Norway’s dominant financial services group DNB ASA (OSE: DNB) reported profit of 1.76 billion NOK in Q1 2012 (EPS 1.08 NOK) on Friday. This compares weakly vs. the 2.85 billion from last year. Net interest income was up by more than 10% year-on-year to 6-65 billion. DNB says that access to funding is good. Write-downs on loans and guarantees were down to 784 million. Investors have been presuming plenty of loan losses from shipping where DNB, together with Nordea, is strong. The development there was clearly weak but the bank says that most of its shipping clients are large companies used to market turmoil.
Ordinary banking operations performed quite strongly and the profit decline resulted mainly from decline in the fair value of interest rate swaps called basis swap. These are derivative contracts used to hedge against currency rate fluctuations. Their fair value had risen in previous quarters due to wild swings in the currency markets (volatility tends to push up the value of derivative securities as it used in the functions to calculate the market value) but came down in Q1 as instruments approach maturity and the markets have been calmer.
Chief executive Rune Bjerke said that the group is seeing strong growth in lending to small and mid-sized Norwegian enterprises and is continuing to gain market share in consumer segment. It seems to them that international turmoil has had very little impact on Norway. Four fifths of DNB’s operations are based there.
The capital ratios stayed relatively on par with last year, with Tier 1 ratios between 9-10%. Stricter capital adequacy and liquidity requirements will likely have an impact on the industry in the future. The weaker result means that DNB has ways to go to reach its own targets. The share was down heavily on Friday. It is now trading close to book value.
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