DNB recorded profits of NOK 19 251 million in 2016, down NOK 5 521 million from 2015.
Despite high impairment losses, mainly in oil-related industries and shipping, DNB delivered solid profits.
The target for the common equity Tier 1 capital ratio was reached one year ahead of plan and was 16.0 per cent at year-end 2016. This is conditional on a dividend payout ratio of 49.8 per cent. Common equity Tier 1 capital increased by NOK 5.3 billion during the year. Profits generated during the period and a strategic reduction in loans to large international corporates with low profitability contributed to the increase in the common equity Tier 1 ratio. The payout ratio is in accordance with the Group’s ambition to increase dividend payments.
Return on equity was 10.1 per cent, down from 14.5 per cent in 2015. The Group delivered a double-digit return on equity despite the build-up of capital, higher impairment losses and the closing of branch offices.
Increased funding costs and a decline in amortisation and fee income had a negative impact on net interest income in 2016. Due to changes in customer behaviour, amortisation periods are increasing, since customers are no longer so inclined to refinance their loans. Volume-weighted spreads narrowed slightly. The interest rate adjustments for personal customers implemented in the fourth quarter of 2016 will have full effect from the start of January 2017. Lending volumes were down in 2016, reflecting a strategic reduction in low profitability exposures in the segments for large corporates and international customers.
Other operating income was NOK 595 million lower than in 2015, mainly due to the effect of basis swaps.
Operating expenses were up NOK 1 423 million from 2015, which was primarily a consequence of the transition from a defined-benefit to a defined-contribution pension scheme in the fourth quarter of 2015. Adjusted for non-recurring effects, there was a reduction in underlying operating expenses of NOK 374 million or 1.8 per cent. DNB continued to invest in IT infrastructure in 2016 to prepare for future competition.
Impairment losses on loans and guarantees increased by NOK 5 154 million during the year due to higher individual impairment in the shipping and offshore segments. There was also a rise in collective impairment, reflecting weaker economic conditions in some industries. Excluding the sale of non-performing portfolios during 2015 and 2016, impairment losses increased by approximately NOK 4 750 million.
2016 was characterised by increasing digitalisation of the financial services industry and swifter changes in customer behaviour. In step with customers’ escalating use of self-service solutions, 59 branch offices were closed during the first half of 2016. Parallel to this, the Group continued to develop new digital services.
At year-end 2016, the Vipps payment app had been downloaded by approximately 2.1 million Norwegians. The app was further developed, and both Vipps Invoice and Vipps SME were launched in 2016. In addition, DNB, Nets and Verifone signed an agreement enabling customers to use Vipps as a means of payment in shops. DNB also entered into agreements with large commercial companies.
In October, Nordea and DNB announced an agreement to combine their operations in Estonia, Latvia and Lithuania, aiming to create a leading bank in the Baltics with strong Nordic roots. The transaction is conditional upon regulatory approvals and is expected to close in the second quarter of 2017.
In the wake of the Panama Papers case, which became known in April, the law firm Hjort was engaged to make an external review of DNB’s involvement in the matter. The report was presented in mid-September and concluded that DNB had not violated the law. On the other hand, DNB’s internal guidelines had been breached, and measures have been decided.
In November, the NXT Conference was held at DNB’s head office in Oslo. The conference was part of Oslo Innovation Week, and aimed to create a digital and physical meeting place for entrepreneurs and investors for networking, knowledge sharing and inspiration. After the conference, DNB and StartupLab launched NXT Accelerator, a programme to help promising technological start-up companies to expand quickly, establish partnerships and create commercial opportunities for both the companies themselves and DNB.
In the fourth quarter, it became known that DNB is one of many banks involved in the financing of the construction of a new and controversial oil pipeline in North Dakota in the US. DNB will ensure that the bank can answer for its part of the project financing and may potentially reconsider its exposure in the pipeline project. During the fourth quarter, the Group’s mutual funds sold their holdings in the companies building the pipeline.
In consequence of the competitive situation and rising market rates, DNB decided to increase interest rates on home mortgages on two occasions in 2016.
DNB performed well in a number of surveys undertaken by Prospera, Universum and the Career Barometer during the year. In addition, DNB was ranked top by Norwegian companies for its pension services and best among banks in Norway in the consumer survey Sustainable Brand Index.
In October, DNB received the Confederation of Vocational Unions’ (YS) equal opportunity award due to its work to equalise salary differences between men and women. In November, DNB was the first Norwegian financial institution to be awarded a rating of A- for its climate work by the Carbon Disclosure Project, CDP.
