RATINGS - DNB · As a result of different risk weighting among the Nordic banks, it can be difficult to compare reported capital ratios. As an example, in Norway, banks’ mortgages

FINANCIAL INSTITUTIONS

CREDIT OPINION5 April 2017

Update

RATINGS

DNB Bank ASADomicile Norway

Long Term Debt Aa2

Type Senior Unsecured - FgnCurr

Outlook Negative

Long Term Deposit Aa2

Type LT Bank Deposits - FgnCurr

Outlook Negative

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Contacts

Alessandro Roccati 44-20-7772-1603Senior Vice [email protected]

Louise Lundberg 46-8-5025-6568VP-Sr Credit [email protected]

Maria Asensio 44-20-7772-1078Associate [email protected]

Jean-FrancoisTremblay

44-20-7772-5653

Associate [email protected]

Sean Marion 44-20-7772-1056Managing Director -Financial [email protected]

DNB Bank ASASemiannual update following year-end 2016 Results

Summary Rating RationaleWe rate Aa2 the long-term deposits and senior unsecured debt of DNB Bank ASA (DNB).We also assign a long- and short-term Counterparty Risk Assessment (CRA) of Aa1(cr)/Prime-1(cr) to the bank. The outlook on the bank’s long-term senior ratings is negative.

DNB's a3 baseline credit assessment (BCA) reflects the bank's strong capital and good levelof profitability, balanced against weakening asset quality and high reliance on internationalcapital markets, which renders the bank susceptible to investor sentiment.

DNB's Aa2 long-term deposits and senior unsecured debt ratings include a two-notch upliftresulting from our advanced Loss Given Failure (LGF) analysis, reflecting our view that thebank’s junior depositors and senior creditors face a very low loss given failure. In addition,our assessment of government support translates into a further two notch uplift included inthese ratings.

The negative outlook on DNB's senior unsecured debt and deposit ratings reflects ourexpectation that Norway's slowing growth resulting from low oil prices and reduced oilinvestments will, over time, have a negative impact on DNB's performance.

Exhibit 1

Rating Scorecard- Key Financial Indicators

2.4% 17.1% 0.7% 35.4% 27.8%0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0%

5%

10%

15%

20%

25%

30%

Asset Risk:

Problem Loans/Gross Loans

Capital:

Tangible CommonEquity/Risk-Weighted

Assets

Profitability: Net

Income/ TangibleAssets

Funding Structure:

Market Funds/Tangible Banking Assets

Liquid Resources: Liquid

BankingAssets/TangibleBanking Assets

Solvency Factors (LHS) Liquidity Factors (RHS)

DNB Bank ASA (BCA: a3) Nordic rated peers

Source: Moody's Banking Financial Metrics

https://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBC_1065503

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Credit Strengths

» As the leading bank in Norway, DNB has a solid banking franchise and status as the nation's flagship bank

» Capital is high and leverage compares well with peers

» DNB reports solid core earnings, and benefits from the relatively strong performance of the Norwegian economy

» DNB's BCA is supported by its Very Strong- macro profile

» Our advanced LGF analysis indicates a very low loss-given-failure for long-term deposit and senior unsecured debt ratings, resultingin a two-notch LGF uplift from the adjusted BCA

» The long-term deposit and senior unsecured debt ratings incorporate a two-notch government support uplift, given size,interconnectedness and partial government ownership

Credit Challenges

» High dependence on market funding, somewhat mitigated by a solid deposit base and good access to local and internationalcapital markets

» Deterioration in asset quality, mostly related to challenges in the oil offshore portfolio highlight negative pressures on the asset riskprofile of the bank

Rating OutlookThe outlook is negative on all long-term ratings of DNB Bank ASA.

Factors that Could Lead to an Upgrade

» Upward pressure on DNB's debt and deposit rating is unlikely in the near term given the negative outlook. The outlook could returnto stable if DNB: (1) further reduces its asset vulnerability, especially in relation to oil-related and offshore exposures as well asto historically more volatile segments, such as shipping and CRE; (2) maintains strong and stable earnings generation withoutincreasing its risk profile; and (3) preserves sustained access to international capital markets.

Factors that Could Lead to a Downgrade

» Downwards pressure on the ratings could develop if: (1) DNB's financing conditions were to become difficult; (2) its asset qualitywere to deteriorate beyond our expectations and leading to further increase of the bank’s credit costs; (3) its credit profilesubstantially deteriorates due to adverse developments in the Norwegian oil, offshore and real-estate markets and/or (4) DNBincreases its involvement in more risky operations such as capital market activities. (5) government support were to recede due tothe implementation of resolution regimes.

