and adequate risk profile. However, the BFSR is primarily constrained by the bank’s
low albeit stable core profitability, its sizeable exposure to more volatile industries such as
commercial real estate and shipping and to the Baltic region as well as its high level of singlename exposure concentration.
All ratings carry a stable outlook.
Moody’s believes that the probability of systemic support for DnB NOR is very high. This
results in a three-notch uplift in the long-term senior debt and deposit ratings to Aa3.
This Credit Analysis provides an in-depth
discussion of credit rating(s) for DNB NOR
Bank ASA and should be read in conjunction
with Moody’s most recent Credit Opinion
and rating information available on Moody's
website.
GLOBAL BANKING
Some upside pressure on the standalone rating could arise from a sustained improvement in core
earnings, a reduction of concentrations in the loan book and/or healthier asset-quality metrics.
Conversely, a downgrade of the standalone rating could be triggered by an increase in DnB NOR’s
overall risk profile, including higher risk concentration, geographical expansion, changes in the capital
policy, or if credit quality weakens to a greater extent than currently envisaged in Moody's base-case
stress scenario.
Changes in the long-term debt and deposit ratings could result from (i) a change in the BFSR; or (ii) a
change in government support in the form of decreased ownership of DnB NOR (which Moody’s
believes is unlikely in the short to medium term); or (iii) a change in the current high level of systemic
support ascribed to Norway.
Key Issues
Limited impact from the acquisition of the remaining stake in DnB NORD
On 23 December 2010, DnB NOR acquired the 49% stake held by Norddeutsche Landesbank
(NORD/LB, rated Aa2/C-/P-1) in the DnB NORD joint venture. The purchase price was €160
million, which is below the €222 million pro-rata book value of DnB NORD as of end-June 2010.
We believe the impact of the transaction is limited, as DnB NORD was already fully consolidated in
the DnB NOR’s financial accounts. However, any losses reported by DnB NORD will now have more
impact on the bottom-line income statement and the shareholders’ equity as there will be no minority
interests going forward. We have not seen any integration problems so far.
On a positive note, we believe the transaction could facilitate decision-making regarding the
restructuring of DnB NORD. Previously, in certain matters, the shareholder agreement required
consent from both DnB NORD’s board chairman (from DnB NOR Bank) and the vice-chairman
(from NORD/LB).
We understand that the operations in DnB NORD will be integrated in DnB NOR going forward. A
first step toward this integration was taken in June 2011, whereby the Lithuanian and Latvian
subsidiaries were transferred to DnB NOR. DnB NORD still owns the operations in Poland and
Estonia as well as the loan portfolios in Denmark and Finland. We further note that DnB NOR is
currently assessing whether it will continue its operations in Poland.
DnB NORD is however a drag on the banking group’s earnings; market activities cause volatility
Income from DnB NOR’s core banking divisions, namely Retail Banking, Large Corporate and
International, have been generally stable in recent years. However, we note that the increase in income
from the Large Corporate and International division on the back of lower loan loss provisions was
somewhat offset by a reduction in income from the Retail Banking division, which suffered downward
pressure on net interest income.
Operations in the DnB NOR Markets division added volatility in the bank’s earning profile, especially
regarding its own risk activities. Indeed, customers’ trading revenue has been relatively stable while
income from the bank’s liquidity portfolio showed large variations (in line with developments in
capital markets).
DnB NORD has been a loss-making division in recent years and we believe it will be difficult to show
a positive result for the financial year ending December 2011. Nevertheless, Moody’s expects DnB
NORD’s performance to improve in the medium term as the credit outlook of exposures in its loan
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CREDIT ANALYSIS: DNB NOR BANK ASA
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book improves in light of the recovering economic environment in the Baltic region. In that respect,
we note that loan loss provisions have weighed less on the subsidiary’s earnings in the recent quarters,
totalling NOK0.4 billion in H1 2011 compared to NOK1.8 billion for the full-year 2010 and
NOK3.9 billion for the full-year 2009. However, it may take time for asset quality to returns to
normalised levels, as illustrated by the still high amount of problem loans (over NOK8 billion at endJune 2011).
Variations in income from other operations primarily relate to changes in the credit spread of the
bank’s own debt and valuation of its equity investments. Income was positive in 2010, partly as a
result of a one-off gain from the merger of Nordito and PBS (NOK1.2 billion).
EXHIBIT 1
Pre-tax operating profit by division
NOK million
Retail Banking
Large Corporates and international
DnB NOR Markets
DnB NORD
Other operations & eliminations
20,000
15,000
10,000
5,000
0
-605
-4,289
-1,481
-5,000
-10,000
2008
2009
2010
Source: Moody’s Investors Service based on Company’s Reports
Future Asset quality developments remain uncertain
Deterioration in asset quality in relation to the mortgage loan book in Norway has, to date, been very
limited at DnB NOR and in the Norwegian banking sector in general. However, we note that
Norwegian households carry a high level of debt, most of which is in the form of mortgage loans,
reflecting the fact that Norwegians are largely home-owners (around 80%). Additionally, almost 95%
of mortgage loans carry floating interest, rendering households highly vulnerable to higher interest
rates. Nevertheless, Moody’s takes comfort from Norway’s household wealth, the low unemployment
rate and the good income protection schemes by international standards – which should support
households’ debt-servicing capacity.
In addition, we note that house prices in Norway have been rising steadily over the past ten years and,
after falling 13% between mid-2007 and year-end 2008, have been rising again in the recent period,
albeit at a somewhat slower rate. As a result, there could be some concern that a housing bubble is
forming. Moody’s cautions that, higher house prices mean higher collateral values for banks, and may
delay the recognition of potential defaults. Therefore, any sharp deterioration in house prices could
lead to rapidly increasing levels of problem loans in DnB NOR’s mortgage portfolio.
