DnB NOR ANNUAL REPORT 2009

Transcription

1 DnB NOR ANNUAL REPORT 2009

2 DnB NOR IN BRIEF > VALUES Helpful professional show initiative > VISION Creating value through the art of serving the customer > OPERATIONS DnB NOR aims to be the Norwegian bank and a leading international niche player > FINANCIAL FACTS Pre-tax operating profits before write-downs NOK 18.7 bn Earnings per share NOK 6.43 Total combined assets Market capitalisation NOK bn NOK 102 bn DnB NOR ANNUAL REPORT 2009

3 DnB NOR IN BRIEF > FINANCIAL PERFORMANCE 2009 Pre-tax operating profits before write-downs NOK million Profits after minority interests NOK million Earnings per share NOK > KEY FIGURES 2009 Return on equity 10.6% Tier 1 capital ratio 9.3% Cost/income ratio 48.3% Share of income from Norwegian operations 83.0% DnB NOR ANNUAL REPORT 2009

4 DnB NOR IN BRIEF > DnB NOR IS NORWAY s LEADING FINANCIAL SERVICES GROUP Personal customers in Norway Corporate clients in Norway Internet bank users in Norway Customers in life and pension insurance companies in Norway Mutual fund customers Customers in DnB NORD Branch offi ces in Norway 218 Branch offi ces in DnB NORD 1) 163 International branches and representative offices 2) 27 Full-time positions ) Branches in Poland, Estonia, Latvia and Lithuania. 2) The DnB NOR Group is represented in Copenhagen, Stockholm, Gothenburg, Malmø, Helsinki, London, Murmansk (9), Luxembourg, Hamburg, Athens, New York, Houston, Santiago, Rio de Janeiro, Shanghai, Singapore, Hong Kong, Chennai and Mumbai. > DnB NOR s BUSINESS AREAS Retail Banking Large Corporates and International DnB NOR Markets Life and Asset Management DnB NORD Pre-tax operating profi t Pre-tax operating profi t Pre-tax operating profi t Pre-tax operating profi t Pre-tax operating loss NOK 7.0 bn NOK 5.7 bn NOK 5.3 bn NOK 1.4 bn NOK (4.3) bn Return on capital Return on capital Return on capital Return on capital Return on capital 26.1% 13.4% 69.8% 16.6% (34.4)% DnB NOR ANNUAL REPORT 2009

5 CONTENTS DnB NOR in brief History 2 // Legal structure 2 // Important events in // Key figures 4 DnB NOR s market shares in Norway 5 // DnB NOR s international units 5 // Business areas 6 Key fi gures DnB NOR share 8 // DnB NOR s strategy 9 // Group chief executive s statement 10 Financial market developments Development trends in the real economy 16 // DnB NOR and the fi nancial crisis 17 2 Business areas Organisation and management of operations 20 // Retail Banking 22 Large Corporates and International 26 // DnB NOR Markets 30 // Life and Asset Management 34 DnB NORD 38 // Staff and support units 40 Governance Group management 44 // Board of Directors 46 // Governing bodies in DnB NOR ASA 48 Corporate governance 50 // Risk management and internal control 56 Capital management and risk categories 58 // The DnB NOR share 72 Society and employees Corporate social responsibility 80 // Employees Directors report and annual accounts Directors report 90 // Annual accounts 101 // Auditor s report 202 Control Committee s report 203 // Key fi gures > FINANCIAL CALENDAR 2010 Annual General Meeting 27 April Contact persons Distribution of dividends First quarter Second quarter as of 11 May 29 April 9 July BJØRN ERIK NÆSS CFO Tel.: (+47) bjorn.erik.naess@dnbnor.no PER SAGBAKKEN Head of Investor Relations/Long-term Funding Tel.: (+47) per.sagbakken@dnbnor.no Third quarter 28 October The Group s annual report has been approved by the Board of Directors in the original Norwegian version. This is an English translation. DnB NOR ANNUAL REPORT 2009

6 DnB NOR IN BRIEF History Realkreditt Vital DnC Acquisition 1992 Acquisition 1996 Skandia AM Nordlandsbanken Merger 1990 DnB DnB Acquisition 2002 Acquisition 2003 Bergen Bank Merger 1999 DnB DnB DnB Postbanken DnB NORD Acquisition (51%) 2005 Den norske Hypotekforening Gjensidige Bank /Elcon Finans Merger 2003 DnB NOR Four large savings banks Acquisition 1993 Acquisition 1999 Acquisition 2006 Sparebanken Oslo/Akershus Merger 1990 Sparebanken NOR Sparebanken NOR Gjensidige NOR Sparebank Demutualisation Monchebank Merger 1985 Sparebanken ABC Merger 2002 Gjensidige NOR ASA Fellesbanken Gjensidige Liv Gjensidige NOR Spareforsikring Demutualisation Acquisition 1992 Forenede Forsikring Legal structure DnB NOR ASA DnB NOR Bank ASA 1) DnB NOR Kapitalforvaltning Holding AS Vital Forsikring ASA DnB NOR Skadeforsikring AS DnB NOR Finans AS 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 SalusAnsvar AB Bank DnB NORD AS (51%) 1) Major subsidiaries only. Ownership 100 per cent unless otherwise indicated. 2 DnB NOR ANNUAL REPORT 2009

