DNB Bank ASA. Table Of Contents. Major Rating Factors. Outlook. Rationale. Related Criteria And Research

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1 Primary Credit Analyst: Alexander Ekbom, Stockholm (46) ; Secondary Contact: Sean Cotten, Stockholm (46) ; Table Of Contents Major Rating Factors Outlook Rationale Related Criteria And Research JULY 26,

2 SACP a + Support +1 + Additional Factors 0 Anchor a- Business Position Capital and Earnings Strong +1 Adequate 0 Risk Position Adequate 0 GRE Support 0 Group Support 0 Issuer Credit Rating A+/Stable/A-1 Funding Liquidity Average Adequate 0 Sovereign Support +1 Major Rating Factors Strengths: Undisputed leading position in Norway where it benefits from a strong and wealthy economy. Solid revenue base, underpinned by wide business diversity, and improved efficiency. Diverse funding profile and good access to market funding. Adequately capitalized and stable core shareholder base, including 34% state ownership. Weaknesses: Inherent market risk and potential capital shortfall in life insurance subsidiary. Increased risk in sizable shipping portfolio, despite sound track record Lesser geographic diversification than some Nordic peers. JULY 26,

3 Outlook: Stable Standard & Poor's Ratings Services' outlook on Norway-based DNB Bank ASA is stable, reflecting our view that the bank will preserve its strong position in the Norwegian market and comfortably maintain a Standard & Poor's risk-adjusted capital (RAC) ratio of above 8%. We might raise the ratings if materially stronger capital generation or capital initiatives by the bank lead to a RAC ratio above 10%. We could also take a positive rating action if we were to positively reassess the bank's risk position in light of demonstrated resilient asset quality, lower losses than its peer group average, and decreasing risk in the life insurance business. A negative rating action is currently unlikely given that a moderate deterioration in DNB Bank's stand-alone credit profile (SACP) would not lead directly to a lower rating under our government support approach. However, a more material deterioration in the SACP could trigger a downgrade following a weakening of the bank's risk position. This could happen, for example, as a result of a material increase in the life insurance subsidiary's risk or deteriorating asset quality, in combination with a deterioration of the group's capital position. Rationale The ratings on DNB Bank reflect its "strong" business position as defined in our criteria, given the bank's undisputed status as the leading financial services provider in Norway. The bank's capital and earnings position is "adequate," in our view. We believe the bank will achieve a RAC ratio of about 8.5% by year-end 2013, supported by organic earnings generation. We assess DNB's risk position as "adequate," reflecting our view that the quality of the bank's domestic loan book is in line with our low economic risk assessment of Norway. Our views of DNB's funding as "average," and liquidity as "adequate," as our criteria define these terms, reflect its diverse funding sources, relatively high share of deposits, and the ownership ties to the government. The ratings on DNB Bank also reflect the creditworthiness of the wider DNB group. Anchor: Blended economic risk dominated by Norwegian exposures. The anchor is 'a-', reflecting the bank's Norwegian regulatory headquarters and its lending exposure to resilient banking markets in Norway (75%), Sweden, and elsewhere in Europe. About 5% of the lending exposure is to Latvia, Lithuania, Estonia, and Poland. The economic risk assessment reflects our view of Norway as a wealthy economy with a stable political environment and a steady oil-driven government surplus. We assess debt levels as manageable in light of high income levels, low unemployment, and well-funded social systems. In addition, we believe that lending growth is driven by structural factors and supported by prudent underwriting practices and a very strong payment culture. With regard to industry risk, the Norwegian banking industry primarily comprises highly rated international institutions and Norway's domestic savings bank alliances, and is managed by a strong, pro-active regulator and a government with a history of successful intervention in the system. A growing domestic covered bond market has increased the system's loan-to-deposit ratio and reliance on wholesale funding. However, we believe that the government and domestic pension funds are committed to the keeping the covered bond market liquid. JULY 26,