As regards exposures to corporates, asset quality deterioration has been more visible, especially in the
commercial real estate and shipping sectors – each accounting for more than 10% of DnB NOR’s loan
book. The commercial real estate sector has been negatively affected by falling market values, lower
rental prices, increased vacancy rates and a low level of sales in 2008-2009. Since Q3 2009,this sector
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AUGUST 2, 2011
CREDIT ANALYSIS: DNB NOR BANK ASA
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has shown signs of stabilisation and vacancy rates are estimated at around 8% in 2010. The shipping
sector 1 was also badly hit in 2009, when freight rates plunged, leading to a decline in profitability and
debt-servicing capacity for many shipping companies.
To date, most of the asset quality problems at DnB NOR stemmed from Baltic exposures in DnB
NORD. Moody’s believes the credit outlook for these exposures will gradually improve as the macroeconomic environment stabilises in the region. However, the recovery is highly vulnerable to external
shocks and it may take time for DnB NORD’s asset quality to return to normalised levels.
Group Structure
EXHIBIT 2
DnB NOR Group’s Simplified Legal Structure at end-June 2011
DnB NOR ASA
DnB NOR
Bank ASA1
(Rated Aa3/P-1/C)
DnB NOR Kapitalforvaltning Holding
AS
Vital Forsikring
ASA
Vital
Skade AS
DnB NOR
Skadeforsikring AS
1
Major subsidiaries: Nordlandsbanken ASA, DnB NOR Næringsmegling AS, Postbanken Eiendom AS, DnB NOR Eiendom AS, DnB NOR Meglerservice AS, DnB NOR
Boligkreditt AS, DnB NOR Næringskreditt AS, DnB NOR Luxembourg S.A., OAO DnB NOR Monchebank, Svensk Fastighetsförmedling AB, Salus-Ansvar AB, Bank DnB
NORD AS*, AB DnB NORD Bankas (Lithuania)*, AS DnB NORD Banka (Latvia)*. Ownership is 100% unless otherwise specified.
*Operations in DnB NORD will be integrated in DnB NOR and are thus under restructuring. As part of the integration, ownership of the banks in Lithuania and Latvia was
transferred to DnB NOR at end-June 2011. Bank DnB NORD in Denmark still owns the operations in Poland and Estonia as well as loan portfolios in Denmark and Finland.
Following the restructuring, DnB NORD in Denmark will only engage in pure investment activity.
Source: Company’s reports
For reporting and management purposes, DnB NOR Bank is organised into the following three
business areas: Retail Banking, Large Corporate and International and DnB NOR Markets. DnB
NORD is treated as a separate profit centre. At the group level, DnB NOR also operates a Life and
Asset Management segment, which consists of Vital Forsikring (life insurance and pension savings)
and DnB NOR Asset Management.
1
4
Please also see: Moody’s Industry Outlook – “Shipping Outlook Turns Negative With Sustained Overcapacity”, June 2011
AUGUST 2, 2011
CREDIT ANALYSIS: DNB NOR BANK ASA
GLOBAL BANKING
Analysis of Rating Considerations
Discussion of Qualitative Rating Drivers
Franchise Value
Dominant position in Norway
DnB NOR is the undisputed leader in the Norwegian banking market, with an overall share above
30% in lending to retail and corporate customers, and some 35% for deposit taking. Despite its
dominant domestic market position, DnB NOR sees some further growth potential in some regions of
Norway, particularly on the south and west coast, where its market shares are below 20%.
EXHIBIT 3
Market shares of banks and covered bond companies at end-March 2011
DnB NOR Bank
Subsidiaries of foreign banks in Norway
Other commercial banks
SpareBank 1 alliance
Branches of foreign banks in Norway
Other savings banks
Terra Group
100%
80%
60%
40%
20%
0%
Retail
Corporate
Retail
Gross lending
Corporate
Deposit
Source: Norges Bank
The retail segment, which accounts for roughly 30% of group operating income (excluding other
operations and eliminations), remains at the core of DnB NOR’s strategy. Management also aims to
maintain a prominent position in the corporate segment, where DnB NOR benefits from its size and
wide product range.
DnB NOR’s closest competitor in this market is Nordea’s Norwegian banking arm, Nordea Bank
Norge; both banks are strong players in financing Norway’s energy and shipping industries.
DnB NOR is increasingly leveraging on its solid position in insurance (around 35% share of the life
insurance market) and asset management (almost 40% of mutual funds) via its sister companies Vital
and DnB NOR Kapitalforvaltning. We see cross-selling as a key driver in the bank’s ability to achieve
an increase in profit per customer in the Norwegian retail and corporate banking segments.
Some geographic diversification through small-scale acquisitions outside of Norway
When DnB NORD was originally established, DnB NOR acquired NORD/LB’s Swedish operations,
which doubled its corporate business in Sweden. In 2007, further initiatives were taken in the Swedish
retail market (Svensk Fastighetsförmedling and SalusAnsvar). In 2008, DnB NOR acquired DnB
NOR SkandiaBanken Bilfinans in Norway and Sweden through its subsidiary DnB NOR Finans, and
has thus become one of the major providers of car financing in the Nordic region. DnB NOR now
classifies Sweden as part of its core market and offers corporate banking, life and pension insurance
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AUGUST 2, 2011
CREDIT ANALYSIS: DNB NOR BANK ASA
GLOBAL BANKING
and asset management services in that country. However, it sold its retail mortgage portfolio in March
2011. We note that DnB NOR faces competition from several stronger, established players in the
Swedish market and therefore building a strong franchise will take time.
DnB NORD provides financial products to retail and corporate customers in the Baltic region and
Poland (BISE Bank in Poland was merged into the DnB NORD joint venture in 2007). Prior to June
2009, it also operated in Denmark and Finland but the customer portfolios in those countries have
been transferred to DnB NOR to allow DnB NORD to focus on its core markets in Central and
Eastern Europe.
In addition, DnB NOR has a foothold in the Murmansk area in Russia via its fully owned subsidiary
DnB NOR Monchebank.