The engagement index in the employee survey remained high at 84 points. This paints a picture of a robust organisation that has coped well through extensive restructuring, but is naturally affected by the reorganisation processes in the Group. Sickness absence in DNB’s Norwegian operations was 4.5 per cent in 2016, an increase from 4.4 per cent in 2015. The special follow-up of units with high sickness absence rates continued.
New solvency regulations for European insurance companies, Solvency II, entered into force on 1 January 2016.
In a stress test conducted by the European Banking Authority, ESA, DNB was described as having the greatest resilience to economic crises among the tested banks.
Towards the end of the year, the Ministry of Finance adopted a new home mortgage regulation. At the same time, it became clear that the Norwegian parliament (Stortinget) supported the government’s proposal to introduce a financial activities tax. The Ministry of Finance also raised the counter-cyclical buffer requirement from 1.5 to 2.0 per cent with effect from year-end 2017.
The Board of Directors has proposed a dividend for 2016 of NOK 5.70 per share, which corresponds to 49.8 per cent of profits. The Board of Directors would like to thank all employees for their dedication and hard work in 2016.
DNB’s vision and values are about putting the customers in focus. The aim to be strongly customer-oriented and to create good customer experiences is reflected in DNB’s vision: “Creating value through the art of serving the customer”.
The Group will ensure long-term value creation for all its stakeholders: customers, shareholders, employees and society at large.
DNB is organised to enable the Group to quickly and effectively adapt to changes in customer behaviour and develop products and services that meet the needs in the various customer segments. In order to reach its targets and succeed in realising its vision, DNB is dependent on having motivated employees with the right competencies. DNB’s corporate culture should be characterised by change capacity, engagement, good leadership and effective communication. Strong cooperation between various units in the Group will ensure customers access to DNB’s total product range.
DNB aims to achieve a return on equity, a rate of growth and a market capitalisation which are competitive in relation to its Nordic peers. At the Group’s Capital Markets Day in November 2016, the long-term ambition to achieve a return on equity above 12 per cent was retained. In consequence of stricter capital requirements and the prolonged low interest rate level, combined with expectations of relatively high impairment losses on loans to oil-related industries over the next few years, the ambition of 12 per cent return on equity is not expected to be reached until towards the end of 2019. Developments in 2016 reflected the economic downturn and high impairment losses on loans, and the return on equity of 10.1 per cent was thus below the long-term target.
A competitive return on equity is required to ensure that DNB is attractive in the market. In addition, the operations of the Group are conditional on adequate capitalisation. In line with the authorities’ requirements, DNB raised its common equity Tier 1 capital ratio target to 15.7 per cent from year-end 2016. The target comprises a requirement of approximately 14.7 per cent and a recommended buffer of around 1 percentage point. From year-end 2017, the common equity Tier 1 capital ratio shall be approximately 16.0 per cent, including the announced increase in the counter-cyclical capital buffer. DNB had a common equity Tier 1 capital ratio of 16.0 per cent at end-December 2016 and had thus reached its target one year ahead of plan and is well positioned for possible new requirements.
Cost-efficient operations are a prerequisite for fulfilling the Group’s return on equity target, and the Group aspires to have a cost/income ratio below 40 per cent. The cost/income ratio was 40.9 per cent in 2016.
The Group’s long-term dividend policy is to have a dividend payout ratio of more than 50 per cent of profits. Cash dividends may be combined with a share buy-back programme. A payout ratio of 49.8 per cent has been proposed for 2016, and a capital adequacy ratio in line with the long-term target increases the probability that the Group will have a dividend capacity in excess of 50 per cent in the period ahead.
In accordance with the provisions of the Norwegian Accounting Act, the Board of Directors confirms that the accounts have been prepared on a going concern basis and that the going concern assumption applies.
Pursuant to Section 3-9 of the Norwegian Accounting Act, DNB prepares consolidated annual accounts in accordance with IFRS, International Financial Reporting Standards, approved by the EU. The statutory accounts of DNB ASA have been prepared in accordance with Norwegian IFRS regulations.
Net interest income was down NOK 1 248 million from 2015. The reduction was mainly attributable to a decline in amortisation and fee income of NOK 644 million compared with 2015, and an increase in long-term funding costs. Due to changes in customer behaviour, amortisation periods are increasing, and customers are no longer so inclined to refinance their loans. The reduction in volumes from 2015, was offset by exchange rate effects. Average lending spreads narrowed by 0.14 percentage points from 2015, while deposit spreads widened by 0.20 percentage points. There was an average increase of NOK 0.2 billion in the performing loan portfolio, while average deposits rose by NOK 9.2 billion compared with 2015.