4 Table 1 DNB Group Key Figures --Year-ended Dec (Mil. NOK) 2012* Adjusted assets 2,339, ,095, ,830, ,794, ,806,765.0 Customer loans (gross) 1,320, ,290, ,181, ,125, ,197,516.0 Adjusted common equity 107, , , , ,117.1 Operating revenues 20, , , , ,347.0 Noninterest expenses 10, , , , ,490.0 Core earnings 6, , , , ,063.9 *Data as of June 30. NOK--Norwegian krone. N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful. Business position: Norway's undisputed status as the leading financial services provider DNB Bank's business position is "strong" in our opinion, reflecting the bank's undisputed status as the leading financial services provider in Norway with total reported assets of NOK2.37 trillion ( 314 billion at NOK7.54 to 1) at June 30, 2012 and a 30% market share in most of its domestic business lines. It also has a world leading shipping finance franchise and, through life insurance subsidiary DNB Livsforsikring, the DNB group is a domestic leader in life insurance and pension products. We believe DNB Bank's stable franchise, which is roughly split equally between corporate and retail banking, and recurring revenues in the form of interest and fee income, support the bank's business model. Further supporting our assessment of the bank's business position as "strong" is our view of the government's stance as a supportive shareholder. The Norwegian government owns a 34% share of the group's capital and was a strong advocate of the merger of two of the country's leading financial institutions at that time, DnB NOR and Union Bank of Norway, to create a major domestic financial institution headquartered in Oslo. We consider management and corporate strategy to be a positive rating factor, although international diversification efforts to decrease the concentration to Norway have had mixed results and, in our view, have caused the majority of the group's asset quality problems. Apart from some smaller operations in Sweden, in 2005, DNB set up joint venture DnB NORD, together with a German bank which they now fully own. DnB NORD has around 160 branches in Estonia, Latvia, Lithuania, and Poland. Given material asset quality problems, its loan book decreased significantly through the downturn, and, at March 31, 2012, represented just above 4% of DNB's total portfolio, from its peak at 7% at year-end Table 2 DNB Group Business Position --Year-ended Dec (%) 2012* Loan market share in country of domicile N/A Deposit market share in country of domicile N/A Total revenues from business line (currency in millions) 20, , , ,733.0 N/A Commercial banking/total revenues from business line N.M. Retail banking/total revenues from business line N.M. JULY 26,

5 Table 2 DNB Group Business Position (cont.) Commercial & retail banking/total revenues from business line N.M. Trading and sales income/total revenues from business line N.M. Insurance activities/total revenues from business line N.M. Asset management/total revenues from business line N/A N.M. Other revenues/total revenues from business line (17.9) 0.2 (1.5) (11.5) N.M. Investment banking/total revenues from business line N.M. Return on equity *Data as of June 30. N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful. Chart 1 Capital and earnings: Adequate capital supported by stable earnings; some volatility from insurance operations DNB Bank's capital and earnings are "adequate" in our view and reflect our expectation that the bank will achieve a RAC ratio of around 8.5% by year-end We expect the increase from 7.6% today to be achieved through adjusted after-tax earnings of around NOK12-14 billion for the coming two years and a dividend policy in line with previous years. In addition, we believe that the bank's capital ratios are underpinned by a strong capital base as we include very limited hybrid capital into our measure of total adjusted capital (TAC). JULY 26,

6 We consider DNB Bank's earnings composition to be sound and dominated by net interest and fee income. Revenues are mainly generated from the retail and corporate division (see chart 2). Income from market operations is driven by customer-related activity. We expect lending growth to moderate, having reached 9% in 2011, and client margins to undergo some further expansion. We note the stability of the bank's net interest margins (about 1.4% over the past five years) and its relatively strong efficiency compared to peers (the cost-to-income ratio was about 48% in 2011). We believe that these factors support the bank's earnings and capital generation. However, we believe that insurance-linked income adds an element of volatility, as demonstrated in 2011 when results fell by almost 75% compared to 2010 given the lower investment return. The life company in DNB has started to alter its investment strategy and shift toward unit-linked products, which in our view should decrease earnings volatility in the medium-to-long term. Our earnings buffer for DNB, which, according to our criteria, measures the capacity for a bank's earnings to cover normalized losses, is in the range of basis points. This indicates that there is a meaningful cushion against decreasing revenues and deteriorating asset quality. Table 3 DNB Group Capital And Earnings --Year-ended Dec (%) 2012* Tier 1 capital ratio S&P RAC ratio before diversification N.M N.M. N.M. S&P RAC ratio after diversification N.M N.M. N.M. Adjusted common equity/total adjusted capital Net interest income/operating revenues Fee income/operating revenues Market-sensitive income/operating revenues Noninterest expenses/operating revenues Preprovision operating income/average assets Core earnings/average managed assets *Data as of June 30. N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful. JULY 26,

