DNBBY - DNB Bank: Norway's Leading Bank Is Firing On All Cylinders

Summary

• DNB Bank ASA delivered stellar FY 2022 results with growth on many levels.
• It has strong fundamentals with an enviable ROE and CET-1 ratio and more than 6% dividend yield.
• We initiate coverage with a Buy stance.

Investment Thesis

DNB Bank ASA (DNBBY) is Norway's largest financial services group and one of the largest in the Nordic region in terms of market capitalization, which is $28.8 billion.

The Norwegian government owns 34% of the shares in DNB Bank.

The Group offers a full range of financial services, including loans, savings, advisory services, insurance, and pension products for retail and corporate customers.

We have invested in this bank in the past and like to keep ourselves abreast of its development, as we may potentially invest in the bank again in the near future.

With the bank's recent announcement of financial results for FY 2022, we will take look at how this bank is doing and if we would like to put it on our watch list.

FY 2022 Financial Results

Net profit after taxes for FY 2022 was NOK 32.86 billion. That was an improvement of 30% from the year before.

EPS for the year was NOK 20.65. With a share price of NOK 189.6 as of closing on the 9th of February 2022, it gives us a TTM P/E of 9.2.

That is certainly not expensive.

The share price has come down roughly 5% over the last year.

Return On Equity

We like to look at a company's return on equity. It is a good yardstick on whether the management is good stewards over the capital they have been.

In a recent article on Japan's largest bank ( MUFG ), we complained about the bank's sub-optimal ROE as it is well below that of many other large banks. Their ROE has been around 9%.

DNB Bank has a good ROE.

This is quite impressive as we need to take into account that they are holding on to a large amount of capital. The higher this is, the more difficult it becomes to obtain a satisfactory return, DNB's CET-1 ratio is as high as 18.3%. This is the highest we have seen amongst the large banks.

In terms of controlling their costs, they are also doing a pretty good job.

Cost to income in 2022 was 40.1%, down from 43.0% the previous year.

Net Interest Income

As we remind our readers, the two most important sources of income for banks are the net interest income and the various fees they earn.

For nearly two decades, banks have had to live with the central bank's low-interest rates. In such an environment, the net interest rate margin is lower than when the interest rates are higher.

Last year was a good year for all banks in that respect.

DNB Bank's net interest income for the year was NOK 48.29 billion, an increase of 25% from the year before.

It was particularly in Q4 that we see a fairly big jump in their net interest rate margin.

Loans to customers increased by NOK 220 billion, or 12.3%, in 2022. Customer deposits also grew by 10.7% or NOK 153 billion during the same period.

Fees Income

DNB Bank's net commissions and fees were slightly higher in 2022 at NOK 11.45 billion compared to the NOK 11.01 billion they recorded in 2021.

Their trading activities are handled by their division DNB Markets. They have been profitable over the years and have a good stream of earnings. In 2022, the division booked a net gain on financial instruments at the fair value of NOK 4.15 billion. Income from cards was also positive.

Impairments & Non-Performing Assets

They made a small impairment on financial instruments in Q4 of just NOK 674 million. However, in the first 9 months of the year, they had reversed NOK 946 million from impairments.

Non-performing assets are divided into 3 stages defined by the length of time these loans have been due but not paid. In stage 1, their liabilities are NOK 2,436 billion. This constitutes 9.28% of the loans.

In stage 2 it is NOK 177 billion, which constitutes 1.25% of the loans, and in stage 3 there is NOK 24 billion, which is 0.01% of their loan book.

Return of Capital to Shareholders

It is no secret that we like companies that return some of the cash a company generates to us, the shareholders.

Many things in life change, but some things are the same today as it was in the past. Warren Buffett's mentor Benjamin Graham once stated:

The true investor will do better if he forgets about the stock market and pays attention to his dividend returns and to the operation results of his companies."

Therefore, you should care too. Although, having stated that, it is not the alpha and omega. Berkshire Hathaway (BRK.A) ( BRK.B ) has never paid a dividend, but Warren Buffett likes to receive them. It has still been a good place to be invested in the past.

Anyway, we like the certainty of a dividend - as to count on ever-increasing share prices of the companies we own is less certain.

DNB Bank has a good record of increasing its dividend.

The payout ratio of dividends from their EPS in 2015 was only 30%. It jumped to 50% in 2016 and since 2017 it has been between 62% to 75%.

That is a high payout ratio, compared to most banks.

The present dividend yield is 6.6% before withholding taxes, which is not bad. From this, you may have to calculate what to pay in regards to a withholding tax in Norway. We believe Norway has a 15% withholding tax.

DNB Bank did not do any share buybacks in 2022. However, they announced a program to potentially buy back up to 0.5% of the common shares outstanding. There are 1.55 billion shares outstanding,

Valuation and a Conclusion

As value investors, we do like to buy assets at a price lower than what they are "worth".

There are many things we look at, like ROE, and other things stated in this article, plus intangible things like the quality of a company's management and its ESG performance.

Another important aspect of this assessment is the price to net tangible book value.

DNB Bank's net book value per share is NOK 156.6.

They managed to increase this from NOK 130.3 at the end of 2018. In terms of its price to book value we get a number of 1.24 which is a fair price we would say. It is not cheap, nor is it expensive.

When we assess the business prospects for a company we do have to consider the economic landscape in which they operate. The Norwegian economy is doing quite well.

We initiate our coverage of DNB Bank with a Buy stance based on solid fundamentals, a reasonable price, and their leading market position.

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