DnB NOR ANNUAL REPORT 2009 DnB NOR IN BRIEF
> VALUES
Helpful – professional – show initiative
> VISION
Creating value through the art of serving the customer
> OPERATIONS
DnB NOR aims to be the Norwegian bank and a leading international niche player
> FINANCIAL FACTS
Pre-tax operating profi ts before write-downs NOK 18.7 bn
Earnings per share NOK 6.43
Total combined assets NOK 2 076 bn
Market capitalisation NOK 102 bn
DnB NOR ANNUAL REPORT 2009 DnB NOR IN BRIEF
> FINANCIAL PERFORMANCE 2009
Pre-tax operating profits before write-downs Profits after minority interests Earnings per share NOK million NOK million NOK
20 000 20 000 12 18 717
15 000 15 000 9
6.43
10 000 10 000 6
8 585
5 000 5 000 3
0 0 0 2007 2008 2009 2007 2008 2009 2007 2008 2009
> KEY FIGURES 2009
Return on equity 10.6%
Tier 1 capital ratio 9.3%
Cost/income ratio 48.3%
Share of income from Norwegian operations 83.0%
DnB NOR ANNUAL REPORT 2009 DnB NOR IN BRIEF
> DnB NOR IS NORWAY’s LEADING FINANCIAL SERVICES GROUP
Personal customers in Norway 2 300 000
Corporate clients in Norway 200 000
Internet bank users in Norway 1 600 000
Customers in life and pension insurance companies in Norway 1 000 000
Mutual fund customers 580 000
Customers in DnB NORD 930 000
Branch offi ces in Norway 218
Branch offi ces in DnB NORD 1) 163
International branches and representative offi ces 2) 27
Full-time positions 13 317
1) Branches in Poland, Estonia, Latvia and Lithuania. 2) The DnB NOR Group is represented in Copenhagen, Stockholm, Gothenburg, Malmø, Helsinki, London, Murmansk (9), Luxembourg, Hamburg, Athens, New York, Houston, Santiago, Rio de Janeiro, Shanghai, Singapore, Hong Kong, Chennai and Mumbai.
> DnB NOR’s BUSINESS AREAS
Large Corporates Life and Asset Retail Banking and International DnB NOR Markets Management DnB NORD
Pre-tax operating profi t Pre-tax operating profi t Pre-tax operating profi t Pre-tax operating profi t Pre-tax operating loss NOK 7.0 bn NOK 5.7 bn NOK 5.3 bn NOK 1.4 bn NOK (4.3) bn
Return on capital Return on capital Return on capital Return on capital Return on capital 26.1% 13.4% 69.8% 16.6% (34.4)%
DnB NOR ANNUAL REPORT 2009 CONTENTS
DnB NOR in brief 2 History 2 // Legal structure 2 // Important events in 2009 3 // Key fi gures 4 DnB NOR’s market shares in Norway 5 // DnB NOR’s international units 5 // Business areas 6 Key fi gures – DnB NOR share 8 // DnB NOR’s strategy 9 // Group chief executive’s statement 10 Financial market developments Development trends in the real economy 16 // DnB NOR and the fi nancial crisis 17
Business areas 19 Organisation and management of operations 20 // Retail Banking 22 Large Corporates and International 26 // DnB NOR Markets 30 // Life and Asset Management 34 DnB NORD 38 // Staff and support units 40 Governance 43 Group management 44 // Board of Directors 46 // Governing bodies in DnB NOR ASA 48 Corporate governance 50 // Risk management and internal control 56 Capital management and risk categories 58 // The DnB NOR share 72
79 Society and employees Corporate social responsibility 80 // Employees 84
Directors’ report and annual accounts 89 Directors’ report 90 // Annual accounts 101 // Auditor’s report 202 Control Committee’s report 203 // Key fi gures 204
> FINANCIAL CALENDAR 2010
Annual General Meeting 27 April Contact persons
Distribution of dividends as of 11 May BJØRN ERIK NÆSS PER SAGBAKKEN First quarter 29 April CFO Head of Investor Relations/Long-term Funding Tel.: (+47) 22 48 29 22 Tel.: (+47) 22 48 20 72 Second quarter 9 July [email protected] [email protected]
Third quarter 28 October
The Group’s annual report has been approved by the Board of Directors in the original Norwegian version. This is an English translation.
DnB NOR ANNUAL REPORT 2009 DnB NOR IN BRIEF History
Realkreditt Vital
Acquisition Acquisition DnC 1992 1996 Skandia AM Nordlandsbanken
Merger Acquisition Acquisition 1990 DnB DnB 2002 2003
Merger Bergen Bank 1999 DnB DnB DnB
Postbanken DnB NORD
Acquisition (51%) 2005
Den norske Gjensidige Bank Merger Hypotekforening /Elcon Finans 2003 DnB NOR
Four large Acquisition Acquisition Acquisition savings banks 1993 1999 2006
Sparebanken Merger Sparebanken Sparebanken Gjensidige NOR De- Monchebank Oslo/Akershus 1990 NOR NOR Sparebank mutualisation
Merger Sparebanken Merger Gjensidige 1985 ABC 2002 NOR ASA
Gjensidige NOR De- Fellesbanken Gjensidige Liv Spareforsikring mutualisation
Acquisition 1992
Forenede Forsikring
Legal structure
DnB NOR ASA
DnB NOR Kapitalforvaltning DnB NOR DnB NOR Bank ASA 1) Vital Forsikring ASA Holding AS Skadeforsikring AS AB ASA (51%) Svensk DnB NOR DnB NOR DnB NOR DnB NOR DnB NOR DnB NOR Postbanken Eiendom AS Eiendom AS Monchebank Boligkreditt AS OAO DnB NOR SalusAnsvar AB Meglerservice AS Luxembourg S.A. Nordlandsbanken Næringskreditt AS Næringsmegling AS Fastighetsförmedling DnB NOR Finans AS Bank DnB NORD AS
1) Major subsidiaries only. Ownership 100 per cent unless otherwise indicated.
2 DnB NOR ANNUAL REPORT 2009 DnB NOR IN BRIEF Important events in 2009
• The stock market reversed from a downward slide to an upward trend • The Norwegian government announced the establishment of the State Finance Fund and the State Bond Fund, with total capital of NOK 100 billion • Access to long-term funding improved • DnB NOR presented its strategy and updated targets at its Capital Markets Day Q1 • DnB NOR Skadeforsikring started its fi rst year of operation
• DnB NOR completed a large unsecured bond issue and was among the few banks able to obtain funding without a government guarantee • DnB NOR established DnB NOR Næringskreditt Q2
• Financial markets showed an improvement • DnB NOR established the business areas Retail Banking and Large Corporates and International • DnB NOR announced plans to strengthen equity through an issue of ordinary shares • DnB NOR Bank’s rating was downgraded to Aa3 by Moody’s Q3 • DnB NOR qualifi ed for inclusion in the Dow Jones World Sustainability Index
• Norges Bank was the fi rst central bank to implement an interest rate increase • DnB NOR’s funding situation normalised, though the Group’s funding costs remained higher than before the onset of the fi nancial crisis • DnB NOR completed an equity issue, raising a net amount of NOK 13.9 billion • DnB NOR Bank’s rating was downgraded to A+ with a stable outlook by Standard & Poor’s • DnB NOR was named Norwegian champion in the category “housing loans above NOK 2 million” by the magazine Dine Penger • Postbanken and DnB NOR were ranked as Norway’s best and fourth best bank, respectively, by the magazine Norsk Familieøkonomi Q4 • Vital was ranked as Norway’s best pensions manager by the magazine Investment & Pension Europe (IPE) • DnB NOR’s Board of Directors decided to initiate an evaluation of the shareholder agreement with NORD/LB
DnB NOR ANNUAL REPORT 2009 3 DnB NOR IN BRIEF Key fi gures
> INCOME STATEMENT
Amounts in NOK million 2009 2008 2007 2006 2005
Net interest income 22 633 21 910 17 866 15 289 13 610 Net other operating income 14 994 12 438 13 732 13 204 11 725 Ordinary operating expenses 18 911 18 721 15 974 14 263 12 711 Other expenses 0 0 476 164 153 Pre-tax operating profi t before write-downs 18 717 15 627 15 148 14 066 12 471 Net gains on fi xed and intangible assets 26 52 2 481 365 775 Write-downs on loans and guarantees 7 710 3 509 220 (258) 137 Pre-tax operating profi t 11 032 12 170 17 409 14 689 13 109 Taxes 4 086 3 252 2 387 2 881 2 965 Profi t from operations and non-current assets held for sale, after taxes 80 0 0 0 0 Profi t for the year 7 026 8 918 15 022 11 808 10 144 Profi t attributable to shareholders 8 585 9 211 14 780 11 665 10 131 Profi t attributable to minority interests (1 559) (293) 242 143 13 Earnings per share (NOK) 6.43 6.91 11.08 8.74 7.59
> BALANCE SHEET
Amounts in NOK million 31 Dec. 2009 31 Dec. 2008 31 Dec. 2007 31 Dec. 2006 31 Dec. 2005
Total assets 1 823 453 1 831 699 1 473 919 1 320 242 1 081 428 Lending to customers 1 114 886 1 191 635 970 504 827 947 697 579 Deposits from customers 590 745 597 242 538 151 474 526 410 991 Average total assets for the year 1 905 708 1 635 113 1 411 576 1 209 037 1 001 705 Total combined assets at year-end 2 075 824 2 140 928 1 834 006 1 687 876 1 459 000
> KEY FIGURES 1)
2009 2008 2007 2006 2005
Return on equity (per cent) 10.6 12.4 22.0 19.5 18.8 Dividend per share (NOK) 2) 1.75 0.00 4.50 4.00 3.50 Core (Tier 1) capital ratio at end of period (per cent) 9.3 6.7 7.2 6.7 7.4 Capital adequacy ratio at end of period (per cent) 12.1 9.5 9.6 10.0 10.2 Write-downs relative to net lending to customers (per cent) 0.67 0.33 0.02 (0.03) 0.02 Average combined spread for lending and deposits (per cent) 1.15 1.04 1.00 1.08 1.19 Share price at end of period (NOK) 62.75 27.00 83.00 88.50 72.00 Diluted share price at end of period, adjusted for rights issue (NOK) 62.75 25.64 78.82 84.04 68.37 Price/book value 1.04 0.47 1.51 1.84 1.68
1) For a more detailed table of key fi gures, see page 204. 2) Proposed dividend for 2009.
4 DnB NOR ANNUAL REPORT 2009 DnB NOR IN BRIEF DnB NOR’s market shares in Norway
Retail market
Lending Deposits Policyholders' funds Mutual fund assets as at 31 Dec. 2009 as at 31 Dec. 2009 as at 30 Sept. 2009 as at 31 Dec. 2009
28% 32% 53% 34%
Corporate market
Lending 1) Deposits Policyholders' funds Mutual fund assets as at 31 Dec. 2009 as at 31 Dec. 2009 as at 30 Sept. 2009 as at 31 Dec. 2009
24% 35% 26% 21%
1) Share of credit from credit institutions.
DnB NOR’s market shares DnB NOR’s international units
Income in DnB NOR's Share of income in Lending volume in DnB NOR's Share of lending in international units international units international units international units NOK million 2009 NOK million as at 31 Dec. 2009
6% 6%
11% 12%
98
2 242 2 468 68
181 4 185 139 3 262
2008 2009 83% 31 Dec. 31 Dec. 82% 2008 2009
DnB NORD Other international units Norwegian units
DnB NOR ANNUAL REPORT 2009 5 DnB NOR IN BRIEF Business areas
> RETAIL BANKING
Key fi gures as at 31 Dec. 2009
Retail Banking is responsible for serving the Group’s 2.3 million personal Pre-tax operating profi ts NOK 6 984 million customers and more than 100 000 corporate customers in Norway. By coordinating the service to the various customer segments in local markets, Cost/income ratio 53.2% Retail Banking will make the services better and more accessible while increasing operational effi ciency. By offering competitive products and NOK 727 billion high-quality advisory services, the business area aims to improve customer Lending satisfaction scores. DnB NOR has Norway’s largest distribution network for fi nancial services. Banking services on mobile phones show rapid growth, Deposits NOK 370 billion and DnB NOR is at the vanguard of developing such services to both per- sonal and corporate customers. Return on allocated capital 26.1%
No. of full-time positions 5 090
> LARGE CORPORATES AND INTERNATIONAL
Key fi gures as at 31 Dec. 2009
Large Corporates and International is responsible for serving the Group’s Pre-tax operating profi ts NOK 5 657 million largest Norwegian corporate clients and for DnB NOR’s international bank- ing operations. The business area’s operations are based on sound, long- Cost/income ratio 21.0% term customer relationships, a broad product range and the ability to offer customers fi nancial services adapted to prevailing market conditions. NOK 335 billion DnB NOR is recognised for its expertise within complex international Lending transactions, and its international operations focus on the Group’s strategic priority areas, which are shipping, energy and seafood. Deposits NOK 193 billion
Return on allocated capital 13.4%
No. of full-time positions 1 061
> DnB NOR MARKETS
Key fi gures as at 31 Dec. 2009
DnB NOR Markets is the Group’s investment fi rm and serves customers Pre-tax operating profi ts NOK 5 331 million from its head offi ce in Oslo, 13 regional sales desks in Norway, six inter- national offi ces and via electronic channels. Key products include foreign Cost/income ratio 26.4% exchange, interest rate and commodity products, securities and other investment products, debt and equity fi nancing in capital markets, research 69.8% and advisory services, as well as custodial and other securities services. To Return on allocated capital better identify and meet current and future customer needs, cooperation with the Group’s other business areas is important, and these provide an No. of full-time positions 647 important sales channel for DnB NOR Markets’ products. The main focus is on customer activities, while trading activities should support customer activities with products and prices.
6 DnB NOR ANNUAL REPORT 2009 DnB NOR IN BRIEF
> LIFE AND ASSET MANAGEMENT
Key fi gures as at 31 Dec. 2009
Life and Asset Management 1) consists of Vital and DnB NOR Asset Man- Pre-tax operating profi ts NOK 1 351 million agement and is responsible for life insurance, pension savings and asset – Vital NOK 1 134 million management in the Group. Vital provided insurance coverage for around – Asset Management NOK 217 million one million policyholders and had group agreements with approximately 25 000 companies at year-end 2009. DnB NOR Asset Management had 16.6% some 580 000 retail clients and a leading position among Norwegian and Return on allocated capital Swedish institutional clients. Cost/income ratio 62.1%
Assets under management NOK 486 billion 1) In early 2010, the insurance operations in the Group were coordinated, and the responsibility for DnB NOR Skadeforsikring was transferred to the business area, which changed its name to Insurance and Asset Management. No. of full-time positions 961
> DnB NORD
Key fi gures as at 31 Dec. 2009
The operations of DnB NORD, in which DnB NOR has a 51 per cent owner- Pre-tax operating loss NOK (4 289) million ship interest, are mainly concentrated in the Baltic States and Poland. The bank offers a wide range of products to both corporate and retail Cost/income ratio 73.5% customers. DnB NORD was strongly affected by the global fi nancial crisis, which caused a serious cool-down in the Baltic economies. The economic NOK 68 billion downturn resulted in a high level of write-downs on loans in 2009. The Lending effects of the fi nancial crisis are expected to last through 2010, though DnB NORD anticipates a reduction in write-downs on loans compared with Deposits NOK 19 billion 2009. DnB NORD will focus on consolidating its operations, improving cost- effi ciency and reducing losses. Return on allocated capital (34.4)%
No. of full-time positions 3 174
Pre-tax operating profit before write-downs
DnB NOR NOK million 10 000
8 569 8 000 7 669 Large Cor- Life Retail DnB NOR 6 785 porates and and Asset 6 410 Banking Markets 6 000 International Management 5 331
3 936 4 000 DnB NORD
2 000 1 351 748 764
0
(1 000) (347) Retail Banking Large Corporates DnB NOR Life and Asset DnB NORD and International Markets Management
2008 2009
DnB NOR ANNUAL REPORT 2009 7 DnB NOR IN BRIEF Key fi gures – DnB NOR share
2009 turned out to be a very good year for the DnB NOR share. The share price rose by 145 per cent, which was signifi cantly higher than the 80 per cent unweighted average increase in the share prices of the Group’s Nordic peers. The DnB NOR share also outper- formed its Nordic peers over the past two and three-year periods. DnB NOR had a market capitalisation of NOK 102 billion at end-December 2009 and is the third largest company listed on Oslo Børs (the Oslo Stock Exchange).
Total annual return as at 31 December 2009 Dividend for the fi nancial year
Total annual return (%) Last year Last two years Last three years 2009 (proposal) NOK 1.75 DnB NOR 144.7 (7.6) (5.4) 2008 NOK 0.00 Nordic average 1) 79.5 (14.2) (12.0) 2007 NOK 4.50 2006 NOK 4.00 2005 NOK 3.50
SHARE PRICE DEVELOPMENT IN 2009 DnB NOR compared with Nordic financial services groups ¹) The DnB NOR Group's market capitalisation Local currency NOK billion
31 December 2008 = 100 118 300 120 111 102 96 250
80 200
150 40 36
100
50 0 31.12.08 28.02.09 30.04.09 30.06.09 31.08.09 31.10.09 31.12.09 31 Dec. 31 Dec. 31 Dec. 31 Dec. 31 Dec. 2005 2006 2007 2008 2009
DnB NOR Nordic financial services groups
1) Unweighted average in local currency of Danske Bank, Swedbank, Nordea, SEB and Handelsbanken.
8 DnB NOR ANNUAL REPORT 2009 DnB NOR IN BRIEF DnB NOR’s strategy
The turmoil in the fi nancial markets in 2008 and 2009 changed the underlying macroeconomic assumptions and affected DnB NOR’s expansion in the short term, not least internationally. However, the Group’s long-term strategy and growth ambitions remain unchanged.
BUSINESS IDEA Profi table international growth built on Norwegian expertise DnB NOR will be customers’ best fi nancial partner and meet their needs – a leading international niche player for fi nancial solutions. DnB NOR will build long-term relations with the largest corporate clients and focus on selected industries based on its core competencies. DnB NOR’s strengths are a local presence and a full range of products. DnB NOR’s target segments will be: DnB NOR has a unique platform in the Norwegian market: • shipping • high market shares in all segments • energy • the largest customer base • seafood • the most extensive distribution network DnB NOR will be among the most cost-effective market Its long-term focus on selected industries such as shipping, energy and players in Europe seafood has made DnB NOR a leading international niche player. DnB NOR will coordinate group and support functions to ensure consistent deliveries, standardised processes and greater automation. VISION AND VALUES An important target for the Group is to achieve even stronger customer Streamlining measures will be given high priority by: orientation in its operations and improve customer satisfaction. • strengthening and coordinating procurement functions in the Group • coordinating and consolidating IT functions DnB NOR’s vision, Creating value through the art of serving the customer, • standardising and automating products, services and customer service is supported by the values helpful, professional and show initiative. where expedient • coordinating and rationalising staff and support functions Employees which are helpful, professional and show initiative are vital if DnB NOR is to succeed in implementing its strategy. FINANCIAL TARGETS DnB NOR will give priority to long-term value creation for its shareholders STRATEGY and aims to achieve a return on equity and a market capitalisation which By capitalising on the Group’s strengths and unique position, DnB NOR are competitive in relation to its Nordic peers. will be the Norwegian bank and a leading international niche player. The successful implementation of DnB NOR’s strategy will result in Strengthen and consolidate DnB NOR’s position in Norway DnB NOR reaching its long-term fi nancial targets, which are: – the Norwegian bank • a return on equity above 13 per cent DnB NOR will build and strengthen relations with high-quality customers. • cost saving measures with an annual effect of NOK 2 billion from the end of 2012 DnB NOR will: • an ordinary cost/income ratio below 46 per cent from 2012 • offer extensive distribution – present a uniform corporate image • offer a complete range of attractive products which meet customer needs Capital strategy and dividend policy: • offer competitive prices and products which create value for customers • DnB NOR to be among the best capitalised fi nancial groups in the • engage in long-term, honest and relevant communication with customers Nordic region • meet the needs of the largest corporate clients in Norway through strong • AA level ratings for long-term debt for DnB NOR Bank ASA industry expertise and local competitive power • dividend payments representing approximately 50 per cent of annual profi ts
Dividends will be determined on the basis of expected profi t levels in a normal situation, external parameters and the need to maintain capital adequacy at a satisfactory level.
DnB NOR ANNUAL REPORT 2009 9 DnB NOR IN BRIEF
GROUP CHIEF EXECUTIVE’S STATEMENT
2009 was a good year for DnB NOR in light of the weak international economic conditions, with annual profi ts of NOK 7 billion and a return on equity of 10.6 per cent. At the same time, we have never been in a better position to meet our customers’ expectations and needs.
10 DnB NOR ANNUAL REPORT 2009 DnB NOR IN BRIEF
In 2009, the international fi nancial crisis continued to dominate the continue to feel the impact of a world economy that is still struggling with global economy, but the main focus moved away from the turbulence in surplus capacity in several areas. fi nancial markets to the danger of a deep and prolonged real economic crisis. In the banking world, there was increasing fear of losses, and Future uncertainties are mainly related to political decisions. Rising pub- pressure grew to raise new equity capital. lic debt, national budget defi cits and a fear of negative developments in the East Asian economies are some of the challenges on the international In March, DnB NOR announced estimated write-downs on loans of political agenda. NOK 8-10 billion for 2009, while the target of NOK 20 billion in pre-tax operating profi ts before write-downs remained fi rm for 2010. Actual In such an economic climate, we believe that DnB NOR’s interna- write-downs were below estimated fi gures, totalling NOK 7.7 billion for tional strategy is robust. Our main priority areas of energy, shipping 2009. The Group delivered a sound fi nancial performance each quarter, and seafood represent important industries in both the developed and recording pre-tax operating profi ts before write downs of NOK 18.7 billion emerging economies. Our extensive international presence makes us well for the full year. positioned to realise our international ambitions. Furthermore, we believe that our operations in the Baltic region represent a sound platform for On 25 September, we announced a rights issue of NOK 14 billion. The long-term growth in areas that are geographically close to Norway. share issue was fully subscribed at the lowest discount obtained by any European bank during the fi nancial crisis. At the end of 2009, DnB NOR During 2009, we made a number of organisational changes, and we had a Tier 1 capital ratio of 9.3 per cent and a leverage ratio of 5.6 per are now in the process of coordinating and integrating our operations to cent, making us one of the most solid banks in Europe. We are well meet the needs of DnB NOR’s personal customers and SMEs in Norway prepared to meet our customers’ future fi nancing needs and changes in in a better and more holistic manner. We have a unique distribution external parameters in the years to come. network, including 218 branch offi ces, 913 in-store banking outlets, 117 real estate brokerage offi ces and 208 post offi ces. Our Internet banks are used by 1.6 million customers, and 500 000 customers access our “Our wish for 2010 is that each individual banking services via their mobile phones. Our aim is that our customers will fi nd that DnB NOR customer’s meeting with DnB NOR will be presents a more uniform corporate image to the market – irrespective of how they choose to use characterised by our employees putting our our services. We have also strengthened the part of our values into practice, showing helpfulness, organisation working with our largest international clients. We are confi dent and optimistic about our professionalism and initiative.” international operations within industries where we have well-established solutions and the exper- tise to succeed. I am impressed by the contribution made by the Group’s employees through the year. They did their best every day for the Group’s customers. In addition, we have been through an extensive process to formulate a Losses were limited, customer relationships were strengthened, and new new vision and new values for the Group. Our wish for 2010 is that each contacts were made. individual customer’s meeting with DnB NOR will be characterised by our employees putting our values into practice, showing helpfulness, profes- DnB NOR was named Norwegian champion in the category “Housing sionalism and initiative. loans above NOK 2 million” by the magazine Dine Penger in its annual bank ranking. This confi rms that we managed to retain our customer In DnB NOR, our aim is to create lasting values for our customers, focus during a challenging year. While many international banks shareholders, employees and society at large. I look forward to work- downscaled their operations in Norway, we strengthened our position as ing towards our goals and meeting future challenges together with the “the Norwegian bank”. Among personal customers in Norway, we had Group’s motivated employees. a 35 per cent market share of the savings market and 28 per cent of the lending market at the beginning of 2010.
As a market leader in most segments, DnB NOR has a unique vantage point from which to observe the Norwegian economy. More than 80 per cent of our income stems from operations in Norway, and in 2009 our write-downs on loans in Norway were lower than what we regard as normalised losses through a business cycle. Rune Bjerke Group chief executive During the fi nancial crisis, governments on four continents implemented successful and coordinated measures. The Norwegian authorities used their economic manoeuvrability to implement some of the most extensive budget stimulus measures in the world. Most economic indicators reversed during the summer of 2009, and DnB NOR Markets forecasts global GDP growth of 3.4 per cent for 2010.
The start of 2010 appears to signal better times ahead for Norway than we feared 12 months ago, however, certain industries and companies
DnB NOR ANNUAL REPORT 2009 11 VALUE
12 Financial market developments Development trends in the real economy 16 // DnB NOR and the fi nancial crisis 17
> The fi nancial crisis demonstrated the importance of stable fi nancial institutions which safeguard customer interests and values over time. DnB NOR, the Norwegian bank, has created values for more than 170 years.
DnB NOR ANNUAL REPORT 2009 13 FINANCIAL MARKET DEVELOPMENTS
FINANCIAL MARKET DEVELOPMENTS
Global fi nancial markets stabilised during 2009 and then gradually improved. The stock markets followed suit, recovering rapidly after bottoming out in the fi rst quarter of 2009. Nevertheless, most markets were far from the high levels reached towards the end of 2007.
Credit risk margins narrowed considerably in the international bond When the US government did not step in to save the investment bank markets during 2009, and it became possible, once again, for certain Lehman Brothers, resulting in the fi ling for Chapter 11 bankruptcy protec- fi nancial institutions and companies to obtain funding in the international tion on 15 September 2008, the fi nancial turmoil developed into the most capital markets. However, the margins remained higher than before the serious fi nancial crisis since the 1930s. The US dollar interbank market fi nancial turmoil. dried up completely, and even the covered bond market ceased to function as a source of funding for Norwegian and international banks. Norway Events in 2009 must be seen in light of the fact that the fi nancial crisis also had to contend with the fact that due to the small size of its domes- started in the summer of 2007 and was therefore well-entrenched. A tic money and capital markets, Norwegian banks obtain a major part of crisis of confi dence occurred in the international capital markets related their funding from abroad. The crisis escalated after several consecutive to securities based on high-risk US home loans (sub-prime loans). These quarters of dysfunctional money and capital markets. A point was reached securities, which were diffi cult to value and hence trade in, were sold on a when only short-term liquidity was available, which was a factor behind large scale to numerous fi nancial institutions. Uncertainty about who had the gradual rise in liquidity risk in the banking system both in Norway and such doubtful commitments on their books led to a dramatic loss of con- internationally . fi dence among international banks. Consequently, the interbank markets ceased to function. These markets are normally the source of funding with During this phase, when the private banks were no longer willing to lend maturities ranging from one day to twelve months. Suddenly, all activ- each other money, other than on very short maturities, and other private ity became very short-term. The majority of available liquid funds had funding sources turned towards risk-free alternatives, such as govern- maturities of maximum one week and some up until one month. At times, ment securities, the central banks and national authorities had to secure certain markets completely ceased to function. As soon as the third quarter liquid funds and fi nancing for the banking systems. Extraordinary funding of 2007, the prevailing uncertainty, combined with dysfunctional markets, schemes were established for banks in the central banks. In some coun- exacerbated the liquidity problems of several international banks. It also tries, there was a fear that bank customers, losing confi dence in the bank- became far more diffi cult for the banks to obtain funding based on loans ing systems, would withdraw their deposits. Danish and German banks with maturities exceeding 12 months. The negative effects spread to the received a general government deposit guarantee, irrespective of amount. US dollar-based Norwegian money market from the onset of the fi nancial In a number of countries, including Sweden and Denmark, government crisis in 2007. In practice, Norwegian money market rates are determined guarantee schemes were established for long-term funding to the banks. in the market for currency swaps between the Norwegian krone and the Deposit guarantee schemes were strengthened and banks in diffi culties US dollar. In order to determine Norwegian interest rates, market players received fi nancial support from their own countries’ govern ments, thereby require access to US dollars with corresponding maturities. When the sup- avoiding losses for depositors and other lenders. ply of US dollars declined and the situation became uncertain, funds in the money market in Norwegian kroner became sparse. The major fl uctuations Even though Norwegian banks were fi nancially sound, the global fi nancial in US money market rates had a direct effect on the Norwegian rates. turmoil meant that also they were unable to count on funding from the international capital markets other than on a very short-term basis. In com- During the fi rst phase of the crisis, the Norwegian and Nordic banks petition with government-guaranteed alternatives in other countries, there remained relatively unscathed. They had refrained from investing in the was also a danger that deposits and savings not covered by the Norwegian type of mortgage-backed securities that were the source of the turmoil. In deposit guarantee scheme, could be transferred to banks in other countries. Norway, in the summer of 2007, covered bonds were starting to be intro- It was feared that customers would be encouraged to move their deposits duced as a new funding instrument, providing investors with security in from Norwegian banks to state-guaranteed deposits in other countries. the best housing loans. This type of long-term funding with fi ve to ten-year maturities was still available up until the autumn of 2008. Norwegian banks It was important for DnB NOR to give the Norwegian authorities a total pic- were therefore able to maintain a normal level of lending activity even in a ture of the situation and help implement the most appropriate measures. more challenging market. It was also positive for DnB NOR that DnB NOR It was pointed out that banks which only had access to short-term funding Bank ASA was upgraded by the rating agency Standard & Poor’s to AA- in would not be able to maintain normal lending operations. The liquidity risk April 2008, a period when many other banks were downgraded. would then become too great. Measures were therefore proposed to also secure longer-term funding, i.e. a minimum period of three years.
14 DnB NOR ANNUAL REPORT 2009 FINANCIAL MARKET DEVELOPMENTS
DnB NOR ANNUAL REPORT 2009 15 FINANCIAL MARKET DEVELOPMENTS
Share indices Index 31 December 2006 = 100 120
105
90
75
60
45
30 31 Dec. 31 Dec. 31 Dec. 31 Dec. 2006 2007 2008 2009
New York Japan London
As one of several measures, on 12 October 2008, the Norwegian authori- fondet, the National Insurance Fund, and has total capital of NOK 50 bil- ties launched a scheme to secure the banks long-term funding whereby lion. As conditions normalise, the bond fund will gradually be downscaled the government would exchange Norwegian Treasury bills for covered and eventually phased out. bonds. The agreements were made based on maturities of up till fi ve years. The fi nal version of the scheme gave the opportunity to exchange bonds DEVELOPMENT TRENDS IN THE REAL ECONOMY for Treasury bills over a revolving period of maximum fi ve years. The banks In 2009, the international economy was strongly affected by the crisis would then be able to sell the Treasury bills and thus obtain funding, or use in the fi nancial markets and its spillover effects. To stimulate economic them as collateral for funding from others. The knowledge that DnB NOR activity, the central banks reduced their key interest rates to historically low and other Norwegian banks had such a secure source of funding was, levels and several countries introduced so-called quantitative easing as a together with other measures, suffi cient to calm fears surrounding the monetary policy measure. This was done by purchasing Treasury bills and liquidity situation. The swap scheme enabled DnB NOR and other banks corporate securities in order to inject liquid funds and reduce interest rate to make better use of available short-term, unsecured funding in their levels on securities with long maturities. lending operations than would otherwise have been the case. DnB NOR therefore used the exchanged Treasury bills to build up liquidity reserves. The fi nancial crisis had an unusually sudden effect on the real economy The scheme ensured the Norwegian government a margin of minimum and led to the most dramatic downturn in the international economy since 0.4 percentage points from the swap scheme with the banks. Norges the Second World War. In many countries, manufacturing output fell by Bank also eased collateral requirements for loans in the central bank and 20-30 per cent over a few quarters. There was also a sharp fall in total provided the market with foreign currency loans. GDP growth, and unemployment rose steeply. Gradually, manufacturing production stabilised and in the second half of 2009, there were clear The fi rst auction under the swap scheme was held on 24 November 2008. signs of a hesitant economic recovery. Fiscal policy measures were used The scheme was gradually phased out as the fi nancial markets normal- actively to curb the economic downturn, while the recession led to lower ised during the autumn of 2009. The agreements with the longest terms government revenues and higher public expenditure on account of a rise will expire in September 2014. The swap scheme encompassed a total of in unemployment benefi ts etc. Fiscal policy measures were necessary to NOK 230 billion, of which DnB NOR has entered into agreements totalling stimulate economic activity, but also caused a rapid rise in public debt. In NOK 118 billion. Even though access to long-term funding through the many countries, public debt rose so high that it put pressure on govern- private bond markets started to improve towards the end of 2009, the ment fi nances while further economic growth became uncertain. High banks’ long-term funding costs remained at a much higher lever than debt in the private sector also created a need for consolidation in both the before the onset of the fi nancial crisis in the summer of 2007. business and the household sector. This may be a contributory factor in reducing future economic growth. An important measure to secure trust in the Norwegian fi nancial system was the establishment of the Norwegian State Finance Fund in March The Norwegian economy has also been affected by the global recession 2009, with capital totalling NOK 50 billion. The purpose of the Fund was both via international trade and through international fi nancial markets. to provide Tier 1 capital for Norwegian banks. Thirty-four banks applied Parts of the export industry and the building and construction industry for capital injections, amounting to a total of NOK 6.7 billion, and the total have been hard hit. In spite of a pronounced economic contraction, there assets of these banks represented approximately 15 per cent of the total has only been a slight rise in unemployment levels in Norway. One reason assets of Norwegian banks. A practical consequence of the establishment is that counter-cyclical policy has been stronger than in most other coun- of the State Finance Fund was that all Norwegian banks were given more tries. The oil industry has also helped stabilise the Norwegian economy time to investigate what opportunities existed to obtain equity by normal as investment within the sector has remained at a high level due to the means in the capital markets and await a further normalisation of market long time lags from decision-making to implementation. The fi nancial conditions. This proved to be very advantageous for DnB NOR. crisis resulted in a rapid weakening of the Norwegian krone against both the euro and the US dollar, which eased the pressure on Norway’s export Another measure was the establishment of the State Bond Fund to industries. The weakening of the krone was partially reversed during 2009 contribute to increasing liquidity and the supply of capital to the Norwegian as Norwegian interest rates were raised at a faster rate than in most other corporate bond market. The Bond Fund is administered by Folketrygd- countries.
16 DnB NOR ANNUAL REPORT 2009 FINANCIAL MARKET DEVELOPMENTS
Credit insurance premiums Funding costs Basis points Basis points
500 200
400 150
300 100
200 50
100 0
0 -50 30 June 31 Dec. 30 June 31 Dec. 30 June 31 Dec. 30 June 31 Dec. 30 June 31 Dec. 30 June 31 Dec. 2007 2007 2008 2008 2009 2009 2007 2007 2008 2008 2009 2009
iTraxx Europe Industry 5-year DnB NOR 5-year senior unsecured iTraxx Europe Energy 5-year DnB NOR 5-year covered bonds
The rise in unemployment was also counteracted by the fact that the risen signifi cantly. The credit risk margin has been widened to some extent many immigrants working in Norway on short-term contracts returned to refl ect customers’ weakened credit quality. home when their jobs were affected by the downturn. For others, higher education became more attractive, reducing the pool of workers and hence On the funding side, DnB NOR was well positioned in 2009. DnB NOR also unemployment fi gures. The Norwegian economy is still in a period of Boligkreditt was established in the summer of 2007 and a substantial recession, but shows clear signs of improvement. In particular, private and volume of housing loans was ready to be transferred from the bank to this public sector consumption and public investments make a positive con- company for the issuance of covered bonds. Ever since the start of the tribution, though exports of traditional goods have also started to recover. global fi nancial turmoil in the autumn of 2007 and until the end of 2009, Housing investments and investments in the business sector have not yet DnB NOR endeavoured to gradually increase the maturity of its funding returned to former levels, but escalating housing prices are expected to and capitalise on the periods when the market conditions were relatively rapidly cause a rise in housebuilding activity . favourable. DnB NOR was one of the fi rst banks able to obtain fi ve-year unsecured senior debt in the spring of 2009. By the end of 2009, the aver- Household debt, in per cent of disposable income, had reached a histori- age maturity of DnB NOR’s funding had increased from 2.7 to 3.0 years. cally high level towards the end of 2009, partly on account of low interest The liquidity risk had been considerably reduced. rates and rising housing prices. Nevertheless, the general fi nancial situa- tion for Norwegian households was positive. DnB NOR increased equity capital by approximately NOK 14 billion in December 2009 through a share issue with preferential rights for existing DnB NOR AND THE FINANCIAL CRISIS shareholders. It was an important step to strengthen the Group’s opportuni- DnB NOR weathered the fi nancial crisis well in 2009. This is partly due ties to satisfy the fi nancing needs of its customers, capitalise on new busi- to the fact that Norway, being the Group’s predominant domestic market, ness opportunities and make it possible for DnB NOR to resume a normal has experienced a less negative economic trend than most other countries. dividend policy. The rights issue and enhancement of the Group’s capital Norway’s favourable economic platform has made it possible for the Nor- base through retained earnings have made DnB NOR well positioned to wegian government to implement strong stimulus measures. However, the satisfy the notifi ed stricter capital adequacy requirements. The Group’s Group has also benefi ted from having a focused and conservative credit Tier 1 capital consists predominantly of ordinary equity. strategy over many years, based on experience gained from the banking crisis in Norway in the early 1990s. In addition, DnB NOR has had moder- DnB NOR chose to obtain new equity from the markets and not avail itself ate liquidity risk and no liquidity risk related to off-balance-sheet commit- of the Norwegian State Finance Fund. This was because an ordinary share ments. The Group is committed to transparency in relation to capital capital increase gave permanent capital on conditions which were attractive market investors, which has ensured trust during challenging times. for shareholders. In addition, this solution enabled a more fl exible employ- ment of the funds and greater fl exibility in business operations. In 2008 and 2009, DnB NOR endeavoured to maintain close to normal credit activity in the Norwegian market. Due to the covered bonds swap scheme, housing loans became self-fi nancing and caused no great increase in funding costs. DnB NOR’s personal customers also benefi ted from the positive effects of the scheme through favourably priced housing loans.
In the corporate market, the bank has given priority to existing customers. On the whole, credit strategies have not been greatly changed. Neverthe- less, when customers may have found it more diffi cult to be granted loans, this has primarily been due to the fact that the outlook for companies and projects has appeared weaker than before. For corporate customers, inter- est rates have been reduced less than the changes in money market rates. As in other banks, DnB NOR’s funding costs in the capital markets have
DnB NOR ANNUAL REPORT 2009 17 HELPFUL
18 Business areas Organisation and management of operations 20 // Retail Banking 22 Large Corporates and International 26 // DnB NOR Markets 30 // Life and Asset Management 34 DnB NORD 38 // Staff and support units 40
> DnB NOR is Norway’s largest fi nancial services group, offering customers a full range of products and services through its national and international operations. By being helpful, we will give our customers pleasant banking experiences.
DnB NOR ANNUAL REPORT 2009 19 BUSINESS AREAS
ORGANISATION AND MANAGEMENT OF OPERATIONS
With effect from 1 July 2009, DnB NOR was organised into the operational business areas Retail Banking, Large Corporates and International, DnB NOR Markets and Life and Asset Management. The business areas operate as independent profi t centres and have responsibility for serving all of the Group’s customers and for the total range of products. DnB NORD is regarded as a separate profi t centre. Operational tasks and group services are carried out by the Group’s staff and support units.
DnB NOR
Marketing and Communications Corporate Centre
Group Large Cor- Life and Retail DnB NOR Finance and porates and Asset Operations HR IT Markets Risk Banking International Management Management
DnB NORD
The business areas operate as independent profi t centres and are respon- enables the Group to offer customer solutions across business areas. sible for customer relationships and for serving specifi c customer segments DnB NOR’s fi nancial management model and operational organisation and ensuring that the Group’s products are adapted to market require- facilitate sale of the entire range of products and services offered by the ments. These responsibilities include customer relationship management, Group. For most types of transactions between the business areas, pricing is distribution and risk assessments in addition to product development, regulated by internal agreements generally based on market terms. For some production and product pricing. transactions, however, income is recorded in more than one business area. Net income from transactions which require extensive cooperation between Central staff and support units carry out infrastructure tasks for the operative several units, where it is diffi cult to quantify the contribution made by each units as well as operational tasks providing cost effi ciencies when undertaken unit, is recorded in its entirety in all units involved in such transactions. for several business areas. In addition, they perform functions for governing bodies and group management. The business areas are able to infl uence staff Services provided by staff and support units are scaled according to the and support units by changing their demand patterns and requirements. business areas’ demand, and intra-group services are charged according to use at market prices. Costs relating to the Group’s strategic initiatives, direct INTERNAL MANAGEMENT OF OPERATIONS IN 2009 shareholder-related expenses and costs concerning the Group’s governing Differentiated fi nancial and operational targets have been set for the bodies are not charged to the business areas. various business areas to help the DnB NOR Group reach its targets. The business areas’ contributions to value creation in the Group are assessed OPERATIONAL STRUCTURE by monitoring developments in economic profi t, defi ned as profi ts after With effect from 1 July 2009, the Group’s operations in the regional net- write-downs and taxes less the calculated cost of capital based on capital work in Norway were restructured, whereby service to personal customers allocated to each business area. In addition, return on capital, defi ned as and small and medium-sized enterprises was organised under the Retail profi ts after taxes relative to allocated capital, is one of the key fi nancial Banking business area. Responsibility for the largest corporate custom- targets for the business areas. In the management of the business areas, ers and international operations was assigned to the business area Large allocated capital is based on DnB NOR’s model for calculating capital Corporates and International. The reorganisation will enable the Group to requirements for various risk categories. See further description under utilise its wide range of products and services and expert skills in an opti- “Capital management and risk categories” on page 58. mal manner by coordinating activities in local markets and thus strengthen relations to customers in all Norwegian market segments. The reorgani- Cooperation between the business areas is an important part of DnB NOR’s sation will also make it possible to capitalise on the size of the Group by strategy. A wide range of products, services and distribution channels coordinating and streamlining operations.
20 DnB NOR ANNUAL REPORT 2009 BUSINESS AREAS
> FINANCIAL PERFORMANCE
Annual pre-tax operating profit (after write-downs) NOK million
8 000 6 984 6 402 6 216 5 657 6 000 5 331
3 935 4 000
2 000 1 351 748
0 (605) (2 000)
(4 000) (4 289) (6 000) Retail Banking Large Corporates DnB NOR Life and Asset DnB NORD and International Markets Management
2008 2009
Large Corporates Life and Asset Retail Banking and International DnB NOR Markets Management DnB NORD
Income statement in NOK million 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 Total income 18 753 17 288 8 591 8 431 7 243 5 685 3 562 2 902 2 242 2 468 Total operating expenses 10 185 9 620 1 806 2 021 1 913 1 749 2 211 2 153 2 589 1 704 Pre-tax operating profi t before write-downs 8 569 7 669 6 785 6 410 5 331 3 936 1 351 748 (347) 764 Net gains on fi xed and intangible assets 1 0 0 17 0 0 (13) 19 Write-downs on loans and guarantees 1 586 1 267 1 128 212 0 1 3 929 1 388 Pre-tax operating profi t 6 984 6 402 5 657 6 216 5 331 3 935 1 351 748 (4 289) (605)
Average balance sheet items in NOK billion Net lending to customers 1) 713 664 372 329 84 75 Deposits from customers 1) 368 353 227 196 21 22 Asset under management (end of period) 486 533
Key fi gures in per cent Return on capital 2) 26.1 23.6 13.4 17.4 69.8 58.0 16.6 3.2 (34.4) (5.8) Cost/income ratio 3) 53.2 55.1 21.0 24.0 26.4 30.8 62.1 74.2 73.5 63.7 Ratio of deposits to lending 51.6 53.1 61.2 59.6 25.6 29.4
1) Nominal values, including lending to and deposits from credit institutions respectively. 2) Return on capital is calculated on the basis of allocated risk-adjusted capital. The calculation is based on a tax-rate of 28 per cent for Retail Banking, Large Corporates and International and DnB NOR Markets, 20 per cent for DnB NORD and recorded tax for Life and Asset Management. 3) Cost/income ratio adjusted for impairment losses for goodwill.
In order to ensure better coordination of the Group’s insurance offering to further cooperation. A possible outcome of the evaluation period is that one customers, all insurance operations, encompassing pension savings and of the owners wishes to change the structure of or end the cooperation. The life and non-life insurance, were organised in the same business area at agreement also regulates the procedures to be followed if one of the owners the beginning of 2010. The business area Life and Asset Management chooses to exercise the option to buy out the other party. DnB NOR has a fi rst thus changed its name to Insurance and Asset Management and took over option to take over DnB NORD’s operations in the Baltic region, while NORD/ responsibility for DnB NOR Skadeforsikring from Retail Banking. LB has a fi rst option to acquire the operations in Poland.
DnB NORD, in which DnB NOR has a 51 per cent ownership interest, is fully As part of the process of coordinating and streamlining operations, the consolidated in the accounts and is regarded as a separate profi t centre. On central support units have to an increasing extent been given group 30 December 2009, the Board of Directors of DnB NOR decided to initiate an responsibility for internal deliveries. Centralised support functions will ensure evaluation of the DnB NORD cooperation. In accordance with the share- coordination, consolidation and professionalisation of deliveries across the holder agreement, the evaluation period will end on 31 July 2010, after which various units in DnB NOR. each of the parties must inform the other party of its conclusion regarding
DnB NOR ANNUAL REPORT 2009 21 BUSINESS AREAS
RETAIL BANKING
From 1 July 2009, responsibility for serving the Group’s 2.3 million personal customers and some 100 000 Norwegian corporate customers was organised under Retail Banking. The aim is that coordinating the service to these customer segments will help improve customer satisfaction by making the services more accessible and by giving customers high-quality fi nancial advisory services. Pre-tax operating profi ts were NOK 6 984 million in 2009, an increase of NOK 582 million from 2008. There was a positive trend in volumes, while non-performing and impaired commitments showed a satisfactory development.
Income statement in NOK million 2009 2008 Change Net interest income 14 998 13 571 1 427 Other operating income 3 756 3 717 38 Total income 18 753 17 288 1 465 Operating expenses 10 185 9 620 565 Pre-tax operating profi t before write-downs 8 569 7 669 900 Net gains on fi xed assets 1 0 1 Net write-downs on loans 1 586 1 267 319 Pre-tax operating profi t 6 984 6 402 582
Average balance sheet items in NOK billion Net lending to customers 713.3 664.1 49.2 Deposits from customers 367.7 352.5 15.2
Key fi gures in per cent Return on allocated capital 1) 26.1 23.6 Cost/income ratio 2) 53.2 55.1 Ratio of deposits to lending 51.6 53.1
1) Calculated on the basis of allocated risk-adjusted capital. 2) Cost/income ratio adjusted for impairment losses for goodwill.
22 DnB NOR ANNUAL REPORT 2009 BUSINESS AREAS
Residential mortgages Small and medium-sized enterprises – risk classification of portfolio 1) NOK billion NOK billion
400 383 200 370
151 300 150 130
200 100 93 86
100 50 44 73 55 26
14 21 2 3 0 0 Mortgage within 60 per cent Mortgage between 60 and 80 per cent Mortgage above 80 per cent PD 0.01 %–0.75 % PD 0.75 % –2.0 % PD 2.0 % – Net non-performing and of collateral value of collateral value of collateral value impaired commitments
31 Dec. 2008 31 Dec. 2008 1) Based on DnB NOR's risk classification system. The volumes represent the expected outstanding amount in the event of default 31 Dec. 2009 31 Dec. 2009
FINANCIAL PERFORMANCE from 0.19 per cent in 2008 to a continuing low level of 0.22 per cent in The steep fall in interest rate levels from the autumn of 2008 and through 2009. Average net impaired commitments amounted to NOK 4.7 billion the fi rst half of 2009 contributed to maintaining the level of demand for in 2009, up from NOK 3.1 billion in 2008. housing loans in 2009. A lower level of activity among small and medium- sized enterprises resulted in more sluggish demand for long-term OPERATIONS fi nancing, lower building loan volumes and a reduction in drawdowns on Retail Banking is responsible for serving personal customers and small overdraft facilities. Average lending increased by 7.4 per cent. Deposits and medium-sized enterprises in Norway. Operations are based on the showed a positive development, with an average increase of 4.3 per cent brands DnB NOR, Postbanken and Nordlandsbanken, whereas credit compared with 2008, primarily due to growth in the retail market. Covered cards are also distributed through external partners under the Cresco bonds based on home mortgages in DnB NOR Boligkreditt were an brand. The business area is divided into seven geographical divisions. In important source of funding, supplementing customer deposits. At the addition, Postbanken, DnB NOR Privatbank and Telephone and Online end of 2009, 82 per cent of lending volume in Retail Banking was Banking are organised as separate divisions. The subsidiaries DnB NOR funded by deposits and covered bonds. Boligkreditt, DnB NOR Finans, DnB NOR Eiendomsmegling, Postbanken Eiendomsmegling and DnB NOR Skadeforsikring, together with Svensk Increased risk pricing, the need to compensate for rising funding costs Fastighetsförmedling and SalusAnsvar in Sweden, are also part of the and temporary effects related to the fact that notifi cation periods for business area. interest rate adjustments entailed a certain time lag before the changes were refl ected in customer interest rates, contributed to widening lending DnB NOR’s goal is to be the preferred and leading bank in Norway for spreads relative to money market rates from 2008 to 2009. Corresponding small and medium-sized enterprises. Retail Banking supports this strategy temporary effects of notifi cation periods, combined with greater competi- by being both a local bank and a bank that offers companies access to tion for deposits, put signifi cant pressure on deposit spreads in 2009. all the expertise and solutions a large group can offer. Companies’ varied Overall, there was a rise in margin income. needs are met through a wide range of high-quality products and solutions among which customers can choose. Net other operating income increased slightly from 2008. Housing sales in Norway improved during the year, giving higher income from real estate Retail Banking has a large customer base consisting of 2.3 million broking, and income from payment transfers also showed a rising trend. personal customers and some 100 000 corporate clients in Norway. At Operations in Sweden generated lower income in 2009. end-December 2009, 1.4 million customers had loyalty programmes and product packages. This number is rising, entailing that a growing number Retail Banking recorded impairment losses for goodwill related to invest- of customers choose to use a wider range of the Group’s products. ments in Sweden totalling NOK 202 million in 2009, which was due to both a new strategic direction and reduced activity resulting from the DnB NOR Boligkreditt had a loan portfolio of NOK 334 billion at the end fi nancial turmoil. Operating expenses excluding impairment losses for of 2009. The company is instrumental in securing the Group access to goodwill increased by 4.9 per cent from 2008. The increase was due long-term funding through the issue of covered bonds. The credit rating to general wage growth, higher IT development costs, depreciation on agencies have given the bonds issued by DnB NOR Boligkreditt an AAA operational leasing in DnB NOR Finans and the transfer of fi nancial advis- rating, and the good classifi cation secures the bank access to lower priced ers from Norway Post. The Group’s cost programme helped reduce costs funding and thus greater competitive power. by NOK 175 million in 2009. The cost/income ratio, excluding impairment losses for goodwill, was reduced from 55.1 per cent in 2008 to 53.2 per DnB NOR is the market leader in the Norwegian market and Retail Bank- cent in 2009. ing had, on average, NOK 713 billion in loans and NOK 368 billion in deposits in 2009. The market share of total lending to wage earners was The quality of the loan portfolio was sound. For retail customers, net approximately 28.4 per cent at end-December 2009, whereas the market write-downs were at a very low level, and the situation was also stable for shares of deposits and total savings from wage earners were 32.4 and corporate customers. Net write-downs relative to average net lending rose 35.0 per cent on the same date.