7 DnB NOR IN BRIEF Important events in 2009 Q1 The stock market reversed from a downward slide to an upward trend The Norwegian government announced the establishment of the State Finance Fund and the State Bond Fund, with total capital of NOK 100 billion Access to long-term funding improved DnB NOR presented its strategy and updated targets at its Capital Markets Day DnB NOR Skadeforsikring started its fi rst year of operation Q2 DnB NOR completed a large unsecured bond issue and was among the few banks able to obtain funding without a government guarantee DnB NOR established DnB NOR Næringskreditt Q3 Financial markets showed an improvement DnB NOR established the business areas Retail Banking and Large Corporates and International DnB NOR announced plans to strengthen equity through an issue of ordinary shares DnB NOR Bank s rating was downgraded to Aa3 by Moody s DnB NOR qualifi ed for inclusion in the Dow Jones World Sustainability Index Q4 Norges Bank was the fi rst central bank to implement an interest rate increase DnB NOR s funding situation normalised, though the Group s funding costs remained higher than before the onset of the fi nancial crisis DnB NOR completed an equity issue, raising a net amount of NOK 13.9 billion DnB NOR Bank s rating was downgraded to A+ with a stable outlook by Standard & Poor s DnB NOR was named Norwegian champion in the category housing loans above NOK 2 million by the magazine Dine Penger Postbanken and DnB NOR were ranked as Norway s best and fourth best bank, respectively, by the magazine Norsk Familieøkonomi Vital was ranked as Norway s best pensions manager by the magazine Investment & Pension Europe (IPE) DnB NOR s Board of Directors decided to initiate an evaluation of the shareholder agreement with NORD/LB DnB NOR ANNUAL REPORT

8 DnB NOR IN BRIEF Key fi gures > INCOME STATEMENT Amounts in NOK million Net interest income Net other operating income Ordinary operating expenses Other expenses Pre-tax operating profi t before write-downs Net gains on fixed and intangible assets Write-downs on loans and guarantees (258) 137 Pre-tax operating profi t Taxes Profi t from operations and non-current assets held for sale, after taxes Profit for the year Profi t attributable to shareholders Profi t attributable to minority interests (1 559) (293) Earnings per share (NOK) > BALANCE SHEET Amounts in NOK million 31 Dec Dec Dec Dec Dec Total assets Lending to customers Deposits from customers Average total assets for the year Total combined assets at year-end > KEY FIGURES 1) Return on equity (per cent) Dividend per share (NOK) 2) Core (Tier 1) capital ratio at end of period (per cent) Capital adequacy ratio at end of period (per cent) Write-downs relative to net lending to customers (per cent) (0.03) 0.02 Average combined spread for lending and deposits (per cent) Share price at end of period (NOK) Diluted share price at end of period, adjusted for rights issue (NOK) Price/book value ) For a more detailed table of key fi gures, see page ) Proposed dividend for DnB NOR ANNUAL REPORT 2009

9 DnB NOR IN BRIEF DnB NOR s market shares in Norway Retail market Lending as at 31 Dec Deposits as at 31 Dec Policyholders' funds as at 30 Sept Mutual fund assets as at 31 Dec % 32% 53% 34% Corporate market Lending 1) as at 31 Dec Deposits as at 31 Dec Policyholders' funds as at 30 Sept Mutual fund assets as at 31 Dec % 35% 26% 21% 1) Share of credit from credit institutions. DnB NOR s market shares DnB NOR s international units Income in DnB NOR's international units NOK million Share of income in international units 2009 Lending volume in DnB NOR's international units NOK million Share of lending in international units as at 31 Dec % 6% 11% 12% % 31 Dec Dec % DnB NORD Other international units Norwegian units DnB NOR ANNUAL REPORT

10 DnB NOR IN BRIEF Business areas > RETAIL BANKING Key figures as at 31 Dec Retail Banking is responsible for serving the Group s 2.3 million personal customers and more than corporate customers in Norway. By coordinating the service to the various customer segments in local markets, Retail Banking will make the services better and more accessible while increasing operational effi ciency. By offering competitive products and high-quality advisory services, the business area aims to improve customer satisfaction scores. DnB NOR has Norway s largest distribution network for fi nancial services. Banking services on mobile phones show rapid growth, and DnB NOR is at the vanguard of developing such services to both personal and corporate customers. Pre-tax operating profits NOK million Cost/income ratio 53.2% Lending NOK 727 billion Deposits NOK 370 billion Return on allocated capital 26.1% No. of full-time positions > LARGE CORPORATES AND INTERNATIONAL Key figures as at 31 Dec Large Corporates and International is responsible for serving the Group s largest Norwegian corporate clients and for DnB NOR s international banking operations. The business area s operations are based on sound, longterm customer relationships, a broad product range and the ability to offer customers fi nancial services adapted to prevailing market conditions. DnB NOR is recognised for its expertise within complex international transactions, and its international operations focus on the Group s strategic priority areas, which are shipping, energy and seafood. Pre-tax operating profits NOK million Cost/income ratio 21.0% Lending NOK 335 billion Deposits NOK 193 billion Return on allocated capital 13.4% No. of full-time positions > DnB NOR MARKETS Key figures as at 31 Dec DnB NOR Markets is the Group s investment fi rm and serves customers from its head offi ce in Oslo, 13 regional sales desks in Norway, six international offi ces and via electronic channels. Key products include foreign exchange, interest rate and commodity products, securities and other investment products, debt and equity fi nancing in capital markets, research and advisory services, as well as custodial and other securities services. To better identify and meet current and future customer needs, cooperation with the Group s other business areas is important, and these provide an important sales channel for DnB NOR Markets products. The main focus is on customer activities, while trading activities should support customer activities with products and prices. Pre-tax operating profits NOK million Cost/income ratio 26.4% Return on allocated capital 69.8% No. of full-time positions DnB NOR ANNUAL REPORT 2009

