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Offshore losses hit DNB ASA hard

took a large andunexpected hit on offshore lending in the second quarter, prompting a sharpdrop in its share price July 12.

The Oslo-basedbank said loan losses jumped to 2.3 billion Norwegian kroner, from 667 millionkroner a year earlier, with impairments on lending to large corporates andinternational customers more than trebling. Quarter over quarter, totalimpairments almost doubled. Group profit attributable to shareholdersdropped to 4.11billion kroner in the second quarter, from 4.55 billion a year ago.

Thespike in loan charges was attributed to the travails of the offshore oil industry.On a conference call to discuss earnings, management said that offshore serviceand exploration companies would suffer for a while, even though the recovery inthe price of Brent crude to about $50 a barrel from below $30 earlier in 2016would help oil producers.

Theoffshore sector "is still deteriorating and the recovery has beenpushed out…There is alagging effect," analysts were told. Shares were off by 7.6% at marketclose.

DNBinsisted that the loan losses on the oil-related portfolio, which it saidrepresents just 8% of the whole loan book, would be limited to 18 billionkroner over a three-year period as previously announced. But these losses arenow expected to crystallize earlier than anticipated, with the highest lossesexpected toward the beginning of this period.

Speakingto S&P Global Market Intelligence, Bengt Kirkøen, a bank analyst atSwedbank, expressed concern about the way the DNB had communicated the increasein impairments. He said the 18 billion kroner figure had not previously formedpart of guidance and that as recently as April the bank stated that loan losseswould be below 6 billion kroner this year; now it has said they will be above 6billion kroner. He said, though, that what appeared to be an increase in loanloss guidance of between 3 and 4 billion kroner did not justify the sharp shareprice fall.

However,Kirkøen said the problems of the oil industry were proving less drastic thanfeared in Norway.

"Theexperience so far is that the effects are minor for the rest of the economywith the exception of the south-west where the industry is based," hesaid. Even here, though, despite some potential problems in commercial realestate, the local economy appears to have stabilized.

Analystson the call also expressed concern about the coverage ratio, which fell from58% to 48% year over year. Management said the value of the associated loancollateral such as oil rigs had not changed significantly.

Theissue of loan losses in the offshore oil industry has arisen as net interestincome is being squeezed by low interest rates. NII fell on both ayear-over-year and a quarter-over-quarter basis. The bank incurred a decreasein deposit spreads, which hurt its combined spread marginally. But managementinsisted that there was enough flexibility to allow it to cope with a25-basis-point interest rate cut in September, from 0.5%, as has been signaledby the Norwegian central bank. Management admitted that coping with furthercuts might be a challenge, but the bank hopes to keep spreads stable at currentlevels.

Netloans, when adjusted for currency, showed a 3% increase year on year. Kirkøensaid he was surprised by the weakness of net interest income, but that he wasnot overly concerned, given that some new lending volumes had been booked latein the second quarter and that there were indications that "they will nowadjust deposit rates going forward when and if the central bank cuts rates."

As of July 11, US$1 wasequivalent to 8.50 Norwegian kroner.