DnB NOR ANNUAL REPORT 2009 23 BUSINESS AREAS
24 DnB NOR ANNUAL REPORT 2009 BUSINESS AREAS
The Group’s cost programme entails a total cost reduction target of bank’s distribution network. From February 2010, the insurance opera- NOK 543 million for Retail Banking by the end of 2012. The business area tions in the Group were coordinated, and the responsibility for DnB NOR was ahead of schedule at the end of 2009 after realising cost-effi ciency Skadeforsikring was transferred to the business area Insurance and Asset measures with an annual effect of NOK 314 million, of which measures Management. Real estate broking is an important channel for the distribu- implemented in 2009 represented NOK 175 million. tion of housing loans and savings products. By the end of 2009, DnB NOR Eiendom was represented at 89 locations in Norway. Postbanken Eiendom The customer satisfaction scores from the autumn of 2009 showed a clear had 27 offi ces, and Svensk Fastighetsförmedling, involved in real estate improvement within important customer segments compared with previous broking in Sweden, had 213 offi ces. SalusAnsvar is an independent surveys. More customer contact and competitive terms contributed to the distributor of life and pension insurance, non-life insurance and banking positive trend. Information from frequent customer surveys will enable products to members of associations and trade unions in Sweden. Retail Banking to respond swifter to customer needs and changed market conditions. The aim is to achieve a further improvement in customer sat- Satisfi ed employees isfaction levels. Retail Banking will maintain a high activity level to defend DnB NOR conducts annual surveys of employee satisfaction. The survey and increase market shares and to achieve healthy growth based on profi t- shows that employees in Retail Banking are very satisfi ed with their workplace. ability and acceptable risk. Increasing cross-sales and cooperation with other units in the Group are an important part of the strategy. Competent and motivated employees are an important prerequisite for success in the market. The business area’s employees are highly skilled Norway’s largest distribution network within fi nancial advisory services and have in-depth knowledge of the DnB NOR’s distribution network is by far the largest within banking Group’s wide range of products, the local business community, various and fi nance in Norway. An extensive physical presence, well-developed business sectors and risk assessment. telephone and Internet banks and mobile banking solutions represent important assets for the Group. During 2009, customer needs for fi nancial Competence development is a priority area, and a signifi cant number of advisory services, products and services were met through 163 DnB NOR employees participated in a number of extensive skills upgrading initiatives, branch offi ces, 37 SAGA investment centres, 50 corporate advisory cen- management development programmes and training within risk assess- tres, DnB NOR Private Banking, telephone and online banking services, ment, ethics and dilemmas in 2009. mobile banking services and in-store banking outlets at 932 locations. Nordlandsbanken had 16 branch offi ces. Postbanken had 39 customer The number of full-time positions in Retail Banking was 5 090 at the end service centres and also served customers through 208 post offi ces and of December 2009, with 4 660 full-time positions in Norway and 430 in 1 233 in-store postal outlets. international units. Ongoing streamlining measures have reduced staff numbers in operations in Norway. The mobile phone is DnB NOR’s fastest growing distribution channel of banking services. DnB NOR is at the forefront of mobile banking solu- FUTURE PROSPECTS tions and had approximately 550 000 users of SMS services at the end The Norwegian economy continues to be affected by the international of the year. Account balance enquiries and alert services are the most downturn, but Norway has fared better through the recession than most popular SMS services. New and requested SMS services for corporate other countries. The strong monetary and fi scal policy stimulus measures clients were launched in October 2009, and at the end of 2009, are working, credit markets are functioning better and the danger of bank- DnB NOR was the only bank in the Nordic region offering such services ruptcies due to insuffi cient credit is therefore reduced. However, capacity to the corporate market. utilisation in the fi nancial services industry is at record-low levels and the number of new orders has fallen steeply, indicating weakened production BankID on mobile phones is now available for all retail customers. The into 2010. Low interest rate levels, subdued unemployment growth and a solution can be used to log on to the Internet bank and to confi rm several more positive future outlook contributed to rising housing prices through- services. DnB NOR and Postbanken were the fi rst to offer an electronic out 2009, and a continued moderate increase is expected in 2010. signature solution for loans using BankID, where also co-borrowers can sign loans in the Internet bank. The service was launched on 2 November The economic downturn is expected to affect operations in Retail Banking 2009, and as at 31 December, approximately 2 100 loans had been signed also in 2010. Stable demand for housing loans will contribute to lending in this way. E-signing simplifi es and streamlines the loan process for both growth, whereas loans to businesses are expected to remain at a stable customers and the bank. level. Net write-downs in the corporate segment are expected to increase, but to remain within a normalised level. From 1 January 2009, DnB NOR became responsible for all banking services at Oslo Airport, an agreement which has a duration of fi ve years. The branch offi ce was awarded the Oslo Airport Service Prize for 2009 for best service company at the airport. From 1 February 2010, DnB NOR has entered into an agreement to provide banking services at Trondheim Airport.
The subsidiary DnB NOR Finans is among Norway’s largest fi nance companies. In addition, the company has operations in both Sweden and Denmark . The main products are leasing, ICT equipment leasing, factoring, vehicle fi nancing and fl eet management under the brand name Autolease. DnB NOR Kort is responsible for credit card and consumer fi nance services in the DnB NOR Group. In addition, DnB NOR Kort is licensed to issue American Express personal customer cards in Norway.
Through the establishment of DnB NOR Skadeforsikring, DnB NOR is well positioned to offer complete insurance solutions distributed through the
DnB NOR ANNUAL REPORT 2009 25 BUSINESS AREAS
LARGE CORPORATES AND INTERNATIONAL
The Group’s operations aimed at large Norwegian companies and all international banking operations were organised under the business area Large Corporates and International from 1 July 2009. Norwegian and international businesses are offered the Group’s wide range of fi nancial services, and the business area will build good customer relationships and offer the Group’s corporate customers fi nancial services adapted to the prevailing market situation. In 2009, pre-tax operating profi ts were NOK 5 657 million, a decline of 9.0 per cent from 2008 resulting from higher write-downs on loans. Volumes were signifi cantly reduced throughout the year due to both a stronger Norwegian krone relative to key currencies and lower market activity.
Income statement in NOK million 2009 2008 Change Net interest income 6 066 6 097 (32) Other operating income 2 525 2 334 191 Total income 8 591 8 431 160 Operating expenses 1 806 2 021 (215) Pre-tax operating profi t before write-downs 6 785 6 410 375 Net gains on fi xed assets 0 17 (17) Net write-downs on loans 1 128 212 916 Pre-tax operating profi t 5 657 6 216 (558)
Average balance sheet items in NOK billion Net lending to customers 371.8 329.2 42.6 Deposits from customers 227.4 196.3 31.1
Key fi gures in per cent Return on allocated capital 1) 13.4 17.4 Cost/income ratio 21.0 24.0 Ratio of deposits to lending 61.2 59.6
1) Calculated on the basis of allocated risk-adjusted capital.
26 DnB NOR ANNUAL REPORT 2009 BUSINESS AREAS
Risk classification of portfolio 1) NOK billion
500 481
400
300 244
200 163
114 100 55 24 2 4 0 PD 0.01%–0.75% PD 0.75% –2.0% PD 2.0% – Net non-performing and impaired commitments
31 Dec. 2008 1) Based on DnB NOR's risk classification system. The volumes represent 31 Dec. 2009 the expected outstanding amount in the event of default.
International Northern Total Shipping, Offshore Corporates and Nordic Europe Large Corporates Income statement in NOK million and Logistics Institutions Corporates Division Other and International
Net interest income 2 113 1 944 1 346 532 131 6 066 Other operating income 628 1 251 689 167 (211) 2 525 Total income 2 741 3 196 2 035 699 (80) 8 591 Opeating expenses 441 489 449 269 158 1 806 Pre-tax operating profi t before write-downs 2 300 2 706 1 587 431 (238) 6 785 Net gains on fi xed assets 0 0 0 0 0 0 Net write-downs on loans 474 210 394 38 12 1 128 Pre-tax operating profi t 1 826 2 496 1 193 392 (250) 5 657 Average balance sheet items in NOK billion Net lending to customers 147 83 83 51 9 372 Deposits from customers 66 71 70 10 10 227
FINANCIAL PERFORMANCE Average deposits from customers rose from 2008 to 2009, though there The general interest rate level in Norway was signifi cantly reduced through was a decline in deposits towards the end of 2009. Movements in the 2009, which contributed to a decline in net interest income of NOK 32 mil- NOK exchange rate greatly affected deposit volumes. lion from 2008. Ordinary operations generated an increase in net interest income of NOK 781 million, whereas the lower interest rate levels caused Income from payment transfers showed a stable trend from 2008 to 2009. a reduction in income from allocated capital. Funding costs were high Cross-sales between Large Corporates and International and the Group’s through the entire year, and it was necessary to increase lending spreads product areas were affected by customers’ relatively low level of activity in relative to the money market rate to cover these costs. Measured against 2009, and income fell somewhat from 2008. Cross-sales contributed NOK the money market rate, lending spreads improved in all segments from 1 268 million in net income to Large Corporates and International. Operating 2008 and widened by an average of 0.31 percentage points from 2008 expenses and the number of full-time positions remained stable in 2009. to 2009 for the business area as a whole. Deposit spreads narrowed by 0.13 percentage points compared with 2008, with a decline in all seg- The level of net write-downs on loans increased from 2008. Relative to ments. The narrowing in deposit spreads refl ected the fact that interest average lending volumes, write-downs were 0.30 per cent, compared with rates stabilised at a low level, while competition for deposits increased. 0.06 per cent in 2008.
Average lending to customers rose from 2008 to 2009, but declined by The business area’s lending policy was in accordance with the Group’s 17.6 per cent from the end of 2008 to the end of 2009. The main reason strategy and desired risk profi le. The quality of the portfolio was satisfactory for the reduction was the strengthening of the Norwegian krone exchange in all sectors, but there was a negative development through 2009 due to rate against key currencies, in particular the US dollar. Exchange rate the general market conditions. A number of the business area’s custom- movements accounted for 9.6 percentage points of the total reduction ers were affected by the consequences of the diffi cult fi nancial situation in lending. Approximately 50 per cent of the business area’s loans were in 2009, and the scope of problem commitments increased. denominated in US dollars, and strategic priority areas such as energy and shipping had a signifi cant exposure in US dollars. DnB NOR’s strategy to OPERATIONS maintain a low risk profi le in the portfolio served as a guiding principle for Large Corporates and International assisted the Group’s largest corporate the granting of credit throughout 2009. clients through a demanding year in 2009. Customer relationships based on
DnB NOR ANNUAL REPORT 2009 27 BUSINESS AREAS
28 DnB NOR ANNUAL REPORT 2009 BUSINESS AREAS
long experience and broad expertise will continue to be important. Custom- DnB NOR is recognised for its expertise within complex international trans- ers should fi nd that the bank is a good partner also when the markets are actions and is one of the world’s leading shipping banks. The Group’s long- challenging. DnB NOR will give priority to long-term and profi table customer term strategy within shipping remains fi rm, and activity levels are expected relationships both in the domestic market and internationally within its strate- to pick up in this segment after a period of lower activity in 2009. The gic priority areas, which are shipping, offshore, energy and seafood. long-term strategy within the priority areas energy and seafood also remain unchanged, and there will be opportunities for growth in these business Broad range of products and wide distribution network sectors in line with the Group’s credit strategy when market conditions are Large Corporates and International offers a broad range of fi nancial prod- opportune. At the end of 2009, DnB NOR was the number one arranger of ucts and services in cooperation with several of the Group’s product areas, syndicated investment grade energy loans in North America. including various types of fi nancing solutions, deposits and investments, everyday banking services, insurance, e-commerce products, commercial Highly skilled employees property brokerage, foreign currency and interest rate products, trade Competent and motivated employees are vital to ensuring market success, fi nance and corporate fi nance services. not least in a challenging year such as 2009. The employees in Large Cor- porates and International have considerable expertise about market devel- The business area is responsible for payment services in the DnB NOR opments, specifi c industries, risk and the Group’s broad range of products. Group, including cash management services, for all clients in Norway and Combined with in-depth customer knowledge, this constitutes a competi- at the Group’s international units. Corporate clients greatly value a broad tive advantage, both in the Norwegian market and within DnB NOR’s range of products, and straightforward solutions and global accessibility international priority areas. Competence development is given high priority, are important. DnB NOR has established joint solutions in its interna- and particular importance is placed on continual skills upgrading within tional branches, resulting in recogniseability, predictability and simplicity credit assessment and risk and profi tability analysis . for clients, independent of geographic location. In 2009, an integrated ‘partner bank solution’ was established within international cash manage- DnB NOR has clear ethical guidelines for credit operations. The guidelines ment, enabling DnB NOR to offer the largest clients global, integrated cash imply that risk associated with environmental and social factors should management solutions without being physically located in the countries in be analysed on a par with other risk factors. Companies that contribute to question, providing a close to complete cash management product offering environmental harm, corruption or the infringement of human or labour in local currency. rights will not be granted credit.
BankID is an electronic identifi cation and signature service offered by The number of full-time positions in Large Corporates and International banks in Norway. BankID is used by an increasing number of corporate was 1 061 at the end of 2009, with 461 full-time positions in Norway and clients, and the range of services is being expanded. In 2009, there were 601 abroad. The Norwegian subsidiaries in the business area had a total approximately 2.5 million BankID users in Norway, and an average of one of 35 full-time positions. million transactions were completed every day. By expanding the use of BankID, customers will benefi t from greater fl exibility and more convenient FUTURE PROSPECTS fi nancial services, while DnB NOR can reduce costs through electronic At the onset of 2010, the fi nancial markets were characterised by a more customer solutions. DnB NOR’s SMS and alert services for companies optimistic mood than a year earlier, opening up opportunities both in were launched in 2009, and corporate clients are increasing their use of Norway and internationally. However, uncertainty continues to prevail mobile banking services. regarding the future development in volumes, and Large Corporates and International will only participate in business transactions that are robust The subsidiary DnB NOR Næringsmegling is Norway’s largest commercial and able to withstand challenging market conditions. Some customers, for property adviser and broker. DnB NOR Næringskreditt was established at example within shipping, offshore and logistics and acquisition fi nancing, the start of 2009, and the company’s portfolio can be used to obtain long- will experience signifi cant effects of the recession, including low growth term funding for the Group through the issuance of covered bonds. also in 2010. The number of customers who will face short or long-term fi nancial challenges is thus expected to remain relatively high in the near The Group’s corporate clients are offered services internationally through future. offi ces in New York, Houston, Santiago, London, Singapore, Shanghai, Mumbai, Copenhagen, Hamburg, Helsinki, Stockholm, Gothenburg Operations in 2010 will depend on opportunities offered by the market, and and Malmø. DnB NOR is represented in Murmansk in Russia through somewhat higher activity levels are anticipated compared with 2009. the subsidiary DnB NOR Monchebank, which is licensed to engage in banking operations throughout Russia.
Strong customer position In recent years, DnB NOR has been named best foreign exchange bank and best trade fi nance bank in Norway. In addition, over many years, DnB NOR has been awarded the recognition of being “best bank in Norway ” by Global Finance Magazine.
DnB NOR holds a strong position in all parts of the Norwegian business community. Customers in the business area are large Norwegian, Nordic and international companies.
High customer satisfaction is an important competitive advantage. Regular customer surveys have shown high satisfaction among the Group’s large corporate clients, and DnB NOR’s ambition is to maintain the high satisfaction level.
DnB NOR ANNUAL REPORT 2009 29 BUSINESS AREAS
DnB NOR MARKETS
DnB NOR Markets is Norway’s largest investment bank, serving customers from its head offi ce in Oslo, 13 regional sales desks in Norway, offi ces in Stockholm, London, New York, Houston, Singapore and Shanghai, and via electronic channels. DnB NOR Markets achieved pre-tax operating profi ts of NOK 5 331 million in 2009, up NOK 1 395 million from 2008. The rise in profi ts was primarily attributable to the extraordinary volatility in exchange rates and interest rates at the beginning of the year. DnB NOR Markets was the largest investment bank on Oslo Børs within equity, bond and commercial paper trading in 2009.
Income statement in NOK million 2009 2008 Change FX, interest rate and commodity derivatives 1 665 1 936 (271) Investment products 766 574 192 Corporate fi nance 570 643 (73) Securities services 190 333 (143) Total customer revenues 3 191 3 486 (295) Net income liquidity portfolio including changes in credit spreads 1 147 (707) 1 854 Other market making/trading revenues 2 761 2 600 161 Total trading revenues 3 908 1 893 2 015 Interest income on allocated capital 144 305 (162) Total income 7 243 5 685 1 558 Operating expenses 1 913 1 749 163 Pre-tax operating profi t before write-downs 5 331 3 936 1 395 Net gains on fi xed assets 0 0 0 Net write-downs on loans 0 1 (1) Pre-tax operating profi t 5 331 3 935 1 396
Key fi gures in per cent Return on allocated capital 1) 69.8 58.0 Cost/income ratio 26.4 30.8
1) Calculated on the basis of allocated risk-adjusted capital.
30 DnB NOR ANNUAL REPORT 2009 BUSINESS AREAS
Daily revenue distribution Number of days
50 47
40
32 30
23 20 20 18 17 16 13 10 10 8 6 7 6 4 4 5 5 2 3 33 2 3 2 0 0 5 000 15 000 30 000 50 000 70 000 90 000 10 000 20 000 40 000 60 000 80 000 (5 000) 110 000 100 000 120 000 (40 000) (25 000) (15 000) (35 000) (20 000) (10 000) >120 000 <(60 000) Revenues, NOK thousand
FINANCIAL PERFORMANCE Income from market making and other proprietary trading came to DnB NOR Markets recorded total income of NOK 7 243 million in 2009, NOK 3 908 million, up NOK 2 015 million compared with 2008. The a 27 per cent increase from 2008. The cost/income ratio was reduced by liquidity portfolio of bonds contributed strongly to the rise in income. The 4.4 percentage points from 2008, standing at 26.4 per cent in 2009. portfolio was reclassifi ed to the “held-to-maturity” category in the third quarter of 2008, while the fair value measurement used in the fi rst half Customer-related revenues totalled NOK 3 191 million, down NOK 295 of 2008 resulted in unrealised losses. The positive income trend also million compared with 2008. refl ected extraordinary volatility in interest rates and exchange rates at the beginning of the year, generating high earnings in DnB NOR Markets’ core Customer-related income from foreign exchange and interest rate and areas of activity, including Norwegian kroner products. commodity derivatives declined in consequence of a lower level of eco- nomic activity. The recession resulted in less activity within investments, OPERATIONS fi nancing, exports and imports and reduced demand for hedging products. DnB NOR Markets aims to be the best partner for Norwegian customers Another contributory factor was intensifying competition and a normalisa- within investment banking and securities services, as well as for inter- tion of margins as the fi nancial turmoil abated. national clients requiring services relating to Norway and the Norwegian krone. In selected fi elds and customer segments such as shipping, energy Customer-related revenues from the sale of securities and other investment and seafood, DnB NOR Markets will engage in international operations products increased compared with 2008. Traded volume for equities on together with other units in the Group. International operations were further Oslo Børs declined by 39 per cent from 2008. DnB NOR Markets’ share strengthened in 2009 through a wider range of products and greater of equities trading on Oslo Børs rose to 9.1 per cent, from 7.4 per cent distribution capacity in Europe, North-America and Asia, especially within the previous year, and DnB NOR Markets became the largest brokerage securities brokerage. house on Oslo Børs in equity and equity derivatives brokerage. There was a high level of activity within bond and commercial paper trading. DnB NOR DnB NOR Markets seeks to achieve competitive returns and high cost- Markets strengthened its leading position in this fi eld in Norway and effi ciency through diversifi ed operations with a moderate risk profi le. accounted for more than a third of such trading on Oslo Børs. New initiatives in 2009 Customer-related revenues from corporate fi nance were somewhat lower During 2009, separate equities brokerage units were established in than in 2008, though there was an improvement in these markets and London , New York and Singapore. In addition, bond brokerage operations in activity levels through 2009. There were no initial public offerings on were started in Asia from the offi ce in Singapore. Equity research within Oslo Børs, and merger and acquisition activity declined. On the other Nordic equities was expanded. DnB NOR Markets entered new market hand, the business area arranged a number of bond issues, especially places to trade Norwegian equities. Extended research and international for corporate clients, due to a shift in companies’ funding from bank distribution of securities contributed to strengthening DnB NOR Markets’ loans to bond issues. DnB NOR Markets was the largest arranger of both position as an arranger of bond and share issues for corporate clients. commercial paper, bond and share issues in the Norwegian market. During 2009, DnB NOR Markets introduced commodity brokerage at the
There was a rising level of activity within share issues. DnB NOR Markets Group’s New York branch and completed the fi rst CO2 emission rights strengthened its market position and acted as global coordinator and transactions. The branch in Shanghai was granted a licence to engage in joint bookrunner for, among others, REC and DnB NOR. DnB NOR customer trading in, among other things, freight derivatives. In Norway, Markets Inc participated in more than 20 bond and share issues for listed warrants were launched for several listed companies. customers in the US market. Key products, services and customer segments Customer-related revenues from custodial and other securities services Key products include foreign exchange, interest rate and commodity prod- declined due to reduced market values, a lower level of customer activity ucts, securities and other investment products, debt and equity fi nancing and greater pressure on prices. Demand for securities fi nancing picked up in capital markets, research and advisory services, as well as custodial and towards the end of the year. other securities services. Value creation in DnB NOR Markets is ensured
DnB NOR ANNUAL REPORT 2009 31 BUSINESS AREAS
32 DnB NOR ANNUAL REPORT 2009 BUSINESS AREAS
by highly skilled employees, sound customer relations, a broad distribution tional units during the year. Throughout the fi nancial crisis, DnB NOR network and a diversifi ed range of products and services. Markets carried out selective recruitment to enhance its market position. A slack labour market has enabled DnB NOR Markets to recruit several In product areas where the business area has special advantages, such as experienced employees both in Norway and abroad, bringing to the organi- products relating to Norway and the Norwegian krone, DnB NOR Markets sation important expertise and customer contacts. Measures are continu- undertakes in-house product development and production. For other ally implemented to strengthen the professional competence and sales, product areas, such as international equity brokerage, emphasis is placed presentation and relation-building skills of individual employees. DnB NOR on insourcing, cooperation agreements with other banks and on bundling Markets emphasises the role of the manager as coach and is committed to existing fi nancial instruments into new products to reduce costs, risk and in-house management training. As in the rest of the DnB NOR Group, the time-to-market. Priority is given to continual development of products and business area gives great priority to building relations with major educa- services. The main focus is on customer activities, while trading activities tional institutions. DnB NOR Markets is a strong brand among Norwegian should support customer activities with products and prices. students, which facilitates the recruitment of employees who are interested in professional and personal development. The business area’s main customer groups are Norwegian retail and cor- porate clients and the public sector. Other important customer groups are High ethical standards and compliance with the Group’s corporate social DnB NOR’s international clients and others requesting fi nancial services in responsibility principles are emphasised in all areas of operation. Norway or services related to Norwegian kroner products. FUTURE PROSPECTS Service adapted to customer needs Developments in the equity, credit, commodity, currency and interest DnB NOR Markets will refi ne service concepts and fi nancial advisory rate markets will be decisive for the business area’s future performance. services which create value for customers and are adapted to their diverse General economic developments and corporate activity levels will infl uence needs. DnB NOR Markets is committed to customer proximity and to customer-related revenues. Income from market making and proprietary providing a wide range of products and services through both physical trading is expected to decrease as the fi nancial turmoil recedes and more and electronic distribution. This is ensured by 13 regional sales desks normal markets conditions return. The fact that Norway has its own cur- in Norway, offi ces in Stockholm, London, New York, Houston, Singapore rency is expected to continue to represent an advantage for DnB NOR and Shanghai, and via electronic channels. Markets.
To better identify and meet current and future customer needs, coopera- tion with the Group’s other business areas is important, and these provide an important sales channel for DnB NOR Markets’ products. In addition, certain products are offered through other investment fi rms. Service to major clients, risk management and support and control functions are centralised. Operations are organised under DnB NOR Bank ASA, with the exception of operations in the US, where securities activity is carried out by the subsidiary DnB NOR Markets Inc.
DnB NOR Markets has a large team of equity, credit, currency, commodity and interest rate analysts who along with other specialists play a key role in advising the business area’s customers.
Stronger position in Norway DnB NOR Markets further strengthened its leading market position in Norway in 2009. In addition to its strong position within FX and interest rate trading, DnB NOR Markets increased its market share within both bond and equity trading and was the largest brokerage house on Oslo Børs in 2009. DnB NOR Markets was also the largest derivatives broker and arranged the greatest number of bond and commercial paper issues in the Norwegian market in 2009. DnB NOR operated as registrar for 53.7 per cent of the companies registered in the Norwegian Central Securities Depository, VPS.
Customer satisfaction is measured and followed up through surveys and evaluations carried out in-house and by external parties such as Prospera. The surveys generally show good customer satisfaction levels. Results for individual product and service areas are used for management and follow- up purposes.
The Global Custodian magazine ranked DnB NOR as the best provider of custody services for international clients in the Norwegian market. In addi- tion, DnB NOR was named best Norwegian foreign exchange bank in 2009 by Global Finance Magazine.
Highly competent employees The number of full-time positions in DnB NOR Markets was 647 at the end of 2009. There was an increase in the number of employees in interna-
DnB NOR ANNUAL REPORT 2009 33 BUSINESS AREAS
LIFE AND ASSET MANAGEMENT
The business area Life and Asset Management consists of Vital and DnB NOR Asset Management. Vital provided insurance coverage for around one million policyholders and had group agreements with approximately 25 000 companies at year-end 2009. DnB NOR Asset Management had some 580 000 retail clients and a leading position among Norwegian and Swedish institutional clients. Pre-tax operating profi ts totalled NOK 1 351 million, up NOK 603 million compared with 2008.
Income statement in NOK million 2009 2008 Change Total income 3 562 2 902 661 Operating expenses 2 211 2 153 58 Pre-tax operating profi t 1 351 748 603 Tax (114) 493 (607) Profi t after tax 1 466 256 1 210
Balances in NOK billion (end of period) Assets under management 485.6 533.4 (47.8)
Key fi gures in per cent Return on allocated capital 1) 16.6 3.2 Cost/income ratio 62.1 74.2
1) Calculated on the basis of allocated risk-adjusted capital.
34 DnB NOR ANNUAL REPORT 2009 BUSINESS AREAS
FINANCIAL PERFORMANCE properties for a total value of NOK 1.8 billion and sold properties valued at NOK 0.7 billion. Financial performance in Vital The risk result was NOK 92 million in 2009, a decline of NOK 44 million Income statement in NOK million 2009 2008 Change from 2008. NOK 177 million was allocated to strengthening premium Interest result 3 043 (2 623) 5 666 reserves within individual pension insurance and group association insur- – of which property revaluations (887) (2 395) 1 508 ance due to higher life expectancy. The allocation is in accordance with a ten-year escalation plan. Finanstilsynet has indicated a swifter escalation Application of additional allocations (173) 2 993 (3 166) plan, however, the process has not been completed. Risk result 92 136 (44) Administration result (108) (143) 34 Corporate clients accounted for 56 per cent of total assets as at 31 Decem- ber 2009, while individual and public-sector clients accounted for 31 and Profi t on risk and guaranteed rate of return 477 437 39 13 per cent, respectively. Premium income totalled NOK 19 459 million in Other (36) (68) 32 2009, down 6 per cent compared with 2008. The reduction mainly refl ected Allocations to policyholders 2 138 89 2 049 a decline in single premiums for products with a guaranteed rate of return due to lower wage growth in 2009 than in 2008. Net profi t in Vital 1 156 644 512 Tax charge (175) 427 (602) Total surrenders, transfers of pension funds and payments to policyholders Profi t after tax 1 331 217 1 114 came to NOK 16 322 million in 2009, down from NOK 23 130 million in 2008. Of total surrenders of individual products, NOK 1.9 billion represented Balances in NOK billion (end of period) products with a guaranteed rate of return and NOK 1.2 billion products with a choice of investment profi le, unit linked. Payments to policyholders, Assets under management 232.5 224.1 8.3 excluding surrenders, amounted to NOK 9.2 billion, down from NOK 9.4 billion the previous year. Key fi gures in per cent
Return on allocated capital 1) 16.0 1.2 Vital won a number of tenders in 2009, giving a net increase in total pre-
1) Calculated on the basis of allocated risk-adjusted capital. mium reserves of NOK 997 million for the year. As risk was transferred on 1 January 2010 for a number of the new customers, an outfl ow of transfers of NOK 396 million was recorded in 2009. Vital achieved pre-tax operating profi ts of NOK 1 156 million in 2009, an increase of NOK 512 million from 2008. In 2009, the recorded return on The securities adjustment reserve increased by NOK 1.3 billion, from nil the common portfolio was 4.7 per cent, while the value-adjusted return at year-end 2008, refl ecting the upturn in the stock market. Equity rose was 5.4 per cent. The return on the corporate portfolio was 5.1 per cent for by NOK 1 278 million. Vital’s solvency capital totalled NOK 20.4 billion at 2009. At year-end 2009, approximately 67.5 per cent of policyholders’ funds year-end 2009, and the solvency margin capital was 71 per cent above the was placed in fi xed-income securities. minimum requirement.
The property portfolio generated a direct return of 5.3 per cent in 2009. Taking account of a downward revision of property values of 2.8 per cent for 2009, the aggregate return was 2.5 per cent. During 2009, Vital acquired
DnB NOR ANNUAL REPORT 2009 35 BUSINESS AREAS
Financial performance in DnB NOR Asset Management and pension savings. At year-end 2009, Vital had around one million retail customers with individual and group agreements. Agreements with Income statement in NOK million 2009 2008 Change companies, municipalities and public enterprises numbered approximately 25 000. Vital offers group pensions in the form of defi ned-benefi t and Net interest income 3 47 (44) defi ned-contribution schemes to businesses and the public sector. At Commission income end-December 2009, defi ned-benefi t schemes represented 96 per cent - from retail customers 269 280 (11) of policyholders’ funds, while defi ned-contribution schemes accounted for the remaining 4 per cent. - from institutional clients 528 553 (25) Other operating income 68 23 45 DnB NOR Asset Management is the country’s leading provider of mutual Total income 868 903 (35) funds and discretionary asset management. The company offers retail customers and institutional clients in the Norwegian and Swedish Operating expenses 650 666 (16) savings markets domestic and international asset management services. Pre-tax operating profi t 217 236 (19) In Norway, operations are carried out under the brand names DnB NOR and Postbanken. The brand names Carlson and DnB NOR Asset Balances in NOK billion (end of period) Management are used in the Swedish market. Asset under management 441.3 478.3 (37.1) Through DnB NOR, external partners and its own sales force, Life and Asset Management has a strong distribution network reaching all customer Key fi gures in per cent groups. Sales through independent agents represented NOK 1.0 billion or Return on allocated capital 1) 24.5 25.9 27 per cent of Vital’s total product sales to the retail market. Sales through Vital’s own distribution network, i.e. own insurers, DnB NOR and internal Cost/income ratio 74.9 73.8 channels, represented NOK 2.8 billion or 73 per cent. In the corporate mar- 1) Calculated on the basis of allocated risk-adjusted capital. ket, Vital’s products are distributed mainly through is own sales force and brokers, though DnB NOR is also an important point of contact for the sale Average assets under management declined by 9.5 per cent from 2008 of Vital products in this market. DnB NOR Asset Management has sales to 2009, which led to a lower level of current commission income. Due to activities from Luxembourg focused on the international market. Coopera- strong asset management performance, performance-based fees came to tion with external distributors in Norway has gained in importance and is NOK 77 million, up NOK 65 million from 2008. a supplement to internal distribution through the bank.
The reduction in total assets was attributable to the renegotiation of an More than 100 asset managers and analysts are responsible for DnB NOR agreement with Skandia Liv, the termination of an asset management man- Asset Management’s mutual funds and portfolios. Investment activity date for Skandia Life Denmark and effects of the strengthened Norwegian primarily takes place in Norway and Sweden. As part of DnB NOR Asset krone against Swedish kronor. There was an overall positive infl ow of funds Management’s focus on global equities, some management operations are from other segments. Developments in share prices and interest rate levels carried out from the offi ces in Hong Kong and Chennai. gave a NOK 55 billion rise in assets under management, while the negative market trend in 2008 resulted in a NOK 34 billion reduction. Life and Asset Management had 961 full-time positions as at 31 December 2009. There were 738 full-time positions in Vital and 223 in DnB NOR The new management agreement with Skandia Liv caused a reduction Asset Management, including 100 outside Norway. in the volume of assets under management and changed the fee struc- ture due to lower rates for ongoing asset management operations, but Strong market position created greater opportunities for performance-based fees. At the same The prestigious magazine Investment & Pension Europe ranked Vital as time, DnB NOR Asset Management was no longer required to have an Norway’s best pensions manager in 2009. The decisive factor for the rank- international presence, which prompted the company to close international ing was how Vital combines risk management with market assessments. entities which had been established to comply with the terms of the former agreement. The restructuring has thus far been implemented in a satisfac- tory manner, and the New York offi ce has already been closed, while the Market shares in Vital London offi ce is in the process of closing. Staff cuts and work process 30 Sept. 31 Dec. adjustments have taken place in the rest of the organisation. Per cent 2009 2008 OPERATIONS Total insurance funds 32.0 32.7 Life and Asset Management is responsible for life insurance, pension - Corporate market 41.2 42.0 savings, asset management and, from February 2010, non-life insurance - Public market 10.7 10.5 operations in the DnB NOR Group. The business area, which has changed its name to Insurance and Asset Management, thus took over responsibil- - Retail market 54.1 54.1 ity for DnB NOR Skadeforsikring. Distribution and distribution support for all non-life insurance products and one-year life-risk products were thus concentrated in the same business area. The business area aims to be the Vital had a 42.4 per cent market share within defi ned-benefi t schemes, best provider of these products in Norway. In order to reach this position, including paid-up policies, at end-September 2009. The company’s market a key tool is the development of a customer-oriented and cost-effective share of defi ned-contribution schemes was 29.2 per cent. Policyholders’ organisation with strong distribution power. Insurance and Asset Manage- funds in defi ned-contribution schemes totalled NOK 8.6 billion at year-end ment will achieve profi table growth while ensuring that the owner and 2009, a 68 per cent increase from the previous year. Competition in the customers receive competitive returns on their funds. paid-up policy segment remained fi erce in 2009. Continued strong growth in the market is expected, not least due to the move from defi ned-benefi t Vital is Norway’s largest provider of individual and group life insurance to defi ned-contribution schemes.
36 DnB NOR ANNUAL REPORT 2009 BUSINESS AREAS
Financial exposure – common portfolio in Vital Assets under management in DnB NOR Asset Management NOK billion NOK billion
200 194 194 500 478 441
400 150
300
100
200
50 100
0 0 31 Dec. 2008 31 Dec. 2009 31 Dec. 2008 31 Dec. 2009
Other Money market instruments Institutional – equity and balanced funds Real estate Bonds Institutional – bonds and money market investments Bonds held to maturity Equities Retail – bonds and money market investments Retail – equity and balanced funds
At year-end 2009, Vital had 61 municipalities and one county municipality FUTURE PROSPECTS as clients in addition to a number of public enterprises. There was con- Continued low interest rate levels and moderate returns on equities are tinued growth in the municipal market in 2009, and four new municipali- expected through 2010. Investors are once again willing to take risk in the ties became clients of Vital. None of the clients that had invited tenders, stock market, and money fl ows in the capital markets have normalised. chose to leave Vital. Consequently, greater interest is expected in saving in traditional mutual fund and insurance products. Vital retained its position as the largest provider of individual pension savings in 2009. The main products are guaranteed-rate savings and Vital expects continued growth in defi ned-contribution pension schemes mutual fund savings through unit linked products. There was a marked and a further conversion from defi ned-benefi t schemes. Vital is also taking drop in surrenders of individual savings products in 2009, in spite of a a number of initiatives in the municipal sector, which is, however, subject continued net outfl ow of transfers. to fi erce competition.
DnB NOR Asset Management is a prominent market participant within The process of adapting Vital’s products to the coming pension reform asset management in both Norway and Sweden and had a market share will be given high priority in 2010. However, the required laws and regu- of 20.5 per cent in the Norwegian institutional mutual fund market and a lations concerning occupational pensions are still not in place, which market share of 15 per cent in the Swedish institutional market at year-end could make the process of implementing the necessary changes by 2009. The total number of institutional clients was 268 at the end of 2009. 1 January 2011 more challenging.
DnB NOR Asset Management’s 580 000 retail clients had entered into Vital’s strategic programme, entailing cost reductions of NOK 210 million, 309 000 savings schemes at year-end 2009, generating annual con- will have full effect from year-end 2010. Already in 2009, the programme tractual savings of NOK 3 billion. The market share of equity funds in resulted in a reduction in the number of full-time positions and strict cost the Norwegian retail market was 26.2 per cent at end-December 2009, control, in spite of extraordinary restructuring expenses charged to the compared with 25.7 per cent a year earlier. At end-December 2009, 48 accounts. of DnB NOR’s mutual funds had received four or fi ve stars from the rating company Morningstar, representing 43 per cent of the funds. Vital has intensifi ed its preparations for Solvency II, which are new solvency capital regulations for insurance companies, replacing the current solvency Ethical management margin requirements. The preparations include assessing the conse- Life and Asset Management follows ethical guidelines based on recognised quences relating to capital, organisational and system requirements. The international principles when managing customers’ pensions and savings. requirements resulting from Solvency II will necessitate extensive adjust- The guidelines set minimum standards and are in line with DnB NOR’s ments in insurance companies’ IT systems and infrastructure. Though the policy for corporate social responsibility and the international principles details regarding the implementation schedule and national adjustments and conventions endorsed by the Group. are not known, the framework directive provides a basis for assessing key requirements which must be met by the companies by the end of 2012. When making investments, Life and Asset Management follows the principles laid down in the UN Global Compact and OECD’s guidelines for Earnings in DnB NOR Asset Management are directly affected by multinational companies. In addition, specifi c criteria have been approved changes in the volume of assets under management. These volumes that exclude investments in companies producing tobacco or pornography refl ect both the company’s net sales of mutual fund products and devel- and in companies which are involved in the production or distribution of opments in the equity, currency and interest rate markets. Competition components used in weapons of mass destruction, including landmines and for savings will necessitate ongoing development and the adaptation of cluster weapons. products and services, and DnB NOR Asset Management has adjusted prices on certain funds to be more competitive. The expectations of At year-end 2009, 54 companies were excluded from the investment port- investors regarding developments in fi nancial markets together with folio based on criteria in the Group’s ethical management rules. investor confi dence in the stock market will have a strong impact on profi t performance in the business area.
DnB NOR ANNUAL REPORT 2009 37 BUSINESS AREAS
DnB NORD
The operations of DnB NORD, in which DnB NOR has a 51 per cent ownership interest, are mainly concentrated in the Baltic States and Poland. 2009 was a challenging year for DnB NORD, which was strongly affected by the global fi nancial crisis where the Baltic States were particularly hard hit. A pre-tax operating loss of NOK 4 289 million was recorded, compared with a loss of NOK 605 million in 2008.
Income statement in NOK million 2009 2008 Change Net interest income 1 559 1 714 (155) Other operating income 684 754 (70) Total income 2 242 2 468 (226) Operating expenses 2 589 1 704 885 Pre-tax operating profi t before write-downs (347) 764 (1 111) Net gains on fi xed assets (13) 19 (32) Net write-downs on loans 3 929 1 388 2 541 Pre-tax operating profi t (4 289) (605) (3 684)
Average balance sheet items in NOK billion Net lending to customers 83.6 75.1 8.5 Deposits from customers 21.4 22.1 (0.7)
Key fi gures in per cent Return on allocated capital 1) (34.4) (5.8) Cost/income ratio 2) 73.5 63.7 Ratio of deposits to lending 25.6 29.4
1) Calculated on the basis of allocated risk-adjusted capital. 2) Cost/income ratio adjusted for impairment losses for goodwill.
38 DnB NOR ANNUAL REPORT 2009 BUSINESS AREAS
Net lending – DnB NORD NOK billion 98 100
26 80 68 12 60 12
12 34 40 25
20 27 19
0 31 Dec. 2008 31 Dec. 2008
Other units Poland Lithuania Latvia
FINANCIAL PERFORMANCE customers and intends to build a strong brand name as a full-service Average lending, measured in Norwegian kroner, rose from 2008 to bank. DnB NORD wishes to offer its customers effective service and 2009. However, from the end of 2008 to the end of 2009, lending was simple and fl exible solutions. reduced by NOK 30.8 billion, or 31.3 per cent, of which NOK 7.6 bil- lion refl ected the sale of about 50 per cent of the Danish and Finnish At year-end 2009, DnB NORD had some 930 000 customers, an portfolios to DnB NOR. Financial performance was also infl uenced by increase of 60 000 during the year, primarily in Lithuania and Latvia. In exchange rate movements. Measured in euro, the decline in lending 2009, DnB NORD was the third largest bank in Lithuania and number was 23.5 per cent, while adjusted for the portfolio which was trans- four in Latvia, measured by total assets. In Estonia, the bank was number ferred to DnB NOR, the reduction in euro was 9.8 per cent. Competition fi ve in terms of total lending, whereas in Poland, DnB NORD was a rela- for deposits was fi erce, and deposit levels were maintained on a par tively small market participant. with 2008. Higher funding costs combined with a pressure on deposit spreads led to lower net interest income. At the end of 2009, DnB NORD’s operations in the Baltic region were evenly distributed between the personal customer market and the corporate The rise in expenses refl ected impairment losses for goodwill and capital- market, with an exposure of approximately 50 per cent in each segment. ised IT investments due to the downscaling of operations. During 2009, The corporate loan portfolio mainly comprised small and medium-sized goodwill related to the subsidiary banks in the Baltic States was impaired enterprises. In Poland, the share of lending to personal customers was to nil. In addition, goodwill related to operations in Poland of NOK 311 just over 10 per cent, and priority will be given to developing products and million was recorded, bringing total impairment losses for goodwill in services for these customers to achieve a stronger market position. 2009 to NOK 941 million. Adjusted for impairment losses for goodwill and write-downs on IT investments of NOK 50 million, expenses increased DnB NORD is working continually to coordinate cross-border activities by 2.8 per cent from 2008 to 2009. During 2009, DnB NORD initiated a by harmonising processes and make optimal use of joint solutions. range of measures to reduce expenses, and operations were downscaled. The number of full-time positions was reduced from 3 597 at year-end FUTURE PROSPECTS 2008 to 3 174 at year-end 2009. After several years of economic growth far above average levels in the EU area, the Baltic economies experienced a serious cool-down during DnB NORD’s fi nancial performance was marked by a steep increase in 2008, which continued into 2009 with a steep decline in gross domes- write-downs on loans during 2009. Operations in the Baltic States were tic product. It is expected that the Baltic economies will remain weak particularly affected by the signifi cant economic downturn in these mar- also in 2010, but there are some indications of stabilisation and also kets. Net write-downs on loans rose from 1.85 per cent of average lend- growth in certain industries. DnB NORD will focus on consolidating its ing in 2008 to 4.70 per cent in 2009. Of total write-downs of NOK 3 929 operations, reducing losses and improving cost-effi ciency. In the longer million in 2009, write-downs in Latvia and Lithuania represented term, DnB NORD expects growth in the region to again surpass average NOK 1 603 million and NOK 1 731 million, respectively. The increase European levels. was due to the general economic downturn. Macroeconomic developments in Poland have been relatively robust OPERATIONS compared with the Baltic States. DnB NORD sees considerable future DnB NORD has made a strategic choice to concentrate operations to opportunities in the Polish market, and will develop new products and the East European core markets Estonia, Latvia, Lithuania and Poland, services for retail customers. whereas market activities in Denmark and Finland are being downscaled. At the end of 2009, DnB NORD had 163 offi ces in four countries, a DnB NORD expects write-downs on loans to be reduced from 2009, reduction of 16 compared with the previous year. The restructuring of though the level in 2010 is also expected to be relatively high. Based on activities in Poland resulted in the closing of 11 offi ces during 2009. anticipated economic developments in the region, the decline in the level of write-downs is expected to continue over the next few years. The bank offers a wide range of products to both corporate and retail
DnB NOR ANNUAL REPORT 2009 39 BUSINESS AREAS
STAFF AND SUPPORT UNITS
OPERATIONS IT attaches great importance to developing and securing systems which Operations will contribute to optimal value creation for the bank and its sustain the Group’s ambitions for effi cient and stable operations. The need customers by delivering and producing competitive services with respect for new solutions will be met partly by capitalising on investments made in to time, quality, cost and risk. existing systems and partly by choosing standard solutions where this is possible. At year-end 2009, Operations was responsible for production functions such as collateral and credit administration, account administration and In 2009, IT made a number of successful deliveries in accordance with payment services for banking operations in Norway and Sweden. In the Group’s priorities. BankID multiple signature solutions were launched, addition, the unit comprised group functions within security, payment infra- and electronic signing of loan documents for retail customers is among structure, procurement and facility management as well as other group the options that have been well received in the market. The corporate operational functions. Internet bank was further adapted to the Group’s international operations, SMS solutions were launched also for corporate customers, and progress Implementing activities in connection with the Group’s cost programme is was made in adapting IRB/Basel II solutions for the entire Group. A multi- a core priority for Operations. The process of restructuring the operating year IT standardisation and modernisation project to promote more secure units in Norway, entailing a reduction from 14 to fi ve locations, is ahead and stable banking operations and a more effective and stable working of schedule, and at the end of 2009, production was based at six loca- platform for the Group’s employees was continued during 2009. A new tions, compared to eleven at the start of the year. In addition, the unit has fi ve-year agreement entered into in 2009 with the Group’s largest supplier streamlined work processes, signifi cantly enhancing productivity, while of operating services, EDB, will contribute towards further cost-effi ciency improving service levels and the quality of deliveries. and standardisation within IT, as well as secure and stable operations.
Another important responsibility for Operations in 2009 was the streamlin- IT operations in the Group were reorganised during 2009. A central unit ing of the Group’s procurement routines. The negotiation of new contracts will ensure coordination, consolidation and professionalisation of IT serv- and changes in group consumption patterns are expected to ensure large ices across the various units in DnB NOR. Priority will be given to greater savings for DnB NOR, and measures implemented so far are estimated to mobility and more effi cient interaction, automation of work processes and give annual cost cuts of more than NOK 100 million. new and innovative customer solutions. At the end of the year, IT had a total of 694 full-time positions, which makes the unit one of Norway’s Operations was a strong contributor to increasing the degree of automa- largest IT organisations with a presence in Oslo, Bergen and Trondheim. tion in the credit process and in account opening procedures in 2009. The automation and standardisation of work processes is expected to give HR further effects in the future. Human Resources, HR, will contribute to organisational, staff and manage- ment development. The unit is responsible for the project to establish DnB NOR’s new head- quarters in Bjørvika in Oslo. Good progress has been made, and the fi rst HR has group-wide responsibilities relating to important personnel policy of three buildings in total is scheduled to be ready by the end of 2012. issues such as employer strategy, health, safety and environment (HS&E), management and competence strategy, central principles governing vari- There was a high level of activity in Operations through 2009, with a steep able remuneration, employee satisfaction surveys and personnel systems. increase in productivity. At the end of the year, the number of full-time In addition, HR assists the Group’s business areas and support units in positions was 1 148, a reduction of 99 compared with end-December identifying resource requirements, attracting, recruiting and meeting the 2008. needs of new employees, as well as developing and retaining current employees. IT IT is responsible for the Group’s IT strategy based on DnB NOR’s governing The need to upgrade skills and increase mobility presented important chal- group and business strategies. IT in DnB NOR aims to be a major contribu- lenges for HR in 2009. Talent development and management training were tor to the business areas by supplying services which support business also key priority areas in addition to restructuring projects. activities and the requirements set for growth, simplifi cation, implementa- tion ability and time to market. HR had 130 full-time positions at year-end 2009.
40 DnB NOR ANNUAL REPORT 2009 BUSINESS AREAS
GROUP FINANCE AND RISK MANAGEMENT Marketing and Communications will ensure that the Group has the neces- Group Finance and Risk Management is responsible for group functions sary means and support to communicate with customers and the market. within specialist areas such as investor relations, funding, fi nancial report- The unit will deliver strategic advisory services and make professional ing, asset-liability management, risk management and legal services. tactical and operational decisions on behalf of the Group. Further areas of responsibility include the development of the Group’s fi nancial management model and other models and processes to measure At the end of 2009, the unit had a total of 130 full-time positions, of which and manage risk, risk analyses and reports. 95 were in the Marketing division.
Group Investments, which is responsible for managing the Group’s equity CORPORATE CENTRE investments, including the business areas’ strategic ownership interests, The Corporate Centre is an important contributor to group projects, includ- is organised under Group Finance and Risk Management. The portfolios ing projects related to process and cost effi ciency in the Group and will consist of both direct investments in companies and indirect ownership work to promote the right strategic choices for the Group. interests through private equity, venture and seed funds. DnB NOR Eien- domsutvikling, which is responsible for properties and real estate projects The Corporate Centre consists of the units Structural Growth, M&A, taken over due to loan default, became part of Group Investments in 2009. DnB NOR Consulting and the Group Secretariat. M&A has operational responsibility in the Group for the purchase and sale of areas of operation Full-time positions in this unit numbered 233 at year-end 2009. and is a key player in the Group’s work on structural issues. DnB NOR Consulting is the Group’s internal consulting unit and provides services MARKETING AND COMMUNICATIONS within strategic consulting and project implementation, combining strong During 2009, the DnB NOR Group merged all marketing and commu- specialist competence with knowledge about DnB NOR. The Group nications functions into one group support unit, Marketing and Commu- Secretariat is the secretariat for the governing bodies in the DnB NOR nications. The unit will be the Group’s supplier of all marketing and Group and ensures effective and rational administrative procedures. communication services and defi ne relevant premises within this fi eld. Sponsoring and marketing activities, CRM, the management of the Group’s The Corporate Centre had 30 full-time positions at year-end 2009. brands, media and external relations and internal communication are organised under this unit.
DnB NOR ANNUAL REPORT 2009 41 PROFESSIONAL
42 Governance Group management 44 // Board of Directors 46 // Governing bodies in DnB NOR ASA 48 Corporate governance 50 // Risk management and internal control 56 Capital management and risk categories 58 // The DnB NOR share 72
> Our values secure equal treatment of shareholders, independence, strong internal control and sound risk and capital management. By being professional, we will reinforce trust in our operations.
DnB NOR ANNUAL REPORT 2009 43 GOVERNANCE Group management
6 1 4 9 5
11
1 RUNE BJERKE (born 1960) 3 BJØRN ERIK NÆSS (born 1954) Chief fi nancial offi cer – Næss assumed the position as chief fi nancial offi cer with effect Group chief executive – Bjerke took from March 2008. He was previously EVP and CFO in Aker Kværner ASA. Prior to this, he held similar positions in Orkla and up the position as group chief execu- Carlsberg (Denmark). Næss has extensive experience from executive positions both in Norway and abroad over the past tive of DnB NOR in January 2007. 25 years. He is a graduate of the Norwegian School of Economics and Business Administration and has also completed an He was formerly president and CEO executive programme at Darden Business School in the USA. of Hafslund ASA and has also been president and CEO of Scancem Inter- national. Bjerke has held a number of 4. LEIF TEKSUM (born 1952) Group executive vice president 5. LIV FIKSDAHL (born 1965) Group executive vice presi- board positions in large companies. Large Corporates and International – Teksum has been head dent Operations – Fiksdahl has been head of Operations He has also served as fi nance com- of Large Corporates and International since the reorganisa- since June 2007. She was previously head of Bank Produc- missioner of the Oslo City Council tion on 1 July 2009 and was previously head of Corporate tion in Corporate Banking and Payment Services. Prior to and as political adviser in Norway’s Banking and Payment Services. He has experience from the this, Fiksdahl held customer-oriented positions in Union Ministry of Petroleum and Energy. petroleum industry and from various executive positions in Bank of Norway, Handelsbanken and Fokus Bank. She He holds an economics degree from DnB and Bergen Bank. In the Group, he has, among other was educated at Trondheim Business School. the University of Oslo and a master’s things, been in charge of DnB Markets, Asset Management, degree in public administration from IT and staff functions. Teksum is a graduate of the Norwegian Harvard University. School of Economics and Business Administration. 6. OTTAR ERTZEID (born 1965) Group executive vice presi- dent DnB NOR Markets – Ertzeid has been head of DnB NOR 2. KARIN BING ORGLAND (born 1959) Group executive vice president Retail Banking – Karin Bing Markets since the merger in 2003. He was previously head Orgland has been head of Retail Banking since the reorganisation on 1 July 2009. Prior to this, she was and deputy head of DnB Markets and held various positions head of Regional Division East in Corporate Banking and Payment Services. She has extensive experi- within the FX/Treasury area in DnB. His prior professional ence from a number of specialist and managerial positions in product and customer units in the Group. experience includes the position as chief fi nancial offi cer in Bing Orgland has studied at the University of Pittsburgh in the USA and has a business degree from the DnB Boligkreditt and head of fi nance in Realkreditt. Ertzeid is Norwegian School of Economics and Business Administration in Bergen. a graduate of BI Norwegian School of Management.
