Research: Rating Action: Moody’s Confirms DNB Bank’s Aa2 Ratings, Changes Outlook on Deposit Ratings to Positive

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Stockholm, October 07, 2022 — Moody’s Investors Service (“Moody’s”) today affirmed DNB Bank ASA’s (DNB) depositary and senior unsecured ratings of Aa2/P-1 and Aa2, respectively, and junior senior unsecured have been confirmed at A3 . The Basic Credit Assessment (BCA) and Adjusted BCA were affirmed at a3. The outlook on long-term deposit ratings changed from negative to positive, and the outlook on long-term senior unsecured ratings changed from negative to stable.

The main drivers for the affirmation of the deposit and unsecured ratings are the strong stand-alone valuation of the bank, due to its well-established franchise which supports strong recurring profitability, comprehensive risk management and very strong capitalization, offset by high, albeit declining, market funding. Additionally, the assertion reflects the very large loss-absorbing buffers protecting creditors in the event of default, and a moderate likelihood of government support.

The positive outlook on long-term deposit ratings reflects Moody’s expectation of improved profitability, less dependence on market funding and very large volumes of debt absorption buffers. losses protecting creditors in the event of default. The stable outlook for senior unsecured debt ratings takes into account stronger autonomous valuation, while also reflecting the risk of higher loss-given-default rates for senior unsecured bondholders given the lower preferred senior debt volumes in the coming years.

Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL470165 for the list of affected credit ratings. This list forms an integral part of this press release and identifies each issuer concerned.

RATINGS RATIONALE

REFERENCE CREDIT ASSESSMENT

The main driver of DNB’s a3 BCA assertion is Norway’s very supportive operating environment, reflected by Moody’s Very Strong – Macro profile, as well as the bank’s strong risk management, very strong capitalization strong and its track record of generating predictable earnings despite a challenging operating environment. In addition, deposit growth has reduced reliance on market funding, a trend likely to continue given strong earnings in the Norwegian oil sector, which will likely lead to further deposit inflows.

DNB has weathered the pandemic well, remaining highly profitable throughout, despite significant provisions in 2020 on its exposures to the offshore oil sector. The problem loan ratio declined to 1.6% as of June 30, 2022, from a high of 2.2% at end-September 2020, as the bank made progress in reducing riskier exposures. The ratio of tangible equity to risk-weighted assets (TCE/RWA) remains very strong at 20.3% despite the consolidation of Sbanken ASA, which contributed to lower capitalization by 21.6% at the end of March 2022. Moody’s expects DNB’s profitability to improve given interest rate hikes, with only a modest increase in provisions reflecting the effect of a deeper slowdown in key overseas markets on non-exporters. energy.

DEPOSIT RATINGS, SENIOR UNSECURED AND JUNIOR SENIOR UNSECURED

DNB’s Aa2 long-term senior unsecured deposit ratings incorporate Moody’s expectation that DNB will continue to refinance maturing senior unsecured debt with junior senior unsecured debt in future years, at as minimum requirements for own funds and eligible liabilities (MREL) are phased in. According to Moody’s Advanced Forward-looking Loss Given Default (LGF) analysis, the three-notch upgrade in deposit and senior unsecured debt ratings will be maintained in 2023 and 2024 due to the considerable debt outstanding unsecured senior debt while the necessary volumes of junior debt are built up. By January 2024, Moody’s expects MREL to equal 37.1% of the total risk exposure amount, of which at least 29.5% will need to be covered by more subordinated liabilities. Our moderate assessment of government support translates into another one-notch increase included in these ratings.

Moody’s considers holders of DNB senior unsecured junior debt to face moderate loss-given-default, resulting in a rating aligned with the issuers’ BCA-adjusted rating of a3. Moody’s does not attribute government support to this category of debt.

OUTLOOK

The positive outlook on deposit ratings signals a likely strengthening of the financial profile as the bank’s entrenched franchise positions it to benefit from the relatively stronger operating environment in Norway compared to the rest of Europe. With interest rates rising and Moody’s expectation of continued deposit growth, profitability will remain strong, while dependence on market funding will tend to decline. Moody’s expects capitalization to remain very strong due to high regulatory requirements in Norway and capital management buffers held by DNB. At the same time, an increase in deposits, coupled with a shift in market funding towards senior junior funding (senior non-preferred debt) away from senior preferred debt, will maintain loss absorption buffers sufficient to sustain a loss extremely low in case of failure for junior applicants.