DnB NOR also seeks to expand internationally through organic growth and bolt-on acquisitions in
segments where it has key expertise – namely shipping, fisheries and energy.
We acknowledge the improvements in geographic diversification over recent years, but also note that
some of the countries in which DnB NOR Bank has been expanding have less stable operating
environments.
Risk Positioning
Corporate governance is ratings-neutral
DnB NOR applies the Norwegian Code of Corporate Governance. We see no issues of concern
relating to the ownership of the bank, organisational complexity, insider and related-party risks or the
depth of management ranks. There are no significant deviations between the Code of Practice and the
way it is implemented in the banking group. The bank also takes account of recommendations from
the Committee of European Banking Supervisors.
The CEO is not a member of the board, on which six members out of nine are considered
independent from the bank’s large shareholders and executive management.
The government continues to be the largest single owner of DnB NOR with a 34% stake and has no
stated intention of reducing this level of ownership. Only one other shareholder has a stake of more
than 5%: the DnB NOR Savings Bank Foundation with 10.03%, which was established in connection
with the merger between DnB and Union Bank of Norway.
There is limited related-party lending and this mainly corresponds to a guarantee provided to
Eksportfinans in relation to its liquidity portfolio.
Adequate risk management practices, systems and culture
In our view, the management practices and systems in DnB NOR provide comprehensive guidelines
and tools for risk-taking. The group’s risk management and internal controls follow the guidelines of
the Committee of Sponsoring Organisations of the Treadway Commission.
The board of directors has ultimate responsibility for limit-setting for liquidity and market risks as well
as for setting risk and capitalisation policies. It carries out a review of risks on a quarterly basis and
assesses the internal controls annually. An audit committee reports to the board, and is responsible for
evaluating quarterly the overall quality of the financial reporting and internal controls. However, DnB
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AUGUST 2, 2011
CREDIT ANALYSIS: DNB NOR BANK ASA
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NOR does not have a separate risk committee under the board although, in November 2009 the bank
appointed a Chief Risk Officer, reporting to the CFO.
DnB NOR’s credit, market, business and operational risks are measured as risk-adjusted capital, which
is estimated using a confidence interval of 99.97% and a horizon of one year. At end-June 2011, the
bank’s gross risk-adjusted capital stood at NOK61.1 billion (see also Capital Adequacy section in this
report).
Overall, risk management is good, but we caution that DnB NOR’s level of single-borrower
concentration is high, which constrains the overall assessment of risk management. Moody’s notes that
this is a common feature at rated Nordic banks.
Timely and extensive financial reporting
Transparency in accounting and company information is good. DnB NOR’s financial statements are
in accordance with IFRS, audited by Ernst & Young. As a listed bank, DnB NOR provides an
extensive amount of information in its public reports. Overall, the disclosed information is of high
quality and is easily measurable for the purposes of global comparison. Management analysis and
discussion provide good insight into the group’s business and financial performance.
Nevertheless, the information regarding the bank’s quantification of the risks in its operations (i.e.
stress-test models and outcomes) is not very detailed. Furthermore, similar to most of its peers, its
public reports lack information regarding the largest exposures.
Frequency and timeliness are also very good; the group’s financials are issued quarterly, and interim
and annual reports are disseminated within four and six weeks, respectively.
Moderate market risk appetite
DnB NOR Bank does not have a large appetite for market risk (namely interest rate, exchange rate and
equity risk). It has relatively strict management policies, with limits set below levels recommended by
the Norwegian authorities.
Market risk chiefly arises through trading activities in DnB NOR Markets. We note that the bank is
involved in both customer trading and own-account trading. Market risk related to trading positions,
as measured by the Value-at-Risk (ten days, 99% confidence interval), was around NOK70 million,
i.e. less than 1% of the bank’s Tier 1 capital, at end-June 2011.
In addition, we note that the bank holds a large proportion of securitised assets in its liquidity
portfolio – though most are non-US and highly rated RMBSs. We also note that DnB NOR does not
hold synthetic securities, nor has it invested in US sub-prime bonds or CDOs.
Regulatory Environment
Neutral effect on Norwegian banks
All Norwegian banks are subject to the same assessment on the regulatory environment. This factor
does not address bank-specific issues but instead it evaluates whether regulatory bodies are
independent and credible, demonstrate enforcement powers and adhere to global standards of best
practices for risk control. Refer to Moody’s latest Banking System Outlook for Norway to obtain a
detailed discussion on the regulatory environment.
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AUGUST 2, 2011
CREDIT ANALYSIS: DNB NOR BANK ASA
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Although DnB NOR operates in several countries outside Norway, our analysis focuses on the country
where the bank is domiciled due to the importance of regular on-site examinations. We recognise that
consolidated supervision and the frequency of home-host regulatory agreements may shift primary
regulatory responsibility to another jurisdiction. However, in our opinion, a strong regulator in a
parent bank’s home country can compensate for a weak regulator in the host country of a subsidiary,
but the opposite is unlikely to be true.
Operating Environment
Baltic region seen as weaker than Norway
In assessing the quality of the operating environment, Moody’s considers economic stability (GDP
volatility), and also looks at issues such as integrity in the country’s business culture and corruption
(according to the Word Bank’s indicators) as well as the power and efficiency of the legal system. 2
We note that economic stability in Norway as measured by the standard deviations of GDP growth
over the past twenty years is negatively impacted by volatility in oil prices. Therefore, in our assessment
of economic stability for Norway, we also look at GDP growth excluding offshore revenue, in order to
reflect the fact that offshore revenues are allocated to the Government Pension Fund and have a
limited impact on the mainland economy.
In the case of DnB NOR, we also analyse the operating environments for the countries in which the
bank has major operations, weighted by the relevant contribution of operating profits. Moody’s
assesses the operating environments in the Baltics as weaker than that in Norway.
2
8
Please refer to Moody’s Banking System Outlook for Norway for a detailed discussion of the bank’s domestic operating environment.