44 DnB NOR ANNUAL REPORT 2009 GOVERNANCE
3 10 8 7 2
7. SOLVEIG HELLEBUST (born 1967) Group executive vice 9. TOM RATHKE (born 1956) Group executive vice presi- 11. CATHRINE KLOUMAN president HR – Hellebust assumed the position as head of HR in dent Life and Asset Management – Rathke has been head (born 1962) Group executive April 2009. Before this, she held the position of vice president of of Life and Asset Management since April 2007. He is chief vice president IT – Klouman has Human Resources and Communications at Pronova BioPharma executive of DnB NOR’s subsidiary Vital Forsikring and been head of IT since June 2007. ASA. Prior professional experience also includes several years board chairman of DnB NOR Kapitalforvaltning Holding. Former positions include head of at Telenor (corporate staff HR) and at BI Norwegian School of He was previously managing director of Gjensidige NOR’s Business Development and head of Management (associate professor in economics). Hellebust investment fund company Avanse, prior to which he held the Telephone and Internet Bank- holds a PhD in international economics from the Norwegian Uni- managerial positions in Vesta and If Skadeforsikring. Rathke ing division in Retail Banking. She versity of Life Sciences, an MSc in agricultural economics from also has experience from SAS and Dyno. He is a graduate has previous management experi- the University of Illinois, and an MSc in business and economics of BI Norwegian School of Management, has a master’s ence from Union Bank of Norway, from BI Norwegian School of Management. degree in business administration from the University of ICA Banken, BankAxept and IBM. Wisconsin and has completed the Advanced Management Klouman has an M.Sc. in business Programme (AMP) at Harvard University. administration from BI Norwegian School of Management. 8. KARI OLRUD MOEN (born 1969) Group executive vice president Corporate Centre, entitled to attend group management meetings – Olrud Moen has been head of the Corporate Centre since June 2007. Prior to this, she was a project manager in Finance/Group Staff and a senior DnB NOR trainee. She has previously been state secretary in 10. TROND BENTESTUEN (born 1970) Group executive vice president Marketing and Communications, the Ministry of Finance (2001-2005) and worked as a con- entitled to attend group management meetings – Bentestuen was head of Corporate Communications sultant in McKinsey & Co and an adviser for the Conservative from January 2008, and became head of Marketing and Communications in 2009. Prior to this, he Party’s parliamentary group. Olrud Moen is a graduate of the was head of Marketing and Communications in Expert and previously worked as a press offi cer and Norwegian School of Economics and Business Administration communications adviser in Telenor. Bentestuen has a bachelor of arts degree in journalism and political and has an MBA from the University of California, Berkeley. science from Temple University, California, and training from the Armed Forces.
DnB NOR ANNUAL REPORT 2009 45 GOVERNANCE Board of Directors
3 1 5 2 8
1. ANNE CARINE TANUM 2. BJØRN SUND (born 1945) Board vice-chairman in 4. TORE OLAF RIMMEREID (born 1962) Board member (born 1954) Chairman of the board DnB NOR (board member since 1999) – Sund headed the in DnB NOR (board member since 2008) – Former board in DnB NOR and DnB NOR Bank work of building the new university hospital in Akershus. member in DnB NOR Bank. President and CEO of E-CO (board member since 1999) Managing director and board chairman in Advansia, a Energi AS, previous head of the Finance and Administra- Former board member in DnB company specialising in project and construction manage- tion Department in NRK (the Norwegian Broadcasting Holding, Den norske Bank and Vital ment for large and complex projects. Board vice-chairman Corporation) and group executive vice president, Financial Forsikring. Board chairman in the in Gassnova SF. Former board chairman in Gjensidige NOR Reporting and Finance, in the SpareBank 1 Group. He has House of Literature Foundation. and board member in Union Bank of Norway. Sund headed held various positions in Christiania Bank. Is former political Board member in the South-Eastern the development of the Winter Olympics site at Lillehammer, adviser for the Conservative Party’s parliamentary group and Norway Regional Health Authority, the Gardermoen airport project and the Telenor project at is now board chairman in E-CO Vannkraft AS. Rimmereid Cappelen Damm AS, Try AS, the Fornebu. He is a graduate of the Norwegian University of has a master’s degree in business administration and is an Henie Onstad Art Centre, IRIS and Technology in Trondheim. authorised fi nancial analyst from the Norwegian School of the WWF. Former board chairman Economics and Business Administration. in the Norwegian Broadcasting Attended 16 of 20 board meetings in 2009. Corporation (NRK), board vice- Attended 18 of 20 board meetings in 2009. chairman in the Norwegian National Opera and long-standing managing 3. JØRN O. KVILHAUG (born 1951) Board employee 5. GUNILLA BERG (born 1960) Board member in DnB NOR director and owner of Tanum AS. representative in DnB NOR and Vital Forsikring (board ASA (board member since 2009) – Executive vice president Tanum holds a law degree from the member since 1999) – Full-time employee representative and CFO in SAS AB from 2002 to 2008 and previously University of Oslo. since 2005. Chief employee representative in Vital Forsikring. executive vice president and CFO in Kooperativa Förbundet Former board member in DnB Holding. Kvilhaug previously AB and regional head of staff in AGA. Berg is a graduate of Attended 20 of 20 board meetings worked as an insurance agent in the corporate market in the Stockholm School of Economics. in 2009. Vital Forsikring. Attended 12 of 12 board meetings in 2009 Attended 18 of 20 board meetings in 2009. (elected to the Board on 17 June 2009).
46 DnB NOR ANNUAL REPORT 2009 GOVERNANCE
4
7 9 6
6. SIRI PETTERSEN STRANDENES (born 1949) Board 8. BENT PEDERSEN (born 1942) Board member in DnB NOR member in DnB NOR and Vital Forsikring (board member and board vice-chairman in DnB NOR Bank (board member in Vital Forsikring since 1999 and in DnB NOR since 2007) since 1999) – Pedersen serves on the boards of several Dan- Former vice-chairman of the Control Committee in DnB for ish companies. Former board member in DnB Holding and several years. Previous board memberships include: TFDS board vice-chairman in Den norske Bank. Managing director ASA, Bergshav Shipholding AS, the Commercial Banks’ of KIRKBI A/S in Billund, Denmark from 1995 to 2006. Guarantee Fund, the Norwegian Guarantee Institute for Export He previously held executive positions in Privatbanken in Credits (GIEK) and Norges Bank. Chairman of the Programme Denmark and was a member of the group management team Board for Maritime Activities and Offshore Operations at the in Unibank in Denmark. He holds a cand.merc. degree from Research Council of Norway and a member of the Corporate Copenhagen Business School. Assembly of Telenor ASA. Professor in Economics at the Norwegian School of Economics and Business Administration, Attended 17 of 20 board meetings in 2009. specialising in international economics, shipping and air trans- port economics. She is a graduate of the Norwegian School of 9. INGJERD SKJELDRUM (born 1957) Board employee rep- Economics and Business Administration. resentative in DnB NOR and DnB NOR Bank (board member since 2002) – Full-time employee representative since Attended 19 of 20 board meetings in 2009. the Union Bank of Norway merger, chief group employee representative for the savings bank since 1 February 2000 7. PER HOFFMANN (born 1951) Board employee repre- and group employee representative in DnB NOR since 2003. sentative in DnB NOR and DnB NOR Bank (board member Member of the national board of the Finance Sector Union. since 1999) – Employee representative in DnB NOR Bank. She is a former board member in Union Bank of Norway and Former board member in DnB Holding and Den norske Gjensidige NOR and has previously held positions within the Bank. retail market in Gjensidige NOR.
Attended 18 of 20 board meetings in 2009. Attended 16 of 20 board meetings in 2009.
DnB NOR ANNUAL REPORT 2009 47 GOVERNANCE Governing bodies in DnB NOR ASA
SUPERVISORY BOARD Members elected by employees Members elected by shareholders Rune André Bernbo, Frogn (0) Amund Skarholt, Oslo (chairman) (1 222) Else Carlsen, Bødalen (1 896) Anne Cathrine Frøstrup, Hønefoss (vice-chairman) (719) Bente H. Espenes, Oslo (182) Nils Halvard Bastiansen, Bærum (0) Bjørn Hennum, Drammen (875) Jan-Erik Dyvi, Oslo (33 811) Svein Ove Kvalheim, Bergen (1 222) Toril Eidesvik, Bergen (0) Carl A. Løvvik, Bergen (116) Elisabeth Grændsen, Lillehammer (244) Svein Kåre Mikkelsen, Bergen (0) Herbjørn Hansson, Sandefjord (20 000) Einar Pedersen, Kristiansund (1 481) Leif O. Høegh, Oslo (0) Marianne Steinsbu, Oslo (3 482) Knut Hartvig Johannson, Snarøya (24 502) Per Åge Sørby, Oslo (0) Alf I. Kirkesæther, Hammerfest (0) Tomas Leire, Kristiansand (1 466) Deputies elected by employees Eldbjørg Løwer, Kongsberg (0) Tore Müller Andresen, Bergen (0) Dag J. Opedal, Oslo (1 705) Terje Bakken, Alta (416) Gudrun B. Rollefsen, Hammerfest (0) Randi Bergsveen, Vestre Toten (549) Arthur Sletteberg, Stabekk (2 444) Sarah Chapsang, Oslo (692) Merethe Smith, Oslo (0) Marion Hagland, Tønsberg (7 097) Birger Solberg, Oslo (4 888) Lillian Hattrem, Oslo (514) Tove Storrødvann, Ski (255) Arve Hatlevoll, Oslo (2 657) Gine Wang, Stavanger (0) Svein Arne Kristoffersen, Alstadhaug (0) Hanne Rigmor Egenæss Wiig, Halden (1 705) Vigdis Mathisen, Oslo (303) Tove Nakken, Trondheim (0) Deputies elected by shareholders Oddmunn Olsen, Trondheim (499) Erik Buchmann, Oslo (378) Anne Liv Reistad, Nesoddtangen (695) Turid Dankertsen, Oslo (1 767) Eli Solhaug, Oslo (1 899) Rolf Domstein, Måløy (0) Bente Sørensen, Bergen (1 782) Harriet Hagan, Alta (244) Astrid Waaler, Oslo (0) Bente Hagem, Ås (0) Arvid Åsen, Fjell (190) Rolf Hodne, Stavanger (0) Liv Johannson, Oslo (3 031) Herman Mehren, Nevlunghamn (10) CONTROL COMMITTEE Gry Nilsen, Drammen (0) Members Einar Nistad, Rådal (1 222) Frode Hassel, Trondheim (chairman) (0) Asbjørn Olsen, Skedsmo (1 313) Svein Nordvald Eriksen, Oslo (0) Oddbjørn Paulsen, Bodø (10) Karl Olav Hovden, Kolbotn (0) Anne Bjørg Thoen, Oslo (416) Thorstein Øverland, Oslo (0) Lars Wenaas, Måndalen (1 678 438) Deputies Svein Brustad, Hvalstad (0) Merete Smith, Oslo (0)
EXTENAL AUDITOR Ernst & Young AS
48 DnB NOR ANNUAL REPORT 2009 GOVERNANCE
BOARD OF DIRECTORS GROUP MANAGEMENT Members Group chief executive Anne Carine Tanum, Rømskog (chairman) (300 000) Rune Bjerke (13 138) Bjørn Sund, Lysaker (vice-chairman) (31 196) Gunilla Berg, Upplands Väsby (0) CFO Per Hoffmann, Oslo (2 142) 1) Bjørn Erik Næss (18 230) Jørn O. Kvilhaug, Hokksund (1 151) 1) Bent Pedersen, Stenløse (15 523) Group executive vice president Tore Olaf Rimmereid, Oslo (6 111) Retail Banking Ingjerd Skjeldrum, Drammen (5 882) 1) Karin Bing Orgland (2 444) Siri Pettersen Strandenes, Bergen (200) Group executive vice president Deputies for the employee representatives Large Corporates and International Sverre Finstad, Moelv (7 525) 1) Leif Teksum (37 904) Jorunn Løvås, Fjell (0) 1) Tor M. Nordvold, Skedsmokorset (2 798) 1) Group executive vice president DnB NOR Markets Ottar Ertzeid (67 746) ELECTION COMMITTEE Amund Skarholt, Oslo (chairman) (1 222) Group executive vice president Eldbjørg Løwer, Kongsberg (0) Life and Asset Management Per Otterdahl Møller, Skien (0) Tom Rathke (4 120) Arthur Sletteberg, Stabekk (2 444) Reier Søberg, Oslo (0) Group executive vice president Operations Liv Fiksdahl (3 902)
AUDIT COMMITTEE Group executive vice president HR Tore Olaf Rimmereid, Oslo (chairman) (6 111) Solveig Hellebust (0) Bent Pedersen, Stenløse (15 523) Siri Pettersen Strandenes, Bergen (200) Group executive vice president IT Cathrine Klouman (8 248)
COMPENSATION COMMITTEE Group executive vice president Anne Carine Tanum, Rømskog (chairman) (300 000) Marketing and Communications Bjørn Sund, Lysaker (31 196) Trond Bentestuen, entitled to attend group management meetings (803) Tore Olaf Rimmereid, Oslo (6 111) Group executive vice president Corporate Centre GROUP AUDIT Kari Olrud Moen, entitled to attend group management meetings (453) Tor Steenfeldt-Foss (0)
1) Not independent, see page 53 under “Corporate governance”.
The fi gures in parentheses indicate shareholdings in DnB NOR ASA as at 31 December 2009. Shares held by the immediate family and companies in which the shareholder has such infl uence as stated in Section 7-26 of the Act relating to annual accounts etc. are also included.
DnB NOR ANNUAL REPORT 2009 49 GOVERNANCE
CORPORATE GOVERNANCE
DnB NOR’s management and Board of Directors annually review the principles for corporate governance and how they are implemented in the Group. DnB NOR complies with the Norwegian Code of Practice for Corporate Governance 1) dated 21 October 2009. The description below accounts for DnB NOR’s compliance with the 15 sections in the Code of Practice.
Section 1 responsible for being fully updated on general and special confi dentiality IMPLEMENTATION OF AND REPORTING ON CORPORATE rules that apply to their areas of responsibility. Moreover, no DnB NOR GOVERNANCE employee is allowed to, via the computer systems or otherwise, actively There are no signifi cant deviations between the Code of Practice and the seek information about colleagues, customers or third parties when they way it is implemented in DnB NOR. One deviation has been accounted do not need to be privy to such information in order to carry out their for in section 14 below. work in the company.
DnB NOR wishes to promote sustainable development through respon- The Group’s code of ethics sets forth that employees must promptly sible business operations. This mainly implies taking ethical, environ- inform their immediate superior or the group executive vice president, mental and social aspects into consideration in investing and lending. Group Audit, if they obtain knowledge about circumstances that are con- Thus, DnB NOR has drawn up separate guidelines for corporate social trary to prevailing regulations issued by the authorities or represent major responsibility for asset management and credit operations. In addition, breaches of internal regulations. Employees who in a responsible manner DnB NOR’s suppliers are required to meet certain requirements by notify reprehensible aspects pursuant to this item will be protected from signing a special declaration. Corporate social responsibility also means any repercussions following such disclosure. controlling business risk, keeping environmental order within the Group and being an attractive employer. DnB NOR wishes to be a partner for Violation of the code of ethics on the part of an employee could have organisations and for sports and cultural institutions. For more informa- consequences for his or her position in the Group. The complete code of tion, please refer to the chapter on corporate social responsibility in the ethics can be found on the Group’s website, dnbnor.com. annual report and the Group’s corporate social responsibility report, which is available on dnbnor.com/csr. As a fi nancial institution, DnB NOR No deviations from the Code of Practice. is committed to curbing possible threats to its reputation and mitigating the risk of losing trust. A high ethical standard among employees and Section 2 elected offi cers will strengthen the confi dence that the Group enjoys in BUSINESS society at large. The object of DnB NOR is to engage in banking, insurance and fi nancing and any related activities within the scope of Norwegian legislation in force DnB NOR’s code of ethics addresses impartiality, confl icts of interest, at any time. The complete Articles of Association can be found on the relations with customers and suppliers, relations with the media, securi- Group’s website, dnbnor.com. ties trading, insider trading and relevant fi nancial interests of a personal nature. The code of ethics applies to all employees and members of The directors’ report describes the Group’s targets and strategies, and the governing bodies. market is kept updated through investor presentations in connection with interim accounts and presentations on special subjects. According to the DnB NOR Group’s guidelines for the handling of information, employees and elected representatives have a duty not to In annual strategy processes, the Board of Directors considers whether disclose any information about the affairs of the Group or the Group’s goals and guidelines established on the basis of the strategies are unam- customers that may come to their knowledge by virtue of their position. biguous, adequate, well operationalised and easily comprehensible for The duty of confi dentiality does not apply only to third parties, but also in the employees. All key guidelines are available to the employees through relation to colleagues who do not need to be privy to such information in DnB NOR’s intranet. order to carry out their work. Furthermore, the rules apply to information about the Group’s strategy and market plans and other aspects of com- No deviations from the Code of Practice. petitive signifi cance. The individual employee or elected representative is
1) The Norwegian Code of Practice, issued by the Norwegian Corporate Governance Board, can be found on ncgb.no.
50 DnB NOR ANNUAL REPORT 2009 GOVERNANCE
GENERAL MEETING STATUTORY AUDITOR
SUPERVISORY BOARD CONTROL COMMITTEE
BOARD OF DIRECTORS AUDIT COMMITTEE COMPENSATION COMMITTEE
GROUP AUDIT GROUP CHIEF EXECUTIVE
GROUP MANAGEMENT GROUP COMPLIANCE
Section 3 Increases in share capital EQUITY AND DIVIDENDS As the present time, no authorisation had been granted to the Board of As at 31 December 2009, DnB NOR had total equity of NOK 101.4 billion. Directors for an increase in DnB NOR’s share capital. According to statutory capital adequacy regulations for fi nancial institu- tions, the Group’s capital adequacy ratio was 12.1 per cent of risk-weighted No deviations from the Code of Practice. assets, while core capital represented 9.3 per cent. The Norwegian authori- ties’ minimum capital adequacy requirements are eight and four per cent Section 4 respectively. The Board of Directors continually reviews the capital situation EQUAL TREATMENT OF SHAREHOLDERS AND in light of the company’s targets, strategies and intended risk profi le. As part TRANSACTIONS WITH CLOSE ASSOCIATES of the Group’ strategy, equity was strengthened by approximately NOK 14 DnB NOR has one class of shares. The Articles of Association, the Board billion through a share capital increase in December 2009. The transaction of Directors and group management emphasise that all shareholders will enhanced DnB NOR’s ability to meet customers’ future fi nancing needs. be treated equally and have the same opportunity to exert infl uence. All The share capital increase also makes DnB NOR better positioned for future shares carry equal voting rights. In connection with increases in share stricter capital adequacy requirements in the banking sector, while enabling capital, existing shareholders will be given pre-emptive rights, unless such a swifter return to the Group’s long-term dividend policy. rights are derogated from due to special circumstances. In such case, the reasons for such a derogation will be specifi ed. In cases when the Board See the chapter on capital management and risk categories for a further of Directors asks the Annual General Meeting for an authorisation to repur- description of the rules on capital adequacy and the principles applied by chase own shares, shares will be purchased through the stock market at DnB NOR to estimate capital requirements. market price.
Dividends Largest shareholders DnB NOR aims to manage group resources in a manner which will ensure The Norwegian government, represented by the Ministry of Trade and shareholders a competitive return in the form of dividends and increases Industry, is DnB NOR’s largest shareholder, owning 34 per cent of the in share price relative to comparable investment alternatives. DnB NOR shares. According to the State Ownership Report (White Paper no. 13 intends to distribute approximately 50 per cent of net annual profi ts as divi- 2006-2007) the purpose of the government’s ownership in DnB NOR ASA dends provided that capital adequacy is at a satisfactory level. Dividends is to ensure that the Group is headquartered in Norway and serves as will be determined on the basis of expected profi t levels in a normalised a partner for Norwegian companies at home and in the export markets. market situation, external parameters and the need for Tier 1 capital. This gives the business community access to a large, Norwegian-based fi nancial services group with a high level of expertise. The State Ownership Repurchase of shares Report confi rms that the Norwegian government’s 34 per cent holding in To ensure fl exibility in the Group’s capital management, the Board of DnB NOR will be retained, as required by the Norwegian parliament in Directors has on previous occasions asked the Annual General Meeting Report no. 212 (2002-2003) to the Storting. for an authorisation to repurchase own shares. The acquired shares have then been required to be redeemed in accordance with regulations on the The shares held by the Ministry are managed by the Department of Owner- reduction of capital. An agreement has previously been signed with the ship, subject to special management guidelines which among other things Norwegian government, represented by the Ministry of Trade and Industry, stipulate that the Norwegian government cannot have representatives on for the redemption of a proportional share of government holdings to the boards of directors or supervisory boards of fi nancial institutions, but ensure that the government’s percentage ownership remains unchanged. that the government, through participation in election committees, must At the present time, no such authorisation for the repurchase of shares ensure that the governing bodies include representatives from all share- has been given. holder groups. The guidelines require that the Ministry act in a manner
DnB NOR ANNUAL REPORT 2009 51 GOVERNANCE
conducive to equal treatment of DnB NOR’s shareholders. Furthermore, Section 6 the Ministry is required not to instruct DnB NOR on how to manage its GENERAL MEETINGS AND CONTROL COMMITTEE operations. According to the Articles of Association, the annual general meeting shall be held before the end of April each year. The notice and registration form will be Sparebankstiftelsen DnB NOR (the DnB NOR Savings Bank Foundation) sent to shareholders and be published on the Group’s website no later than is the second largest shareholder, owning 10.0 per cent of the shares. 21 days prior to the date of the general meeting. The procedure for voting and The foundation was established in autumn 2002, when the former for proposing resolutions is described in the notice of the general meeting. Gjensidige NOR Sparebank (Union Bank of Norway) was converted to a limited company. According to Norwegian law, the foundation is required According to the Articles of Association, the general meeting shall be to be a stable, long-term owner in the Group. In order to ensure funds for chaired by the chairman of the Supervisory Board. its total operations, the foundation aims to achieve the highest possible risk-adjusted return on capital under management. More information is Members of the Board of Directors, at least one representative from the available on sparebankstiftelsen.no. Control Committee, and the statutory auditor will attend general meetings. Representatives from group management will include the group chief Transactions with close associates executive, the chief fi nancial offi cer, the head of Group Audit and special- Instructions for the Board of Directors of DnB NOR ASA state that a board ists in certain fi elds. The minutes of general meetings are available on the member must not participate in deliberations or decisions on issues where Group’s website, dnbnor.com. he or she personally or his or her close associates would be seen as having a direct or indirect personal or fi nancial interest in the matter. The same The general meeting will appoint an Election Committee which will principle is embodied in the Group’s code of ethics. It is the duty of each present a well-founded recommendation on proposed shareholder-elected board member to ensure that he or she is without prejudice in delibera- members to the Supervisory Board, the Board of Directors and the Control tions of specifi c matters. The Board of Directors must approve agreements Committee. between the company and a board member or the group chief executive. The Board must also approve agreements between the company and Decisions are generally made by simple majority. Decisions concerning third parties where a board member or the group chief executive can be the disposal of shares, mergers, demergers, the sale of a material part of perceived to have a signifi cant interest in the matter. DnB NOR Bank ASA’s business or the issuing of shares in the bank to par- ties other than DnB NOR ASA, require the approval of at least two-thirds of Board members must inform the Board of Directors if they have a direct, the votes cast and of the share capital represented at the general meeting. signifi cant interest in an agreement entered into by the company or another company in the DnB NOR Group. The same applies if such The voting procedure gives shareholders the opportunity to vote separately agreement is signed by a company outside the DnB NOR Group in which for each individual candidate nominated for election to the various govern- the board member either has an ownership interest, serves on the board ing bodies. or has a senior management position. A notifi cation should be sent to the board chairman, with a copy to the Group Secretariat. Shareholders may choose to appoint a proxy. In addition, a person will be appointed to vote for the shareholders in the capacity of proxy. As far as Board members, or companies with which they are associated, should not possible, the proxy form is drawn up so that separate voting instructions take on special assignments for companies in the DnB NOR Group other can be given for each matter to be considered by the meeting and each than their board membership. If this occurs, however, the entire Board of of the candidates nominated for election. Directors must be informed. Remuneration for such assignments is subject to approval by the Board of Directors. The Control Committee shall ensure that the Group conducts its business in an appropriate and satisfactory manner in compliance with laws, regula- With respect to the Group’s other employees and elected offi cers, the tions and guidelines. The committee shall also make sure that the Board of Group’s code of ethics lays down detailed rules regulating transactions Directors and the group chief executive maintain adequate supervision and with close associates. As a general rule, an employee or elected offi cer will control of subsidiaries. To the extent the committee fi nds it necessary, it be considered incompetent if circumstances exist that may lead others to may examine the Group’s records, accounts, correspondence and assets, believe that he or she promotes interests other than those of the DnB NOR those of the Group itself as well as those on deposit with the Group. The Group. Control Committee consists of four members and two deputies elected by the general meeting. The deputies attend all Control Committee meetings. Where a transaction is not immaterial for either the DnB NOR Group or the close associate involved, unless it is a matter for consideration by the gen- No deviations from the Code of Practice. eral meeting according to stipulations in the Public Limited Companies Act, the Board of Directors will ensure that a valuation is made by an independ- Section 7 ent third party. This also applies to any transactions between companies in ELECTION COMMITTEE the DnB NOR Group where minority shareholders are involved. In accordance with DnB NOR’s Articles of Association, the General Meet- ing and the Supervisory Board have established an Election Committee No deviations from the Code of Practice. consisting of fi ve members. The members must be shareholders or repre- sentatives for shareholders. No member of the Board of Directors or repre- Section 5 sentative from group management is a member of the Election Committee. FREELY NEGOTIABLE SHARES The committee is chaired by the chairman of the Supervisory Board, and The shares are listed on Oslo Børs (the Oslo Stock Exchange) and are members are elected by the general meeting for a term of two years. freely negotiable. The Articles of Association include no form of restriction on negotiability. The Election Committee submits recommendations to the General Meet- ing for the election of members to the Supervisory Board and the Control No deviations from the Code of Practice. Committee. The Election Committee also submits recommendations to the Supervisory Board for the election of members of the Board of Direc-
52 DnB NOR ANNUAL REPORT 2009 GOVERNANCE
tors. The recommendation should include relevant information on each Responsibilities encompass DnB NOR’s annual plan process, stipulating candidate’s background and independence. Furthermore, the committee principal goals and strategic choices for the Group as well as fi nancial proposes remuneration to members of the Board of Directors and the three-year plans, budgets and forecasts for the Group and the business Supervisory Board. The remuneration of the Election Committee is deter- areas. Further more, the Board should ensure that operations are subject mined by the General Meeting. Information about the Election Committee to adequate control and that the Group’s equity capital is at a satisfactory and closing dates for proposing candidates can be found on the Group’s level relative to the risk and scale of operations. The Board of Directors’ website, dnbnor.com. responsibility for reviewing and reporting risk management and internal control is described on page 56. The Election Committee held 19 meetings during 2009. The Commit- tee presented a recommendation for the election of new members to the A vice-chairman has been elected to chair meetings of the Board of Supervisory Board, including the new chairman and vice-chairman. In Directors in the event that the chairman cannot or should not lead the addition, the committee proposed candidates for election to the Board of work of the Board. Directors and the Control Committee and also carried out the preparatory work related to issues to be considered in 2010. Audit Committee The Board of Directors in DnB NOR ASA has an Audit Committee that No deviations from the Code of Practice. will consist of up to four board members, with meetings normally held seven to eight times a year. Members are elected for a term of up to two Section 8 years, and the chairman is appointed for a term of one year at a time. At SUPERVISORY BOARD AND BOARD OF DIRECTORS, least one of the committee members should have relevant accounting or COMPOSITION AND INDEPENDENCE auditing expertise. The purpose, responsibilities and functions of the Audit The main responsibility of the Supervisory Board is to supervise the Board Committee are in compliance with international rules and standards as of Directors’ and the group chief executive’s management of the company. well as legislative amendments resulting from the implementation of the The Supervisory Board has 30 members, 20 of whom are elected by the EU Audit Directive. The Audit Committee reviews drafts of quarterly and shareholders at the general meeting. Emphasis is placed on ensuring annual accounts before these are presented to the Board of Directors. The broad representation from the company’s shareholders. In addition, ten Committee especially reviews matters regarding the interpretation of and representatives are elected by and among the employees. compliance with accounting principles and practices, valuations and dis- closure. In connection with its review of the accounts, the Committee has The Board of Directors has up to twelve members, eight of whom discussions with management, Group Audit and the statutory auditor. are elected by the shareholders and four are representatives for the employees . Members are elected for terms of up to two years. As at The Audit Committee’s responsibilities include ensuring that the Group has 31 December 2009, the Board had nine members, six of whom were independent and effective internal and external audit procedures and that elected by the shareholders and three were representatives for the risk management systems function effi ciently, while supervising the fi nan- employees . Four of the members were women, three of whom were cial reporting process. At least once a year, the Committee has separate elected by the shareholders and one represented the employees. meetings with the statutory auditors and the group chief audit executive without any members from management present. The curricula vitae of the individual board members are found in the annual report and on the Group’s website. The Board of Directors will Compensation Committee consider the independence of its members, and their conclusion is The Board of Directors of DnB NOR ASA has a Compensation Commit- presented in the listing of board members, along with a specifi cation of tee consisting of three members of the company’s Board of Directors. the number of DnB NOR shares held by members of governing bodies The committee normally meets three to four times a year. The committee as at 31 December 2009. draws up proposals and issues recommendations to the Board of Directors regarding the remuneration awarded to the group chief executive and acts No deviations from the Code of Practice. in an advisory capacity to the group chief executive with respect to the remuneration and other key benefi ts awarded to members of the group Section 9 management team and any others reporting to the group chief executive. THE WORK OF THE BOARD OF DIRECTORS The duties of the Board of Directors Meeting structure The Board of Directors has approved instructions governing its work and The group chief executive will prepare matters to be considered by the administrative procedures, including matters to be considered by the Board of Directors in consultation with the chairman of the Board. Each Board, the group chief executive’s tasks and obligations towards the Board matter must be prepared and presented in a manner which provides a and rules on convening and conducting meetings. The Board of Directors satisfactory basis for discussion. draws up an annual plan for its activities, covering duties stipulated in laws, regulations, resolutions passed by the authorities, the Articles of Association Board proceedings will be presided over by the board chairman. If neither and decisions made by the general meeting and the Supervisory Board. The the board chairman nor the vice-chairman participates, the Board must Board of Directors has also issued instructions for the group chief executive. select a member to chair the meeting.
The Board evaluates its own work and work methods annually, and the No deviations from the Code of Practice. evaluation forms the basis for adjustments and measures. In addition, the Board’s competencies, overall and those of each board member, are Sections 10 and 13 evaluated. RISK MANAGEMENT AND INTERNAL CONTROL AND INFORMATION AND COMMUNICATIONS The Board of Directors has the ultimate responsibility for the manage- The Board of Directors carries out a quarterly review of developments ment of DnB NOR. Through the group chief executive, the Board shall within the Group’s most signifi cant risk areas and makes an annual review ensure a sound organisation of business activities and ensure that it is of its internal control system. See page 56 for a description of the Board of continually updated on the company’s fi nancial position and development. Directors’ responsibilities and implementation and monitoring aspects.
DnB NOR ANNUAL REPORT 2009 53 GOVERNANCE
Key elements in internal control and risk management systems related to fi nancial reporting
STIPULATE REPORTING GUIDELINES
REPORT
REVIEW AND ADAPT
INTERNAL AUDIT
CONSIDERATION BY THE BOARD AND THE AUDIT COMMITTEE
SUPERVISORY AUTHORITIES INFORMATION TO THE MARKET
Stipulation of guidelines for fi nancial reporting will be made together with the individual business areas at least on a The Board of Directors of DnB NOR ASA has prepared guidelines to quarterly basis and with the support units as required. ensure reliable, relevant, timely and uniform reporting to shareholders and other capital market participants in line with relevant requirements, Audit hereinafter referred to as fi nancial reporting. The guidelines also cover the Financial reporting for the DnB NOR Group, the DnB NOR Bank Group Group’s contact with investors outside general meetings and are available and Vital Forsikring ASA is reviewed by the internal auditors on a quarterly on the Group’s website, dnbnor.com. basis. The annual accounts of all the companies in the DnB NOR Group are audited by the statutory auditors, who, within the limits stipulated in The Board of Directors determines the Group’s return on equity target, audit standard RS 610, partly base their audit on the work carried out by which forms the basis for the group chief executive’s return targets for the internal auditors in the largest group companies. the business areas. These targets are based on the risk-adjusted capital required by each business area. The internal audit carries out operational and fi nancial audits of units in the DnB NOR Group. An audit plan is prepared, which is discussed with Group Financial Reporting is headed by the chief fi nancial offi cer and is group management, reviewed by the Audit Committee and approved by organised outside the business areas and prepares guidelines for monthly, the Board of Directors. The internal audit’s risk assessments form the quarterly and annual reporting from the business areas and subsidiaries basis for determining which units should be given priority in the auditing on the basis of internal and external requirements and risk assessments process. Special audit reports are prepared, which include the results of relating to fi nancial reporting. the audit, a description of any identifi ed errors, proposed measures, a specifi cation of responsible persons and deadlines. The audit reports are The business areas are responsible for monthly fi nancial monitoring and sent to the heads of the relevant companies, while the companies’ Boards reporting. All business areas have management teams and accounting of Directors receive a summary report. An audit summary, reviewing all of units adapted to their organisation and operations. All units within the the units in the DnB NOR Group, is presented to the Board of Directors of Group make an annual evaluation of whether control activities function DnB NOR ASA once every six months. The Board of Directors of DnB NOR optimally. Bank ASA receives a monthly summary of the audit reports for the units in the DnB NOR Bank Group. The Boards of Directors of Vital and DnB NOR Review and adaptation Kapitalforvaltning Holding AS receive quarterly summaries of audit reports Group Financial Reporting prepares fi nancial reports for the DnB NOR for their respective units. The results of the fi nancial audit of the DnB NOR Group and ensures that such reporting is in line with prevailing legislation, Group, the DnB NOR Bank Group and Vital Forsikring ASA are reported to accounting standards, current accounting principles and guidelines from the the Audit Committee each quarter. Board of Directors. A number of control measures have been prepared in connection with the fi nalisation of such information, including both general Consideration by the Board and the Audit Committee reasonableness and probability tests and detailed reconciliation controls. The Audit Committee reviews quarterly fi nancial reporting for the DnB NOR Group. The committee makes a thorough review of discretionary assess- Group Financial Reporting has established processes to ensure that ments and estimates in addition to any changes in accounting practice. fi nancial reporting is of high quality and that any errors or defi ciencies are After the quarterly accounts and proposed annual accounts for the followed up and corrected. respective companies have been reviewed by the executive management and the Audit Committee, they are considered by the Boards of Directors The group management team will review monthly fi nancial reporting, includ- of DnB NOR ASA and DnB NOR Bank ASA. The annual accounts are ing trends in profi t and loss and balance sheet items, the current status approved by the general meeting. The Board of Directors of Vital consid- relative to statutory enactments, results for legal units and analyses of and ers the quarterly accounts and the proposed annual accounts, which are comments to the fi nancial performance of business areas and support units. approved by the general meeting.
The chief fi nancial offi cer will continually consider the fi nancial results and Information to the market target attainment of the business areas and support units as well as critical The Group presents the Norwegian and international markets with aspects and events which will affect their future performance and optimal extensive analytical information in connection with the quarterly reporting resource utilisation. A thorough review covering, inter alia, these subjects, of fi nancial information and presentations on particular topics. Parallel to
54 DnB NOR ANNUAL REPORT 2009 GOVERNANCE
this, the same information is made available to all interested parties on the 20 per cent of variable salary is paid in the form of shares in DnB NOR websites of Oslo Børs and the Group. ASA, with a minimum holding period of two years. The Board of Directors can make exceptions for certain positions if this is necessary to ensure Supervisory authorities competitive terms. Though salary in the latter case should be competitive, The operations of the DnB NOR Group are supervised by Finanstilsynet it should not be market-leading. The level of variable salary in DnB NOR is (the Financial Supervisory Authority of Norway). Among other things, the in any case considered to be moderate compared with prevailing levels in a Authority reviews the Group’s annual and interim reports. The Board of number of international fi nancial institutions. Directors aims to have an open and constructive dialogue with Finans- tilsynet. With effect from 2010, when determining the variable salary of the group chief executive and other senior executives, stronger emphasis will be No deviations from the Code of Practice. placed on group measurement parameters for fi nancial key fi gures, customer satisfaction and corporate reputation. Section 11 REMUNERATION OF THE BOARD OF DIRECTORS In the wake of the fi nancial crisis, both the level and structure of remu- Remuneration paid to members of the Board of Directors, proposed by neration systems in the fi nancial services industry have been subject to the Election Committee and approved by the Supervisory Board, is not international debate. Among other things, the EU Commission has issued performance-based or linked to options in DnB NOR ASA. The Board of a recommendation regarding guidelines for remunerations in the industry. Directors must approve any remuneration from the company to members Finanstilsynet has proposed new Norwegian guidelines with effect from of the Board of Directors other than ordinary remuneration for their service 2011, based on the EU guidelines. on the Board of Directors, Audit Committee and Compensation Committee and inform the Supervisory Board of such matters. Note 45 to the annual At the present time, no employees in the DnB NOR Group have any accounts for the DnB NOR Group shows remunerations to senior execu- outstanding subscription rights etc. Note 45 to the annual accounts for tives and elected offi cers in DnB NOR ASA. the DnB NOR Group shows the remunerations of senior executives and elected representatives in DnB NOR. See also the description of the Board No deviations from the Code of Practice. of Directors’ Compensation Committee in Section 9 above.
Section 12 No deviations from the Code of Practice. REMUNERATION OF THE EXECUTIVE MANAGEMENT DnB NOR’s guidelines for determining remunerations to the group chief Section 14 executive and other members of the group management team should, at CORPORATE TAKE-OVERS all times, support prevailing strategy and values, while contributing to the DnB NOR’s Board of Directors will handle any take-over bids in compli- attainment of the Group’s targets. The total remuneration to the group chief ance with the principle of equal treatment of shareholders. Parallel to this, executive and other senior executives consists of basic salary (main ele- the Board will help ensure that shareholders are given adequate informa- ment), benefi ts in kind, variable salary, pension and insurance schemes. tion in all situations that will affect shareholder interests. Cf. item 4, which gives an account of the Norwegian government’s intention to retain its 34 The total remuneration to the group chief executive is determined per cent holding in DnB NOR, as required by the Norwegian parliament. on the basis of a total evaluation, based on market comparisons and reputational aspects. The remuneration should be competitive, but not Deviations from Section 14 in the Code of Practice: The Board of Directors has market-leading. thus far chosen not to work out explicit guiding principles for how it will act in the event of a take-over bid, but otherwise endorses the wording in this section The variable salary of the group chief executive is performance-based and of the Code. determined on the basis of the following elements: fi nancial performance, customer satisfaction, employee satisfaction and the DnB NOR Group’s Section 15 reputation, as well as selected targets relating to the Group’s business AUDITOR strategy. In addition, a discretionary assessment is made of total target The statutory auditor annually submits a plan for the audit to the Audit attainment. Variable salary cannot exceed 50 per cent of fi xed salary, and Committee and Control Committee. Guidelines have been drawn up in 20 per cent of variable salary is paid in the form of shares in DnB NOR respect of relations with the statutory auditor, including restrictions on what ASA, with a minimum holding period of two years. additional services can be undertaken, approval of fees and a policy to invite tenders for external audit services. The audit partner cannot hold this The total remuneration to other senior executives is determined based on position for more than fi ve years. At the end of the period, tenders should the need to offer competitive terms in the various business areas, promote normally be invited from several auditing fi rms. The Audit Committee the Group’s competitiveness in the labour market and enhance profi tability submits a recommendation regarding the choice of auditor to the Board of in line with the Group’s income and cost targets. The total remuneration Directors. The proposal is thereafter presented to the Supervisory Board, must neither pose a threat to DnB NOR’s reputation nor be market-leading, which submits a recommendation to the General Meeting. At least once but should ensure that DnB NOR attracts and retains senior executives a year, the Audit Committee holds a meeting with the auditors at which with the desired skills and experience. neither the group chief executive nor any other member of executive management is present. Variable salary is determined based on whether specifi c group targets have been met, and on defi ned targets within the individual executive’s area The Audit Committee submits a recommendation regarding the statutory of responsibility. In addition, a discretionary assessment is made of total auditor’s remuneration to the Board of Directors, which presents the remu- target attainment. neration proposal to the Annual General Meeting for approval.
The variable salary scheme should be performance-based without expos- No deviations from the Code of Practice. ing the Group to unwanted risk, and should pose no threat to DnB NOR’s reputation. Variable salary cannot exceed 50 per cent of fi xed salary, and
DnB NOR ANNUAL REPORT 2009 55 GOVERNANCE
RISK MANAGEMENT AND INTERNAL CONTROL
Monitoring and managing risk is an integral part of fi nancial operations. In DnB NOR, sound risk management is a strategic tool to enhance value generation. Internal control should ensure effective operations and prudent management of risks that could prevent the Group from attaining its business targets.
Internal and external reporting shall be of high quality, and the Group shall Implementation and monitoring comply with relevant laws, regulations and internal guidelines, including the The holding company board annually reviews the Group’s principal risk Group’s values and code of ethics. The organisational structure of DnB NOR areas and internal control. The review, which is based on reporting from aims to ensure independent risk reporting. the group chief executive, aims to document the quality of the work performed in key risk areas and to identify any weaknesses and needs The profi tability of DnB NOR will depend on the Group’s ability to identify, for improvement. The review should ensure that changes in the risk situ- manage and accurately price risk arising in connection with fi nancial ation are identifi ed, so that the necessary improvement measures can be services. The Board of Directors of DnB NOR ASA has a clearly stated implemented. The Audit Committee also evaluates the quality of the work goal to maintain a low risk profi le. The banking group aims to maintain an performed by the internal auditors. The Boards of Directors of DnB NOR Aa level rating for ordinary long-term debt. The Group’s risk is measured Bank ASA, Vital and other signifi cant subsidiaries annually evaluate the in the form of risk-adjusted capital requirements, calculated for main risk companies’ key risk areas and internal control. categories and for all of the Group’s business areas. Cf. the further descrip- tion under “Capital management and risk categories”. In addition, risk is Each quarter, the Audit Committee and the holding company board receive followed up through supplementary risk measures adapted to operations a report on developments in the Group’s defi ned risk categories. In addi- in the various business areas, for example monitoring of exposure relative tion, the bank’s Board of Directors receives a report on developments in to limits, key fi gures and portfolio risk targets. credit risk for the banking group each quarter. The Board of Directors of Vital receives periodic reports analysing the company’s risk situation. BOARDS OF DIRECTORS Organisation and responsibilities Information about the Group’s risk situation is made available to the mar- The Board of Directors of DnB NOR ASA, the holding company board, ket, shareholders and the authorities through quarterly reports. In addition, has principal responsibility for the Group’s business operations, including information is released about DnB NOR’s adaptation to and compliance all ongoing management and control. The board has approved a code of with the capital adequacy regulations, including information on processes ethics which should help raise awareness of and ensure compliance with and models and quantitative information about the various risk categories. the ethical standards required in the Group. The holding company board Information is made available on the Group’s website, dnbnor.com. carries responsibility for ensuring that the Group is adequately capitalised relative to the risk and scope of operations and that capital requirements The holding company board has approved a capitalisation policy to stipulated in laws and regulations are met. Policies have also been worked ensure that the Group’s equity is adapted to the scope and risk profi le of out for internal control and operational risk management at group level. operations, based on the authorities’ capital adequacy requirements and DnB NOR’s internal estimated capital requirements. The Board of Directors The Audit Committee will supervise the preparation of the accounts, review continually monitors the Group’s capital situation. draft fi nancial reports and ensure that the Group’s internal control, includ- ing the internal audit and risk management systems, functions effectively. GROUP CHIEF EXECUTIVE AND EXECUTIVE BODIES The Audit Committee reports the results of its assessments to the holding Organisation and responsibilities company board. The group chief executive is responsible for implementing risk manage- ment measures that help achieve targets for operations set by the holding The Group’s credit policy is laid down in a joint meeting of the Boards of company board, including the development of effective management Directors of the holding company and DnB NOR Bank ASA. The bank’s systems and internal control. Board of Directors determines credit strategies and annual limits for liquid- ity risk and market risk for the banking group. Market risk refl ects equity, The group management meeting is the group chief executive’s collegiate currency, interest rate and commodity exposure. body for management at group level. All important decisions concerning risk and capital management will generally be made in consultation with The Boards of Directors of the other operative companies in the Group, the group management team. e.g. Vital, set limits for relevant risks pertaining to their operations. The group management meetings are attended by the group executive vice
56 DnB NOR ANNUAL REPORT 2009 GOVERNANCE
presidents in charge of the business areas and staff and support units. developments in the various risk categories. The group chief credit offi cer A number of advisory bodies have been established to assist in preparing presents a report to the bank’s Board of Directors regarding the trend in documentation and carrying out follow-ups and controls within various the banking group’s credit risk. The Group’s risk is measured in the form specialist areas: of risk-adjusted capital requirements. Calculations of the business areas’ • The Asset and Liability Committee, ALCO, is an advisory body for the chief capital requirements are based on the Group’s internal risk model. See fi nancial offi cer and handles matters relating to the management of mar- “Capital management and risk categories” in the annual report. Return on ket and funding risk, risk modelling, capital structure and return targets. risk-adjusted capital is a key factor in product pricing, profi t calculations • The Group Advisory Credit Committee approves credits according to and in monitoring performance in the business areas. assigned authorisations and advises the group chief executive and the Board of Directors in connection with large individual credit proposals Group Financial Reporting assesses the risk associated with fi nancial and other credits of an extraordinary nature. The committee plays a key reporting and facilitates monitoring of the business areas and support units. role in formulating the Group’s credit policy, credit strategies and credit At least once each quarter, meetings are held with the business areas in regulations, as well as in assessing portfolio risk. which the risks associated with fi nancial reporting, both in the short and • The Investment Committee is an advisory body with respect to the the long term, are assessed. The group chief executive, the chief fi nancial Group’s purchases and sales of equity instruments in the bank’s strategic offi cer, managers in the relevant unit and relevant experts participate in the and fi nancial equity portfolios. Decisions on purchases and sales are meetings, which are chaired by the group chief executive. In addition, the delegated based on authorised amounts and trading limits. Decisions chief fi nancial offi cer holds meetings with the support units as and when on transactions in excess of NOK 250 million must be presented to the required in which the risks associated with fi nancial reporting are reviewed. Board of Directors. • The Group Operational Risk Management Committee helps ensure effec- GROUP COMPLIANCE tive and consistent monitoring and reporting of operational risk through- Organisation and responsibilities out the Group. A key task is to make sure that the Group’s routines DnB NOR shall comply with all laws and regulations applicable to the relating to internal control and quality assurance are designed to provide Group’s operations, hereinafter referred to as compliance. The Board of added value relative to group operations. Directors has approved a compliance policy which describes the main principles of the duty of operational compliance and how the compliance Implementation and monitoring function is organised in the Group. The compliance function is an inde- The basis for risk management in DnB NOR is that individual managers in pendent function which identifi es, evaluates, gives advice on, monitors and the Group must make sure that they are acquainted with all material risks reports on the Group’s operational compliance risk. In all business areas within their areas of responsibility, thus ensuring that the management of and support units, as well as in large subsidiaries and international entities, such risk is fi nancially and administratively sound. compliance offi cers have been appointed with responsibility for ensuring compliance with relevant regulations. The group chief executive has issued more detailed guidelines concerning the implementation of the group credit policy and credit strategies. Each The identifi cation, assessment and monitoring of the Group’s fi nancial business area manages its own credit processes based on such guidelines. compliance risk is carried out by Group Financial Reporting on behalf of the chief fi nancial offi cer. Risk in Vital Forsikring is monitored by measuring the overall decline in value which Vital would be able to cover while meeting statutory minimum Implementation and monitoring capital requirements. The group compliance offi cer is responsible for the Group’s overall control of and reporting of operational compliance risk and any breach of laws All units carry out an annual risk review which includes: and regulations pertaining to the Group. The group compliance offi cer is • comments to the unit’s work on internal control organised the Group Risk Management division and reports to the Board of • risk assessments Directors through the group chief executive at least once a year. Compli- • an evaluation of compliance with external and internal regulations ance offi cers in the business areas and support units issue periodic reports • planned improvement measures on the current status and on any violations of regulations to the group compliance offi cer and to the heads of their respective units. Reporting takes place at department level and forms the basis for aggregate reports for business areas and support units, which in turn are Group Financial Reporting assesses the Group’s fi nancial compliance risk included in the group chief executive’s reports to the holding company and issues regular reports to the Audit Committee. board. Where assessments identify particularly serious risks, these should be reported along with an indication of relevant improvement measures. AUDIT The units should consider the maximum loss potential for the Group. Organisation and responsibilities Independent and effective audits will help ensure satisfactory internal GROUP FINANCE AND RISK MANAGEMENT control as well as reliable fi nancial reporting. Group Audit receives its Organisation and responsibilities instructions from the holding company board, which also approves the Group Finance and Risk Management has overall responsibility for risk department’s annual plans and budgets. measurement and management and internal control and for assessing and reporting the Group’s overall risk situation. The Group Risk Manage- Implementation and monitoring ment division is organised in Group Finance and Risk Management and is As a quality check to ensure compliance with the conditions set by the headed by the Group’s chief risk offi cer. All of the Group’s risk entities are Board of Directors, Group Audit carries out independent risk assess- now organised in this division. The Group Financial Reporting division is ments of and checks on group activities. The results of the audit activities responsible for fi nancial reporting and sets the premises for matters relat- are reported to the Boards of Directors of the relevant companies in the ing to accounting and fi nance in the Group. DnB NOR Group, the holding company board, the Audit Committee and group management. Reports from Group Audit are also presented to the Implementation and monitoring Control Committee and the statutory auditor. The results of the fi nancial Group Risk Management, represented by the Group Risk Analysis sec- audit are reported to the Audit Committee on a quarterly basis. Group Audit tion, prepares periodic reports to the holding company board regarding monitors that the necessary measures are initiated and implemented.
DnB NOR ANNUAL REPORT 2009 57 GOVERNANCE
CAPITAL MANAGEMENT AND RISK CATEGORIES
CAPITAL MANAGEMENT institutions are required to complete an Internal Capital Adequacy Assess- Capitalisation policy ment Process, ICAAP. The Board of Directors of DnB NOR ASA approved a new capitalisation pol- icy for the Group on 20 January 2009. The capitalisation policy is aimed at Finanstilsynet (the Financial Supervisory Authority of Norway) has estab- ensuring that DnB NOR’s equity is adequate to secure effective and optimal lished guidelines for what such a process should include. The capital use of equity relative to the scope and risk profi le of operations. The capitali- adequacy assessment process should encompass risks which are not sation policy shall balance the need for a competitive return on equity with included in the calculation of the minimum requirement. In addition, it the need for stability required by the supervisory authorities, bondholders, should refl ect the fact that risk quantifi cation and capital requirements are market players and other stakeholders, including rating companies. based on methods and data which entail uncertainty. Capital requirement assessments should be forward-looking and take account of business The Board of Directors has approved a target of minimum 8 per cent plans, growth and access to capital markets. The capital base should be Tier 1 capital upon full implementation of the IRB system (Internal Ratings adequate to get through a recession characterised by negative results Based, IRB). As risk-weighted volume is affected by cyclical fl uctuations, and diffi culties in obtaining new capital. The ICAAP should be reported to this means that the Tier 1 capital ratio must be well over 8 per cent in good Finanstilsynet. economic times and minimum 8 per cent during an economic downturn. As part of its supervisory process, Finanstilsynet prepares an annual overall Capital assessments should be forward-looking and take organic growth risk assessment for the Group, including feedback on the capitalisation of and the need for strategic fl exibility into account. General economic condi- the Group. tions should also be taken into consideration. Risk is quantifi ed through calculations of risk-adjusted capital. Processes have been established in DnB NOR to assess capital require- ments relative to the Group’s risk profi le and the quality of established risk Assessment of risk profi le and capital requirements management and control systems. The Group’s risk and capital situation is Pursuant to the Norwegian Public Limited Liability Companies Act, all assessed and summarised in a separate risk report to the Board of Direc- companies must at all times have an equity which is sound, based on the tors of DnB NOR ASA each quarter in connection with the presentation extent of the company’s activities and the risk they involve. The capital of the accounts. The Group’s capitalisation target is an important element adequacy regulations set a minimum primary capital requirement, encom- in the budget and strategy process. The capitalisation policy is reviewed passing credit risk, market risk and operational risk. In addition, fi nancial annually.
