DNB shares drop 4% as loan losses rise, core income misses estimates

Investing.com -- Shares of DnB ASA (OL:DNB) fell 4% on Wednesday after Norway’s largest bank posted a weaker third-quarter performance in its core income lines, with higher loan impairments offsetting better trading and insurance results.

The bank reported a net profit of NOK 10.68 billion, 1% above consensus of NOK 10.61 billion, supported by stronger trading income and lower costs. Pre-provision profit was 2% higher than expected.

However, analysts Jefferies said both net interest income and fee income missed estimates. DNB’s stock last closed at NOK 273.20, with Jefferies maintaining a “hold” rating and a price target of NOK 285, indicating a 4% potential upside.

Net interest income (NII) declined 1% from the prior quarter to NOK 15.99 billion, coming in 1% below estimates. 

Jefferies said the drop was “driven by lower money market rates seeing lower interest on equity as well as partial repricing effects,” adding that the bank “saw lower spreads during the quarter mainly from deposits.” The net interest margin fell 5 basis points quarter over quarter.

Commissions and fees fell 10% sequentially and were 6% below consensus, with Jefferies noting that “the driver of the decline was IB fees with the lower seasonality also seeing a lower contribution from M&A.” 

Meanwhile, trading income rose sharply to NOK 1.39 billion, above consensus of NOK 1.08 billion, helped by “a positive result in other mark-to-market adjustments of NOK 284 million,” reversing a negative NOK 327 million in the previous quarter.

Expenses came in 2% better than expected, driven by lower other expenses, with the cost-to-income ratio at 37% in the quarter. Impairments totaled NOK 862 million, exceeding expectations of NOK 630 million, corresponding to a cost of risk of 15 basis points compared with consensus of 11 basis points. 

Jefferies said DNB “saw an impairment provision related to the legacy portfolio in Poland and additional impairment provisions relating to customers spread across various industry segments, primarily within real estate related segments.”

DNB’s CET1 capital ratio was 17.9%, in line with estimates but down 40 basis points from the prior quarter due to higher risk-weight floors for mortgages and the impact of a share buyback. 

The ratio remains 135 basis points above the Norwegian Financial Supervisory Authority’s current expectation. 

The bank announced a new share buyback program of up to 1% of its shares, which Jefferies said “is expected to see a 40bp CET1 impact.”

Loans rose 7% from the prior quarter to NOK 2.47 trillion, while deposits declined 1% to NOK 1.54 trillion. Pre-tax profit was NOK 13.35 billion, broadly in line with consensus of NOK 13.31 billion.