DBRS Morningstar Confirms DNB Bank ASA’s Long-Term Issuer Rating at AA (low), 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 Long-Term Issuer Rating reflects DNB’s robust franchise in the domestic Norwegian market where the bank has strong market shares among retail and corporate customers, as well as a high level of digital penetration. In addition, the ratings also consider that the Bank has been able to maintain its historically sound earnings profile with strong revenue generation expected to further benefit from increasing interest rates. The Bank’s efficiency remains very strong compared to other European peers.

The ratings also reflect DNB’s stable risk profile and sound asset quality metrics, albeit uncertainty remains due to the deterioration of the macroeconomic outlook after Russia’s invasion of Ukraine. DNB continues to show a high reliance on wholesale funding when compared to many European peers, however this is mitigated by DNB’s stable and well-established access to debt capital 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 reliance on wholesale funding over time, while maintaining strong earnings and the current risk profile.

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

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Strong

DNB is the largest Bank in Norway, offering universal banking products to its 2.1 million personal customers and around 231,000 corporate clients through a wide range of physical and digital channels. DNB benefits from a dominant market position in both the retail and corporate segments in Norway reporting a market share of 24% in loans / 32% in deposits among retail customers and 22% in loans / 36% in deposits among corporate customers as of May 2022. In addition, DNB operates in the other Nordic countries and has maintained a global strategic focus in selected industries such as energy, seafood and shipping. In 2022, DNB completed the acquisition of Sbanken ASA (Sbanken). Sbanken was one of the leading digital retail banks in Norway. The acquisition of Sbanken has further strengthened DNB’s position in the retail banking sector in Norway, complementing DNB’s activity in the savings area, as well as adding highly skilled technological personnel to the Group.

Earnings Combined Building Block (BB) Assessment: Strong/Good

In DBRS Morningstar's view, DNB continued to demonstrate sound earnings generation which benefited from the Bank’s very strong operating efficiency levels. In 2021, DNB’s performance improved significantly compared to the previous year, mostly due to the very high loan loss provisions reported by the Bank in 2020 to cover potential losses from the COVID-19 pandemic as well as the sharp decline in the oil price. In 2021, the Bank reported a Return-on-Equity (ROE) of 10.7%, compared to 8.4% in 2020. In H1 2022, DNB’s annualised ROE further increased to 13.1% (vs. 10.5% H1 2021) which is in line with the Bank’s financial ambitions of >12% by 2023. DNB has been able to maintain very good revenue generation. In particular, in H1 2022, the Bank’s revenues increased by 17% compared to H1 2021. This was mainly driven by the 18% increase of net interest income (NII) year-on-year (YoY) which benefited from increased volumes, higher interest rates and the contribution from Sbanken. DNB's operating efficiency remains strong compared to European peers with the cost-income ratio at 39.7% in H1 2022 (vs. 44% in H1 2021). In 2021, DNB reported net loan loss reversals of NOK 868 million which compares with the significantly higher charge of NOK 9,918 million reported in 2020. In H1 2022, the Bank reported additional loan loss reversals of NOK 798 million (vs. NOK 943 million in H1 2021), of which the majority were in the oil, gas and offshore segments.

Risk Combined Building Block (BB) Assessment: Strong/Good

DNB's risk profile is considered solid, supported by high sector diversification and relatively low credit risk in its lending portfolio. DBRS Morningstar notes that overall the Norwegian economy has proved to be relatively resilient to the effects of the global pandemic and therefore credit deterioration has been limited to specific sectors. Nevertheless, DNB's asset quality improved in 2021 and H1 2022, mostly due to the improving macroeconomic scenarios post-pandemic as well as further de-risking in the oil, gas and offshore portfolio. In fact, 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. While uncertainty remains due to the worsening macroeconomic outlook following Russia’s invasion of Ukraine, we note that the Bank’s asset quality metrics remained sound with gross stage 3 loans amounting to 1.3% of total gross credit exposure at end-H1 2022 vs. 1.46% at end-2021 and 1.6% at end-2020.

Funding and Liquidity Combined Building Block (BB) Assessment: Good/Moderate

DNB maintains a sound and stable funding profile. Similar to its Nordic peers, reliance on wholesale funding is higher than other European peers. However, DNB has consistently maintained good access to various market funding sources including covered bonds. In addition, customer deposits, which accounted for 57% of total funding at end-H1 2022, increased by 26% at end-H1 2022 vs. end-2020, partly driven by the incorporation of Sbanken. As a consequence, the Bank’s loan-to deposit ratio decreased to 138% at end H1 2022, compared to 140% at end-2021 and 153% at end-2020. DNB’s liquidity profile remains strong with a Liquidity Coverage Ratio (LCR) of 139% at end-H1 2022 and total liquid assets of NOK 688.7 billion at end-H1 2022 (+20% vs. end-2021), which adequately covers DNB´s short-term maturities.

Capitalisation Combined Building Block (BB) Assessment: Strong

DNB’s capitalisation is strong, supported by the Bank’s historically high internal capital generation capacity. At end-H1 2022, DNB reported a Common Equity Tier 1 (CET1) ratio of 18%, down from 19.4% at end-2021. The reduction was mostly driven by the acquisition of Sbanken which had a negative effect of around 125 basis points (bps) on the CET1 ratio. This was partially counterbalanced by retained earnings which had a positive impact of 80 bps. We note that, the Ministry of Finance has decided to increase the countercyclical buffer (CCyB) back to 2.5% effectively end-March 2023. However, the increase is going to happen gradually with the CCyB going up to 1.5% at end-June 2022 and 2% at end-December 2022. As a consequence, DNB has estimated the minimum CET1 ratio requirement will increase to 15.2% at end-Q2 2022, 15.7% at end-2022 and 16.2% at end-Q1 2023. In addition, the Bank also reported a Pillar 2 Guidance of 1.5%.

As per the above, we note that the minimum capital requirements for Norwegian banks remain high compared to European peers. DNB’s current capital position seems to be in line with its capital ratio target of above 17.7% which corresponds to the supervisory expectations taking into account the full counter-cyclical capital buffer requirement.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/399878

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in NOK unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (23 June 2022) - https://www.dbrsmorningstar.com/research/398692/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 (17 May 2022) https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

The sources of information used for this rating include Morningstar Inc. and Company Documents, DNB Annual Report 2021, DNB Q4 2021/ Q1-Q2 2022 Presentations, DNB Q4 2021/ Q1-Q2 2022 Factbooks, DNB Q4 2021/ Q1-Q2 2022 Interim Reports and DNB Debt Investor Presentation. 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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: https://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/399877

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 FIG
Initial Rating Date: 09/18/2006
Last Rating Date: 07/16/2021

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