11 DnB NOR IN BRIEF > LIFE AND ASSET MANAGEMENT Key figures as at 31 Dec Life and Asset Management 1) consists of Vital and DnB NOR Asset Management and is responsible for life insurance, pension savings and asset management in the Group. Vital provided insurance coverage for around one million policyholders and had group agreements with approximately companies at year-end DnB NOR Asset Management had some retail clients and a leading position among Norwegian and Swedish institutional clients. Pre-tax operating profits NOK million Vital NOK million Asset Management NOK 217 million Return on allocated capital 16.6% Cost/income ratio 62.1% 1) In early 2010, the insurance operations in the Group were coordinated, and the responsibility for DnB NOR Skadeforsikring was transferred to the business area, which changed its name to Insurance and Asset Management. Assets under management NOK 486 billion No. of full-time positions 961 > DnB NORD Key figures as at 31 Dec The operations of DnB NORD, in which DnB NOR has a 51 per cent ownership interest, are mainly concentrated in the Baltic States and Poland. The bank offers a wide range of products to both corporate and retail customers. DnB NORD was strongly affected by the global fi nancial crisis, which caused a serious cool-down in the Baltic economies. The economic downturn resulted in a high level of write-downs on loans in The effects of the fi nancial crisis are expected to last through 2010, though DnB NORD anticipates a reduction in write-downs on loans compared with DnB NORD will focus on consolidating its operations, improving costeffi ciency and reducing losses. Pre-tax operating loss NOK (4 289) million Cost/income ratio 73.5% Lending NOK 68 billion Deposits NOK 19 billion Return on allocated capital (34.4)% No. of full-time positions DnB NOR Pre-tax operating profit before write-downs NOK million Retail Banking Large Corporates and International DnB NOR Markets Life and Asset Management DnB NORD (1 000) Retail Banking Large Corporates and International DnB NOR Markets Life and Asset Management (347) DnB NORD DnB NOR ANNUAL REPORT

12 DnB NOR IN BRIEF Key fi gures DnB NOR share 2009 turned out to be a very good year for the DnB NOR share. The share price rose by 145 per cent, which was significantly higher than the 80 per cent unweighted average increase in the share prices of the Group s Nordic peers. The DnB NOR share also outperformed its Nordic peers over the past two and three-year periods. DnB NOR had a market capitalisation of NOK 102 billion at end-december 2009 and is the third largest company listed on Oslo Børs (the Oslo Stock Exchange). Total annual return as at 31 December 2009 Total annual return (%) Last year Last two years Last three years DnB NOR (7.6) (5.4) Nordic average 1) 79.5 (14.2) (12.0) Dividend for the financial year 2009 (proposal) NOK NOK NOK NOK NOK 3.50 SHARE PRICE DEVELOPMENT IN 2009 DnB NOR compared with Nordic financial services groups ¹ ) Local currency 31 December 2008 = The DnB NOR Group's market capitalisation NOK billion Dec Dec Dec Dec Dec DnB NOR Nordic financial services groups 1) Unweighted average in local currency of Danske Bank, Swedbank, Nordea, SEB and Handelsbanken. 8 DnB NOR ANNUAL REPORT 2009

