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Rating Action:

Moody's downgrades DNB to A1/C- from Aa3/C; outlook stable

24 May 2012

Actions conclude the review announcements of 15 February 2012

London, 24 May 2012 -- Moody's Investors Service has today downgraded the senior debt and deposit ratings of DNB Bank ASA to A1 from Aa3 and its standalone bank financial strength rating (BFSR) to C- (mapping to a baa1 standalone credit assessment) from C/a3. The short term Prime-1 ratings were affirmed. The non-cumulative Tier 1 securities ratings were downgraded to Ba1(hyb) from Baa3(hyb), prompted by the downgrade of the bank's standalone credit assessment. Moody's has also downgraded DNB's subordinated and junior subordinated debt ratings by four notches to Baa3(hyb) and two notches to Baa3(hyb), respectively. All the ratings carry a stable outlook.

The downgrades reflect (i) DNB's reliance on market funding, at around 40% (excluding interbank funds, which are largely deposited with Central Banks) of total funding (ii) exposures to volatile asset classes, such as commercial real estate (CRE) and shipping; and (iii) the likelihood that DNB's relatively diversified earnings will come under pressure from higher liquidity requirements and weaker revenue raising opportunities.

Moody's notes that several mitigating issues have limited the magnitude of today's downgrade. Specifically, Moody's recognises the banks' relatively resilient asset quality and profitability metrics, partly reflecting its more stable domestic economic environment, its increased capital and liquidity buffers, as well as our assessment of a very high probability of systemic support. As a result, DNB's A1 rating positions it at the high end of Moody's European banking ratings.

Please click on this http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_142302 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

For additional information on bank ratings, please refer to the webpage containing Moody's related announcements http://www.moodys.com/bankratings2012

RATINGS RATIONALE

The downgrade of DNB's standalone rating, and in turn its senior debt and deposit ratings, was primarily driven by the following rating drivers.

FIRST DRIVER --- HIGH RELIANCE ON WHOLESALE FUNDING

DNB's funding is characterised by a high degree of reliance on market funds; only 42% of its funding stems from deposits. Notwithstanding the bank's recent good access to capital markets (EUR11 billion long-term funding raised in 2012 so far), Moody's regards reliance on wholesale funding as credit negative, due to the inherent confidence sensitivity and the potential for the availability and cost of market-based funding to change unexpectedly.

Unlike many other European banks with similar wholesale funding reliance, Moody's notes several factors which mitigate the extent of the rating downgrade. In addition to the generally strong demand from domestic pension funds and others for securities denominated in Norwegian kroner, Moody's believes that the rapidly developing Norwegian covered bond market has the potential to provide a funding source that is typically less confidence sensitive than other wholesale market sources. Moody's also notes that DNB has increased the maturity profile of its funding and maintains adequate liquidity buffers, limiting its funding risk in the short- term.

SECOND DRIVER --- HIGH EXPOSURE TO VOLATILE SECTORS MIGHT CAUSE FURTHER ASSET-QUALITY DETERIORATION

Moody's views DNB's sizeable exposure to more volatile sectors, such as CRE (14.7% of the loan book) and shipping (8.4%, including cruise, logistics and aviation) as a potential vulnerability. We typically see these sectors as more susceptible to economic downturns.

In addition, similar to its Nordic peers, low interest rates have thus far supported borrowers' ability to repay their debts and therefore variable-rate loans in DNB's loan book are vulnerable to interest-rate hikes. Moody's also considers house prices in Norway to be somewhat inflated and notes a possible decrease in house prices would add to the need for provisions by reducing the value of loan collateral.

However, Moody's acknowledges that DNB's currently sound asset-quality metrics (problem loans at 2.3% of gross loans at end-March 2012) -- relative to its rated peers -- are underpinned by the relatively robust domestic environment, a strong retail base and a relatively diversified corporate book.

THIRD DRIVER --- DOWNWARD PRESSURE ON EARNINGS FROM COMPETITION AND INCREASED REGULATORY DEMANDS

DNB's earnings are diversified, mainly stemming from core banking income in the form of net interest income, which has shown resilience and has improved despite upwards pressure on funding costs, due to the bank's substantial re-pricing ability. However, Moody's believes that DNB's earnings will likely come under pressure, due to keen competition in Norway as well as increased regulatory demands regarding liquidity reserves and capital.

MITIGATING FACTORS -- STRONG DOMESTIC ECONOMIC ENVIRONMENT AND INCREASED CAPITAL AND LIQUIDITY BUFFERS

Moody's notes that the continued strong performance of the Norwegian economy mitigates some of the rating drivers above, limiting the extent of downgrade compared with other European banks. Almost 80% of DNB's earnings stem from Norway and, in our view, the Norwegian operating environment is less affected by the global macroeconomic instability and low growth than most other European countries. DNB's asset quality and profitability metrics have therefore been less affected, so far, than many rated European peers.

