Results and accounts
Operations in 2018
DNB recorded profits of NOK 24 282 million in 2018, up NOK 2 479 million or 11.4 per cent compared with 2017. The increase in profits was driven by higher net interest income, lower impairment of financial instruments and a gain of NOK 464 million following the merger of BankID, BankAxept and Vipps.
Earnings per share were NOK 14.56, up 13.4 per cent from NOK 12.84 in 2017.
The common equity Tier 1 capital ratio was 16.4 per cent at end-December, unchanged from a year earlier.
The leverage ratio for the Group was 7.5 per cent, up from 7.2 at end-December 2017.
Return on equity was 11.7 per cent, compared with 10.8 per cent in 2017.
Net interest income increased by NOK 1 400 million from 2017. Reclassification effects related to IFRS 9 offset most of the loss of revenues as a result of the sale of the Baltic operations. Effects from amortisation of fees and higher volumes contributed positively with NOK 424 million and 318 million, respectively. There were rising volumes in the personal customers and small and medium-sized enterprises segments, and a planned reduction in volumes to large corporates and international customers.
Net other operating income was NOK 13 546 million, down NOK 2 172 million compared with 2017. Net gains on other financial instruments at fair value contributed negatively with NOK 3 857 million, due to volatility in the fixed-income markets and effects from reclassifications under IFRS 9. Basis swaps contributed negatively with NOK 687 million. Net commissions and fees grew by NOK 862 million, mainly due to reclassifications under IFRS 9.
Operating expenses were down NOK 536 million compared with 2017. The reduction was mainly due to the fact that operating expenses relating to the Baltics were included in the accounts up to October 2017, as well as impairment of goodwill of NOK 502 million related to the external distribution of credit cards under the Cresco brand in 2017. Corrected for these factors, IT expenses increased in 2018, mainly due to higher digitalisation activity.
There were net reversals on impairment losses on financial instruments of NOK 139 million in 2018. The net reversals were primarily related to the large corporates and international customers segment. The main drivers were restructurings of selected large exposures and a positive development in oil and gas-related industries combined with a general improvement in the underlying credit quality of the portfolio. The reversals were offset by impairments within the personal customers segment and from individually assessed corporate customers in stage 3.
The Board of Directors has proposed a dividend for 2018 of NOK 8.25 per share, which is an increase of 16 per cent from 2017 and corresponds to 56 per cent of profits. Including the share buy-back programme of 1.5 per cent, the total payout ratio is 73 per cent. When considering the dividend proposal, the Board of Directors took the regulatory capital adequacy requirements into account. The payout ratio is in accordance with the Group’s ambition to increase dividend payments.
The Board would like to thank all employees for a job well done in 2018.
Read more about important events here.
Share buy-back programme
The annual general meeting (AGM) held in April 2018 authorised DNB ASA to repurchase up to 3.5 per cent of the company’s share capital, calculated after the completion of the reduction in capital in connection with the share buy-back programme authorised by the AGM in 2017. The authorisation is valid up to the AGM in 2019. Initially, DNB has applied and received approval for a 2 per cent repurchase limit from Finanstilsynet (the Financial Supervisory Authority of Norway), but may at any time apply to Finanstilsynet for the remaining 1.5 per cent. Furthermore, DNB ASA has signed an agreement with the Norwegian government, represented by the Ministry of Trade, Industry and Fisheries, to ensure that the government maintains its 34 per cent ownership interest in DNB ASA after the completion of the buy-back programme.
The first buy-back programme under this authorisation includes up to 1.5 per cent of the shares, and by the end of December, DNB had repurchased shares representing a total of 0.62 per cent of outstanding shares. In addition, a proportion of the Norwegian government’s holding, equivalent to 0.32 per cent of outstanding shares, will be redeemed after the AGM in 2019, resulting in repurchases of 0.95 per cent in total.
DNB ASA will seek approval from the AGM in 2019 to delete the repurchased shares and to redeem a proportional number of shares owned by the Norwegian government. The shares owned by the Norwegian government will be redeemed against a payment corresponding to the average volume weighted price of the shares repurchased by DNB ASA in the open market as part of the buy-back programme, in addition to an interest compensation and an agreed adjustment for dividends paid on the redeemed shares during the buy-back period (if any). Once this transaction has been completed, a statement to Oslo Børs (Oslo Stock Exchange) will be published, specifying the updated number of shares.
Strategy and targets
DNB’s overarching goals are to create the best customer experiences and to reach its financial targets. Several strategic initiatives have been defined to ensure attainment of these goals. Read more about the strategy and how DNB creates value here.
Review of the annual accounts
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
|wdt_ID||Amounts in NOK million||2018||2017|
|1||Amounts in NOK million|
|2||Lending spread, customer segments||28 152||29 467|
|3||Deposit spread, customer segments||2 742||1 635|
|4||Amortisation effects and fees||3 200||2 776|
|5||Operational leasing||1 525||1 555|
|7||Other net interest income||1 202||(833)|
|8||Net interest income||36 822||35 422|
Net interest income increased by NOK 1 400 million from 2017. Reclassification effects related to IFRS 9 offset most of the loss of revenues from the sale of the Baltic operations. Effects from amortisation of fees and higher volumes contributed positively with NOK 424 million and 318 million, respectively. In the comments below, volumes and spreads have been adjusted for the effects of the Baltic operations in 2017.
