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

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

KEY RATING CONSIDERATIONS

The confirmation of DNB’s AA (low) Long-Term Issuer Rating reflects the Group’s leading retail and commercial banking franchise in its core market of Norway, the robust track record in earnings generation, which is supported by its historically strong operating efficiency, and the Group's solid starting point going into the current crisis in terms of asset quality and capitalisation. The ratings also take into account the Group’s relatively high reliance on wholesale funding, when compared to similarly rated European peers. Nonetheless, this is partially mitigated by a good liquidity position and the access to the stable Nordic covered bond markets.

DBRS Morningstar also considers that the wide and growing scale of economic disruption caused by the coronavirus (COVID-19) pandemic is negatively affecting the Group’s operating environment, and, as a result, expects weaker revenue generation for DNB in 2020, as well as higher loan loss provisions and some deterioration in its asset quality profile. Similar to its Nordic peers, any disruption in the Nordic covered bond markets would also have a negative impact given the Group's sizable use of this funding source.

RATING DRIVERS

Given DNB’s high ratings and the current economic environment, an upgrade of the ratings is unlikely. An upgrade would require a materially lower reliance on wholesale funding, whilst increasing geographical diversification, and maintaining strong capital cushions and underlying profitability.

A downgrade of DNB’s Long-Term Issuer Rating would arise if there is a prolonged adverse impact from the COVID-19 pandemic resulting in a material deterioration in asset quality and a sustained weakening of profitability. In addition, a downgrade would arise if the Bank were to face challenges in accessing wholesale markets.

RATING RATIONALE

DNB is a leading banking group in its core market in Norway, while the Group also has a global footprint in select sectors, such as shipping, offshore, energy, and seafood. Over the past few years, DNB has streamlined certain of its operations, including its presence in the Baltics and its non-life insurance offering in Norway, while significantly enhancing its digital offering.

DBRS Morningstar considers that DNB has demonstrated sound earnings generation in recent years, and DNB's top line performance remained sound in H1 2020 despite the adverse economic environment caused by the COVID-19 pandemic. Total income increased by 9.4% YoY in H1 2020, mostly driven by higher volumes, positive currency effects and increased lending margins, partly driven by the full repricing impact from the rise in interest rates between November 2019 to early 2020. However, we expect net interest income to be under pressure as the key policy rate is currently 0 bps following the 150 bps reduction by the Norwegian Central Bank between March and May 2020. Net fees were down 2.6% YoY due to the impact of COVID-19 in H1 2020 on money transfer and banking services business amidst the restrictive mobility measures that were put in place for most of Q2 2020. However, higher customer confidence, coupled with the recovery in financial markets, led to good performance in real estate brokerage and investment banking services in the same quarter.

The Group maintained strong operating efficiency in H1 2020, with total operating expenses down 1.7% YoY, which resulted in the Group's cost-to-income ratio standing at a strong 37.7% in H1 2020, an improvement compared to 42% in H1 2019, and is in line with the below 40% targeted level under the current 2019-22 strategic plan.

DNB's impairments on loans and guarantees jumped to NOK 7.9 billion in H1 2020 from NOK 766 million in H1 2019, representing 42.7% of the Group's (income before provisions and taxes) IBPT compared to 4.9% in H1 2019, implying an annualised cost of risk of 96 bps, based on the average customer loan portfolio as reported by DNB. We note around 90% of the impairment losses were booked in the corporate customer segment, of which about half were against offshore, and oil-related exposures.

DNB’s risk profile has been supported by its sound asset quality metrics to date, that have historically benefitted from good economic conditions in Norway. However, DBRS Morningstar anticipates some deterioration in the Bank's asset quality indicators given the increased cost of risk and the exposure to some cyclical sectors, which could potentially be negatively affected by the challenging operating environment and are typically more risky in an economic slowdown. At end-H1 2020, DNB’s ratio of Stage 3 net loans and financial commitments to net loans was 1.83%, up from 1.13% at end-2019 (or 1.29% at end-H1 2020, up from 0.81% at end-2019 calculated as net stage 3 loans and commitments as % of net loans at amortised cost and financial commitments). DNB’s largest exposure is mortgages which account for 50% of the total net exposure at default (EAD) at end-June 2020. DBRS Morningstar notes that the majority of mortgages are located in Norway and that currently households benefit from the improved unemployment benefit and from the flexibility provided to banks to defer amortisation. Given the high house prices in Norway, we will continue to monitor developments in the housing market and any potential impact on the quality of DNB’s loan book. Major exposures in the corporate loan portfolio include commercial real estate (9% of total net EAD), and residential property (5%). In addition, the oil, gas and offshore segment accounted for about 5% of total net EAD (of which 1.7% was specifically offshore), thereby exposing the Group to lower oil prices. DNB’s exposure to shipping accounted for 2.8% of its net EAD as of end-H1 2020, but has not required additional provisions.

DBRS Morningstar views DNB as having a sound and well-managed funding and liquidity profile. In H1 2020, DNB maintained good access to funding markets and the domestic covered bond markets kept functioning well. Similar to its main Nordic peers, DNB has a relatively high reliance on capital market funding, primarily covered bonds, while it also needs to issue senior not preferred debt in light of future MREL requirements. As a result, DBRS Morningstar considers that a deterioration in the Norwegian economy and disruption in the financial markets, could have a negative impact on DNB’s funding position. DBRS Morningstar notes that the Group issued a NOK 4 billion subordinated loan in May 2020, benefiting from the recovering markets and funding costs normalising to pre-COVID-19 levels. In our view, the Bank’s liquidity position remains sufficient, and is underpinned by liquid assets of NOK 654 billion (21% of total assets), and a Liquidity Coverage Ratio of 134% at end-H1 2020.

DNB's capital position remains robust, supported by its sound track record in earnings generation and access to capital markets. On 31 December 2019, Norway fully implemented the EU's capital requirements legislation CRR/CRD IV, resulting in the removal of the so-called Basel I floor and the introduction of the SME discount factor. This allowed the Group to strengthen its capital ratios as of end-2019. DNB had a Common Equity Tier 1 (CET1) ratio of 18.2% as of end-June 2020, down from 18.6% at end-2019, although up from 17.7% as of end-March 2020, supported by retained earnings and the strengthening of the NOK in Q2 2020, which partly offset the negative FX effects and higher counterparty risk-weighted assets (RWAs) from the oil price fall and COVID-19 in Q1 2020. The Group's capital cushion over the regulatory minimum requirement remains comfortable at 350 bps over the SREP requirements.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

Notes:
All figures are in NOK unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (8 June 2020) https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883

The sources of information used for this rating include DNB Bank Q2 2020 Investor Presentation, Report and Factbook, DNB Bank 2019 Annual Report, Finanstilsynet (Norwegian FSA), Norges Bank (Norwegian Central Bank), Regjeringen (Norwegian Ministry of Finance), the European Banking Authority, and S&P Global Market Intelligence.

DBRS Morningstar 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.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are 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: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/364321

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

Lead Analyst: Vitaline Yeterian, Senior Vice President – Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG – Global FIG
Initial Rating Date: September 18, 2006
Last Rating Date: August 2, 2019

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