Net other operating income decreased by NOK 595 million from 2015. There was a strong increase in net gains on other financial instruments due to a higher level of activity in the equity, foreign exchange and interest rate markets. Profits from the sale of Visa Norway’s holding in Visa Europe gave a NOK 1 128 million rise in income in 2016. Basis swaps gave a reduction in profits of NOK 3 227 million. Other operating income in 2015 was negatively affected by the transfer from the risk equalisation fund to the policyholders’ premium reserve in DNB Livsforsikring.
Total operating expenses were up 7.1 per cent from 2015. Adjusted for non-recurring effects, there was a 1.8 per cent reduction in expenses. Significant non-recurring effects had a negative impact and resulted in a rise in expenses of NOK 1 797 million. The main factor was lower personnel expenses in 2015 due to the transition from a defined-benefit to a defined-contribution pension scheme. Exchange rate effects gave an increase of NOK 104 million. Provisions for financial activities tax represented NOK 142 million.
Impairment of loans and guarantees
Impairment losses on loans and guarantees totalled NOK 7 424 million in 2016, up NOK 5 154 million from 2015.
Impairment losses for 2016 were mainly related to shipping, offshore and energy in the large corporate and international customers segment. Individual impairment losses stemmed primarily from a small number of large customers. The sale of non-performing portfolios led to recoveries and reassessed impairment totalling NOK 668 million in 2016, compared with NOK 1 067 million in 2015.
The rise in collective impairment is mainly related to negative migration in the risk classification of loans and less favourable economic conditions in the above-mentioned industries. The other credit portfolios are still of high quality, and the difficult situation in the oil-related industries had no material impact on these portfolios.
Net non-performing and doubtful loans and guarantees amounted to NOK 25.7 billion at end-December 2016, up from NOK 14.0 billion at year-end 2015. Net non-performing and doubtful loans and guarantees represented 1.49 per cent of the loan portfolio, an increase of 0.73 percentage points from end-December 2015. The increase in non-performing and doubtful loans and guarantees was linked to shipping, offshore and energy in the large corporate and international customers segment.
The DNB Group’s tax expense for 2016 was NOK 4 140 million, representing 18 per cent of pre-tax operating profits. The tax rate was down 4 percentage points from 2015 and was lower than the anticipated rate of 22 per cent, mainly due to equity sales under the tax exemption method, reduced tax expenses in entities outside Norway and Norwegian taxation rules for the allocation of interest expenses between Norway and the US.
Throughout the year, the short-term funding markets were characterised by uncertainty related to the effects of new regulatory reforms for US money market funds. The limited availability of longer maturities in combination with increased demand led to wider spreads. DNB had ample access to short-term funding throughout the year.
The long-term funding markets were characterised by regulatory and political uncertainty in 2016. Concerns related to the Chinese economy and a weaker growth outlook for European banks led to higher spreads and lower activity at the beginning of the year. Spreads were markedly reduced after the European Central Bank meeting in March, where, among other things, the asset purchase programme was further expanded. The level of activity declined towards the summer as the EU referendum in the UK was approaching. After the vote markets normalised and spreads decreased. The activity level was once again down ahead of the US presidential election, but increased markedly afterwards. Concerns related to a potential reduction in the ECB’s asset purchase programme resulted in wider spreads towards the end of the year.
DNB had good access to long-term funding in 2016 and spreads on covered bonds and ordinary senior debt decreased markedly throughout the year.
The nominal value of long-term debt securities issued by the Group was NOK 580 billion at end-December 2016, compared with NOK 606 billion a year earlier. The average remaining term to maturity for these debt securities was 3.9 years at end-December 2016, compared with 3.8 years at year-end 2015.
The short-term liquidity requirement, Liquidity Coverage Ratio, LCR, remained stable at above 100 per cent throughout the year. At end-December 2016, the total LCR was 138 per cent.
Total combined assets in the DNB Group were NOK 2 931 billion, up from NOK 2 901 billion at end-December 2015. Total assets in the Group’s balance sheet were NOK 2 653 billion as at 31 December 2016 and NOK 2 599 billion a year earlier. Of this, total assets in DNB Livsforsikring amounted to NOK 299 billion and NOK 288 billion, respectively.