Average lending spreads contracted by 12 basis points from 2017, while deposit spreads widened by 12 basis points. There was an average increase of NOK 21.5 billion in the healthy loan portfolio, while average deposits decreased by NOK 18.7 billion compared with 2017.
Net other operating income
|wdt_ID||Amounts in NOK million||2018||2017|
|1||Amounts in NOK million|
|2||Net commissions and fees||9 310||8 448|
|3||Basis swaps||(1 358)||(672)|
|4||Exchange rate effects additional Tier 1 capital||721||(616)|
|5||Net gains on other financial instruments||1 979||5 836|
|6||Net financial and risk result, life insurance||969||1 295|
|7||Net insurance result, non-life insurance||622||683|
|8||Other operating income||1 302||744|
|9||Net other operating income||13 546||15 718|
Net other operating income was down NOK 2 172 million from 2017. Net gains on other financial instruments at fair value contributed negatively with NOK 3 857 million, due to volatility in the fixed-income markets and effects from reclassifications under IFRS 9. Basis swaps contributed negatively with NOK 687 million. There was a strong increase in exchange rate effects on additional Tier 1 capital. Net commissions and fees grew by NOK 862 million, partly due to reclassifications under IFRS 9. Other operating income rose by NOK 557 million mainly due to a positive contribution from Luminor.
|wdt_ID||Amounts in NOK million||2018||2017|
|1||Amounts in NOK million|
|2||Salaries and other personnel expenses||(11 864)||(12 184)|
|3||Other expenses||(7 789)||(7 878)|
|4||Depreciation and impairment of fixed and intangible assets||(2 404)||(2 531)|
|5||Operating expenses||(22 057)||(22 593)|
Total operating expenses were down NOK 536 million, or 2.4 per cent from 2017. This was mainly due to the fact that operating expenses relating to the Baltics were included in the accounts up to October 2017, in addition to increased costs due to impairment of goodwill of NOK 502 million related to the external distribution of credit cards under the Cresco brand in 2017. Corrected for the Baltic operations, operating expenses increased by NOK 162 million mainly due to a higher level of IT activity.
The cost/income ratio was 43.8 per cent in 2018.
Impairment of financial instruments
|wdt_ID||Amounts in NOK million||2018|
|1||Amounts in NOK million|
|3||Commercial real estate||82|
|5||Oil, gas and offshore||1 079|
|6||Other industry segments||(744)|
|7||Impairment of financial instruments||139|
Net reversals on impairment of financial instruments amounted to NOK 139 million in 2018. The impairment losses within the most relevant industry segments are shown above.
The personal customers segment had stable credit quality and low impairments of NOK 287 million in 2018. Commercial real estate had a net reversal of NOK 82 million due to improved credit quality during the year.
There were net reversals of NOK 1 079 million for the oil, gas and offshore industry in 2018. The reversals reflected an improved market situation, especially for oil and gas, in line with the forecast at the start of the year. Further, there were reversals related to successful restructurings of financially distressed customers. However, the net reversals were somewhat curtailed by impairments of specific customers in stage 3 within rigs and offshore supply vessels.
There were net reversals of NOK 8 million within the shipping segment. The macro forecasts for shipping during 2018 were fairly stable. Further, the NOK 8 million included both increases and reversals related to specific customers in stage 2 and 3.
The net impairment losses of NOK 744 million within other industry segments primarily reflected negative credit development on individually assessed customers within the industry segments trade and services. In general, relevant macro drivers developed in line with the forecasts at the start of the year for most industries. Net stage 3 loans and financial guarantees and unutilised credit lines amounted to NOK 23.2 billion at end-December 2018.
The DNB Group’s tax expense for the full year 2018 was NOK 4 493 million, representing 16 per cent of pre-tax operating profits. The tax rate was lower than the anticipated rate of 20 per cent, mainly due to transitional effects from new tax rules for DNB Livsforsikring and capital gains on shares under the Norwegian tax exemption method.
Funding, liquidity and balance sheet
Throughout 2018, DNB still had good access to the short-term funding market. Competition on price is the main driver of volume, partly due to high funding demands among Scandinavian peers and increased supply of short-term US government debt. The market is becoming more of an “investors’ market” where issuers adapt to the levels investors are looking for. The USD market is still the most important short-term funding market for DNB. European markets, except GBP which is getting better, are still suffering from very low or negative interest rates in the short end.
The long-term funding markets in 2018 proved to be more volatile than the year before. The first quarter turned out to be very good for issuers, with low spreads and high activity in the long-term funding markets. Several issuers were expecting a widening of the spreads later in the year and wanted to ensure long-term funding at low spread levels. As the European Central Bank (ECB) started to reduce its asset purchase programme in March, spreads were widening and raised the funding costs for issuers in both covered bonds and senior preferred bonds. This trend was amplified by some political uncertainty in May. Despite this, DNB issued its first green covered bond in June, which was very well received by the investors. During the third quarter, the supply of new covered bonds was high, but the spreads were kept at a stable and low level until October for both covered bonds and senior bonds. In the market for senior bonds, there were more issuances of so-called senior non-preferred bonds due to the coming Minimum Requirement for own funds and Eligible Liabilities (MREL). During the last part of the year, there was more instability in the long-term funding markets, and spreads widened significantly for all instruments. This was partly due to the ECB asset purchase programme coming to an end, as well as political conditions involving Italy, Brexit and the global trade conflict between US and China. Overall, DNB had good access to long-term funding markets at attractive spreads throughout the year.