Key Indicators

Exhibit 2

DNB Bank ASA (Consolidated Financials) [1]12-162 12-152 12-142 12-133 12-123 Avg.

Total Assets (NOK billion) 2,235 2,173 2,191 2,046 2,069 2.04

Total Assets (EUR million) 246,219 226,032 241,453 244,803 281,973 -3.34

Total Assets (USD million) 259,700 245,537 292,171 337,324 371,750 -8.64

Tangible Common Equity (NOK billion) 178 173 143 123 110 12.74

Tangible Common Equity (EUR million) 19,567 17,964 15,722 14,721 15,000 6.94

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 5 April 2017 DNB Bank ASA: Semiannual update following year-end 2016 Results


Tangible Common Equity (USD million) 20,638 19,515 19,025 20,284 19,776 1.14

Problem Loans / Gross Loans (%) 2.4 1.5 1.9 2.3 2.2 2.05

Tangible Common Equity / Risk Weighted Assets (%) 17.1 16.3 13.7 12.2 11.2 15.76

Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) 19.3 12.3 17.5 22.7 24.0 19.25

Net Interest Margin (%) 1.5 1.5 1.5 1.4 1.4 1.55

PPI / Average RWA (%) 2.6 3.0 2.6 2.3 2.0 2.76

Net Income / Tangible Assets (%) 0.7 1.0 0.9 0.8 0.6 0.85

Cost / Income Ratio (%) 42.7 39.6 42.3 46.4 48.4 43.95

Market Funds / Tangible Banking Assets (%) 35.4 34.9 37.6 38.0 43.7 37.95

Liquid Banking Assets / Tangible Banking Assets (%) 27.8 25.4 29.4 30.0 27.8 28.15

Gross loans / Due to customers (%) 159.2 161.2 153.4 152.9 161.0 157.55

[1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel III - fully-loaded or transitional phase-in; IFRS [3] Basel II; IFRS [4] Compound Annual Growth Rate (%).Any interim period amounts presented are assumed to be fiscal year end amounts for calculation purposes [5] Simple average of periods presented [6] Simple average of Basel III periodspresentedSource: Moody's Financial Metrics

Detailed Rating ConsiderationsThe financial data in the following sections are sourced from DNB's financial statements and Moody's Financial Metrics.

As the leading bank in Norway, DNB has a solid banking franchise and status as the nation's flagship bank

DNB's sizeable domestic franchise is a key positive rating driver, supporting the bank's profitability and asset quality. DNB is Norway'slargest financial institution, with a dominant and sustainable market share of 29% of domestic gross lending as of end-2016, accordingto Finance Norway. DNB achieves stable earnings generation capacity aided by the supportive operating environment, the bank's solidcustomer base and pricing power, and high brand recognition in Norway.

DNB is Norway's most international bank. The loan portfolio of the bank's international units accounted for around 22.5% of totalloans at the end of December 2016, thus adding diversification to DNB's earnings and risk.

In contrast with European banks that were nationalised during the recent financial crisis, we continue to view DNB as the government'sflagship financial institution. The Norwegian government's 34% stake in the bank makes it the largest shareholder and ensures thebank's headquarters remain in the country, so that we view a reduction of this stake as unlikely. In August 2016, DNB and NordeaBank AB (Aa3/Aa3 stable, a3) agreed to combine their Baltic operations in a joint venture, which they expect to complete in mid-2017,subject to regulatory approval. Although the financial effect of the transaction will be limited for both banks, we expect that the mergerwill create cost and revenue synergies in the bank’s sub-scale Baltic operations.

Capital is high and leverage compares well with peers

At the end of December 2016, DNB's common equity Tier 1 (CET1) and total capital ratios according to Basel III transitional ruleswere 16.0% (above the requirement reached one year ahead on plan) and 19.5%, respectively (up from 14.4% and 17.8% respectively,at end-2015). The increase of common equity Tier 1 capital, was primarily driven by profits generated during the period as well as astrategic reduction in risk-weighted assets relating to large international corporates with low profitability. The group targets a dividendpay-out ratio above 50% from 2017. At the end of December 2016, a dividend of NOK 5.70 per share was proposed by the Board ofDirectors, (around 50% pay-out ratio).

As a result of different risk weighting among the Nordic banks, it can be difficult to compare reported capital ratios. As an example, inNorway, banks’ mortgages are subject to both Basel III requirements with a loss given default floor and Basel I requirements subject toan 80% floor, which result in risk-weighting of around 40% on mortgages. In comparison in Sweden, the large Swedish banks apply amortgage risk-weighting of around 5% to 8% on mortgages in their reported capital ratios but these banks must meet high nominalcapital requirements which include a 25% risk-weight on mortgages. Similar considerations apply to the corporate book.

