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FINANCIAL INSTITUTIONS
CREDIT OPINION14 January 2019
Update
RATINGS
DNB Bank ASADomicile Norway
Long Term CRR Aa1
Type LT Counterparty RiskRating - Fgn Curr
Outlook Not Assigned
Long Term Debt Aa2
Type Senior Unsecured - FgnCurr
Outlook Negative
Long Term Deposit Aa2
Type LT Bank Deposits - FgnCurr
Outlook Negative
Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.
Contacts
Roland Auquier [email protected]
Malika Takhtayeva +44.20.7772.8662Associate [email protected]
Jean-FrancoisTremblay
+44.20.7772.5653
Associate Managing [email protected]
Sean Marion +44.20.7772.1056MD-Financial [email protected]
CLIENT SERVICES
Americas 1-212-553-1653
Asia Pacific 852-3551-3077
Japan 81-3-5408-4100
EMEA 44-20-7772-5454
DNB Bank ASAUpdate to credit analysis
SummaryWe assign a baseline credit assessment (BCA) of a3 to DNB Bank ASA (DNB), an adjustedBCA of a3, a long-term deposit rating of Aa2 and senior unsecured debt rating of Aa2.We also assign a long- and short-term Counterparty Risk Assessment (CRA) of Aa1(cr)/Prime-1(cr) and Counterparty Risk Rating (CRR) of Aa1/P-1 to the bank. The outlook on thebank’s long-term senior ratings is negative.
DNB's a3 baseline credit assessment (BCA) reflects the bank's strong capital and good levelof profitability, balanced against weakening asset quality and high reliance on internationalcapital markets, which renders the bank susceptible to investor sentiment. DNB's Aa2 long-term deposits and senior unsecured debt ratings include a two-notch uplift resulting fromour advanced Loss Given Failure (LGF) analysis, reflecting our view that the bank’s juniordepositors and senior creditors face a very low loss given failure. In addition, our assessmentof government support translates into a further two notch uplift included in these ratings.
The negative outlook on DNB's senior unsecured debt and deposit ratings primarily reflectsthe potential rating pressure from the upcoming implementation of BRRD in Norway whichwill trigger a reassessment of our government support assumptions, and receding negativepressure on DNB's asset risk profile.
Exhibit 1
Rating Scorecard - Key Financial Ratios as of 30 September 2018
1.9% 17.7%0.9%
35.2% 29.3%
0%
5%
10%
15%
20%
25%
30%
35%
40%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Asset Risk:Problem Loans/
Gross Loans
Capital:Tangible Common
Equity/Risk-WeightedAssets
Profitability:Net Income/
Tangible Assets
Funding Structure:Market Funds/
Tangible BankingAssets
Liquid Resources:Liquid Banking
Assets/TangibleBanking Assets
Solvency Factors (LHS) Liquidity Factors (RHS)
DNB Bank ASA (BCA: a3) Median a3-rated banks
So
lve
ncy F
acto
rs
Liq
uid
ity F
acto
rs
Source: Moody's Financial Metrics
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MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Credit strengths
» As the leading bank in Norway, DNB has a solid banking franchise and status as the nation's flagship bank
» Capital is high and leverage compares well with peers
» DNB reports solid core earnings, and benefits from the relatively strong performance of the Norwegian economy
» DNB's BCA is supported by its Very Strong- macro profile
» Our advanced LGF analysis indicates a very low loss-given-failure for long-term deposit and senior unsecured debt ratings, resultingin a two-notch LGF uplift from the adjusted BCA
Credit challenges
» High dependence on market funding, somewhat mitigated by a solid deposit base and good access to local and international capitalmarkets
» Negative pressures on the asset risk profile of the bank, mostly related to challenges in the oil offshore portfolio
Rating outlookDNB's deposit and debt ratings carry a negative outlook to reflect primarily the potential rating pressure from the upcomingimplementation of BRRD in Norway, which will trigger a reassessment of our government support assumptions (please see pressrelease for more details) despite receding pressure on DNB's fundamentals.
Factors that could lead to an upgrade
» Upward pressure on DNB's debt and deposit rating is unlikely in the near term, as evidenced by the negative outlook. The outlookcould return to stable if DNB: (1) further reduces its asset vulnerability, especially in relation to oil-related and offshore exposuresas well as to historically more volatile segments, such as shipping and CRE; (2) maintains strong and stable earnings generationwithout increasing its risk profile; and (3) preserves sustained access to international capital markets.
