DBRS Morningstar Confirms DNB Bank ASA’s Issuer Ratings at AA (low)/R-1 (middle), Trend Stable

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

KEY RATING CONSIDERATIONS
The confirmation of the Long-Term Issuer Rating continues to reflect the Bank’s robust franchise in the domestic Norwegian market with dominant market shares among household and corporate customers. The ratings also take into account the Bank’s historically sound earnings profile supported by consistent revenue generation, despite the challenging operating environment. The Bank’s efficiency remains strong and this helped to mitigate the higher cost of risk in 2020.

The confirmation of the ratings also reflects DNB’s stable risk profile and sound asset quality metrics, albeit these have deteriorated due to the impact of COVID-19 pandemic and the oil-price volatility. DNB continues to have a high reliance on wholesale funding when compared to European peers, however this is partially mitigated by increasing customer deposits, stable and well-established access to covered bond markets and ample liquidity. Capitalisation is robust, supported by solid internal capital generation.

RATING DRIVERS
Given the high level of the ratings, an upgrade of the Long-Term Issuer Rating is unlikely and would require significantly lower usage of wholesale funding over time and higher geographical diversification, while maintaining strong earnings and capitalisation.

A downgrade of the Long-Term Issuer Rating would be driven by a material deterioration of asset quality and/or a sustained deterioration of profitability metrics.

RATING RATIONALE
DNB is the largest Bank in Norway, with 2.1 million personal customers and around 233,000 SMEs and corporate clients, and it services this customer base through a wide range of physical and digital channels. DNB benefits from a dominant market position in Norway with high market shares in both Personal (23% in loans and 29% in deposits) and Corporate (21% in loans and 37% in deposits) banking and across different products. The Bank also operates in the wider Nordic area and has maintained a global strategic focus in selected industries such as energy, seafood and shipping. In June 2021, DNB announced that a recommended tender offer for Sbanken ASA, a small Norwegian bank with a specific digital footprint, has been accepted by around 81.3% of Sbanken's shareholders. Together with its existing stake of approximately 9.9% of share capital, DNB is expected to hold 91.2% of total Sbanken's shares. The takeover is still subject to the Norwegian Competition Authority approval.

In DBRS Morningstar’s view, DNB has demonstrated sound earnings generation in recent years, supported by very strong operating efficiency levels. Nevertheless, in 2020, DNB’s Return-on-Equity (ROE) decreased to 8.4% in 2020 (2019: 11.7%) mostly due to higher credit impairments as a result of COVID-19 and the oil price volatility. However, the Bank has been able to maintain good revenue generation with total operating income increasing 3% in 2020, despite the impact on net interest income (NII) of the repricing following the key policy rate cut to zero. DNB´s operating efficiency is among the strongest in Europe, and in 2020, the cost-income ratio decreased to 41.5% in 2020, from 42.2% in 2019. Loan loss provisions (LLPs) significantly increased to NOK 9,918 million in 2020 (2019: NOK 2,191 million) with the oil, gas and offshore segment accounting for 69% of the total, mostly related to credit impairments on Stage 3 exposures in the offshore segment. Primarily reflecting LLPs reversals, DNB reported a net profit of NOK 12,317 million in H1 2021, up 37% vs. H1 2020 and a ROE of 10.5% vs. 7.6% in H1 2020. The Bank has maintained its ROE target of above 12% by 2023.

DNB's risk profile is considered solid, supported by high sector diversification and relatively low credit risk in its lending portfolio. While DBRS Morningstar will continue to monitor the consequences of the COVID-19 pandemic in terms of credit deterioration, we take into account that, notwithstanding the prolonged lockdown measures imposed by the government, the Norwegian economy has proved to be relatively resilient to the effects of the global pandemic. In addition, in recent years, the Group has progressively reduced its exposure to cyclical industries which were adversely affected by the pandemic, while rebalancing its portfolio towards personal customers. Nevertheless, DNB’s asset quality has deteriorated since end-2019, mostly due to the impact of the COVID-19 pandemic and the oil-price volatility. Gross stage 3 loans and financial commitments increased by 38% YoY in 2020 but decreased by around 4% in H1 2021 vs. end-2020. However, the Bank’s gross stage 3 loans account for a relatively low 1.5% of total gross credit exposure at end-H1 2021 vs. 1.6% at end-2020 and 1.2% at end-2019. The Group's exposure to the more cyclical industries such as shipping and oil, gas and offshore, accounted for a combined 6% of net EAD at end-H1 2021. Reflecting the Bank's de-risking strategy, the current exposure to these sectors decreased by almost 60% compared to end- September 2015.

DBRS Morningstar considers DNB has a sound and stable funding profile. Similar to its Nordic peers, wholesale funding represents a higher portion of total funding than European peers. This is mainly due to high usage of covered bonds as a source of funding for the mortgage loan portfolio which is very typical in the Nordic markets. In addition, total customer deposits, which remain the major source of funding, increased by 11% at end-H1 2021 vs. end-2020. This led DNB’s loan-to-deposit ratio, adjusted for repos, to improve to 134% at end-H1 2021 from 147% at end-2020 and 165% at end-2019. DNB’s liquidity profile is strong with a Liquidity Coverage Ratio (LCR) of 148% at end-H1 2021, well above the 100% minimum requirement.

DNB’s capitalisation is robust, supported by the Bank’s historically high internal capital generation capacity. At end-H1 2021, DNB reported a Common Equity Tier 1 (CET1) ratio of 19.1%, up from 18.7% at end-2020 and 18.6% at end-2019. We note that, notwithstanding the capital relief measures adopted by government and regulators amid the global pandemic, the minimum capital requirements for Norwegian banks remain very high compared to European and Nordic peers. DNB’s minimum requirement for its CET1 ratio was 14.9% at end-H1 2021, 15.9% including a supervisory expectation of a Pillar 2 Guidance of 1%. DNB continues to report one of the highest leverage ratios among European banks which stood at 6.7% at end-H1 2021 (vs. 7.1% at end-2020). This compares to as high minimum requirement of 6% for Norwegian banks which includes a 1% additional buffer for Systemically important financial institutions.

ESG CONSIDERATION
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

The Grid Summary Grades for DNB Bank ASA are as follows: Franchise Strength – Very Strong/Strong; Earnings Power –Very Strong/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 . Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

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’s Annual and Sustainability Report 2020, Q1 2021 and H1 2021 Interim Reports and Presentations, DNB Bank’s Investor Presentation, DNB Bank’s Fact Book 2020, Q1 2021 and H1 2021, DNB Bank’s Pillar 3 Report 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.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/381710

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Mario De Cicco, Vice President, Global FIG
Rating Committee Chair: Ross Abercromby, Managing Director, Global Financial Institutions and Sovereign Ratings
Initial Rating Date: September 18, 2006
Last Rating Date: July 23, 2020

DBRS Ratings GmbH, Sucursal en España
Paseo de la Castellana 81
Plantas 26 & 27
28046 Madrid, Spain
Tel. +34 (91) 903 6500

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.