13 DnB NOR IN BRIEF DnB NOR s strategy The turmoil in the financial markets in 2008 and 2009 changed the underlying macroeconomic assumptions and affected DnB NOR s expansion in the short term, not least internationally. However, the Group s long-term strategy and growth ambitions remain unchanged. BUSINESS IDEA DnB NOR will be customers best financial partner and meet their needs for financial solutions. DnB NOR s strengths are a local presence and a full range of products. DnB NOR has a unique platform in the Norwegian market: high market shares in all segments the largest customer base the most extensive distribution network Its long-term focus on selected industries such as shipping, energy and seafood has made DnB NOR a leading international niche player. VISION AND VALUES An important target for the Group is to achieve even stronger customer orientation in its operations and improve customer satisfaction. DnB NOR s vision, Creating value through the art of serving the customer, is supported by the values helpful, professional and show initiative. Employees which are helpful, professional and show initiative are vital if DnB NOR is to succeed in implementing its strategy. STRATEGY By capitalising on the Group s strengths and unique position, DnB NOR will be the Norwegian bank and a leading international niche player. Strengthen and consolidate DnB NOR s position in Norway the Norwegian bank DnB NOR will build and strengthen relations with high-quality customers. DnB NOR will: offer extensive distribution present a uniform corporate image offer a complete range of attractive products which meet customer needs offer competitive prices and products which create value for customers engage in long-term, honest and relevant communication with customers meet the needs of the largest corporate clients in Norway through strong industry expertise and local competitive power Profitable international growth built on Norwegian expertise a leading international niche player DnB NOR will build long-term relations with the largest corporate clients and focus on selected industries based on its core competencies. DnB NOR s target segments will be: shipping energy seafood DnB NOR will be among the most cost-effective market players in Europe DnB NOR will coordinate group and support functions to ensure consistent deliveries, standardised processes and greater automation. Streamlining measures will be given high priority by: strengthening and coordinating procurement functions in the Group coordinating and consolidating IT functions standardising and automating products, services and customer service where expedient coordinating and rationalising staff and support functions FINANCIAL TARGETS DnB NOR will give priority to long-term value creation for its shareholders and aims to achieve a return on equity and a market capitalisation which are competitive in relation to its Nordic peers. The successful implementation of DnB NOR s strategy will result in DnB NOR reaching its long-term financial targets, which are: a return on equity above 13 per cent cost saving measures with an annual effect of NOK 2 billion from the end of 2012 an ordinary cost/income ratio below 46 per cent from 2012 Capital strategy and dividend policy: DnB NOR to be among the best capitalised financial groups in the Nordic region AA level ratings for long-term debt for DnB NOR Bank ASA dividend payments representing approximately 50 per cent of annual profits Dividends will be determined on the basis of expected profit levels in a normal situation, external parameters and the need to maintain capital adequacy at a satisfactory level. DnB NOR ANNUAL REPORT

14 DnB NOR IN BRIEF GROUP CHIEF EXECUTIVE S STATEMENT 2009 was a good year for DnB NOR in light of the weak international economic conditions, with annual profits of NOK 7 billion and a return on equity of 10.6 per cent. At the same time, we have never been in a better position to meet our customers expectations and needs. 10 DnB NOR ANNUAL REPORT 2009

15 DnB NOR IN BRIEF In 2009, the international fi nancial crisis continued to dominate the global economy, but the main focus moved away from the turbulence in fi nancial markets to the danger of a deep and prolonged real economic crisis. In the banking world, there was increasing fear of losses, and pressure grew to raise new equity capital. In March, DnB NOR announced estimated write-downs on loans of NOK 8-10 billion for 2009, while the target of NOK 20 billion in pre-tax operating profi ts before write-downs remained fi rm for Actual write-downs were below estimated fi gures, totalling NOK 7.7 billion for The Group delivered a sound fi nancial performance each quarter, recording pre-tax operating profi ts before write downs of NOK 18.7 billion for the full year. On 25 September, we announced a rights issue of NOK 14 billion. The share issue was fully subscribed at the lowest discount obtained by any European bank during the fi nancial crisis. At the end of 2009, DnB NOR had a Tier 1 capital ratio of 9.3 per cent and a leverage ratio of 5.6 per cent, making us one of the most solid banks in Europe. We are well prepared to meet our customers future fi nancing needs and changes in external parameters in the years to come. Our wish for 2010 is that each individual customer s meeting with DnB NOR will be characterised by our employees putting our values into practice, showing helpfulness, professionalism and initiative. I am impressed by the contribution made by the Group s employees through the year. They did their best every day for the Group s customers. Losses were limited, customer relationships were strengthened, and new contacts were made. DnB NOR was named Norwegian champion in the category Housing loans above NOK 2 million by the magazine Dine Penger in its annual bank ranking. This confi rms that we managed to retain our customer focus during a challenging year. While many international banks downscaled their operations in Norway, we strengthened our position as the Norwegian bank. Among personal customers in Norway, we had a 35 per cent market share of the savings market and 28 per cent of the lending market at the beginning of continue to feel the impact of a world economy that is still struggling with surplus capacity in several areas. Future uncertainties are mainly related to political decisions. Rising public debt, national budget defi cits and a fear of negative developments in the East Asian economies are some of the challenges on the international political agenda. In such an economic climate, we believe that DnB NOR s international strategy is robust. Our main priority areas of energy, shipping and seafood represent important industries in both the developed and emerging economies. Our extensive international presence makes us well positioned to realise our international ambitions. Furthermore, we believe that our operations in the Baltic region represent a sound platform for long-term growth in areas that are geographically close to Norway. During 2009, we made a number of organisational changes, and we are now in the process of coordinating and integrating our operations to meet the needs of DnB NOR s personal customers and SMEs in Norway in a better and more holistic manner. We have a unique distribution network, including 218 branch offi ces, 913 in-store banking outlets, 117 real estate brokerage offi ces and 208 post offi ces. Our Internet banks are used by 1.6 million customers, and customers access our banking services via their mobile phones. Our aim is that our customers will fi nd that DnB NOR presents a more uniform corporate image to the market irrespective of how they choose to use our services. We have also strengthened the part of our organisation working with our largest international clients. We are confi dent and optimistic about our international operations within industries where we have well-established solutions and the expertise to succeed. In addition, we have been through an extensive process to formulate a new vision and new values for the Group. Our wish for 2010 is that each individual customer s meeting with DnB NOR will be characterised by our employees putting our values into practice, showing helpfulness, professionalism and initiative. In DnB NOR, our aim is to create lasting values for our customers, shareholders, employees and society at large. I look forward to working towards our goals and meeting future challenges together with the Group s motivated employees. As a market leader in most segments, DnB NOR has a unique vantage point from which to observe the Norwegian economy. More than 80 per cent of our income stems from operations in Norway, and in 2009 our write-downs on loans in Norway were lower than what we regard as normalised losses through a business cycle. During the fi nancial crisis, governments on four continents implemented successful and coordinated measures. The Norwegian authorities used their economic manoeuvrability to implement some of the most extensive budget stimulus measures in the world. Most economic indicators reversed during the summer of 2009, and DnB NOR Markets forecasts global GDP growth of 3.4 per cent for Rune Bjerke Group chief executive The start of 2010 appears to signal better times ahead for Norway than we feared 12 months ago, however, certain industries and companies DnB NOR ANNUAL REPORT