Factors that could lead to a downgrade
» Downwards pressure on the ratings could develop if: (1) DNB's financing conditions become challenging; (2) its asset quality wereto deteriorate beyond our expectations and lead to further increase of the bank's credit costs; (3) its credit profile substantiallydeteriorates due to adverse developments in the Norwegian oil, offshore and real-estate markets; (4) DNB increases its involvementin more risky operations such as capital market activities; and/or (5) the eventual passage of the official resolution law (BRRD) inNorway and revision of our government support assumptions.
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.
2 14 January 2019 DNB Bank ASA: Update to credit analysis
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MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Key indicators
Exhibit 2
DNB Bank ASA (Consolidated Financials) [1]9-182 12-172 12-162 12-152 12-142 CAGR/Avg.3
Total Assets (NOK billion) 2,345 2,264 2,235 2,173 2,191 1.84
Total Assets (EUR million) 247,963 230,559 246,219 226,032 241,453 0.74
Total Assets (USD million) 288,007 276,855 259,700 245,537 292,171 -0.44
Tangible Common Equity (NOK billion) 181 191 178 173 143 6.64
Tangible Common Equity (EUR million) 19,132 19,437 19,567 17,964 15,722 5.44
Tangible Common Equity (USD million) 22,222 23,339 20,638 19,515 19,025 4.24
Problem Loans / Gross Loans (%) 1.8 1.7 2.4 1.5 1.9 1.95
Tangible Common Equity / Risk Weighted Assets (%) 17.7 18.8 17.1 16.3 13.7 16.76
Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) 14.6 13.1 19.3 12.3 17.5 15.45
Net Interest Margin (%) 1.5 1.5 1.5 1.5 1.5 1.55
PPI / Average RWA (%) 2.5 2.6 2.6 3.0 2.6 2.76
Net Income / Tangible Assets (%) 0.9 0.8 0.7 1.0 0.9 0.95
Cost / Income Ratio (%) 44.7 44.1 42.7 39.6 42.3 42.75
Market Funds / Tangible Banking Assets (%) 37.1 35.2 35.4 34.9 37.6 36.05
Liquid Banking Assets / Tangible Banking Assets (%) 29.1 29.3 27.8 25.4 29.4 28.25
Gross Loans / Due to Customers (%) 158.0 157.4 159.2 161.2 153.4 157.85
[1] All figures and ratios are adjusted using Moody's standard adjustments. [2] Basel III - fully-loaded or transitional phase-in; IFRS. [3] May include rounding differences due to scaleof reported amounts. [4] Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime. [5] Simple average of periods presented for the latestaccounting regime. [6] Simple average of Basel III periods presented.Source: Moody's Financial Metrics
ProfileDNB Bank ASA (formerly DnB NOR Bank ASA) is a subsidiary of the Norwegian financial services group DNB ASA and part of theDNB Group. The group (including DNB ASA, DNB Asset Management Holding AS, DNB Livsforsikring AS and DNB Forsikring) offersa full range of financial services, including loans, savings, advisory services, insurance and pension products for retail and corporatecustomers. In this structure, the bank (DNB Bank) mainly provides products and services to four different segments: personalcustomers, small and medium enterprises, large corporates and international customers, and trading.
As of 30 September 2018, DNB Bank ASA exhibited 2.1 million retail customers, 218 thousands corporate customers, 1.3 millioninternet bank users, 864 thousand mobile banking users, 1.2 million customer in life and pension insurance and 225 thousands in non-life insurance across Norway. DNB is Norway's largest asset management company with approximately 479 thousand mutual fundcustomers in Norway and 154 institutional clients in Norway and Sweden. DNB Markets is Norway's leading investment firm and offersinvestment banking services, including risk management, investment and financing products in the capital markets, to the Group'scustomers.
As of 30 September 2018, DNB Bank Group reported a consolidated asset base of NOK2.4 trillion ($293 billion).
DNB Bank ASA was established by the merger of Den norske Bank ASA (established in 1990 following the merger of Bergen Bank andDen norske Creditbank) and Gjensidige NOR. The newly merged bank, DnB NOR Bank ASA, was registered in January 2004. The bankwas renamed DNB Bank ASA in November 2011.
