DNB misses consensus for Q2, but CET1 positives cited

DNB’s second quarter pre-tax profits fell short of consensus expectations as the Norwegian bank announced its results today (Thursday), but it reported a CET1 level that suggests it “is becoming more like its Swedish peers and competitors”, according to a Kepler Cheuvreux analyst.

DNB is the first of the major Nordic banks to report second quarter results.

It disclosed profits of Nkr4.654bn (Eu571m) for the second quarter, a year-on-year increase of Nkr856m. Other key figures highlighted by the bank included pre-tax operating profit before impairment of Nkr6.7bn (Q2 2013 Nkr6.1bn), earnings per share of Nkr2.86 (Nkr2.33), and return on equity of 12.7% (11.6%).

It said that the strong profits achieved in the second quarter put it on track to fulfil regulatory capital requirements.

“DNB is now among the best capitalised banks in the world,” said Rune Bjerke, group chief executive (pictured). “This provides vital security for customers, employees and shareholders.

“During the quarter, DNB was also classified as a systemically important bank by the Norwegian authorities, which emphasises the importance of being present for individuals, companies and local communities throughout Norway. This classification also entails an additional own funds requirement for systemically important banks, which means that we must continue to increase our equity considerably in order to reach the target.”

Bjerke attributed the increase in profits from Q2 2013 to high lending volumes, wider lending spreads, reduced restructuring expenses, and lower impairment losses on loans.

DNB’s Common Equity Tier 1 (CET1) ratio was 12.1% at the end of June, according to the institution, which includes 50% of interim profits. It said that if DNB had been able to report based on Swedish regulations, the Group could have reported CET1 as high as 17.3%.

Mats Anderson, equity research analyst at Kepler Cheuvreux, noted that DNB shares were down 4% this morning, underperforming the market, but that this reflected an interpretation of the group’s results he does not share.

The pre-tax profit of Nkr6.2bn (after provisioning) versus consensus expectations of Nkr6.4bn “is perfectly explainable” in terms of the market having been too optimistic about loan loss provision levels, he said.

“The market was looking for 10bp-11bp in the second quarter and DNB came in at 16bp,” he said. “That compares with 2bp in the first quarter, but that was low because of dissolved unallocated general provisions.

“So to me the profit results look very good, with loan loss provisioning below the Group’s own guidance for long term loan loss provisioning levels.”

He said that the market also reacted to uncertainty around margin developments given a change in pricing policy in Norway in the second quarter, but that the bank’s guidance is that this should not have an impact.

More important, according to Anderson, is that the bank has reached a CET1 level of 12.1%, based on the Norwegian requirement of CET1 calculated in accordance with the transitional rules. This represents an increase of 1.3 percentage points over the past year, he said, with the bank’s requirement being to reach 13.5%-14% by end 2016.

In Anderson’s view, this suggests that DNB will increase its pay-out ratio, which presently is under a self-imposed limit of 25%, earlier than expected.

“I would assume that DNB will start raising the level above 25% already this year, which means heading back to a long term pay-out ratio of 50% much more quickly than guided for,” he said.

“In other words, DNB is becoming more like its Swedish peers and competitors,” he said. “And if the DNB pay-out ratio starts to go up, the question is then why stop at 50%? Why not go for Swedish levels?”

The pay-out ratios at Swedbank and Svenska Handelsbanken are roughly 75%, and at Nordea and SEB are just below 60% but increasing.

Nordea and Svenska Handelsbanken report second quarter results next Thursday, 17 July, followed by Swedbank on 18 July.