Capital adequacy Capital adequacy requirement – 8 per cent of risk-weighted volume Per cent NOK billion
14 100
10.7 12 80 8.7 2.8 10 3.7 3.9 3.4 0.8 8.0 60 8 2.8
0.8 0.9 71.3 0.6 60.3 6 0.8 40 8.5 4 6.3 6.6 6.1 5.8 20 2 2.3 2.4 4.7 4.3 6.5 8.2 0 0 31 Dec. 31 Dec. 31 Dec. 31 Dec. 31 Dec. Target 31 Dec. 31 Dec. 2005 2006 2007 2008 2009 2008 2009
Tier 2 capital Credit risk, IRB approach Operational risk Hybrid Tier 1 securities Credit risk, standardised approach Other Equity Tier 1 capital Market risk Tier 1 capital
58 DnB NOR ANNUAL REPORT 2009 GOVERNANCE
Reporting methods for credit risk in capital adequacy calculations
Portfolios 31 Dec. 2009 31 Dec. 2010 31 Dec. 2011
Retail: – mortgage loans, DnB NOR Bank and DnB NOR Boligkreditt IRB 1) IRB 1) IRB 1) – qualifying revolving retail exposure, DnB NOR Kort Standardised IRB 1) IRB 1) – mortgage loans, Nordlandsbanken Standardised IRB 1) IRB 1) – loans in Norway, DnB NOR Finans excluding the portfolio from SkandiaBanken Bilfi nans Standardised IRB 1) IRB 1) – remaining portfolios, DnB NOR Finans Standardised Standardised IRB 1) Corporates: – small and medium-sized corporates, DnB NOR Bank Advanced IRB Advanced IRB Advanced IRB – large corporate clients, DnB NOR Bank Standardised Advanced IRB Advanced IRB – corporate clients, Nordlandsbanken Standardised Advanced IRB Advanced IRB
– leasing and loans in Norway, DnB NOR Finans excluding the portfolio from SkandiaBanken Bilfi nans Standardised Advanced IRB Advanced IRB – remaining portfolios, DnB NOR Finans Standardised Standardised Advanced IRB – corporate clients, DnB NOR Næringskreditt Standardised Advanced IRB Advanced IRB Institutions: – banks and fi nancial institutions Standardised Standardised Advanced IRB Exceptions: – approved exceptions: government and municipalities, equity positions, commercial paper Standardised Standardised Standardised
– temporary exceptions: DnB NORD, DnB NOR Luxembourg, Monchebank and various other portfolios Standardised Standardised Standardised
1) For mortgage loans, no distinction is made between the foundation and the advanced IRB approach.
A process for assessing the risk profi les and capital requirements of the DnB NOR has been granted permission to use the IRB approach for credit parent company DnB NOR ASA, Vital Forsikring ASA and other major risk to calculate capital adequacy for that part of the portfolio for which use subsidiaries is completed each year. Risk is quantifi ed by calculating of the IRB approach has been approved. The table shows which portfolios risk-adjusted capital. Qualitative assessments are also used. Stress tests this applies to and the Group’s implementation plan for new portfolios. for credit and market risk are other important references. The Boards of Directors of the subsidiaries make independent assessments of capital Approximately 47 per cent of DnB NOR’s portfolio is reported according to levels and future capital requirements based on guidelines in the Group’s the IRB approach, measured by lending volume. capitalisation policy. The results are verifi ed with the specialist units in the respective subsidiaries and in DnB NOR ASA and considered by the Asset Practially all of the Group’s mortgages secured by real property are reported and Liability Committee, ALCO, before being presented to the respective according to the IRB approach. When applying the IRB approach to mort- Boards of Directors. gage loans, the bank’s models for expected default frequency, loss given default and exposure are used for both internal management purposes and The process and the result thereof are documented in writing in an ICAAP capital adequacy calculations. In the retail market, supervisory approval has report. DnB NOR’s ICAAP report was sent to Finanstilsynet in April 2009. been sought to apply the IRB approach in 2010 for both capital adequacy reporting for DnB NOR Kort and mortgage loans in Nordlandsbanken. The Group’s CFO is responsible for ensuring that the ICAAP process is completed. A large part of the portfolio for small and medium-sized businesses is reported according to the advanced IRB approach. The use of this Basel II implementation approach implies that the bank’s models for expected default frequency, The Basel II regulations entered into force on 1 January 2007. The capital loss given default, exposure and maturity are used for both internal adequacy regulations imply greater consistency between the authorities’ management purposes and capital adequacy calculations. The Group has capital adequacy requirements for fi nancial institutions and the method applied for approval to use the advanced IRB approach for large corporate applied by the institutions themselves in calculating capital requirements. customers in DnB NOR Bank and Nordlandsbanken, as well as for the For credit risk, capital requirements can be calculated according to the leasing and loan portfolios in DnB NOR Finans, with the exception of the standardised approach or based on internal models, IRB. The standard- portfolio of SkandiaBanken Bilfi nans. ised approach is largely based on previous regulations (Basel I), assign- ing risk weights to claims on various debtors. Use of the IRB approach is The basic indicator approach, the standardised approach and the subject to approval by Finanstilsynet. advanced approach can all be used to measure operational risk under
DnB NOR ANNUAL REPORT 2009 59 GOVERNANCE
Risk-adjusted capital for the DnB NOR Group
Amounts in NOK billion 31 Dec. 2009 31 Dec. 2008 Credit risk 50.9 59.2 Market risk 3.7 4.2 Market and insurance risk in life insurance 10.5 7.1 Non-life insurance risk 0.5 Operational risk 7.2 6.7 Business risk 4.1 3.7 Gross risk-adjusted capital 76.9 81.0 Diversifi cation effect 1) (14.8) (12.9) Net risk-adjusted capital 62.1 68.1 Diversifi cation effect in per cent of gross risk-adjusted capital 1) 19.3 15.9
1) The diversifi cation effect refers to the effect achieved by the Group in reducing risk by operating within several risk categories where unexpected losses are unlikely to occur at the same time.
Basel II. DnB NOR Bank ASA reports according to the standardised Risk-adjusted capital and average losses over a normal business cycle approach, while some subsidiaries use the basic indicator approach. A are elements in calculations of risk-adjusted return, which is a key shift to the most advanced reporting standard, Avanced Measurement fi nancial management parameter in the internal management of the Approaches, AMA, will be considered at a later date. The use of the most DnB NOR Group. The calculations are included in the fi nancial planning advanced approach is subject to approval by Finanstilsynet. for the business areas and is reported quarterly. Risk-adjusted return is a measurement parameter in the pricing model and is reported monthly in Market risk can be reported according to the standardised approach or automated management systems which include large parts of the credit based on internal models, the Internal Model Method, IMM. DnB NOR portfolio. Risk-adjusted capital is also used as decision support for risk reports according to the standardised approach. The shift from Basel I management . to Basel II has a more limited impact on the treatment of market risk. Risk-adjusted capital is a measure of the risk of losses generated by Capital adequacy various business operations. Risk-adjusted capital makes it possible to Risk-weighted volume included in the calculation of the formal compare risk across risk categories and business areas. Calculations capital adequacy requirement declined by NOK 147 billion in 2009, to of risk-adjusted capital are based on statistical methods. Nevertheless, NOK 1 053 billion. The banking group’s risk-weighted volume could not calculations require a certain level of discretion and estimation. be reduced below 80 per cent of the Basel I requirement in 2009, but this limitation had no signifi cance in 2009. In December 2009, this rule was The similarities between the framework for risk-adjusted capital and the extended to apply till year-end 2011. The Tier I capital ratio was 9.3 per capital adequacy regulations increase as a greater part of the Group’s cent as at 31 December 2009, while the capital adequacy ratio was portfolios are reported according to the IRB approach. The underlying risk 12.1 per cent. For that part of the portfolio which was reported according drivers for credit, and in part operational risk, are largely the same. Never- to the IRB approach, the risk-weighted volume was reduced by 60 per theless, the confi dence levels differ, and risk-adjusted capital provides a cent compared with the Basel I requirement. more conservative calculation.
Calculations have been made of the effect of full future implementa- DnB NOR quantifi es risk-adjusted capital for the following risk categories: tion of the Basel II regulations for all of the Group’s portfolios, excluding credit risk, market risk, market and insurance risk in life insurance, non- DnB NORD. The calculations showed a potential Tier I capital ratio of life insurance risk, operational risk and business risk. The risk-adjusted 11.7 per cent at end-December 2009 based on such implementation. No capital for the various risk categories is calculated separately. In addition, similar reduction in capital can be expected, as the framework also takes risk-adjusted capital is calculated for each business area. A signifi cant other factors into account. diversifi cation or portfolio effect arises when the various risks are consid- ered together, as it is unlikely that all losses will occur at the same time. Risk-adjusted capital An economic downturn will normally have a negative effect on most areas, Calculations of profi tability and internal capital requirements are based on but there will be a diversifi cation effect, as not all areas will be hit equally internal calculations of economic capital – risk-adjusted capital. Average hard. The diversifi cation effect between risk categories and business areas losses over a normal business cycle represent expected costs which should implies that the Group’s risk-adjusted capital will be much lower than if the primarily be covered through correct pricing of the Group’s products. business areas had been independent companies. Risk-adjusted capital should cover unexpected losses. The quantifi cation is based on statistical probability calculations for the various risk categories Risk measurement is a fi eld in constant development, and measurement on the basis of historical data. As it is impossible to guard against all poten- methods and tools are subject to continual improvement. There were no tial losses, DnB NOR has stipulated that risk-adjusted capital should cover particular changes in the models for calculating risk-adjusted capital in 99.97 per cent of potential losses within a one-year horizon. This level is in 2009. As part of the IRB introduction process, new models have been accordance with an Aa level rating for ordinary long-term debt. implemented for caculating expected default frequency, loss given default and exposure at default for mortgage loans and the corporate portfolios.
60 DnB NOR ANNUAL REPORT 2009 GOVERNANCE
Risk-adjusted capital per business area, 31 December 2009 Segments in the Shipping, Offshore and Logistics division Per cent Per cent – measured in terms of exposure at default
100 7
80 10 26
60 10
40
10 9 20
14 14 0 Retail Large Corporates DnB NOR Life and Asset DnB NORD DnB NOR Banking and International Markets Management Group
Non-life insurance risk Market and insurance risk in life insurance Offshore Other shipping Business risk Market risk Tanker Other (non-shipping) Operational risk Credit risk RoRo/container/PCC Gas Dry bulk Logistics
Estimated risk level connection with payment transfers as not all transactions take place At end-December 2009, net risk-adjusted capital for the Group was esti- in real time. mated at NOK 62.1 billion, a decline of NOK 6.0 billion from end-Decem- ber 2008. Risk-adjusted capital for credit was NOK 50.9 billion, down Credit policy NOK 8.3 billion from a year earlier. The decline was due to the strength- According to the Group’s credit policy, approved by the Boards of Directors ening of the Norwegian krone and reduced credit demand, resulting in a of DnB NOR ASA and DnB NOR Bank ASA, the principal objective for lower credit exposure in the corporate market. In addition, the fi gures were credit activity is that the loan portfolio should have a quality and a compo- somewhat infl uenced by the upgrading and improvement of internal credit sition which secure the Group’s profi tability in the short and long term. The risk models. A higher equity exposure in Vital’s investment portfolio gave an quality of the credit portfolio should be consistent with DnB NOR’s low risk increase in risk in life insurance, especially towards the end of 2009. profi le target.
Risk-adjusted capital allocated to the business areas is based on the Credit risk management same framework as for the Group. Risk-adjusted profi tability measures The credit policy regulates credit activity in DnB NOR Bank. The customer’s risk-adjusted profi ts as part of allocated capital. This enables comparisons debt servicing capacity will be the key element when considering whether to of fi nancial performance across business areas. approve a credit. If the customer has not proven a satisfactory debt servic- ing capacity, credit should normally not be extended even if the collateral is Stress testing adequate. The value of collateral should be assessed based on estimated reali- Stress testing is an important part of the risk and capital assessment pro- sation value. The portfolio should be suffi ciently fl exible and liquid to permit cess and a key tool for analysing the Group’s risk profi le. The stress tests sales, syndication and securitisation of credits and the use of credit derivatives. should identify aspects which could have a negative impact on the Group. Credit operations must comply with business, credit and industry strategies In the planning process, stess testing is used to identify possible negative approved by the Board of Directors. According to DnB NOR’s corporate consequences of changes in macroeconomic conditions. social responsibility guidelines, DnB NOR has undertaken not to offer products and services or perform acts representing a material risk of RISK CATEGORIES involvement in unethical conduct, infringement of human or labour rights, Risk measurement and monitoring constitute an integral part of DnB NOR’s corruption or harm to the environment. management processes. For risk management purposes, DnB NOR distin- guishes between the following risk categories: credit risk, market risk, The Group aims to reduce large risk concentrations, whereby signifi cant liquidity risk, market and insurance risk in life insurance, non-life insurance changes in one or a few risk drivers may markedly affect the Group’s risk, operational risk and business risk. See description below. profi tability. Risk concentrations include large exposures to a customer or customer group as well as clusters of commitments in high-risk classes, Credit risk industries and geographical areas. Credit exposure within shipping and Credit risk is the risk of losses due to failure on the part of the Group’s commercial property is monitored closely. counterparties or customers to meet their payment obligations towards the DnB NOR Group. Credit risk refers to all claims against counterparties Credit approval authorisations are personal and graded on the basis of cus- or customers, including credit risk in trading operations, country risk and tomers’ risk class. For large credits, there is a two-layered decision-making settlement risk. procedure where credit approval authority rests with the business units while fi nal credit approval requires endorsement by a credit offi cer who is The credit portfolio includes loans, liabilities in the form of other extended organisationally independent of the business units. credits, guarantees, leasing, factoring, interest-bearing securities, approved, undrawn credits, as well as counterparty risk arising through Commitments showing a negative development are identifi ed and followed derivatives and foreign exchange contracts. Settlement risk arises in up separately.
DnB NOR ANNUAL REPORT 2009 61 GOVERNANCE
DnB NOR’s risk classifi cation 1)
Probability of default (per cent) External rating Risk class As from Up to Moody’s Standard & Poor’s
1 0.01 0.10 Aaa – A3 AAA – A- 2 0.10 0.25 Baa1 – Baa2 BBB+ – BBB 3 0.25 0.50 Baa3 BBB- 4 0.50 0.75 Ba1 BB+ 5 0.75 1.25 Ba2 BB 6 1.25 2.00 7 2.00 3.00 Ba3 BB- 8 3.00 5.00 B1 B+ 9 5.00 8.00 B2 B 10 8.00 impaired B3, Caa/C B-, CCC/C
1) Based on DnB NOR’s risk classifi cation system, where 1 represents the lowest risk and 10 the highest risk.
All corporate customers granted credit must be classifi ed according to risk The Group’s credit risk models provide a basis for statistically based cal- in connection with every signifi cant credit approval and, unless otherwise culations of expected losses in a long-term perspective and risk-adjusted decided, at least once a year. In the personal banking market, where there capital in a portfolio perspective. The calculations are based on several risk is a large number of customers, the majority of credit decisions should be parameters, with the most important being: made on the basis of automated scoring and decision support systems. • Probability of default, PD, is used to measure quality. Customers are Risk classifi cation should refl ect long-term risk associated with each cus- classifi ed based on the probability of default. tomer and the customer’s credit commitment. • Exposure at default, EAD, is an estimated fi gure which includes amounts drawn under credit limits or loans as well as a percentage share of com- The unit responsible for the classifi cation system is organisationally mitted, undrawn credit lines. independent of the operative units. The classifi cation models have been • Loss given default, LGD, indicates how much the Group expects to lose developed to cover specifi c loan portfolios. If a model is considered to if the customer fails to meet his obligations, taking the collateral provided place a commitment in a highly misleading risk class, the generated by the customer and other relevant factors into consideration. class may be overridden by a unit which is independent of the operative units, based on a recommendation from the business areas. All overrides The risk classes are defi ned on the basis of the scales used by interna- must be well founded and be made only in exceptional cases based on a tional rating agencies. There are ten risk classes for performing loans. In thorough assessment. The effect of overrides is tested by an independent addition, impaired and non-performing commitments are placed in classes unit once a year. 11 and 12 respectively for reporting purposes.
The risk classifi cation systems are used as decision support, risk monitor- DnB NOR’s models for risk classifi cation of customers are subject to con- ing and reporting. The risk parameters used in the classifi cation systems tinual improvement and testing. The models are adapted to different indus- are an integrated part of the credit process and ongoing monitoring, tries and segments and are regularly upgraded to ensure that the variables including the follow-up of credit strategies. used in the models have high explanatory power at all times based on key risk drivers for the individual parameters included in the models. If an Detailed rules are in place for the use and monitoring of collateral, includ- external rating has been given, such rating may be taken into consideration ing guidelines for the valuation of various pledged assets and guarantees. when classifying individual commitments. The classifi cation of institutional Such valuations are part of credit decisions and are reviewed in connec- and country risk is based on classifi cations by external rating agencies. tion with the annual renewal of the commitments. A procedure has been established for the periodic control of collateral. In 2007, DnB NOR was granted permission to use the Group’s own clas- sifi cation systems as a basis for capital adequacy reporting for parts of the DnB NORD credit portfolio. This has subsequently been extended to include use of the DnB NOR owns 51 per cent of DnB NORD, which is headquartered in Group’s own models for severity and credit exposure, and an increasing Copenhagen and has a network of banks and branches in the Baltic region share of the portfolio is included. and Poland. DnB NOR’s governance requirements are fulfi lled through direct participation on the Boards of Directors of DnB NORD and the indi- Use of the Group’s own calculations of risk parameters in capital adequacy vidual subsidiary banks. As in DnB NOR, credit operations in DnB NORD reporting is part of the IRB system, defi ned as the models, work processes, are regulated through a credit policy that applies to the whole bank. In decision-making processes, control mechanisms, IT systems and internal addition, credit strategies have been prepared for DnB NORD’s various guidelines and routines used to classify and quantify credit risk. The IRB sys- business areas. tem thus affects a major part of the Group’s operations, also across business areas and support and staff units. Extensive efforts have been made over a Classifi cation models and the IRB system number of years to establish the IRB system. In addition, the bank has long The DnB NOR Group has extensive experience with classifi cation systems and extensive experience from the use of risk models and systems and main- as support for credit decisions and monitoring. Data and analytical tools tains sound credit control. The introduction of the IRB system has contributed are an integrated part of risk management. to better credit risk management through improved follow-up systems.
62 DnB NOR ANNUAL REPORT 2009 GOVERNANCE
Retail IRB portfolio according to risk class Corporate IRBA portfolio according to risk class Per cent Per cent
40 25
35 20 30
25 15
20
10 15
10 5 5
0 0 123456789101112 123456789101112 Risk class Risk class
31 Dec. 2008 31 Dec. 2008 31 Dec. 2009 31 Dec. 2009
Validation is a key element in assuring the quality of the IRB system and expanded due to the improved situation in the housing market. There was can be divided into quantitative and qualitative validation. The quantitative stable credit quality and a relatively low level of non-performing loans in validation tests the risk models, whereas the qualitative validation tests the the part of the portfolio which depends on developments in the Norwegian structure of the IRB system and whether it is used as intended. At least economy, primarily loans to private individuals and small and medium-sized once a year, the Board of Directors should be presented with a validation businesses in Norway. Credit quality was impaired in the shipping portfolio. report providing them with a basis for considering whether the Group’s credit risk is adequately classifi ed and quantifi ed. Responsibility for all vali- The weak trend in the international economy resulted in lower credit qual- dation has been assigned to the chief fi nancial offi cer, while Group Credit ity and thus rising write-downs on loans in 2009. The most pronounced Risk Management has responsibility for carrying out the validation process. increase in write-downs took place in the Baltic States, where the Group is exposed through DnB NORD. There was also a rise in write-downs within Credit risk measurement shipping and port terminals. The portfolio of Norwegian-related loans was Credit risk is monitored by following developments in risk parameters, subject to moderate write-downs, while write-downs remained very low in migration and distribution over the various risk classes. Developments in risk the Norwegian personal customer market. concentrations are monitored closely with respect to exposure, risk classes and allocated risk-adjusted capital. Large customers and customer groups Over the past year, the Group has stepped up its efforts considerably are followed up based on risk class and allocated risk-adjusted capital. to ensure the value of problem commitments. The uncertainty relating to DnB NORD will continue, and economic developments in the Baltic In the corporate segment, all commitments which are considered to States will be vital to the level of write-downs. There is also uncertainty require special follow-up during the credit approval process are identifi ed. about macro economic developments in some industries in the Group’s This ensures management attention and follow-up. Norwegian and Norwegian-related credit operations.
The models’ calculations of estimated probability of default should show the In consequence of the Group’s plans for IRB reporting of new portfolios, average probability of default during a business cycle. This implies that the new large corporate models were taken into use for internal reporting models are cyclical in that they overestimate the credit risk during a period during 2009. of strong economic expansion and underestimate the credit risk during a recession. Consequently, stress testing is used to assess the effects of a Market risk recession on capital requirements. The stress tests should identify possible Market risk is the risk of losses or reduced future income due to fl uctua- future changes in economic conditions which could have a negative impact tions in market prices or exchange rates. The risk arises as a consequence on the Group’s credit exposure and ability to withstand such changes. of the bank’s unhedged positions and exposure in the foreign exchange, These assessments are taken into account in the Group’s risk and capital interest rate, commodity and equity markets. The risk level refl ects market assessment process to determine the correct level of capital. price volatility and the positions taken.
Risk-adjusted capital for credit risk is aggregated based on individual com- A distinction is made between trading and banking actitivites. Trading mitments, where each commitment is classifi ed with respect to quality in activities include trading and positions in fi nancial instruments, aiming to the form of expected default frequency and the amount of loss experi- achieve a profi t by capitalising on differences and fl uctuations in interest enced in the event of default. The portfolio classifi cation provides a basis rates and exchange rates, typically in a short-term perspective. Banking for statistically based calculations of normalised losses and risk-adjusted activities include the Group’s ordinary funding and lending operations, capital. Calculations of risk-adjusted capital include the effect of industry where mismatches in fi xed-rate periods for assets and liabilities represent concentrations, diversifi cation effects and large exposures. sources of market risk. DnB NOR’s investments in equity instruments are also included in banking activities. The portfolio of fi xed-income securi- Developments in credit risk in 2009 ties in DnB NOR Markets, the majority of which are classifi ed as held-to- Credit growth in the corporate market in 2009 refl ected weak demand maturity investments, is defi ned as credit risk in the internal measurement and a decline in lending volumes. In the retail market, lending volumes of risk-adjusted capital.
DnB NOR ANNUAL REPORT 2009 63 GOVERNANCE
Daily risk exposure (Value-at-Risk) NOK million
150
100
50
0 Jan. 09 Apr. 09 Jul. 09 Oct. 09 Dec. 09
Interest rate and currency risk after diversification Interest rate risk Currency risk Equity risk
Market risk arising in Vital is defi ned as market risk in life insurance. Mar- ing the monitoring of mutual fund holdings invested in through DnB NOR ket risk arising in DnB NOR Skadeforsikring is included in measurements Asset Management, rests with Group Investments, which is organised of non-life insurance risk. under Group Finance and Risk Management. The unit is part of the bank’s contingency team handling non-performing commitments as it is also Market risk in the trading portfolio arises through trading activities in the responsible for credit commitments where the bank takes ownership posi- interest rate, foreign exchange, commodity and equity markets. The risk tions. Follow-ups take place on a monthly basis. relates partly to customer business, though there is scope for moderate risk-taking within proprietary trading in foreign exchange and fi nancial instru- Limits and guidelines for managing market risk in DnB NORD are ments. Positions will be generated by trading in balance sheet products such established by the company’s Board of Directors and followed up by the as bonds and commercial paper, as well as fi nancial derivatives such as company’s Asset and Liability Committee, ALCO, which has representatives interest rate swaps, options, forward contracts and future rate agreements. from DnB NOR Markets and Group Finance and Risk Management. Such instruments are used to hedge positions in the trading portfolio. Market risk measurement Overall, market risk represents a small share of the Group’s total risk. When measuring market risk, a distinction is made between measure- ments of risk under normal market conditions and measurements which Market risk management focus on extreme market conditions. Limits established for the Group’s market risk exposure also encompass market risk in Vital and in DnB NOR Skadeforsikring. Several tools have been established to quantify and measure the Group’s total market risk exposure under normal conditions. Interest rate risk is Responsibility for all trading activities in the DnB NOR Bank Group, with measured as the change in value resulting from an interest rate adjustment the exception of DnB NORD, rests with DnB NOR Markets. Limits and of one basis point. Limits for foreign exchange, equity and commodity risk guidelines for managing market risk on trading activities are reviewed represent nominal amounts for individual positions. In addition, Value- at least once a year and are determined by the Board of Directors of at-Risk calculations are used in operational management and control in DnB NOR Bank. A unit independent of brokerage operations checks DnB NOR Markets. positions in relation to limits and results on a daily basis. Risk measurement under extreme market conditions includes stress tests The Treasury function in the DnB NOR Bank Group handles interest rate and calculations of risk-adjusted capital. Stress tests are also used to follow risk on the banking book. As for trading activities, limits and guidelines for up non-linear instruments and interest rate risk. managing market risk are reviewed by the bank’s Board of Directors once a year. Principles, methods, limits and follow-ups are based on the same Risk-adjusted capital for market risk is calculated by simulating potential guidelines as trading activities, which includes daily measurement of inter- losses on the basis of expected maximum exposure, liquidation periods est rate risk. Interest rate and currency risk in the banking group is cen- for positions and correlations between the defi ned portfolios. Correlations tralised, as all units in the banking group, with the exception of DnB NORD are based on a stressed scenario. The liquidation period ranges from 250 and DnB NOR Monchebank, must hedge their positions through the trading days for equity instruments in the banking book to two trading days Treasury function. DnB NORD and DnB NOR Monchebank have their own for positions in the most commonly traded currencies. Calculations of risk- risk limits. This ensures the quality and transparency of position-taking adjusted capital distinguish between trading and banking activities. both locally and in the Group as a whole. Developments in market risk during 2009 Limits for equity instruments are determined by the Board of Directors of Risk-adjusted capital for market risk declined from NOK 4.2 billion at the DnB NOR Bank ASA. The limits are reviewed at least once a year. end of 2008 to NOK 3.7 billion at end-December 2009. The reduction mainly refl ected lower exposure to equity instruments. Interest rate risk Primary responsibility for following up, further developing and reporting remained low throughout the year, representing a NOK 51 million decline in all types of investments in and purchases of equity instruments, includ- value in the event of a parallel one percentage point shift in the interest curve
64 DnB NOR ANNUAL REPORT 2009 GOVERNANCE
in an unfavourable direction in all currencies at year-end 2009. Currency risk Boligkreditt AS and DnB NOR Næringskreditt AS, and are secured by and the risk on equity instruments were moderate through the year. the companies’ housing mortgage and commercial mortgage portfolios, respectively. During the fi nancial market turmoil, covered bonds have Liquidity risk proved to be a more robust and considerably lower priced funding instru- Liquidity risk is the risk that the Group will be unable to meet its obligations ment than ordinary bonds. Over the next few years, DnB NOR will thus as they fall due, and risk that the Group will be unable to meet its liquidity seek to cover a large share of its long-term funding requirement through obligations without a substantial rise in appurtenant costs. In a broader the issue of covered bonds. perspective, liquidity risk also includes the risk that the Group will be unable to fi nance increases in assets as its funding requirements rise. As an element in ongoing liquidity management, DnB NOR Bank needs to have a holding of securities that can be used in various ways to regulate the Risk profi le Group’s liquidity requirements and serve as collateral for operations in the In line with the bank’s other operations, liquidity risk should be low and main currencies in which the bank is active. The securities are used, among promote the bank’s fi nancial strength and ability to withstand various events other things, as collateral for short-term loans in a number of central banks and developments. This implies that the bank should seek to have a balance and serve as liquidity buffers to fulfi l regulatory requirements. The bank has sheet structure that refl ects the liquidity profi le of an international bank with chosen to meet its need for liquid securities by holding international bonds an Aa level long-term credit rating from recognised rating agencies. of superior credit quality. At end-December 2009, the international liquidity portfolio totalled NOK 118 billion, of which 97 per cent were securities with Liquidity risk management an AAA rating. Only four securities had a rating below AA, representing 0.3 The Board of Directors regularly reviews the bank’s liquidity risk and per cent of the portfolio. In addition, the bank had a portfolio of Norwegian determines limits and guidelines. The Board reviews the limits each year, Treasury bills totalling NOK 134 billion at year-end 2009. or more frequently if required. DnB NOR gives priority to maintaining sound business relations with a The bank’s liquidity management is organised based on a clear authorisa- large number of international investors and banks and to promoting the tion and reporting structure. Group in international capital markets.
Group Finance and Risk Management has divided the responsibility for Liquidity risk measurement determining principles and limits for liquidity management and for arrang- Liquidity risk is managed and measured using various measurement ing long-term funding between the Asset and Liability Management unit techniques, as no single technique can quantify this type of risk. The and the IR/Long-term Funding unit. The Treasury function is responsible tecnhniques include monitoring refi nancing needs, balance sheet key for modifying the Group’s total short-term liquidity risk and for ensuring ratios, average residual maturity and future funding requirements. that liquidity requirements are within the short-term limits established by DnB NOR also uses stress testing, simulating the liquidity effect of a down- the Board of Directors. The unit also has operative responsibility for long- grading of the bank’s international credit rating following one or more nega- term bond debt in Norwegian kroner, while the operative responsibility for tive events. The results of such stress testing are included in the banking liquidity management in other currencies lies with DnB NOR Markets. The group’s contingency plan for liquidity management during a fi nancial crisis. Asset and Liability Committee, ALCO, is the advisory body for DnB NOR’s CFO with respect to principles and methods for liquidity risk measurement. The refi nancing requirement limits refl ect that the bank should be self- suffi cient with regard to liquidity for a minimum period of one month in an Overall liquidity management in the DnB NOR Bank Group is based on acute situation. The limit for structural liquidity risk implies that minimum DnB NOR Bank ASA providing funding for subsidiaries such as Nord- 90 per cent of lending to the general public should be fi nanced through landsbanken and DnB NOR Finans as well as international branches and customer deposits, long-term funding and primary capital. subsidiaries. The funding of DnB NORD corresponds to the percentage ownership of the DnB NOR Group in the bank. The bank regularly reviews the premises underlying liquidity management. This includes considering whether assets which are classifi ed as liquid, Liquidity risk is managed through both short-term limits which restrict the may be realised or used as collateral in accordance with the underlying net refi nancing requirement within one week and one month, along with premises, and to what extent assumptions regarding stable funding are a long-term management target which specifi es the share of lending to realistic in a bank-specifi c crisis or in a deteriorating market. be fi nanced by customer deposits or funding with a residual maturity of minimum 12 months. Liquidity risk limits reduce the bank’s dependence Developments in liquidity risk during 2009 on short-term funding from the money and capital markets in Norway and After signifi cant market turmoil in 2008, the markets for short-term liquidity abroad. The limits have been established as funding from such sources is improved considerably at the beginning of 2009. The main reason for this generally more unstable than ordinary deposits. was expectations of further major interest rate cuts in various countries, whereby investors chose to invest liquid funds for somewhat longer periods Liquidity management in DnB NOR implies maintaining a diversifi ed fund- before the interest rate cuts had an impact on the markets. ing structure, including a broad deposit base representing both retail and corporate customers. As an element in this strategy, a number of funding However, large international banks intermittently reported new, sizeable programmes have been established in different markets. DnB NOR has a and surprising losses, followed by rescue operations by the authorities. commercial paper programme of USD 14 billion in the US and a commer- This resulted in setbacks when the markets functioned less satisfactorily cial paper programme of EUR 10 billion in Europe. The short-term funding and available liquid funds once again had shorter maturities. sources are further diversifi ed through a so-called Yankee CD programme, where commercial paper are issued by DnB NOR’s New York branch. The Later in the year, however, there was a gradual improvement in the mar- bank also has a European Medium Term Note Programme of EUR 35 bil- kets, and during the second half of the year, the situation was sound and lion and a USD 8 billion long-term funding programme in the US market. stable. Volumes and maturities returned to close to normalised levels, and very short-term funding prices regained pre-crisis levels. Nevertheless, An important instrument for long-term funding is the issue of covered investors showed little risk willingness in general, and strong emphasis bonds. The bonds are issued by the bank’s subsidiaries DnB NOR continued to be placed on borrowers’ credit ratings.
DnB NOR ANNUAL REPORT 2009 65 GOVERNANCE
Average term to maturity for the bond portfolio, senior debt Customer deposits and ratio of deposits to lending Years NOK billion Per cent
4 700 70
600 60
3 500 50
400 40 2 300 30
200 20 1
100 10
0 0 0 Dec. Dec. Dec. Dec. Dec. Dec. 31 Dec. 31 Dec. 31 Dec. 31 Dec. 2004 2005 2006 2007 2008 2009 2006 2007 2008 2009
Total customer deposits (NOK billion) Total ratio of deposits to lending (per cent)
Due to the more normalised money market situation, the differential Management of market and insurance risk in life insurance between money market rates and central banks’ key policy rates was Limits for market risk in Vital are established by the Board of Directors of reduced, though it remained wider than prior to the fi nancial crisis. This DnB NOR ASA and the Board of Directors of Vital. is assumed to refl ect a generally low level of activity in the traditional, unsecured interbank markets, differences in the various banks’ liquidity Risk management in Vital is part of the company’s strategy, which has positions and the fact that this activity had largely been replaced by been approved by the Board of Directors. Through regular assessments by funding backed by securities portfolios. the Group’s Asset and Liability Committee, ALCO, the risk situation in Vital is reviewed relative to the Group’s overall risk profi le. Vital’s chief executive During the fourth quarter of 2008, the Norwegian authorities introduced a and Board of Directors are to help ensure that Vital’s risk management and scheme for long-term funding of banks whereby government securities are strategy are consistent with the Group’s risk profi le. The Risk Analysis and exchanged for covered bonds issued by banks and secured by residential Control unit is organised independent of the company’s fi nancial manage- mortgages. The scheme was instrumental in stabilising the liquidity situation ment and business areas and is responsible for reporting, monitoring and during a turbulent period, but was phased out during the autumn of 2009. follow-up of the company’s total risk. A quarterly report is prepared for the company’s management and Board of Directors. Following a substantial reduction in long-term funding costs during the summer of 2009, the situation was more stable towards the end of the Vital has worked out a stress test to determine the company’s overall risk year, and margins were signifi cantly wider than before the fi nancial crisis. tolerance. The loss potential resulting from the stress test is measured against the buffer capital in excess of statutory requirements to measure DnB NOR’s liquidity situation at end-December 2009 can be characterised the total risk in the company. This method is also used as a basis for as sound, and the average remaining term to maturity for the portfolio of risk measurement and for stipulating risk limits for asset management. senior bond debt was 3.0 years, an increase from 2.7 years a year earlier. Moreover, according to the company’s asset management strategy, profi t The Group aims to achieve a sound and stable maturity structure for fund- performance should be stabilised. ing over the next fi ve years. The Risk Analysis and Control unit monitors, reports and follows up limits Risk in Vital Forsikring ASA – market and insurance and guidelines. Risk reports to the Board of Directors and management risk in life insurance include stress tests, stress scenarios and sensitivity tests to enable continual Risk measurement in Vital Forsikring ASA, Vital, includes market, insur- monitoring of the company’s total risk. The unit oversees fi nancial market ance, credit, operational and business risk. Market and insurance risk in developments on a daily basis and issues weekly reports on the situation life insurance comprises the risk that the return on fi nancial assets will not relative to the risk limit for asset management. Aspects relating to compli- be suffi cient to meet the obligations specifi ed in insurance policies and the ance with laws and regulations and internal guidelines are reported monthly. risk related to changes in future insurance payments due to changes in life expectancy and disability rates. The asset management strategy aims to reduce earnings variability. In order to comply with the need for minimum diversifi cation, limits have been set According to current parameters for life insurance operations in Norway, for each asset class. The limits also restrict concentration risk relative to Vital carries the risk of fulfi lling the company’s commitments in contracts individual issuers. Separate limits have been established for derivatives with policyholders. The return on fi nancial assets must be suffi cient to within asset management. All asset management limits are determined meet the guaranteed annual return to the company’s policyholders. If this each year by the Boards of Directors of DnB NOR ASA and Vital. is not the case, additional allocations will have to be used, representing buffer capital built up from profi ts in previous years. Alternatively, the short- Solvency II fall could be charged to equity. Solvency II are new EU regulations which, among other things, will replace the current minimum requirements for capital adequacy and solvency Risk in Vital primarily represents market and insurance risk in life margin. The framework directive was approved in May 2009, and fi nal insurance . implementation in national regulations is scheduled to take place by
66 DnB NOR ANNUAL REPORT 2009 GOVERNANCE
Development in annual guaranteed rate of return and Development in investment risk – measured weekly 10-year Treasury bill yield Per cent Per cent
100 5.5
95 5.0
90 4.5
85
4.0 80
3.5 75
70 3.0 Feb. 09 Apr. 09 Jul. 09 Oct. 09 Dec. 09 31 Dec. 31 Dec. 31 Dec. 31 Dec. 31 Dec. 31 Dec. 2004 2005 2006 2007 2008 2009
Effective Treasury bill yield Annual guaranteed rate of return
end-October 2012. Supplementary provisions to the framework directive distinction is made between policyholders’ funds and company funds. In are currently under consultation and are expected to be approved in 2011. consequence of this, the company’s capital is managed separately at the owner’s expense and risk. Value developments are simulated on a daily The regulations are expected to follow the structure in Basel II, with three basis for all portfolios, taking account of the level of correlation between pillars. This implies that in addition to minimum capital adequacy require- the sub-portfolios. The values are tested against limits which indicate ments, Solvency II will also include qualitative requirements regarding risk when DnB NOR will have to record losses. These limits are affected by the management, the internal capital adequacy assessment process and more securities adjustment reserve, interim profi ts, additional allocations and the stringent external reporting requirements. The new requirements will be guaranteed rate of return. Insurance risk and the risk that Finanstilsynet more risk-sensitive and ensure better insight into insurance companies’ will require Vital to make extraordinary insurance provisions are refl ected actual risk profi les. in the calculations. The calculations also include the effect of a possible rebalancing of the portfolio, i.e. dynamic adaptation. Vital has participated in all the quantitative studies implemented for the European insurance industry. The company has also performed a gap Developments in market and insurance risk in life insurance analysis, and a programme for implementing Solvency II has been initiated. in 2009 In addition, a good dialogue has been established with government and At the end of 2009, the average annual guaranteed return was 3.4 per cent. industry bodies to ensure the best possible adaptation of the regulations during the period up until fi nal implementation. The yield on Norwegian 10-year government bonds increased from 3.8 per cent at year-end 2008 to 4.2 per cent at end-December 2009. In conse- Measurement of market and insurance risk in life insurance quence, overall long-term fi nancial risk in Vital was somewhat reduced. Risk measurement in Vital includes stress tests of the total loss potential, including risk other than market and insurance risk, and sensitivity analy- The DnB NOR Group reported risk-adjusted capital for market and insur- ses. The internal stress test calculates the total loss potential for market, ance risk in life insurance of NOK 10.5 billion at the end of 2009 and insurance, credit, operational and business risk. When determining the NOK 7.1 billion at end-December 2008. A signifi cant rise in the company’s overall investment risk tolerance, this loss potential is measured against equity exposure contributed to increasing risk-adjusted capital. Accumula- the company’s buffer capital in excess of the regulatory requirement. This tions in the securities adjustment reserve and in additional allocations in method is also used as a basis for measuring and determining the limit 2009 increased the company’s buffer capital and risk capacity. for market and credit risk in asset management. Calculations of the loss potential associated with market and credit risk include stress tests for In addition to market and insurance risk in life insurance, Vital was allo- equity, interest rate, property, spread and counterparty risk, respectively. cated operational risk and business risk of NOK 1.3 billion and NOK 0.5 billion, respectively, at year-end 2009. Sensitivity analyses have been established which estimate the change in value and effects on profi ts of a 20 per cent fall in equity prices, a 1.5 per- Risk in DnB NOR Skadeforsikring – non-life insurance risk centage point rise in interest rates and a 12 per cent reduction in property Risk in DnB NOR Skadeforsikring includes insurance, market, credit, prices. The sensitivity analyses are carried out separately. operational and business risk. Insurance risk is the risk of losses if insur- ance premiums fail to cover future claims payments. The company is Risk-adjusted capital is used to measure the Group’s market and life exposed to market and credit risk in investment operations, and reassur- insurance risk. Risk-adjusted capital refl ects the ownership risk associated ance agreements encompass credit risk. with the DnB NOR Group, as owner of the life insurance company, having to report a net loss from these operations and possibly being required to Management of non-life insurance risk inject new equity. In calculations of risk-adjusted capital, developments The premises for non-life insurance risk are laid down in the business in the value of the insurance company’s fi nancial assets are simulated, plan of DnB NOR Skadeforsikring and adopted by the company’s Board including the value of currency hedges. This entails that new regulations of Directors. The business plan is an integral part of Retail Banking’s busi- for Norwegian life insurance companies effective from 1 January 2008, a ness plan. The company’s Board of Directors has established a strategy
DnB NOR ANNUAL REPORT 2009 67 GOVERNANCE
Operational losses according to category Per cent Processing and routine errors 100 Business disruptions and system errors Destruction of property Products and business practices 34 80 Employees and working environment External fraud
77 Internal irregularities 60 5 0
40 36
20 9 0 0 13 8 0 4 11 0 2 2008 2009
and principal guidelines for market and insurance risk, including the When a need for improvement measures is identifi ed, special follow-ups premises for the company’s reinsurance hedging. Through the reinsurance are initiated. programme, the total risk is geared to the capital base. The reinsurance programme also contributes to profi t equalisation by hedging catastrophe In order to limit the consequences of serious events, operational disrup- risk. Credit and market risk is managed through the investment plan, tions etc., comprehensive emergency, contingency and business continuity which is considered by the company’s Asset and Liability Committee and plans have been worked out for all business-critical processes and in areas Board of Directors once a year. affecting health, safety and environment. These are regularly tested and updated. Insurance risk is continually monitored by tracking profi tability on all products . In addition, the claims reserve is reviewed on a quarterly basis. In all business areas, special groups have been established to support management in managing operational risk. Responsibilities include Measurement of non-life insurance risk monitoring and reporting identifi ed risks, helping prevent loss events and Capital utilisation is measured relative to the solvency margin requirement improving the relevant business area’s risk situation. To ensure independ- in Solvency I, while capital adequacy and buffer capital utilisation are ence relative to business operations, these persons are organised in the calculated on the basis of Finanstilsynet’s stress test. business areas’ respective staff units. Their work also includes making sure that operations are in compliance with relevant laws and regulations. Risk-adjusted capital for non-life insurance risk is measured on the All reporting is a two-way process, both through the line organisation and basis of Finanstilsynet’s total risk calculations, but is calibrated against through the Group’s central risk unit. Operational risk management and DnB NOR’s confi dence level. Risk calculations cover market and insurance compliance at group level is organised in a separate unit within Group Risk risk, including premium risk and risk associated with technical insurance Management, which is organised under the staff area Group Finance and provisions. Risk Management.
Developments in non-life insurance risk in 2009 The Board of Directors is kept updated on the status of operational risk DnB NOR Skadeforsikring was established in 2008. Non-life insurance risk through the Group’s quarterly risk report and annual reports, and through increased during 2009 in consequence of growth in the insurance port- additional reporting as required. The status report on ongoing management folio. The premium portfolio totalled just under NOK 1 billion at year-end and control includes a presentation of key risks and relevant improvement 2009, of which more than 90 per cent refers to the retail market. A limited measures and a detailed assessment of the current status of the individual range of products is offered to small and medium-sized enterprises. business areas’ ongoing management and control. The results of the evalu- ation are summarised in a point model which is part of the calculation of Operational risk risk-adjusted capital for operational risk for the business areas. Operational risk is the risk of losses due to defi ciencies or errors in pro cesses and systems, errors made by employees or external events. There is a rising demand from the outside world to document operations. Operational risk is a consequence of DnB NOR’s operations. The group quality system, KRAFT, gives a structured and standardised documentation of the Group’s work and management processes. KRAFT Operational risk management helps reduce the operational risk associated with the Group’s processes and The Board of Directors has laid down a policy for the management of business practices. In addition, KRAFT provides background documenta- operational risk in the Group. Operational risk should be low, and risk tion for the Group’s ongoing streamlining and improvement processes. management should ensure that the risk of unwanted losses is reduced. The Group’s insurance programme provides wide coverage against the The basic principle is that all managers must have sound knowledge of greater part of losses in the event of large-scale catastrophes such as and manage operational risk within their own area of responsibility. This is fi res, serious operational disruptions and criminal attacks. Losses resulting to be ensured through ongoing risk assessments of everyday operations, of from major indemnity suits are also covered. The insurance programme is all major changes in operations as well as of particularly critical functions. highly cost-effective and primarily aims to cover serious loss events. The
68 DnB NOR ANNUAL REPORT 2009 GOVERNANCE
deductible risk is handled through the Group’s captive company, DnB NOR and pressure on prices, competitors introducing new products, govern- Reinsurance SA. ment regulations or negative media coverage. Losses arise if the Group fails to adapt its cost base to such changes. Operational risk measurement Operational loss events in the Group which result in losses of more Negative media coverage may be a consequence of other risk factors, than NOK 50 000 and near-events with a loss potential of more than but are handled as business risk in DnB NOR. A damaged reputation can NOK 100 000 are registered, reported and followed up on an ongoing have an adverse impact on all business areas, independent of where in the basis in the Group’s event database. Events are categorised according to Group or in the rest of the fi nancial industry the original incident occurred. Basel II’s defi ned event types. Information from the event database is a key element in the Group’s operational risk management and is used as input Business risk management and measurement in analyses, reports and the business areas’ risk assessments. Loss events As business risk may arise due to various risk factors, a broad range of are reported quarterly. tools is applied to identify and report such risk.
The calculation of risk-adjusted capital for operational risk is based on Sound strategic planning is the key tool to reduce business risk. Reputa- external capital requirements, but is adjusted upward to refl ect DnB NOR’s tional risk is managed through policies and business activities, including risk tolerance. In addition, the caluculations take into account that the real compliance. The Group’s active commitment to corporate social respon- risk situation differs between the various business areas. sibility and the code of ethics for employees also has a positive impact on business risk. Developments in operational risk during 2009 The registration of operational loss events started on 1 January 2005. Reputational risk is followed up by monitoring media coverage, while the The Group thus has data on operational loss events dating back fi ve years competitive situation is followed up by analysing market trends and devel- and experience from just over 2 200 events. Operational losses average opments in market shares. approximately NOK 25 million each quarter, though major individual events could have a signifi cant impact on the loss level. The Group has developed a model for calculating business risk per busi- ness area. The model is based on past fl uctuations in income and costs A total of 456 operational loss events were reported during 2009, causing and is structured so that if all other factors are kept constant, high income an overall net loss of NOK 235 million. Potential losses relating to the same volatility raises the risk level and thus risk-adjusted capital. Vice versa, a events represented just under NOK 660 million, which was roughly on a highly fl exible cost structure will reduce risk-adjusted capital. level with the 2008 fi gure. Developments in business risk in 2008 Just over 70 per cent of overall losses were in the categories process- Risk-adjusted capital for business risk represented NOK 4.1 billion at ing and routine errors and products and business practices, which is year-end 2009. unchanged from 2008. In addition, throughout 2009 there was a rise in losses resulting from fraud. However, most of these losses are recorded as credit losses even if operational risk constitutes the underlying cause.
At end-December 2009, risk-adjusted capital for operational risk was estimated at NOK 7.2 billion.
Experience shows the importance of close monitoring and control of new areas of operation. The ongoing restructuring processes in the Group, entailing organisational changes, new reporting lines, new role assign- ments, staff reductions and process effi ciency, result in increased opera- tional risk and will receive continued management attention in 2010.
In the autumn of 2008, an investigation was initiated against DnB NOR following allegations that the bank had traded Treasury bills after receiving insider information in connection with the Norwegian government’s stimulus package. The investigation was closed on 17 February 2010 and resulted in a fi ne of NOK 12 million against DnB NOR ASA and the forfeiture of estimated gains of NOK 14 million. At the same time, the case against two employees was dropped. DnB NOR accepted the fi ne without a judicial review, but maintains that no unlawful insider information was given in the case. DnB NOR is thus of the opinion that no employees broke the law on behalf of the bank. In its assessment, DnB NOR emphasised that a judicial review would be resource-intensive for management and other employees for an extended period.
Business risk Business risk is the risk of losses due to external factors such as the mar- ket situation or government regulations. Such risk includes loss of income due to a weakened reputation.
Business risk is manifested in an unexpected decline in profi ts. Such a decline can be caused by competitive conditions resulting in lower volumes
DnB NOR ANNUAL REPORT 2009 69 GOVERNANCE New external parameters
Stricter capital requirements thus function as a macroeconomic management tool. The banks will The Basel Committee 1) has proposed stricter requirements for the have to retain more capital during periods of brisk lending growth, level and quality of the capital base intended to protect depositors which could dampen credit growth. There is reason to believe that and others funding the banks against losses. The quality of the capital DnB NOR, based on its current capital base and risk profi le, will satisfy base is determined on the basis of whether it absorbs losses on a the new minimum requirements with a good margin. going concern basis or whether the bank will be required to be placed under public administration before material losses are absorbed by Minimum leverage ratio requirement the capital base. This distinction has generally refl ected the difference In addition to the capital adequacy requirements, which are based between Tier 1 capital, which will typically be equity, and Tier 2 capital, on risk-weighting of assets and positions, a minimum requirement for which will typically be subordinated loans. equity or core capital relative to total assets, but with no form of risk- weighting, has been proposed. The purpose of this requirement is to However, the fi nancial crisis revealed that in a number of countries, place an absolute ceiling on banks’ leverage. In addition, it will contrib- capital approved as Tier 1 capital did not function as a proper buffer ute to reducing the signifi cance of model errors and other indefi cien- against losses on a going concern basis. Thus, a major tightening has cies in systems for risk-weighting and capital adequacy calculations. been proposed in the criteria for what can qualify as such capital, The details on how the actual ratio will be designed and calibrated are whereby the major part of Tier 1 capital must be in the form of com- not yet fi nalised. Independent of the chosen model, however, it seems mon equity. DnB NOR’s current hybrid Tier 1 securities do not meet clear that compared with most other banks, DnB NOR will be well the proposed criteria for such capital. positioned in relation to this requirement.
Revised minimum requirements will be presented for the size of com- Stricter liquidity coverage ratio requirements mon equity, total core capital and total capital base. The minimum The Basel Committee has proposed the introduction of a requirement requirements will be enforced by capital adequacy calculations. Capi- whereby banks must maintain stocks of high quality liquid assets in tal adequacy is calculated by measuring the capital base as a percent- excess of net cash outfl ows from the bank over a 30-day period of age of the risk-weighted assets which refl ect the bank’s risk. The Basel stress. High quality liquid assets are defi ned as deposits in central Committee proposes to tighten risk-weighted asset measurements banks and government securities. Net cash outfl ows during the stress in a number of ways. A proposal has also been presented whereby period are calculated based on, among other things, an assumed systemically critical institutions will be subject to higher capital require- decline in deposits. The scope of the decline depends on the type ments in the form of individual supplementary requirements based on of deposits. Other underlying assumptions are greater utilisation of assessments made by the national supervisory authorities. undrawn credit lines and no renewal of short-term capital market fund- ing falling due during the period of stress. These stress factors come If banks are to withstand an extended period of extensive losses and in addition to ordinary cash infl ows and outfl ows, including planned still be able to meet the minimum requirements, a buffer must be lending growth. At year-end 2009, DnB NOR would have satisfi ed this built up in good times which can be drawn upon in periods of stress. requirement with a good margin. The Basel Committee proposes the establishment of a buffer zone in capital adequacy calculations, whereby the banks’ opportunities for distributing dividends and discretionary bonuses will be gradually Stock of high quality liquid assets reduced the closer they are to the minimum requirements. The buffer Liquidity coverage ratio: Ն 100% zone may be increased if credit growth becomes too strong and may Net cash outfl ows over a 30-day period
1) The Basel Committee on Banking Supervision is a cooperative body organised under the Bank for International Settlements which develops global regulations for international banking.