The nominal value of long-term debt securities issued by the Group was NOK 604 billion at end-December 2018, compared with NOK 596 billion a year earlier. The average remaining term to maturity for these debt securities was 4.1 years at end-December 2018, up from 4.0 at end-December 2017.
The short-term liquidity requirement, Liquidity Coverage Ratio (LCR), remained stable at above 100 per cent throughout the year. At end-December 2018, the LCR was 117 per cent.
Total combined assets in the DNB Group were NOK 2 951 billion at year-end 2018, down from NOK 3 026 billion a year earlier. Total assets in the Group’s balance sheet were NOK 2 635 billion at the end of 2018 and NOK 2 698 billion a year earlier. Of this, total assets in DNB Livsforsikring amounted to NOK 316 billion and NOK 317 billion, respectively.
In the DNB Bank Group, loans to customers increased by NOK 66.7 billion or 4.4 per cent from end-December 2017. Customer deposits were down NOK 40.3 billion or 4.1 per cent during the same period. For the banking group, the ratio of customer deposits to net loans to customers was 58.8 per cent at end-December 2018, down from 64.0 per cent a year earlier. 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 Corporate governance.
The DNB Group’s Basel III common equity Tier 1 (CET1) capital ratio, calculated according to transitional rules, was 16.4 per cent at the end of 2018, which was at the same level as a year earlier. The CET1 capital ratio according to Basel III was 17.2 per cent at year-end 2018.
The CET1 capital increased by NOK 5.5 billion from a year earlier to NOK 176.8 billion at year-end 2018. Retained earnings contributed to the increase, while the share buy-back programme announced in the second quarter of 2018, reduced the CET1 capital by around NOK 4 billion.
The risk-weighted assets increased by NOK 35.3 billion from year-end 2017 to NOK 1 077.9 billion. The increase was mainly due to underlying growth in the segments in combination with exchange rate effects as the Norwegian krone depreciated against both the euro and the US dollar.
The non-risk based leverage ratio was 7.5 per cent at end-December, up from 7.2 in the year-earlier period. The ratio increased from year-end 2017 due to higher CET1 capital in combination with a reduction in the total exposure.
The capital adequacy legislation specifies a minimum primary capital requirement based on risk-weighted assets that include credit risk, market risk and operational risk. In addition to meeting the minimum requirement, the bank must satisfy various buffer requirements (Pillar 1 and Pillar 2 requirements).
Capital and risk
|2||CET 1 capital ratio, per cent||16.4||16.4|
|3||Tier 1 capital ratio, per cent||17.7||17.9|
|4||Capital ratio, per cent||19.9||20.0|
|5||Risk-weighted assets, NOK billion||1 078||1 043|
|7||CET 1 capital ratio, Basel III, per cent||17.2||16.7|
|9||Leverage ratio, per cent||7.5||7.2|
As the DNB Group consists of both credit and insurance companies, the DNB Group has to satisfy a cross-sectoral calculation test to demonstrate that it complies with the sectoral requirements: the capital adequacy requirement in accordance with “CRD IV” and “the Solvency II” requirement. At end-December 2018, DNB complied with these requirements by a good margin, with excess capital of NOK 14.3 billion. Read more about the Group’s risk aspects here under Corporate governance and about capitalisation in the Group’s Pillar 3 report at ir.dnb.no.
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.
Total exposure at default
1)Portfolio composition in terms of exposure at default (EAD)
This segment includes the Group’s more than 2 million personal customers in Norway. The Personal customers segment delivered sound results in 2018, with a pre-tax operating profit before impairment of NOK 10 183 million and a return on allocated capital of 15.8 per cent. The cost/income ratio remained stable at 45 per cent, which is on a level with 2017.
Net interest income increased by 0.6 per cent from 2017. The combined spreads on loans and deposits narrowed by 0.08 percentage points in the period. Average net loans for 2018 rose by 4.7 per cent from the previous year, while deposits showed an increase of 1.7 percent on average.
Net other operating income remained unchanged from 2017. Lower income from insurance was offset by a positive development in net income from payment services. Several cooperation and agent agreements were terminated in 2018, contributing to a reduction in credit broking commission, while a new incentive agreement with VISA Norway and repricing of certain services lead to increased income in the period.
Expenses increased by NOK 107 million or 1.3 per cent from 2017. Costs related to IT and real estate broking showed a slight increase, but the rise was partly counteracted by reduced restructuring costs, lower costs relating to premises and reduced impairment losses for goodwill.
On 1 November 2018, DNB sold its SAS AMEX customer portfolio to AMEX. The recorded sales revenue amounted to NOK 49 million for 2018.
Net impairment losses on financial instruments remained stable at a low level of 0.04 per cent of average net loans. There is low risk in the home mortgage portfolio, and impairments within consumer finance also remained stable throughout the year.
The market share of credit to households stood at 24.0 per cent at end-December 2018, which represented a decline from 24.7 per cent at the end of 2017. The market share of total household savings was 30.8 per cent. DNB Eiendom had an average market share of 18.7 per cent in 2018, down from 19.7 per cent a year earlier.
