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DNB reports profit growth in face of NOK1.25B impairment loss

DNB ASA reported a rise in third-quarter profits despite being hit by impairment losses of 1.25 billion Norwegian kroner which was reportedly related to the collapse of tour operator Thomas Cook Group PLC.

The Norwegian bank's third-quarter profit attributable to shareholders was 5.75 billion kroner, up from 5.44 billion kroner in the same quarter last year. Earnings per share came in at 3.64 kroner, compared to 3.41 kroner in the year-ago period.

This growth "builds up and supports our capability to deliver on our dividend strategy and policy for 2019," said CEO Kjerstin R. Braathen, presenting the bank's third-quarter earnings at a press conference in Oslo on Oct. 24. The bank will now begin a new share buyback program, which will see it purchase up to 0.5% of its shares at between 10 kroner and 250 kroner each by the end of March 2020.

While low interest rates are hitting the bottom lines of banks elsewhere in Europe, Braathen said DNB's profit growth was driven by higher net interest income, which increased by 9.1% from the third quarter of 2018, to 9.98 billion kroner. The growth is seen for all sectors but particularly across the SME and large corporates segments, she said.

Additionally, profits were driven by an 11.6% growth in net commissions and fees, in particular due to higher activity in investment banking and real estate broking.

The "solid increase" in net interest income reflects the strong Norwegian macro environment, said CFO Ottar Ertzeid at the same press conference, adding that contributing factors were both volume growth and repricing in May and August, as well as higher interest income from equity due to a higher interest rate. It follows the Norwegian central bank's decision in September to raise rates for a fourth time in a year, from 1.25% to 1.50%.

Ertzeid said these positive factors would continue in the next quarter, but estimated the effect from the bank's latest repricing, which will take effect Nov. 7, to be less than 1 billion kroner.

No spillover from impairment loss

DNB's positive results come in light of a significant increase in net impairment losses on financial instruments, which jumped from 11 million to 1.25 billion kroner year over year.

Eighty-five percent of these were related to "one specific loan engagement" in stage 3 in the large corporates and international customers segment, which the bank accounted for on Sept. 24.

While DNB has not disclosed the origins of this provision, Norwegian media including Finansavisen and Dagens Næringsliv have reported that the loss stemmed from the Thomas Cook collapse in late September.

Braathen emphasized on Oct. 24 that there is "limited if any further downside to the exposure."

"We see no spillover or ancillary effects related to this specific company situation when it comes to the rest of the portfolio," she said.

Impairment levels beyond the specific incident are "very low," Braathen added, both for SMEs and large corporates. She said DNB has reduced its high-level risk exposure by more than 20% in the past two years.

"And if we look at that exposure geographically outside of Norway, the reduction in high-risk exposure is double to what we have seen for the portfolio, indicating a clear and material reduction of risk in the past two years," she said.

As of Oct. 23, US$1 was equivalent to 9.15 Norwegian kroner.