16 12 VALUE

17 Financial market developments Development trends in the real economy 16 // DnB NOR and the fi nancial crisis 17 > The financial crisis demonstrated the importance of stable fi nancial institutions which safeguard customer interests and values over time. DnB NOR, the Norwegian bank, has created values for more than 170 years. DnB NOR ANNUAL REPORT

18 FINANCIAL MARKET DEVELOPMENTS FINANCIAL MARKET DEVELOPMENTS Global fi nancial markets stabilised during 2009 and then gradually improved. The stock markets followed suit, recovering rapidly after bottoming out in the fi rst quarter of Nevertheless, most markets were far from the high levels reached towards the end of Credit risk margins narrowed considerably in the international bond markets during 2009, and it became possible, once again, for certain fi nancial institutions and companies to obtain funding in the international capital markets. However, the margins remained higher than before the fi nancial turmoil. Events in 2009 must be seen in light of the fact that the financial crisis started in the summer of 2007 and was therefore well-entrenched. A crisis of confi dence occurred in the international capital markets related to securities based on high-risk US home loans (sub-prime loans). These securities, which were diffi cult to value and hence trade in, were sold on a large scale to numerous fi nancial institutions. Uncertainty about who had such doubtful commitments on their books led to a dramatic loss of confi dence among international banks. Consequently, the interbank markets ceased to function. These markets are normally the source of funding with maturities ranging from one day to twelve months. Suddenly, all activity became very short-term. The majority of available liquid funds had maturities of maximum one week and some up until one month. At times, certain markets completely ceased to function. As soon as the third quarter of 2007, the prevailing uncertainty, combined with dysfunctional markets, exacerbated the liquidity problems of several international banks. It also became far more diffi cult for the banks to obtain funding based on loans with maturities exceeding 12 months. The negative effects spread to the US dollar-based Norwegian money market from the onset of the financial crisis in In practice, Norwegian money market rates are determined in the market for currency swaps between the Norwegian krone and the US dollar. In order to determine Norwegian interest rates, market players require access to US dollars with corresponding maturities. When the supply of US dollars declined and the situation became uncertain, funds in the money market in Norwegian kroner became sparse. The major fl uctuations in US money market rates had a direct effect on the Norwegian rates. During the fi rst phase of the crisis, the Norwegian and Nordic banks remained relatively unscathed. They had refrained from investing in the type of mortgage-backed securities that were the source of the turmoil. In Norway, in the summer of 2007, covered bonds were starting to be introduced as a new funding instrument, providing investors with security in the best housing loans. This type of long-term funding with five to ten-year maturities was still available up until the autumn of Norwegian banks were therefore able to maintain a normal level of lending activity even in a more challenging market. It was also positive for DnB NOR that DnB NOR Bank ASA was upgraded by the rating agency Standard & Poor s to AA- in April 2008, a period when many other banks were downgraded. When the US government did not step in to save the investment bank Lehman Brothers, resulting in the filing for Chapter 11 bankruptcy protection on 15 September 2008, the financial turmoil developed into the most serious financial crisis since the 1930s. The US dollar interbank market dried up completely, and even the covered bond market ceased to function as a source of funding for Norwegian and international banks. Norway also had to contend with the fact that due to the small size of its domestic money and capital markets, Norwegian banks obtain a major part of their funding from abroad. The crisis escalated after several consecutive quarters of dysfunctional money and capital markets. A point was reached when only short-term liquidity was available, which was a factor behind the gradual rise in liquidity risk in the banking system both in Norway and internationally. During this phase, when the private banks were no longer willing to lend each other money, other than on very short maturities, and other private funding sources turned towards risk-free alternatives, such as government securities, the central banks and national authorities had to secure liquid funds and financing for the banking systems. Extraordinary funding schemes were established for banks in the central banks. In some countries, there was a fear that bank customers, losing confidence in the banking systems, would withdraw their deposits. Danish and German banks received a general government deposit guarantee, irrespective of amount. In a number of countries, including Sweden and Denmark, government guarantee schemes were established for long-term funding to the banks. Deposit guarantee schemes were strengthened and banks in difficulties received financial support from their own countries govern ments, thereby avoiding losses for depositors and other lenders. Even though Norwegian banks were financially sound, the global financial turmoil meant that also they were unable to count on funding from the international capital markets other than on a very short-term basis. In competition with government-guaranteed alternatives in other countries, there was also a danger that deposits and savings not covered by the Norwegian deposit guarantee scheme, could be transferred to banks in other countries. It was feared that customers would be encouraged to move their deposits from Norwegian banks to state-guaranteed deposits in other countries. It was important for DnB NOR to give the Norwegian authorities a total picture of the situation and help implement the most appropriate measures. It was pointed out that banks which only had access to short-term funding would not be able to maintain normal lending operations. The liquidity risk would then become too great. Measures were therefore proposed to also secure longer-term funding, i.e. a minimum period of three years. 14 DnB NOR ANNUAL REPORT 2009