The stable outlook for senior unsecured debt ratings takes into account the strengthening of the financial profile, while also reflecting the risk of higher loss rates for senior unsecured bondholders from 2025 given the decline in preferred senior debt volumes in the coming years.

FACTORS THAT MAY LEAD TO IMPROVEMENT OR DEGRADATION OF RATINGS

DNB’s ratings could be improved following an upgrade to its BCA. The BCA could be upgraded if the DNB maintains its very high capitalization, continues its reduction in risky assets while reducing the share of market funding and maintains its strong recurring profitability despite a weakened global macroeconomic outlook.

DNB’s ratings could be downgraded due to (i) lower volumes of loss-absorbing liabilities protecting creditors in the event of default; or although unlikely (ii) a downgrade of its standalone BCA due to deterioration in asset quality beyond Moody’s expectations; or financing conditions become difficult.

MAIN METHODOLOGY

The main methodology used in these ratings is the Methodology for Banks published in July 2021 and available on https://ratings.moodys.com/api/rmc-documents/71997. Otherwise, please see the Scoring Methodologies page on https://ratings.moodys.com for a copy of this methodology.

REGULATORY INFORMATION

The list of affected credit scores announced here is a mix of solicited and unsolicited credit scores. For more information, please see Moody’s policy on the designation and assignment of unsolicited credit ratings available on its website. https://ratings.moodys.com. Additionally, the list of affected credit ratings includes additional information that varies depending on some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL470165 for the list of affected credit ratings. This list forms an integral part of this press release and provides, for each of the credit ratings covered, the information provided by Moody’s on the following elements:

• EU approval status

• UK approval status

• Rating solicitation

• Participation of the issuer

• Participation: access to management

• Participation: access to internal documents

• Senior Analyst

• Release Office

For details on key rating assumptions and Moody’s sensitivity analysis, see the Methodological Assumptions and Sensitivity to Assumptions sections in the Disclosure Form. Moody’s rating symbols and definitions can be found at https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security, this announcement provides certain regulatory information regarding each rating of a subsequently issued bond or note of the same series, category/class of debt, security or under a program for which ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a media provider, this announcement provides certain regulatory information relating to the credit rating action on the media provider and each particular credit rating action for securities whose credit ratings are derived from the support provider’s credit rating. For the provisional ratings, this press release provides certain regulatory information relating to the provisional rating assigned, and to a final rating that may be assigned after the final issuance of the debt, in each case where the structure and conditions of the transaction n have not changed prior to the final rating being assigned in a way that would have affected the rating. For more information, please see the issuer/transaction page of the respective issuer at https://ratings.moodys.com.

For all relevant securities or rated entities receiving direct credit support from the lead entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action , the associated regulatory information will be that of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to the jurisdiction: Ancillary services, Disclosures to the rated entity, Disclosures to be provided by the rated entity.

The ratings have been disclosed to the rated entities or their designated agent(s) and issued without modification resulting from such disclosure.

The regulatory information contained in this press release applies to the credit rating and, if applicable, the outlook or rating revision relating thereto.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis are available at https://ratings.moodys.com/documents/PBC_1288235.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and Moody’s legal entity that issued the rating.

Please see the issuer/transaction page at https://ratings.moodys.com for additional regulatory information for each credit rating.

Nicolas Boheman
Vice President – Senior Analyst
Financial Institutions Group
Moody’s Investors Service (Nordics) AB
Norrlandsgatan 20
Stockholm, 111 43
Sweden
JOURNALISTS: 44 20 7772 5456
Customer service: 44 20 7772 5454

Simon Ainsworth
Associate General Manager
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Customer service: 44 20 7772 5454

Release Office:
Moody’s Investors Service (Nordics) AB
Norrlandsgatan 20
Stockholm, 111 43
Sweden
JOURNALISTS: 44 20 7772 5456
Customer service: 44 20 7772 5454

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