AUGUST 2, 2011
CREDIT ANALYSIS: DNB NOR BANK ASA
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Discussion of Quantitative Rating Drivers
Profitability and Efficiency
Overall earnings capacity weakened by asset quality issues in 2008 and 2009 – now stabilising
DnB NOR showed continuous improvement in revenue in the past five years, primarily reflecting
strong loan growth (except in 2009) and a coherent organic growth strategy, as well as supportive
macro-economic conditions in Norway – though it was largely helped by exceptionally high income
from financial investments in 2009. However, the bank’s bottom-line profitability was negatively
affected by the significant increase in loan loss provisions in 2008 and especially in 2009. We view
positively that the level of loan loss provisions has been overall decreasing since late 2009.
EXHIBIT 4
DnB NOR Bank - Operating income, pre-provision income and net income
NOK, million
40,000
35,000
Net income (before
minority interest)
30,000
Preprovision income
25,000
Other operating income
20,000
15,000
Trading income and
gains/losses on
securities
Fee & commission
income
10,000
5,000
0
Operating
income
-5,000
2010
2009
2008
2007
2006
Source: Moody’s Investors Service based on Company’s reports
DnB NOR Markets accounted for over 20% of the banking group’s operating income in 2010.
Trading income made an particularly high contribution in 2009 and has returned to more normalised
levels in 2010, despite a NOK1.2 billion one-off gain from the merger of Nordito and PBS. Although
the bank expects profits of this division to be boosted by heightened demand and activity levels,
Moody’s cautions that this source of earnings is highly dependent on market developments.
Moreover, DnB NOR’s investments have been adding volatility to its earning profile. Despite the
reclassification of the liquidity portfolio in DnB NOR Markets to the held-to-maturity category – thus
reducing the volatility in the income statement – some volatility could still arise from the bank’s equity
positions, including its 40.4% holding in and guarantees issued for Eksportfinans.
The main driver behind DnB NOR’s improved performance in 2010 so far relative to 2009 is the
reduction in loan loss provisions: NOK2.997 billion in 2010 compared to NOK7.710 billion in 2009.
The corresponding figure in H1 2011 was NOK1.349 billion. Most of the improvement in provisions
stems from the reduction in provisions related to loans in DnB NORD, reflecting the more favourable
macro-economic outlook in Baltic countries. Moody’s believes there is scope for further reductions in
loan loss provisions in the period ahead but cautions that DnB NOR’s exposure to more cyclical
industries, such as real estate and shipping, are vulnerable and could result in unforeseen impairment
charges.
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CREDIT ANALYSIS: DNB NOR BANK ASA
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EXHIBIT 5
Pre-provision income in relation to average risk-weighted assets
2010
2009
2008
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
Nordea
Handelsbanken
Source: Moody’s Investors Service based on Companies’ Reports
DnB NOR
Danske Bank
SEB
Swedbank
Overall, we view positively DnB NOR’s improved profitability in 2009 and 2010 but we note that,
while it is more in line with that of its Nordic peers, it remains relatively low compared to most of the
large European banks. One of the reasons for this is that DnB NOR has a large retail loan book, which
is secured by first-priority mortgages: the low risk of these loans is reflected in low earnings.
Maintaining cost efficiency remains important
Cost efficiency remains one of the management priorities and we note that the group has a cost
programme in place aimed at reducing its costs by NOK2 billion by YE2012 (revised upwards from
NOK1.2 billion initially). Savings will primarily be derived from streamlining of the branch network,
reducing procurement costs, shifting to electronic customer communication and improving
coordination of the banking group’s staff and support functions. This programme reportedly reduced
costs by NOK410 million in 2009 and NOK607 million in 2010 compared to the previous year.
EXHIBIT 6
Cost-to-Income Ratio
2010
2009
2008
70%
60%
50%
40%
30%
20%
10%
0%
Nordea
Handelsbanken
DnB NOR
Danske Bank
SEB
Swedbank
Source: Moody’s Investors Service based on Companies’ Reports
DnB NOR’s cost-to-income ratio stood at 42% at year-end 2010, in line with its 2009 level, but
down from 55% at year-end 2008. Considering operating expenses in relation to total assets - a metric
which is not distorted by volatility in income - the improving trend in the bank’s efficiency is also
visible. Operating expenses gradually declined over the past five years from above 1% of total assets to
0.9% in 2010.
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CREDIT ANALYSIS: DNB NOR BANK ASA
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DnB NOR’s cost base compares well with most of its peers, and maintaining this relative level of
expenditure will be important for its competitiveness. However, we note that goodwill impairment in
DnB NORD increased operating costs significantly in 2009 and the restructuring of the joint
venture’s activities may challenge the bank’s ability to streamline its cost base, though the additional
costs related to it have been limited in 2011 so far. In addition, wage pressure persists in Norway and
continues to exert pressure on the banking group’s efficiency.
Liquidity
Liquidity profile geared towards market funds – increasing importance of covered bond funding
The proportion of customer deposits in DnB NOR’s funding has gradually declined over the past five
years due to intense competition and savings disintermediation. At year-end 2010, they accounted for
some 40% of total funding (close to 50% in 2006). To compensate, the group is increasingly using
interbank (mainly in relation to the Central Bank’s swap scheme) and debt markets, nationally and
internationally, for funding purposes. Though we acknowledge DnB NOR’s good access to capital
markets, we continue to view its high reliance on market funding as a potential challenge.
After the establishment of its fully owned covered bond company DnB NOR Boligkreditt in 2007,
market funding has, to a large extent, been converted to covered bonds rated Aaa. 3 As of end-June
2011, the outstanding covered bonds issued by DnB NOR Boligkreditt totalled NOK325 billion, i.e.
around a third of DnB NOR’s market funds. In addition, in Q3 2009 DnB NOR established DnB
NOR Næringskreditt, a covered bond vehicle for mortgages on commercial property.