7 Chart 2 Table 4 DNB Group RACF [Risk-Adjusted Capital Framework] Data (NOK 000s) Exposure* Basel II RWA Average Basel II RW (%) Standard & Poor's RWA Average Standard & Poor's RW (%) Credit risk Government and central banks 118,682,299 1,804, ,888,129 6 Institutions 28,472,324 11,936, ,417, Corporate 926,467, ,635, ,557, Retail 707,715, ,080, ,433, Of which mortgage 584,820,033 89,853, ,145, Securitization 95,061,960 9,401, ,754, Other assets 64,829,850 48,622, ,079, Total credit risk 1,941,229, ,480, ,010,130, Market risk Equity in the banking book 5,535,534 3,601, ,837, Trading book market risk -- 36,595, ,893, Total market risk -- 40,197, ,730, Insurance risk Total insurance risk ,350, JULY 26,

8 Table 4 DNB Group RACF [Risk-Adjusted Capital Framework] Data (cont.) Operational risk Total operational risk -- 67,319, ,443, (NOK 000s) Basel II RWA Standard & Poor's RWA % of Standard & Poor's RWA Diversification adjustments RWA before diversification 952,997,523 1,385,654, Total Diversification/Concentration Adjustments ,931, RWA after diversification 952,997,523 1,199,723, (NOK 000s) Tier 1 capital Tier 1 ratio (%) Total adjusted capital Standard & Poor's RAC ratio (%) Capital ratio Capital ratio before adjustments 107,719, ,506, Capital ratio after adjustments 107,719, ,506, *Exposure at default. Securitisation Exposure includes the securitisation tranches deducted from capital in the regulatory framework. Exposure and Standard & Poor's risk-weighted assets for equity in the banking book include minority equity holdings in financial institutions. Adjustments to Tier 1 ratio are additional regulatory requirements (e.g. transitional floor or Pillar 2 add-ons). RWA--Risk-weighted assets. RW--Risk weight. RAC--Risk-adjusted capital.nok--norway Krone. Sources: Company data as of Dec. 31, 2011, Standard & Poor's. Risk position: Adequate, but capitalization from the insurance operations is challenged DNB Bank's risk position is "adequate", in our view, primarily reflecting our view that the quality of the bank's domestic loan book is in line with our low economic risk assessment of Norway and the higher risk we assign to countries where the bank's insurance subsidiary, DnB NORD, operates. DNB bank's total nonperforming loans amounted to close to NOK29 billion, 2.18% of average loans, at June 30, a level that has remained relatively stable for the last three years after the spike in Loan loss provisions have also stabilized in the same period, around 25 basis points annually, and we expect 2012 levels to be similar to those in Losses in the Baltic countries and Poland make up a disproportionate share of the group's impairments and accounted for 36% of write-downs in 2011 and 53% of the impaired loan stock as of end-2011, although it only represented 4% of group lending. As the region is recovering we expect an improvement in credit quality and the share of new losses to be smaller. We note the resilience of the domestic book, which has performed well since 2008, including the mild downturn in the domestic economy in DNB's domestic portfolio should continue to prove resilient, in our view, supported by low interest rates, low unemployment, and a supportive government with very significant financial flexibility. We believe that the shipping industry, in which DNB remains one of the largest players in the world, is inherently volatile. Nevertheless, we observe that DNB's credit losses in the sector remained contained despite the recent sharp downturn. They could increase in 2012, however, owing to the difficult economic environment that is affecting global trade. To reduce concentration risk, the shipping and offshore portfolios have been managed down and now comprise 10.5% of the total loan book. Our RAC framework applies a risk-weight of 1,250% for investments in insurance operations. This translates into a full JULY 26,

9 deduction of all equity invested in insurance subsidiaries from the group's consolidated capital base. We expect that the incoming Solvency II environment will constrain the capitalization of many Nordic insurers, including DNB Livforsikring, given the substantial amount of guaranteed business with relatively high guarantee levels. Under Standard & Poor's Insurance Capital Model, the subsidiary's capitalization level is still weaker than that of the overall group, although strengthened by a NOK3 billion capital injection in 2011 and de-risking of the investment portfolio. This reflects the fact that since the financial crisis, investment returns have not been at a high enough level above guarantees to build up buffers. Given the potential need for more capital, we believe the RAC ratio may not fully capture the risks associated with the bank's insurance operations. We take some comfort from the moderate size of the insurance operations relative to the wider DNB group. Chart 3 Table 5 DNB Group Risk Position --Year-ended Dec (%) 2012* Growth in customer loans (6.0) 23.1 Total managed assets/adjusted common equity (x) New loan loss provisions/average customer loans Net charge-offs/average customer loans (0.0) N.M. Gross nonperforming assets/customer loans + other real estate owned Loan loss reserves/gross nonperforming assets *Data as of June 30. N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful. JULY 26,