70 DnB NOR ANNUAL REPORT 2009 GOVERNANCE
Stricter requirements to banks’ funding structure New accounting rules for write-downs on loans New quantitative regulations have been proposed, presenting According to prevailing rules for the valuation of loans, write-downs requirements relating to banks’ funding structure relative to lending, should be made when there are objective indications of impairment. investments and other assets. The purpose of the regulations is to This model for write-downs on loans has been criticised for giving prevent that banks excessively fi nance illiquid and long-term assets belated write-downs and for resulting in excessive interest income. through short-term funding. The International Accounting Standards Board has thus proposed a The requirement is based on a comparison between the bank’s avail- new solution based on recording expected losses. Interest income able amount of long-term funding and an estimated required amount will thus be reduced by an element covering such losses. Expected of such funding. Calculations of the bank’s available amount of long- losses will be an estimate for the portfolio on the valuation date, tak- term funding include all contractual funding obligations with residual ing account of the prevailing economic situation. The losses are thus maturities of 12 months or greater and non-maturity deposits. How- spread over the expected term of the commitments. The effects of ever, deposits will be subject to a run-off factor of between 15 and changes in expected losses which, for example, are due to unex- 50 per cent, depending on how stable they are considered to be. pected economic developments, will be shown on a separate line in the income statement as a change in estimates. The proposal has Calculations of the required amount of long-term funding implies been endorsed by the Basel Committee, though the implementation that all assets with maturities greater than one year that are not of the system is expected to be mandatory no earlier than for the particularly liquid, must be backed by long-term funding. Loans with 2013 accounting year. maturities shorter than one year must be backed by 50-85 per cent long-term funding. In addition, 10 per cent of the undrawn portion Solvency II of credit lines must be covered. Just like a number of other banks, Solvency II is the name of the new solvency capital regulations for DnB NOR will need to increase long-term funding to be able to meet insurance companies. The framework directive was approved by the proposed ratios. the European Parliament in 2009. Final implementation in national regulations is scheduled to take place by end-October 2012 and to become effective on 1 January 2013. There is reason to believe that Solvency II will require insurance companies to hold somewhat more Available amount of stable funding Stable funding ratio: Ն 100% equity than today. This will also be the case for Vital. However, the Required amount of stable funding system has not been fi nally calibrated.
Implementation The Basel Committee’s various proposals regarding stricter capital, liquidity and funding requirements will, to the extent they are approved, be included in EU regulations and also become effec- tive for Norwegian fi nancial institutions through the EEA agreement. The EU regulations are expected to enter into force no earlier than 31 December 2012. However, the Norwegian regulatory authorities have the opportunity to enforce the implementation of the changes.
DnB NOR ANNUAL REPORT 2009 71 GOVERNANCE
THE DnB NOR SHARE
2009 turned out to be a very good year for the DnB NOR share. The share price rose by 145 per cent, which was signifi cantly higher than the 80 per cent unweighted average increase in the share prices of the Group’s Nordic peers. The DnB NOR share also outperformed its Nordic peers over the past two and three-year periods.
DnB NOR had a market capitalisation of NOK 102 billion at end-December RETURNS AND SHARE TURNOVER 2009 and was the third largest company listed on Oslo Børs (the Oslo The price of the DnB NOR share increased by 145 per cent during 2009. Stock Exchange). The Group’s market capitalisation was NOK 36 billion at No dividends were paid for 2008. The Board of Directors has proposed a year-end 2008. A comparison with the value at year-end 2009 must, how- dividend of NOK 1.75 per share for 2009. The total trading volume for the ever, include an adjustment for the NOK 14 billion increase in DnB NOR’s DnB NOR share on Oslo Børs was NOK 1 252 billion in 2009, a 44 per cent equity through the rights issue completed in December 2009. reduction compared with the previous year. The number of transactions was 12.4 million, down 6 per cent. The average daily trading volume for the As at 31 December 2009, DnB NOR’s share capital was NOK 16 288 DnB NOR share was 5.9 million shares in 2009 (table 2), which repre- million. The DnB NOR share is covered by 14 Nordic-based and 11 sented approximately 5 per cent of the total trading volume on Oslo Børs. international brokerage houses. It is in the interests of DnB NOR that high- quality equity analyses are published. Emphasis is placed on providing At the beginning of 2010, the DnB NOR share is weighted on all relevant relevant, complete and high-quality information and on ensuring that all Oslo Børs indices, with 8.2, 7.1, 9.1 and 8.8 per cent respectively on the analysts, regardless of their assessments of the DnB NOR share, receive benchmark, all-share, OBX and mutual fund indices. DnB NOR is also equal treatment at all times. A list of analysts following the DnB NOR share represented on various global indices, but with relatively low weights. It is can be found on dnbnor.com. Daily contact with investors and analysts possible to trade standardised derivative contracts on the DnB NOR share, is handled by the Investor Relations/Long-term Funding department. A and DnB NOR derivatives were sold on 210 of the 251 trading days on further description of DnB NOR’s shareholder policy can be found in the Oslo Børs in 2009. Around 176 000 contracts were sold at a total value chapter “Corporate governance”. of NOK 59 million.
Share price development in 2009 Local currency 31 December 2008 = 100 280
240
200
160
120
80
40 31 Dec. 28 Feb. 30 Apr. 30 Jun. 31 Aug. 31 Oct. 31 Dec. 2008 2009 2009 2009 2009 2009 2009
DnB NOR Nordea Danske Bank Svenska Handelsbanken Swedbank SEB
72 DnB NOR ANNUAL REPORT 2009 GOVERNANCE
Table 1: Total annual return as at 31 December 2009 1)
Total annual return (%) Last year Last two years Last three years
DnB NOR 144.7 (7.6) (5.4) Nordic average 2) 79.5 (14.2) (12.0)
1) Aggregate return is defi ned as the closing price at the start of the period minus the closing price at the end of the period, adjusted for dividends paid during the period and divided by the closing price at the start of the period. 2) Unweighted average of Danske Bank, Swedbank, Nordea, SEB and Handelsbanken.
Table 2: The DnB NOR share in 2007, 2008 and 2009
In NOK unless otherwise indicated 2009 2008 2007
Highest closing price 1) 69.13 79.77 89.93 Lowest cosing price 1) 15.86 20.89 71.22 Closing price as at 31 December 2) 62.75 25.64 78.82 Market capitalisation as at 31 December (NOK million) 102 207 35 982 110 610 Tax value as at 1 January the following year 63.70 27.75 83.50 Dividends for the accounting year 3) 1.75 0.00 4.50 Annual turnover (in 1 000) 1 487 761 1 549 935 1 456 095 Average daily turnover (in 1 000) 5 923 6 150 5 824 Annual turnover (NOK million) 63 921 91 586 121 134 Turnover rate (%) 111 116 109
1) The prices are adjusted for the share issue implemented in December 2009. 2) The prices for 2007 and 2008 are adjusted for the share issue. 3) Proposed dividend for 2009.
SHARE CAPITAL AND SHAREHOLDER STRUCTURE DIVIDEND POLICY At end-December 2009, the share capital of the company was DnB NOR’s primary objective is to create value for shareholders through NOK 16 288 million divided into 1 628.8 million shares, each with a nominal an attractive and competitive return relative to comparable investment value of NOK 10. DnB NOR has approximately 46 000 private and institu- alternatives, partly through increases in share price and partly through tional shareholders, of which the largest are the Norwegian government, dividend payments. The Board of Directors has approved a dividend policy represented by the Ministry of Trade and Industry, and Sparebankstiftelsen for the company which aims to fulfi l this objective. DnB NOR intends to DnB NOR (the DnB NOR Savings Bank Foundation). A further description distribute approximately 50 per cent of net annual profi ts as dividends of the government’s ownership can be found in the chapter “Corporate provided that capital adequacy is at a satisfactory level. Dividends will be governance” under the heading “Equal treatment of shareholders”. determined on the basis of expected profi t levels in a normalised market situation, prevailing economic parameters and the Group’s need for capital, The object of the Savings Bank Foundation is to manage its long-term including a Tier 1 capital target of minimum 8 per cent. The company aims ownership interests in DnB NOR and support the company in its efforts to resume normal dividend payments within a reasonable time span after to continue the savings bank tradition. The Foundation can use a portion the capital increase. of annual profi ts to make fi nancial contributions to non-profi t causes. The Foundation’s governing body is the general meeting, with members elected RIGHTS ISSUE among the bank’s depositors and by county councils in eastern Norway. In the fourth quarter of 2009, DnB NOR completed an equity issue of The general meeting has elected a board with six members. NOK 14 billion. Existing shareholders were given preferential subscription rights and were granted two new shares for every nine shares held. The RATING subscription price was NOK 47.30 per share, and a total of 99.4 per cent The creditworthiness of DnB NOR Bank ASA is assessed by the rating of the subscription rights were used. A total of 294 million new shares were agencies Moody’s Investors Service, Standard & Poor’s and Dominion offered, and the issue was oversubscribed by 40 per cent. Bond Rating Service.
DnB NOR ANNUAL REPORT 2009 73 GOVERNANCE
Table 3: Largest shareholders as at 31 December 2008
Per cent Norwegian Government/Ministry of Trade and Industry 34.0 DnB NOR Savings Bank Foundation 10.0 National Insurance Scheme Fund 3.8 Capital Research/Capital International 2.5 Fidelity Investments 2.2 Jupiter Asset Management 2.0 People's Bank of China 1.1 DnB NOR Funds 1.0 Blackrock Investments 0.9 Nordea Funds 0.9 Standard Life 0.8 State of New Jersey Com Pension Fund 0.8 Schroder Investment Management 0.6 Vanguard 0.6 L&G Legal and General 0.5 Storebrand Funds 0.5 Deutche Bank AG/DWS Investments 0.5 Bessemer 0.4 DFA Dimentional Fund Advisors 0.4 State Street Global Advisors 0.4 Other shareholders 36.0 Total 100.0
Table 4: Number of shares in 2007, 2008 and 2009
Number of shares 2009 2008 2007
Outstanding as at 1 January 1 332 653 615 1 332 653 615 1 336 874 898 Number of shares cancelled 0 0 4 221 283 Share issue (subscription rights) 296 145 246 0 0 Shares for conversion 0 0 0 Outstanding as at 31 December 1 628 798 861 1 332 653 615 1 332 653 615 Holdings of own shares 0 0 0 Number of shares outstanding as at 31 December, incl. own shares 1 628 798 861 1 332 653 615 1 332 653 615 Number of subscription rights outstanding as at 31 December 0 0 0 Number of shares outstanding, fully diluted 1 628 798 861 1 332 653 615 1 332 653 615
74 DnB NOR ANNUAL REPORT 2009 GOVERNANCE
Shareholders according to number of shares and percentage ownership Ownership according to investor category as at 31 December 2009 as at 31 December 2009 Per cent
40 000 8.2 4.3 66.0% 31 190 30 000 34.0 13.4
20 000
13 204 21.2% 10 000 15.6
9.8% 10.0
2.3% 1 836 14.4 0.8% 112 18 0 1–1 000 shares 1 001–10 000 10 001– 1 000 001– > 10 mill. shares shares 1 000 000 shares 10 000 000 shares International investors 42% Norwegian investors 58%
Number of shareholders Norwegian government/Ministry of US Percentage ownership Trade and Industry UK DnB NOR Savings Bank Foundation Luxembourg and Germany Other Norwegian Other international
Table 5: Credit ratings (DnB NOR Bank ASA’s credit ratings in bold type)
Standard & Poor’s Standard & Poor’s Moody’s Moody’s Dominion Bond Dominion Bond short-term long-term short-term long-term Rating Service short-term Rating Service long-term
A-1+ AAA P-1 Aaa R-1 (high) AAA A-1 AA+ P-2 Aa1 R-1 (middle) AA (high) A-2 AA P-3 Aa2 R-1 (low) AA A-3 AA- Not prime Aa3 R-2 (high) AA (low) B A+ A1 R-2 (middle) A (high) C A A2 R-2 (low) A A- A3 R-3 A (low) BBB+ Baa1 R-4 BBB (high)
Bonds issued by DnB NOR Boligkreditt have a long-term AAA rating from Standard & Poor’s, Moody’s and Fitch.
The capital increase was implemented to strengthen capital to a level that so many shareholders used their subscription rights and that which is certain to meet future requirements from the regulatory authori- the ownership interests of existing shareholders were safeguarded. ties. Strong emphasis was also placed on ensuring that DnB NOR will have the required capital strength to proactively meet its customers’ needs and The fi nal step in the rights issue was the payment of the new equity in the fi nancial fl exibility to implement the Group’s strategy. A swift return to late December 2009. normalised dividend payments was also an important consideration. Consequently, the Group’s share capital now totals NOK 16 288 million DnB NOR has approximately 46 000 shareholders. Extensive efforts were divided into 1 628 798 861 shares with a nominal value of NOK 10. At made to reach all of these through road shows, brochures and advertise- year-end 2009, the Group had total recorded equity of NOK 101 billion ments, text messages via mobile phones and telephone calls. A total of 23 and a market capitalisation of NOK 102 billion. 000 shareholders were contacted in person. It was thus gratifying to note
DnB NOR ANNUAL REPORT 2009 75 GOVERNANCE
76 DnB NOR ANNUAL REPORT 2009 GOVERNANCE
TAXATION OF SHAREHOLDERS ACCORDING TO in subsequent years. If the sale of the share has resulted in a loss, a claim NORWEGIAN LAW cannot be made to deduct the unutilised shielding deduction. Limited liability companies and corresponding companies as shareholders The Norwegian Tax Administration’s register of Norwegian limited compa- A tax exemption model has been introduced in accordance with Section nies and their shares, called the shareholder register, contains the above 2-38 of the Taxation Act, whereby shareholders organised as a company etc. information about shares in Norwegian companies, including DnB NOR as a rule are exempt from tax on dividends received and capital gains on ASA. The register is based on information from the Norwegian Central shares. Corresponding losses on the sale of shares are not tax deductible. Securities Depository, DnB NOR ASA and the shareholders themselves. The tax exemption model applies to corporate shareholders etc. resident in Each year, statements from the register are sent to all Norwegian share- Norway and to corresponding business entities resident in other countries. holders to be used in preparing their tax returns. The tax exemption on dividends received by foreign corporate shareholders applies only within the EEA and only if the corporate shareholder is genuinely Foreign shareholders established and carries out genuine economic activity in an EEA country. Gains on the sale of shares are, as a rule, not taxable in Norway when the shareholder is a person or a company resident outside Norway. Shareholders eligible for the tax exemption model must nevertheless record as income 3 per cent of income on shares comprised by the tax exemp- As a general rule, dividends received by foreign shareholders are subject to tion model. As the normal tax rate is 28 per cent, such income will thus be tax in Norway. For shareholders who are natural persons resident outside taxed at a rate of 0.84 per cent. This tax liability does not apply to foreign Norway, withholding tax should always be assessed and deducted at a corporate shareholders. rate of 25 per cent. However, Norway has entered into tax treaties with a number of countries, whereby the withholding tax rate is often reduced, The taxable income will be calculated on the basis of net tax-exempt normally to 15 per cent. Shareholders who are tax resident in other EEA income according to the tax exemption model. The tax base thus repre- countries are entitled to a shielding deduction. If the withholding tax sents tax-exempt income on shares in the form of dividends and gains deducted is higher than the tax payable on dividends after the shielding on the sale of shares, minus non-deductible losses on the sale of shares. deduction, the shareholder may reclaim the excess withholding tax. When calculating gains and losses, a deduction is made for acquisition If the shielding deduction exceeds dividends received during the relevant and sales costs. A possible negative tax base from one year cannot be year, the unutilised shielding deduction may be carried forward and be carried forward to subsequent fi scal years. deducted from dividends on the same share in subsequent years. If a shareholder does not claim repayment of excess withholding tax based Natural persons as shareholders on the right to a shielding deduction, the part of the shielding deduction The tax exemption model applies to shareholders who are natural persons that does not exceed the year’s dividend payments, is annulled. The same resident in Norway. This implies that dividends on shares and gains on the applies in cases where the shielding deduction cannot be used as the with- sale of shares in excess of a shielded amount (the shielding deduction) holding tax under the relevant tax treaty is lower than the tax assessed on are taxed at a rate of 28 per cent, with a corresponding deduction right for dividends after deducting the shielding deduction. losses on the sale of shares. As mentioned above, foreign corporate shareholders resident in an EEA The shielded amount should correspond to the return on an alternative country are eligible for the tax exemption model and thus exempted from risk-free investment. The shielding deduction is computed by multiplying withholding tax on dividends. The tax exemption is conditional on the the shielding basis by a shielding interest. In principle, the shielding basis foreign limited liability company etc. being the real benefi cial owner of the represents the amount the shareholder has paid for the share, with the addi- share dividends. tion of any costs accrued upon acquiring the share. Moreover, any unused shielding deduction carried forward from previous years should be added. The company distributing the dividends is responsible for making advance For shares acquired prior to 1 January 2006, “RISK” adjustments during the tax deductions to cover the income tax on such dividends. period of ownership should be used to adjust the shielding basis up or down. In cases where incorrect or too much withholding tax is deducted upon the A shielding basis should be calculated individually for each share. Thus, distribution of dividends, the foreign shareholder may apply to the Central if shares in the same share class owned by a shareholder are acquired on Offi ce – Foreign Tax Affairs for a refund. different dates and at various prices, the shielding deduction may vary. When selling shares, the FIFO principle applies (First In First Out), whereby the shares that were acquired fi rst, are sold fi rst.
The shielding interest is based on the average three-month yield on Treas- ury bills after taxes. The Norwegian Directorate of Taxes calculates and announces the yield for each fi scal year in January/February the year after the fi scal year in question.
The shielding deduction is calculated annually and is assigned to each share on 31 December of the fi scal year. Shareholders may require that the shielding deduction be deducted from dividends on the share or gains from the sale of the share. The deduction is calculated individually for each share and can only be deducted from dividends and gains on the same share. Thus, it is not permissible to deduct unutilised shielding deductions relating to one share from gains on another share. Unutilised shielding deductions may be carried forward, and shareholders may require that such deductions be deducted from dividends or gains on the same share
DnB NOR ANNUAL REPORT 2009 77 THE ART
78 Society and employees Corporate social responsibility 80 // Employees 84
> A bank plays an important role in society, both as a driving force for local and international value creation and as a responsible employer. Through the art of serving the customer, DnB NOR will contribute to creating value for society.
DnB NOR ANNUAL REPORT 2009 79 SOCIETY AND EMPLOYEES
CORPORATE SOCIAL RESPONSIBILITY
DnB NOR wishes to promote sustainable development through business operations that emphasise environmental, ethical and social considerations.
THE GROUP’S ROLE IN SOCIETY confi dentiality, notifi cation requirements, and the need to exercise due DnB NOR is an important source of fi nance, enabling Norwegian compa- care when trading in fi nancial instruments. Life and Asset Management nies and households to realise their plans and ambitions, secure jobs and follows ethical guidelines in its management of customers’ pension funds and develop products and services. In addition to providing credit, DnB NOR’s savings, based on recognised international principles. In this connection, role is to contribute towards a common infrastructure for payment 54 companies were excluded from the investment portfolio at year-end 2009. transfers, and offer payment services, while managing and insuring both The Group’s code of ethics is published in its entirety on dnbnor.com/csr. fi nancial and non-fi nancial values. DnB NOR has a range of training tools related to ethical issues, such as The Group’s role in society also comprises: e-learning programs on economic crime and money laundering, as well • assuming responsibility in relation to customers as ethics and good advisory practices. In 2009, a group-wide training • giving new groups access to fi nancial services programme presenting ethical dilemmas was launched. • being open about the Group’s operations • making demands on suppliers regarding their corporate social DnB NOR’s CSR policy follows Norwegian standards, as well as interna- responsibility activities tional guidelines and initiatives. The Group’s reporting of CSR topics is • being a stimulating and diverse workplace based on the Global Reporting Initiative framework. In the spring of 2010, • meeting the climate challenge DnB NOR will publish a separate report on the Group’s CSR practices dur- • supporting cultural, sporting and voluntary organisations ing the two preceding years, including targets and measures for 2010 and 2011. The report is reviewed by an external auditor. Information on CSR in TRANSPARENCY DnB NOR is also available on dnbnor.com/csr. DnB NOR emphasises transparency and is committed to maintaining an open dialogue with its stakeholders. All communication to all target groups In September 2009, DnB NOR qualifi ed for inclusion in the prestigious should be open, honest and unambiguous. Dow Jones Sustainability World Index (DJSI World). This means that the Group is considered to be among the top ten per cent in its industry in During the past two years, the Group’s standing has fallen in most corpo- the world in terms of contributing towards sustainability. DnB NOR is also rate reputation surveys. This is due to several factors, including fi nancial included in the FTSE4Good Sustainability Index. market developments and the strong public criticism of certain DnB NOR products and services.
DnB NOR meets this challenge by, among other things, taking a clear 9 10 responsibility for its products and services. Financial advice given by the Group must be of high quality and tailored to meet the needs of each indi- THE CLIMATE CHALLENGE vidual customer. All fi nancial advisers receive comprehensive training in DnB NOR concurs with the view that climate change is one of the greatest all relevant products. Since 2006, DnB NOR’s advisers have also followed challenges of our time. In order to set targets and implement measures to an extensive internal certifi cation programme to document their expertise. reduce the Group’s greenhouse gas emissions, a carbon audit has been Since 2009, the certifi cation programme has been replaced by a new, drawn up and can be viewed on dnbnor.com/csr. The carbon audit quanti- national authorisation scheme for the entire fi nancial sector. fi es direct emissions from heating, the Group’s own vehicles, purchased electricity and district heating/cooling and purchased goods and services The mandate of Group Audit in DnB NOR is to expose, report on and help such as paper and air travel. prevent any internal irregularities. In addition, a separate unit is dedicated to exposing external fraud attempts, money laundering and terrorist fi nancing. DnB NOR participates, both as an investor and as an investment object, in It is DnB NOR’s policy to comply with all laws and regulations applying to the the Carbon Disclosure Project (CDP), which is a climate reporting project. Group’s operations. Read more about the compliance function on page 57. The purpose of CDP is to collect and publish information on corporate greenhouse gas emissions and other information regarding how companies DnB NOR’s code of ethics addresses various confl icts of interest, the tackle the problem of reducing such emissions. responsible use of the Group’s equipment and assets, requirements that the Group should have open and clear communication, the duty of Since the early 1990s, DnB NOR, in its capacity as lender, has also given
80 DnB NOR ANNUAL REPORT 2009 SOCIETY AND EMPLOYEES
Internal environmental effi ciency 1)
2009 2008
Energy consumption (Gwh) 104.0 105.5 2) Per employee (Kwh) 11 343 11 126 Purchased paper (tons) 859 1 077 Waste recycling ratio (%) 55 53 2) Eco-lighthouse certifi ed buildings (number) 30 23 Domestic air travel (1 000 kms) 18 548 20 688 2) International air travel (1 000 kms) 16 155 19 101 2)
1) All fi gures apply to the Group’s operations in Norway. 2) As a consequence of the process of improving the quality of non-fi nancial data, certain fi gures for 2008 have been revised subsequent to the previous reporting.
priority to renewable energy. The Group has analysts in its investment bank greenhouse gas emissions per employee compared with current levels. The who specialise in the renewable energy sector, and the Group also offers new headquarters will fulfi l the requirements of an energy class B building trading in emission quotas. as set out in the EU’s building energy directive. This entails an annual esti- mated energy consumption level which is lower than 120 kwh/m2. The main DnB NOR offers loans with discounted interest rates for cars which do energy sources will be renewable, including thermal energy from seawater. not harm the environment to the same extent as conventional cars. The Group can also offer leasing customers a solution to make car fl eets carbon Thirty of DnB NOR’s properties in Norway were environmentally certifi ed neutral through the purchase of UN-approved CO2 quotas. In 2009, leasing by the end of 2009. DnB NOR certifi es its buildings through the Norwegian customers purchased such quotas compensating for emissions totalling eco-lighthouse programme, a Norwegian public certifi cate recommended
1 135 tons CO2. by the Norwegian Ministry of the Environment. In order to be awarded an environment certifi cate, the company must fulfi l a number of requirements DnB NOR manages the Nordic region’s oldest and largest environmental within areas such as procurement, energy consumption, transportation, fund, DnB NOR Renewable Energy, which invests in companies which waste management, health, safety and environment (HSE), water con- develop and produce energy from the sun, wind and other alternative sumption, air quality and noise. energy sources. The fund was established in 1989 and had, at the end of 2009, a total of NOK 1 300 million under management and 23 387 unit CUSTOMERS AND SUPPLIERS holders. The equity fund DnB NOR Grønt Norden invests in companies DnB NOR does not wish to contribute to the infringement of human and which have a positive environmental profi le. employee rights, nor to be involved in corruption, serious environmental damage or other acts which could be perceived to be unethical. The Group is offering a growing number of paperless services which reduce environmental harm. For example, an increasing number of customers DnB NOR has developed a diligence matrix to be used by account offi cers can send applications to refi nance their housing loans from their Internet involved in lending activities to evaluate the relevant social, environmental bank, receive an SMS informing them of the status of their application and and ethical aspects of individual credit cases. The matrix assesses, for thereafter sign the loan documents electronically in the Internet bank by example, customers’ ownership structure, areas of operation and geo- using BankID. In addition, banking services via SMS on mobile phones graphic affi liation and information on relevant risk factors. The Group has have experienced a steep increase in popularity. adopted the Equator Principles, a voluntary set of guidelines for managing environmental and social issues in project fi nance. As one of the fi rst companies in Norway, DnB NOR will hereafter primarily publish its annual report on the Group’s website and send the report only to DnB NOR does not wish to invest in companies involved in the production those shareholders who specifi cally request a printed version. The change of tobacco and/or pornography, anti-personnel mines and cluster weapons, was approved at the extraordinary general meeting in November 2009, fol- or in companies which develop and produce central components for use lowing new provisions in the Norwegian Public Limited Companies Act and in weapons of mass destruction as a key part of their operations. Weapons will save the Group production and postal expenses and thus be positive for of mass destruction are defi ned as ABC weapons (atomic, biological and the environment. chemical).
Prior to booking business trips, the Group’s employees must consider DnB NOR pursues, as part of its ownership strategy, an active dialogue with whether alternative forms of communication can replace a face-to-face companies suspected of acting contrary to the Group’s guidelines in order meeting. The objective is to minimise negative infl uences on the environ- to infl uence these companies in the desired direction. A list of the number ment as travel is a central source of greenhouse gas emissions. Through the of companies excluded from the investment portfolio and the criteria upon introduction of a new, standard PC platform in 2010, the necessary technol- which the exclusions are based can be viewed on dnbnor.com/csr. ogy will be in place to increase the use of web meetings, web chats and document sharing, which will reduce the need for face-to-face meetings. Customer satisfaction surveys showed that retail customers in DnB NOR became more satisfi ed with the bank during 2009, narrowing the gap DnB NOR is building new headquarters for some 4 000 employees in Bjør- between DnB NOR and its competitors in this area. Scores were improved vika in Oslo. The environmental targets for the new headquarters are ambi- in all customer segments in the retail market, in particular among loan tious and include a 50 per cent reduction in energy consumption and in customers. In the corporate market, satisfaction levels fell within most
DnB NOR ANNUAL REPORT 2009 81 SOCIETY AND EMPLOYEES
Financial support and sponsorship agreements Distribution of value creation 1) NOK million Per cent
80 80 Employees (salaries and other social costs) 70.2 Norwegian government (direct and indirect taxes) 28 Shareholders (dividends) 6060 58.9 Retained in operations 38
4040
12 19.9 20.8 2020
7.1 7.0 22 2.0 2.6 00 Sports Culture Research/gifts/ Humanitarian work 1) The Group's value creation in 2009 according to stakeholder category. Value creation is defined as the professorships and other non-profit causes difference between income generated by operations and the consumption of external goods and services.
2008 2009
customer segments, but survey results from the fourth quarter of 2009 DnB NOR Savings Bank Foundation is the second largest shareholder showed signs of improvement. in the DnB NOR Group and donates a share of its profi ts to non-profi t projects. In 2009, the foundation made donations totalling NOK 67 million. DnB NOR requests that its suppliers sign a declaration form stating that they do not contribute to human or labour rights violations, environmental In addition, DnB NOR makes a substantial contribution to society in the harm or corruption. form of direct and indirect taxes and employers’ national insurance contri- butions. The Norwegian government also receives, as the Group’s largest EMPLOYEES shareholder, sizeable dividend payments from its ownership interest. DnB NOR is committed to having a working environment characterised by diversity, respect and consideration. Discrimination or harassment shall not SELECTED TARGETS AND MEASURES take place. Reduce emissions of greenhouse gases per employee by 20 per cent DnB NOR wishes to give each employee development opportunities by 2014 adapted to individual needs. The Group has extensive security routines • Reduce energy consumption and use more renewable energy in new and training measures to prevent injuries caused by robberies and threats. buildings Training activities and HS&E and equality initiatives are described in the • Reduce business travel through greater use of digital tools and a new chapter on the Group’s employees. business travel policy • Have a high percentage of public transport travellers to and from the CONTRIBUTION TO SOCIETY Group’s new headquarters DnB NOR makes important contributions to society through its expertise, resources and innovative ability. For example, the Group imparts its know- Reward ethical and socially responsible conduct during 2010 ledge in the fi elds of personal fi nances and macroeconomics through its • Incorporate specifi c corporate reputation targets in group management’s own publications and in the press, in addition to a wide variety of lecturing scorecard and education activities. Increase DnB NOR’s corporate reputation score from 56 to 65 points DnB NOR wishes to make fi nancial products and services available to new by 2011 groups, for example through microfi nance initiatives. In 2009, the Group • Authorise employees who provide fi nancial advisory services to retail continued its support to a project in Rwanda under the auspices of the aid customers under the new national scheme organisation CARE. The participants in the project receive help to organise themselves in saving and loan groups and thus gain access to local Achieve a score of minimum 75 for the statement: “DnB NOR is a group fi nancial services. In addition, the participants on the scheme are trained characterised by high ethical standards” in the employee satisfaction in business management. DnB NOR has supported the project with a total survey in 2010 amount of NOK 1.25 million since 2006, money which is mainly used to • Ensure that all employees complete the Group’s ethics programme fund training measures. Reduce sickness absence from 5.12 per cent to below 5 per cent In addition to providing fi nancial support to humanitarian organisations during 2010 involved in microfi nance, the Group has also joined the Norwegian Micro- • Improve the follow-up of long-term sickness absence and units with fi nance Initiative, which is a partnership between private and public actors particularly high absence rates which directly and indirectly invest in microfi nance institutions in the form of equity, loans or guarantees. The Norwegian Microfi nance Initiative oper- Achieve a score of minimum 75 for the statement: “I consider the ates on a commercial basis and the aim is to generate attractive returns, DnB NOR Group to be an attractive workplace” in the employee satisfac- both sustainable effects and traditional fi nancial returns. tion survey in 2010 and be among the three most attractive companies for business students DnB NOR supports sporting, cultural and charitable organisations and • Use modern IT tools and working methods other non-profi t causes with considerable amounts, cf. graph below. The • Be visible in important arenas at educational institutions
82 DnB NOR ANNUAL REPORT 2009 SOCIETY AND EMPLOYEES
Evaluation of target achievement in 2009
Implemented In progress
Review governing documents concerning corporate social responsibilityx Achieve a score of 85 for knowledge of the Group's code of ethics in the employee satisfaction survey 1) x Continue to be qualifi ed for inclusion in FTSE4Good x Qualify for inclusion in the Dow Jones Sustainability Index x Be one of the four largest private contributors to the Norwegian Microfi nance Initiative x Present DnB NOR’s annual regional and national innovation awards for 2008 2) x Authorise all relevant investment and fi nancial advisers 3) x Introduce the Equator Principles for project fi nancing x
Continue to screen all investments managed by DnB NOR in relation to international standards, and x exclude controversial weapons
Reduce purchased paper quantities by 3 per cent from the 2007 level x Certify an additional nine buildings under the eco-lighthouse programme – in total 30 buildings x Introduce a system for measuring the use of telephone, web-based and video conferencing equipment x Achieve an employee satisfaction score above 70 points 1) x Achieve an average sickness absence level below 5 per cent 3) x Achieve an average retirement age above 62 years x
1) Based on the employee satisfaction survey conducted in 2009. 2) There was no innovation award in 2009, but there will be in 2010. 3) For more information, see the chapter on the Group’s employees.
DnB NOR ANNUAL REPORT 2009 83 SOCIETY AND EMPLOYEES
EMPLOYEES
DnB NOR has competent and dynamic employees, and the Group is regarded as an attractive workplace. 2009 was a year characterised by internal restructuring and demanding market conditions. In spite of these challenges, the scores from the employee satisfaction survey in 2009 showed that the employees were more satisfi ed than ever.
RECRUITMENT “Grow” is the Group’s talent programme for particularly skilled employees DnB NOR advanced to second place in Universum’s business student within management, specialised fi elds and project work. The purpose of survey, which ranks Norway’s most attractive workplaces, an improvement the programme is to enable participants to function as driving forces in the from fourth place in 2008. The survey shows that DnB NOR is perceived future DnB NOR. In 2009, 32 employees were selected to participate, nine to be an exciting and secure place of employment. Such a ranking is an of whom were from the Group’s international offi ces. A total of 141 partici- important element in attracting the best candidates to the Group. pants have completed the programme since it was established in 2006.
In 2009, the DnB NOR Group recruited 259 employees, compared with In 2009, the Group’s trainee programme was given an international 835 in 2008. Of these, 92 were women and 167 men. Their average age profi le, and the seminars were held in English. The Group employed seven was 35 years. 179 new employees were employed in Norway in 2009, of trainees representing four nationalities. A total of 166 employees have whom 61 were women and 118 men. completed the programme, and of these 68 per cent are still employed in the Group. DEVELOPING MANAGERS AND EMPLOYEES The purpose of the Group’s development and career programmes is to In 2009, a national authorisation scheme was introduced for fi nancial attract, develop and retain good employees. DnB NOR is committed to advisers in Norway. The new scheme replaces the previous internal certifi - giving clear career opportunities and facilitating professional and personal cation scheme in DnB NOR. The authorisation scheme aims to ensure that development to enhance expertise and promote mobility within the Group. fi nancial advisers meet the required level of expertise and provide advisory services in line with accepted practices. In total, 900 managers and A new model for management development was approved at the end of employees have started the training programme, which consists of several 2009. A central element in this model is three core programmes adapted different courses within fi nance, economics and ethics. 130 managers and to different target groups in the organisation. The programmes are employees were authorised under the new scheme in 2009. designed to support the Group’s strategy and will include topics such as group integration and customer orientation. During 2009, the programme In 2009, the Group launched a new ethics programme. The purpose of the “Effective and well-functioning management groups” was started in six programme is to increase awareness of ethical dilemmas which employees management groups. may encounter in contact with customers and in internal processes. All employees are required to complete the programme. The Group’s core practical management training programme came to a close in the spring of 2009. In total, 620 managers participated in the EMPLOYEE SATISFACTION 29 programmes since it was started in 2004. The programme “Thinking The total score from the employee satisfaction survey conducted in 2009 together”, which aims to promote good communication techniques and showed an increase from 70 points in 2008 to 74 points in 2009, which extend networks across the DnB NOR organisation, was held for 167 is the best result ever. In spite of diffi cult economic times and uncertainty, managers and employees in 2009. the result showed that the Group’s employees were very satisfi ed with their workplace. The next survey will be conducted in the fi rst quarter of 2010. In 2009, 12 employees from the Group completed FUTURA, the Norwe- gian Financial Services Association’s programme to train women manage- REMUNERATION ment talents within the fi nancial industry. The percentage of women in The purpose of the remuneration policy is to support the Group’s prevailing the group management team rose to 40 per cent in 2009, from 33 per strategy and core values, and help the Group reach its targets. The policy cent in 2008. At the top four management levels, female representation should also encourage conduct which promotes the desired corporate was 27 per cent in 2009, an increase from 25 per cent in 2008. When culture, i.e. with respect to performance and profi t orientation, teamwork, the fi gures for management level fi ve are included, the percentage share mobility and corporate image. In 2009, the scorecard and variable remu- increased to 33 per cent in 2009, up from 30 per cent in 2008. neration concepts applicable to the Group’s senior executives were revised, whereby variable remuneration will now be based on a total evaluation of
84 DnB NOR ANNUAL REPORT 2009 SOCIETY AND EMPLOYEES
DnB NOR ANNUAL REPORT 2009 85 SOCIETY AND EMPLOYEES
86 DnB NOR ANNUAL REPORT 2009 SOCIETY AND EMPLOYEES
Number of employees according to age 1) Number of employees according to country Gender distribution Per cent Per cent
3 500 1
16 3 000 27 73 2 500 Top four management levels 7 2 000 33 67 69 3 1 500 Top five management levels 4 1 000 56 44 500 Total Group
0 20–29 30–39 40–49 50–59 60–70 0 20406080100 years years years years years
2008 1) DnB NOR Group excluding DnB NORD and Monchebank. Asia and the US Other European countries Women 2009 Baltic States Sweden Men Poland Norway
the Group’s fi nancial performance, the unit’s fi nancial performance and tematically to improve the working environment. Measures to improve the the individual manager’s contribution to value creation. The scheme should working environment should be preventive, forward-looking and integrated be performance-based without exposing the Group to unwanted risk, nor in the daily operations of the Group. Management training, ergonomics, should it pose a threat to DnB NOR’s reputation. crisis management, absence due to illness and rehabilitation were key focus areas in 2009. Measures are implemented in close cooperation The average fi xed salary for women and men in the Group’s Norwegian between managers, employees and the Group’s safety representatives. operations in 2009 was NOK 434 283 and NOK 558 132, respectively. In 2009, a total of 237 managers and safety representatives completed INTERNATIONALISATION the Group’s internal programme on statutory working environment train- DnB NOR’s activities outside Norway have resulted in a growing number ing. The programme is tailored to the needs of managers with personnel of short and long-term international assignments for managers and other responsibility, safety representatives and members of the working environ- employees in the Group. An increase in the number of employees sta- ment committees. The aim of the training is to provide the necessary tioned abroad created a need for training in multicultural communication, insight and knowledge to comply with the Working Environment Act and language skills and cultural understanding in 2009, and new measures DnB NOR’s HS&E requirements. were implemented for the employees concerned in 2009. In addition, several of the Group’s training programmes were held in English. Fitness programmes during working hours in 2009 served as preven- tive working environment measures for employees at risk of repetitive MOBILITY AND RESTRUCTURING strain injuries (RSI). The measures contribute to keeping the employees In 2009, a company agreement was negotiated for the entire Group. The motivated and also result in a reduction in RSI injuries and other health purpose of the agreement is to make it easier for employees to change jobs problems. Approximately 450 employees in the Group participate in these between the Group’s companies. In 2009, 102 employees changed jobs programmes. across the various legal units in the Group. In order to fulfi l its responsibilities as an inclusive workplace, DnB NOR In 2009, a new unit was established which is responsible for job transition is committed to working systematically to reach the targets set within the management in the Group. The purpose of the unit is to assist managers following areas: a reduction in sickness absence levels, better working and employees involved in extensive restructuring processes. conditions for employees with special needs and a higher actual retirement age. The average retirement age rose from 61.7 to 61.8 years. The goal is DnB NOR’s has its own career change and career advice centre. The to achieve an average retirement age above 62. centre assists employees seeking new challenges, for example by drawing up individual career plans and giving advice on how to become aware of The Group implemented a number of preventive measures in connection own skills and personal qualities. In 2009, 158 employees received assist- with swine fl u during the autumn of 2009. A contingency management ance from the Career Change Centre, of whom 34 took up new positions team was set up for the Group and contingency plans were implemented. A in the Group, 27 found work outside the Group, 24 were granted early number of hygiene measures were introduced in DnB NOR’s staff canteens, retirement or terminated their employment in the Group and 73 returned and an intranet page in both Norwegian and English conveyed information to their former jobs. In addition, the centre assisted 19 employees on long- to employees on swine fl u. In addition, employees in DnB NOR’s companies term sick leave in 2009. Some wished to test their capacity for work, while in Norway were offered the opportunity to be vaccinated, free of charge, at others required assistance because the position they held before they fell ill work. A total of 2 013 employees were vaccinated under this initiative. no longer existed or had been changed upon their return. Since its start in 2003, more than 1 400 employees have received advice from the centre. Absence due to illness in the DnB NOR Group was 5.12 per cent in Norwe- gian operations in 2009, an improvement from 5.35 per cent in 2008. This HEALTH, SAFETY AND ENVIRONMENT is considered satisfactory in light of the major changes undergone by the Health, safety and environment (HS&E) issues are important elements in Group in recent years, however, various measures were commenced in 2009 the Group’s human resources policy, and in 2009 DnB NOR worked sys- to further reduce this fi gure. These measures will be continued in 2010.
DnB NOR ANNUAL REPORT 2009 87 SHOW INITIATIVE
88 Directors’ report and annual accounts Directors’ report 90 // Annual accounts 101 // Auditor’s report 202 Control Committee’s report 203 // Key fi gures 204
> 2009 was a challenging year, but despite turbulent markets, DnB NOR managed to create robust economic values. By showing initiative, we will further develop our position as the Norwegian bank.
DnB NOR ANNUAL REPORT 2009 89 DIRECTORS’ REPORT
DIRECTORS’ REPORT
In accordance with the provisions of the Norwegian Accounting Act, the Board of Directors confi rms that the accounts have been prepared on a going concern basis. Pursuant to Section 3-9 of the Norwegian Accounting Act, DnB NOR prepares consolidated annual accounts in accordance with IFRS, International Financial Reporting Standards, approved by the EU. The statutory accounts of DnB NOR ASA have been prepared in accordance with Norwegian IFRS regulations.
OPERATIONS IN 2009 Average lending to customers rose by NOK 87 billion from 2008 to 2009. 2009 was a turbulent and demanding year characterised by fi nancial Adjusted for exchange rate movements, lending volumes increased by turmoil and a period of contraction both in Norway and internationally. NOK 54.5 billion. Higher lending spreads partially compensated for the However, the economic situation gradually improved during the second rise in funding costs. Average lending spreads widened from 1.01 per cent half of the year. In spite of the challenging situation, the Group recorded in 2008 to 1.61 per cent in 2009. Average deposit spreads narrowed from net profi ts during all four quarters in 2009. 1.08 per cent in 2008 to 0.29 per cent in 2009.
Due to Norway’s relatively strong economic position, the Group’s Other operating income was higher in 2009 than in 2008, especially in Norwegian -related operations, which account for more than 80 per cent of DnB NOR Markets, rising by NOK 2 556 million. The Group achieved a total operations, were less affected by the economic downturn than fi nan- high level of income by meeting customers’ needs for hedging products. cial institutions in many other countries. Pre-tax operating profi ts before Due to extensive market volatility, market making and proprietary trading write-downs rose by 19.8 per cent from 2008, to NOK 18 717 million. also generated healthy revenues. Moreover, income in the fi rst half of 2008 refl ected large unrealised losses in the Group’s bond portfolio, which However, the Group recorded a signifi cant increase in write-downs on affect comparisons between the two years. Income from payment services loans, from NOK 3 509 million in 2008 to NOK 7 710 million in 2009, of and real estate broking increased in the second half of 2009 due to the which NOK 3 929 million related to operations in DnB NORD. This repre- improved economic situation. sented 51 per cent of the Group’s total write-downs, while DnB NORD’s loan portfolio on average represented no more than 7 per cent of In the fi rst half of 2008, new international operations were started, for DnB NOR’s total loan portfolio. The serious international economic down- example in Sweden, giving a rise in expenses in 2009. However, extensive turn thus had a material negative effect on the Group’s fi nancial perform- cost-reducing measures were implemented in 2008 and 2009, partly ance, not least in the Baltic region. Profi ts for 2009 came to NOK 7 026 through the Group’s cost programme, and total expenses, excluding million, compared with NOK 8 918 million in 2008. Profi ts after minority impairment losses for goodwill, thus rose by only 2.9 per cent from 2008. interests were NOK 8 585 million and NOK 9 211 million, respectively, Expenses were reduced by 5.3 per cent from the fourth quarter of 2008 to for the two years. The large differential between profi ts before and after the fourth quarter of 2009. The cost/income ratio, excluding impairment minority interests in 2009 was due to the net loss in DnB NORD, where losses for goodwill, declined from 51.4 per cent in 2008 to 48.3 per cent the minority shareholder was charged with its respective share. in 2009.
The Group’s funding situation was largely normalised during 2009, though Due to the diffi cult economic conditions which affected parts of the funding costs were higher than before the onset of the fi nancial crisis. Group’s operations, it was necessary to record total impairment losses Covered bonds issued by DnB NOR Boligkreditt remained an important for goodwill of NOK 730 million relating to operations in DnB NORD and funding source, especially in the fi rst half of 2009. In the second quarter Sweden in the income statement. of the year, DnB NOR Næringskreditt was established. The company issues covered bonds based on loans secured by commercial property. Like a number of other fi nancial services groups, DnB NOR experienced a ratings downgrade by Moody’s and Standard & Poor’s during the fourth Due to high funding costs in 2009, competition for deposits intensifi ed, quarter of 2009. At year-end 2009, the ratings were Aa3 from Moody’s and which was one of the factors behind the narrowing in deposit spreads. A+ from Standard and Poor’s, both with a stable outlook. This has had a Nevertheless, the ratio of deposits to lending increased from 50.1 per cent minimal effect on prices and access to funding. in 2008 to 53 per cent in 2009.
90 DnB NOR ANNUAL REPORT 2009 DIRECTORS’ REPORT
Profit performance Cost/income ratio and return on equity Earnings per share NOK million Per cent NOK
20 000 18 717 60 8 51.4 6.91 6.43 15 627 50 48.3 15 000 6 40
10 000 8 918 30 4
7 026 20 5 000 12.4 2 10.6 10
0 0 0 Pre-tax operating profit Profit for the year Cost/income ratio Profit for the year 2008 2009 before write-downs
2008 2008 Earnings per share 2009 2009 Of which proposed dividend
Return on equity was 12.4 per cent in 2008 and 10.6 per cent in 2009. The Group’s annual employee satisfaction survey was carried out at the Earnings per share were NOK 6.91 and NOK 6.43, respectively, during the beginning of 2009. The resulting score was at an all-time high, with a same periods. At year-end 2009, DnB NOR was the third largest company marked increase in satisfaction levels from the corresponding survey one listed on Oslo Børs, with a market capitalisation of NOK 102 billion. year earlier. A new survey will be conducted in the fi rst quarter of 2010.
Towards the end of 2009, DnB NOR’s equity was strengthened by a net The Board of Directors would like to thank all employees for their commit- amount of NOK 13.9 billion through an issue of ordinary shares with pre- ted efforts and for succeeding in giving the Group’s customers their full emptive subscription rights for existing shareholders. The capital increase attention during a year characterised by demanding market conditions and makes the Group well positioned for expected stricter capital adequacy extensive change. DnB NOR’s motivated employees represent a sound requirements, while the transaction will enhance the Group’s ability to platform for handling the challenges faced by the Group. meet customers’ future fi nancing needs and to pursue profi table business opportunities as part of its future growth strategy. TARGETS AND STRATEGY The fi nancial turmoil which started in 2008 affected DnB NOR’s short-term As a result of the fi nancial turmoil, the market and the authorities growth prospects, not least in international markets. However, the Group’s presented stricter capitalisation requirements for the fi nancial services long-term strategy and growth ambitions remained unchanged. industry. Along with rising profi ts and other measures, the capital increase helped raise the Tier 1 capital ratio from 6.7 per cent at year-end 2008 to An important target for the Group is to achieve even stronger customer 9.3 per cent at end-December 2009. The Board of Directors considers the orientation in its operations and improve customer satisfaction. DnB NOR’s Group to be well capitalised in relation to regulatory requirements and its new vision, “Creating value through the art of serving the customer”, is Nordic competitors. supported by its new values: helpful, professional and show initiative. Employees who are helpful, professional and show initiative are vital if Along with healthy profi ts in 2009, the capital increase will enable a swifter DnB NOR is to succeed in implementing its strategy. return to the Group’s long-term dividend policy. The Board of Directors has proposed a dividend of NOK 1.75 per share for 2009. The long-term divi- DnB NOR has a unique platform in the Norwegian market by virtue of dend payout ratio target is approximately 50 per cent of normalised annual its large customer base, distribution power and wide range of products. profi ts, provided that capital adequacy is at a satisfactory level. Internationally, over several years, the Group has focused on professional expertise and good customer relations within selected industries, such as During the third quarter of 2009, DnB NOR qualifi ed for inclusion in the shipping, energy and seafood. By cultivating the Group’s strengths and Dow Jones World Sustainability Index, which means that the Group is capitalising on its unique position, DnB NOR aims to be the Norwegian regarded as being among the top 10 per cent within its industry worldwide bank and a leading international niche player. DnB NOR will strengthen in terms of sustainability with respect to economic, environmental and and consolidate its position in Norway by offering an extensive distribu- social factors. tion system and an attractive and complete range of products which meet customer needs and create values. In addition, DnB NOR will achieve prof- DnB NOR is strongly committed to offering customers good products and itable growth outside its home market by building long-term relations with services at competitive terms. Towards the end of 2009, Postbanken and its largest corporate clients and focusing on selected industries based on DnB NOR were ranked as the best and the fourth best bank, respectively, core competencies. High priority will be given to streamlining operations, by the magazine Norsk Familieøkonomi. In addition, DnB NOR was named and DnB NOR’s goal is to be one of the most cost-effective market players Norwegian champion in the category ‘housing loans above NOK 2 million’ in Europe through measures such as the coordination and rationalsation of by the magazine Dine Penger. Efforts to increase customer satisfaction its staff and support functions. levels will be further strengthened in 2010. DnB NOR’s vision is to create value through the art of serving the customer, supported by the core values DnB NOR will give priority to long-term value creation for its shareholders helpful, professional and show initiative. and aims to achieve a return on equity and a market capitalisation which are competitive in relation to its Nordic peers. The successful implementa-
DnB NOR ANNUAL REPORT 2009 91 DIRECTORS’ REPORT
Developments in interest rate spreads Per cent
2.0
1.54 1.58 1.57 1.45 1.43 1.41 1.42 1.5 1.37 1.30 1.19 1.15 1.08 1.00 1.04 1.0
0.5
0.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Combined spread – weighted total
tion of DnB NOR’s strategy will result in the Group reaching its long-term 2009 due to exchange rate movements and lower credit demand. Adjusted fi nancial targets, which are: for exchange rate movements, the average lending volume increased by • a return on equity above 13 per cent 5.2 per cent from 2008 to 2009. • cost saving measures with an annual effect of NOK 2 billion from the end of 2012 Relative to the 3-month money market rate, average lending spreads • an ordinary cost/income ratio below 46 per cent from 2012 widened from 1.01 per cent in 2008 to 1.61 per cent in 2009. However, the actual costs for new long-term funding in 2009 were signifi cantly DnB NOR increased its Tier 1 capital ratio through the rights issue, which higher than money market rates. The lending spreads should cover both raised a net amount of NOK 13.9 billion in 2009, while the Group’s sound rising funding costs, higher guarantee fund levies and higher credit risk. fi nancial performance also contributed to strengthening the capital base. During 2009, there was a repricing of corporate loans to compensate for DnB NOR is well capitalised and aims to resume normal dividend pay- the rise in such costs. The portfolio of housing loans to personal custom- ments as soon as possible. DnB NOR’s ambitions are refl ected in the ers was less affected by the rising funding costs. These loans were largely Group’s capital strategy and dividend policy: fi nanced through covered bonds issued by DnB NOR Boligkreditt, which • DnB NOR to be among the best capitalised fi nancial groups in the thus far have generated lower costs than other funding sources. Nordic region • AA level ratings for long-term debt for DnB NOR Bank ASA Deposit growth averaged NOK 42.9 billion or 7.7 per cent. The competition • dividend payments representing approximately 50 per cent of annual for deposits remained strong during 2009, contributing to a decline in the profi ts average deposit spread from 1.08 per cent in 2008 to 0.29 per cent in 2009. The low interest rate level also led to increased pressure on deposit spreads. Dividends will be determined on the basis of expected profi t levels in a normal situation, external parameters and the need to maintain capital Net other operating income adequacy at a satisfactory level. Amounts in NOK million 2009 Change 2008
REVIEW OF THE ANNUAL ACCOUNTS Net other operating income 14 994 2 556 12 438 Net interest income Stock market-related income including fi nancial instruments 1 379 Amounts in NOK million 2009 Change 2008 Unrealised losses in the liquidity portfolio 1 333 Net interest income 22 633 723 21 910 Net fi nancial and risk result from Vital 1) 379 Lending and deposit spreads 1 856 Real estate broking 115 Lending and deposit volumes 943 Net gains on foreign exchange and interest Exchange rate movements 569 rate instruments 2) 9 Equity and non-interest-bearing items (1 940) Net other commissions and fees (13) Long-term funding costs (853) Other operating income (107) Guarantee fund levy (430) Profi ts from associated companies (539) Interbank funding and interest rate instruments (206) 1) Excluding guaranteed returns and allocations to policyholders. 2) Excluding guarantees and unrealised losses in the liquidity portfolio. Amortisation effects in the liquidity portfolio 397
Other net interest income 387 Net other operating income increased by 20.6 per cent from 2008. The great uncertainty in fi nancial markets gave a considerable boost in demand Net interest income rose by 3.3 per cent compared with 2008. There was a for hedging products from DnB NOR Markets, especially in the fi rst half signifi cant increase in lending volumes through 2008, which boosted inter- of 2009. The fi nancial turmoil also caused greater differences between est income in 2009. Lending volumes declined quarter by quarter through ask and bid prices, resulting in increased income from foreign exchange
92 DnB NOR ANNUAL REPORT 2009 DIRECTORS’ REPORT
and interest rate products. The rise in income can be viewed in light of The cost programme was ahead of schedule, and considerable efforts other negative profi t effects arising from the fi nancial turmoil and refl ects were made to achieve cost savings. Cost reductions recorded since year- DnB NOR’s broad income base, which enables the Group to maintain a end 2007 up until year-end 2009 had an annual effect corresponding to sound level of profi ts even when the fi nancial markets are weak. NOK 954 million. The most extensive measures relate to the streamlining of the branch network, reduced procurement costs, the shift to electronic During the fi rst half of 2008, NOK 1 333 million in unrealised losses in the customer communication and streamlining measures in connection with liquidity portfolio in DnB NOR Markets was recorded. With effect from the restructuring and coordination within the Group. At the Capital Markets second half of 2008, these bonds were reclassifi ed to the held-to-maturity Day in spring 2009, the cost programme target was adjusted upwards to category, and the Group thus recorded no such mark-to-market losses annual cost savings of NOK 2 billion by the end of 2012. in 2009. Based on the Group’s profi t performance in 2009, the Board of Directors The rise in income from Vital refl ects the company’s sizeable losses and has decided to reserve NOK 131 million for allocations to the employees. write-downs on equity and property investments in 2008. The company signifi cantly reduced its equity exposure and recorded healthy income Impairment losses for goodwill on investments in fi xed-income securities in 2009. During the year, Vital Each quarter, recorded goodwill and intangible assets in the Group’s bal- started to gradually increase its equity exposure. ance sheet are reviewed with respect to a possible decline in value. Total impairment losses for goodwill of NOK 730 million were recorded in 2009. Recorded changes in the value of special balance sheet items carried at fair value represented a net loss of NOK 230 million in 2009 and net As a result of macroeconomic developments and weak profi ts, impair- income of NOK 489 million in 2008. Such items refl ect, among other ment losses for goodwill of NOK 941 million were recorded in DnB NORD. things, mark-to-market adjustments of credit margins on the Group’s lia- DnB NOR recorded total impairment losses of NOK 529 million related to bilities, for example in Eksportfi nans, and value assessments of currency DnB NORD. Impairment losses for goodwill of NOK 99 million relating to swap agreements for the exchange of group liabilities. Svensk Fastighetsförmedling in Sweden were recorded in consequence of a new strategic direction for these operations. Due to changes in the In the second half of 2009, there was a rise in income from, among other market outlook, impairment losses for goodwill of NOK 102 million relating things, payment services and real estate broking due to the introduction of to SalusAnsvar in Sweden were recorded. new products and a stronger economy. Write-downs on commitments Operating expenses Excluding DnB NORD, individual write-downs totalled NOK 2 719 million Operating expenses increased by NOK 190 million from 2008 to 2009, to in 2009, up NOK 1 218 million from 2008. The level of write-downs was NOK 18 911 million. However, total expenses include impairment losses relatively stable through 2009. for goodwill. The table below shows expenses for DnB NOR’s ordinary operations. Individual write-downs in DnB NORD came to NOK 3 346 million in 2009, an increase of NOK 2 168 million from 2008. The write-downs can be ascribed to the diffi cult economic situation in DnB NORD’s markets, most Amounts in NOK million 2009 Change 2008 particularly in Latvia and Lithuania. Total ordinary operating expenses 18 180 518 17 662 Due to the serious international economic downturn, there was a rise in Cost programme (470) collective write-downs in 2009. The effect of collective write-downs on the Restructuring expenses, cost programme 38 income statement was NOK 1 645 million in 2009, up from NOK 830 million Marketing expenses (152) in 2008. Weak shipping markets were the primary factor behind the increase.
