DNB Net Gains 41% as Loan Losses Drop, Lending Income Rises

DNB ASA (DNB), Norway’s largest bank, said third-quarter profit jumped 41 percent after lending income increased and writedowns on loans and guarantees declined.

Net income rose to 3.51 billion kroner ($612 million) from 2.49 billion kroner a year earlier, the Oslo-based bank said in a statement today. That beat the 3.18 billion-krone average estimate of 20 analysts surveyed by Bloomberg. Net interest income rose 6.8 percent to 6.83 billion kroner, while writedowns on loans and guarantees fell 55 percent to 521 million kroner.

Norway, Europe’s second-largest oil and gas exporter, boasts no net debt, adding to its appeal as an alternative to the debt-riddled euro area. DNB made more than 80 percent of its revenue in Norway last year and is benefiting from continued demand for credit in the country. Lending to customers increased 4.8 percent in the first nine months from a year earlier at DNB.

“In spite of a weak international economic trend, the Norwegian economy is expected to remain strong,” DNB said. “In the retail banking business area, rising lending volumes, slightly widening lending spreads, pressure on deposit spreads and a continued low level of writedowns on loans are expected.”

DNB shares gained as much as 2.4 kroner, or 3.4 percent, to 72.75 kroner in Oslo trading, their steepest intraday increase since Sept. 6. The stock was at 71.9 kroner as of 11:58 a.m.

Writedowns

“Net loan losses were fairly low at 16 basis points in the quarter, compared to our estimate of 29 basis points and consensus at 26 basis points,” Vegard Eid Mediaas, an analyst at Pareto Securities ASA, said in a note to clients today.

DNB said its writedowns on loans and guarantees declined in the third quarter as total markdowns in the Baltic countries and in Poland were reduced to 0.43 percent of its total lending in that region from 5.2 percent in the same period of 2011.

“The strong Norwegian economy is a factor behind the low level of writedowns,” Chief Executive Officer Rune Bjerke said. “There was a decline in writedowns in most segments with the exception of shipping. As expected, writedowns are increasing in this segment due to the challenging market situation.”

Writedowns on loans and guarantees at DNB’s shipping unit soared more than 17-fold to 293 million kroner in the third quarter and made up 56 percent of the bank’s total writedowns. DNB Chief Financial Officer Bjoern Erik Naess said at a press conference in Oslo today that markdowns in 2013 at the shipping unit will probably be 1 billion kroner to 1.5 billion kroner.

Tanker Outlook

Still, the shipping division will be profitable this year and the company forecasts it to “be profitable in nominal terms” in the future, Bjerke said in an interview in Oslo. Shipping will remain “a core activity” for the Norwegian bank even as it rebalances the overall loan portfolio and cuts its shipping holdings to 6 percent of the total from 7 percent, he said.

The global shipping industry is struggling amid an overcapacity of ships, falling demand amid the European debt crisis and low freight rates. The situation for dry tankers and bulk will probably be difficult next year also, Bjerke said.

“We expect the market to be challenging for tankers and dry bulk in 2012 as well as 2013, but gradually there should come positive impulses due to the fact that the global economy will continue to grow” and as “there seems to be somewhat more of a balance between supply and demand from the shipyards in the upcoming quarters,” he said. “There will be challenges in 2013 but hopefully from the beginning to mid-2014 there will be an improvement in the dry-bulk segment and the tanker segment when it comes to freight rates.”

The Norwegian lender said its core Tier 1 capital ratio, a key measure of financial strength, rose to 10 percent, including so-called transitional rules, at the end of the quarter. It stood at 9.6 percent at the end of the second quarter. Excluding the effects of the transitional rules, it was 11.4 percent.

Rival Ratios

Swedish rivals Svenska Handelsbanken AB (SHBA), SEB AB and Swedbank AB (SWEDA), which all had ratios above 16 percent in the third quarter, are the three best-capitalized lenders in the European Union. Nordea Bank AB (NDA), the Nordic region’s largest bank, had a core Tier 1 capital ratio of 12.2 percent in the third quarter.

Sweden requires its lenders to target 10 percent core Tier 1 buffers of their risk-weighted assets from next year and 12 percent from 2015. That compares with the Basel Committee on Banking Supervision’s core capital target of at least 7 percent, while the European Banking Authority has set a temporary 9 percent target for some banks. Norway requires its banks to have a ratio, including so-called transition rules, of 9 percent.

DNB said today it aims to increase its common equity Tier 1 ratio under Basel III regulation to between 12 percent and 12.5 percent by 2015. The Norwegian bank also targets a return on equity above 12 percent that year and forecasts annual growth in net interest income of more than 6 percent between 2012 and 2015 and a maximum 2 percent increase in costs.

To contact the reporters on this story: Niklas Magnusson in Hamburg at nmagnusson1@bloomberg.net Josiane Kremer in Oslo at jkremer4@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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