In the DNB Bank Group, loans to customers decreased by NOK 40 billion or 2.6 per cent from end-December 2015. Customer deposits were down NOK 12 billion or 1.2 per cent during the same period. For the banking group the ratio of customer deposits to net loans to customers was up from 62.5 per cent at end-December 2015 to 63.4 per cent a year later. The Group’s ambition is to have a ratio of customer deposits to net loans, for the banking group, of minimum 60 per cent.
The management of DNB is based, inter alia, on the Norwegian Accounting Act and the Norwegian Code of Practice for Corporate Governance. Read more about the Group’s corporate governance principles and practice in the Governance chapter.
Organisation and monitoring
The Board of Directors continually monitors the Group’s capital situation.
DNB’s group policy for risk management serves as a guide for the Group’s overall risk management and describes the ambitions for, attitudes to and work on risk. Read more about risk aspects and the capitalisation of the Group under Corporate governance and in the Group’s Pillar 3 report at dnb.no/investor-relations.
Risk developments in 2016
The DNB Group quantifies risk by measuring economic capital. Economic capital declined by NOK 2.7 billion from year-end 2015, to NOK 73.0 billion at year-end 2016.
Economic capital for credit declined by NOK 1.1 billion through 2016, reflecting a reduction in credit volumes in the large corporate portfolio of approximately NOK 90 billion in terms of exposure at default, EAD. There was continued sound and stable credit quality in most portfolios, though some sectors faced significant challenges in 2016. The reduction in oil and gas investments had the most pronounced effect on oil service and offshore companies, and there were several extensive restructurings in these sectors in 2016. DNB devotes considerable resources and professional expertise to these processes and expects this to continue into 2017.
The situation for traditional shipping companies has been demanding, but far less dramatic than for oil-related industries. Rates in the dry bulk market improved in 2016, but from a historically low level. Rates in the tanker segment were strong in the first half, but declined in the second half of the year, while rates in the container segment were weak throughout the year. It might also become necessary to restructure companies in these segments.
Economic capital for market risk in DNB Livsforsikring declined by NOK 3.0 billion during the year, reflecting a lower equity exposure, larger buffers and higher interest rates. The company strengthened its solvency capital by NOK 6.2 billion in 2016. DNB Livsforsikring’s solvency margin was 152 per cent at year-end 2016. DNB’s market risk exposure in operations other than life insurance was virtually unchanged during 2016.
The operational risk situation in 2016 was satisfactory, and there was a low level of losses. Efforts to strengthen information security in the Group have been intensified to meet the increasing threats relating to the protection of confidential information and cyberattacks. In general, the operational stability of DNB’s IT systems became more stable during 2016, which was mainly attributable to the upgrading of the IT infrastructure in connection with the move of the Group’s data processing centres to a single location in 2015. In August, a successful full-scale test of disaster recovery solutions for DNB’s mainframe computer was conducted. The test confirmed that the Group’s solution is robust and reliable.
Calculated according to transitional rules, risk-weighted assets were reduced by NOK 78 billion from year-end 2015, to NOK 1 051 billion. The common equity Tier 1 capital ratio was 16.0 per cent, while the capital adequacy ratio was 19.5 per cent.
Financial governance in DNB is adapted to the different customer segments. The follow-up of total customer relationships and segment profitability are important dimensions when making strategic priorities and deciding where to allocate the Group’s resources. Reported figures reflect the Group’s total sales of products and services to the relevant segments.
This segment includes the Group’s more than 2 million personal customers in Norway. The personal customer segment recorded a strong level of income in 2016, and the return on allocated capital stood at 18.4 per cent. Some reduction in income, partly due to pressure on spreads, affected profits. The decline in income was partly offset by reduced costs. Reversals on impairment losses on loans related to the sale of portfolios of non-performing loans affected accounting figures in both 2015 and 2016.
Net loans to customers showed a satisfactory trend, rising by 4.0 per cent on average from 2015 to 2016 after adjusting for the sale of fixed-rate loans from DNB Boligkreditt to DNB Livsforsikring representing NOK 20 billion in 2015 and NOK 5 billion in 2016. The customers are still served by the bank, though the loans are included in DNB Livsforsikring’s portfolio as an investment that yields a healthy return for the company.
In spite of growth in volumes, net interest income was down 3.1 per cent from 2015 to 2016. Lower interest rate levels and strong competition caused pressure on lending spreads, while deposit spreads widened. Volume-weighted interest rate spreads contracted by 0.10 percentage points from the previous year.
There was a stable trend in other operating income from 2015. Increased digitalisation, discount schemes linked to card use and reduced interchange fees from September 2016 had a negative impact on income from payment transfers. The decline in income from payment services was counteracted by higher income from, among other things, insurance, savings products, equities and foreign exchange products, while there was a stable level of income from real estate broking in spite of a certain reduction in the number of residential properties sold.
