Norwegian Lender DNB Warns of Rising Bad Loans

A deterioration in the oil and gas industry drives writedowns higher and DNB's shares 8% lower.
By James Skinner ,

Norway's largest bank, DNB (DNHBY) , blindsided investors on Tuesday when it unveiled a surprise increase in loan impairments while updating the market on its second-quarter performance. It also revised forecasts of the likely level of bad debts throughout the rest of 2016.

The bank reported a 10% drop in recorded profit for the second quarter and a 9% reduction in earnings per share. Management also noted a near-40% increase in the value of impaired loans, from 1.6 billion Norwegian kroner ($184 million) in the second quarter of last year to Nkr2.2 billion for the recent quarter.

DNB shares fell by as much as 8.4% in early European trading, bringing the total decline so far this year to 14.5% and wiping Nkr11 billion off the bank's market value.

"We are satisfied with these figures...the Norwegian economy is sound, even though oil-related industries are under restructuring." said Chief Executive Rune Bjerke.

Adding fuel to the fire the bank also told investors that earlier management guidance, which had suggested impairment charges and loan losses would be below Nkr6 billion ($710 million) for the full 2016 year, was too conservative.

The board did not specify how much of an overshoot it is anticipating, just that total losses are likely to be higher than forecast given that loans to the oil and gas industry have begun to turn sour much quicker than it had previously expected.

Although the bank's bottom line was hampered by bad loans, net interest income held up relatively well during the second quarter and for the first half, despite ultra-low or negative interest rates across Europe.

Net interest income for the second quarter was Nkr8.5 billion, down from Nkr8.7 billion in the first quarter of 2015 while for the first half of 2016, net interest income was Nkr17.2 billion, down from Nkr17.3 billion. Resilience in net interest income was reportedly due to strong growth in mortgage sales during the period.

The group's all-important cost to income ratio also fell during the second quarter, from 42.8% down to 39.9%, as the bank benefited from the  closure of 59 branches.

Perhaps most importantly for investors, DNB held its core equity tier one capital ratio steady at 15.2%, which is above the 15% level that management have made a higher dividend payout ratio contingent on.

The payout currently sits at around 30% of earnings. However, long-held internal targets stipulate that when the cost to income ratio falls below 40% and regulatory capital buffers are sufficient, or 15% or more, then the payout ratio will rise to 50%.

UBS analysts stated on Monday that DNB offers the greatest prospects for dividend growth among Nordic banks at the moment. They labelled the stock as a  preferred pick, reiterated their buy rating and affirmed their price target of Nkr97.95. The stock was recently trading at Nkr93.90. 

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