However, while Moody's recognises that the macro-economic environment in Norway is more supportive than in many other European countries, a further intensification and prolonging of the euro area crisis may negatively affect Norway's economic growth and in turn DNB's earnings opportunities in Norway.

In addition, DNB has recently improved its liquidity position through lengthening its maturity profile and expanding its liquid assets portfolio, providing a substantial buffer in the event of market funding pressure. Furthermore, the bank has strengthened its capital position using internal capital resources and retained earnings, and the bank's Tier 1 ratio has improved to 9.9% at year-end 2011 from 9.2% at year-end 2010. Both these factors mitigate the rating pressures described above.

RATINGS RATIONALE -- DEBT & DEPOSIT RATINGS

Moody's maintains its view that DNB is highly likely to benefit from systemic support if needed, as reflected in the three-notch uplift for DNB's long-term ratings from its baa1 standalone credit assessment. The main reasons for Moody's assessment of a high probability of systemic support are (i) the 34% government ownership and statement that DNB is the country's flagship bank; and (ii) its dominant position in the Norwegian banking market, including for retail deposits.

RATIONALE FOR SUBORDINATED DEBT AND JUNIOR SUBORDINATED DEBT DOWNGRADES

The downgrade of DNB's subordinated debt and junior subordinated debt ratings to Baa3(hyb) (two notches below its baa1 standalone credit assessment) reflects Moody's view that systemic support is less likely to be extended to subordinated instruments' holders and the specific features of these instruments, including an option to permanently write-down principal in a going concern scenario if net assets are less than 25% of share capital and after the bank's share capital has been fully written down. We have also attached a hybrid (hyb) indicator to the dated subordinated debt of DNB Bank.

TODAY'S ACTIONS FOLLOW REVIEW ANNOUNCEMENTS ON 15 FEBRUARY 2012

Today's rating actions follow Moody's decision to review for downgrade the ratings for 114 European financial institutions, including two Norwegian banks -- DNB Bank ASA and Nordea Bank Norge ASA (see "Moody's reviews Ratings for European Banks", 15 February 2012 (http://www.moodys.com/research/Moodys-Reviews-Ratings-for-European-Banks--PR_237914). The conclusion of the rating review for Nordea Bank Norge is addressed is a separate press release.

Moody's downgrade of DNB's subordinated and junior subordinated debt ratings concludes the review of those ratings initiated on 29 November 2011 (see "Moody's reviews European banks' subordinated, junior and Tier 3 debt for downgrade"for more information - http://www.moodys.com/research/Moodys-reviews-European-banks-subordinated-junior-and-Tier-3-debt--PR_231957)

WHAT COULD MOVE THE RATINGS UP/DOWN

Rating upgrades are unlikely in the near future for DNB, for the reasons cited above. A limited amount of upward rating momentum could develop for DNB if it substantially improves its credit profile and resilience to the prevailing conditions. This may occur through increased standalone strength, e.g. bolstered capital and liquidity buffers, work-out of asset quality challenges or improved earnings.

While the current rating levels and outlooks incorporate a degree of expected further deterioration, ratings may decline further if (i) operating conditions worsen beyond current expectations, notably if Norway's sovereign creditworthiness and economic environment encounter material negative pressure, leading to asset quality deterioration exceeding current expectations, and (ii) DNB's market funding access, via covered bonds or wholesale markets, experiences a sharp decline.

The methodologies used in these ratings were Bank Financial Strength Ratings: Global Methodology, published in February 2007, and Incorporation of Joint-Default Analysis into Moody's Bank Ratings: Global Methodology, published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

DNB Bank, headquartered in Oslo, Norway, reported total assets of NOK2.1 trillion (EUR278 billion) at the end of March 2012.

RESEARCH REFERENCES

For further detail please refer to:

- List of Affected Issuers (http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_142302), 24 May 2012

- Press Release: Moody's Reviews Ratings for European Banks, 15 Feb 2012

- Special Comment: How Sovereign Credit Quality May Affect Other Ratings, 13 Feb 2012.

- Special Comment: Euro Area Debt Crisis Weakens Bank Credit Profiles, 19 Jan 2012

- Special Comment: European Banks: How Moody's Analytic Approach Reflects Evolving Challenges, 19 Jan 2012

Moody's webpages with additional information:

- http://www.moodys.com/bankratings2012

- http://www.moodys.com/eusovereign

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The ratings have been disclosed to the rated entities or their designated agents and issued with no amendment resulting from that disclosure.

Information sources used to prepare the ratings are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entities or their related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

The below contact information is provided for information purposes only. Please see the issuer page on www.moodys.com for Moody's regulatory disclosure of the name of the lead analyst and the office that has issued the credit rating.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Simon Harris
MD - Financial Institutions
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
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Gregory?Winans?Bauer
MD - Global Banking
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
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Moody's downgrades DNB to A1/C- from Aa3/C; outlook stable
No Related Data.
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