Detailed credit considerationsAs the leading bank in Norway, DNB has a solid banking franchise and status as the nation's flagship bankDNB's sizeable domestic franchise is a key positive rating driver, supporting the bank's profitability and asset quality. DNB is Norway'slargest financial institution, with a dominant and sustainable market share of 28% in retail loans and 30% in corporate loansdomestically as of June 2018, according to Norges Bank. DNB achieves stable earnings generation capacity aided by the supportiveoperating environment, the bank's solid customer base and pricing power, and high brand recognition in Norway.
3 14 January 2019 DNB Bank ASA: Update to credit analysis
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MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
DNB is Norway's most international bank. The loan portfolio of the bank's international units accounted for around 22% of total loansat the end of December 2017, thus adding diversification to DNB's earnings and risk.
In contrast with European banks that were nationalised during the recent financial crisis, we continue to view DNB as the government'sflagship financial institution. As at 30 June 2018 the Norwegian government's 34.4% stake in the bank makes it the largest shareholderand ensures the bank's headquarters remain in the country, so that we view a reduction of this stake as unlikely.
In October 2017, DNB and Nordea Bank AB closed the transaction to create a joint venture of the banks’ operations in the Baltics. Thenew entity will operate as Luminor, with Nordea controlling 56% of the economic rights and DNB controlling 44%, and both bankseach holding 50% of the voting rights. In mid-September 2018, an agreement was signed with Blackstone to sell part of the mergedbank. The agreement means that Blackstone will purchase 60.1% of the Luminor Group from its current owners. DNB’s ownershipinterest will be reduced to 20% from 44% currently as a result of the transaction, which is expected to be completed during the firsthalf of 2019, subject to regulatory approvals.
DNB has taken a number of initiatives as part of its digital strategy. In early 2017, DNB spun-off Vipps, a digital ecosystem for fintechentrants in the banking system launched in May 2015. In June 2018, Vipps, BankID Norge and BankAxept merged and DNB currentlyowns 44.3% of Vipps. In May DNB made its first investment in Payr, a payment platform, through DNB Venture fund which wasestablished in 2017 to make investments in growth companies in the fintech industry.
At the end of May 2018, DNB in cooperation with four other Nordic banks, announced the development of a common Know YourCustomer (KYC) infrastructure by creating a joint venture with the other Nordic Banks. The aim of KYC is to enhance customerexperience and prevent the criminal misuse of banks. The joint venture company will offer KYC services to all players who need this inthe Nordic market, and the establishment of the company is subject to approval by the European Commission.
Capital is high and leverage compares well with peersAt the end of September 2018, DNB's common equity Tier 1 (CET1) according to Basel III transitional rules was 16.5% in-line withthe Group's 16.3% target level. The bank reached its targeted capital level through internal capital generation as well as a strategicreduction in risk-weighted assets relating to large international corporates with low profitability. DNB is well-positioned for newregulatory requirements, including Basel 4, which is expected to have minimal effects for DNB.
The group's dividend policy remains unchanged, targeting a a dividend pay-out ratio above 50% towards 2019 and the distributionof a higher cash dividend per share each year, provided that capital adequacy is at a satisfactory level. On 1 February 2018, a dividendof NOK 7.10 per share was proposed by the Board of Directors and distributed on 4 May 2018. New authorisation for 2018 buy-backsof up to 4% of outstanding shares has been approved by the Annual General Meeting and the bank applied for and got approval fromNorwegian FSA for up to 2%. The new buy-back programme of 1.5% was initiated in the second quarter of 2018.
As a result of different risk weighting among the Nordic banks, it can be difficult to compare reported capital ratios. As an example, inNorway, banks’ mortgages are subject to both Basel III requirements with a loss given default floor and Basel I requirements subject toan 80% floor, which result in risk-weighting of around 40% on mortgages. In comparison, in Sweden, the large Swedish banks apply amortgage risk-weighting of around 5% to 8% on mortgages in their reported capital ratios but these banks must meet high nominalcapital requirements which include a 25% risk-weight on mortgages. Similar considerations apply to the corporate book. However,going forward we expect Norway's Basel 1 floor to be removed and that lower capital requirements for lending to small and medium-sized enterprises will be introduced, in order to align Norwegian provisions with the EU's capital requirements regulations CRR/CRD IV.CRR/CRD IV is expected to be incorporated into the European Economic Area (EEA) agreement.
DNB's leverage ratio according to Moody’s definition (tangible common equity to total assets at 7.7% at end- September 2018)compares well against large Nordic and international peers.
