Europe’s Bank Stress-Test Star Is Focus of Buyback Speculation

  • Norway’s biggest bank spent oil crisis building capital
  • DNB is now better prepared than most to handle Basel IV

A DNB ASA minibank in Oslo, Norway.

Photographer: Krister Soerboe/Bloomberg

Norway’s biggest bank, DNB ASA, has more capital than it needs and will probably start using the excess funds to buy back its own shares.

After topping the European Banking Authority’s resilience score (DNB’s capital reserves were hardly affected in the stress tests’ “adverse” scenario), the Oslo-based lender is now attracting investor interest as analysts predict shareholder rewards ahead.

Barclays analysts estimate DNB will buy back 5 billion kroner ($588 million) this year, growing to twice that in 2018. Arctic Securities sees the yearly figure around 4.3 billion kroner, while analysts at Swedbank predict about 4 billion kroner in buybacks through 2018. Others expect the lender to pay more in dividends. DNB, which has signaled it is open to buybacks, declined to comment.

“I assume DNB will raise its dividends and pay 50 percent this year and 70 percent in 2018,” said Geir Kristiansen, an analyst at Beringer Finance in Oslo. Even assuming payouts rise to that level, DNB will still have a capital ratio that exceeds the regulatory requirement, he said. “So they could buy back shares.”

Shares in DNB rose as much as 1.8 percent shortly after the market opened in Oslo on Monday, and traded 0.2 percent higher at 134.70 kroner as of 11:50 a.m. local time. The stock has gained 5 percent this year, after rising 17 percent in 2016.

Oil Fallout

As DNB emerges intact from an oil-market crash that left many of its clients in an existential crisis, investors are taking a closer look at the lender. Analysts at Credit Suisse on Monday raised their 12-month price target by 30 percent and upgraded their rating to neutral, citing a “fundamental shift” as oil rises and a mortgage price war eases up.

The regulator’s early insistence that DNB management prepare for a punishing commodities environment means the bank is now better placed than most of its competitors to meet tougher requirements on risk weights. (Operating in western Europe’s biggest oil producer, DNB was more exposed to the slump in crude prices than most.)

“We’ve seen that the downturn in oil didn’t lead to a crash in the domestic economy,” Bengt Kirkoen, an analyst at Swedbank, said by phone. Now, people tracking DNB are “discovering that the economy is doing well and they’re turning more positive,” he said.

Thanks to Norway’s proactive regulator, DNB is ahead of the rest of Europe “and in a very good position with respect to capital ratios,” Kirkoen said. Particularly when it comes to the leverage ratio, which doesn’t take risk weighting into account, “DNB is in the forefront,” he said.

Basel IV

Paulina Sokolova and Kiri Vijayarajah, analysts at Barclays in London, agree that DNB is likely to struggle less with tougher capital rules than others. They note that Norway has been stricter in applying minimum requirements than other countries.

The impact of Basel IV, as the final chapter of the Basel III overhaul has been dubbed by the industry, is “a worry for the sector, but DNB is well insulated,” they wrote to clients in a Jan. 5 note. They also see “upside to earnings” from net interest margins and costs, as well as “growing comfort over the robustness of domestic onshore asset quality,” which they expect will play out this year.

It’s also worth noting that DNB is the only major Nordic bank not operating in a negative interest rate environment. Norway’s main rate is 0.5 percent. Danske Bank A/S has endured sub-zero rates since mid-2012. Nordea Bank AB and Sweden’s other three big lenders were forced to adapt to negative rates at the beginning of 2015.

But like all Scandinavian countries, Norway is struggling with an overheated housing market fueled by low rates. If the regulator in Oslo decides that real estate risks warrant a response, it might raise the so-called counter-cyclical buffer, an add-on designed to rein in boom-to-bust trajectories.

So far, the regulator’s efforts to cool Norway’s housing market “haven’t succeeded,” according to Kirkoen. That means investors should watch property market indicators closely. Kristiansen at Beringer says an increase in the counter-cyclical buffer of half a percentage point would leave little room for shareholder rewards.

Arctic Securities analysts Roy Tilley and Joakim Svingen say DNB will probably raise lending rates, which means “a combination of a cash dividend and share buybacks looks most likely for 2017.”

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