Expenses were reduced by 2.0 per cent from 2015 despite an increase in provisions for severance packages and vacated premises in consequence of the restructuring of the branch network. Implemented restructuring measures have reduced the underlying cost base in the personal customer segment, and thus made the Group better prepared to meet the future banking reality.
Net impairment losses on loans reflected the sale of portfolios of non-performing loans, which resulted in net reversals on loans in both 2015 and 2016, representing NOK 990 million and NOK 654 million, respectively, for the two years. Adjusted for the reversals, net impairment losses increased from 0.01 per cent of average loans in 2015 to 0.04 per cent in 2016. There was low risk in the home mortgage portfolio, and there was also a stable level of impairment on consumer loans throughout the year.
The market share of credit to households stood at 25.1 per cent at end-November 2016, down from 25.4 per cent at end-December 2015. The market share of total household savings was 31.8 per cent. DNB Eiendom had a stable market share of approximately 19 per cent during the year.
DNB aspires to achieve continued profitable growth in the personal customer segment and is well under way with adapting products, service concepts and cost levels to the banking market of the future. As a result of a higher self-service ratio, the number of branch offices serving personal customers was reduced from 116 to 57 during the first half of 2016. Parallel to this, the innovation of new, digital services, such as Vipps, is being strengthened. During 2016, Vipps was downloaded by 50 per cent of Norway’s adult population. Impairment losses on loans are expected to remain stable at a low level.
Small and medium-sized enterprises
This segment includes sales of products and advisory services to the Group’s small and medium-sized corporate customers in Norway. Strong growth in both net interest and operating income helped raise pre-tax operating profits by 4.9 per cent from 2015.
Average net loans to customers rose by 4.6 per cent from 2015, while deposits were up 3.4 per cent during the same period. Higher volumes and wider lending and deposit spreads contributed to a 3.7 per cent rise in net interest income compared with 2015.
Net other operating income showed a satisfactory trend from 2015, increasing by 13.9 per cent. Demand for both currency and interest rate hedging products gave a boost to income. There was also a positive trend for payment services.
Operating expenses were up 9.0 per cent from 2015, reflecting higher IT development and restructuring costs. In addition, strong activity levels and increased product sales resulted in higher costs from product suppliers.
Net impairment of loans was on a level with the previous year. Impairment losses represented 0.48 per cent of average net loans in 2016 and stemmed primarily from a few exposures spread over various segments. Thus far, no general deterioration has been observed in the quality of the loan portfolio, which is considered to be satisfactory. Close follow-up of customers and preventive measures are vital to retaining the level of quality. Developments in oil-related sectors and the regions which are most seriously affected, are being closely monitored.
DNB expects lending growth in this segment on a level with the expected domestic credit growth in the corporate customer segment. The segment is expected to show continued strong profitability.
Large corporates and international customers
This segment includes the Group’s largest Norwegian corporate customers and international customers, including all customer segments in the Baltics and Poland. Lower volumes and higher impairment losses on loans gave a reduction in pre-tax profits compared with 2015.
Volumes were affected by measures to rebalance operations, which included restructuring the portfolios and reducing exposures within shipping and oil and offshore-related segments.
Average loans to customers were down 3.1 per cent from 2015, while there was a reduction of 8.6 per cent from year-end 2015 to year-end 2016. In addition to restructuring in certain segments, DNB sold some loans and entered into guarantee contracts relating to other exposures to help strengthen the Group’s capital adequacy ratios. Among other things, a portfolio of commercial property loans totalling NOK 6.2 billion was sold to DNB Livsforsikring towards the end of 2016. In the period ahead, portfolio management will also help improve profitability as capital can be reallocated to the segments with the highest returns. Average customer deposits declined by 4.4 per cent from 2015, while deposit volumes were virtually unchanged from year-end 2015 to year-end 2016.
Due to the reduction in volumes, there was a decline in net interest income, in spite of wider spreads. Volume-weighted spreads widened by 0.05 percentage points from 2015, to 1.29 per cent in 2016. Lower activity levels and a decline in fee income were other factors behind the reduction in net interest income.
There was a slight increase in net other operating income compared with 2015. In consequence of continued high volatility through 2016, there was strong demand for currency, interest rate and commodity hedging products, which generated increasing income. On the other hand, there was a certain reduction in income from arranging debt capital issues and within syndication. In addition, gains from a profit-sharing agreement had a positive impact, while costs related to measures to reduce risk-weighted assets had a negative effect on income towards the end of the year.