We believe this additional source of funding is a strength for the bank. We note positively that after
the phase-out of the swap arrangement in Q3 2009, DnB NOR has accessed the domestic and
international covered bond markets. However, Moody’s cautions that use of covered bonds through
these structures whereby prime assets come off the bank’s balance sheet, might result in material
structural subordination of DnB NOR’s unsecured creditors, including depositors. Any structural
significant subordination might impact the bank’s senior debt and deposit ratings.
EXHIBIT 7
Structural Liquidity*
31 December 2010
Loan book
Other assets
Customer deposits
LT funding
Other liabilities
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Nordea
Handelsbanken
DnB NOR
Danske Bank
SEB
Swedbank
* Long-term funding includes equity and debt securities issued with remaining maturities above one year.
Source: Moody’s Investors Service based on Companies’ Reports
3
11
Please see New Issue Report “DnB NOR Boligkreditt AS”, July 2007 (SF102008isf)
AUGUST 2, 2011
CREDIT ANALYSIS: DNB NOR BANK ASA
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On the asset side, DnB NOR’s liquidity buffer in the form of fixed-income and equity securities
accounted for less than 20% of the bank’s balance sheet. We note that most of the securities in DnB
NOR’s liquidity portfolio can be repoed with the central bank, if required. However, a significant
proportion of the portfolio consists of RMBS, which we deem less liquid, but we take comfort from
the fact that these are non-US and highly rated transactions. Additionally, we note that DnB NOR has
increased the proportion of government paper in its liquidity portfolio. Government risk – primarily
Norwegian – now accounts for more than 30% of DnB NOR’s liquidity portfolio (56% including the
bank’s domestic portfolios) and will constitute the bank’s first line of defence.
However, we note that DnB NOR’s improved liquidity position has been supported from the (now
phased out) swap facility put in place by the Norwegian government in October 2008 whereby
covered bonds could be exchanged for government bonds. Some 40% of the covered bonds issued by
DnB NOR Boligkreditt have been used in this swap arrangement. Concurrently, the bank’s
strengthened liquidity buffer largely reflects over NOK100 billion of government Treasury bills from
the swap arrangement. Moody’s views the increased liquidity positively but cautions that, at the end of
the swap period, DnB NOR will have to repurchase the covered bonds from the government at the
same price paid by the government for these bonds.
As regards the new liquidity requirements under the new proposed Basel framework (“Basel III”), the
bank reported it complies with the liquidity coverage ratio (LCR) as of year-end 2010. However, in
line with its Nordic peers, DnB NOR reports a shortage in relation to the net stable funding ratio
(NSFR) – but we note that some uncertainties remain regarding the calculation of the ratios, especially
regarding which assets will be considered “liquid”.
Capital Adequacy
Relatively low Tier 1 ratio but expected to benefit from IRB implementation
At end-June 2011, the Tier 1 and capital ratios were 8.6% and 10.6% respectively (excluding interim
profit). The bank’s Tier 1 ratio has increased from 8.4% at year-end 2009, chiefly reflecting a
reduction in risk-weighted assets and retained earnings. In addition, we note that capital levels have
increased from below 7% and 10% respectively, at year-end 2008 after the bank raised NOK13.9
billion in a rights issue in Q4 2009. However, they are relatively low compared to other major Nordic
banks.
EXHIBIT 8
Tier 1 Ratio (Basel II including transitional floor)
2010
2009
2008
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Nordea
Handelsbanken
DnB NOR
Danske Bank
SEB
Swedbank
Source: Moody’s Investors Service based on Companies’ Reports
12
AUGUST 2, 2011
CREDIT ANALYSIS: DNB NOR BANK ASA
GLOBAL BANKING
Nevertheless, we note that DnB NOR has, so far, benefited less from the implementation of Basel II in
relation to Basel I. This is because only 65% of the credit risk exposures are measured with the Internal
Ratings Based (IRB) method – whereas other large Nordic banks are more advanced in that process. In
Q4 2010, DnB NOR was granted permission to use IRB to calculate credit risk for most of its large
corporate and bond portfolios, which lead to some reduction in risk-weighted assets. Nevertheless,
Moody’s looks at Tier 1 ratios including the transitional floor, which caps the bank’s risk-weighted
assets at 80% of the Basel I requirement, hence less prone to distortion from the use of the banks’ own
IRB models.
The bank’s capital policy states that the Tier 1 ratio must be a minimum of 8% upon full introduction
of the IRB system.
As regards the new capital requirements under the new proposed Basel framework, we believe that – in
common with most of its Nordic peers – DnB NOR will not be significantly affected. We note
positively that, regarding the introduction of a non-risk-based leverage ratio, DnB NOR exhibits one
of the highest leverage ratios (total equity in relation to total assets) in the region at above 5%.
Asset Quality
Relatively unseasoned loan book as a result of strong growth until late 2008
The loan book expanded rapidly during the middle years of the last decade (around 20% annual
growth on average), until late 2008 when the less favourable credit outlook put a halt to the trend.
After contracting by 6% in 2009, the loan book resumed growth in 2010, albeit at a slower pace
(around 5%).
Significant concentrations in the loan book
Overall, DnB NOR’s loan portfolio is well diversified, with almost half being retail-oriented, of which
around 90% corresponded to mortgages. Nevertheless, DnB NOR’s corporate loan book exhibits
some concentrations in the real estate and shipping industries, which accounted for 31% and 23% of
commercial lending at year-end 2010 respectively. We understand that this reflects DnB NOR’s
strategic choice to concentrate on industries in which it has had core competencies historically.
In addition, DnB NOR has – in common with other Nordic banks – high industry and single-name
exposure concentration in its loan book. In our analysis of this area, we analyse the bank’s top 20
exposures, without taking into consideration any collateral, in relation to either Tier 1 capital or
earnings – whichever provides the highest ratio. However, this level is in line with DnB NOR’s status
as the dominant bank in Norway. We continue to view the group’s ability to further reduce its
borrower concentration risks as an important rating driver going forward.
