DNB hit by funding costs, tough capital rules

DNB, Norway’s biggest bank, said higher funding costs and tough new capital rules would make it difficult to meet its full-year profit target as it posted a bigger-than-expected drop in first-quarter earnings due to a big accounting charge. “A poor set of results,” Credit Suisse analysts said in a research note. “The shares should be very weak on these numbers, especially due to the poor net interest income and continued capital deficit.” The outcome is in stark contrast to results from Swedish banks, which have mostly beaten expectations thanks in large part to strong trading revenues as market sentiment improved following cash injections from the European Central Bank. Analysts said it was all the more disappointing as Norway has remained largely immune from Europe’s economic troubles thanks to its oil sector, stable finances and steady growth. DNB said its net interest income - the profit it makes from lending minus its costs for borrowing -rose 10.5 per cent after it did not pass on the central bank’s rate cuts to clients. But that was well below analysts forecasts for a 13 per cent rise. The bank also booked a bigger-than-expected 2.43 billion crown loss on the fair value adjustment of its swaps, which dragged first-quarter net profit down 38 per cent to 1.76 billion crowns ($307 million), compared with an expected 2.66 billion. “Rising funding costs and stricter capital adequacy and liquidity requirements will probably have an impact on the competitive situation in the entire financial services industry over the next few years,” DNB said. “The group’s financial ambitions remain firm, but will be more challenging to reach due to lower interest rate expectations and the negative accounting effect of hedging instruments.” Funding costs have been on the rise across Europe as the continent’s economic troubles have eroded confidence, forcing borrowers to pay more for funds. At the same time, banks are also striving to meet tougher capital rules as regulators seek to prevent a repeat of the 2008-9 financial crisis. Citi analysts said they expected 2012 and 2013 net profit forecasts to be trimmed by 5 per cent. DNB is targeting a full-year pretax operating profit of between 22 billion and 25 billion crowns before writedowns.