DNB reports solid core earnings and benefits from the strong performance of the Norwegian economyWe view DNB's core earnings as resilient, supported by its dominant position in the Norwegian market. With around 78% of its loansdriven by Norwegian exposures (as of December 2017), DNB benefits from the strong performance of the Norwegian economy. Weforecast a 2.5% increase in total real GDP growth and 1.9% in mainland (non-oil) real GDP for 2019.
4 14 January 2019 DNB Bank ASA: Update to credit analysis
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The bank's net income to tangible assets remained stable at 0.88% during the first nine months of 2018 following a decrease from1% in 2015. During the first nine months of 2018, net interest income (the main driver of DNB's revenues contributing to around 74%of total revenues on a three year average basis) increased by 2.7% year on year as a result of the reclassification of some past dueloans, due to the implementation of IFRS 9, and reduced long-term funding costs, which offset the loss of revenues from the Balticoperations. We expect DNB's net interest income to be further supported in the coming quarters, following the loan rate increases inOctober and November 2018 after the increase in Norge Bank's key policy rate.
In addition, the bank's operating expenses decreased by NOK751 million year on year due to a lower level of restructuring expensesrelating to the Baltic operations. DNB's cost-to-income ratio remains among the strongest in its European peer group with a three-yearaverage of around 44%, reflecting good cost control.
During the first nine months of 2018, there were net reversals on DNB's loan loss provisions of NOK374 million (comparing to NOK2.0billion of loan loss impairment in the same period in 2017 primarily due to positive development for oil and gas related industriescombined with a general improvement in the underlying credit quality of the portfolio). As a result, the bank recorded a 11.1% ReturnOn Equity (ROE) and NOK 15.4 billion net profit (Moody's adjusted figures) during the first nine months of 2018. As DNB workstowards its ROE target of 12% by year-end 2019, the bank set up a new non-core division (effective as of January 2018) to acceleratethe rebalancing of its non-core portfolio (shipping and oil-related exposures), enabling the rest of the group to focus on profitable newbusiness.
We expect the bank's profitability to be supported by low provisioning levels during the outlook period, particularly in the largecorporate sector following the restructuring of oil-related exposures reflecting more stable conditions in the industry.
DNB's BCA is supported by its Very Strong- Macro ProfileDNB Bank ASA's operating environment is primarily influenced by developments in its home market Norway, the EU and through itsshipping exposures to the rest of the world. Norway, which accounted for 78% of customer loans at end-2017, carries a Very Strong-Macro Profile.
Banks in Norway (Aaa stable) benefit from operating in a wealthy and developed country with very high economic, institutional andgovernment financial strength as well as low susceptibility to event risk. Norway has a diversified and growing economy, which hasdemonstrated resilience to the weaknesses in the oil sector. The main risks to the system stem from the high level of householdindebtedness, elevated real estate prices and domestic banks' extensive use of market funding. However, these risks are offset bythe strength of households' ability to service debt, banks' adequate capitalization and the relatively small size of the banking systemcompared to the total size of the economy.
DNB's exposures to Sweden (8% of customer loans) and the UK (1% of customer loans) are also supported by Strong+ Macro Profiles.Exposures to the EU (8% of customer loans) currently carry a Strong Macro Profile, while the remaining exposures are to a combinationof countries to which DNB is exposed mainly through its global shipping operations (3% of the portfolio as of December 2017). Basedon a breakdown of total loans and receivables, the weighted average Macro Profile for DNB is currently Very Strong-.
High dependence on market funding, but DNB benefits from a solid deposit base and good access to local and internationalcapital marketsDNB's funding is underpinned by a solid deposit base, which comprises around 46.7% of total funding and 63% of the loan portfolio;the remainder consists of market funding. Interbank funding accounted for 29% of total market funding at end-September 2018.Covered bonds have represented a rapidly growing source of funding, and contributed around one-fourth of market funding at end-September 2018. We globally reflect the relative stability of covered bonds compared to unsecured market funding through a standardadjustment in our scorecard. Nevertheless, we note that extensive use of covered bond funding structurally subordinates seniorcreditors, including depositors.
DNB has good access to the capital markets, including extensive use of international funding. However, we note that the bank'sdependence on market funding - albeit common for Nordic banks - could be a source of risk because, in times of market stress, marketfunds can become less cost-effective, exerting pressure on banks' net profitability. In early June 2018, DNB Boligkreditt issued its firstgreen bonds, which will finance the most energy efficient residential properties in DNB Boligkreditt’s portfolio.