Operating expenses were down 2.4 per cent from 2015. The number of full-time positions was reduced by 74 from end-December 2015. Adjusted for the number of employees working on a time-limited development project, there was an actual reduction of approximately 150 full-time positions during 2016. The reductions took place in both Norwegian and international operations.
There was an increase in net impairment losses on loans compared with 2015, partly due to the exposure to oil-related industries and the offshore and shipping markets. Net impairment represented 1.22 per cent of average loans in 2016, up 0.85 percentage points from the previous year. There was a 0.50 percentage point rise in individual impairment losses, to 0.83 per cent in 2016. Higher collective impairment losses accounted for the rest of the increase, reflecting weaker economic conditions. Net non-performing and doubtful loans and guarantees amounted to NOK 20.2 billion at end-December 2016, compared with NOK 9.5 billion a year earlier.
DNB is operating in highly competitive markets and one of the challenges facing the Group is different capital requirements for banks. In consequence of strict capital requirements in Norway combined with higher impairment losses, 2016 was a challenging year for the large corporate segment in DNB. The main aim for the Large Corporates and International business area is to strengthen profitability and contribute to fulfilling DNB’s long-term ambitions. A reduction in and rebalancing of large corporate exposures through 2017, focusing on higher turnover in the portfolio, will ensure lower final hold on DNB’s books and increase ancillary income. Interest rate spreads are expected to increase somewhat, and new transactions are expected to contribute positively in a longer-term perspective. DNB will continue to focus on utilising in-depth industry expertise, offering a wide product range and up-to-date technological solutions to prioritised customers. Through close relations with leading companies, DNB is well-positioned to cover a wide range of customers’ financial needs and increase the contribution from non-lending products, such as investment banking, trade finance, leasing, factoring and defined-contribution pensions.
This segment comprises market making and proprietary trading in foreign exchange, fixed-income, equity and commodity products, including the hedging of market risk inherent in customer transactions. Customer activities are supported by trading activities.
Various measures implemented by central banks and unexpected international political events contributed to market volatility in 2016. Sound risk management ensured a high level of income from market making and proprietary trading. Total income was up close to 90 per cent compared with 2015. Steeper yield curves towards the end of the year helped raise income from fixed-income instruments in Norwegian kroner, while income from international fixed-income instruments and money market activities remained high. Income from bonds increased, partly in consequence of narrower credit spreads, while the fact that Norway has its own currency resulted in strong income levels from currency trading.
Traditional pension products
This segment comprises the portfolio of traditional defined-benefit pension products in DNB Livsforsikring. DNB no longer offers such products to new customers.
There was a healthy level of profits in 2016, in spite of a reduction in income from upfront pricing. The decline in income reflected the conversion from defined-benefit to defined-contribution pension schemes. In 2015, the owner’s share of the interest result was reduced by NOK 980 million due to a transfer from the risk equalisation fund to the policyholders’ premium reserve.
The prolonged low interest rate level could make it challenging for life insurance companies to achieve a satisfactory level of earnings over the coming years. DNB Livsforsikring has adapted to the low interest rate level by holding a large portfolio of long-term bonds at amortised cost, fixed-rate home mortgages and property investments. The structure of the portfolios will help ensure that returns will cover the guaranteed rate of return over the next few years.
Each quarter, DNB Livsforsikring carries out a test to assess whether the company has adequate premium reserves. In the test, insurance provisions calculated on the basis of market rates and insurance liabilities calculated on the basis of the contracts’ base rate (guaranteed rate of return) are compared. The test showed positive margins at end-December 2016.
In consequence of higher life expectancy, it will be necessary to strengthen the premium reserve for group pension insurance. At end-December 2016, reserves for higher life expectancy totalled NOK 10.8 billion, while the total required increase in reserves is estimated at NOK 11.4 billion. The reserves were increased by NOK 1.4 billion in 2016. The remaining required increase in reserves of NOK 0.6 billion will be financed during the period up to and including 2020. The entire amount refers to paid-up policies, while the required increase relating to defined-benefit pensions was fully financed during 2016. The remainder may be financed by the policyholders’ interest result, provided that the return is adequate to cover both the rate of return guaranteed in the contracts and the required increase in reserves for higher life expectancy. This gives the company a sound basis for providing DNB with profits also in the remaining years in which reserves have to be strengthened.