Wage and price infl ation 537 Total write-downs in DnB NORD represented 4.7 per cent of DnB NORD’s Operational leasing 230 average loan portfolio in 2009, compared with 1.9 per cent in 2008. The corresponding fi gures for the rest of the DnB NOR Group were 0.33 per IT expenses 139 cent and 0.22 per cent, respectively. Other operating expenses 196 Net non-performing and impaired commitments totalled NOK 19.1 billion Ordinary operating expenses rose by 2.9 per cent from 2008 to 2009. at year-end 2009, compared with NOK 11.9 billion a year earlier. Commit- The increase primarily refl ected the acquisition and establishment of ments which are subject to individual write-downs, net impaired commit- new opera tions in Norway and internationally during 2008, which was ments, totalled NOK 12.1 billion in 2009, up NOK 3.3 billion from 2008. fully refl ected in the income statement in 2009. A number of the specifi c Net impaired commitments represented 1.08 per cent of lending volume measures which caused a rise in costs had a direct corresponding effect as at 31 December 2009, an increase from 0.73 per cent at year-end on income. This applies, among other things, to the take-over of fi nancial 2008. Non-performing commitments not subject to write-downs repre- advisers from Norway Post and the increase in operational leasing. In sented NOK 7.0 billion as at 31 December 2009, up NOK 3.9 billion from addition, there was considerable investment in IT. The number of full-time a year earlier. Non-performing commitments not subject to write-downs positions in the Group was reduced by 740 from year-end 2008 to end- represented 0.63 per cent of lending volume at year-end 2009, compared December 2009. with 0.26 per cent a year earlier.
The Group’s cost programme counteracted the effects of expansionary In consequence of the diffi cult situation in the Baltic region, there was an measures and ordinary wage and price infl ation. The measures imple- increase in the volume of non-performing and impaired commitments in mented up till the end of 2009 reduced recorded costs by NOK 470 mil- DnB NORD through 2009, though the volume of such commitments was lion compared with 2008. Restructuring costs totalled NOK 210 million in reduced in the Group’s other operations. Nevertheless, it is too early to say 2009, up NOK 38 million compared with 2008. whether the improvement represents a lasting trend.
DnB NOR ANNUAL REPORT 2009 93 DIRECTORS’ REPORT
Net non-performing and impaired commitments NOK billion Per cent
40 2.0
1.68 1.71 1.56 30 1.5 1.18
1.04 0.99 20 18.3 19.2 19.1 1.0 0.70 14.0 11.9 0.45 0.42 10 0.5 6.0 4.9 3.8 4.2
0 0.0 31 Dec. 31 Dec. 31 Dec. 31 Dec. 31 Dec. 31 Mar. 30 Jun. 30 Sept. 31 Dec. 2004 1) 2005 2006 2007 2008 2009 2009 2009 2009
DnB NORD As a percentage of net lending 1) Pro forma figures prior to 2005 DnB NOR Group excl. DnB NORD
Taxes losses, followed by measures initiated by the authorities to curb the result- The DnB NOR Group’s total tax charge for 2009 was NOK 4 086 million, ing effects. The turmoil led to occasional setbacks where the markets func- a rise of NOK 834 million from 2008. Relative to pre-tax operating profi ts, tioned less satisfactorily and the maturities of available liquid funds again the tax charge increased from 26.7 to 37.0 per cent from 2008 to 2009. became shorter. Later in the year, the markets gradually improved, and the Impairment losses for goodwill, which give no tax deduction, have resulted situation was stable and sound in the second half of 2009. Volumes and in a higher relative tax charge. Adjusted for this factor, the tax charge was maturities practically returned to normalised levels, and the pricing of very 24.6 per cent and 34.7 per cent in 2008 and 2009, respectively. The tax short-term funding virtually corresponded to the levels before the fi nancial charge in 2009 was particularly high due to developments in DnB NORD, turmoil. Nevertheless, investors still showed little risk willingness, and exchange rates and interest rate levels. strong emphasis continued to be placed on borrowers’ credit ratings.
BALANCE SHEET, LIQUIDITY AND FUNDING In the fourth quarter of 2008, the Norwegian authorities introduced a At end-December 2009, total combined assets in the DnB NOR Group scheme to ensure long-term funding for the banks through the exchange were NOK 2 076 billion, a reduction of NOK 65 billion or 3 per cent from of Treasury bills for covered bonds backed by mortgage loans issued by the a year earlier. Total assets in the Group’s balance sheet were NOK 1 823 banks. The scheme was instrumental in stabilising the liquidity situation billion at year-end 2009 and NOK 1 832 billion a year earlier. Total assets during a turbulent period. It was phased out during the autumn of 2009. in Vital were NOK 232 billion and NOK 224 billion, respectively, on the same dates. Following a substantial reduction in the Group’s long-term funding costs during the summer of 2009, the situation was more stable towards the end Net lending to customers declined by NOK 77 billion or 6.4 per cent from of the year. However, funding costs remained at a markedly higher level year-end 2008 to end-December 2009. The reduction was mainly due to than before the fi nancial crisis. exchange rate movements. Adjusted for these effects, there was a 1.1 per cent reduction in lending. More sluggish credit demand in the corporate CORPORATE GOVERNANCE sector affected lending fi gures. Customer deposits declined by NOK 6.5 The management of DnB NOR is based on the principles contained in billion or 1.1 per cent during the corresponding period. After adjusting for the Norwegian Code of Practice for Corporate Governance. There are exchange rate movements, there was a 2.7 per cent increase in depos- no signifi cant deviations between the Code of Practice and the way it is its. The Group’s ratio of customer deposits to net lending to customers implemented in the DnB NOR Group. increased, from 50.1 per cent at end-December 2008 to 53.0 per cent a year later. During the same period, the ratio of deposits to lending in the During the year, the Board of Directors held 20 meetings. The Group’s bank increased from 69.2 to 92.7 per cent, partly due to the transfer of strategy, future development and structure remained high on the agenda in loans from the bank to DnB NOR Boligkreditt to enable securities market 2009, in addition to DnB NOR’s funding situation in the wake of the fi nan- funding. The Group’s future strategy is to increase the ratio of deposits to cial crisis and announced changes in external parameters for the fi nancial lending. services industry.
In order to keep the Group’s liquidity risk at a low level, the majority of The Board of Directors has two sub-committees. The Audit Committee, loans are fi nanced through customer deposits, long-term securities, which is composed of three of the Board’s members, held seven meetings subordinated loan capital and equity. The Group has a self-imposed limit in 2009. The committee reviewed the quarterly and annual accounts, risk whereby such long-term or stable funding limit must represent 90 per cent reporting and the work of the internal and statutory auditors. In addi- of lending to the general public. This limit remained unchanged through tion, the committee reviewed the internal control of the Group’s fi nancial 2009. With respect to short-term funding, conservative limits have been set reporting. The Compensation Committee also consists of three members for refunding requirements. The Group stayed well within the established of the Board of Directors and held fi ve meetings in 2009. The committee liquidity limits through 2009. draws up proposals and issues recommendations to the Board of Directors regarding the remuneration awarded to the group chief executive and acts Following extensive market turmoil in 2008, the market for short-term in an advisory capacity to the group chief executive with respect to the liquidity showed a clearly improved trend at the start of 2009. However, remuneration and other key benefi ts awarded to members of the group at times, large international banks reported new, sizeable and unexpected management team and any others reporting to the group chief executive.
94 DnB NOR ANNUAL REPORT 2009 DIRECTORS’ REPORT
Corporate governance in DnB NOR is described in greater detail in the In the Nordic portfolio, credit risk increased primarily within acquisition chapter “Management in DnB NOR”. fi nance in 2009. There are mixed experiences with private equity funds, though the funds generally seem to follow up their investments in a RISK AND CAPITAL ADEQUACY responsible manner. DnB NOR quantifi es risk by measuring risk-adjusted capital, which is a guiding factor for the Group’s capital requirement. Net risk-adjusted capital Market risk varied during the year due to changes in the Group’s equity declined by NOK 6 billion to NOK 62.1 billion from year-end 2008 to positions. The exposure to Eksportfi nans changed after the Group issued year-end 2009. The fi gures were somewhat affected by the upgrading and a guarantee for parts of the company’s bond investments in 2008. The improvement of internal risk models, but nevertheless refl ected the general unutilised part of the guarantee is included in the calculation of market trend. Due to a marked strengthening of the Norwegian krone, there was risk. DnB NOR Boligkreditt increased its business volume considerably in a reduction in credit volumes in the corporate market in 2009, which 2009, which required an increase in interest risk limits. Due to large fl uc- explains the decline in risk-adjusted capital for credit. A higher equity tuations in money market rates and in the relative margins between various exposure in Vital’s investment portfolio gave an increase in life insurance currencies, there have been signifi cant changes in the value of derivative risk, especially towards the end of 2009. positions relative to the Group’s funding when one currency is used to fund another currency. However, these changes in value are generally of Risk-adjusted capital for the DnB NOR Group a temporary nature and will be reversed over time.
Amounts in NOK billion 31 Dec. 2009 31 Dec. 2008 There was a rise in market risk in Vital during the year due to a rise in Credit risk 50.9 59.2 the share of equities in the company’s investment portfolio from 3.8 per cent to 13.5 per cent from year-end 2008 to end-December 2009. The Market risk 3.7 4.2 equity exposure grew more rapidly than the corresponding increase in Market and insurance risk solvency capital, which is used to meet the guaranteed rate of return on in life insurance 10.5 7.1 policyholders’ funds, which resulted in higher risk-adjusted capital. At year-end 2009, the securities adjustment reserve totalled NOK 1.3 billion, Non-life insurance risk 0.5 up from nil in 2008. Total additional allocations rose by NOK 0.2 billion Operational risk 7.2 6.7 to NOK 5.6 billion. There was a positive risk result due to lower disability Business risk 4.1 3.7 insurance payments, though developments through 2009 indicate that life expectancy will increase more rapidly than the assumptions which have Gross risk-adjusted capital 76.9 81.0 thus far been used in Vital’s tariff rates. Vital has applied to Finanstilsynet Diversifi cation effect 1) (14.8) (12.9) for permission to use a ten-year escalation period to strengthen alloca- Net risk-adjusted capital 62.1 68.1 tions for higher life expectancy in the individual portfolio. Finanstilsynet has indicated a swifter escalation plan, however, the process has not Diversifi cation effect in per cent of gross been completed. risk-adjusted capital 1) 19.3 15.9
1) The diversifi cation effect refers to the effect achieved by the Group in reducing risk by A total of 456 operational loss events were registered during 2009, causing operating within several risk categories where unexpected losses are unlikely to occur at an overall net loss of NOK 200 million. In addition, there were operational the same time. errors in connection with credit losses. The operational stability of the Group’s Internet banks and other IT systems improved in 2009. The aver- Credit growth in the corporate market in 2009 refl ected weak demand age operational time in the Group’s Internet banks was 99.7 per cent. and a decline in lending volumes. In the retail market, lending volumes expanded due to the improved situation in the housing market, with an In the autumn of 2008, an investigation was initiated against DnB NOR estimated increase in housing prices in Norway of 2.9 per cent from 2008 following allegations that the bank had traded Treasury bills after receiv- to 2009 and brisk sales activity. ing insider information in connection with the Norwegian government’s stimulus package. The investigation was closed on 17 February 2010 There was stable credit quality and a relatively low level of non-performing and resulted in a fi ne of NOK 12 million against DnB NOR ASA and the loans in the part of the portfolio which depends on developments in the forfeiture of estimated gains of NOK 14 million. At the same time, the Norwegian economy, primarily loans to private individuals and small and case against two employees was dropped. DnB NOR accepted the fi ne medium-sized businesses in Norway. without a judicial review, but maintains that no unlawful insider informa- tion was given in the case. Thus, DnB NOR is also of the opinion that There was a negative trend within shipping in 2009, though freight rates no employees broke the law on behalf of the bank. In its assessment, remained at a higher level than expected within key segments such as dry DnB NOR emphasised that a judicial review would be resource-intensive bulk and oil tankers. The container segment showed the poorest perform- for management and other employees over a long period. ance. In spite of a large number of cancellations of newbuilding orders, the fl eet is still expected to increase within most segments, which will Liquidity risk is not quantifi ed when calculating risk-adjusted capital. The contribute to keeping rates low for a long period in the future. On the posi- Group tightened its liquidity risk limits at the beginning of 2009 and was tive side, the large, leading shipping companies strengthened their equity well within these limits through the year. The exchange scheme in Norges through capital market issues. Bank continued to function well in 2009. The scheme gave DnB NOR access to Norwegian Treasury bills in exchange for covered bonds issued The Baltic States experienced a stronger recession than most other coun- by DnB NOR Boligkreditt and backed by well-secured housing loans. At tries in 2009. Consequently, extensive write-downs on loans were recorded, year-end 2009, a total of NOK 118 billion had been used in this scheme. and future developments remain highly uncertain. This is reinforced by The Treasury bills were used primarily as liquidity reserves and enabled the countries’ short history of market economy, newly established institu- the Group to make use of ample short-term funding from private sources tions and legislative framework. Towards the end of the year, however, without increasing overall liquidity risk. Low lending growth, combined with there were indications that the situation was stabilising somewhat, and the a signifi cant increase in customer deposits, gave a rise in the Group’s ratio increase in non-performing loans abated. of deposits to lending from 50.1 per cent at year-end 2008 to 53.0 per
DnB NOR ANNUAL REPORT 2009 95 DIRECTORS’ REPORT
cent at end-December 2009. At the end of 2009, long-term stable funding Large Corporates and International recorded pre-tax operating profi ts of of the Group’s lending volume represented 102 per cent, compared with NOK 5 657 million in 2009, down NOK 558 million from the previous 93 per cent the previous year. year. The reduction resulted from higher write-downs on loans, which increased by NOK 916 million to NOK 1 128 million. Relative to aver- Risk-weighted volume included in the calculation of the formal capital age lending, write-downs were 0.30 per cent in 2009, up from 0.06 adequacy requirement was NOK 1 052.8 billion at end-December 2009, per cent in 2008. Net interest income declined by NOK 32 million from down 12.3 per cent from 2008. The reduction mainly refl ected lower lend- 2008. Ordinary operations generated an increase in net interest income ing volumes in consequence of the stronger Norwegian krone, whereby cur- of NOK 781 million, whereas income from allocated capital was reduced rency loans had a lower value measured in Norwegian kroner. Calculations due to lower interest rate levels. Measured against the money market rate, of risk-weighted volume according to Basel II gave a reduction in the capital lending spreads widened by 0.31 percentage points from 2008, improv- requirement relative to Basel I of 10.9 per cent at year-end 2009. The ing in all segments. It was necessary to increase interest rate spreads to transitional rules which apply until year-end 2011 allow a maximum reduc- compensate for higher funding costs and greater risk of write-downs on tion in risk-weighted volume of 20 per cent. In 2009, the Group applied to loans. Interest rates stabilised at a lower level than was previously the case. Finanstilsynet (the Financial Supervisory Authority of Norway) for permis- In combination with increased competition for deposits, this resulted in sion to use the IRB approach to measure credit portfolios for large corporate narrowing deposit spreads in all segments. Average lending to customers clients, which could give a signifi cant reduction in risk-weighted volume in rose by 12.9 per cent from 2008 to 2009, but declined through the year 2010. The transitional fl oor is then expected to apply. The Tier 1 capital ratio due to weaker demand and a reduction in the NOK value of foreign cur- was 9.3 per cent at end-December 2009 and 6.7 per cent at year-end rency loans due to the strengthened Norwegian krone. The quality of the 2008, while the capital adequacy ratio was 12.1 per cent at year-end 2009. portfolio was satisfactory in all sectors, but there was a negative develop- ment through 2009 due to the general market conditions. Average deposits In December 2009, the Basel Committee and the EU presented a number rose by 15.8 per cent. of proposals to tighten capital adequacy regulations, along with new requirements for liquidity buffers and the funding structure of fi nancial DnB NOR Markets achieved healthy profi ts in 2009. Pre-tax operating profi ts institutions. The measures are scheduled to be implemented once the totalled NOK 5 331 million in 2009, up NOK 1 395 million from 2008. Due ongoing fi nancial crisis is over and will make the fi nancial sector more to a lower level of economic activity, customer-related revenues declined robust. The most important proposals have yet to be approved, and in important product areas, totalling NOK 3 191 million in 2009, down changes must be expected following the 2010 consultation round. Follow- NOK 295 million compared with 2008. Extraordinary volatility in inter- ing the net NOK 13.9 billion increase in the Group’s equity in December est rates and exchange rates at the beginning of 2009 gave a signifi cant 2009, DnB NOR is well positioned to meet the anticipated new capitali- increase in income from market making and other proprietary trading sation requirements. Due to the ample access to Treasury bills through within DnB NOR Markets’ core areas of activity, including Norwegian the exchange scheme with Norges Bank, the Group also has more than kroner products. Together with a strong rise in profi ts from the liquidity adequate liquidity reserves. The main challenge lies in the funding struc- portfolio of bonds, this gave a NOK 2 015 million increase in income from ture requirements, as the Basel Committee’s proposal requires a consider- market making and other proprietary trading, to NOK 3 908 million. The ably higher share of long-term funding than the share held by DnB NOR cost/income ratio was 26.4 per cent in 2009, down from 30.8 per cent at year-end 2009. in 2008.
BUSINESS AREAS Life and Asset Management consisted of Vital Forsikring and DnB NOR With effect from 1 July 2009, activities in DnB NOR have been organised Asset Management through 2009. The business area achieved pre-tax in the business areas Retail Banking, Large Corporates and International, operating profi ts of NOK 1 351 million for the year, up NOK 603 million DnB NOR Markets and Life and Asset Management. The business areas compared with 2008. The improvement in fi nancial markets during 2009 operate as independent profi t centres and have responsibility for serving all contributed to the rise in profi ts. of the Group’s customers and for the total range of products. DnB NORD is regarded as a separate profi t centre. Vital achieved pre-tax operating profi ts of NOK 1 156 million in 2009, an increase from NOK 644 million in 2008. The recorded and value-adjusted Retail Banking delivered a sound fi nancial performance in 2009. Pre-tax returns on the common portfolio were 4.7 per cent and 5.4 per cent, operating profi ts were NOK 6 984 million, an increase of NOK 582 million respectively, in 2009. The return on the corporate portfolio was 5.1 per from 2008. The steep fall in interest rate levels from the autumn of 2008 cent in 2009. At year-end 2009, approximately 67.5 per cent of policyhold- and through the fi rst half of 2009 contributed to widening lending spreads ers’ funds were placed in fi xed-income securities. relative to money market rates from 2008. Low interest rate levels and fi erce competition for deposits put pressure on deposit spreads. Average DnB NOR Asset Management recorded pre-tax operating profi ts of NOK lending rose by 7.4 per cent compared with 2008. Demand for housing 217 million in 2009, down NOK 19 million compared with 2008. A rene- loans was maintained at a relatively high level in 2009, while a lower level gotiated agreement with Skandia Liv caused a reduction in the volume of of activity among small and medium-sized enterprises resulted in more assets under management, but created greater opportunities for generating sluggish demand for fi nancing. Deposits showed an average increase of fees due to sound asset management performance and the restructuring 4.3 per cent. Other operating income was slightly higher than in 2008, and of operations. Thus far, the New York offi ce has been closed, the London there was a sound trend in income from payment services and real estate offi ce is in the process of closing, and staff cuts and adjustments of work broking during 2009. Expenses increased by 5.9 per cent from 2008, processes have taken place in the rest of the organisation. refl ecting general wage growth, higher IT development costs, the transfer of fi nancial advisers from Norway Post and impairment losses for goodwill in DnB NORD was strongly affected by the recession, recording a pre-tax Sweden. The cost/income ratio, excluding impairment losses for goodwill, operating loss of NOK 4 289 million, compared with a loss of NOK 605 mil- was reduced by 1.8 percentage points to 53.2 per cent. Net write-downs lion in 2008. DnB NORD’s fi nancial performance was marked by a steep relative to average net lending rose from 0.19 per cent in 2008 to a con- increase in write-downs on loans in consequence of the signifi cant eco- tinuing low level of 0.22 per cent in 2009. The quality of the loan portfolio nomic downturn in the Baltic region. Average lending in DnB NORD was was sound at year-end 2009. NOK 83.6 billion in 2009, up 11.3 per cent from 2008, though there was a reduction in lending through the year. Net write-downs totalled NOK 3 929
96 DnB NOR ANNUAL REPORT 2009 DIRECTORS’ REPORT
million or 4.70 per cent of average lending in 2009, an increase from EXTERNAL ENVIRONMENT NOK 1 388 million or 1.85 per cent in 2008. DnB NORD expects the level DnB NOR considers climate change to be one of the greatest challenges of write-downs to remain relatively high in 2010. DnB NORD will focus on of our time, and the Group seeks to fi nd solutions which safeguard the consolidating its operations, reducing losses and improving cost-effi ciency. interests of both people and the environment. Impairment losses for goodwill relating to operations in the Baltic States of NOK 619 million and impairment losses of NOK 306 million relating to DnB NOR infl uences the environment directly and indirectly. The operations in Poland were recorded in 2009. For the DnB NOR Group, Group’s investments and lending activities have an indirect impact on impairment losses for goodwill relating to DnB NORD totalled NOK 529 the environment and are governed by CSR guidelines for credit and asset million in 2009. At year-end 2009, it was clear that DnB NORD will require management operations. DnB NOR has a direct impact on the environ- new capital during 2010. DnB NOR will exercise its ownership role and ment through its consumption of paper and energy, waste management, honour its obligations by providing its proportional share of the capital procurement and use of means of transport. required by DnB NORD. Internal environmental effi ciency 1) Other units – Group Centre recorded an operating loss of NOK 2 353 million in 2009, compared with a loss of NOK 2 551 million in 2008. The entity 2009 2008 comprises individual items which do not affect ongoing operations in the Energy consumption (Gwh) 104.0 105.5 2) business areas, including costs in DnB NOR ASA, impairment losses for goodwill on group investments, accrual effects of fair value measurements Per employee (Kwh) 11 343 11 126 of credit margins on own debt and interest income on the Group’s equity Purchased paper (tons) 859 1 077 investments. Waste recycling ratio (%) 55 53 2) CORPORATE SOCIAL RESPONSIBILITY Eco-lighthouse certifi ed buildings (number) 30 23 DnB NOR wishes to promote sustainable development through Domestic air travel (1 000 kms) 18 548 20 688 2) business operations that emphasise environmental, ethical and social International air travel (1 000 kms) 16 155 19 101 2) considerations . 1) All fi gures apply to the Group’s operations in Norway. 2) As a consequence of the process of improving the quality of non-fi nancial data, certain In September 2009, DnB NOR qualifi ed for inclusion in the prestigious fi gures for 2008 have been revised subsequent to the previous reporting. American Dow Jones Sustainability World Index. This means that the Group is considered to be among the top ten per cent in its industry in the world in terms of contributing towards sustainability. In order to set targets and implement measures to reduce the Group’s greenhouse gas emissions, a carbon audit has been drawn up and is avail- DnB NOR is committed to ensuring that human and labour rights, environ- able on dnbnor.com/csr. The carbon audit quantifi es direct emissions from mental considerations and the fi ght against corruption are respected in its heating, the Group’s own vehicles, purchased electricity, district heating and business activities and by the Group’s suppliers. The Group has separate cooling, as well as emissions from the purchase goods and services such as guidelines for corporate social responsibility in credit activities and in asset paper and air travel. management operations, and has introduced a declaration form to ensure that suppliers comply with DnB NOR’s guidelines for corporate social The Group offers a growing number of paperless services which reduce responsibility. environmental harm, such as the refi nancing of housing loans via DnB NOR’s Internet bank and banking services via SMS on mobile DnB NOR should be characterised by high ethical standards. DnB NOR’s phones. As one of the fi rst companies in Norway, DnB NOR will primarily code of ethics addresses confl icts of interest, the responsible use of the publish its annual report on the Group’s website and send the report only Group’s equipment and assets, requirements that the Group should have to those shareholders who specifi cally request a printed version. open and clear communication, the duty of confi dentiality, notifi cation requirements and the need to exercise due care when trading in fi nancial DnB NOR offers loans with discounted interest rates for cars which do not instruments. Life and Asset Management follows ethical guidelines in harm the environment to the same extent as conventional cars. The Group its management of customers’ pension funds and savings, based on also offers leasing customers a solution to make car fl eets carbon neutral recognised international principles. In this connection, 54 companies through the purchase of UN-approved CO2 quotas. In the retail market, were excluded from the investment portfolio at year-end 2009. The Group’s DnB NOR offers two mutual funds with an environmental profi le: DnB NOR code of ethics is available in its entirety on dnbnor.com/csr. DnB NOR has Renewable Energy, the Nordic region’s oldest and largest environmental several training measures which focus on ethical issues. fund, and Grønt Norden.
In 2009, the Group continued its support to a microfi nance project in DnB NOR is building new headquarters for some 4 000 employees in Rwanda under the auspices of the aid organisation CARE. The money is Bjørvika in Oslo. The environmental targets for the new headquarters are mainly used to fund training measures. In addition, the Group has also ambitious and include a 40 per cent reduction in energy consumption and joined the Norwegian Microfi nance Initiative, a partnership between private in greenhouse gas emissions per employee compared with current levels. and public actors which directly and indirectly invest in microfi nance The energy sources will, in the main, be renewable, including thermal institutions in the form of equity, loans or guarantees. energy from seawater.
In 2009, a total of NOK 100.6 million was paid to sporting and cultural EMPLOYEES AND MANAGERS institutions, research projects, humanitarian and charitable organisations Being a safe and attractive workplace with qualifi ed employees and high and as gifts to good causes. ethical standards is an important objective for DnB NOR. Approximately 24 000 employees participated in various training measures in the Group The DnB NOR Savings Bank Foundation is the second largest shareholder in 2009, compared with approximately 22 000 in 2008. in the DnB NOR Group and donates a share of its profi ts to non-profi t projects. In 2009, the foundation made donations totalling NOK 67 million. The Group works methodically to train employees in how to meet ethical
DnB NOR ANNUAL REPORT 2009 97 DIRECTORS’ REPORT
dilemmas. In 2009, a new ethics programme was launched for all employ- employees with special needs and increase the actual retirement age in ees across the Group to increase awareness of ethical dilemmas which the Group. In 2009, the average actual retirement age was 61.8 years, each employee may encounter when dealing with customers or in internal compared with 61.7 years in 2008. processes. EQUALITY The programme “Effective and well-functioning management teams” was DnB NOR is committed to giving men and women the same opportuni- started towards the end of 2009, and training courses were also held for ties for professional and personal development, combined with salary and managers involved in reorganisation processes. career progression. The Group has fl exible schemes that make it easier to combine a career with family life. The female representation target set by In 2009, 32 new candidates were selected for the talent programme the Board of Directors for the top four management levels in the Group is “Grow”. The programme is important for the Group’s initiatives aimed at minimum 30 per cent. At the end of 2009, female representation at the young, particularly skilled employees within management, specialised top four management levels was 27 per cent, whereas in 2008, the fi gure fi elds and project work. The purpose of the programme is to enable the was 25 per cent. If the fi gures for management level fi ve are included, total participants to function as driving forces in the future DnB NOR. female representation was 33 per cent. In 2009, 12 employees from the Group participated in FUTURA, the Norwegian Financial Services Associa- In 2009, the DnB NOR Group recruited 259 employees, compared with tion’s programme to train women management talents within the fi nancial 835 in 2008. Of these, 92 were women and 167 men. Their average age industry. was 35 years. 179 new employees were employed in Norway in 2009, of whom 61 were women and 118 men. Four introduction courses were held Equal opportunity measures in DnB NOR: for new employees. At the end of 2009, the total number of employees in • Priority to be given to female applicants for management positions, the Group was 13 691. subject to equal qualifi cations • The best female candidate to be considered for positions in units where The total score from the employee satisfaction survey conducted in January women are in a minority 2009 showed an increase from 70 points in 2008 to 74 points in 2009, • Equality and diversity to be on the agenda in management training which is the best score ever. In spite of diffi cult economic times and uncer- programmes tainty in connection with organisational changes in the Group, the result showed that the Group’s employees were very satisfi ed with their workplace. MACROECONOMIC DEVELOPMENTS In 2009, the international economy was strongly infl uenced by the crisis HEALTH, SAFETY AND ENVIRONMENT (HS&E) in the fi nancial markets and its spill-over effects. The fi nancial crisis had In 2009, DnB NOR worked systematically to improve the working environ- an unusually sudden effect on the real economy and led to the most ment. Health, safety and environmental issues (HS&E) are important dramatic downturn in the international economy since the Second World elements in the Group’s human resources policy. In 2009, key focus areas War. In many countries, manufacturing output fell by 20-30 per cent were management training, ergonomics, crisis management, sickness over a few quarters. There was also a sharp fall in total GDP growth, absence and rehabilitation. Measures are implemented in close coopera- and unemployment rose steeply. Governments launched a number of tion with managers, employees and the Group’s safety representatives. measures to stimulate economic activity. The central banks lowered their key interest rates to historically low levels and injected liquidity to help In 2009, a total of 237 managers and safety representatives completed the the money markets function as normally as possible. Authorities across Group’s internal programme on statutory working environment training. the world also initiated various measures to make the banking system The purpose of the training is to provide the necessary insight and know- function in an optimal manner. Fiscal policy was used actively to curb the ledge to comply with the Working Environment Act and DnB NOR’s HS&E economic downturn, and the fall in manufacturing production gradually requirements. levelled off. In the second half of 2009, there were increasing signs of a hesitant economic recovery. DnB NOR endeavours to prevent injuries caused by robberies and threats through extensive security procedures and training programmes. The Baltic States have been among those countries most severely affected In 2009, 24 courses were held on how to handle robberies. In addition, by the fi nancial crisis. GDP in Estonia and Lithuania fell by approximately 275 employees attended various courses on threat management, security 15 per cent in 2009, whereas GDP in Latvia fell by 17-18 per cent. and fi re protection. According to Consensus Forecasts, the Baltic economies will experience a further downturn in 2010, with a fall in GDP of approximately 1-3 per cent. In 2009, a total of 41 employees were exposed to threats, and DnB NOR The International Monetary Fund, which operates with more long-term experienced two robberies. Several of the incidents were grave incidents prognoses, estimates a moderate growth in GDP of 1.5-3.5 per cent for and also caused physical injury. 38 accidents and injuries were registered 2011 and 2012, respectively. during working hours or in connection with commuting to and from work. The Norwegian economy was infl uenced by the global economic downturn, During 2009, the Group initiated preventive measures in connection with both through its international trade and through the international fi nancial swine fl u. markets. Parts of the export industry and the building and construction industry were particularly affected. Sickness absence and an inclusive workplace Sickness absence in the DnB NOR Group was 5.1 per cent in Norwegian In spite of a pronounced economic contraction, there was only a slight operations in 2009, down from 5.4 per cent in 2008. This is considered rise in unemployment levels in Norway. One reason is that counter-cyclical satisfactory in light of the fi nancial turmoil and major organisational policy was stronger in Norway than in most other countries. The oil indus- changes. try also helped stabilise the Norwegian economy as investment within the sector remained at a high level. Many labour immigrants on short-term Additional assistance is provided to units with high levels of sickness contracts returned home when the downturn reached the Norwegian absence. As an inclusive workplace, DnB NOR is committed to working economy. Higher education became more attractive, reducing the pool systematically to reduce sickness absence, adapt working conditions for of workers and hence also unemployment fi gures.
98 DnB NOR ANNUAL REPORT 2009 DIRECTORS’ REPORT
The fi nancial crisis rapidly resulted in a weakening of the Norwegian collective write-downs. Developments in interest rate levels, housing prices, krone against both the euro and the US dollar, which eased the pressure unemployment levels, property values, freight rates and manufacturing on Norway ’s export industries. The weakening of the krone was partially production will be among the factors infl uencing the level of write-downs. reversed during 2009 as Norwegian interest rates were raised at a faster Based on an overall evaluation, the Group concludes that write-downs in rate than in most other countries. 2010 will probably be somewhat lower than in 2009.
At the end of 2009, the Norwegian economy was still in a recession, but Funding costs are anticipated to remain high compared with pre-crisis showed clear signs of improvement. In particular, private and public sector levels. As the Group has a sound position and enjoys confi dence in the consumption and public investments made a positive contribution, though capital markets, it is expected to have continued access to short and long- exports of traditional goods also started to increase. Housing investments term funding at competitive prices. and investments in the business sector remained low in 2009, but rising housing prices will probably cause a rise in housebuilding activity. The fi nancial turmoil in 2008 and 2009 resulted in a higher level of other operating income due to extensive hedging activity in the markets. A sta- DnB NOR’s company survey conducted in December 2009, where bilisation of the markets will entail a reduction in such sources of income. 2 100 business managers were interviewed on their expectations for The Group will retain its tight control on expenditure, including following 2010, showed that approximately fi fty per cent believed in higher turnover up its cost programme. DnB NOR has not departed from its goal to imple- in 2010, which could indicate that Norwegian companies are starting to ment cost-cutting measures which will result in annual cost reductions emerge from the fi nancial crisis. There were considerable sectoral varia- of minimum NOK 2 billion from year-end 2007 to year-end 2012. The tions in the survey, but only 12 per cent of the business mangers feared cost-cutting measures include streamlining the bank’s branch network and a fall in profi ts in 2010. IT systems, reducing procurement costs and centralising staff and support functions. The measures contribute to counteracting infl ationary effects Household debt, in per cent of disposable income, reached a high level at and other cost increases and will be followed up closely. the end of 2009, partly on account of low interest rates and rising housing prices. Nevertheless, the general fi nancial situation for Norwegian house- The Group’s tax charge in 2009 was particularly high due to impairment holds was positive. losses for goodwill, developments in DnB NORD and fl uctuations in share prices and exchange rates. A lower tax level is expected in 2010. FUTURE PROSPECTS At the end of 2009, the global economy showed several signs of recovery, The Board of Directors of DnB NOR decided at the end of 2009 to initiate but it remains uncertain whether the positive trend will continue. The an evaluation of the shareholder agreement with NORD/LB, aiming for a Norwegian economy has weathered the crisis better than many other possible purchase of their 49 per cent ownership interest in DnB NORD. economies, yet due to its open economy, Norway is strongly infl uenced The process is expected to be fi nalised in the course of 2010. by international developments. The same is true for DnB NOR through DnB NORD’s commitments in the Baltic States and in Poland, the It is likely that proposals from the Basel Committee and the EU to tighten Group’s shipping commitments, Norwegian customers who operate capital adequacy regulations and implement new liquidity buffer and internationally and local commitments at DnB NOR’s international offi ces. funding structure requirements will increase the Group’s long-term funding Another important factor for DnB NOR is the performance of Norway’s requirements. In addition, it is probable that there will be changes in the export industry. requirements relating to capital structure, with greater emphasis on pure equity and less emphasis on various forms of hybrid capital and subordi- Nevertheless, about 80 per cent of DnB NOR’s operations are based in nated loans. A parallel process is looking at how to change the accounting Norway, and developments in Norway will thus be of key importance to rules governing fi nancial instruments, including write-downs on loans. The DnB NOR. The Group expects that Norway will slowly recover from the changes will be discussed in consultative processes in 2010. The fi nancial cyclical downturn of the last two years. industry and the real economy could be materially affected by these regulatory changes. DnB NOR has a relatively sound platform, enabling it To ensure long-term growth and profi tability, the Group will further increase to adapt to the changes. The Group wishes to participate in developing and its customer focus. The aim is that all customers will feel that their needs analysing the impact of a balanced regulatory framework. are met when they are in contact with DnB NOR. To strengthen the Group’s strategy, a new vision has been defi ned focusing on long-term DnB NOR’s economic forecast for 2010 is greater competition and moder- value creation and customer orientation, “Creating value through the art of ate growth in the fi rst part of the year, with a gradual recovery in activity serving the customer”, supported by the following core values: helpful, pro- during the year. The Group is not departing from its goal to achieve pre-tax fessional and show initiative. The vision and core values should distinguish operating profi ts before write-downs of NOK 20 billion in 2010. However, the Group as a whole and be refl ected in the conduct of its employees. macroeconomic developments, characterised by lower interest rate levels and more sluggish growth, have made this target more challenging to The capital increase gives the Group a greater capacity for growth based reach. As stated above, write-downs on loans in 2010 are expected to be on profi tability and acceptable risk. Combined with even stronger cus- somewhat lower than in 2009. tomer orientation, the capital increase is expected to further strengthen DnB NOR’s position in the Norwegian and international markets over the DIVIDENDS AND ALLOCATION OF PROFITS next few years. DnB NOR will, as Norway’s leading banking group, have a The Board of Directors has approved a dividend policy for the company strong presence in all fi nancial markets in Norway and ensure customers which aims to fulfi l the objective of creating value for shareholders through a competitive total product offering. an attractive and competitive return relative to comparable investment alternatives, partly through increases in share price and partly through In 2009, write-downs in the Baltic States were considerably higher dividend payments. DnB NOR intends to distribute approximately 50 per than normal, whereas write-downs in Norwegian-related operations cent of net annual profi ts as dividends provided that capital adequacy is at remained lower than expected. The future development of write-downs a satisfactory level. Dividends will be determined on the basis of expected in both Norwegian-related and international operations is uncertain. This profi t levels in a normalised market situation, prevailing economic param- uncertainty could affect both individual write-downs and calculations of eters and the Group’s need for capital, including a Tier 1 capital target of
DnB NOR ANNUAL REPORT 2009 99 DIRECTORS’ REPORT
minimum 8 per cent. The capital situation at year-end 2009 will enable a In connection with dividend distributions to shareholders for 2009, the swifter return to the Group’s approved dividend policy. Board of Directors has decided to make allocations of NOK 131 million to the Group’s employees. The Group’s capital adequacy position was considerably strengthened at year-end 2009 due to both the share capital increase and reduced lend- Profi ts for 2009 in DnB NOR ASA came to NOK 3 214 million, attributing ing growth in the wake of the fi nancial crisis. At the same time, however, mainly to the transfer of group contributions and dividends from subsidi- uncertainty prevails over future economic developments and changes aries. The Group’s capital adequacy ratio as at 31 December 2009 was in parameters for the fi nancial services industry. The Board of Directors 12.1 per cent, with a Tier 1 capital ratio of 9.3 per cent. Correspondingly, has proposed a dividend of NOK 1.75 per share for 2009, which gives a the capital adequacy ratio in DnB NOR Bank ASA was 12.4 per cent and dividend yield of 2.8 per cent based on a share price of NOK 62.75 as at the Tier 1 capital ratio 9.2 per cent. The banking group, which includes the 31 December 2009. The proposed dividend implies that DnB NOR ASA bank and its subsidiaries, had a capital adequacy ratio of 11.4 per cent will distribute a total of NOK 2 850 million in dividends for 2009. The and a Tier 1 capital ratio of 8.4 per cent. payout ratio represents 27 per cent of earnings per share, or 33 per cent of earnings per share registered after the share issue. In the opinion of the Board of Directors, following allocations, DnB NOR ASA will have adequate fi nancial strength and fl exibility to provide suffi - DnB NOR did not distribute dividends for 2008 due to the strong impact cient support to operations in subsidiaries and meet the Group’s expansion of the fi nancial turmoil on profi ts and the need to strengthen the Group’s requirements and changes in external parameters. capital base.
Oslo, 17 March 2010 The Board of Directors of DnB NOR ASA
Anne Carine Tanum Bjørn Sund (chairman) (vice-chairman)
Gunilla Berg Per Hoffmann Jørn O. Kvilhaug Bent Pedersen
Tore Olaf Rimmereid Ingjerd Skjeldrum Siri Pettersen Strandenes
Rune Bjerke (group chief executive)
100 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP Contents – annual accounts
DnB NOR Group Balance sheet Note 27 Classification of financial instruments ...... 164 Income statement ...... 102 Note 28 Fair value of financial instruments at amortised cost...... 165 Balance sheet ...... 103 Note 29 Financial instruments at fair value...... 167 Statement of changes in equity...... 104 Note 30 Shareholdings...... 170 Cash flow statement ...... 105 Note 31 Financial assets and insurance Accounting principles ...... 106 liabilites, customers bearing the risk...... 171 Note 32 Commercial paper and bonds, held to maturity ...... 171 Notes to the accounts Note 33 Investment properties ...... 173 Note 1 Important accounting estimates and discretionary Note 34 Investments in associated companies ...... 174 assessments...... 118 Note 35 Intangible assets ...... 175 Note 2 Changes in group structure and operations and Note 36 Goodwill and intangible assets with an indefinite non-current assets held for sale...... 120 useful life ...... 176 Note 3 Segments ...... 121 Note 37 Fixed assets ...... 180 Note 4 Capitalisation policy and capital adequacy ...... 129 Note 38 Leasing...... 181 Note 5 Risk management ...... 133 Note 39 Other assets...... 182 Note 40 Deposits from customers for principal sectors ...... 182 Credit risk Note 41 Debt securities issued ...... 183 Note 6 Credit risk ...... 135 Note 42 Subordinated loan capital and Note 7 Commitments for principal sectors ...... 138 perpetual subordinated loan capital securities...... 184 Note 8 Commitments according to geographical location ...... 139 Note 43 Provisions ...... 185 Note 9 Impaired commitments for principal sectors ...... 141 Note 44 Other liabilities ...... 185 Note 10 Write-downs on loans and guarantees ...... 141 Note 11 Write-downs on loans and Additional information guarantees for principal sectors ...... 142 Note 45 Remunerations etc...... 186 Note 12 Developments in write-downs on loans Note 46 Information on related parties ...... 191 and guarantees...... 143 Note 47 Earnings per share ...... 192 Note 48 Largest shareholders ...... 193 Market risk Note 49 Off-balance sheet transactions, Note 13 Sensitivity analysis - market risk...... 144 contingencies and post-balance sheet events...... 193 Note 14 Interest rate sensitivity...... 145 Note 15 Currency positions ...... 146 Note 16 Financial derivatives ...... 147
Liquidity risk DnB NOR ASA Note 17 Liquidity risk ...... 149 Income statement ...... 195 Insurance risk Balance sheet ...... 195 Note 18 Insurance risk ...... 151 Statement of changes in equity...... 196 Cash flow statement ...... 196 Income statement Accounting principles ...... 197 Note 19 Net interest income ...... 156 Note 20 Interest rates on selected balance sheet items...... 156 Notes to the accounts Note 21 Net other operating income ...... 157 Note 1 Dividends/group contributions from subsidiaries ...... 198 Note 22 Net gains on financial instruments at fair value...... 158 Note 2 Remunerations etc...... 198 Note 23 Operating expenses...... 159 Note 3 Taxes ...... 198 Note 24 Pensions ...... 159 Note 4 Investments in subsidiaries ...... 199 Note 25 Number of employees/full-time positions ...... 162 Note 5 Loans and deposits from credit institutions...... 199 Note 26 Taxes ...... 163 Note 6 Shares in DnB NOR ASA held by members of governing bodies and senior executives...... 200
Signatures of the board members ...... 200 Statement pursuant to the Securities Trading Act...... 201
DnB NOR ANNUAL REPORT 2009 101 ANNUAL ACCOUNTS DnB NOR GROUP Income statement
DnB NOR Group Amounts in NOK million Note 2009 2008 Total interest income 19 58 363 81 953 Total interest expenses 19 35 730 60 044 Net interest income 19 22 633 21 910 Commissions and fees receivable etc. 21 8 724 9 207 Commissions and fees payable etc. 21 2 069 2 313 Net gains on financial instruments at fair value 22 6 286 3 339 Net gains on assets in Vital 21 13 462 (701) Guaranteed returns and allocations to policyholders in Vital 12 712 (1 027) Premium income etc. included in the risk result in Vital 4 705 4 543 Insurance claims etc. included in the risk result in Vital 4 613 4 407 Premium income non-life insurance 593 - Insurance claims etc. non-life insurance 538 - Profit from companies accounted for by the equity method 21 93 632 Other income 21 1 063 1 111 Net other operating income 21 14 994 12 438 Total income 37 627 34 347 Salaries and other personnel expenses 23, 24 9 917 9 463 Other expenses 23 6 784 7 040 Depreciation and impairment of fixed and intangible assets 23 2 210 2 217 Total operating expenses 23 18 911 18 721 Net gains on fixed and intangible assets 26 52 Write-downs on loans and guarantees 10, 11 7 710 3 509 Pre-tax operating profit 11 032 12 170 Taxes 26 4 086 3 252 Profit from operations and non-current assets held for sale, after taxes 80 0 Profit for the year 7 026 8 918
Profit attributable to shareholders 8 585 9 211 Profit attributable to minority interests (1 559) (293)
Earnings/diluted earnings per share (NOK) 47 6.43 6.91 Earnings per share excluding operations held for sale (NOK) 47 6.37 6.91
Comprehensive income statement
DnB NOR Group Amounts in NOK million 2009 2008 Profit for the year 7 026 8 918 Exchange differences arising from the translation of foreign operations 1) (1 096) 957 Comprehensive income for the year 5 930 9 875
Comprehensive income attributable to shareholders 8 076 9 616 Comprehensive income attributable to minority interests (2 147) 259
1) The decline in 2009 must be viewed in light of the sharp increase towards the end of 2008. At year-end 2009, the euro and US dollar rates had declined by 15 and 17 per cent, respectively, from a very high level a year earlier. This had the most pronounced effect for DnB NORD, whose accounts are denominated in euro, and DnB NOR Bank ASA's branches in Singapore and New York, which use US dollars.
102 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP Balance sheet
DnB NOR Group 31 Dec. 31 Dec. Amounts in NOK million Note 2009 2008
Assets Cash and deposits with central banks 27, 28 31 859 51 147 Lending to and deposits with credit institutions 7, 8, 27, 28, 29 62 317 59 717 Lending to customers 7, 8, 27, 28, 29 1 114 886 1 191 635 Commercial paper and bonds 27, 29 225 415 125 571 Shareholdings 27, 29, 30 58 227 36 839 Financial assets, customers bearing the risk 27, 29, 31 21 337 16 454 Financial derivatives 16, 27, 29 70 072 136 552 Commercial paper and bonds, held to maturity 27, 28, 32 179 832 155 156 Investment property 33 33 381 32 558 Investments in associated companies 34 2 521 2 517 Intangible assets 35, 36 7 644 8 480 Deferred tax assets 26 246 263 Fixed assets 37 5 482 5 326 Operations and non-current assets held for sale 2 1 255 246 Other assets 39 8 979 9 236 Total assets 1 823 453 1 831 699
Liabilities and equity Loans and deposits from credit institutions 27, 28, 29 302 669 178 822 Deposits from customers 27, 28, 29, 40 590 745 597 242 Financial derivatives 16, 27, 29 53 019 95 498 Debt securities issued 27, 28, 29, 41 493 732 606 222 Insurance liabilities, customers bearing the risk 18, 31 21 337 16 454 Liabilities to life insurance policyholders 18 193 556 184 791 Insurance liabilities, non-life insurance 18 704 - Payable taxes 9 093 384 Deferred taxes 26 525 5 457 Other liabilities 27, 44 12 331 15 410 Operations held for sale 366 0 Provisions 43 4 923 4 918 Subordinated loan capital 27, 28, 29, 42 39 051 45 225 Total liabilities 1 722 050 1 750 424
Minority interests 2 755 4 211 Share capital 16 231 13 327 Share premium reserve 22 609 11 697 Other equity 59 808 52 041 Total equity 101 403 81 275 Total liabilities and equity 1 823 453 1 831 699
Off-balance sheet transactions and contingencies 49
DnB NOR ANNUAL REPORT 2009 103 ANNUAL ACCOUNTS DnB NOR GROUP Statement of changes in equity
DnB NOR Group Share Minority Share premium Other Total Amounts in NOK million interests capital reserve equity equity Balance sheet as at 31 December 2007 1) 2 662 13 327 11 697 48 290 75 976 Comprehensive income for the period 1) 259 9 616 9 875 Dividends 2007 (5 997) (5 997) Minority interests DnB NORD 2) 1 305 1 305 Other minority interests (15) (15) New regulations for the life insurance industry 130 130 Balance sheet as at 31 December 2008 1) 4 211 13 327 11 697 52 041 81 275 Comprehensive income for the period 1) (2 147) 8 076 5 930 Issue of share capital 2 961 10 912 13 874 Puchase of treasury shares (57) (309) (366) Minority interests DnB NORD 2) 693 693 Other minority interests (2) (2) Balance sheet as at 31 December 2009 1) 2 755 16 231 22 609 59 808 101 403
1) Of which currency translation reserve : Balance sheet as at 31 December 2007 (28) (275) (303) Adjustment to currency translation reserve DnB NORD 20 20 Comprehensive income for the period 552 405 957 Balance sheet as at 31 December 2008 524 150 674 Comprehensive income for the period (587) (509) (1 096) Balance sheet as at 31 December 2009 (63) (359) (422)
2) Minority interests DnB NORD : NORD/LB's share of capital increase in DnB NORD Denmark 1 199 Other movements 106 Movements 2008 1 305 NORD/LB's share of capital increase in DnB NORD Denmark 814 Purchase of minority shares in Lithuania (121) Movements 2009 693
The share premium reserve can be used to cover financial losses. Other equity can be used in accordance with stipulations in the Public Limited Companies Act.