19 FINANCIAL MARKET DEVELOPMENTS DnB NOR ANNUAL REPORT

20 FINANCIAL MARKET DEVELOPMENTS Share indices Index December 2006 = Dec Dec Dec Dec New York Japan London As one of several measures, on 12 October 2008, the Norwegian authorities launched a scheme to secure the banks long-term funding whereby the government would exchange Norwegian Treasury bills for covered bonds. The agreements were made based on maturities of up till five years. The fi nal version of the scheme gave the opportunity to exchange bonds for Treasury bills over a revolving period of maximum five years. The banks would then be able to sell the Treasury bills and thus obtain funding, or use them as collateral for funding from others. The knowledge that DnB NOR and other Norwegian banks had such a secure source of funding was, together with other measures, sufficient to calm fears surrounding the liquidity situation. The swap scheme enabled DnB NOR and other banks to make better use of available short-term, unsecured funding in their lending operations than would otherwise have been the case. DnB NOR therefore used the exchanged Treasury bills to build up liquidity reserves. The scheme ensured the Norwegian government a margin of minimum 0.4 percentage points from the swap scheme with the banks. Norges Bank also eased collateral requirements for loans in the central bank and provided the market with foreign currency loans. The fi rst auction under the swap scheme was held on 24 November The scheme was gradually phased out as the financial markets normalised during the autumn of The agreements with the longest terms will expire in September The swap scheme encompassed a total of NOK 230 billion, of which DnB NOR has entered into agreements totalling NOK 118 billion. Even though access to long-term funding through the private bond markets started to improve towards the end of 2009, the banks long-term funding costs remained at a much higher lever than before the onset of the fi nancial crisis in the summer of An important measure to secure trust in the Norwegian financial system was the establishment of the Norwegian State Finance Fund in March 2009, with capital totalling NOK 50 billion. The purpose of the Fund was to provide Tier 1 capital for Norwegian banks. Thirty-four banks applied for capital injections, amounting to a total of NOK 6.7 billion, and the total assets of these banks represented approximately 15 per cent of the total assets of Norwegian banks. A practical consequence of the establishment of the State Finance Fund was that all Norwegian banks were given more time to investigate what opportunities existed to obtain equity by normal means in the capital markets and await a further normalisation of market conditions. This proved to be very advantageous for DnB NOR. Another measure was the establishment of the State Bond Fund to contribute to increasing liquidity and the supply of capital to the Norwegian corporate bond market. The Bond Fund is administered by Folketrygdfondet, the National Insurance Fund, and has total capital of NOK 50 billion. As conditions normalise, the bond fund will gradually be downscaled and eventually phased out. DEVELOPMENT TRENDS IN THE REAL ECONOMY In 2009, the international economy was strongly affected by the crisis in the financial markets and its spillover effects. To stimulate economic activity, the central banks reduced their key interest rates to historically low levels and several countries introduced so-called quantitative easing as a monetary policy measure. This was done by purchasing Treasury bills and corporate securities in order to inject liquid funds and reduce interest rate levels on securities with long maturities. The financial crisis had an unusually sudden effect on the real economy and led to the most dramatic downturn in the international economy since the Second World War. In many countries, manufacturing output fell by per cent over a few quarters. There was also a sharp fall in total GDP growth, and unemployment rose steeply. Gradually, manufacturing production stabilised and in the second half of 2009, there were clear signs of a hesitant economic recovery. Fiscal policy measures were used actively to curb the economic downturn, while the recession led to lower government revenues and higher public expenditure on account of a rise in unemployment benefits etc. Fiscal policy measures were necessary to stimulate economic activity, but also caused a rapid rise in public debt. In many countries, public debt rose so high that it put pressure on government finances while further economic growth became uncertain. High debt in the private sector also created a need for consolidation in both the business and the household sector. This may be a contributory factor in reducing future economic growth. The Norwegian economy has also been affected by the global recession both via international trade and through international financial markets. Parts of the export industry and the building and construction industry have been hard hit. In spite of a pronounced economic contraction, there has only been a slight rise in unemployment levels in Norway. One reason is that counter-cyclical policy has been stronger than in most other countries. The oil industry has also helped stabilise the Norwegian economy as investment within the sector has remained at a high level due to the long time lags from decision-making to implementation. The financial crisis resulted in a rapid weakening of the Norwegian krone against both the euro and the US dollar, which eased the pressure on Norway s export industries. The weakening of the krone was partially reversed during 2009 as Norwegian interest rates were raised at a faster rate than in most other countries. 16 DnB NOR ANNUAL REPORT 2009

