DNB: Nordic bank feels the warmth of rate rises

Bank earnings season in Europe has opened with a whimper. On Tuesday, Norway’s largest bank DNB reported a Nkr10bn ($1bn) second-quarter profit before tax that was 16 per cent ahead of market expectations. Strip out volatile trading income, however, and the beat all but disappears. What investors hoped for was a window into the way in which early rate-rising economies such as Norway are coping. But it may still be too early to say.

Norges Bank joined the Bank of England last month by raising rates to 1.25 per cent — a level last seen before the pandemic. As the European Central Bank heads towards its first rate rise in more than a decade, policymakers are looking for signs of borrower stress elsewhere.

At DNB these remain subdued for now. Higher rates are helping. The bank earned an extra Nkr1.5bn ($147mn) in net interest income from the first 25 basis point increase last year. Diminishing returns lowered that to Nkr1.2bn for the 25bp rise in March, thinks Johan Ekblom at UBS. He expects gains for the latest 50bp increase to be proportionally weaker as higher rates flow through to borrowers.

Lending and deposit levels also remained firm. Savings stashed during the pandemic are still intact. Provisions for bad loans are still being unwound, with a net Nkr209mn of reversals in the second quarter. These are being driven by better prospects in the energy sector.

Yet falling bank share prices reflect a lack of faith that this favourable situation can continue, even if the region has some of the lowest credit losses in Europe. The cost of risk at Nordic banks rose to just 30bp of loans on average during 2020. This is less than half the European average but double what they are now. Loss-absorbing capacity this year would cover that amount by seven times if it returns, thinks UBS.

DNB should be able to absorb 2020-level losses by almost four times. If a similar credit event did occur, the restrictions on distributions that accompanied it last time are unlikely to be repeated.