The share capital increase pertaining to the rights issue in DnB NOR ASA, adopted by the general meeting on 19 November 2009, was completed during December, and the registration of the capital increase in the Norwegian Register of Business Enterprises was announced on 21 December 2009.
In consequence of the rights issue, DnB NOR received NOK 14 007 670 135.80 before the deduction of transaction costs.
The company's share capital was thus increased by NOK 2 961 452 460 through the issue of 296 145 246 new shares. The new share capital of DnB NOR ASA is NOK 16 287 988 610 divided into 1 628 798 861 shares, each with a nominal value of NOK 10.
104 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP Cash fl ow statement
DnB NOR Group Amounts in NOK million 2009 2008
Operating activities Net receipts/payments on loans to customers 7 015 (147 274) Net receipts on deposits from customers 15 999 36 919 Interest received from customers 47 321 71 011 Interest paid to customers (12 294) (24 850) Net payments on the acquisition of financial assets for investment or trading (114 096) (7 563) Net receipts on commissions and fees 6 597 6 896 Payments to operations (17 808) (14 005) Taxes paid (1 070) (928) Receipts on premiums 16 326 14 482 Net payments on premium reserve transfers (345) (629) Payments of insurance settlements (12 069) (18 959) Other receipts 1 068 1 108 Net cash flow relating to operating activities (63 356) (83 793)
Investment activities Net payments on the acquisition of fixed assets (1 118) (3 544) Receipts on the sale of long-term investments in shares 0 139 Payments on the acquisition of long-term investments in shares 0 (2 724) Dividends received on long-term investments in shares 136 147 Net cash flow relating to investment activities (982) (5 981)
Funding activities Net receipts on loans to credit institutions 124 259 19 497 Net payments on other short-term liabilities (4 604) (977) Receipts on issued bonds and commercial papers 219 172 539 827 Payments on the redeemed bonds and commercial papers (286 177) (395 791) Issue of subordinated loan capital 0 8 747 Redemptions of subordinated loan capital 0 (3 196) Repurchase of own shares/share issue 13 732 0 Dividend payments 0 (5 997) Interest receipts on funding activities 2 879 3 637 Interest payments on funding activities (21 882) (36 614) Net cash flow from funding activities 47 380 129 133 Effects of exchange rate changes on cash and cash equivalents (3 771) 1 895 Net cash flow (20 730) 41 253 Cash as at 1 January 57 188 15 935 Net receipts/payments of cash (20 730) 41 252 Cash as at 31 December *) 36 458 57 187
*) Of which: Cash and deposits with central banks 31 859 51 147 Deposits with credit institutions with no agreed period of notice 1) 4 599 6 040
1) Recorded under "Lending to and deposits with credit institutions" in the balance sheet.
The cash flow statement shows receipts and payments of cash and cash equivalents during the year. The statement has been prepared in accordance with the direct method and has been adjusted for items that do not generate cash flows, such as accruals, depreciation and write- downs on loans and guarantees. Cash flows are classified as operating activities, investment activities or funding activities. Balance sheet items are adjusted for the effects of exchange rate movements. Cash is defined as cash and deposits with central banks, and deposits with credit institutions with no agreed period of notice.
DnB NOR ANNUAL REPORT 2009 105 ANNUAL ACCOUNTS DnB NOR GROUP Accounting principles
CONTENTS
1. Corporate information 2. Basis for preparing the accounts 3. Changes in accounting principles 4. Consolidation - Subsidiaries and associated companies - Conversion of transactions in foreign currency 5. Business combinations - Operations held for sale 6. Recognition in the income statement 7. Recognition of assets and liabilities 8. Financial instruments - Classification of financial instruments - Reclassification - Measurement - Presentation in the balance sheet and income statement - Hedge accounting - Offsetting 9. Leasing 10. Investment property and fixed assets 11. Intangible assets - Goodwill - Development of IT systems and software 12. Impairment of fixed and intangible asset 13. Pensions - Defined-benefit occupational pension schemes - Defined-contribution occupational pension schemes 14. Income tax 15. Liabilities to policyholders - Technical insurance reserves in life insurance - Technical insurance reserves in non-life insurance 16. Segments 17. Restructuring 18. Cash flow statements 19. Equity and capital adequacy - Proposed dividends - Capital adequacy 20. Issued standards that have not entered into force - IASB's annual improvement project
106 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
1. CORPORATE INFORMATION Subsidiaries and associated companies DnB NOR ASA is a Norwegian public limited company listed on Subsidiaries are defined as companies in which DnB NOR has Oslo Børs (the Oslo Stock Exchange). The consolidated accounts control, directly or indirectly, through ownership or other means for 2009 were approved by the Board of Directors on 17 March and a holding of more than 50 per cent of the voting share capital 2010. or primary capital. DnB NOR recognises the existence of de facto The DnB NOR Group offers banking, securities and investment control, but generally assumes to have control when holding more services and insurance services and asset management services in than 50 per cent of the voting share capital or primary capital in the Norwegian and international retail and corporate markets. another entity. With respect to companies where the Group's The visiting address to the Group's head office is Stranden 21, holding is 50 per cent or less, DnB NOR makes an assessment of Oslo, Norway. whether other factors indicate de facto control. Subsidiaries are fully consolidated from the date on which control is transferred to 2. BASIS FOR PREPARING THE ACCOUNTS the Group. Subsidiaries that are sold are consolidated up till the DnB NOR has prepared consolidated accounts for 2009 in time risk and control are transferred. accordance with IFRS, International Financial Reporting Standards, Associated companies are companies in which DnB NOR has as approved by the EU. The statutory accounts of DnB NOR ASA a significant influence, that is the power to participate in the have been prepared in accordance with Norwegian IFRS financial and operating policy decisions of the companies, but regulations. is not in control or joint control of the companies. DnB NOR The consolidated accounts are based on the historic cost assumes that significant influence exists when the Group holds principle, with the following exceptions: financial assets available between 20 and 50 per cent of the voting share capital or primary for sale, financial assets and liabilities (including financial capital in another entity. derivatives) carried at fair value through profit or loss and Associated companies are recognised in the group accounts investment property. The consolidated accounts are presented in according to the equity method. The investment is recorded at Norwegian kroner. Unless otherwise specified, values are rounded cost at the time of acquisition and is adjusted for subsequent off to the nearest million. changes in the Group's share of equity in the associated company. The Group's balance sheets are primarily based on an Any goodwill is included in the acquisition cost. The Group's share assessment of the liquidity of the balance sheet items. of profits or losses is recognised in the income statement and added to the balance sheet value of the investment along with 3. CHANGES IN ACCOUNTING PRINCIPLES other changes in equity which have not been reflected in the The Group has made no changes in the accounting principles income statement. The Group's share of losses is not reflected in applied in 2009, but has implemented the following new the income statement if the balance sheet value of the investment standards, amendments and interpretations: will be negative, unless the Group has taken on commitments or With effect from 1 January 2009, the Group has applied issued guarantees for the commitments of the associated the revised IFRS 7 Financial Instruments – Disclosure. The company. amendments to the standard affect information on financial The Group's share of unrealised gains on transactions between instruments in the notes to the consolidated accounts. the Group and its associated companies is eliminated. The same Financial instruments measured at fair value are required applies to unrealised losses provided that the transaction indicates to be classified in a three level hierarchy by reference to the a need for a write-down of the transferred assets. inputs used in the valuation: quoted prices from active markets, observable market data and inputs not based on observable Conversion of transactions in foreign market data. If the financial instrument is measured using a currency valuation technique not based on observable market data, stricter The major entity in the Group, DnB NOR Bank ASA, has Norwegian disclosure requirements apply. In accordance with the transitional kroner as its functional currency. Balance sheet items of foreign provisions, no corresponding data has been given for the com- branches and subsidiaries are translated into Norwegian kroner parison period. In consequence of the amendments to IFRS 7, according to exchange rates prevailing on the balance sheet date, enhanced disclosures about liquidity risk are also required. while profit and loss items are translated according to exchange The Group has applied the revised IAS 1 – Presentation of rates on the transaction date. Changes in net assets resulting from Financial Statements with effect from 1 January 2009. According exchange rate movements are charged directly to equity. to the revised standard, the statement of changes in equity shall Monetary assets and liabilities in foreign currency are trans- only show details on transactions with owners. Other transactions lated at exchange rates prevailing on the balance sheet date. which were previously recognised in equity should be included Changes in value of such assets due to exchange rate movements in comprehensive income for the period. between the transaction date and the balance sheet date, are recognised in the income statement. 4. CONSOLIDATION The consolidated accounts for DnB NOR ASA ("DnB NOR") include 5. BUSINESS COMBINATIONS DnB NOR Bank ASA, Vital Forsikring ASA, DnB NOR Kapital- The purchase method is applied for acquisitions of operations. Cost forvaltning Holding AS and DnB NOR Skadeforsikring AS including is measured at fair value of the consideration, taking account of subsidiaries and associated companies. any equity instruments issued in addition to any direct costs The accounting principles are applied consistently when relating to the transaction. Possible share issue expenses are not consolidating ownership interests in subsidiaries and associated included in cost, but deducted from equity. companies and are based on the same reporting periods as those Acquired identifiable tangible and intangible assets and used for the parent company. liabilities are recorded at fair value at the time of acquisition. If When preparing the consolidated accounts, intra-group cost exceeds the fair value of identifiable assets and liabilities, the transactions and balances along with unrealised gains or losses excess will be recorded as goodwill. If cost is lower than the fair on these transactions between group units are eliminated. value of identifiable assets and liabilities, the difference will be
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recognised in the income statement on the transaction date. 7. RECOGNITION OF ASSETS AND In connection with acquisitions of less than 100 per cent of LIABILITIES voting share capital, 100 per cent of excess fair value is recorded Assets and liabilities are recorded in the balance sheet of the in the balance sheet, with the exception of goodwill, where only DnB NOR Group at the time the Group assumes actual control of DnB NOR's share is included. the rights to the assets and takes on a real commitment. In connection with step acquisitions of subsidiaries, the Group Assets are derecognised at the time actual risk relating to the will make a full acquisition price allocation in connection with each assets is transferred and control of the rights to the assets is acquisition to measure the goodwill arising from each transaction. annulled or expired. Identifiable assets and liabilities in the acquired company are With respect to financial assets where either risk, control or measured at the value on the final acquisition date. returns have not been transferred, an assessment is to be made of whether the asset should be derecognised. Upon the transfer to Operations held for sale loan portfolios for which the Group retains the major part of the The Group classifies operations as held for sale when the recorded exposure, the assets are not derecognised. The asset's recorded value will be retrieved through a sale. An operation is classified as value is limited to the amount for which the Group still carries risk. held for sale from the time management has approved a concrete Upon the sale of assets or operations which are still in use plan to sell the operation in its current form and it is highly within the Group, for example in connection with outsourcing, the probable that the sale will take place within 12 months. transaction's effects on profits and future income and costs are Operations held for sale are measured at the lower of the assessed together. balance sheet value and fair value less costs to sell. Acquired operations which are immediately classified as held for sale are 8. FINANCIAL INSTRUMENTS recorded at fair value less costs to sell upon initial recognition. Classification of financial instruments Profits after taxes for such operations are presented On initial recognition financial assets are classified in one of the separately as "Profit from operations and non-current assets held following categories according to the purpose of the investment: for sale, after taxes" in the consolidated accounts. Total assets and x Financial assets held for trading and derivatives carried at fair liabilities from these operations are presented separately under value with changes in value recognised in profit or loss "Operations and non-current assets held for sale" and "Operations x Financial instruments designated as at fair value with changes held for sale" in the Group's balance sheet. in value recognised in profit or loss With effect from 31 December 2009 operations in the Nordisk x Financial derivatives designated as hedging instruments Tekstil Holding Group are classified as held for sale. See further x Loans and receivables, carried at amortised cost description in note 2 Changes in group structure and operations x Held-to-maturity investments, carried at amortised cost and non-current assets held for sale. x Available-for-sale financial instruments carried at fair value, with changes in value recorded against equity 6. RECOGNITION IN THE INCOME STATEMENT On initial recognition financial liabilities are classified in one of the Interest income is recorded using the effective interest method. following categories: This implies that nominal interest is recorded when incurred, with x Financial liabilities held for trading and derivatives carried at the addition of amortised front-end fees less direct establishment fair value with changes in value recognised in profit or loss costs, e.g. paid credit broking commissions. Interest is recorded x Financial liabilities designated as at fair value with changes according to the effective interest method with respect to both in value recognised in profit or loss balance sheet items carried at amortised cost and balance sheet x Other financial liabilities carried at amortised cost items carried at fair value in the income statement, with the x Issued financial guarantees at fair value exception of front-end fees on loans at fair value, which are recorded when earned. Interest taken to income on impaired Guidelines for classification in the various portfolios of the commitments corresponds to the effective interest rate on the DnB NOR Group are given below. written-down value. Cf. "Measurement at fair value", "Measure- ment at amortised cost" and "Impairments on financial assets" Financial assets and liabilities in the trading portfolio in item 8. Instruments in the trading portfolio are typically subject to Fees and commissions are included in the income statement frequent trading and positions are established with an aim to when the services are rendered. Fees for the establishment of loan obtain short-term gains. agreements are included in cash flows when calculating amortised The trading portfolio mainly includes financial assets in cost and recorded under "Net interest income" using the effective DnB NOR Markets and financial derivatives excluding derivatives interest method. Fees that are incurred when establishing financial used for hedging. In 2008, the liquidity portfolio in DnB NOR guarantees are included in the valuation and recorded over the Markets was reclassified from the trading portfolio to the held-to- term of the contract under "Net gains on financial instruments at maturity category. In addition, the portfolio includes securities fair value". "Net other operating income" includes among others issued and deposits where instruments are used actively in fees and commissions relating to money transfers, asset manage- interest rate and liquidity management and have a short ment, including success fees, credit broking, corporate finance, remaining maturity. securities services, insurance products and lease income from investment properties. Fees and commissions are recorded in the Financial assets and liabilities designated as at fair value income statement when the services are rendered. Success fees with changes in value recognised in profit or loss are recorded when the fees with a high degree of certainty have These are assets and liabilities which on initial recognition are been earned and can be measured in a reliable manner. defined as designated as at fair value with changes in value Dividends on investments are recognised from the date the recognised in profit or loss. Financial assets are classified in this dividends were approved at the general meeting. category if one of the following criteria is fulfilled:
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x The classification eliminates or significantly reduces fication date will be the new acquisition cost or amortised cost. measurement inconsistency that would otherwise have arisen The Group has in 2008 reclassified the liquidity portfolio in from measuring financial assets or liabilities on different bases DnB NOR Markets from fair value through profit or loss to the x The financial instruments are part of a portfolio that is held–to-maturity category. No reclassifications were made in managed and evaluated on a fair value basis, in accordance 2009. with a documented risk management or investment strategy. Measurement These portfolios include commercial paper and bonds, equities, Initial recognition of financial instruments fixed-rate loans in Norwegian kroner, financial assets – customers On initial recognition, financial instruments carried at fair value bearing the risk, current financial assets within life insurance, through profit or loss will be recorded at fair value on the trading fixed-rate securities issued in Norwegian kroner, such as index- date. Fair value will normally be the transaction price, unless a linked bonds and equity-linked bank deposits and other fixed-rate different value can be justified based on observable market deposits in Norwegian kroner, as well as financial guarantees. transactions. Financial instruments carried at amortised cost are recorded at the transaction price excluding or including direct Financial derivatives designated as hedging instruments transaction costs. Financial derivatives used in hedge accounting to manage interest rate risk are included in this category. Subsequent measurement Measurement at fair value Loans and receivables carried at amortised cost Fair value is the amount for which an asset could be exchanged, The loans and receivables category includes portfolios of loans and or a liability settled, in a transaction between independent parties. receivables that are not designated as at fair value. Financial assets and liabilities are measured at bid or asking prices respectively. Derivatives which are carried net, are recorded at Held-to-maturity investments carried at amortised cost mid-market prices on the balance sheet date. Listed financial Securities held to maturity are carried at amortised cost. equity instruments covering insurance obligations are measured at the most recent listed transaction price. Available-for-sale financial instruments carried at fair value, with changes in value recorded against equity Instruments traded in an active market Assets which are not included in other categories, are classified as With respect to instruments traded in an active market, quoted available for sale. prices are used, obtained from a stock exchange, a broker or a As at 31 December 2008 and 2009, the DnB NOR Group had price-setting agency. no financial instruments classified as available-for-sale. A market is considered active if it is possible to obtain external, observable prices, exchange rates or interest rates and Other financial liabilities carried at amortised cost these prices represent actual and frequent market transactions. Other financial liabilities that are not included in the trading Most of the DnB NOR Group's financial derivatives, e.g. portfolio or the portfolio designated as at fair value with changes forward currency contracts, forward rate agreements (FRAs), in value recognised in profit or loss, are carried at amortised cost. interest rate options, currency options, interest rate swaps and interest rate futures, are traded in an active market. In addition, Issued financial guarantees some investments in equities and commercial paper and bonds are Contracts resulting in the Group having to reimburse the holder for traded in active markets. a loss incurred because a specified debtor fails to make payment If no prices are quoted for the instrument in its entirety, but when due, are classified as issued financial guarantees. for the components, it is decomposed and valued on the basis of quoted prices on the individual components. Reclassification Non-derivative financial assets may be reclassified from the held- Instruments not traded in an active market for-trading category to the loans and receivables, held-to-maturity Financial instruments not traded in an active market are valued or available-for-sale category according to specific rules if the according to different valuation techniques and are divided into financial asset is no longer held for sale or repurchase in the near two categories: term. Equity instruments and fixed-income securities that have Valuation based on observable market data: quoted prices in an active market can be reclassified only in rare x recently observed transactions in the relevant instrument and extraordinary circumstances. between informed, willing and independent parties Financial assets, which meet the definition of loans and x instruments traded in an active market which are substantially receivables in IAS 39, may be reclassified from the held-for- similar to the instrument that is valued trading category to the loans and receivables category if the Group x other valuation techniques where key parameters are based has the intention and ability to hold the financial assets for the on observable market data foreseeable future or until maturity. If, after the reclassification, the Group increases its estimates for future cash receipts as a Valuation based on other factors than observable market data: result of increased recoverability of those cash receipts, the effect x estimated cash flows of the increase will be recognised as an adjustment to the effective x valuation of assets and liabilities in companies interest rate from the date the estimate was changed. x models where key parameters are not based on observable The Group will consider reclassifications based on the market data individual financial instruments. The earliest reclassification date x possible industry standards will be the date when the asset is reclassified out of the trading category. The fair value of the financial asset on the reclassi-
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When using valuation techniques, values are adjusted for credit characteristics in accordance with the division of customers into and liquidity risk. Valuations are based on pricing of risk for similar main sectors or industries and risk categories. The need for write- instruments. downs is estimated per customer group based on estimates of the general economic situation and loss experience for the respective Measurement of financial guarantees customer groups. Issued financial guarantees are carried at fair value, which on Collective write-downs reduce the value of the commitments initial recognition equals the consideration received for the in the balance sheet. For loans, changes during the period are guarantee. recorded under "Write-downs on loans and guarantees". Like Issued financial guarantees are subsequently measured at the individual write-downs, collective write-downs are based on dis- higher of the consideration received for the guarantee excluding counted cash flows. Cash flows are discounted on the basis of any amortised amounts recorded in the income statement and statistics derived from individual write-downs. Interest is calcu- the best estimate of the consideration due if the guarantee is lated on commitments subject to collective write-downs according honoured. to the same principles and experience base as for commitments evaluated on an individual basis. Measurement at amortised cost Financial instruments not recorded at fair value are recorded at Repossession of assets amortised cost, and income is calculated based on the instru- Assets which are repossessed as part of the management of non- ment's effective interest rate. The effective interest rate is set by performing and impaired commitments, are recorded at fair value discounting contractual cash flows based on the expected life of at the time of acquisition. Such assets are recorded in the balance the financial instrument. Cash flows include front-end fees and sheet according to the nature of the asset. Subsequent valuations direct marginal transaction costs not paid directly by the customer, and classification of the impact on profits follow the principles for as well as any residual value at the end of the expected life of the the relevant balance sheet item. instrument. Amortised cost is the net present value of such cash flows discounted by the effective interest rate. Presentation in the balance sheet and income statement Impairment of financial assets Lending On each balance sheet date, the Group will consider whether there Loans are recorded, dependent on the counterparty, either as are objective indications that the financial assets have decreased lending to and deposits with credit institutions or lending to in value. A financial asset or group of financial assets is written customers, regardless of measurement principle. down if there are objective evidences of impairment. Objective Interest income on instruments classified as lending are evidences of a decrease in value include serious financial problems included in "Net interest income" using the effective interest on the part of the debtor, non-payment or other serious breaches method, irrespective of measurement principle. The method is of contract, the probability that the debtor will enter into debt described above under "Measurement at amortised cost". negotiations or other special circumstances that have occurred. A decrease in value on the balance sheet date based on Impairment of other financial assets is recognised in the objective indications of impairment for loans valued at amortised income statement according to the nature of the asset. cost and in the portfolios of fixed-rate loans measured at fair value, are reflected in "Write-downs on loans and guarantees". Individual write-downs on loans and guarantees Other changes in value of the portfolios of fixed-rate loans If objective indications of a decrease in value can be found, write- measured at fair value, and changes in value of loans included downs on loans are calculated as the difference between the value in the trading portfolio are included under "Net gains on financial of the loan in the balance sheet and the net present value of instruments at fair value". estimated future cash flows discounted by the effective interest rate. Renegotiation of loan terms to ease the position of the Commercial paper and bonds borrower qualifies as objective indications of impairment. In This category includes commercial paper and bonds which accordance with IAS 39, the best estimate is used to assess future DnB NOR has no stated intention of holding to maturity. The cash flows. The effective interest rate used for discounting is not portfolio includes both commercial paper and bonds in the trading adjusted to reflect changes in the credit risk and terms of the loan portfolio and commercial paper and bonds designated as at fair due to objective indications of impairment being identified. value through profit or loss. Individual write-downs on loans reduce the value of the Changes in value of commercial paper and bonds within life commitments in the balance sheet. Changes in the assessed value insurance are recorded under "Net gains on assets in Vital". of loans during the period are recorded under "Write-downs on Interest income and expenses on other portfolios of commer- loans and guarantees". Interest calculated according to the cial paper and bonds, using the effective interest method, are effective interest method on the written-down value of the loan included in "Net interest income". Other changes in value are is included in "Net interest income". recorded under "Net gains on financial instruments at fair value" in the income statement. Collective write-downs on loans Loans which have not been individually evaluated for impairment, Shareholdings are evaluated collectively in groups. Loans which have been indivi- Shareholdings include shareholdings in the trading portfolio as well dually evaluated, but not written down, are also evaluated in as shareholdings and mutual funds designated as at fair value. groups. Changes in value of shareholdings within life insurance are The evaluation is based on objective evidences of a decrease recorded under "Net gains on assets in Vital". in value that has occurred on the balance sheet date and can be Changes in value of other shareholdings are recorded under related to the group. "Net gains on financial instruments at fair value". Loans are grouped on the basis of similar risk and value
110 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Financial assets, customers bearing the risk to the hedged risk of the hedged item and instrument are This line includes financial instruments from units offering products evaluated periodically to ensure the necessary hedge effec- with a choice of investment profile (unit linked). For such assets, tiveness. Hedging instruments are recorded at fair value and the customers carry the financial risk. Changes in value of financial included under "Net gains on financial instruments at fair value" assets for such assets are recorded under "Net gains on assets in in the income statement. Vital". In hedge relationships, changes in fair value attributable to the hedged risk will be recorded as an addition to or deduction from Financial derivatives financial liabilities and assets. Financial derivatives are classified as either financial derivatives in If the hedge relationship ceases or adequate hedge effec- the trading portfolio or as derivatives used in hedge accounting. tiveness cannot be verified, the change in value of the hedged Financial derivatives are presented as an asset if the value is item is amortised over the remaining maturity. positive and as a liability if there is a negative value. DnB NOR Bank ASA undertakes fair value hedging of Changes in value of derivatives within life insurance are investments in subsidiaries to eliminate the currency risk on recorded under "Net gains on assets in Vital". the invested amount. Hedging transactions are in the form of Interest income and expenses on other financial derivatives currency swaps or long-term borrowings in foreign currency. In are included in "Net interest income" using the effective interest the consolidated accounts, the hedge relationships are recorded as method. Other changes in value are recorded under "Net gains on hedging of net investments in international operations. financial instruments at fair value". Offsetting Commercial paper and bonds, held to maturity Financial assets and financial liabilities are offset and the net The portfolio consists of long-term securities which the Group both amount recorded in the balance sheet only when the Group has intends and is able to hold to maturity. a legally enforceable right to set off the amounts and when the Group intends to settle on a net basis. Income and costs are not Loans and deposits from credit institutions and deposits offset unless such action is required or permitted under IFRS. from customers Liabilities to credit institutions and customers are recorded, 9. LEASING dependent on the counterparty, either as loans and deposits from A lease is classified as a finance lease if it transfers substantially credit institutions or deposits from customers. all the risks and rewards incident to ownership. Other leases are Interest expenses on such instruments are included in "Net classified as operational leases. interest income" using the effective interest method. Other changes in value are recorded under "Net gains on financial DnB NOR as lessor instruments at fair value". Operational leasing Operating leases include leases where DnB NOR offers the lessee Securities issued and subordinated loan capital a guaranteed residual value at the end of the lease period. Securities issued and subordinated loan capital includes com- Operating assets are recorded as machinery, fixtures and fittings mercial paper issued, bond debt, subordinated loan capital and and means of transport. Income from operating leases is perpetual subordinated loan capital securities. recognised over the lease term on a straight-line basis, unless Interest expenses on such instruments are included in "Net another systematic basis is more representative of the time interest income" using the effective interest method. Other pattern of the lessee's benefit. Depreciation in the accounts changes in value are recorded under "Net gains on financial is classified as ordinary depreciation. instruments at fair value" in the income statement and include changes in value due to changes in credit margins. Financial leasing Finance leases are classified as lending and at the inception of the Issued financial guarantees lease, its value is set at an amount equal to the net investment in When issuing financial guarantees, the consideration for the the lease. The net investment represents minimum lease pay- guarantee is recorded under "Provisions" in the balance sheet. ments, unguaranteed residual values and any direct expenses Except for individually identified impaired commitments, any incurred by the lessor in negotiating the lease, discounted by the changes in the carrying amount of financial guarantee contracts implicit interest rate (internal rate of return). Leasing income is issued are recorded as "Net gains on financial instruments at fair recorded according to the annuity method, where the interest value". Changes in the value of such guarantee contracts are component is recorded under "Net interest income" while recorded under "Net write-downs on loans and guarantees". instalments reduce the balance sheet value of lending.
Hedge accounting DnB NOR as lessee The Group enters into hedging transactions to manage interest Operational leasing rate risk on long-term borrowings and deposits in foreign Lease payments are recognised as an expense on a straight-line currencies. These transactions are recorded as fair value hedges. basis over the lease term unless another systematic basis is more When instruments are individually hedged, there is a clear, representative of the time pattern of the user's benefit. direct and documented correlation between changes in the value of the hedged item resulting from the hedged risk and changes in 10. INVESTMENT PROPERTY AND FIXED the value of the financial derivative (hedging instrument). ASSETS Upon entering into the hedge relationship, the correlation Properties held to generate profits in customer portfolios through between the hedged item and the hedging instrument is rental income or for an increase in value, are classified as documented. In addition, the goal and strategy underlying the investment property. hedging transaction are documented. Changes in fair value related Other tangible assets are classified as fixed assets.
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Investment properties are measured initially at cost and evaluated on the basis of profitability analyses. Development thereafter at fair value on the balance sheet date. No annual expenses include expenses covering pay to employees directly depreciation is made on investment property. Internal and involved in the project, materials and a share of directly related external expertise is used for valuations. A selection of external overhead expenses. Expenses relating to maintenance of software appraisals are obtained and compared with internal valuations. and IT systems are charged to the income statement as they Sensitivity tests are carried for various estimates of parameter occur. Software expenses recorded in the balance sheet are values included in an overall evaluation. Changes in value of depreciated according to a straight line principle over their investment property excluding property managed by Vital are expected useful life, usually five years. The need for impairment recorded under "Other income" in the income statement. Changes testing is considered according to the principles described below. in value of investment property within life insurance are recorded under "Net gains on assets at fair value in Vital". 12. IMPAIRMENT OF FIXED AND INTANGIBLE Other tangible assets are recorded at cost less accumulated ASSETS depreciation and write-downs. Cost includes expenses directly On each reporting date and if there is any indication of a decrease related to the acquisition of the asset. Subsequent expenses are in value of fixed and intangible assets, the recoverable amount of capitalised on the relevant assets when it is probable that future the asset is calculated to estimate possible impairment needs. economic benefits associated with the expenditure will flow to The recoverable amount represents the higher of an asset's DnB NOR and can be measured reliably. Expenses for repairs and fair value less costs to sell and its value in use. If the asset's maintenance are recorded in the income statement as they occur. recorded value exceeds the estimated recoverable amount, the Fixed assets held for sale are recorded at the lower of balance asset is immediately written down to its recoverable amount. See sheet value and fair value, excluding selling expenses. note 36 Goodwill and intangible assets with an indefinite useful The residual values and useful lives of the assets are reviewed life, for a description of impairment testing. annually and adjusted if required. Gains and losses on the sale of The Group uses the following criteria to consider whether fixed assets are recorded under "Net gain on fixed and intangible there are indications that an asset has been impaired: assets" in the income statement. x a decline in the asset's market value x changes in the long-term return requirement which may affect 11. INTANGIBLE ASSETS the discount rate used in the calculation of the asset's value in Goodwill use An annual impairment test is made for all cash-generating units x plans to restructure or liquidate the asset for goodwill. If there is objective evidence of a decrease in value x the asset generates less income than anticipated during the year, a new test will be carried out in order to verify whether values are intact. The test is based on the units' value in 13. PENSIONS use for the Group. Defined-benefit occupational pension The choice of cash-generating unit is based on where it is schemes possible to identify and separate cash flows relating to operations. In a defined-benefit scheme, the employer is committed to paying A cash-generating unit may include goodwill from several future specified pension benefits. transactions, and the impairment test is carried out on the unit's The basis for calculating pension expenses is a linear total recorded goodwill. distribution of pension entitlements measured against estimated The tests are based on historical results and available budgets accumulated commitments at the time of retirement. Expenses are and plan figures approved by management. On the basis of plan calculated on the basis of pension entitlements earned during the figures for the cash-generating units, a future cash flow year with the deduction of the return on funds assigned to is estimated, defined as the potential return to the owner. The pensions. return includes profits from operations adjusted for the need to Pension commitments which are administered through life build sufficient capital to meet prevailing capital adequacy insurance companies, are matched against funds within the requirements. Higher capital requirements due to expanded scheme. When total pension funds exceed estimated pension operations could make it necessary to retain part of the profits or commitments on the balance sheet date, the net value is classified to inject more capital from the owner, if profits from operations as an asset in the balance sheet if it has been rendered probable are not adequate to build the necessary capital. Beyond the plan that the overfunding can be utilised to cover future commitments. period, which in most cases is three years, cash flow trends are When pension commitments exceed pension funds, the net assumed to reflect market expectations for the type of operations commitments are classified under liabilities in the balance sheet. carried out by the cash-generating unit. Each scheme is considered separately. The required rate of return is based on an assessment of the Pension commitments which are not administered through life market's required rate of return for the type of operations carried insurance companies, are recorded as liabilities in the balance out by the cash-generating unit. The required rate of return sheet. reflects the risk of the operations. Goodwill from the acquisition of Pension commitments represent the present value of companies generating cash flows in foreign currencies is translated estimated future pension payments which in the accounts are at rates of exchange ruling on the balance sheet date. classified as accumulated on the balance sheet date. The calculation of pension commitments is based on actuarial and Development of IT systems and software economic assumptions about life expectancy, rise in salaries Acquired software is recorded at cost with the addition of expenses and early retirement. The discount rate used is determined by incurred to make the software ready for use. Identifiable costs for reference to market yields at the balance sheet date on long term internally developed software controlled by the Group where it is (10-year) government bonds, plus an addition that takes into probable that economic benefits will cover development expenses account the relevant duration of the pension liabilities. at the balance sheet date, are recorded as intangible assets. When Deviations in estimates are recorded in the income statement assessing balance sheet values, the economic benefits are over the average remaining service period when the difference
112 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
exceeds the greater of 10 per cent of pension funds and 10 per Insurance Activity, include the premium reserve, additional cent of pension commitments. allocations, the securities adjustment reserve, the claims reserve, The financial effects of changes in pension schemes are the risk equalisation fund, the administration reserve and other recorded as income or charged to expense on the date of the technical reserves. In addition, the premium fund, deposit fund change, unless the rights under the new pension scheme are and the pensioners' surplus fund are included in insurance pro- conditional on the employee remaining in service for a specified visions. Apart from the risk equalisation fund and the adminis- period. tration reserve, which are classified as equity, all insurance Pension expenses are based on assumptions determined provisions are classified as liabilities to policyholders. at the start of the period. Pension expenses are classified as The premium reserve is a reserve to secure future insurance personnel expenses in the income statement. Employer's liabilities to policyholders and insured persons. The premium contributions are included in pension expenses and pension reserve represents the technical cash value, i.e. the net present commitments. value, of the company's total insurance liabilities including costs, The Group's life insurance company, Vital Forsikring ASA, less the cash value of future agreed premiums. largely administers the Group's pension schemes in Norway. Additional allocations are a conditional allocation to policy- No eliminations are made with respect to the Group's pension holders where changes during the year are recognised in the commitments and pension funds or for pension expenses and income statement. Finanstilsynet (the Financial Supervisory premium income in the income statement. Authority of Norway) has issued regulations on maximum additional allocations per contract. According to these regulations, Defined-contribution occupational pension maximum additional allocations per contract cannot exceed 12 per schemes cent of the premium reserve for the contract. Actual allocations for Under defined-contribution pension schemes, the Group does not the individual years are determined in connection with year-end commit itself to paying specified future pension benefits, but adjustments. Additional allocations can be used to cover any rate- makes annual contributions to the employees' group pension of-return shortfall if the annual return is lower than the savings. Future pensions will depend on the size of annual guaranteed return. contributions and the annual return on pension savings. After The securities adjustment reserve represents the sum total paying annual contributions, the Group thus has no further of unrealised gains on current financial assets included in the commitments linked to employees' work performance. Thus, no common portfolio. allocations are made for accrued pension commitments in such The claims reserve shall cover the Group's anticipated schemes. Defined-contribution pension schemes are charged indemnity payments for insurance claims which have not been directly to the income statement. settled or advanced against the company at the end of the accounting year. The claims reserve represents only the funds that 14. INCOME TAX would have been disbursed during the accounting year if the Taxes for the year comprise payable taxes for the financial year, processing of the insurance claims had been completed. any payable taxes for previous years and changes in deferred The risk equalisation fund can be used to cover negative risk taxes on temporary differences. Temporary differences are results and to strengthen premium reserves in connection with differences between the recorded value of an asset or liability changes in demographic assumptions in the calculation base. Each and the taxable value of the asset or liability. Deferred taxes are year, up to 50 per cent of the company's total risk result can be calculated on the basis of tax rates and tax rules that are applied allocated to the risk equalisation fund. The annual return is on the balance sheet date or are highly likely to be approved and reviewed in connection with year-end adjustments. The risk are expected to be applicable when the deferred tax asset is equalisation fund is classified as equity in the balance sheet. realised or the deferred tax liability settled. The most significant The premium fund contains premiums prepaid by policyholders temporary differences refer to pensions, depreciation of fixed within individual and group pension insurance. A share of annual assets and properties, impairment losses for goodwill and profits is allocated to the pensioners' surplus fund. The fund is revaluations of certain financial assets and liabilities. used to strengthen the premium reserve for pensioners in Deferred tax assets are recorded in the balance sheet to the connection with adjustments in pension payments. extent that it is probable that future taxable income will be avail- Allocations relating to investment contracts represent the able against which they can be utilised. Deferred taxes and market value of invested policyholders' funds at any given time. deferred tax assets in the tax group are recorded net in DnB NOR's balance sheet. Classification of insurance liabilities, customers bearing Payable and deferred taxes are recorded against equity if the the risk taxes refer to items recorded against equity during the same or in Insurance liabilities for which customers bear the risk represent previous periods. the market value of invested customer funds in products with a choice of investment profile which are managed by and allocated 15. LIABILITIES TO POLICYHOLDERS to each customer.
Technical insurance reserves in life insurance Assessment of liabilities to policyholders Classification of contracts Liabilities should be in reasonable proportion to the associated Products offered by Vital include group pension insurance, group risk. This is ensured through continual monitoring of existing association insurance, individual endowment insurance, individual contracts. Furthermore, all premium rates prepared by the annuity and pension insurance, products with a choice of company shall be reported to Finanstilsynet, which has overall investment profile and group life insurance. In addition, Vital responsibility for controlling that adequate premiums are applied. offers individual risk non-life insurance, mainly statutory Prevailing premium rates are continually reviewed. occupational injury insurance and appurtenant coverage. With respect to group pension insurance, the basis for Technical insurance reserves, as defined in the Act on calculating premium reserves was changed on 1 January 2008,
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including new assumptions for life expectancy and marital status. settled on the balance sheet date. This includes both reported but With respect to existing individual pension insurance contracts, the not settled claims (RBNS) and incurred but not reported claims calculation base used for large parts of the portfolio dates further (IBNR). Reserves relating to known claims are assessed back. individually by the settlement team, while IBNR reserves are The basis for calculating disability risk is more recent, taking based on empirical data, using statistical models to estimate the account of the increase in disability registered in society at large. scope of subsequent claims. The company took new premium rates for group disability pension The premium reserve and the claims reserve shall cover the into use in 2005. New premium rates were introduced for Group's anticipated compensation payments arising from existing municipal schemes as of 1 January 2004. insurance contracts. The security reserve shall protect the The base rate is used to calculate the present value of future company against unforeseen developments in compensation premiums, payments and insurance provisions. The maximum payments. The total of the premium, claims and security reserves base rate is stipulated by Finanstilsynet, based on the yield on shall, at a confidence level of 99 per cent, in accordance with long-term government bonds. The maximum base rate for new statistical calculations, cover the company's obligations on the contracts signed after 1 January 2006 is 2.75 per cent. For reporting date. contracts signed prior to 1 January 2006, the base rate is generally between 3 and 4 per cent. Recognition in the income statement "Premium income DnB NOR Skadeforsikring" includes premium Adequacy test income for own account. Insurance premiums are recorded as The Group carries out an annual adequacy test to assess whether income in accordance with the insurance period. its premium reserves are adequate to cover its liabilities to "Insurance claims etc. DnB NOR Skadeforsikring" includes policyholders. The test is described in more detail in Note 18 the cost of claims for own account and changes in the security Insurance risk. reserve. The cost of claims comprises paid gross compensation payments and changes in gross claims reserves, excluding the Recording of changes in liabilities to policyholders reinsurance share. Insurance premiums and insurance settlements are recorded by the amounts earned and accrued during the year. Accrual of 16. SEGMENTS premiums earned takes place through allocations to the premium Segment reporting is based on internal management reporting and reserve in the insurance fund. resource allocation. Insurance contracts transferred from other companies are The income statement and balance sheets for segments have recognised at the time the insurance risk is taken over. If the risk been prepared on the basis of internal financial reporting for the is transferred as at 31 December, it is reflected in the accounts for functional organisation of the DnB NOR Group into business areas. the subsequent year. Transfer amounts include the policies' shares Figures for the business areas are based on DnB NOR’s manage- of additional allocations, the securities adjustment reserve and ment model and the Group’s accounting principles. The figures are profits for the year. based on a number of assumptions, estimates and discretionary The item "Net gains on assets in Vital" includes returns and distribution. See note 3 Segments. gains less all losses, adjusted for allocations to or elimination of The operational structure of DnB NOR includes four business the securities adjustment reserve. areas and four staff and support units. DnB NORD is reported as The item "Guaranteed returns and allocations to policyholders a separate profit centre. The business areas carry responsibility for in Vital" includes the company's guaranteed rate of return on customer segments served by the Group, as well as the products policyholders' funds plus policyholders' share of profits including offered. transfers to additional allocations. According to DnB NOR's management model, the business Premium income and insurance settlements comprise the areas are independent profit centres with responsibility for meet- elements used as a basis for calculating the risk result. The share ing requirements for return on allocated capital. All of the Group's of payments from policyholders allocated to the insurance funds is customer activities are divided among the business areas, along recorded in the balance sheet. with the related balance-sheet items, income and expenses. Administrative expenses are charged to policyholders through Excess liquidity and liquidity deficits in the business areas are premium payments, returns and the dissolution of reserves. Total placed in or borrowed from the Group Treasury at market terms, charges for policyholders are included in "Commissions and fees where interest rates are based on duration and the Group's receivable etc.". Operating expenses and commission expenses financial position. are recorded in the group accounts according to type. When business areas cooperate on the delivery of financial services to customers, internal deliveries are based on market Technical insurance reserves in prices or simulated market prices according to agreements. In non-life insurance certain cases where it is particularly difficult to find relevant Technical insurance reserves are assessed pursuant to the Act on principles and prices for the distribution of items between two Insurance Activity with appurtenant regulations. Finanstilsynet has cooperating business areas, DnB NOR has chosen to show net formulated separate minimum requirements for the various contributions from each transaction in both business areas. The reserve categories, which include the reserve for unearned gross impact on profits is eliminated at group level. premiums, the gross claims reserve, the security reserve and the Services provided by group services and staff units are administration reserve. charged to the business areas in accordance with service The reserve for unearned gross premiums represents accrual agreements. Joint expenses, which are indirectly linked to activ- accounting of premiums written. The reserve relates to the ities in the business areas, are charged to the business areas' unearned parts of the premiums written. accounts on the basis of distribution formulas. The claims reserve shall cover anticipated future compensation A number of key functions along with profits from activities not payments for claims which have been incurred, but not been fully related to the business areas' strategic operations are entered in
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the accounts under the Group Centre. This item comprises income IAS 27 – Consolidated and Separate Financial Statements and expenses relating to the Group's liquidity management, (revised) income from investments in equity instruments not included in the Compared with the prevailing IAS 27, the revised standard gives trading portfolio and interest income on the Group's unallocated more guidance regarding the accounting treatment of changes in capital. Further entries include ownership-related expenses and ownership interests in subsidiaries. The introduction of the revised income from the management of the bank's real estate portfolio. standard implies that upon loss of control of a subsidiary, any Return on capital is estimated on the basis of official residual holding in the former subsidiary must be measured at fair requirements in accordance with regulations issued by value and the gain or loss on the disposal recognised in profit or Finanstilsynet, with the exception of Vital and DnB NOR Asset loss. In addition, current rules relating to the distribution of losses Management, where calculations are based on recorded equity. between the majority and the minority have been changed, Note 3 Segments also shows a geographic breakdown of whereby losses are to be charged to the non-controlling interests operations, including DnB NORD and other international (minority interests), even if the balance sheet value of the operations. minority interest will thus be negative. The revised IAS 27 entered into force on 1 July 2009. The Group introduced IAS 27 (R) as 17. RESTRUCTURING from 1 January 2010. The revised standard will affect the Group's If restructuring plans that change the scope of operations or the recording of future acquisitions and any sale/purchase of residual way operations are carried out are approved and communicated, holdings in subsidiaries. the need for restructuring provisions will be considered. The provisions are reviewed on each reporting date and will be IFRS 9 – Financial Instruments – Classification and reversed as expenses are incurred. Measurement In the new IFRS 9, the number of measurement categories for 18. CASH FLOW STATEMENTS financial assets is reduced from four to two: amortised cost and The cash flow statements show cash flows grouped according to fair value. It will still be possible to use the fair value option for source and use. Cash is defined as cash, deposits with central financial instruments which initially must be recorded at amortised banks and deposits with credit institutions with no agreed period cost if fair value measurement will reduce or eliminate measure- of notice. The cash flow statement has been prepared in ment inconsistency. It will no longer be permissible to record accordance with the direct method. unquoted equity instruments at cost. In order for a financial instrument to be measured at 19. EQUITY AND CAPITAL ADEQUACY amortised costs, the instrument must have basic loan features Proposed dividends and be managed on a contractual cash flow basis. If the criteria Proposed dividends are part of equity until approved by the for measuring the financial instrument at amortised cost are not general meeting. Proposed dividends are not included in capital met, the instrument must be measured at fair value. adequacy calculations. The new standard requires a review of the existing classifi- cation of all financial instruments in the Group's balance sheet. Capital adequacy As a rule, loans to customers that are currently measured at The Basel II capital adequacy rules entered into force on 1 January amortised cost can still be measured at amortised cost according 2007. to the new rules. Capital adequacy calculations are subject to special Equities and financial derivatives will still be measured at consolidation rules governed by the Consolidation Regulations. fair value. Primary capital and nominal amounts used in calculating risk- Commercial paper and bonds held for trading will be measured weighted volume will deviate from figures in the DnB NOR Group's at fair value. The Group may consider measuring commercial accounts, as associated companies which are presented in the paper and bonds classified as held-to-maturity at amortised cost accounts according to the equity method are included in capital if it intends to collect the instruments' contractual cash flows. adequacy calculations according to the gross method. Valuation Contract terms and the Group's business model must be rules used in the statutory accounts form the basis for the considered specifically for each instrument. consolidation. Equity instruments will not meet the terms for measurement at amortised cost. According to the new standard, unquoted equity 20. APPROVED STANDARDS AND instruments cannot be measured at cost. The amendment will not INTERPRETATIONS THAT HAVE NOT affect the measurement of the Group's equity instruments, as ENTERED INTO FORCE these are measured at fair value. IFRS 3 – Business Combinations (revised) The Group will consider the effects of the new IFRS 9. To be Compared with the prevailing IFRS 3, the revised standard able to make an overall assessment of the accounting effects of introduces certain changes and specifications with respect to the the new classification and measurement of the Group's financial use of the acquisition method. Amendments relate to goodwill in instruments, it is considered prudent to await the completion of all step acquisitions, minority interests and contingent considerations. stages of the project leading up to the new IAS 39. Acquisition costs in excess of issue and borrowing costs shall be IFRS 9 will enter into force on 1 January 2013, but has not yet expensed as they occur. The revised IFRS 3 entered into force on received EU approval. The Group expects to introduce the 1 July 2009. The Group introduced IFRS 3 (R) as from 1 January standard as from 1 January 2013. 2010. IFRS 3 (R) cannot be applied retrospectively. The revised standard will affect the Group's recording of future acquisitions.
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None of the amendments below will result in changes in the IFRIC 17 as from 1 January 2010. Group's use of accounting principles or note information: IFRIC 18 – Transfers of Assets from Customers Amendments to IAS 39 – Financial Instruments – The interpretation relates to the seller's accounting practice for Recognition and Measurement – hedging of risk transfers of fixed assets from customers to the seller in accord- components ance with the terms of the agreement. The interpretation entered Amendments to the standard provide further guidance on hedging into force on 1 November 2009. unilateral risk and inflation risk. The amendments entered into force on 1 July 2009. The Group will apply the amendments in IAS IFRIC 19 – Extinguishing Financial Liabilities with Equity 39 as from 1 January 2010. Instruments The interpretation gives guidance for accounting for transactions IFRIC 16 – Hedges of a Net Investment in a Foreign when a company settles all or parts of its financial obligations Operation through the issue of equity instruments. The interpretation will The interpretation clarifies which types of hedges may qualify enter into force on 1 July 2010, but has not yet received EU for hedge accounting and which risks may be hedged. The approval. interpretation entered into force on 1 July 2009. The Group will apply IFRIC 16 as from 1 January 2010. IASB's annual improvement project Amendments to several standards have been approved, entering Amendments to IAS 32 – Financial Instruments – into force during 2010. None of the amendments will result in Presentation– Classification of Rights Issues changes in the Group's use of accounting principles or note The amendments to IAS 32 imply that subscription rights information. denominated in another currency than the company's functional currency may be classified as equity instruments. The amend- IFRS 2 – Share-based Payment ments entered into force on 1 February 2010. The Group expects The contribution of a business on formation of a joint venture and to apply the amendments as from 1 January 2011. combinations under common control are not within the scope of IFRS 2. IAS 24 – Related Party Disclosures (revised) The revised standard clarifies and simplifies the definition of IFRS 5 – Non-current Assets Held for Sale and Discontinued related parties. The amendments will enter into force on 1 January Operations 2011, but have not yet received EU approval. The Group expects Clarifies that only the disclosure requirements in IFRS 5 apply to to apply the revised IAS 24 from 1 January 2011. non-current assets held for sale and discontinued operations.
Amendments to IFRS 2 – Share-based Payment - IFRS 8 – Operating Segments Group Cash-settled Share-based Payment Transactions Clarifies that only segment assets and liabilities which are reported IFRS 2 gives more guidance regarding cash-settled share-based separately for internal decision-making purposed need to be payments. The definition of share-based payments has been disclosed in segment information. changed somewhat. The amendments have not received EU approval. The amendments entered into force on 1 January 2010. IAS 1 – Presentation of Financial Statements Clarifies that if the lender at all times is entitled to convert a IFRIC 12 – Service Concession Arrangements convertible loan to equity, it will not affect the classification of the IFRIC 12 deals with public service concessions related to loan. infrastructure projects granted to private operators, where the services are regulated or controlled by the public sector body. IAS 7 – Statement of Cash Flows The interpretation entered into force on 29 March 2009. Clarifies that only expenditure that results in a recognised asset can be classified as a cash flow from investing activities. Amendments to IFRIC 14 and IAS 19 – the Limit on a Defined Benefit Asset, Minimum Funding Requirements and IAS 17 – Leases their Interaction The specific guidance on classifying land as a financial leases is The amendments imply that companies subject to a minimum removed. funding requirement for a pension scheme may record prepayments of premiums due in a defined benefit pension IAS 18 – Revenue scheme. The amendments to IRFIC 14 will enter into force on Guidance has been added to determine whether an entity is acting 1 January 2011, but have not yet received EU approval. as an agent or as a principal for own account and risk.
