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Rating Action:

Moody's concludes review of five Norwegian banks

08 Sep 2009

LT ratings and BFSRs downgraded by up to two notches

London, 08 September 2009 -- Moody's Investors Service today downgraded the ratings of four Norwegian banks and confirmed the ratings of one bank, thus concluding its review for possible downgrade initiated on 22 July. Moody's downgraded: the long-term ratings of three banks -- DnB NOR Bank ASA and Sparebanken Øst by two notches and Sparebanken Vest by one notch; and the bank financial strength ratings (BFSRs) of three banks -- DnB NOR Bank ASA by two notches and SpareBank 1 SMN and Sparebanken Vest by one notch. The rating agency also confirmed the long-term ratings of SpareBank 1 SR-Bank.

The full list of rating actions and their specific rationales can be found below under the name of each reviewed bank.

Moody's will comment on its rating actions on Nordea Bank Norge ASA in a separate press release, together with those on its parent, Nordea Bank AB.

Please note that this press release does not deal with the possible implications for the covered bond ratings of Norwegian issuers.

Moody's review, during which it assessed the impact of anticipated credit losses on banks' earnings and capitalisation, showed that the BFSRs of the affected banks would be weakened by further deterioration in their financial performance arising from the economic downturn. (please refer to Moody's Special Comments: "Moody's Approach to Estimating Nordic Banks' Credit Losses", published in July 2009; "Calibrating Bank Ratings in the Context of the Global Financial Crisis", published in February 2009; and "Moody's Approach to Estimating Bank Credit Losses and their Impact on Bank Financial Strength Ratings", published in May 2009)

The anticipated deterioration in asset quality mainly reflects the more challenging outlook for the Norwegian corporate sector and exposures to more volatile sectors such as commercial real estate and shipping-related industries. The negative outlooks that some of the BFSRs carry recognises the potential for additional macroeconomic deterioration beyond Moody's current expectations and related transition risk in the financial strength of these banks.

As part of the process, Moody's also reviewed the support considerations and notes that the long-term debt and deposit ratings continue to incorporate varying levels of probability of systemic support from the Norwegian government, depending on the systemic importance of each bank to the system.

Further explanation regarding Moody's recalibration framework is provided in Moody's Press Release dated 22 July 2009 where the above mentioned Norwegian banks were put on review.

RATINGS OF HYBRID INSTRUMENTS

The downgrades of hybrid ratings in terms of notches were in line with the downgrades of the senior debt ratings, reflecting Moody's current methodology.

Moody's published a Request for Comment in June 2009 regarding proposed changes to banks' subordinated capital ratings. If implemented in their proposed form, the changes could lead to multi-notch downgrades of hybrids. Please refer to the Request for Comment "Moody's Proposed Changes to Bank Subordinated Capital Ratings" for further details.

RATING ACTIONS IN DETAIL

DnB NOR Bank ASA

Moody's downgraded the BFSR of DnB NOR Bank ASA (DnB NOR) to C (mapping to an A3 Baseline Credit Assessment, BCA) from B-. The BFSR remains on review for possible downgrade. The downgrade of the BFSR reflects the bank's capital position in relation to anticipated losses in the credit portfolio as well as developments in its recurring earnings. DnB NOR is the leading bank in Norway and has a solid loan portfolio in retail mortgages of around 40% of its total loan portfolio. However, its corporate loan book displays some concentration in lending to the shipping industry and commercial real estate. In addition, DnB NOR has exposure to the Baltic countries via its joint venture, DnB NORD (not rated).

At the current capital levels, the anticipated losses from these portfolios and concentrated single borrower exposure add pressure on the core capital level, which stood at 7.5% at the end of June 2009 under Basel II transitional rules and excluding interim profit. Adding the possible mark-to-market volatility on its relatively large structured portfolio, this could lead to a BFSR at a lower level than C. However, Moody's notes the government scheme in place in Norway whereby it is possible for Norwegian banks to apply for hybrid or preferred capital before the end of September 2009. DnB NOR has not yet revealed whether it plans to use the option. Moody's review will focus on the bank's capitalisation levels in light of the bank's decision.

