Reuters: FSA backs government measures to cool property market

Banks in Norway have been hurrying to buffer their balance sheets and liquidity preparedness to meet expected tightening measures that have now received the support of the financial supervisory authority according to a Bloomberg report. Finanstilsynet shares government’s worries of soaring household debt stemming from continued good prospects in the energy sector. The worry is that a history will repeat itself and a housing bubble will once again cause problems for many families. Both the dominant DnB (OSE: DNB) and numerous listed and unlisted savings banks have been anticipating such a move for quite some time.

DNB reports growing profits and activity

Norwegian financial group DNB ASA (OSE:DNB) reported growing profits, strong deposit growth and low write-downs for Q2 2012 this morning. By far the biggest bank in Norway had pre-tax operating profit before write-downs of almost 6.7 billion NOK and reported profit for the period of 4.58 billion, both considerably above comparison period and analysts’ expectations. Some of that came from reversal of a negative effect from derivatives in Q1 2012 to a positive effect of over a billion. Insurance and Asset Management was the lone exception regarding the business areas.

Home mortgages demand is strong and the bank believes that Norwegian housing market remains robust. This is helped by heavy investments in oil, gas and energy sectors. There have been a lot of contrasting views on this. Lending to small-and medium sized businesses has also grown quickly, which is a marked difference from many other peers in Europe. Situation in the Baltic countries seems to be improving. Many segments within the shipping industry are still facing difficulties. Common Tier 1 capital ratio at the end of June had grown to 9.6 per cent.

Moody’s Nordic downgrades come

Ratings agency Moody’s has today announced ratings actions concerning a number of banks in the Nordic region. Senior debt and deposit ratings of Norwegian DNB Bank ASA, part of DNB ASA (OSE: DNB) were downgraded to A1from Aa3 couple with downgrades on other ratings as well with a stable outlook. This reflects reliance on market funding and exposures to volatile assets such as real estate sector and shipping and possible pressure on earnings from higher liquidity requirements. The decline was mitigated due to likely system support in the event of problems and stable domestic environment.

Rating actions on five Swedish banking groups resulted in a downgrade of long-term debt and deposit ratings for Nordea Bank Ab (OMX: NDA, OMXH: NDA1V) and Svenska Handelsbanken (OMX: SHB A) both by one notch from Aa3 and that of farm and forest holder member owned specialised agricultural lender Landshypotek AB by two notches. The debt and deposit ratings of Skandinaviska Enskilda Banken's SEB (OMX: SEB A) and Swedbank (OMX: SWED A) were maintained at A1 and A2 respectively. All the ratings carry a stable outlook. The challenges faced by the sector as given by Moody’s are comparatively high reliance on wholesale funding, modest profits and risks to assets quality. Nonetheless the commendable performance of the Swedish economy and the relative strength of the banks is recognized.

Swap fair value decline hurts DNB’s profit

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.

DNB has good momentum going into 2012

Financial service group DNB ASA’s (OSE: DNB) fourth quarter 2011 was one of high activity. The behemoth managed to further increase its market share and with 15% deposit growth and 9.3% increase in total lending. Profit for the period was 4.1 billion Norwegian kroner resulting in an EPS of 2.51. Compared to 2010 these numbers were lower as write-downs increased by 400 million to approach 1 billion for the quarter. This is still considered a low number by the bank. Operating profit was 0.7 billion higher than in 2010 at 6.8 billion.

Full-year operating profit was 21.8 million and after tax profit 13 billion for an EPS of 7.98 NOK. DNB has no direct exposure to crisis countries in Europe but indirect effects in the form of share price declines affected it too. This was felt by the life insurance arm DNB Livsforsikring in particular. Keeping in mind the still-ongoing financial turmoil plus tighter capital adequacy requirements, proposed dividend is cut in half to 2 NOK.

Four fifths of DNB’s operations are in Norway. The bank expects further growth in 2012. The company says that profits may be under some pressure from rising funding costs but that positive trend should continue. Situation in the Baltic countries and Poland remains challenging although DNB forecasts improving conditions. Write-downs are expected to stay on par with 2011.

Tier 1 Capital ratio according to Basel II rules stood at 9.4% at years-end and at 10.8% proforma subject to full IRB implementation. These are close to 2010 numbers but a clear improvement on the end of Q3. The Board feels that related to group’s risk of operations it is well capitalized. The common equity Tier 1 capital ratio target by the end of 2012 is 10%.

The report was well received on the market as most of the numbers explained above, particularly profit and cost control, were better than expectations. There had been a lot of talk regarding the shipping segment loans after Nordea alluded to those in its report since DNB is a major player in the field. Certainly the amount of doubtful and non-performing loans was of some concern. On the reporting day Thursday the stock popped over 9%. For the week it was up by nearly 5%

Nordic banks pass stress tests

European Banking Authority has published results of the 2011 EU-wide stress tests for 90 banks in 21 countries. All 10 Nordic banks involved in the latest stress tests passed comfortably. They were Nordea Bank (OMXS: NDA, OMXH: NDA1V), Skandinaviska Enskilda Banken (OMX: SEB A, STO: SEB C), Svenska Handelsbanken(OMX: SHB A) and Swedbank(OMX: SWED) from Sweden, Danske Bank (OMX: DANSKE), Jyske Bank (OMX: JYSK), Nykredit Bank and Sydbank (OMX: SYDB) from Denmark, DNB NOR (OSE: DNBNOR) from Norway and Pohjola Bank (HSE: POH1S) as a part of OP-Pohjola group from Finland.

Eight banks were below 5% Core Tier 1 T capital threshold and sixteen banks between 5% and 6% CT1R. EBA is formally recommending national supervisory authorities to require those banks under 5% CT1R to promptly remedy capital shortfall. Those failing the tests were all small banks. Five of them are in Spain, two in Greece and one in Austria.

While stricter than the tests last year, these tests have been also been blamed too soft and authorities are worried markets will view the fact that the tests do not include Greek default provision as a reason to panic. Also some have worried about the great detail that banks are revealing about their specific exposures to provide bad incentives. More information is available here.

DnB NOR Q2 2011

DnB NOR (OSE: DNBNOR) is holding up pretty well in a brutal morning sell-of of European banks after the firm beat consensus estimates handily for second quarter of 2011. Norway’s largest financial concern foresees higher interest rates contributing to still improving profitability going forward. DnB NOR’s profit after taxes for second quarter was 3 546 million Norwegian kroner, up 20% from the previous year, helped by low write-downs. Lessening trend in credit losses is largely due to improvement in operations in the Baltic countries.

DnB NOR name will change to DNB in November 2011. The company expects rising growth in Norway and internationally during the next six months. Company’s own expectations are for Pre-tax operating profit of 22-25 billion NOK in 2012 and to reach 30 billion within 2015 along with 14% return on equity from current 12% level. Full report and presentations are available from here.