The Solvency II directive stipulates solvency capital requirements. DNB Livsforsikring has been given permission to use the transitional rules for insurance provisions, which ensures a controlled and predictable implementation of Solvency II. The solvency margin, calculated according to the transitional rules, was 211 per cent as at 31 December 2016. Without the transitional rules, DNB Livsforsikring had a solvency margin of 152 per cent. At year-end 2015, the solvency margins were 192 per cent and 113 per cent, respectively. The significant strengthening of the company’s solvency position without the transitional rules reflected a rise in market rates, higher buffer capital and reserves for higher life expectancy.
As Norway’s largest bank, DNB wants to promote sustainable value creation by integrating ethical, environmental and social aspects into its business operations. DNB’s policy and appurtenant guidelines for corporate social responsibility set the standards for all of the Group’s work on both the observance and the further development of sustainable business operations. Read more about how DNB meets its corporate social responsibility commitments and the challenges the Group considers to be most important to meet to ensure long-term value creation and responsible operations in the chapter Responsible operations and at dnb.no/en/about-us.
Adapting to the new banking reality, with rapid changes in customer behaviour, digitalisation and stricter capital adequacy requirements, characterised organisational and leadership development in 2016. Systematic efforts were made to ensure that the Group has the right competencies and to promote change capacity and employee engagement. Read more about the priorities that are considered to be essential to ensuring the right competencies, and about the working environment, equality and discrimination in the chapter Responsible operations and a more detailed description in note 22 Salaries and other personnel expenses in the annual accounts.
The regulation of the financial services industry is based on a set of regulatory parameters. Over the last few years, a number of new regulations setting stricter requirements for the financial services industry have been introduced or announced. The Norwegian authorities have introduced more stringent capital adequacy requirements and earlier implementation compared with the EU. Read more about regulations and the regulatory framework in the chapter New regulatory framework.
Global GDP increased by approximately 3 per cent in 2016, about the same as the year before. However, growth was unevenly distributed. The emerging economies had considerably stronger growth than the industrialised countries, with an economic growth rate of approximately 1.5 per cent from 2015 to 2016. Eight years after the financial crisis, the more economically developed countries, MEDCs, are still characterised by spare capacity, low inflation and historically low interest rates. This also affects the political landscape. President Donald Trump has signalled a strong fiscal stimulus package. This has increased expectations with respect to both growth and inflation, and was an important driver of the hike in long-term interest rates towards the end of 2016.
In the United States, the cyclical upturn appears to continue. After a weak start to 2016, the economy showed signs of recovery. Several factors are helping to keep up growth momentum. Monetary policy remains expansionary while fiscal policy is expected to become more expansionary. Higher oil prices are making a positive contribution to the energy sector, counteracting the weakening of households’ purchasing power. In addition, the tightening effects of the strong US dollar are starting to abate.
Growth in the Chinese economy appears to be more stable than expected. This is partly due to the authorities’ expansionary policy and partly to the higher commodity prices, which have helped improve earnings in many industries. However, higher debt levels and unprofitable investments are increasing the risk of a crisis at some time in the future. In the short term, the greatest risk factors include capital flight, which will probably be intensified by higher US dollar interest rates and the authorities’ restrictive housing policy, which may result in an unwanted reduction in housebuilding activity, higher loan default rates and lower consumption growth.
The result of the EU referendum in the United Kingdom has so far had fewer negative consequences than expected. The financial turmoil was short-lived and domestic demand remained buoyant well into the autumn of 2016. The British pound has weakened more than expected, which is positive for the British export economy. The downside is that the weaker currency also results in higher inflation, which will weaken households’ real disposable income.
GDP for Mainland Norway rose by approximately 0.7 per cent from 2015 to 2016, slightly lower than the previous year. The fall in oil investments was the most important factor behind the weak growth levels and had the most pronounced effect on petroleum-related industries. Employment levels in the mainland economy were virtually unchanged from the year before, stimulated by increased public demand, more construction workers and growth in some tourism-based industries. In other industries, however, there were few signs of employment growth in 2016. The weakening of the Norwegian krone in preceding years has strengthened Norwegian tourist companies, parts of the transportation sector and the hotel and restaurant industry. The depreciation of the krone also made a significant impact on inflation and reduced households’ purchasing power. Real wages probably declined by more than 1 per cent, the weakest trend since 1981. According to AKU (a Norwegian labour force survey), the unemployment rate rose to 4.8 per cent, while the number of unemployed people registered with the Norwegian Labour and Welfare Administration (NAV) decreased slightly during the year. Zero growth in employment, however, supports the view that the labour market weakened slightly in 2016. In the housing market, prices rose significantly in the second half of the year. For the year as a whole, price inflation was 8.3 per cent. In Oslo, increases in housing prices were particularly strong, which was a major reason why the Norwegian government tightened the rules for home mortgages.