21 FINANCIAL MARKET DEVELOPMENTS Credit insurance premiums Basis points 500 Funding costs Basis points June Dec June Dec June Dec June Dec June Dec June Dec itraxx Europe Industry 5-year itraxx Europe Energy 5-year DnB NOR 5-year senior unsecured DnB NOR 5-year covered bonds The rise in unemployment was also counteracted by the fact that the many immigrants working in Norway on short-term contracts returned home when their jobs were affected by the downturn. For others, higher education became more attractive, reducing the pool of workers and hence also unemployment fi gures. The Norwegian economy is still in a period of recession, but shows clear signs of improvement. In particular, private and public sector consumption and public investments make a positive contribution, though exports of traditional goods have also started to recover. Housing investments and investments in the business sector have not yet returned to former levels, but escalating housing prices are expected to rapidly cause a rise in housebuilding activity. Household debt, in per cent of disposable income, had reached a historically high level towards the end of 2009, partly on account of low interest rates and rising housing prices. Nevertheless, the general financial situation for Norwegian households was positive. DnB NOR AND THE FINANCIAL CRISIS DnB NOR weathered the financial crisis well in This is partly due to the fact that Norway, being the Group s predominant domestic market, has experienced a less negative economic trend than most other countries. Norway s favourable economic platform has made it possible for the Norwegian government to implement strong stimulus measures. However, the Group has also benefi ted from having a focused and conservative credit strategy over many years, based on experience gained from the banking crisis in Norway in the early 1990s. In addition, DnB NOR has had moderate liquidity risk and no liquidity risk related to off-balance-sheet commitments. The Group is committed to transparency in relation to capital market investors, which has ensured trust during challenging times. In 2008 and 2009, DnB NOR endeavoured to maintain close to normal credit activity in the Norwegian market. Due to the covered bonds swap scheme, housing loans became self-financing and caused no great increase in funding costs. DnB NOR s personal customers also benefite d from the positive effects of the scheme through favourably priced housing loans. risen significantly. The credit risk margin has been widened to some extent to reflect customers weakened credit quality. On the funding side, DnB NOR was well positioned in DnB NOR Boligkreditt was established in the summer of 2007 and a substantial volume of housing loans was ready to be transferred from the bank to this company for the issuance of covered bonds. Ever since the start of the global financial turmoil in the autumn of 2007 and until the end of 2009, DnB NOR endeavoured to gradually increase the maturity of its funding and capitalise on the periods when the market conditions were relatively favourable. DnB NOR was one of the first banks able to obtain fi ve-year unsecured senior debt in the spring of By the end of 2009, the average maturity of DnB NOR s funding had increased from 2.7 to 3.0 years. The liquidity risk had been considerably reduced. DnB NOR increased equity capital by approximately NOK 14 billion in December 2009 through a share issue with preferential rights for existing shareholders. It was an important step to strengthen the Group s opportunities to satisfy the financing needs of its customers, capitalise on new business opportunities and make it possible for DnB NOR to resume a normal dividend policy. The rights issue and enhancement of the Group s capital base through retained earnings have made DnB NOR well positioned to satisfy the notified stricter capital adequacy requirements. The Group s Tier 1 capital consists predominantly of ordinary equity. DnB NOR chose to obtain new equity from the markets and not avail itself of the Norwegian State Finance Fund. This was because an ordinary share capital increase gave permanent capital on conditions which were attractive for shareholders. In addition, this solution enabled a more flexible employment of the funds and greater flexibility in business operations. In the corporate market, the bank has given priority to existing customers. On the whole, credit strategies have not been greatly changed. Nevertheless, when customers may have found it more difficult to be granted loans, this has primarily been due to the fact that the outlook for companies and projects has appeared weaker than before. For corporate customers, interest rates have been reduced less than the changes in money market rates. As in other banks, DnB NOR s funding costs in the capital markets have DnB NOR ANNUAL REPORT

22 18 HELPFUL

23 Business areas Organisation and management of operations 20 // Retail Banking 22 Large Corporates and International 26 // DnB NOR Markets 30 // Life and Asset Management 34 DnB NORD 38 // Staff and support units 40 > DnB NOR is Norway s largest financial services group, offering customers a full range of products and services through its national and international operations. By being helpful, we will give our customers pleasant banking experiences. DnB NOR ANNUAL REPORT