DNB aspires to achieve continued profitable growth in the personal customers segment and will sustain its efforts to adapt products, solutions, customer service and cost level to the competitive situation of the future. Customers are becoming increasingly self-sufficient, not least through the use of mobile solutions. The communication between the customer and the bank is changing, and what we like to call personalised automated communication (PAC) enables us to engage in more effective communication with the customers. In 2018, the digital pre-qualification letter for use on mobiles was launched as part of the further development of a fully automated loan application process. In addition, we introduced ‘Enkel Bilhandel’ (simple car purchase), an app that helps the customer through the whole process of purchasing and selling second-hand cars. Furthermore, our chatbot Aino was launched in the fourth quarter and after a few months in operation, Aino is already answering the majority of customer inquiries received via chat and email.
|wdt_ID||Income statement in NOK million||2018||2017|
|2||Net interest income||13 452||13 367|
|3||Net other operating income||5 117||5 113|
|4||Total income||18 569||18 480|
|5||Operating expenses||(8 386)||(8 279)|
|6||Pre-tax operating profit before impairment||10 183||10 201|
|7||Net gains on fixed and intangible assets||49||(0)|
|8||Impairment of financial instruments||(318)||(207)|
|9||Pre-tax operating profit||9 914||9 995|
|10||Profit for the year||7 435||7 496|
Development in loans, deposits and net interest income
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 net interest income combined with a reduced cost level contributed to a solid pre-tax operating profit before impairment in 2018. Impairments were up from the previous year, but remained at a satisfactorily low level. Combined, this resulted in an improvement in the pre-tax operating profit of as much as 17.1 per cent from 2017. The segment delivered a total return on allocated capital of 18.2 per cent in 2018, compared with 16.9 per cent in 2017.
Net loans to customers showed an average increase of 8.7 per cent from 2017, while deposits rose by 2.8 per cent. Higher loan volumes and wider deposit spreads contributed to a growth in net interest income of 11.1 per cent compared with 2017.
Net other operating income showed an increase of 2.7 per cent from 2017. Increased sales of pension products and higher income from payment services contributed to the increased income. Income from currency and interest rate hedging products as well as capital market activities was on the same level as in the previous year.
Operating costs decreased by 3.5 per cent from 2017. A reduction in restructuring expenses was the main reason for the decrease in costs from the previous year.
Net impairment losses on financial instruments were NOK 566 million in 2018. This constituted 0.19 per cent of average loans. The impairment losses in 2018 primarily stemmed from a few exposures. The quality of the loan portfolio is considered to be satisfactory. Developments are closely monitored, and preventive measures are continually considered and implemented to retain the strong portfolio quality.
DNB wants to help its corporate customers succeed. This involves making it easy to be our customer by offering easy-to-use digital solutions and by being more than a bank. We have a strong focus on automation and digitalisation of products and services to meet our customers’ needs and expectations in the time ahead. Throughout 2018, DNB developed and launched new services to make our customers’ everyday lives easier. Examples include the automated accounting solution DNB Regnskap for the smallest companies and DNB Puls, which is a separate app that helps corporate customers manage their finances via their mobiles. In parallel with this, DNB is working to be the best possible adviser with expertise in start-up and growth companies, selected industries and a wide range of traditional banking services.
|wdt_ID||Income statement in NOK million||2018||2017|
|2||Net interest income||9 530||8 578|
|3||Net other operating income||2 157||2 101|
|4||Total income||11 688||10 678|
|5||Operating expenses||(4 228)||(4 380)|
|6||Pre-tax operating profit before impairment||7 459||6 298|
|7||Net gains on fixed and intangible assets||3||(1)|
|8||Impairment of financial instruments||(566)||(413)|
|9||Profit from repossessed operations||8||14|
|10||Pre-tax operating profit||6 905||5 899|
Development in loans, deposits and net interest income
LARGE CORPORATES AND INTERNATIONAL CUSTOMERS
This segment includes the Group’s largest Norwegian corporate customers and all international corporate customers. Lower volumes were offset by wider spreads, while reversals on impairments losses on loans helped increase pre-tax operating profits compared with 2017, and thus an increased return on allocated capital.
The trend in volume growth over the past years has been affected by measures to rebalance operations, which includes restructuring the portfolios and reducing exposures within shipping, oil and offshore-related sectors.
Average loans to customers were down 14.6 per cent from 2017. Adjusted for the operations in the Baltics, which was included in the segment during the first three quarters of 2017, the reduction was 7.9 per cent. From year-end 2017 to year-end 2018, lending increased by 3.5 per cent, while the underlying growth rate excluding exchange rate effects was 1.5 per cent. Average customer deposits declined by 9.0 per cent adjusted for the Baltics. Deposit volumes were down 9.2 per cent from year-end 2017 to year-end 2018.
The reduction in net interest income from 2017 is solely due to the fact that the Baltic operation is no longer included in the segment. Adjusted for the Baltic operation, the net interest income showed an increase of 2.1 per cent despite reduced volumes. Volume-weighted spreads widened by 0.05 percent- age points from 2017, ending at 1.25 per cent in 2018. Both the lending and deposit spreads showed a positive development.
Net other operating income adjusted for the Baltics increased by 2.4 per cent from the previous year. A strong focus on using the entire product range and a shift towards reducing final hold on DNB’s books helped raise income from arranging debt capital issues. Based on adjusted figures, total operating expenses showed an increase of 1.4 per cent from 2017.