Continued pressure on the loan book’s credit quality, although some improvement expected in DnB NORD
Asset quality started to deteriorate in 2008, a trend that accelerated in Q4 of that year. Problem loans
(gross non-performing commitments and commitments subject to individual write-downs) comprised
2% of the loan book at end-June 2011, slightly up from 2.3% at year-end 2010.
13
AUGUST 2, 2011
CREDIT ANALYSIS: DNB NOR BANK ASA
GLOBAL BANKING
EXHIBIT 9
Problem Loans as a percentage of Gross Loans
2010
2009
2008
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Nordea
Handelsbanken
DnB NOR
Danske Bank
SEB
Swedbank
Nordea: gross impaired loans + non-performing loans which are not impaired;
Handelsbanken: gross impaired loans + non-performing loans which are not impaired;
DnB NOR: gross non-performing and impaired commitments;
Danske Bank: gross loans subject to individual impairment test;
SEB: individually assessed impaired loans + portfolio assessed loans over 60 days past due or restructured;
Swedbank: gross impaired loans + loans over 60 days past due which are not impaired
Source: Moody’s Investors Service based on Companies’ Reports
Around half of the problem loans at end-June 2011 were booked in DnB NORD, mainly in Lithuania
and in Latvia. At end-June 2011, net lending in the Baltic countries was NOK38.4 billion, i.e. around
3% of DnB NOR’s loan portfolio. Over the short-to-medium term, we expect asset quality in relation
to exposures in the Baltic countries to gradually improve as the macro-economic environment in the
region recovers. Nevertheless, we caution that some more impairments may be booked in relation to
DnB NORD, especially in light of the Danish FSA’s inspection report 4 which advocated some
improvements in the subsidiary impairment calculations.
The bank’s credit quality in the rest of the portfolio has also deteriorated, albeit to a lesser extent. The
problem loans are concentrated in the real estate and construction sectors (20% of net problem loans
excluding DnB NORD). Problem loans from the shipping sector have been reduced and accounted
for 5% of net problem loans excluding DnB NORD at end-June 2011. We expect the credit risk for
exposures to those sectors to remain high in the foreseeable future. Nevertheless, mitigating factors for
this class of loans – which are typically granted based on cash flow analyses – are the low interest rate
environment and still good macro-economic environment in Norway (see Key Issues at the beginning
of this report for more details).
The most resilient asset class in terms of asset quality has been retail mortgages. However, we note that
almost 40% the total loan book (close to 70% of retail mortgages) has been transferred to DnB NOR
Boligkreditt to serve as collateral for covered bonds. We caution that the mortgages remaining on the
bank’s unconsolidated balance sheet have higher average credit risk than the mortgages transferred to
the covered bond subsidiary.
4
14
See full report on: http://www.dnbnord.com/static/files/91.Report%20on%20inspection%20Lithuania%20Public%20part.doc (English translation)
AUGUST 2, 2011
CREDIT ANALYSIS: DNB NOR BANK ASA
GLOBAL BANKING
Discussion of Support Considerations
Very high probability of support – leading to a three-notch uplift the bank’s deposit ratings
DnB NOR ASA’s long-term deposit rating of Aa3 is based on its BFSR of C (which translates into a
BCA of A3, see Exhibit 10) and Moody’s judgment that there is a very high probability that the
Norwegian authorities would support the bank in a period of financial distress given the bank’s
importance in the system.
The Norwegian banking system has around 140 banks, and DnB NOR is the dominant bank in the
country with total assets of around NOK1.6 trillion and NOK1.9 trillion on a group basis – the
second-largest entity is Nordea Bank Norway with total assets close to NOK500 billion. DnB NOR
has a dominant market share in several product areas and the government has a 34% ownership stake,
with no current discussions about a possible reduction in this ownership level.
Overall, Norway is considered by Moody’s to be a high support country, and, for the reasons stated
above, we have assessed the probability for systemic support for DnB NOR to be in the “very high”
category. As per Moody’s Joint Default Analysis (JDA) methodology, the range of support for a “very
high” classification is 70%-95%.
Incorporating this guideline into DnB NOR’s credit rating, Moody’s raises the bank’s local currency
deposit rating three notches, to Aa3, over the BCA of A3.
Given the sustainable size of DnB NOR’s domestic franchise and government ownership, it is difficult
to see the support assumptions changing unless the bank experienced a dramatic loss of franchise or
the government disposed of its ownership stake or significantly reduced it – neither of which scenarios
is anticipated.
Notching considerations
In line with Moody’s revised Guidelines for Rating Bank Hybrids and Subordinated Debt, published
in November 2009, ratings for DnB NOR’s junior obligations are notched off the adjusted Baseline
Credit Assessment (Adjusted BCA). The Adjusted BCA reflects the bank’s stand-alone credit strength,
including parental and/or co-operative support, if applicable, and excludes systemic support. The
Adjusted BCA for DnB NOR is A3 – the same as the BCA, given that parental and/or co-operative
support does not apply.
The Baa1 rating on DnB NOR’s junior subordinated debt is set at a level one notch below the
Adjusted BCA. These securities have a junior subordinated claim in liquidation and require coupon
suspension on a cumulative basis if a minimum regulatory capital trigger is breached. These
instruments are also exposed to principal losses in a going concern scenario, although Moody’s notes
that this can occur only following the remote event of a significant reduction in shareholders’ equity.
The Baa3 rating on DnB NOR’s Tier 1 securities is set at a level three notches below the Adjusted
BCA. These securities have a deeply subordinated claim in liquidation and require non-cumulative
coupon skip upon the breach of minimum regulatory capital requirements or if the bank does not have
sufficient available distributable funds (balance-sheet trigger). In addition these securities feature a
permanent principal write-down if the share capital has been reduced to zero, and a temporary
principal write-down if capital falls below the regulatory minimum.