DNB's leverage ratio according to Moody’s definition (8.7% at end-December 2016) compares well against large Nordic andinternational peers, albeit less so against smaller Norwegian peers (average of 5.4%).



DNB reports solid core earnings and benefits from the relatively strong performance of the Norwegian economy

We view DNB's core earnings as resilient, supported by DNB's dominant position in the Norwegian market. With around 80% of itsloans driven by Norwegian exposures, DNB benefits from the relatively strong performance of the Norwegian economy. We forecast amodest real GDP growth for the total economy (mainland and offshore) of 1.4% in 2017.

The bank's net income to tangible assets has been steadily increasing over the last 3 years from 0.6% in 2012 to 0.8% the followingyear and reaching 0.7% % in 2016. In 2016, net interest income, the main driver of DNB's revenues (70% of total revenues on a three-year average basis), declined by 4% year on year due to higher long term funding costs and a decline in amortisation and fee income;however, the bank was able to reduce expenses by 2% year on year, mainly supported by the positive impact from recent restructuringinitiatives. DNB's cost-to-income ratio remains among the strongest in its European peer group with a three-year average of 40%,reflecting good cost control.

During 2016, DNB's loan loss provisions more than tripled to NOK 7.4 billion of which NOK 2.3 billion on oil and shipping relatedindustries. Despite these challenges, the bank recorded a double digit 10% Return On Equity (ROE) and NOK 19.3 billion net profitin 2016. We expect that spill-over effects from Norway's slowing growth driven by reduced oil investments will continue to putdownward pressure on the bank's earnings.

DNB's BCA is supported by its Very Strong- Macro Profile

DNB's operating environment is primarily influenced by developments in its home market Norway, the EU and through its shippingexposures the rest of the world. Norway, which accounted for 77% of customer loans at end-2016, carries a Very Strong- Macro Profile,reflecting its solid economic, institutional and government fundamentals, but restrained by Norwegian households' high indebtedness,which renders them sensitive to changes in interest rates. The Norwegian banking market is also highly dependent on market fundingand particularly foreign-currency based funding. In terms of industry structure, we view Norway as a favourable banking market withDNB as dominant bank, yielding the bank a certain amount of pricing power.

DNB's exposures to Sweden (5% of customer loans) and the UK (1% of customer loans) are also supported by Very Strong- MacroProfiles. Exposures to the EU (7% of customer loans) currently carry a Strong Macro Profile, while the remaining exposures are toa combination of countries to which DNB is exposed mainly through its global shipping operations (6% of lending). Based on abreakdown of total loans and receivables, the weighted average Macro Profile for DNB is currently Very Strong-.

High dependence on market funding, but DNB benefits from a solid deposit base and good access to local and internationalcapital markets

DNB's funding is underpinned by a solid deposit base, which comprises almost 50% of total funding and 62% of the loan portfolio; theremainder consists of market funding. Interbank funding accounted for 11% of total market funding at year-end 2016. Covered bondshave represented a rapidly growing source of funding, and contributed around one third of market funding at year end 2016. We notethat extensive use of covered bond funding structurally subordinates senior creditors, including depositors.

DNB has good access to the capital markets, including extensive use of international funding which contributed 83% of covered bondfunding at end-2016. However, we regard the bank's dependence on market funding - albeit common for Nordic banks - as a riskbecause, in times of market stress, market funds can become less cost-effective, exerting pressure on banks' net profitability.

As reflected in our methodology, we globally reflect the relative stability of covered bonds compared to unsecured market fundingthrough a standard adjustment in our scorecard.

A relatively large liquidity buffer of NOK625 billion - 24% of total assets at end-2016 - supports the bank's liquidity profile. The reserveconsists of cash and deposits with financial institutions and central banks (63%), Norwegian bonds and fixed-income securities (18%),shareholdings (2%) and the international bond portfolio of the investment bank division (DNB Markets) (30%), which includes highlyrated non-US residential mortgage-backed securities (RMBS) transactions (14% of the international bond portfolio excluding held tomaturity portion), highly rated sovereign bonds (46%) and European covered bonds (40%): all these securities can be repo-ed withcentral banks.



Deterioration in asset quality, mostly related to challenges in the oil offshore portfolio highlight negative pressures on theasset risk profile of the bank

We view DNB's loan portfolio as well diversified, with 50% of exposures at default (EAD) comprising retail lending at end-December2016 (mainly secured by first-lien mortgages) and the remainder spread across industries. However, shipping and CRE account for 6%and 11% of the bank's EAD, respectively, and we typically view these sectors as more volatile. Exposure to riskier oilfield services andthe offshore sector accounts for a sizeable 7% of DNB's EAD which has experienced an increase in losses in the last 12 months.