DnB NOR's debt and deposit ratings were downgraded to Aa3 from Aa1 with a stable outlook. Moody's says that the bank's debt and deposit ratings continue to benefit from a three-notch uplift from the BCA, which reflects the bank's systemic importance in the Norwegian banking sector as well as the part ownership by the government. Therefore, the ratings incorporate a very high probability of systemic support. In case the review on DnB NOR's BFSR would lead to a downgrade of one notch, the supported debt and deposit ratings will remain unaffected at Aa3 explaining the stable outlook.

SpareBank 1 SMN

Moody's downgraded SpareBank 1 SMN's BFSR to C- (mapping to a Baa1 BCA) from C. The outlook on the BFSR is stable. The lower BFSR reflects Moody's expectation of deterioration in SpareBank 1 SMN's asset quality in light of its exposures to volatile sectors such as commercial real estate and maritime- and fishing-related activities. Combined with the strong loan growth in the past few years, especially in the corporate sector, this could exert additional pressure on the bank's financial strength and capitalisation in the downturn. Moody's notes that the bank has decided to apply for hybrid capital amounting to NOK1.25 billion from the Norwegian State Finance Fund, which will provide it with an additional buffer with which to absorb potential losses and could limit further transition risk in its BFSR, which is also reflected in the stable outlook.

The long-term debt and deposit ratings of A1, with negative outlook, were not affected by this rating action. The ratings continue to incorporate a very high probability of systemic support, which reflects the bank's position in the Norwegian market and its membership of the SpareBank 1 Alliance and results in a three-notch uplift for the debt and deposit ratings from the BCA. The negative outlook on the debt and deposit ratings reflects the risk that, under a scenario of more severe stress than the rating agency anticipates, the bank could become more weakly positioned in the C- BFSR category, mapping to a BCA of Baa2 rather than Baa1, which would result in a downgrade of the debt and deposit ratings.

SpareBank 1 SR-Bank

SpareBank 1 SR-Bank's debt and deposit ratings were confirmed at A1. The outlook is negative. The confirmation reflects the bank's decision to apply for hybrid and preferred capital totalling NOK2.4 billion from the Norwegian State Finance Fund. In Moody's view, the capital increase would improve the bank's ability to absorb potential losses in light of potentially higher credit risk in the loan portfolio given some risk concentrations and strong lending growth in the past few years, and place it more appropriately at the current BFSR level (C-, mapping to a Baa1 BCA).

The BFSR carries a negative outlook, reflecting transition risk that SpareBank 1 SR-Bank's financial strength could come under pressure under a more stressed scenario, according to Moody's scenario analysis, given its exposures to more volatile sectors such as commercial real estate and shipping/offshore.

SpareBank SR-Bank's long-term ratings continue to incorporate a very high probability of systemic support, which reflects the bank's position in the Norwegian market and its membership of the SpareBank 1 Alliance and results in a three-notch uplift for the debt and deposit ratings from the BCA. The negative outlook on the debt and deposit ratings reflects the risk that under a scenario of more severe stress than the rating agency anticipates, the bank could become more weakly positioned in the C- BFSR category, mapping to a BCA of Baa2 rather than Baa1, which would result in a downgrade of the debt and deposit ratings.

Sparebanken Vest

Moody's downgraded Sparebanken Vest's BFSR to C- (mapping to a Baa1 BCA) from C. The outlook on the BFSR is stable. The lower BFSR reflects Moody's expectation of deteriorating asset quality in light of strong growth in the corporate sector and exposures to commercial real estate and shipping, which are seen as a potential source of increased credit risk and could adversely affect the bank's capitalisation. Moody's notes that the bank has decided to apply for hybrid capital of NOK960 million from the Norwegian State Finance Fund, which will provide the bank with an additional buffer with which to absorb potential losses and limit further downside risks in its financial strength.

Sparebanken Vest's debt and deposit ratings were downgraded to A2 from A1. Moody's says that the ratings continue to receive a two-notch uplift from the BCA, which reflects Moody's assessment of a high probability of systemic support due to the bank's importance in the system. The outlook on the debt and deposit ratings is negative, reflecting the risk that under a scenario of more severe stress than the rating agency anticipates, the bank could become more weakly positioned in the C- BFSR category, mapping to a BCA of Baa2 rather than Baa1, which would result in a downgrade of the debt and deposit ratings.

