DNB Shares Plunge as Loan Losses Hit Norway’s Largest Bank

  • DNB now sees 2016 loan impairments topping 6 billion kroner
  • Bank’s shares fall almost 9% in Oslo on heavy trading

DNB ASA’s shares slumped after Norway’s largest bank missed profit estimates as loan losses more than tripled amid a slump in the oil industry.

Net income for the three months that ended June 30 fell 10 percent to 4.45 billion kroner ($525 million), the Oslo-based bank said. That missed the 4.85 billion-krone estimate in a Bloomberg analyst survey. Loan losses more than tripled to 2.32 billion kroner while low interest rates drove net interest income down 2 percent to 8.54 billion kroner.

“It was much weaker than expected, a negative surprise, and the loan losses are the driver here,” Matti Ahokas, an analyst at Danske Bank, said by phone. “The figures had been holding up quite well for a number of quarters and now there’s a big deviation. The question now is whether this is one quarter or something else.”

The bank said that loan losses will likely rise above 6 billion kroner this year, higher than estimated earlier, even as it kept an outlook for losses of up to 18 billion kroner over the next three years. Impairments will be primarily in the shipping, offshore and energy industries, DNB said. Norway is western Europe’s biggest oil producer and its economy has been hit hard by the drop in oil prices since 2014.

Not Easy

Rune Bjerke, DNB’s chief executive officer, said in an interview that while the bank had been “fully aware of the challenges in the market,” credit quality deteriorated faster and more broadly than expected at an aggregated level.

“The individual loan losses are high but within what we expected to be the outlook for the year, but collective provisions have been higher than anticipated due to the steep and wide migration” in credit risk, Bjerke said. “It wasn’t very easy to analyze and to estimate that development when we had the last quarterly presentation.”

Shares in DNB declined as much as 8.7 percent and were down 7.7 percent to 93.90 kroner as of 1:35 p.m. in Oslo. Trading volumes were almost three times the three-month average.

Lower Rates

DNB faces a toxic cocktail of depressed oil prices and record low central bank rates. Extraordinary monetary policy is posing a challenge especially to lenders in the Nordic region, where authorities have imposed a negative rates the longest. (Denmark lowered its key rate below zero for the first time in July 2012.) Norway’s central bank has signaled it may again cut its benchmark from 0.50 percent when it meets again in September.

Net interest income “comes in weaker than expected and especially if you look at the large corporates division,” Karl Morris, a London-based analyst at Keefe, Bruyette & Woods, said by phone. While lending volumes have been down, “the company has to reprice given the low interest rate environment. We’re expecting another rate cut in September, and that’s going to mean further headwinds.”

DNB is the first of the region’s biggest banks to report second-quarter results. Its shares had been the best performing compared with Nordic and European peers over the past month, as worries over the impact of oil’s plunge on the Norwegian economy fade amid the turmoil caused by the U.K.’s vote to leave the European Union.

Norway’s government can spend its way out of a softening economy, Mediobanca analysts said in a note last week as it reiterated its preference for DNB. Goldman Sachs named DNB among five stocks to buy after Brexit sent markets down in a June note. But other analysts warn of increasing dissatisfaction among customers poses a risk to plans to offset lower interest income with higher fees.

According to Ahokas, DNB was “too optimistic.”

“They’re saying now loan losses will be more than 6 billion kroner,” Ahokas said. “It’s tough. The visibility is so low. No one knows how the offshore market and the shipping market will react to these fairly big changes, and what the direct and indirect impact will be.”

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