Net reversals of NOK 1 022 million on impairment losses on financial instruments contributed significantly to profits in 2018. Among the reasons for the reversals were successful efforts to restructure the portfolio, more favourable economic conditions and an overall reduced credit risk in the portfolio. Net impairment represented 0.25 per cent of average loans in 2018. Net stage 3 exposures totalled NOK 15.9 billion at the end of 2018.
DNB is operating in highly competitive markets, and one of the challenges we face is different capital requirements for banks. The main aim is to strengthen profitability and contribute to fulfilling DNB’s long-term ambitions. Active portfolio management in the large corporates segment will continue in 2018 by channelling capital and resources to segments, customers and transactions that will ensure higher profitability in the longer term. An ‘originate and distribute’ approach, which gives higher turnover in the portfolio, will ensure lower final hold on DNB’s books and increase ancillary income. DNB will continue to focus on utilising in-depth industry expertise, offering a wide range of financial services and modern technological solutions to priority customers. Through close relations with leading companies, DNB is well-positioned to help our customers meet their extensive financial needs. This will form the basis for increasing the contribution from non-lending products, such as investment banking, trade finance, leasing, factoring and defined-contribution pensions.
|wdt_ID||Income statement in NOK million||2018||2017|
|2||Net interest income||12 111||12 683|
|3||Net other operating income||5 442||5 730|
|4||Total income||17 553||18 413|
|5||Operating expenses||(6 890)||(7 572)|
|6||Pre-tax operating profit before impairment||10 663||10 842|
|7||Net gains on fixed and intangible assets||(0)||20|
|8||Impairment of financial instruments||1 022||(1 800)|
|9||Profit from repossessed operations||(263)||(19)|
|10||Pre-tax operating profit||11 422||9 043|
Development in loans, deposits and net interest income
The segment comprises the business activities in the risk management operations in Markets and traditional pension products in DNB Livsforsikring, in addition to several group items not allocated to the segments. Pre-tax operating profit was NOK 738 million in 2018.
The market making and other trading activities in the risk management operations in Markets showed a satisfactory result in 2018 with a return on allocated capital of in excess of 12 per cent. However, the segment’s total income was reduced by 43 per cent from 2017 to NOK 1 346 million in 2018. Reduced volumes and increased competition in the money market resulted in a lower level of trading revenues compared with 2017. Wider credit spreads towards the end of 2018 resulted in negative market value changes for bonds and credit value adjustments.
For traditional pension products with a guaranteed return, net other operating income was NOK 1 393 million in 2018, down NOK 327 million from the year before, reflecting a decline in profits both in the corporate portfolio and in the common portfolio. DNB Livsforsikring had a solvency margin of 184 per cent according to the transitional rules, while the margin calculated without the transitional rules was 152 per cent as at 31 December 2018.
The profits in the other operations segment are affected by several group items which vary greatly from year to year. Net other operating income in 2018 was affected negatively by mark-to-market effects related to changes in basis swaps spreads, while exchange rate effects on additional Tier 1 capital were positive.
In the presentation of the segments, a normalised tax rate is applied to each segment, while the tax rate applied to the other operations segment is the difference between the Group’s tax expense and the calculated tax in the segments. The Group’s taxes were lower than expected for the year 2018, which resulted in a higher taxable income for other operations compared with the year before.
|wdt_ID||Income statement in NOK million||2018||2017|
|2||Net interest income||1 729||794|
|3||Net other operating income||3 783||6 288|
|4||Total income||5 511||7 082|
|5||Operating expenses||(5 506)||(5 877)|
|6||Pre-tax operating profit before impairment||5||1 205|
|7||Net gains on fixed and intangible assets||477||719|
|8||Impairment of financial instruments||(0)||(8)|
|9||Profit from repossessed operations||256||4|
|10||Pre-tax operating profit||738||1 921|
As Norway’s largest financial institution, DNB plays a major role in society. As an employer, investor, lender, arranger and provider of financial infrastructure, DNB will create value to the benefit of society and lay the foundation for further growth. How this value is created, is what constitutes the core of DNB’s corporate responsibility. We are convinced that the companies that will maintain their competitive edge and thus succeed in the future are the ones that take responsibility for making society a better place, and that consider both risks and opportunities in a long-term perspective.
DNB meets the authorities’ requirements for reporting relating to human rights, labour rights and social conditions, the external environment and the fight against corruption in its business strategies, daily operations and in the relationships with stakeholders through integrated annual reporting and through reporting according to the Global Reporting Initiative, GRI.
This integrated annual report fully reflects how DNB works for, and safeguards, its corporate responsibility.
Employees and competence
Adapting to the new banking reality, with rapid changes in customer behaviour, digitalisation and stricter capital adequacy requirements, characterised organisational and leadership development in 2018. Systematic efforts were made to ensure that the Group has the right competencies and promotes change capacity and employee engagement. Sickness absence in DNB’s Norwegian operations was 4.5 per cent in 2018, in line with 2017.
Read more about the priorities that are considered to be essential to ensuring the right competencies, and about working conditions, equality and diversity here with a more detailed description in note 22 Salaries and other personnel expenses in the annual accounts.
