DNB kicks off Nordic reporting, Nkr5.2bn profit beats consensus

Norway’s DNB kicked off the Nordic reporting season today (Thursday), posting second quarter pre-tax profits that beat consensus expectations as the bank benefitted from raising lending rates and improved deposit margins.

CEO Rune Bjerke presenting DNB’s results this morning.

DNB reported pre-tax profit of Nkr5.2bn (Eu656m) for the second quarter of 2013, up from Nkr4.3bn in the first quarter, versus Nkr6.1bn in Q2 2012.

DNB group chief executive Rune Bjerke (pictured this morning) highlighted a significant underlying increase in profits in spite of lower lending growth, and the priority that DNB has accorded capital growth — in response to “marching orders” from the authorities.

“DNB’s Common Equity Tier 1 capital has been increased by approximately Nkr11bn over the past 12 months, which corresponds to more than Nkr200m each week,” said Bjerke. “This capital build-up increases the financial strength of the bank, though stricter capital requirements come at a cost for both employees, shareholders and customers.”

With pre-tax profits of Nkr5.2bn, DNB beat consensus expectations by 8%, according to a bank equity analyst in Stockholm.

“The bank surprises, not only having been able to capitalise on the interest rate volatility in the quarter through the Net items of financial transactions, but more importantly the Net interest is reaching a new level derived from higher margins,” he said.

In addition to higher lending margins, as was announced by the bank, DNB also benefitted from improved deposit margins, said the analyst.

From a funding perspective, Thor Tellefsen, senior vice president and head of long term funding at DNB, highlighted two aspects of the results and said that together they spell reduced funding needs.

“We have never had a higher deposit coverage, which is up to 75% if you include everything, and at the same time lending growth is somewhat slower,” he said. “That means that the need for additional senior unsecured and covered bond funding is reduced.”

DNB still intends to tap the market in the second half of the year, added Tellefsen, but total issuance volumes will be much lower than in the past.

“In the first half of the year we issued Eu6.2bn, which is already significantly lower than in previous years,” he said.

Chief executive officer Bjerke said that lower lending growth reflected weaker market developments and use of the bond market for financing by several of DNB’s large customers, but that demand for residential mortgages remained strong, with an average growth of 7% from Q2 2012.

The bank equity analyst said that volume growth is slowing down further as the bank strikes to improve its CET1.

“This is now reported at 12.1% fully loaded Basel III but not including the expected raised floor for risk weights for Norwegian mortgages,” he said.

Costs amounted to Nkr5.66bn in Q2, including a restructuring charge of Nkr459m for staff cutbacks, according to DNB, with CEO Bjerke saying that DNB aims to reduce staff by 500 more full time positions by 2015, on top of the more than 1,000 that have been cut since the second quarter of 2012.

The analyst said that excluding the charge related to staff reduction, costs are down 1.4% year-on-year — “a very strong performance in Norway with its cost growth”.

Slightly higher loan loss provisions should be seen in the context of strong revenues at the bank, he added.

SEB will be the first of the Swedish large cap banks to report Q2 results when it releases them on Monday (15 July), followed by Swedbank a day later. The analyst expects results for both to show stable underlying performance, but for the cost of Swedbank’s exit from retail banking in Ukraine to show up and mar the reported net profit. The bank previously stated it would take the final charge, Skr1.9bn (Eu218m), in the second quarter.