5 14 January 2019 DNB Bank ASA: Update to credit analysis
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On 29 June 2018, the Norwegian FSA published a draft proposal of the minimum requirement for own funds and eligible liabilities(MREL) rule, under which banks must hold minimum volumes of loss-absorbing debt so as to shield taxpayers from the cost of lenderinsolvency. Although the Norwegian regulator has not yet communicated bank specific requirements, the bank anticipates its MRELrequirements to be approximately NOK150 billion, which is in line with the current outstanding volume of senior bonds.
The bank's liquidity profile is supported by a relatively large liquidity buffer of NOK682 billion - 29% of reported total assets at end-September 2018. The reserve consists of: cash and deposits with financial institutions and central banks (64%), Norwegian bonds andfixed-income securities (35%) and shareholdings (1%).
Negative pressures on the asset risk profile of the bank receding as the performance of the oil related portfolio stabilisesowning to improving economic conditionsWe view DNB's loan portfolio as well diversified, with 53.4% of exposures at default (EAD) comprising retail lending at end-September2018 (mainly residential mortgages) and the remaining amount spread across industries. However, shipping and commercial real estate(CRE) respectively account for 3.8% and 9.3% of the bank's EAD, and we typically view these sectors as more volatile. Although theexposure to riskier oilfield services and the offshore sector has been reduced, it still accounts for 5.4% of DNB's EAD (5.9% at end-September 2017).
The bank's retail loan book has shown good resilience. While we believe that the high leverage of Norwegian households and elevatedhouse prices create credit risks, the high levels of employment and supportive welfare system partly mitigate these risks. In addition, inour opinion the strong Norwegian operating environment will remain supportive for bank credit quality for the 12-18 months horizon.
We view DNB's risk management and systems as robust, but our assessment of the bank's risk practices is constrained by its highborrower concentration. We understand this concentration is partly explained by the fact that DNB is the leading corporate bank inNorway, and this is also a typical feature at many Nordic banks. However, we believe such concentration poses material risk to DNB'sasset quality as it potentially heightens the pace and the extent of any deterioration in asset quality.
During the third quarter of 2018 most industry segments, including personal customers and commercial real estate, experienced astable credit quality. There were net reversals on impairment losses of NOK500 million for oil, gas and offshore in Q3 2018 (NOK157million in Q2 2018), reflecting improved credit quality and continued modest improvement in market conditions. Shipping had anegative credit development in Q3 2018 resulting in net impairment losses of NOK261 million.
DNB's problem loans remain stable to 1.8% at end-September 2018 compared to 1.7% at year-end 2017 and decreased form 2.4% atyear-end 2016 owing to an improvement in the performance of the bank's oil offshore portfolio, and asset risk metrics compare wellwith most European peers (see Exhibit 3).
Exhibit 3
DNB's Problem Loans Relative to Norwegian and European Banks. DNB is showing strong asset risk metrics compared to most Europeansystems
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
2011 2012 2013 2014 2015 2016 2017 1H2018
DNB Norway Euro Area
Note: Asset-weighted average for rated banks in Eurozone and Norway.Source: Moody's Banking Financial Metrics
6 14 January 2019 DNB Bank ASA: Update to credit analysis
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In recent years, most of DNB's asset quality risks have been related to its exposures outside of Norway, which we expect to reducefollowing the sale of the Polish network and the return of a more stable operating environment in the Baltic States. In addition, the oiland shipping portfolio, which required elevated provisioning in the past few years, is under a restructuring process leading to decliningtotal impairment losses to NOK2.4 billion at year-end 2017 and further to net reversals of NOK374 million during the first ninemonths of 2018. The improvement is mainly due to positive developments in the oil and gas related industries combined with generalimprovement in the underlying credit quality in the portfolio.
DNB is exposed to Eksportfinans (Baa3/P-3; positive) via a 40% shareholding and a guarantee provided for the institution's portfolio,which in our opinion entails some risks due to Eksportfinans' run-off business model.
Support and structural considerationsLoss Given FailureNorway will shortly implement the EU's Bank Recovery and Resolution Directive (BRRD), which confirms our current assumptionsregarding LGF analysis. For our resolution analysis we assume residual tangible common equity of 3% and losses post-failure of 8% oftangible banking assets, a 25% run-off in “junior” wholesale deposits, a 5% run-off in preferred deposits, and assign a 25% probabilityto deposits being preferred to senior unsecured debt. We apply a standard assumption for the large European banks that 26% ofdeposits are junior.