15
AUGUST 2, 2011
CREDIT ANALYSIS: DNB NOR BANK ASA
GLOBAL BANKING
EXHIBIT 10
Mapping the BFSR to the Baseline Credit Assessment (BCA)
The discussions of qualitative and quantitative rating drivers presented in this report form
the analytical basis for assigning a Bank Financial Strength Rating (BSFR) of C to DNB
NOR Bank ASA.
BFSRs are Moody’s opinions on the intrinsic safety and soundness of a bank enterprise
and, in effect, address the susceptibility of a particular institution to financial distress.
The BFSR array of ratings is not on Moody’s traditional rating scale (Aaa, Aa, etc.).
However, there is a useful method for translating BFSRs to Moody’s traditional scale – the
baseline credit assessment – which, in effect, measures a bank’s stand-alone default risk
assuming there is no systemic or other external support.
DNB NOR Bank ASA’s C BFSR maps to a baseline credit assessment of A3; however,
considering external support factors, its deposit ratings are Aa3.
BFSR/Baseline Credit Assessment Mapping for
DNB NOR Bank ASA
16
AUGUST 2, 2011
BFSR
Baseline Credit Assessment (BCA)
A
Aaa
A-
Aa1
B+
Aa2
B
Aa3
B-
A1
C+
A2
C
A3
C-
Baa1
C-
Baa2
D+
Baa3
D+
Ba1
D
Ba2
D-
Ba3
E+
B1
E+
B2
E+
B3
E
Caa1
E
Caa2
E
Caa3
CREDIT ANALYSIS: DNB NOR BANK ASA
GLOBAL BANKING
Company Annual Statistics
DNB NOR Bank ASA
Norwegian Krone (Billions)
2011 YTD
2010
2009
2008
2007
15.83
16.20
31.86
51.15
9.82
BALANCE SHEET
ASSETS
Cash and Balances with Central Bank
Loans due from banks and other financial institutions
Securities and Investments
Financial Assets held for trading
Other financial assets designated at fair value through profit or loss (FVTPL)
35.43
43.84
58.75
54.19
52.30
318.04
361.78
369.44
297.02
187.59
80.52
122.33
120.38
167.14
166.51
138.37
125.70
135.76
29.60
21.08
Financial Investments/ Investment Securities
99.15
113.75
113.30
100.28
-
Investment securities (held to maturity)
99.15
113.75
113.30
100.28
-
-
5.77
4.04
4.66
0.50
Fair value of hedging derivative financial instruments / Portfolio hedge valuation
adjustment (IFRS)
Loans and advances to Customers (Gross) - Net of Allowance for Loan Losses
Loans to Customers (Gross)
Allowance for loan losses
1,215.36
1,184.10
1,128.79
1,206.84
980.24
1,225.99
1,195.18
1,139.43
1,212.72
982.90
10.62
11.08
10.64
5.88
2.66
Property, plant and equipment, net
5.95
5.77
5.43
5.27
3.44
Investments in associates and joint ventures
2.14
2.29
2.50
2.50
1.42
Goodwill and other intangible assets
4.95
5.00
5.55
6.10
4.73
Other assets - Total
16.65
12.89
9.62
7.45
9.59
1,614.35
1,637.64
1,616.00
1,635.19
1,249.62
Due to Customers
668.51
664.01
613.63
606.91
542.31
Due to Banks and other Financial Institutions
207.49
257.93
302.69
178.83
144.23
-
1.83
0.77
0.96
0.78
51.02
58.79
51.59
92.25
60.95
Short-term Borrowings
170.27
153.93
168.03
194.85
97.81
Senior Bonds, Notes and Other Long-term Borrowings
372.92
355.51
332.74
419.85
273.45
9.42
10.00
13.18
15.32
13.32
Other liabilities - Total
27.56
23.80
24.63
22.72
31.66
Subordinated Debt (IFRS)
12.76
17.65
23.75
27.46
17.72
-
-
2.75
4.21
2.66
1,519.94
1,543.47
1,533.77
1,563.37
1,184.88
0.00
0.00
0.00
0.00
0.00
Common shares
30.92
30.92
30.92
30.92
30.92
Retained earnings - Total
58.63
59.20
50.02
39.62
33.06
5.52
5.82
2.12
2.44
2.19
-0.66
-1.78
-0.83
-1.16
-1.44
-0.66
-0.27
-0.28
0.18
-0.21
Total Assets
LIABILITIES
Fair value of derivative financial instruments used for hedging / Portfolio hedge
valuation adjustments (IFRS)
Trading liabilities
Debt securities - hybrids
Minority interest - liability
Total Liabilities
CAPITAL/SHAREHOLDERS' EQUITY
Minority interest
Hybrid equity credit
Accumulated other comprehensive income
Foreign currency translation adjustments
Additional minimum pension liability adjustment
Total Capital / Shareholders' Equity
17
AUGUST 2, 2011
-
-1.51
-0.55
-1.35
-1.23
94.41
94.16
82.23
71.82
64.74
CREDIT ANALYSIS: DNB NOR BANK ASA
GLOBAL BANKING
DNB NOR Bank ASA
2011 YTD
2010
2009
2008
2007
1,614.35
1,637.64
1,616.00
1,635.19
1,249.62
Interest income
30.29
57.40
59.05
82.74
62.21
Interest expense
17.92
33.68
35.79
60.26
44.05
Net interest income (expense)
12.37
23.72
23.26
22.48
18.16
Net fee and commission income (IFRS)
2.18
4.35
4.07
4.22
4.59
Income from Trading activities / Gains (Losses) on financial instruments through
profit and loss (IFRS)
1.65
4.58
6.81
-0.66
2.94
-
0.01
-0.13
-0.13
0.03
Gross dividends from investment securities (IFRS)
0.35
0.38
0.16
0.16
0.17
Non-interest income
1.38
3.58
1.51
1.62
4.11
1.38
3.58
1.51
1.62
4.11
Total non-interest income
5.55
12.91
12.41
5.21
11.84
Personnel Expense (IFRS)