New regulatory framework
INCORPORATION OF CRD IV AND CRR INTO THE EEA AGREEMENT
The EU’s capital requirements legislation CRD IV and CRR is expected to be incorporated into the EEA Agreement during the first half of 2019. The regulatory framework has for the most part already been implemented in Norwegian law, but the Norwegian Ministry of Finance has underlined that provisions that are not in line with the EU legislation, including the Basel I floor for IRB banks and the exception from the SME supporting factor, will not be continued. The introduction of the SME supporting factor implies that the banks’ capital requirement for loans to small and medium-sized enterprises will be reduced by approximately 24 per cent.
INCREASED COUNTER-CYCLICAL CAPITAL BUFFER REQUIREMENT
The Norwegian Ministry of Finance has decided that the counter-cyclical capital buffer requirement will be increased by 0.5 percentage point to 2.5 per cent with effect from 31 December 2019. The requirement is the weighted average of the buffer rates for the countries where the bank has credit exposures. Several countries in which DNB has exposures have set the requirement to zero per cent, and as a result, DNB’s effective counter-cyclical buffer rate will increase by less than 0.5 percentage point.
In the course of 2019, certain Norwegian provisions that are not in line with the EU legislation will cease to apply in connection with the implementation of the CRR/CRD IV in Norwegian law. The expected removal of the Basel I transitional floor will give a reduction in risk-weighted assets (Basel III). This reduction is expected to absorb the increased capital requirement for the CET1 ratio related to the counter-cyclical buffer, and the nominal capital base is expected to be stable.
NEW PERSONAL DATA ACT
The Norwegian Parliament (Stortinget) has adopted a new Personal Data Act, which implements the EU General Data Protection Regulation (GDPR) in Norway. The new Act entered into force on 20 July 2018. New Personal Data Regulations and separate transitional Regulations have also been adopted.
NEW ANTI-MONEY LAUNDERING LEGISLATION
The new Norwegian Money Laundering Act and Anti-Money Laundering Regulations entered into force on 15 October 2018. The new legislation implements the EU’s fourth Anti-Money Laundering Directive in Norwegian law and involves, among other things, stricter requirements for customer due diligence and more responsibilities for the management and Board of Directors. Administrative sanctions for companies and individuals who do not abide by the law have also been introduced.
GOVERNMENT PROPOSAL FOR AN ADJUSTMENT OF THE FINANCIAL ACTIVITIES TAX
The financial activities tax was introduced in 2017 and implies a 5 percentage point increase in employer’s national insurance contributions and a 2 percentage point increase in the corporate income tax rate for the financial services industry in 2018. The Norwegian Parliament (Stortinget) has decided to reduce the corporate income tax rate from 23 to 22 per cent in 2019. However, this reduction does not include companies that are liable to financial activities tax. The tax rate for the financial services industry will thus increase from 2 to 3 percentage points above the rate in other sectors. The Ministry of Finance is examining a new amendment in the financial activities tax from 2020 where salary costs and taxable profit will be combined into one common tax base with one tax rate.
MINIMUM REQUIREMENT FOR OWN FUNDS AND ELIGIBLE LIABILITIES
The Norwegian Parliament has adopted the Act related to the Norwegian Banks’ Guarantee Fund and the Act related to amendments to the Financial Institutions Act, etc. The adopted acts implement the EU’s Bank Recovery and Resolution Directive (BRRD) and Deposit Guarantee Scheme Directive (DGSD) in Norwegian law and came into force on 1 January 2019. The BRRD has already been incorporated into the EEA Agreement, and efforts are now being made to incorporate the DGSD.
On 19 December 2018, the Norwegian Ministry of Finance laid down amendments to the Financial Services Regulations and new Regulations to the Act related to the Norwegian Banks’ Guarantee Fund that supplement the new statutory provisions. The amendments involve new rules and tasks for both banks and public authorities. These include rules on recovery plans and crisis resolution plans, rules on writing down or converting own funds and eligible liabilities into equity and establishing a national resolution fund.
Among the new crisis resolution measures, the most significant change is internal recapitalisation (bail-in). Bail-in implies that parts of the debt of a bank in resolution are converted to equity, whereby losses are covered and the bank is capitalised to a level where operations can be continued. The new crisis resolution rules are therefore introducing a minimum requirement for own funds and eligible liabilities (MREL) that can be written down or converted into equity. Finanstilsynet (the Financial Supervisory Authority of Norway) shall, as the crisis resolution authority, lay down specific MREL requirements for each individual bank, and will return with more information about the process for determining MREL in 2019.
DEPOSIT GUARANTEE LEVEL
The DGSD implies that Norway would have to lower its deposit guarantee from NOK 2 million per customer per bank to EUR 100 000. However, as part of the negotiations with the European Commission to incorporate the directive into the EEA Agreement, Norway will most likely be granted a transitional arrangement extending beyond 2018.
SECURITISATION IN NORWAY
The Norwegian Ministry of Finance has asked Finanstilsynet to establish a working group to consider the implementation of the EU’s rules on securitisation in Norway. The report must be submitted to the Ministry by the end of May 2019. The purpose of a Norwegian regulatory framework for securitisation is to give Norwegian banks an important tool for modern risk management and help increase the supply of capital to the business community.
THE HOME MORTGAGE PROVISIONS ARE CONTINUED
The Norwegian Ministry of Finance has laid down new Home Mortgage Regulations effective as of 1 July 2018. Both the general provisions, the banks’ flexibility quota and the special requirements for Oslo have been continued in the new Regulations, which will apply until 31 December 2019.