10 Funding and liquidity: Adequate, supported by a stable deposit and wholesale funding base with a maturity profile that is being extended In our view, DNB Bank's funding is "average" and is supported by highly diverse funding sources and DNB Bank's ownership ties to the government. The DNB group benefits from its leading position in the Norwegian savings market and has access to a strong deposit base. In contrast to many of its Nordic peers, core deposits cover a relatively high 64.7% of the loan book and we consider that they are stable and granular. The bank also benefits from a growing domestic covered bond market and stable access to international secured and unsecured markets where its spreads are among the lowest in Europe. DNB has been extending its wholesale maturity profile meaningfully in the last two years by issuing instruments with tenors of a minimum of five but an average of seven years. Currently, deposits and long-term covered bonds cover almost 100% of the loan portfolio. Although the domestic covered bond market is increasing, a large part of the wholesale funding raised came from international capital markets as the depth of Norway's domestic bond market remains modest. We consider this a relative weakness which we capture in our assessment of the Norwegian Banking Industry Country Risk Assessment (BICRA). In our view, DNB Bank's liquidity is "adequate", reflecting our view of its conservative policy-setting limits and meaningful stress tests, which are then reflected in the group's liquidity contingency plans for a financial crisis. The bank holds a large portfolio of liquid assets, estimated at close to 25 billion (NOK182 billion) at June 30, 2012, of which about 70% is unencumbered and eligible for repurchase transactions with central banks. Table 6 DNB Group Funding And Liquidity --Year-ended Dec (%) 2012* Core deposits/funding base Customer loans (net)/customer deposits Long term funding ratio Broad liquid assets/short-term wholesale funding (x) N.A Net broad liquid assets/short-term customer deposits N.A (61.0) (85.7) Narrow liquid assets/3-month wholesale funding (x) N/A N/A N/A Net short-term interbank funding/total wholesale funding Short-term wholesale funding/total wholesale funding N.A *Data as of June 30. N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful. External support: One notch of government/group support to the SACP of 'a' The long-term rating on DNB Bank is one notch higher than its SACP, reflecting our view that it has "high" systemic importance in Norway and that the government is "supportive" toward its banking sector and that there is a "high" likelihood that the government will provide extraordinary government support in the future. Additional rating factors: None No additional factors affect this rating JULY 26,

11 Related Criteria And Research All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated. Banks: Rating Methodology And Assumptions, Nov. 9, 2011 Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 BICRA On Norway Maintained At Group '2', Nov. 9, 2011 Group Rating Methodology And Assumptions, Nov. 9, 2011 Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011 Bank Capital Methodology And Assumptions, Dec. 6, 2010 Anchor Matrix Industry Risk Economic Risk a a a- bbb+ bbb+ bbb a a- a- bbb+ bbb bbb bbb a- a- bbb+ bbb+ bbb bbb- bbb- bb bbb+ bbb+ bbb+ bbb bbb bbb- bb+ bb bb - 5 bbb+ bbb bbb bbb bbb- bbb- bb+ bb bb- b+ 6 bbb bbb bbb- bbb- bbb- bb+ bb bb bb- b+ 7 - bbb- bbb- bb+ bb+ bb bb bb- b+ b bb+ bb bb bb bb- bb- b+ b bb bb- bb- b+ b+ b+ b b+ b+ b+ b b b- Ratings Detail (As Of July 26, 2012) DNB Bank ASA Counterparty Credit Rating A+/Stable/A-1 Senior Unsecured A+ Senior Unsecured A-1 Short-Term Debt A-1 Subordinated A- Counterparty Credit Ratings History 18-Dec-2009 A+/Stable/A-1 30-Jan-2009 AA-/Negative/A Apr-2008 AA-/Stable/A-1+ Sovereign Rating Norway (Kingdom of) AAA/Stable/A-1+ Related Entities DNB Boligkreditt AS Senior Secured AAA Senior Secured AAA/Stable JULY 26,

12 Ratings Detail (As Of July 26, 2012) (cont.) *Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. Additional Contact: Financial Institutions Ratings Europe; FIG_Europe@standardandpoors.com JULY 26,

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