December 1, 2011 Research Update: DNB Bank ASA Ratings Affirmed At 'A+/A-1' On Bank Criteria Change; Outlook Stable Primary Credit Analyst: Alexander Ekbom, Stockholm (46) 8-440-59 11;alexander_ekbom@standardandpoors.com Secondary Contact: Sean Cotten, Stockholm (46) 8-440-5928;sean_cotten@standardandpoors.com Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Related Criteria And Research Ratings List www.standardandpoors.com/ratingsdirect 1
Research Update: DNB Bank ASA Ratings Affirmed At 'A+/A-1' On Bank Criteria Change; Outlook Stable Overview Following a review under Standard & Poor's revised bank criteria (published Nov. 9, 2011), we have affirmed the 'A+' long-term and 'A-1' short-term counterparty credit ratings on DNB Bank ASA. The outlook is stable. The ratings reflect the bank's strong business position, adequate capital and earnings, adequate risk position, average funding, and adequate liquidity. We consider DNB Bank to be of high systemic importance in Norway, which we classify as supportive, and accordingly incorporate one notch of uplift in the long-term rating. The stable outlook reflects our view that the bank will preserve its strong position in the Norwegian market and comfortably maintain a risk-adjusted capital ratio of above 8%. Rating Action As we previously announced on Dec. 1, 2011, Standard & Poor's Ratings Services has affirmed its 'A+' long-term and 'A-1' short-term counterparty credit ratings on DNB Bank ASA. The outlook is stable. At the same time, we lowered the issue ratings on the bank's rated junior subordinated debt to 'BBB' from 'BBB+'. Rationale We base the ratings on DNB Bank on the bank's "strong" business position, "adequate" capital and earnings, "adequate" risk position, "average" funding, and "adequate" liquidity, as our criteria define those terms. The bank's stand-alone credit profile (SACP) is 'a'. In our view, DNB Bank is of "high" systemic importance. Accordingly, we currently incorporate one notch of uplift in the long-term rating above the SACP. Our bank criteria use our Banking Industry Country Risk Assessment economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating. The anchor is 'a-'. This reflects 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 bank's lending exposure is to Latvia, Lithuania, Estonia, and Poland. A significant shift in exposure towards countries with higher economic risk than Norway could lead to negative changes in the anchor. Standard & Poors RatingsDirect on the Global Credit Portal December 1, 2011 2
Research Update: DNB Bank ASA Ratings Affirmed At 'A+/A-1' On Bank Criteria Change; Outlook Stable Our 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 strong underwriting practices and a very strong payment culture. In terms of industry risk, the Norwegian banking industry is primarily comprised of highly rated international institutions and Norway's domestic savings bank alliances and is managed by a strong, proactive regulator and a government with a history of successful intervention in the system. Capital-market funding is increasing, largely due to a developing covered-bond market. Moreover, both the government and domestic pension funds are committed to the covered-bond market as an alternative to issuing government debt. 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 a 30% market share in most of its business lines. The bank 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. Recurring revenues in the form of interest and fee income and a supportive ownership structure, whereby the Norwegian government holds a 34% stake, underpin the business model. The ratings on DNB Bank also reflect the creditworthiness of the wider DNB group. DNB Bank's capital and earnings are "adequate" in our view and reflect our expectation that the bank will achieve a risk-adjusted capital (RAC) ratio of 8.5%-9% by year-end 2012. The bank's capital ratios are underpinned by a strong capital base with very limited hybrid capital. While we believe that insurance-linked income adds a moderate element of volatility, we note the stability of the bank's net interest margins (about 1.4% over the past five years) and its relatively good efficiency (the cost-to-income ratio was about 49% in the first nine months of 2011) and take the view that these factors support earnings generation. 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. We believe that the bank's RAC adequately reflects the majority of its risks. However, we estimate that DNB Livsforsikring's capitalization is weaker than that of the overall group, suggesting that the relevant deduction within our RAC calculations may be understated. The bank's relatively large loan exposure to the volatile shipping industry heightens its credit risk, despite a resilient track record to date. The group's operations in Latvia and Lithuania have generated disproportionate loans losses in recent years but are currently recovering. In our view, DNB Bank's funding is "average" and supported by highly diverse funding sources and DNB Bank's ownership ties to the government. Core deposits cover 60% of the loan book and the bank benefits from a growing domestic covered bond market and a lengthy maturity profile. The Norwegian system's www.standardandpoors.com/ratingsdirect 3
Research Update: DNB Bank ASA Ratings Affirmed At 'A+/A-1' On Bank Criteria Change; Outlook Stable reliance on foreign investors is captured in our industry risk assessment for Norway. In our view, the bank's liquidity is "adequate", supported by a liquid portfolio of 15 billion, which can be used for collateralized borrowing, and a substantial cash balance. Outlook The stable outlook reflects our view that the bank will preserve its strong position in the Norwegian market and comfortably maintain a risk-adjusted capital ratio of above 8%. A positive rating action is possible 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 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. Ratings Score Snapshot Issuer Credit Rating A+ SACP a Anchor a- Business Position Strong (+1) Capital and Earnings Adequate (0) Risk Position Adequate (0) Funding and Liquidity Average and Adequate (0) Support 1 GRE Support 0 Group Support 0 Sovereign Support 1 Additional Factors 0 Standard & Poors RatingsDirect on the Global Credit Portal December 1, 2011 4
Research Update: DNB Bank ASA Ratings Affirmed At 'A+/A-1' On Bank Criteria Change; Outlook Stable Related Criteria And Research All articles listed below are available on RatingsDirect on the Global Credit Portal. Banks: Rating Methodology And Assumptions, Nov. 9, 2011 Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 Group Rating Methodology And Assumptions, Nov. 9, 2011 Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011 Ratings List Ratings Affirmed DNB Bank ASA Counterparty Credit Rating A+/Stable/A-1 Certificate Of Deposit A+/A-1 Senior Unsecured A+ Subordinated A Commercial Paper A-1 Downgraded To From Junior Subordinated BBB BBB+ Additional Contact: Financial Institutions Ratings Europe;FIG_Europe@standardandpoors.com Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009. www.standardandpoors.com/ratingsdirect 5
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