INTRODUCTION OF PSD2 INTO NORWEGIAN LAW
The EU’s revised Payment Services Directive, PSD2, entered into force in the EU in 2018. The implementation into Norwegian law is under way in the form of a bill and updated regulations. Some of these provisions will enter into force in Norway on 1 April 2019, while the date of entry into force of certain provisions relating to private law is yet to be determined. In dialogue with the authorities, DNB is working actively to explore the possibilities for new services within so-called Open Banking, i.e. data exchange with third parties, among other things to clarify the implications of GDPR and electronic ID (the eIDAS Regulation) for such services.
NEW RULES ON MARKETS IN FINANCIAL INSTRUMENTS
In the spring of 2018, the Norwegian Parliament (Stortinget) adopted a number of amendments to the securities legislation, as part of the implementation of the EU’s regulatory framework on markets in financial instruments, MiFID II and MiFIR. The amendments entered into force on 1 January 2019. In terms of content, the amended provisions have already been implemented in Norwegian law through the temporary MiFID II and MiFIR regulations that were urgently adopted in December 2017 to ensure Norwegian market participants continued access to the European Single Market. The provisions have now been given a permanent and carefully considered formulation, but parts of the temporary legislation will nevertheless be applicable for a while longer. This is the case for the rules which are included in the EU Regulation, and which, due to the connection with the Norwegian Constitution, cannot be given direct effect in Norwegian law before the MiFID II and MiFIR have been included in the EEA Agreement.
NEW TAX RULES FOR INSURANCE AND PENSION COMPANIES IN 2018
By adopting the Act of 20 December 2018, the Norwegian Parliament (Stortinget) laid down new tax rules with appurte- nant transitional rules for life insurance and pension companies, with effect from 2018. The new rules involve taxation of income and costs related to assets in the common portfolio and the investment choice portfolio. The transition to new rules is regulated in the transitional provisions, where tax value and commitments as at 31 December 2018 shall be determined in line with the accounting rules. Changes in tax value are taxable or deductible in the 2018 fiscal year.
Based on our evaluation and understanding of the new tax rules with appurtenant transitional rules, the transition will result in a tax income of NOK 880 million for 2018. DNB will consider recognising further tax income in the time ahead. In December, the Norwegian Directorate of Taxes gave a statement of principles of their understanding of the transitional rule that may be conceived as divergent from DNB’s view.
EXPANSION OF THE INTEREST LIMITATION RULE
The current rules on interest limitation have been expanded to include interest on external loans with new threshold values and exceptions. The exception for financial institutions is maintained.
WITHHOLDING TAX ON INTEREST PAID OUT OF NORWAY
In the National Budget for 2019, the Norwegian government announced that it intends to circulate for comments a proposal to introduce withholding tax on interest and also present a bill on the matter in 2019. The announcement included no information about the details of this withholding tax scheme. Withholding tax on cross-border interest payments will be a Norwegian tax on international creditors.
In 2018, the EU adopted a Council Directive which imposes a disclosure obligation on lawyers, accountants, banks and other tax advisers for matters concerning tax planning strategies that are offered to customers (DAC 6). The directive is the last in a series of EU measures on automatic exchange of infor- mation in the field of taxation (Directive on Administrative Cooperation, DAC 1-5). The new rules require intermediaries (or taxpayers) to report to the authorities any potentially aggressive tax planning strategies that are developed for customers and that involve two or more countries. Whether a tax planning strategy is to be considered potentially aggressive is determined by certain characteristics set out in DAC 6. The directive also implies an obligation for Member States to exchange information about such arrangements with each other through the automatic exchange of information. Norway is not covered by the directive. Whether similar rules will be implemented in Norway, is being considered by the committee tasked with examining the disclosure obligation and duty of confidentiality of tax advisers. The committee will present its recommendation in 2019.
The growth in the world economy held up well during the first half of 2018, but slowed down markedly through the second half. The slowdown, which was particularly evident in Europe and China, was caused by several factors. High energy prices contributed to a weakening of the real household disposable income and put a damper on demand. New emission rules for cars were part of the reason for a pronounced drop in the German automotive industry. These are both presumably temporary effects, which will be reversed in 2019. In addition, the ongoing trade war between the US and China contributed to reducing the growth in the Chinese economy. The trade conflict will probably continue in 2019, but the negative effects on the global economy will nevertheless be relatively limited. It is also possible that the two parties will reach a solution that will prevent further escalation of the conflict.
In the US, lower tax rates and increased public spending boosted the economy in 2018, thus preventing a slowdown in the growth. In 2019, the effects of this fiscal policy will gradually diminish. Financial turmoil and a significant fall in the stock markets at the end of 2018 may put a damper on economic activity in the time ahead. However, this may cause the Federal Reserve (Fed) to raise the key policy rate by less than would otherwise be the case, despite the fact that the unemployment rate is very low. In any case, the GDP growth will be slightly lower in 2019 than in 2018.
Growth in the eurozone was disappointing in 2018, but this stagnation is most likely temporary. In 2019, DNB expects a GDP growth of 1.5 per cent. The European Central Bank (ECB) has announced that it will gradually depart from its expansionary monetary policy and at the turn of the year, it finalised its asset purchases. The first rate hike may be expected towards the end of 2019.
The uncertainty surrounding Brexit has put a damper on the British economy in the wake of the referendum. This has particularly affected investments in the business world.