4.48
8.30
8.41
7.92
7.64
Administrative and Other Operating Expense (IFRS)
3.66
6.74
6.07
6.35
5.30
Other operating (non-interest) expense
0.81
0.53
0.53
1.06
0.86
0.81
0.53
0.53
1.06
0.86
1.35
3.00
7.71
3.51
0.22
Total other operating expenses / charges
8.95
15.57
15.01
15.33
13.79
Share of associates profit/Joint venture profit (IFRS)
0.04
0.18
0.09
0.63
0.01
-
2.15
1.12
0.25
0.68
Pre-tax income (loss)
7.66
16.08
11.92
9.22
15.33
Income tax (benefit) expense
2.06
4.69
4.53
2.47
3.95
Net Profit (Loss) After-tax Before Unusual Items
5.61
11.39
7.39
6.76
11.38
Norwegian Krone (Billions)
Total Liabilities, Mezzanine and Shareholders' Equity
INCOME STATEMENT
Net Gains (Losses) on financial instruments designated at fair value through profit
and loss (IFRS)
Other income
Depreciation and Amortization
Loan Loss Provisions (IFRS)
Non-recurring charges / unusual items (as reported) (IFRS)
-
-
-
-
0.00
Extraordinary items after-tax expense (income)
Income (loss) from discontinued operations, net of tax
0.03
-0.07
-0.08
0.00
-
Net income (loss)
5.58
11.47
7.47
6.76
11.38
-
0.55
-1.18
2.60
0.15
Net income (loss) after unusual items adjustments
5.58
12.01
6.28
9.36
11.53
Minority interest expense (income)
0.00
-0.75
-1.56
-0.29
0.24
Preferred dividends declared
0.31
0.33
0.14
0.15
0.15
Income available / (Loss attributable) to common shareholders
5.26
12.44
7.70
9.51
11.14
Cumulative effect of Moody's unusual items adjustments to net income (loss), net
of tax
RATIOS
ASSET QUALITY
Loan Loss Provisions / Gross Loans
Loan Loss Provisions / Pre-Provision Profit
Allowance for Loan Losses / Gross Loans
Problem Loans & Leases / Gross Loans
Problem Loans & Leases / Shareholders' Equity + Loan Loss Reserves
0.22%
0.25%
0.68%
0.29%
0.02%
15.04%
14.24%
37.32%
28.40%
1.36%
0.87%
0.93%
0.93%
0.48%
0.27%
2.01%
2.32%
2.56%
1.34%
0.63%
23.47%
26.30%
31.42%
20.95%
9.23%
0.66%
0.69%
0.45%
0.47%
0.97%
PROFITABILITY
Return on Average Assets (after Tax before Unusual Items)
18
AUGUST 2, 2011
CREDIT ANALYSIS: DNB NOR BANK ASA
GLOBAL BANKING
DNB NOR Bank ASA
2011 YTD
2010
2009
2008
2007
11.75%
12.84%
9.39%
9.68%
19.10%
Net Income / Average RWA - Basel II
1.20%
1.20%
0.72%
0.67%
1.28%
Pre-Provision Income / Average RWA - Basel II
1.93%
2.19%
1.99%
1.23%
1.83%
Norwegian Krone (Billions)
Return on Average Shareholders' Equity (after Tax before Unusual Items)
CAPITALIZATION
Tier 1 Capital / RWA - Basel II
8.60%
9.20%
8.40%
6.90%
7.90%
Total Capital / RWA - Basel II
10.60%
11.70%
11.40%
9.90%
10.50%
TCE / RWA - Basel II
9.45%
9.71%
7.99%
5.87%
6.77%
Shareholders' Equity / Total Assets
5.85%
5.75%
5.09%
4.39%
5.18%
49.96%
42.52%
42.09%
55.38%
45.96%
42.87%
40.76%
41.94%
39.90%
30.34%
8.16%
11.49%
13.31%
16.95%
18.34%
EFFICIENCY
Cost / Income Ratio
LIQUIDITY AND FUNDING
(Market Funds - Liquid Assets) / Total Assets
Total Liquid Assets / Total Assets
Source: Moody’s
19
AUGUST 2, 2011
CREDIT ANALYSIS: DNB NOR BANK ASA
GLOBAL BANKING
Moody’s Related Research
Credit Opinion:
» DNB NOR Bank ASA
Banking System Outlook:
»
Norway, December 2009 (121542)
Banking Statistical Supplements:
» Norway, June 2011
Special Comments:
» Moody’s Approach to Estimating Bank Credit Losses and their Impact on Bank Financial
Strength Ratings, May 2009 (117326)
»
Moody’s Approach to Estimating Nordic Banks’ Credit Losses, July 2009 (118758)
Industry Outlook:
»
Shipping Outlook Turns Negative With Sustained Overcapacity, June 2011 (133720)
Rating Methodologies:
»
Incorporation of Joint-Default Analysis into Moody’s Bank Ratings: A Refined Methodology,
March 2007 (102639)
»
Bank Financial Strength Ratings: Global Methodology, February 2007 (102151)
»
Moody’s Guidelines for Rating Bank Hybrid Securities and Subordinated Debt, November 2009
(120307)
To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of
this report and that more recent reports may be available. All research may not be available to all clients.
20
AUGUST 2, 2011
CREDIT ANALYSIS: DNB NOR BANK ASA
GLOBAL BANKING
Report Number: 129316
Authors
Soline Poulain
Janne Thomsen
Production Specialist
Wendy Kroeker
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This credit rating is an opinion as to the creditworthiness or a debt obligation of the issuer, not on the equity securities of the issuer
or any form of security that is available to retail investors. It would be dangerous for retail investors to make any investment decision
based on this credit rating. If in doubt you should contact your financial or other professional adviser.
21
AUGUST 2, 2011
CREDIT ANALYSIS: DNB NOR BANK ASA