Sparebanken Øst

Moody's downgraded Sparebanken Øst's long-term deposit rating to A3 from A1 with negative outlook, reflecting its view that Sparebanken Øst is more weakly positioned in the C- BFSR category (which now maps to a BCA of Baa2 rather than Baa1). The rating action reflects Moody's concern that the bank's franchise could come under more pressure given the highly competitive banking market in the Oslo region. The bank's loan portfolio declined by 6% in H1 2009. Moody's also notes potentially higher credit risk arising from the bank's corporate exposures, which are mainly to the real estate sector. In addition, financial investments could still be a source of losses although the rating agency notes that the bank has already taken significant provisions on these holdings and also has increased equity capital.

Given the bank's position in the Norwegian banking system, Moody's assesses the probability of systemic support as high, which results in a two-notch uplift for the long-term deposit rating from the BCA.

The short-term deposit rating was downgraded to Prime-2 from Prime-1, which is in line with the downgrade of the long-term deposit rating.

RATING ACTIONS IN SUMMARY

DnB NOR Bank ASA:

- BFSR downgraded to C from B-, remains on review for possible downgrade;

- Long-term deposit and senior unsecured ratings downgraded to Aa3 from Aa1, with stable outlook;

- Subordinate ratings downgraded to A1 from Aa2, with stable outlook;

- Preferred stock ratings downgraded to A2 from Aa3, with stable outlook;

- Prime-1 short-term ratings unaffected.

Moody's last rating action on DnB NOR Bank ASA was on 22 July 2009 when the BFSR and long-term ratings were placed on review for possible downgrade.

SpareBank 1 SMN:

- BFSR downgraded to C- from C, with stable outlook.

- A1 long-term deposit, senior unsecured and issuer ratings with negative outlook unaffected,

- A2 subordinate ratings with negative outlook unaffected;

- A3 preferred stock ratings with negative outlook unaffected;

- Prime-1 short-term rating unaffected.

Moody's last rating action on SpareBank 1 SMN was on 22 July 2009 when the BFSR was placed on review for possible downgrade.

SpareBank 1 SR-Bank:

- Long-term deposit, senior unsecured and issuer ratings confirmed at A1, with negative outlook;

- Subordinate ratings confirmed at A2, with negative outlook;

- Preferred stock ratings confirmed at A3, with negative outlook;

- C- BFSR with negative unaffected;

- Prime-1 short-term rating unaffected.

Moody's last rating action on SpareBank 1 SR-Bank was on 22 July 2009 when the long-term ratings were placed on review for possible downgrade.

Sparebanken Vest:

- BFSR downgraded to C- from C, with stable outlook;

- Long-term deposit and senior unsecured ratings downgraded to A2 from A1, with negative outlook;

- Subordinate ratings downgraded to A3 from A2, with negative outlook;

- Preferred stock ratings downgraded to Baa1 from A3, with negative outlook;

- Prime-1 short-term rating unaffected.

Moody's last rating action on Sparebanken Vest was on 22 July 2009 when the BFSR and long-term ratings were placed on review for possible downgrade.

Sparebanken Øst:

- Long-term deposit rating downgraded to A3 from A1, with negative outlook;

- Short-term deposit rating downgraded to Prime-2 from Prime-1;

- C- BFSR with negative outlook not affected but is now mapping to a BCA of Baa2 rather than Baa1.

Moody's last rating action on Sparebanken Øst was on 22 July 2009 when the deposit ratings were placed on review for possible downgrade.

RATING METHODOLOGIES

The principal methodologies used in the above rating actions are "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology" published in March 2007 and "Bank Financial Strength Ratings: Global Methodology" published in February 2007, which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered can also be found in the Rating Methodologies sub-directory on Moody's website.

DnB NOR Bank ASA, headquartered in Oslo, Norway, reported total assets of NOK1,617 billion (EUR179.2 billion) at the end of June 2009.

SpareBank 1 SMN, headquartered in Trondheim, Norway, reported total assets of NOK90 billion (EUR9.9 billion) at the end of June 2009.

SpareBank 1 SR-Bank, headquartered in Stavanger, Norway, reported total assets of NOK125 billion (EUR13.9 billion) at the end of June 2009.

Sparebanken Vest, headquartered in Bergen, Norway, reported total assets of NOK94 billion (EUR10.4 billion) at the end of June 2009.

Sparebanken Øst, headquartered in Drammen, Norway, reported total assets of NOK24 billion (EUR2.6 billion) at the end of June 2009.

London
Reynold R. Leegerstee
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Eeva Antila
Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's concludes review of five Norwegian banks
No Related Data.
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