The GDP for Mainland Norway rose by an estimated 2.2 per cent in 2018, which was slightly higher than the growth rate the year before. After a very hot and dry summer there was a decline in the agricultural production, which contributed to a slowdown in the economy. A cold winter, dry summer and higher energy prices in Europe led to an increase in the electricity prices of more than 25 per cent in 2018. This was the main reason why an expected real wage growth failed to occur. The increase in electricity prices was probably also a major contributor to the stagnation in household consumption. Although electricity prices were high as we entered 2019, there is little reason to expect the same price growth in 2019 as in 2018. This could mean that the real wage growth will pick up, and thereby also the growth in consumption. A marked upswing in oil investments is also expected to contribute positively to the economic growth in 2019. In addition, other business investments are expected to rise and support further growth in domestic demand. On the other hand, the trade war between China and the US is contributing to slowing down the increase. We assume, however, that the effects will be relatively moderate as long as a global trade war is avoided. We forecast a growth in the mainland economy of close to 2 per cent in 2019.
Higher manufacturing growth has been reflected in stronger employment growth. The rate of unemployment has fallen, but the decline levelled out somewhat in the autumn of 2018. DNB expects a moderate decrease in the unemployment rate in 2019. The marked rise in electricity prices contributed to an overall increase in consumer prices of 2.7 per cent last year. Adjusted for tax changes and energy prices, the rise ended at 1.6 per cent. Slightly lower electricity prices in the course of 2019 will cause a marked drop in the inflation rate. In the housing market, prices increased by 0.7 per cent from 2017 to 2018. Prices rose somewhat at the beginning of 2018, but then levelled out. In 2019, we expect housing prices to remain relatively stable for the country as a whole. Over the last two years, the activity in the Norwegian economy has increased somewhat faster than normal, and capacity utilisation has gone up. The inflation outlook is relatively stable, and the risk of a marked drop in the inflation rate is significantly reduced. The Norwegian krone is weak. Based on this situation, Norges Bank raised the key policy rate in September 2018 and has notified a new increase in March 2019, in which case the rate will stand at 1.00 per cent. One more rate hike is expected in the course of 2019.
The Group’s overriding financial target is a return on equity (ROE) above 12 per cent towards the end of 2019. Several factors will contribute to reaching the ROE target, including profitable lending growth, growth in capital-light products, greater cost efficiency through the automation of internal processes, and optimal use of capital.
The increase in Norges Bank’s key policy rate from 0.5 per cent to 0.75 per cent, followed by DNB’s announcement of an interest rate rise on loans that was effective from 4 November, will have full effect on net interest income in 2019. The annual increase in lending volumes is anticipated to be 3 to 4 per cent in 2019 and 2020. In this period, higher growth in lending volumes is expected for small and medium-sized enterprises, while lending to large corporates and international customers is expected to grow at a slower pace.
DNB’s ambition is to have a cost/income ratio below 40 per cent towards the end of 2019.
The increase in the counter-cyclical buffer requirement from 2019 will raise the CET1 capital ratio requirement to 16.8 per cent including a management buffer of around 1 per cent. The expected removal of the Basel I transitional floor will give a reduction in risk-weighted assets (Basel III). This reduction is expected to absorb the increased capital requirement for the CET1 ratio, and the nominal capital base is expected to be stable. The CET1 capital ratio achieved at end 2018 was 16.4 per cent (transitional rules) and according to Basel III, 17.2 per cent.
The tax rate is expected to be 20 per cent in 2019 and 2020.
DNB’s dividend policy remains unchanged, with a payout ratio of more than 50 per cent and an increase in the nominal dividend per share each year. In addition to dividend payments, DNB will use repurchases of own shares as a flexible tool to allocate excess capital to its owners.
Dividends and allocation of profits
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.
When considering the dividend proposal for 2018, the Board of Directors has taken into account the capital adequacy requirements and the Group’s ambition to have a dividend payout ratio of more than 50 per cent. The Board of Directors has thus proposed a dividend for 2018 of NOK 8.25 per share. The proposed dividend gives a dividend yield of 6.0 per cent based on a share price of NOK 138.15 as at 31 December 2018 and implies that DNB ASA will distribute a total of NOK 13 105 million in dividends for 2018. The payout ratio represents 56 per cent of profits. Including the completion of the buy-back programme of 1.5 per cent, the total payout ratio is 73 per cent. A dividend of NOK 7.10 per share was paid for 2017.
In connection with the satisfactory attainment of the Group’s financial targets, the Board of Directors has decided to make allocations of NOK 278 million to the Group’s employees.
Profits for 2018 in DNB ASA came to NOK 13 327 million, compared with NOK 18 419 million in 2017. The profits for 2018 can mainly be attributed to the transfer of group contributions and dividends from subsidiaries.
|wdt_ID||Amounts in NOK million||2018||2017|
|1||Amounts in NOK million|
|2||Profit for the year||13 327||18 419|
|3||Proposed dividend per share (NOK)||8.25||7.10|
|4||Share dividend||13 105||11 392|
|5||Transfers to other equity||222||7 027|
|6||Total allocations||13 327||18 419|
In view of the DNB Group’s capital adequacy ratio of 19.9 per cent and common equity Tier 1 capital ratio of 16.4 per cent at year-end 2018, 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, 6 March 2019
The Board of Directors of DNB ASA
Olaug Svarva (chair of the board)
Tore Olaf Rimmereid (vice chair of the board)
Carl A. Løvvik