24 BUSINESS AREAS ORGANISATION AND MANAGEMENT OF OPERATIONS With effect from 1 July 2009, DnB NOR was organised into the operational business areas Retail Banking, Large Corporates and International, DnB NOR Markets and Life and Asset Management. The business areas operate as independent profi t centres and have responsibility for serving all of the Group s customers and for the total range of products. DnB NORD is regarded as a separate profi t centre. Operational tasks and group services are carried out by the Group s staff and support units. DnB NOR Marketing and Communications Corporate Centre Retail Banking Large Corporates and International DnB NOR Markets Life and Asset Management Operations HR IT Group Finance and Risk Management DnB NORD The business areas operate as independent profit centres and are responsible for customer relationships and for serving specific customer segments and ensuring that the Group s products are adapted to market requirements. These responsibilities include customer relationship management, distribution and risk assessments in addition to product development, production and product pricing. Central staff and support units carry out infrastructure tasks for the operative units as well as operational tasks providing cost efficiencies when undertaken for several business areas. In addition, they perform functions for governing bodies and group management. The business areas are able to influence staff and support units by changing their demand patterns and requirements. INTERNAL MANAGEMENT OF OPERATIONS IN 2009 Differentiated fi nancial and operational targets have been set for the various business areas to help the DnB NOR Group reach its targets. The business areas contributions to value creation in the Group are assessed by monitoring developments in economic profit, defined as profits after write-downs and taxes less the calculated cost of capital based on capital allocated to each business area. In addition, return on capital, defined as profi ts after taxes relative to allocated capital, is one of the key financial targets for the business areas. In the management of the business areas, allocated capital is based on DnB NOR s model for calculating capital requirements for various risk categories. See further description under Capital management and risk categories on page 58. Cooperation between the business areas is an important part of DnB NOR s strategy. A wide range of products, services and distribution channels enables the Group to offer customer solutions across business areas. DnB NOR s financial management model and operational organisation facilitate sale of the entire range of products and services offered by the Group. For most types of transactions between the business areas, pricing is regulated by internal agreements generally based on market terms. For some transactions, however, income is recorded in more than one business area. Net income from transactions which require extensive cooperation between several units, where it is difficult to quantify the contribution made by each unit, is recorded in its entirety in all units involved in such transactions. Services provided by staff and support units are scaled according to the business areas demand, and intra-group services are charged according to use at market prices. Costs relating to the Group s strategic initiatives, direct shareholder-related expenses and costs concerning the Group s governing bodies are not charged to the business areas. OPERATIONAL STRUCTURE With effect from 1 July 2009, the Group s operations in the regional network in Norway were restructured, whereby service to personal customers and small and medium-sized enterprises was organised under the Retail Banking business area. Responsibility for the largest corporate customers and international operations was assigned to the business area Large Corporates and International. The reorganisation will enable the Group to utilise its wide range of products and services and expert skills in an optimal manner by coordinating activities in local markets and thus strengthen relations to customers in all Norwegian market segments. The reorganisation will also make it possible to capitalise on the size of the Group by coordinating and streamlining operations. 20 DnB NOR ANNUAL REPORT 2009

25 BUSINESS AREAS > FINANCIAL PERFORMANCE Annual pre-tax operating profit (after write-downs) NOK million (2 000) (605) (4 000) (4 289) (6 000) Retail Banking Large Corporates and International DnB NOR Markets Life and Asset Management DnB NORD Retail Banking Large Corporates and International DnB NOR Markets Life and Asset Management DnB NORD Income statement in NOK million Total income Total operating expenses Pre-tax operating profit before write-downs (347) 764 Net gains on fi xed and intangible assets (13) 19 Write-downs on loans and guarantees Pre-tax operating profit (4 289) (605) Average balance sheet items in NOK billion Net lending to customers 1) Deposits from customers 1) Asset under management (end of period) Key fi gures in per cent Return on capital 2) (34.4) (5.8) Cost/income ratio 3) Ratio of deposits to lending ) Nominal values, including lending to and deposits from credit institutions respectively. 2) Return on capital is calculated on the basis of allocated risk-adjusted capital. The calculation is based on a tax-rate of 28 per cent for Retail Banking, Large Corporates and International and DnB NOR Markets, 20 per cent for DnB NORD and recorded tax for Life and Asset Management. 3) Cost/income ratio adjusted for impairment losses for goodwill. In order to ensure better coordination of the Group s insurance offering to customers, all insurance operations, encompassing pension savings and life and non-life insurance, were organised in the same business area at the beginning of The business area Life and Asset Management thus changed its name to Insurance and Asset Management and took over responsibility for DnB NOR Skadeforsikring from Retail Banking. DnB NORD, in which DnB NOR has a 51 per cent ownership interest, is fully consolidated in the accounts and is regarded as a separate profit centre. On 30 December 2009, the Board of Directors of DnB NOR decided to initiate an evaluation of the DnB NORD cooperation. In accordance with the shareholder agreement, the evaluation period will end on 31 July 2010, after which each of the parties must inform the other party of its conclusion regarding further cooperation. A possible outcome of the evaluation period is that one of the owners wishes to change the structure of or end the cooperation. The agreement also regulates the procedures to be followed if one of the owners chooses to exercise the option to buy out the other party. DnB NOR has a first option to take over DnB NORD s operations in the Baltic region, while NORD/ LB has a first option to acquire the operations in Poland. As part of the process of coordinating and streamlining operations, the central support units have to an increasing extent been given group responsibility for internal deliveries. Centralised support functions will ensure coordination, consolidation and professionalisation of deliveries across the various units in DnB NOR. DnB NOR ANNUAL REPORT