Economic forecasts for 2017 indicate continued moderate growth in the global economy. Growth is expected to pick up in the United States, be marginally reduced in China and have a somewhat steeper decline in the eurozone and the United Kingdom. In Norway, activity levels in the mainland economy are expected to increase somewhat, but hardly enough to cause any major reduction in unemployment levels. Internationally, there is significant risk related to factors such as global political changes, increasing financial imbalances in China, economic and political developments in the United States and the situation for some European banks.
DNB presented its updated financial ambitions for 2017-2019 at the Capital Markets Day in November. The principal target is still to achieve a return on equity above 12 per cent towards 2019. Several factors will contribute to reaching the return on equity target, including strong emphasis on profitability through strict cost control and more efficient use of capital.
The Group has a target for its common equity Tier 1 capital ratio of 16.0 per cent from year-end 2017, including the announced change in the counter-cyclical buffer. DNB achieved a common equity Tier 1 ratio of 16.0 per cent at end-December 2016, and thus reached the target one year ahead of plan. The Group is well positioned for possible new requirements.
The Group aspires to have a cost/income ratio below 40 per cent towards 2018 and a dividend payout ratio of more than 50 per cent from 2017. A share buy-back programme in addition to a cash dividend will be considered.
Volume-weighted spreads are anticipated to widen somewhat in 2017, while lending volumes are expected to be stable in 2017 and 2018. During this period, total loans are expected to increase for personal customers and small and medium-sized enterprises, while the Group will actively reduce its portfolio of loans to large corporates and international customers. In 2019, total lending volume is expected to rise by 2 to 3 per cent. Adjusted for exchange rate movements, risk-weighted assets are expected to be stable. DNB aims to increase commission and fee income by approximately 3 per cent per year. Total impairment losses for the period 2016 to 2018 are estimated to be up to NOK 18 billion, with the highest impairment losses during the first part of the period.
Long-term funding costs are expected to decrease somewhat from 2016 to 2017.
The tax rate is expected to be 23 per cent in the period from 2017 to 2019.
DNB’s Board of Directors has approved a dividend policy which aims to provide an attractive and competitive return for shareholders through a combination of increases in the share price and dividend payments. DNB is well capitalised and fulfills the statutory requirements in addition to having an adequate buffer. The significant build-up of capital through 2016 provides for a normalisation of dividends to a level above 50 per cent in the form of a cash dividend combined with a share buy-back programme as from 2017.
When considering the dividend proposal for 2016, the Board of Directors has taken into account the capital adequacy requirements and the Group’s ambition to return to a normalised dividend payout ratio. The Board of Directors has thus proposed a dividend for 2016 of NOK 5.70 per share. The proposed dividend gives a dividend yield of 4.4 per cent based on a share price of NOK 128.40 as at 31 December 2016 and implies that DNB ASA will distribute a total of NOK 9 284 million in dividends for 2016. The payout ratio represents 49.8 per cent of profits. A dividend of NOK 4.50 per share was paid for 2015.
In connection with the satisfactory attainment of the Group’s financial targets, the Board of Directors has decided to make allocations of NOK 247 million to the Group’s employees.
Profits for 2016 in DNB ASA came to NOK 10 472 million, compared with NOK 5 916 million in 2015. The profits for 2016 attributed mainly to the transfer of group contributions and dividends from subsidiaries.
The Board of Directors proposes allocating a group contribution of NOK 4 200 million after tax to DNB Bank ASA. At the same time, DNB ASA will receive dividends of NOK 9 183 million and a group contribution of NOK 101 million after tax from DNB Bank ASA, totalling NOK 9 284 million. In addition, the Board of Directors proposes allocating a group contribution of NOK 1 090 million after tax to DNB Livsforsikring AS. At the same time, DNB ASA will receive a group contribution of NOK 1 090 million after tax from DNB Livsforsikring AS.
In view of the DNB Group’s capital adequacy ratio of 19.5 per cent and common equity Tier 1 capital ratio of 16.0 per cent at year-end 2016, the Board of Directors is of the opinion that, following the proposed allocations, DNB ASA will have adequate financial strength and flexibility to provide sufficient support to operations in subsidiaries and meet the Group’s expansion requirements and changes in external parameters.
Oslo, 8 March 2017
The Board of Directors of DNB ASA