The bank's Aa2 deposit takes into account (1) the a3 adjusted BCA; (2) a very low loss given failure for these instruments as analysedusing our LGF framework resulting in a two-notch LGF uplift; and (3) our expectation of government support.
DNB's Aa2 long-term senior unsecured debt rating reflects our view that the enhanced volume of senior unsecured debt and underlyingsubordination, which benefits the position of senior unsecured debt, will be sustainable. For junior securities issued by DNB, our LGFanalysis confirms a high loss-given-failure, given the small volume of debt and limited protection from more subordinated instrumentsand residual equity. We also incorporate additional notching for junior subordinated and preference share instruments reflecting thecoupon features.
Government SupportGiven DNB's leading market position and partial government ownership, we currently assess a high probability of government supportfor DNB's long-term deposits and senior unsecured debt, resulting in a two-notch uplift. We intend to reassess our government supportassumptions for all Norwegian savings banks, including DNB Bank, once the implementation of an official resolution regime will beenacted through local legislation. The resolution regime is likely to be aligned with the EU’s bank recovery and resolution directive(BRRD), as indicated by the recent Ministry of Finance proposal tabled at the parliament on 21 June 2017.
For junior securities, we continue to believe that the probability of government support is low and that these ratings do not include anyrelated uplift. Junior securities also include additional downward notching from the BCA reflecting coupon suspension risk ahead of apotential failure.
Counterparty risk ratingsCRRs are opinions of the ability of entities to honour the uncollateralised portion of non-debt counterparty financial liabilities (CRRliabilities) and also reflect the expected financial losses in the event such liabilities are not honoured. CRRs are distinct from ratingsassigned to senior unsecured debt instruments and from issuer ratings because they reflect that, in a resolution, CRR liabilities mightbenefit from preferential treatment compared with senior unsecured debt. Examples of CRR liabilities include the uncollateralisedportion of payables arising from derivatives transactions and the uncollateralised portion of liabilities under sale and repurchaseagreements.
DNB Bank ASA's CRR is positioned at Aa1/P-1.The counterparty risk rating of Aa1 reflects the Adjusted BCA of a3, three notches of uplift reflecting the extremely low loss-givenfailure from the high volume of instruments that are subordinated to CRR liabilities. The CRR also benefits from two notches ofsystemic support, as an assumption of a high likelihood of government support. The short-term CRR is P-1.
7 14 January 2019 DNB Bank ASA: Update to credit analysis
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Counterparty Risk AssessmentCR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails and are distinct from debt anddeposit ratings in that they (1) consider only the risk of default rather than both the likelihood of default and the expected financial losssuffered in the event of default and (2) apply to counterparty obligations and contractual commitments rather than debt or depositinstruments. The CR assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performanceobligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities.
The CR Assessment of DNB Bank ASA is positioned at Aa1(cr)/P-1(cr).DNB's a3 baseline credit assessment (BCA) reflects the bank's strong capital and good level of profitability, balanced against weakeningasset quality and high reliance on international capital markets, which renders the bank susceptible to investor sentiment.
Source of facts and figures cited in this reportUnless noted otherwise, all figures shown in this report are sourced from the company's latest annual and interim financial reports andour Banking Financial Metrics. These metrics are based on our own chart of account, and are adjusted for analytical purposes. Pleaserefer to the documents entitled “Financial Statement Adjustments in the Analysis of Financial Institutions” published on 13 June 2017
About Moody's bank scorecardOur Scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment. When read inconjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the output of our Scorecardmay materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strongdivergence). The Scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down toreflect conditions specific to each rated entity.