The bank's retail loan book has shown good resilience. While we believe that the high leverage of Norwegian households and elevatedhouse prices create credit risks, the high levels of employment and supportive welfare system partly mitigate these risks. In addition, inour opinion the strong Norwegian operating environment will remain supportive for bank credit quality for the 12-18 month horizon,despite the reduction in oil-related investments weighing on growth prospects.

Exhibit 3

DNB's Problem Loans Relative to Norwegian and European BanksDespite the recent increase in problem loans, DNB is still showing stringasset risk metrics compared to most European systems

0%

1%

2%

3%

4%

5%

6%

7%

8%

2011 2012 2013 2014 2015 2016

DNB Norway Euro Area

Note: Asset-weighted average for rated banks in the Euro Zone and Norway.Source: Moody's Banking Financial Metrics

We view DNB's risk management and systems as robust, but our assessment of the bank's risk practices is constrained by its highborrower concentration. We understand this concentration is partly explained by the fact that DNB is the leading corporate bank inNorway, and in addition that such concentration is a typical feature at many Nordic banks. However, we believe such concentrationposes a material risk to DNB's asset quality as it potentially heightens the pace and the extent of any deterioration in asset quality.DNB's problem loans increased to 2.4% of gross loans at end-December 2016, from 1.5% at end-2015. The deterioration in the bank’sasset quality was mostly related to challenges in the oil offshore portfolio, which highlights negative pressures on the asset risk profileof the bank. Non-performing loans in the oil-related industries increased to NOK 3.6 billion at the end of 2016 from zero at the endof 2015. Despite the increase, the bank’s level of problem loans are low compared to most of its European peers and in line with otherrated Norwegian banks (see Exhibit 3).

In recent years, most of DNB's asset quality risks have been related to its exposures outside of Norway, and we expect the impactof exposures outside of Norway to diminish following the sale of the Polish network and the return of a more stable operatingenvironment in the Baltic States. In addition, the shipping portfolio has required elevated provisioning in the past few years, andshipping and oil-related impairments rose to NOK 2.3 billion in 2016 (NOK 0.9 billion in 2015). The problem loan coverage decreasedto 35% at end-December 2016, compared with 49% at end-2015.

DNB is exposed to Eksportfinans (Ba3/Not Prime; stable) via a 40% shareholding and a guarantee provided for the institution's liquidityportfolio.



Notching ConsiderationsLoss Given FailureWe expect Norway as member of the European Economic Area to adopt the EU Bank Resolution and Recovery Directive (BRRD). Forthis reason we apply our Advanced LGF analysis. We assume residual tangible common equity of 3% and losses post-failure of 8% oftangible banking assets, a 25% run-off in “junior” wholesale deposits, a 5% run-off in preferred deposits, and assign a 25% probabilityto deposits being preferred to senior unsecured debt. We apply a standard assumption for the large European banks that 26% ofdeposits are junior.

The bank's Aa2 deposit takes into account (1) the a3 adjusted BCA; (2) a very low loss given failure for these instruments as analysedusing our LGF framework resulting in a two-notch LGF uplift; and (3) our expectation of a high probability of government support.Taking into account the Norwegian government's 34% ownership of the bank, our government support assessment translates intotwo notches of support uplift. While we expect Norway to introduce bank resolution legislation in the coming years, we believe thatNorway, as a non-EU European Economic Area (EEA) member with substantial government wealth, will have more flexibility in dealingwith bank resolutions compared with EU states.

DNB's Aa2 long-term senior unsecured debt rating reflects our view that the enhanced volume of senior unsecured debt and underlyingsubordination, which benefits the position of senior unsecured debt, will be sustainable. For junior securities issued by DNB, our LGFanalysis confirms a high loss-given-failure, given the small volume of debt and limited protection from more subordinated instrumentsand residual equity. We also incorporate additional notching for junior subordinated and preference share instruments reflecting thecoupon features.

Government SupportThe expected implementation of resolution regimes has caused us to reconsider the potential for government support to benefitcertain creditors. Given DNB's leading market position and partial government ownership, we assess a high probability of governmentsupport for DNB's long-term deposits and senior unsecured debt, resulting in a two-notch uplift. For junior securities, we continueto believe that the probability of government support is low and these ratings do not include any related uplift. Junior securities alsoinclude additional downward notching from the BCA reflecting coupon suspension risk ahead of a potential failure.



