DnB NOR Group Roar Hoff, Head of Group Risk Analysis Nordic Bank Seminar, 3 June 2010, Copenhagen
Agenda DnB NOR and the Norwegian economy Basel III new regulations Actions ahead of Basel III 2
DnB NOR - Norway's leading financial services group The Bank: 30% market share of the retail market 35% market share of the corporate market lending Credit Ratings: Moody's: Aa3 (stable), S&P: A+ (stable) Norway's largest life insurance company Market capitalisation of NOK 105 billion (EUR 13.2 billion) The Norwegian government has 34% ownership 3
1st quarter 2010 Sound pre-tax operating profit before write-downs: NOK 4.9 billion (6.1) Continued positive cost trend Lower than expected write-downs on loans: NOK 0.9 billion (1.6) Profit to DnB NOR's shareholders: NOK 3.1 billion (3.1) Return on equity: 12.5 per cent (15.8) 4
Norway's economy less hit than the other Nordics. Why? 1 0-1 -2-3 -4-5 -6-7 -8-9 GDP, seas. adj. Per cent change since 2008Q1 Q1 2008 Q3 2008 Q1 2009 Q3 2009 Q1 2010 US Jap. EZ UK Den. Fin. Sw e. Nor. 11 10 9 8 7 6 5 4 3 2 1 0 Unemployment rates, % Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 EZ Sweden USA Denm ark Finland Norw ay 5
1) Unlike other industrial nations "Luck", but more exposed to China than others 100 80 Norwegian goods exports, % 35 30 Manufacturing production Pct. of total gross value added (2007) 60 25 40 20 Average 20 15 0 1970 1980 1990 2000 Oil/gas Chem. Metals Pulp/paper Food Shipping Machinery Tourism Other 10 5 0 NOR AUS FRA USA ESP NZL POR BLG ITA IRE GER JAP SWE FIN 6
2) Expansionary monetary/credit policy High share of floating rate mortgages. Folio rate cut from 5¾% to 1¼%. Similar decline in lending rates => 4½% increase in disposable income Also: NOK350''' to OMF <-> t-bills, 50''' to SOF and 50''' to SFF (30/9). 7
3) Large and rich public sector! 35 30 25 20 15 10 General gov't employment Per cent of total employment (2007) Average 100 50 0-50 -100 OECD: Net debt, %GDP 5 0 JPN NLD AUS ESP PRT USA ITA BLG UK CA FRA FIN DNK SW NOR -150 1980 1990 2000 2010 US EZ Norw ay 8
Oil wealth gave room for action "Underlying" expenditure +5,6% in 2009, the highest since mid- 1970s. Budget stimulus of +2.1% of Mainland GDP in 2009, +0.8% in 2010 the largest since the late 1980s/early 1990s (despite milder downturn). 6 Underlying expenditure Pct. volum e change (RNB2010) 0 Structural budget balance Pct of trend-gdp Mainland Norway 5-1 4-2 3-3 2-4 1-5 0-6 -1 1985 1990 1995 2000 2005 2010-7 1980 1985 1990 1995 2000 2005 2010 9
10 Basel III new regulations
Several analysis conclude that the proposed Basel III will be too tough on traditional banking models Equity capital requirements for global banks $221bn* RoE for global banks down from 13.3% to 5.4%* Increased funding needs Reduced lending growth Increase in prices Customers and economies will be negatively affected * Source: JP Morgan analysis: Global Banks - Too big to fail? Running the numbers 11
DnB NOR will be among the least affected of the European banks Capital deductions - Deductions for insurance subsidiaries already accounted for - Deferred tax assets and goodwill fully deducted Capital level - Already compliant - High-quality composition Counterparty risk - Minimal exposure to derivative markets 12
Only proposed changes in net stable funding ratio will create a shortfall Leverage ratio - Strong capitalisation and business model Deposit guarantee scheme - Already above EUR 100 000 and well funded Liquidity coverage ratio - Compliant as of today? Net stable funding ratio - Shortfall, deposit haircuts are unreasonably high 13
A very robust and high-quality capital structure Tier 1 capital ratio Nordic peers 1Q2010, Basel II Core Tier 1 Hybrid 11.2 % 1,1 14.2 % 4,9 14.6 % 2,5 13.9 % 2,2 13.5 % 1,2 9.4 % 0,8 12.0 % 1,0 13.7 % 1,1 10,1 9,3 12,1 11,7 12,3 8,6 11,0 12,6 Bank 1 Bank 2 Bank 3 Bank 4 Bank 5 DnB NOR DnB NOR* DnB NOR** * Full implementation of IRB **Full IRB and Swedish model for calibrating insurance exposure 14
IRB risk weights are not comparable across banks DnB NOR corrected to 9,1% (8,7%) Standard & Poor s advanced standarised approach 15
Traditional hybrid does not share risk with common equity Tier 1 capital excluding minority interests Deductions NOK11.7 billion Loss absorbtion Other equity NOK 62.9 billion Share premium reserve NOK22.6 billion Share capital NOK16.2 billion Hybrid NOK 8.5 billion Hybrid write-down ranks pari passu with share capital 16
The strongest leverage ratio among Nordic peers Leverage ratio* Nordic peers 1Q2010 5,4 % 3,8 % 3,7 % 3,8 % 4,4 % 4,3 % Bank 1 Bank 2 Bank 3 Bank 4 Bank 5 DnB NOR * Tier 1/total assets 17
13 per cent return on equity in 2012 (and beyond) just as ambitious as the 16 per cent target set in 2007 Simplified illustration of effects of changes on RoE targets set in 2007 and in 2010 16 % Interest on equity Increased capitalisation 13 % Interest on equity Contribution from leverage Lower interest rates Contribution from leverage 2007 2010 18
19 Actions ahead of Basel III
Strengthened capitalisation levels through retained earnings and NOK 14 bn share issue in 2009 1) Including 50 per cent of profit for the period 20
Raised level of long-term funding, tightened internal limits for short-term funding Average residual maturity, long-term senior debt and covered bonds (years) Share of stable long-term funding* Internal target** ** * Deposits from customers, subordinated debt, covered bonds and senior debt > 12 months residual maturity ** Internal target for stable long-term funding increased from 88% to 90% in 2009 21
Stable access to long-term funding longer maturities at competitive prices 2010 NOK billion Maturity Covered bonds 41.1 6.7 Senior bonds 12.1 5.7 Spread (3-month Euribor) Total 53.2 6.5 49bp 2009 NOK billion Maturity Spread Covered bonds 10.7 12.1 Covered bonds, Norges Bank (central bank) 90.3 4.2 Senior bonds 39.0 4.6 Total 139.1 4.9 50bp 2008 NOK billion Maturity Spread Covered bonds 57.5 5.9 Covered bonds, Norges Bank (central bank) 29.1 2.8 Senior bonds 100.5 3.7 Total 187.2 4.3 48bp 22
Further issues Continued focus on long term funding - Increased emphasis on funding diversification by geography and by instruments (e.g. DnB NOR Næringskreditt) Controlled balance sheet growth Provide for more selective deposit gathering strategies High attention on Basel III signals - uncertainties on final definitions and calibrations 23
Financial ambitions Ambitions 2012 Long-term ambitions NOK 22-25 billion in pre-tax operating profits before write-downs Return on equity above 13 per cent NOK 2 billion in cost reductions Be among the best capitalised banks in the Nordics Cost/income ratio below 46 per cent Long-term AA rating Approx 50 per cent dividend 24
Thank you