8 14 January 2019 DNB Bank ASA: Update to credit analysis
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Rating methodology and scorecard factors
Exhibit 4
DNB Bank ASAMacro FactorsWeighted Macro Profile Very
Strong -100%
Factor HistoricRatio
InitialScore
ExpectedTrend
Assigned Score Key driver #1 Key driver #2
SolvencyAsset RiskProblem Loans / Gross Loans 1.9% aa3 ← → a3 Quality of assets Sector concentration
CapitalTCE / RWA 17.7% aa2 ← → aa3 Risk-weighted
capitalisationProfitabilityNet Income / Tangible Assets 0.9% baa1 ← → baa1 Return on assets
Combined Solvency Score a1 a2LiquidityFunding StructureMarket Funds / Tangible Banking Assets 35.2% ba2 ← → ba2 Term structure
Liquid ResourcesLiquid Banking Assets / Tangible Banking Assets 29.3% a2 ← → a2 Stock of liquid assets
Combined Liquidity Score baa2 baa2Financial Profile a3
Business Diversification 0Opacity and Complexity 0Corporate Behavior 0
Total Qualitative Adjustments 0Sovereign or Affiliate constraint: AaaScorecard Calculated BCA range a2-baa1Assigned BCA a3Affiliate Support notching 0Adjusted BCA a3
Balance Sheet in-scope(NOK million)
% in-scope at-failure(NOK million)
% at-failure
Other liabilities 1,077,753 46.0% 1,179,259 50.4%Deposits 995,154 42.5% 893,648 38.2%
Preferred deposits 736,414 31.4% 699,593 29.9%Junior Deposits 258,740 11.0% 194,055 8.3%
Senior unsecured bank debt 153,598 6.6% 153,598 6.6%Dated subordinated bank debt 23,933 1.0% 23,933 1.0%Junior subordinated bank debt 5,334 0.2% 5,334 0.2%Preference shares (bank) 15,574 0.7% 15,574 0.7%Equity 70,248 3.0% 70,248 3.0%Total Tangible Banking Assets 2,341,594 100% 2,341,594 100%
9 14 January 2019 DNB Bank ASA: Update to credit analysis
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De Jure waterfall De Facto waterfall NotchingDebt classInstrumentvolume +
subordination
Sub-ordination
Instrumentvolume +
subordination
Sub-ordination
De Jure De FactoLGF
NotchingGuidance
vs.Adjusted
BCA
AssignedLGF
notching
Additionalnotching
PreliminaryRating
Assessment
Counterparty Risk Rating 19.8% 19.8% 19.8% 19.8% 3 3 3 3 0 aa3Counterparty Risk Assessment 19.8% 19.8% 19.8% 19.8% 3 3 3 3 0 aa3 (cr)Deposits 19.8% 4.9% 19.8% 11.5% 2 3 2 2 0 a1Senior unsecured bank debt 19.8% 4.9% 11.5% 4.9% 2 0 1 2 0 a1Dated subordinated bank debt 4.9% 3.9% 4.9% 3.9% -1 -1 -1 -1 0 baa1 (hyb)Non-cumulative bank preference shares 3.7% 3.0% 3.7% 3.0% -1 -1 -1 -1 -2 baa3 (hyb)
Instrument class Loss GivenFailure notching
AdditionalNotching
Preliminary RatingAssessment
GovernmentSupport notching
Local CurrencyRating
ForeignCurrency
RatingCounterparty Risk Rating 3 0 aa3 2 Aa1 Aa1Counterparty Risk Assessment 3 0 aa3 (cr) 2 Aa1 (cr) --Deposits 2 0 a1 2 Aa2 Aa2Senior unsecured bank debt 2 0 a1 2 Aa2 Aa2Dated subordinated bank debt -1 0 baa1 (hyb) 0 Baa1 (hyb) (P)Baa1
(hyb)Non-cumulative bank preference shares -1 -2 baa3 (hyb) 0 Baa3 (hyb) Baa3 (hyb)[1] Where dashes are shown for a particular factor (or sub-factor), the score is based on non-public information.Source: Moody's Financial Metrics
Ratings
Exhibit 5Category Moody's RatingDNB BANK ASA
Outlook NegativeCounterparty Risk Rating Aa1/P-1Bank Deposits Aa2/P-1Baseline Credit Assessment a3Adjusted Baseline Credit Assessment a3Counterparty Risk Assessment Aa1(cr)/P-1(cr)Senior Unsecured Aa2Subordinate -Dom Curr Baa1 (hyb)Pref. Stock Non-cumulative Baa3 (hyb)Commercial Paper P-1Other Short Term (P)P-1
DNB BANK ASA, NEW YORK BRANCH
Outlook NegativeBank Deposits Aa2/P-1Other Short Term P-1
DEN NORSKE CREDITBANK
Bkd Jr Subordinate Baa2 (hyb)Source: Moody's Investors Service
10 14 January 2019 DNB Bank ASA: Update to credit analysis
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