Rating Methodology and Scorecard Factors

Exhibit 4

DNB Bank ASAMacro FactorsWeighted Macro Profile Very

Strong -100%

Factor HistoricRatio

MacroAdjusted

Score

CreditTrend

Assigned Score Key driver #1 Key driver #2

SolvencyAsset RiskProblem Loans / Gross Loans 2.4% a1 ← → a3 Quality of assets Sector concentration

CapitalTCE / RWA 17.1% aa2 ← → aa3 Risk-weighted

capitalisationProfitabilityNet Income / Tangible Assets 0.7% baa2 ← → baa2 Return on assets

Combined Solvency Score a1 a2LiquidityFunding StructureMarket Funds / Tangible Banking Assets 35.4% ba2 ← → ba2 Term structure

Liquid ResourcesLiquid Banking Assets / Tangible Banking Assets 27.8% a2 ← → a2 Stock of liquid assets

Combined Liquidity Score baa2 baa2Financial Profile a3

Business Diversification 0Opacity and Complexity 0Corporate Behavior 0

Total Qualitative Adjustments 0Sovereign or Affiliate constraint: AaaScorecard Calculated BCA range a2-baa1Assigned BCA a3Affiliate Support notching 0Adjusted BCA a3

Balance Sheet in-scope(NOK million)

% in-scope at-failure(NOK million)

% at-failure

Other liabilities 974,966 43.7% 1,071,427 48.0%Deposits 945,694 42.4% 849,233 38.1%

Preferred deposits 699,814 31.4% 664,823 29.8%Junior Deposits 245,880 11.0% 184,410 8.3%

Senior unsecured bank debt 198,535 8.9% 198,535 8.9%Dated subordinated bank debt 20,014 0.9% 20,014 0.9%Junior subordinated bank debt 9,334 0.4% 9,334 0.4%Preference shares (bank) 15,952 0.7% 15,952 0.7%Equity 66,943 3.0% 66,943 3.0%Total Tangible Banking Assets 2,231,438 100% 2,231,438 100%



De jure waterfall De facto waterfall NotchingDebt classInstrumentvolume +

Subordination

Sub-ordination

Instrumentvolume +

Subordination

Sub-ordination

De jure De factoLGF

notchingguidance

versusBCA

AssignedLGF

notching

Additionalnotching

PreliminaryRating

Assessment

Counterparty Risk Assessment 22.2% 22.2% 22.2% 22.2% 3 3 3 3 0 aa3 (cr)Deposits 22.2% 5.0% 22.2% 13.9% 2 3 2 2 0 a1Senior unsecured bank debt 22.2% 5.0% 13.9% 5.0% 2 1 2 1 0 a1Dated subordinated bank debt 5.0% 4.1% 5.0% 4.1% -1 -1 -1 -1 0 baa1 (hyb)Non-cumulative bank preference shares 3.7% 3.0% 3.7% 3.0% -1 -1 -1 -1 -2 baa3 (hyb)

Instrument class Loss GivenFailure notching

AdditionalNotching

Preliminary RatingAssessment

GovernmentSupport notching

Local CurrencyRating

ForeignCurrency

RatingCounterparty Risk Assessment 3 0 aa3 (cr) 2 Aa1 (cr) --Deposits 2 0 a1 2 Aa2 Aa2Senior unsecured bank debt 1 0 a1 2 Aa2 Aa2Dated subordinated bank debt -1 0 baa1 (hyb) 0 Baa1 (hyb) Baa1 (hyb)Non-cumulative bank preference shares -1 -2 baa3 (hyb) 0 Baa3 (hyb) Baa3 (hyb)Source: Moody's Financial Metrics

Ratings

Exhibit 5Category Moody's RatingDNB BANK ASA

Outlook NegativeBank Deposits Aa2/P-1Baseline Credit Assessment a3Adjusted Baseline Credit Assessment a3Counterparty Risk Assessment Aa1(cr)/P-1(cr)Senior Unsecured -Fgn Curr (P)Aa2Senior Unsecured -Dom Curr Aa2Subordinate -Dom Curr Baa1 (hyb)Pref. Stock Non-cumulative Baa3 (hyb)Commercial Paper P-1Other Short Term (P)P-1

DNB BANK ASA, NEW YORK BRANCH

Outlook NegativeBank Deposits Aa2/P-1Other Short Term P-1

DEN NORSKE CREDITBANK

Bkd Jr Subordinate Baa2 (hyb)Source: Moody's Investors Service



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Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’sOverseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a NationallyRecognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by anentity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registeredwith the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferredstock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it feesranging from JPY200,000 to approximately JPY350,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

REPORT NUMBER 1065503


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