IFRIC 15 – Agreements for the Construction of Real Estate IAS 36 – Impairment of Assets The amendments imply that a number of projects can no longer be Clarifies that the largest unit permitted for allocating goodwill regarded as construction projects in accordance with IAS 11 acquired in a business combination is the operating segment. Construction Contracts. The interpretation has received EU approval and entered into force on 1 January 2010. IAS 38 – Intangible Assets Clarifies that if an intangible asset is identifiable only with another IFRIC 17 – Distributions of Non-cash Assets to Owners intangible asset, the assets may be recognised as a single asset The interpretation addresses the accounting treatment of provided that they have similar useful lives. distributions of non-cash assets to owners. The interpretation entered into force on 1 November 2009. The Group will apply
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IAS 39 – Financial Instruments: Recognition and IFRIC 9 – Reassessment of Embedded Derivatives Measurement Clarifies that IFRIC 9 does not apply to the reassessment of Clarifies that a prepayment option is considered to be closely embedded derivatives in combinations between businesses under related to the host contract when the exercise price approximates common control or the formation of a joint venture. the present value of remaining interest payments under the host contract. IFRIC 16 – Hedges of a net Investment in a Foreign Clarifies that the exemption for contracts between an acquirer Operation and a vendor in a business combination for a future transfer of Clarifies that in a hedge of a net investment in a foreign operation, assets in the target company, applies only to forward contracts. qualifying hedging instruments may be held by any entity within Clarifies that gains and losses on instruments in cash flow the group. hedges where the future expected cash flow results in the recognition of a financial instrument should not be recognised in profit or loss until the hedged forecast cash flows affect profit or loss.
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Note 1 Important accounting estimates and discretionary assessments
When preparing the consolidated accounts, management makes estimates and discretionary assessments and prepares assumptions that influence the effect of the accounting principles applied. In turn, this will affect the recorded values of assets and liabilities, income and expenses. Estimates and discretionary assessments are subject to continual evaluation and are based on historical experience and other factors, including expectations of future events that are believed to be probable on the balance sheet date.
Write-downs on loans If objective evidence of a decrease in value can be found, write-downs on loans are calculated as the difference between the value of the loan in the balance sheet and the net present value of estimated future cash flows discounted by the effective interest rate. Estimates of future cash flow are based on empirical data and discretionary assessments of future macroeconomic developments and developments in problem commitments, based on the situation on the balance sheet date. The estimates are the result of a process which involves the business areas and central credit units and represents management's best estimate. When considering write-downs on loans, there will be an element of uncertainty with respect to the identification of impaired loans, the estimation of amounts and the timing of future cash flows, including collateral assessments. Write-downs on loans in 2010 are expected to be somewhat lower than in 2009.
Individual write-downs When estimating write-downs on individual commitments, both the current and the future financial positions of customers are considered. For corporate customers, the prevailing market situation is also reviewed, along with market conditions within the relevant industry and general market conditions which could affect the commitments. In addition, potential restructuring, refinancing and recapitalisation are taken into account. An overall assessment of these factors forms the basis for estimating future cash flow. The discount period is estimated on an individual basis or based on empirical data regarding the period up until a solution is found to the problems resulting in impairment of the commitment.
Collective write-downs On each balance sheet date, commitments which have not been individually evaluated for impairment, are evaluated collectively in groups. Commitments which have been individually evaluated, but not individually written down, are also included in this category. Commitments are divided into customer groups on the basis of macroeconomic conditions which are assumed to have the same effect on the relevant customers. The expected future cash flow is estimated on the basis of expected losses and the anticipated economic situation for the respective customer groups. Expected losses are based on loss experience within the relevant customer groups. The economic situation is assessed by means of economic indicators for each customer group based on external information about the markets. Various parameters are used depending on the customer group in question. Key parameters are production gaps, which give an indication of capacity utilisation in the economy, housing prices and shipping freight rates. To estimate the net present value of expected future cash flows for commitments subject to collective write-downs, the observed discount effect estimated for the individually evaluated commitments is used.
Estimated impairment of goodwill See note 36 for information regarding goodwill.
Fair value of financial derivatives and other financial instruments The fair value of financial instruments that are not traded in an active market is determined by using different valuation techniques. The Group considers and chooses techniques and assumptions that as far as possible are based on market conditions on the balance sheet date. When valuing financial instruments for which observable market data are not available, the Group will make assumptions regarding what it expects the market to use as a basis for valuing corresponding financial instruments. The valuations require a high level of discretion when calculating liquidity risk, credit risk and volatility. Changes in these factors could affect the established fair value of the Group's financial instruments. See also note 29 Financial instruments at fair value. The fair value of the obligations under issued financial guarantees is measured by using the techniques applied to write-downs on loans, as described above.
When determining the fair value of Private Equity, PE, funds, the industry's recognised guidelines for PE valuations are used. The industry standard has been prepared by the European Private Equity & Venture Capital Association, EVCA. The method is considered to represent the best basis for the best estimate of fair values for investments in not very liquid equity instruments. On the balance sheet date, the Group did not have access to valuations of PE funds as at 31 December 2009. Valuations in the consolidated accounts are thus based on valuations received for previous periods, adjusted for a time lag of approximately three months, in the reporting from the funds. The time lags are assessed based on a weighted index consisting of stock market parameters, using MSCI World as reference index, along with parameters for anticipated long-term returns on PE investments. If developments in the weighted quarterly index are within a determined reliability interval of –2.5/+7.5 percentage points, the portfolio value is adjusted by the parameter for anticipated long-term returns. If developments in the weighted quarterly index fall outside the reliability interval, a full valuation must be made relative to the weighted index. The method has been tested on historical data and is considered to have good prediction ability.
Valuation of properties within Vital Forsikring The property portfolio in Vital Forsikring is recorded at fair value. Vital Forsikring's model has been used for valuation of the property portfolio in Norway, based on the net present value of anticipated cash flows. In addition, internal valuations are behchmarked against independent external appraisals. There was an increasing level of activity in the property market in the second half of 2009, though there was still a limited number of relevant benchmarks at the end of the year. Key parameters in the valuation model have been benchmarked against actual market transactions.
Changes in assumptions regarding the required rate of return and future rental levels subsequent to the contract period could result in a significant change in the value of the property portfolio. The assumptions used in calculating the fair value of the property portfolio in Vital Forsikring can be found in note 33 Investment property.
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Note 1 Important accounting estimates and discretionary assessments (continued) Pension commitments The net present value of pension commitments depends on current economic and actuarial assumptions. Any change made to these assumptions affects the pension commitments amount recorded in the balance sheet and pension expenses.
The discount rate used is determined by reference to market yields at the balance sheet date on long term (10-year) government bonds, plus an addition that takes into account the relevant duration of the pension liabilities. The type of pension fund investments and historical returns determine the expected return on pension funds. In the past, the average return on pension funds has been higher than the risk-free rate of interest as part of the pension funds has normally been placed in securities with slightly higher risk than government bonds. The estimated return is expected to be 2 percentage points higher than the Treasury bill yield.
Other fundamental assumptions for pension commitments include annual rise in salaries, annual rise in pensions, anticipated increase in the National Insurance basic amount (G) and anticipated CPA acceptance (early retirement pension). The assumptions are based on the updated guidance notes on pension assumptions issued by the Norwegian Accounting Standards Board. A sensitivity analysis is shown in note 24 Pensions.
Income taxes The Group is subject to income taxes in numerous jurisdictions. Significant discretion is required in determining the income tax in the consolidated accounts. The final tax liability relating to many transactions and calculations will be uncertain. The Group recognises liabilities related to the future outcome of tax disputes based on estimates of additional taxes. When assessing the uncertain tax liabilities to be recognised in the balance sheet, the probability of the liability arising is considered. The liability is calculated on a best estimate basis. If the final outcome of the cases deviates from the originally allocated amounts, the deviations will affect income tax entered in the applicable period.
Contingencies Due to its extensive operations in Norway and abroad, the DnB NOR Group will regularly be party to a number of legal actions. Any impact on the accounts will be considered in each case. See note 49 Off-balance sheet transactions, contingencies and post-balance sheet events.
The Norwegian government's stimulus package The Norwegian government's stimulus package for the banks allows the banks to exchange covered bonds for Treasury bills. DnB NOR Bank ASA has purchased bonds from DnB NOR Boligkreditt which have been used as collateral for swap agreements with Norges Bank. The value of the collateral must exceed the value of the Treasury bills by a minimum safety margin throughout the contract period. At the end of the contract period, the bank is required to repurchase the covered bonds at the original selling price. The bank receives yield from the covered bonds as if they never had been sold. From an accounting perspective, the Group is of the opinion that the terms for derecognition in IAS 39 have not been fulfilled, as the Group, through the swap agreements, retain the risk associated with changes in value of the bonds and other cash flows in the form of yields.
The interest rate paid by the banks in the swap scheme with Norges Bank is determined through auctions. In the opinion of DnB NOR, the market price of Treasury bills in the latest auctions have been influenced by factors and limitations which are specific to the various auction participants. In order to assess the fair value of the Group's existing funding through the swap scheme with Norges Bank, it is necessary to calculate the anticipated long-term yield on Treasury bills. The Group has thus made an assessment of the normal spread between the Treasury bill yield and NIBOR, based on developments in the interest rate market, which has been used when estimating the value of the funding as at 31 December 2009.
Transfer of loan portfolios When transferring loan portfolios to, among others, Eksportfinans AS, the Group will consider whether the criteria for derecognition have been fulfilled in accordance with IAS 39. In cases where the Group retains the credit risk and margins relating to the loan portfolios, the risks and returns are not considered to be transferred to the counterparty, and the loan portfolios are retained in the Group's balance sheet. As at 31 December 2009, such portfolios totalled NOK 9 215 million.
DnB NORD The Group has a 51 per cent ownership interest in Bank DnB NORD AS. Bank DnB NORD AS is the parent company in the DnB NORD Group and has branches in Denmark, Finland and Estonia and subsidiaries in Lithuania, Latvia and Poland. The Board of Directors of Bank DnB NORD AS was established with four representatives from each of the owners. The board chairman is from DnB NOR, while the vice-chairman is from NORD L/B. DnB NOR has the majority of the votes at general meetings. If there is a tie vote, the board chairman in Bank DnB NORD AS has a double vote. In certain matters, however, the shareholder agreement requires consent from both the board chairman and the vice- chairman. In this connection, an assessment has been made of whether the existing shareholder agreement may influence the consolidation requirement. After an assessment of key operational aspects, it has been concluded that the consolidation requirement remains in force. Through its ownership, shareholder agreement and actual management, DnB NOR has de facto control of operations, whereby Bank DnB NORD AS is classified as a subsidiary. The DnB NORD Group is thus consolidated as a subsidiary in the accounts of the DnB NOR Group.
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Note 1 Important accounting estimates and discretionary assessments (continued)
The shareholder agreement in DnB NORD entitles the parties to require an evaluation of the joint venture. In December 2009, the Board of Directors of DnB NOR decided to initiate the evaluation period of the shareholder agreement with effect from 31 January 2010. During the evaluation period, DnB NOR will amongst other consider the ownership structure, including the option to acquire NORD/LB's ownership interest in DnB NORD. In accordance with the shareholder agreement, the evaluation period will end on 31 July 2010. If DnB NOR does not avail itself of the right to acquire NORD/LB's ownership interest in DnB NORD, NORD/LB will be entitled to transfer its ownership interest in DnB NORD to DnB NOR or to take over the ownership interest of DnB NOR. The initiation of the evaluation period is not considered to be an absolute signal of an ultimate take-over of DnB NORD, as various outcomes of the process are possible. The accounting treatment of DnB NORD will be subject to ongoing assessment throughout the evaluation period.
Note 2 Changes in group structure and operations and non-current assets held for sale
Changes in group structure DnB NOR Skadeforsikring DnB NOR Skadeforsikring is owned by DnB NOR ASA and included in the Retail Banking business area. The company, which delivers non-life insurance products to the retail market, was established in 2008 and initiated operations on 1 January 2009. The products are primarily distributed through other group companies and the Internet. The company bases its operations on ten years of experience within non-life insurance gained by the insurance agent Vital Skade and has taken over more than 100 000 policyholders from this company in the course of 2009. Vital Skade was merged into DnB NOR Skadeforsikring in December 2009.
DnB NOR Næringskreditt DnB NOR Næringskreditt is 100 per cent owned by DnB NOR Bank ASA. The mortgage institution was established to issue covered bonds secured by a cover pool comprising commercial property and is instrumental in the bank's asset and liability management as a source of short and long-term funding. The bonds will be used in swap schemes with the Norwegian government, as collateral for central banks loans or sold in the market.
The company started operations in the third quarter of 2009, and in 2009 loans with a total value of NOK 11.5 billion were transferred from DnB NOR Bank ASA to the company. The portfolio is diversified with respect to property types, sizes and locations. The transfers are made in agreement with the customers. Like DnB NOR Boligkreditt, DnB NOR Næringskreditt purchases management and administrative services from DnB NOR Bank ASA.
Operations and non-current assets held for sale Nordisk Tekstil Holding Group On 26 August 2009, DnB NOR Bank ASA took over the shares in Nordisk Tekstil Holding AS as part of the restructuring of the bank's commitment with the company. Nordisk Tekstil Holding AS owns 100 per cent of Kid Interiør AS and Kid Logistikk AS and 50 per cent of Kid Skeidar AS. Kid Interiør has a dominant position in the Norwegian home textile market and had a total turnover of just over NOK 860 million in 2008. The Nordisk Tekstil Holding Group was taken over at the price of NOK 1.
According to the DnB NOR Group's strategy, ownership resulting from non-performing loans should as a rule have a short-term perspective, normally no longer than one year. Plans for the sale of the Nordisk Tekstil Holding Group have been worked out, and the sales process has been initiated. The Nordisk Tekstil Holding Group is classified under operations held for sale in the accounts.
Operations in the Nordisk Tekstil Holding Group, after the elimination of internal items with other units in the DnB NOR Group, are presented under "Profits from operations and non-current assets held for sale, after taxes" in the income statement, and under "Operations and non- current assets held for sale" and "Operations held for sale" in the balance sheet. Profits from operations in the Nordisk Tekstil Holding Group after tax were NOK 58 million for the September through December period in 2009. After the elimination of internal items, profits came to NOK 80 million. In the segment reporting, these operations are included under "Group Centre".
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Note 3 Segments
Business areas The operational structure of DnB NOR includes four business areas and four staff and support units. In addition, DnB NORD, in which DnB NOR has a 51 per cent ownership interest, is regarded as a separate profit centre. The business areas are independent profit centres and have responsibility for serving all of the Group's customers and for the total range of products. DnB NOR's business areas comprised Retail Banking, Large Corporates and International, DnB NOR Markets and Life and Asset Management. As of 1 July 2009, operations were reorganised, whereby private individuals and small and medium-sized companies in Norway will be served by the same business area, Retail Banking, while the largest corporate clients in Norway and international clients will be served by the business area Large Corporates and International. Figures for previous periods have been restated. The other business areas were not directly affected by the change.
Retail Banking - offers a broad range of financial products and services through several brands and a wide distribution network. In cooperation with several of the Group's product areas, customers are offered various financing and leasing, deposit and investment alternatives, as well as insurance, real estate broking and financial advisory services. In addition, extensive everyday banking services are provided through the Internet bank, mobile banking, SMS services, branch offices, in-store banking outlets, in-store postal outlets and Norway Post.
Large Corporates - offers a broad range of financial products and services to large Norwegian and international corporates and International in cooperation with several of the Group's product areas, including various types of financing solutions, deposits and investments, insurance, e-commerce products, commercial property brokerage, foreign currency, interest rate products, trade finance and corporate finance services.
DnB NOR Markets - is the group's investment bank with the key product include foreign exchange, interest rate and commodity products, securities and other investment products, debt and equity financing in capital markets, research and advisory services, as well as custodial and other securities services.
Life and Asset Management - is responsible for life insurance, pension savings and asset management.
DnB NORD - provides a broad range of products to both the retail and corporate markets.
The income statement and balance sheet for the business areas have been prepared on the basis of internal financial reporting for the functional organisation of the DnB NOR Group into business areas. Figures for the business areas are based on DnB NOR's management model and the Group's accounting principles. The figures have been restated in accordance with the Group's current principles for allocating costs and capital between business areas and are based on a number of assumptions, estimates and discretionary distribution. Internal transfer rates used between the business areas are determined based on observable market rates, e.g. NIBOR. Additional costs relating to the Group's long-term funding are charged to the business areas. According to the Group's liquidity management policy over 90 per cent of lending is financed through stable deposits and long-term funding. The additional costs related to long-term funding are charged to the business areas.
Income statement DnB NOR Group
Other Large Corporates DnB NOR Life and Asset operations/ DnB NOR Retail Banking and International Markets Management DnB NORD eliminations 1) Group Amounts in NOK million 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 Net interest income - ordinary operations 14 495 12 347 5 273 4 492 1 100 708 (251) (588) 1 462 1 411 554 3 539 22 633 21 910
Interest on allocated capital 2) 503 1 224 793 1 606 144 305 231 502 96 303 (1 767) (3 939) Net interest income 14 998 13 571 6 066 6 097 1 244 1 014 (20) (86) 1 559 1 714 (1 213) (400) 22 633 21 910
Profit from companies accounted for by the equity metod 4 1 86 61 0 0 0 0 0 0 2 570 93 632
Other operating income 3 751 3 716 2 439 2 273 5 999 4 671 3 582 2 988 683 754 (1 554) (2 597) 14 901 11 805 Net other operating income 3 756 3 717 2 525 2 334 5 999 4 671 3 582 2 988 684 754 (1 552) (2 027) 14 994 12 438
Operating expenses 9 177 8 978 1 784 1 970 1 898 1 738 2 098 2 060 1 418 1 396 327 361 16 701 16 503
Depreciation and impairment of fixed and intangible assets 1 008 642 22 50 15 11 113 93 1 172 308 (119) 1 113 2 210 2 217 Total operating expenses 10 185 9 620 1 806 2 021 1 913 1 749 2 211 2 153 2 589 1 704 207 1 473 18 911 18 721
Pre-tax operating profit before write-downs 8 569 7 669 6 785 6 410 5 331 3 936 1 351 748 (347) 764 (2 972) (3 900) 18 717 15 627 Net gains on fixed and intangible assets 1 0 0 17 0 0 0 0 (13) 19 38 16 26 52
Write-downs on loans and guarantees 1 586 1 267 1 128 212 0 1 0 0 3 929 1 388 1 067 641 7 710 3 509
Pre-tax operating profit 6 984 6 402 5 657 6 216 5 331 3 935 1 351 748 (4 289) (605) (4 001) (4 525) 11 032 12 170 Taxes 4 086 3 252
Profit from operations and non-current assets held for sale, after taxes 80 0 80 0 Profit for the year (3 922) (4 525) 7 026 8 918
DnB NOR ANNUAL REPORT 2009 121 ANNUAL ACCOUNTS DnB NOR GROUP
Note 3 Segments (continued)
Balance sheets DnB NOR Group
Other Large Corporates DnB NOR Life and Asset operations/ DnB NOR Retail Banking and International Markets Management DnB NORD eliminations Group Amounts in NOK billion 31.12.09 31.12.08 31.12.09 31.12.08 31.12.09 31.12.08 31.12.09 31.12.08 31.12.09 31.12.08 31.12.09 31.12.08 31.12.09 31.12.08
Net lending to customers 3) 727 703 335 410 8 9 3 3 68 99 (21) (19) 1 120 1 204
Investments in associated companies 4) 2 2 3 3
Opertaions and non-current assets held for sale 1 0 1 0
Other assets 14 40 18 21 676 786 233 223 15 17 (257) (462) 699 624
Total assets 741 744 354 431 684 794 236 226 83 116 (275) (479) 1 823 1 832
Assets under management 253 309 253 309
Total combined assets 741 744 354 431 684 794 489 535 83 116 (275) (479) 2 077 2 141 Deposits from customers 3) 370 366 193 216 28 15 0 0 20 24 (4) (6) 608 617 Operations held for sale 0 0 0 Other liabilities 352 358 130 189 651 774 227 218 56 85 (301) (489) 1 114 1 134 Total liabilities 722 724 324 405 679 789 227 218 75 109 (304) (495) 1 722 1 750
Allocated capital 5) 19 20 30 26 6 5 9 8 8 7 30 17 101 81 Total liabilities and equity 741 744 354 431 684 794 236 226 83 116 (275) (479) 1 823 1 832
1) Other operations/eliminations: Elimination of Other double entries eliminations Group Centre *) Total Amounts in NOK million 2009 2008 2009 2008 2009 2008 2009 2008 Net interest income - ordinary operations (96) (163) 650 3 703 554 3 539 Interest on allocated capital 0 0 (1 767) (3 939) (1 767) (3 939) Net interest income (96) (163) (1 117) (237) (1 213) (400) Profit from companies accounted for by the equity metod 0 0 2 570 2 570 Other operating income (1 649) (1 974) (436) (223) 531 (400) (1 554) (2 597) Net other operating income (1 649) (1 974) (436) (223) 533 170 (1 552) (2 027) Operating expenses (533) (377) 859 738 327 361 Depreciaton and impairment of fixed and intangible assets 0 0 (119) 1 113 (119) 1 113 Total operating expenses (533) (377) 740 1 851 207 1 473 Pre-tax operating profit before write-downs (1 649) (1 974) 0 (9) (1 323) (1 917) (2 972) (3 900) Net gains on fixed and intangible assets 0 9 38 7 38 16 Write-downs on loans and guarantees 0 0 1 067 642 1 067 641 Pre-tax operating profit (1 649) (1 974) 0 0 (2 353) (2 551) (4 001) (4 525)
The eliminations refer mainly to internal services from support units to business areas and between business areas. Further, intra-group transactions and gains and losses on transactions between companies in the Group are eliminated. In the ongoing management reporting and financial performance monitoring, net profits on customer business carried out in cooperation between primarily DnB NOR Markets and customer units in other business areas, are taken to income in both areas. Double entries are eliminated at group level.
The Group Centre includes Operations, HR (Human Resources), IT, Group Finance and Risk Management, Marketing and Communications, Corporate Centre, the partially owned company Eksportfinans AS, investments in IT infrastructure and shareholder-related expenses. In addition, the Group Centre includes that part of the Group’s equity that is not allocated to the business areas.
*) Group Centre - pre-tax operating profit in NOK million 2009 2008 Interest on unallocated equity and other unallocated items 439 440 Allocation to employees 131 0 Income on equities 6) 87 (1 391) Impairment loss for goodwill 0 (826) Funding costs on goodwill (49) (238) Eksportfinans AS (200) 570 Ownership-related expenses (costs relating to shareholders, investor relations, strategic planning etc.) (208) (247) Net interest income DnB NOR ASA (401) (277) Unallocated write-downs on loans and guarantees (1 191) (682) Portfolio hedging, Treasury and fair value on lending (1 217) (415) Other 256 516 Pre-tax operating profit (2 353) (2 551)
2) The interest is calculated on the basis of internal measurement of risk-adjusted capital. 3) Net lending to customers includes lending to credit institutions totalling NOK 5.5 billion in 2009 and NOK 12.9 billion in 2008. Customer deposits include deposits from credit institutions of NOK 16.9 billion in 2009 and NOK 19.6 billion in 2008. Deposits with and from banks are not included. 4) See note 34 Investments in associated companies. 5) Allocated capital is calculated on the basis of internal measurement of risk-adjusted capital. 6) The value of the investment in Oslo Børs VPS Holding ASA was reduced by NOK 576 million in 2008.
122 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 3 Segments (continued)
Key figures DnB NOR Group
Large Corporates DnB NOR Life and Asset Other DnB NOR Retail Banking and International Markets Management DnB NORD operations Group Per cent 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 Cost/income ratio 1) 53.2 55.1 21.0 24.0 26.4 30.8 62.1 74.2 73.5 63.7 48.3 51.4
Ratio of deposits to lending as at 31 Dec. 2) 50.9 52.1 57.7 52.8 29.0 24.7 54.2 51.2 Return on allocated capital 3) 26.1 23.6 13.4 17.4 69.8 58.0 16.6 3.2 (34.4) (5.8) 12.6 15.3
Number of full-time positions as at 31 Dec. 4) 5 090 5 241 1 061 1 115 647 655 961 1 169 3 174 3 597 2 385 2 280 13 317 14 057
1) Total operating expenses relative to total income. Expenses exclude impairment losses for goodwill. 2) Deposits from customers relative to net lending to customers. Customer deposits and net lending to customers include credit institutions. 3) The return is calculated on the basis of internal measurement of risk-adjusted capital. 4) Due to changes in the agreement with Norway Post, 162.6 full-time positions were transferred from Norway Post on 1 May 2009. Costs and corresponding head-count figures were included with effect from the first quarter of 2009. In connection with the centralisation of IT functions in 2009, some 200 full-time positions were transferred to the IT unit from other units in the Group.
Comments to the results 2009 Retail Banking Retail Banking delivered a sound financial performance in 2009. Pre-tax operating profits were NOK 6 984 million, an increase of NOK 582 million from 2008. The steep fall in interest rate levels from the autumn of 2008 and through the first half of 2009 contributed to widening lending spreads relative to money market rates from 2008. Low interest rate levels and fierce competition for deposits put pressure on deposit spreads. Average lending rose by 7.4 per cent compared with 2008. Demand for housing loans was maintained at a relatively high level in 2009, while a lower level of activity among small and medium-sized enterprises resulted in more sluggish demand for financing. Deposits showed an average increase of 4.3 per cent. Other operating income was slightly higher than in 2008, and there was a sound trend in income from payment services and real estate broking during 2009. Expenses increased by 5.9 per cent from 2008, reflecting general wage growth, higher IT development costs, the transfer of financial advisers from Norway Post and impairment losses for goodwill in Sweden. The cost/income ratio, excluding impairment losses for goodwill, was reduced by 1.8 percentage points to 53.2 per cent. Net write-downs relative to average net lending rose from 0.19 per cent in 2008 to a continuing low level of 0.22 per cent in 2009. The quality of the loan portfolio was sound at year-end 2009.
Large Corporates and International Large Corporates and International recorded pre-tax operating profits of NOK 5 657 million in 2009, down NOK 558 million from the previous year. The reduction resulted from higher write-downs on loans, which increased by NOK 916 million to NOK 1 128 million. Relative to average lending, write-downs were 0.30 per cent in 2009, up from 0.06 per cent in 2008. Net interest income declined by NOK 32 million from 2008. Ordinary operations generated an increase in net interest income of NOK 781 million, income from allocated capital was reduced due to lower interest rate level. Measured against the money market rate, lending spreads widened by 0.31 percentage points from 2008, improving in all segments. It was necessary to increase interest rate spreads to compensate for higher funding costs and greater risk of write-downs on loans. Interest rates stabilised at a lower level than was previously the case. In combination with increased competition for deposits, this resulted in narrowing deposit spreads in all segments. Average lending to customers rose by 12.9 per cent from 2008 to 2009, but declined through the year due to weaker demand and a reduction in the NOK value of foreign currency loans due to the strengthened Norwegian krone. The quality of the portfolio was satisfactory in all sectors, but there was a negative development through 2009 due to the general market conditions. Average deposits rose by 15.8 per cent.
DnB NOR Markets DnB NOR Markets achieved healthy profits in 2009. Pre-tax operating profits totalled NOK 5 331 million in 2009, up NOK 1 395 million from 2008. Due to a lower level of economic activity, customer-related revenues declined in important product areas, totalling NOK 3 191 million in 2009, down NOK 295 million compared with 2008. Extraordinary volatility in interest rates and exchange rates at the beginning of 2009 gave a significant increase in income from market making and other proprietary trading within DnB NOR Markets' core areas of activity, including Norwegian kroner products. Along with a strong increase in profit from the liquidity portfolio of bonds, this gave a NOK 2 015 million increase in income from market making and other proprietary trading, to NOK 3 908 million. The cost/income ratio was 26.4 per cent in 2009, down from 30.8 per cent in 2008.
DnB NOR ANNUAL REPORT 2009 123 ANNUAL ACCOUNTS DnB NOR GROUP
Note 3 Segments (continued)
Revenues within various segments DnB NOR Markets Amounts in NOK million 2009 2008
FX, interest rate and commodity derivatives 1 665 1 936
Investment products 766 574 Corporate finance 570 643
Securities services 190 333 Total customer revenues 3 191 3 486
Net income liquidity portfolio incl. changes in credit spreads 1 147 (707)
Other market making/trading revenues 2 761 2 600 Total trading revenues 3 908 1 893
Interest income on allocated capital 144 305 Total income 7 243 5 685
Life and Asset Management Life and Asset Management consisted of Vital Forsikring and DnB NOR Asset Management through 2009. The business area achieved pre-tax operating profits of NOK 1 351 million for the year, up NOK 603 million compared with 2008. The improvement in financial markets during 2009 contributed to the rise in profits.
Vital Vital achieved pre-tax operating profits of NOK 1 156 million in 2009, an increase from NOK 644 million in 2008. The recorded and value- adjusted returns on the common portfolio were 4.7 per cent and 5.4 per cent, respectively, in 2009. The return on the corporate portfolio was 5.1 per cent in 2009. At year-end 2009, approximately 67,5 per cent of policyholders' funds were placed in fixed-income securities.
DnB NOR Asset Management DnB NOR Asset Management recorded pre-tax operating profits of NOK 217 million in 2009, down NOK 19 million compared with 2008. A renegotiated agreement with Skandia Liv caused a reduction in the volume of assets under management, but created greater opportunities for generating fees due to sound asset management performance and the restructuring of operations. Thus far, the New York office has been closed, the London office is in the process of closing, and staff cuts and adjustments of work processes have taken place in the rest of the organisation.
DnB NORD DnB NORD was strongly affected by the recession, recording a pre-tax operating loss of NOK 4 289 million, compared with a loss of NOK 605 million in 2008. DnB NORD's financial performance was marked by a steep increase in write-downs on loans in consequence of the significant economic downturn in the Baltic region. Average lending in DnB NORD was NOK 83.6 billion in 2009, up 11.3 per cent from 2008, though there was a reduction in lending through the year. Net write-downs totalled NOK 3 929 million or 4.70 per cent of average lending in 2009, an increase from NOK 1 388 million or 1.85 per cent in 2008. DnB NORD expects the level of write-downs to remain relatively high in 2010. DnB NORD will focus on consolidating its operations, reducing losses and improving cost-efficiency. Impairment losses for goodwill of NOK 619 million relating to operations in the Baltic States were recorded in 2009, whereas impairment losses relating to operations in Poland represented NOK 306 million. The impairment losses are reflected in profits for the profit centre. For the DnB NOR Group, impairment losses for goodwill relating to DnB NORD amounted to NOK 529 million in 2009, see note 36 'Goodwill and intangible assets with an indefinite useful life'. At year-end 2009, it was clear that DnB NORD will require new capital during 2010. DnB NOR will exercise its ownership role and honour its obligations by providing its proportional share of the capital required by DnB NORD.
Other units – Group Centre The Group Centre recorded a pre-tax operating loss of NOK 2 353 million in 2009, compared with a loss of NOK 2 551 million in 2008. There was a loss attributable to the Group from the associated company Eksportfinans of NOK 200 million in 2009, including the share of the portfolio guarantee issued for the liquidity portfolio, while there was a positive profit contribution of NOK 570 million in 2008. The sound financial performance in 2008 was due to large unrealised gains on own debt due to higher margin requirements. Through 2009, the margin requirement was reduced and previous income reversed. Income from equity investments totalled NOK 87 million in 2009, while the financial turmoil resulted in losses of NOK 1 391 million in 2008. Due to changes in credit margins, DnB NOR recorded negative profit effects relating to own debt, the fair value of loans carried at fair value and related derivatives. In sum, this resulted in a negative profit contribution in 2009 of NOK 1 618 million, compared with NOK 692 million in 2008. Allocations for a general bonus to employees totalled NOK 131 million in 2009, whereas no corresponding allocations were made in 2008. Impairment losses for goodwill of NOK 826 million were recorded in 2008 and primarily applied to DnB NOR ASA's investment in DnB NOR Asset Management. Collective write-downs totalled NOK 1 186 million in 2009, an increase of NOK 525 million from the previous year.
124 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 3 Segments (continued) Geographic areas
Income statement DnB NOR Group Other international DnB NOR DnB NORD operations Norway Group Amounts in NOK million 2009 2008 2009 2008 2009 2008 2009 2008
Net interest income 1 559 1 714 2 392 1 954 18 682 18 242 22 633 21 910
External operating income 684 754 1 773 1 476 12 537 10 208 14 994 12 438 Total income 2 242 2 468 4 165 3 430 31 220 28 450 37 627 34 347
Balance sheet items DnB NOR Group Other international DnB NOR DnB NORD operations Norway Group Amounts in NOK billion 31.12.09 31.12.08 31.12.09 31.12.08 31.12.09 31.12.08 31.12.09 31.12.08
Net lending to customers 1) 68 99 162 205 891 901 1 120 1 204
Total assets 83 116 290 302 1 450 1 414 1 823 1 832
Guarantees 2 5 7 7 56 73 66 85
1) Net lending to customers includes lending to credit institutions totalling NOK 5.5 billion in 2009 and NOK 12.9 billion in 2008. Customer deposits include deposits from credit institutions of NOK 16.9 billion in 2009 and NOK 19.6 billion in 2008. Deposits with and from banks are not included.
Product information See note 19 Net other operating income and note 21 Net interest income for further information on product.
DnB NOR ANNUAL REPORT 2009 125 ANNUAL ACCOUNTS DnB NOR GROUP
Note 3 Segments (continued) Vital The business area Life and Asset Management in DnB NOR comprises Vital Forsikring ASA and DnB NOR Kapitalforvaltning Holding AS, both with subsidiaries. Vital Forsikring ASA including subsidiaries, hereinafter referred to as "Vital", is fully consolidated in the DnB NOR Group's accounts. Vital's lines of business are life insurance and pension savings. Operations are thus different from operations in the rest of the Group. Profit sharing between policyholders and the owner in life insurance companies is based on special accounting regulations for such operations stipulated by the Norwegian Ministry of Finance. Regulations relating to profit sharing between the owner and policyholders in life insurance companies limit the DnB NOR Group’s access to revenues and assets from life insurance operations. The tables below describe the income statement, balance sheet and key figures for Vital.
Income statement 1) Vital Amounts in NOK million 2009 2008 Commissions and fees receivable etc. 2 209 2 237 Commissions and fees payable etc. 336 456 Net gains on assets in Vital 13 464 (813) Guaranteed returns and allocations to policyholders in Vital 12 712 (1 027) Premium income etc. included in the risk result in Vital 4 705 4 543 Insurance claims etc. included in the risk result in Vital 4 613 4 407 Net other operating income 2 717 2 132 Total income 2 717 2 132 Salaries and other personnel expenses 740 714 Other expenses 718 682 Depreciation and impairment of fixed and intangible assets 103 90 Total operating expenses 1 561 1 487 Pre-tax operating profit 1 156 644 Taxes (175) 427 Profit for the year 2) 1 331 218
1) The figures encompass Vital Forsikring ASA including subsidiaries as included in the DnB NOR Group accounts before eliminations for intra-group transactions and balances.
2) Breakdown of income statement Vital Amounts in NOK million 2009 2008 Interest result 3 043 (2 623) Application of/(transferred to) additional allocations (173) 2 993 Risk result 92 136 Administration result (108) (143) Profit on risk and guaranteed rate of return 477 437 Transferred from security reserve (36) (68) Funds transferred to policyholders 2 138 89 Pre-tax operating profit in Vital 1 156 644 Taxes (175) 427 Profit for the period in Vital 1 331 218
126 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 3 Segments (continued)
Balance sheets 1) Vital Amounts in NOK million 31 Dec. 2009 31 Dec. 2008
Assets Lending to and deposits with credit institutions 4 871 6 723 Lending to customers 3 076 2 623 Commercial paper and bonds 52 673 72 841 Shareholdings 2) 44 955 26 964 Financial assets, customers bearing the risk 3) 21 337 16 454 Financial derivatives 2 149 5 644 Commercial paper and bonds, held to maturity 4) 68 128 57 089 Investment property 5) 32 766 32 392 Investments in associated companies 19 19 Intangible assets 288 243 Deferred tax assets 52 Fixed assets 43 45 Other assets 2 109 3 093 Total assets 232 465 224 129
Liabilities and equity Financial derivatives 1 909 7 950 Insurance liabilities, customers bearing the risk 3) 6) 21 337 16 454 Liabilities to life insurance policyholders 6) 193 556 184 791 Payable taxes 654 28 Deferred taxes 584 Other liabilities 2 277 2 851 Provisions 227 157 Subordinated loan capital 2 489 2 575 Total liabilities 222 448 215 389
Share capital 1 321 1 321 Share premim reserve 1 175 1 175 Other equity 7 522 6 244 Total equity 10 018 8 740 Total liabilities and equity 232 465 224 129
1) The figures encompass Vital Forsikring ASA including subsidiaries as included in the DnB NOR Group accounts before eliminations for intra-group transactions and balances. 2) See note 30 Shareholdings for a specification of the largest investments in shares in Vital. 3) See note 31 Financial assets and insurance liabilities, customers bearing the risk. 4) See note 32 Commercial paper and bonds, held to maturity. 5) See note 33 Investment properties. 6) See note 18 Insurance risk.
Key figures Vital Per cent 2009 2008 Recorded return, excluding unrealised gains on financial instruments 1) 4.7 1.7 Value-adjusted return, excluding changes in unrealised gains on commercial paper and bonds, held to maturity 1) 5.4 0.0 Value-adjusted return, including changes in unrealised gains on commercial paper and bonds, held to maturity, and unrealised gains on current assets 1) 5.7 0.8 Capital adequacy ratio at end of period 2) 11.6 12.3 Tier 1 capital ratio at end of period 2) 9.7 9.8 Solvency margin capital in per cent of requirement at end of period 2) 3) 171 162
1) Refers to the common portfolio. 2) Finanstilsynet (the Financial Supervisory Authority of Norway) and the Ministry of Finance have not adapted capital adequacy or solvency margin capital regulations to IFRS. 3) Solvency margin capital is measured against the solvency margin requirement, which is linked to the company's insurance commitments. The solvency margin capital requirements for Norwegian life insurance companies are subject to regulations laid down by the Ministry of Finance on 19 May 1995.
DnB NOR ANNUAL REPORT 2009 127 ANNUAL ACCOUNTS DnB NOR GROUP
Note 3 Segments (continued) DnB NOR Skadeforsikring
Income statement DnB NOR Skadeforsikring Amounts in NOK million 2009 2008 Net interest income 19 6 Commissions and fees receivable etc. 2 0 Commissions and fees payable etc. 54 0 Net gains on financial instruments at fair value (2) 4 Premium income 593 0 Insurance claims etc. 1) 538 0 Net other operating income 2 4 Total income 21 10 Salaries and other personnel expenses 65 7 Other expenses 59 4 Total operating expenses 124 11 Pre-tax operating profit (103) (1) Taxes (25) Profit for the period (78) (1)
1) Of which contingency reserve 83 0
Balance sheets DnB NOR Skadeforsikring 31 Dec. 31 Dec. Amounts in NOK million 2009 2008 Assets Lending to and deposits with credit institutions 129 61 Commercial paper and bonds 606 236 Commercial paper and bonds, held to maturity 100 24 Deferred tax assets 2 0 Other assets 251 12 Total assets 1 089 333 Liabilities and equity Insurance liabilities 704 0 Other liabilities 18 3 Provisions 26 65 Subordinated loan capital 50 0 Total liabilities 799 68
Total equity 290 265 Total liabilities and equity 1 089 333
128 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 4 Capitalisation policy and capital adequacy
Capitalisation policy The Board of Directors approved a new capitalisation policy in connection with the transition to Basel II. The policy sets forth that Tier 1 capital in per cent of risk-weighted volume shall be minimum 8 per cent upon full completion of the IRB system. By the end of 2010, most of the IRB system will be in place. The Group's capitalisation level shall support the bank's AA level rating target for ordinary long-term funding. Relative to the current risk-weighted volume, which is based on a combination of the standardised approach and the IRB approach, it has been estimated that measurement according to the IRB approach would have given a reduction in risk-weighted volume of approximately 20 per cent at year-end 2009. The effect on the official capital adequacy ratio will, however, be less pronounced due to the transitional rules, which set a floor for the reduction in risk-weighted volume. Risk-weighted volume cannot be reduced below 80 per cent of corresponding amounts calculated in accordance with the Basel I rules. This entails that the official risk-weighted volume would have been reduced by approximately 10 per cent. The transitional rules will apply until the end of 2011.
After the completion of the share issue in December 2009, the allocation of annual profits, the expansion of the scope of application for the IRB approach and other capital efficiency measures, the Tier 1 capital ratio in the DnB NOR Group was 9.3 per cent at year-end 2009, compared with 6.7 per cent at year-end 2008. In the calculation, the proposed dividend payment for 2009 is not included in the capital base. The capital adequacy ratio was 12.1 per cent, up from 9.5 per cent for the previous year. The injection of capital through the share issue increased the ratios by 1.2 percentage points. The improved capitalisation makes the DnB NOR Group well prepared to meet the uncertain economic climate and stricter capitalisation requirements from the market and the authorities, and gives the Group greater manoeuvrability to achieve profitable growth and implement structural changes.
According to the Group's capital strategy and dividend policy, the Group aims to be among the best capitalised financial groups in the Nordic region. In addition, the Group will work towards an AA level rating for long-term debt. Dividends will be determined based on factors such as the need to maintain solidity at a satisfactory level and developments in external parameters, in addition to an evaluation of expected profit levels in a normal situation.
The capitalisation and the liquid funds injected in the Group's holding company, DnB NOR ASA, also provides greater scope for meeting the capitalisation requirements in those parts of the Group which are organised as separate subsidiaries. This applies primarily to DnB NOR Bank ASA, Vital Forsikring ASA and DnB NOR Skadeforsikring AS.
After the allocation of profits for 2009 and the finalisation of the share issue, the holding company DnB NOR ASA had a net liquidity reserve of NOK 11.6 billion, which can be used to strengthen the subsidiaries' capital base. At year-end 2009, none of the subsidiaries had such needs, but new capital adequacy requirements are being drawn up both for banking and insurance operations. DnB NOR ASA's capital strength and liquidity provide a sound platform from which to meet new capital adequacy requirements in the subsidiaries.
The DnB NOR Bank Group, which comprises DnB NOR Bank ASA and subsidiaries, had a Tier 1 capital ratio of 8.4 per cent and a capital adequacy ratio of 11.4 per cent at year-end 2009, compared with 6.9 and 9.9 per cent, respectively in 2008. The same capital adequacy requirements from the Norwegian authorities apply to the banking group as to the entire DnB NOR Group, thus the 2009 requirements were met by a wide margin. In addition, a separate requirement from the US authorities to the banking group relating to the operations of the subsidiary DnB NOR Markets Inc. in New York must be fulfilled, whereby the Tier 1 capital ratio for the banking group must be 6 per cent and the total capital adequacy ratio 10 per cent. At year-end 2009, this requirement was also fulfilled by a wide margin.
DnB NORD, in which DnB NOR Bank ASA owns 51 per cent of the shares and has implemented a process to evaluate an acquisition of the remaining shares, has shown a weak profit performance over several years and has on several occasions required and received primary capital injections. Such capital has been transferred from the owner banks through equity capital increases in DnB NORD's Danish holding company Bank DnB NORD A/S, and in the form of subordinated loans. The holding company has injected capital into the underlying subsidiaries. At year-end 2009, it was clear that DnB NORD will require new capital during 2010. DnB NOR will exercise its ownership role and honour its obligations by providing its proportional share of the capital required by DnB NORD.
Vital had a capital adequacy ratio of 11.6 per cent and a solvency margin of 171 per cent at year-end 2009, which is well above the regulatory requirements of 8 per cent and 100 per cent, respectively. Total annual profits of NOK 1.3 billion were retained in the company. This capital increase, together with the strengthening of the securities adjustment reserve and additional allocations by NOK 1.5 billion, mean that Vital can increase the risk in its financial management operations to reflect its customer promises in 2010. As from 2013, the current solvency rules will be replaced by a common regulatory framework for the capitalisation of insurance companies in Europe, Solvency II. Vital is making the necessary preparations for this by, for example, adapting the management of the company to Finanstilsynet's stress tests and supervisory methodology and by participating in Quantitative Impact Studies (QIS), organised by the European supervisory organisation.
The Basel Committee's work on the new regulatory requirements relating to capitalisation and liquidity in banking and financial services groups resulted in a proposal which was submitted for consultation on 17 December 2009. The closing date to submit comments is 16 April 2010. It is expected that the new rules will lead to stricter requirements with respect to capital adequacy, capital structure, liquidity buffers and financing structure. DnB NOR, based on its current capital structure, is expected to be relatively well prepared to meet the new require- ments. The Board of Directors will, on an ongoing basis, evaluate the Group's capitalisation needs in light of international developments.
DnB NOR ANNUAL REPORT 2009 129 ANNUAL ACCOUNTS DnB NOR GROUP
Note 4 Capitalisation policy and capital adequacy (continued)
In addition to the regulatory assessment and allocation of capital to the Group's legal units, an allocation of capital to the operative business areas is made for management purposes, based on a calculation of risk-adjusted capital requirements according to the Group's internal calculations of economic capital. The need for capital is determined in the plans for each individual year, and the business areas are followed up with respect to this allocation.
Capital adequacy The DnB NOR Group follows the Basel II regulations for capital adequacy calculations. Valuation rules used in the statutory accounts form the basis for the consolidation, which is subject to special consolidation rules governed by the Consolidation Regulations.
Primary capital DnB NOR Bank ASA DnB NOR Bank Group DnB NOR Group 31 Dec. 31 Dec. 31 Dec. 31 Dec. 31 Dec. 31 Dec. Amounts in NOK million 2009 2008 2009 2008 2009 2008 Share capital 17 514 17 514 17 514 17 514 16 231 13 327 Other equity 54 948 51 702 65 800 59 969 85 172 67 949 Total equity 72 462 69 217 83 314 77 483 101 403 81 275 Deductions Pension funds above pension commitments 0 0 (3) (1) (119) (152) Goodwill (1 650) (1 657) (3 853) (4 737) (5 653) (6 854) Deferred tax assets (1 153) (10) (295) (306) (300) (316) Other intangible assets (912) (516) (1 980) (1 584) (2 270) (1 842) Dividends payable 0 0 (3 750) 0 (2 850) 0 Unrealised gains on fixed assets 0 0 (30) (30) (30) (30) 50 per cent of investments in other financial institutions (1 033) (1 070) (1 033) (1 070) (2) 0 50 per cent of expected losses exceeding actual losses, IRB portfolios (101) (288) (222) (339) (222) (339) Adjustments for unrealised losses/ (gains) on debt recorded at fair value 182 (323) (404) (2 284) (404) (2 284) Additions Portion of unrecognised actuarial gains/losses, pension costs 1) - 555 - 594 - 608 Equity Tier 1 capital 67 796 65 908 71 745 67 726 89 553 70 066 Perpetual subordinated loan capital securities 2) 3) 8 468 9 742 8 655 9 945 8 655 9 945 Core capital 76 264 75 649 80 400 77 671 98 208 80 010 Perpetual subordinated loan capital 6 830 8 007 6 830 8 007 6 830 8 007 Term subordinated loan capital 3) 21 111 23 843 23 003 26 083 23 003 26 083 Deductions 50 per cent of investments in other financial institutions (1 033) (1 070) (1 033) (1 070) (2) 0 50 per cent of expected losses exceeding actual losses, IRB portfolios (101) (288) (222) (339) (222) (339) Additions 45 per cent of unrealised gains on fixed assets 0 0 18 18 18 18 Supplementary capital 26 807 30 492 28 597 32 700 29 628 33 770 Total eligible primary capital 4) 103 071 106 141 108 997 110 371 127 836 113 780 Risk-weighted volume 831 885 965 059 960 208 1 120 428 1 052 566 1 200 590 Minimum capital requirement 66 551 77 205 76 817 89 634 84 205 96 047 Equity Tier 1 ratio (per cent) 8.1 6.8 7.5 6.0 8.5 5.8 Core capital ratio (per cent) 9.2 7.8 8.4 6.9 9.3 6.7 Capital ratio (per cent) 12.4 11.0 11.4 9.9 12.1 9.5
1) Upon implementation of NRS 6A (IAS 19) in 2005, unrecognised actuarial gains/losses for pension commitments were charged to equity in the accounts. The Ministry of Finance established a transitional rule for the years 2005 to 2008 meant to reduce the negative effect when calculating capital adequacy. 2) Perpetual subordinated loan capital securities can represent up to 15 per cent of core capital. The excess will qualify as perpetual supplementary capital. 3) As at 31 December 2009, calculations of capital adequacy included a total of NOK 735 million in subordinated loan capital in associated companies, in addition to subordinated loan capital in the balance sheets of the banking group and the DnB NOR Group. 4) Primary capital and nominal amounts used in calculating risk-weighted volume deviate from figures in the DnB NOR Group's accounts, as associated companies which are assessed according to the equity method in the accounts, are assessed according to the gross method in capital adequacy calculations.
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Note 4 Capitalisation policy and capital adequacy (continued)
Due to transitional rules, the minimum capital adequacy requirements for 2008 and 2009 cannot be reduced below 90 and 80 per cent respectively relative to the Basel I requirements. Risk-weighted volume for the Group at the end of 2009 represented 89.1 per cent of the corresponding volume based on the Basel I rules.
Specification of risk-weighted volume and capital requirements DnB NOR Group Nominal Risk-weighted Capital Capital exposure EAD 1) volume requirements requirements Amounts in NOK million 31 Dec. 2009 31 Dec. 2009 31 Dec. 2009 31 Dec. 2009 31 Dec. 2008 IRB approach Corporate 92 955 88 243 45 343 3 627 6 826 Retail - residential property 485 804 485 582 62 830 5 026 3 844 Total credit risk, IRB approach 578 758 573 825 108 173 8 654 10 671 Standardised approach Central and regional government 168 021 169 254 3 791 303 602 Institutions 91 338 88 727 22 404 1 792 2 830 Corporate 864 010 637 537 615 901 49 272 58 385 Specialised Lending (SL) 8 767 8 257 8 257 661 789 Retail - mortgage loans 41 658 40 473 16 131 1 290 1 404 Retail - credit card exposures (QRRE) 59 369 13 441 10 368 829 734 Other retail 85 430 61 738 49 186 3 935 4 751 Equity positions 2 499 2 499 2 591 207 220 Securitisation 125 026 125 026 25 115 2 009 1 591 Total credit risk, standardised approach 1 446 117 1 146 951 753 744 60 300 71 306 Total credit risk 9 247 9 247 9 247 740 810 Other assets 871 164 69 693 82 786 Market risk, standardised approach 28 825 2 306 2 412 Of which: Position risk 28 825 2 306 2 146 Currency risk 0 0 266 Operational risk 58 776 4 702 4 278 Net insurance, after eliminations 96 313 7 705 6 651 Deductions (2 512) (201) (80) Total risk-weighted volume and capital requirements before transitional rule 1 052 566 84 205 96 047 Additional capital requirements according to transitional rules 0 0 Capital requirements 84 205 96 047
1) EAD, exposure at default.
DnB NOR ANNUAL REPORT 2009 131 ANNUAL ACCOUNTS DnB NOR GROUP
Note 4 Capitalisation policy and capital adequacy (continued) Basel II implementation Further progress A major reduction in risk-weighted assets is expected upon full implementation of the IRB system. The IRB system is defined as the models, work processes, decision-making processes, control mechanisms, IT systems and internal guidelines and routines used to classify and quantify credit risk. Below is a time schedule for the implementation of the different reporting methods used for the Group's portfolios.
Reporting methods for credit risk in capital adequacy calculations Portfolios 31 Dec. 2009 31 Dec. 2010 31 Dec. 2011
Retail: - mortgage loans, DnB NOR Bank and DnB NOR Boligkreditt IRB 1) IRB 1) IRB 1) - qualifying revolving retail exposure, DnB NOR Kort Standardised IRB 1) IRB 1) - mortgage loans, Nordlandsbanken Standardised IRB 1) IRB 1) - loans in Norway, DnB NOR Finans excluding the portfolio from SkandiaBanken Bilfinans Standardised IRB 1) IRB 1) - remaining portfolios, DnB NOR Finans Standardised Standardised IRB 1)
Corporates: - small and medium-sized corporates, DnB NOR Bank Advanced IRB Advanced IRB Advanced IRB - large corporate clients, DnB NOR Bank Standardised Advanced IRB Advanced IRB - corporate clients, Nordlandsbanken Standardised Advanced IRB Advanced IRB - leasing and loans in Norway, DnB NOR Finans excluding the portfolio from SkandiaBanken Bilfinans Standardised Advanced IRB Advanced IRB - remaining portfolios, DnB NOR Finans Standardised Standardised Advanced IRB - corporate clients, DnB NOR Næringskreditt Standardised Advanced IRB Advanced IRB
Institutions: - banks and financial institutions Standardised Standardised Advanced IRB
Exceptions: - approved exceptions: government and municipalities, equity positions, commercial paper Standardised Standardised Standardised - temporary exceptions: DnB NORD, DnB NOR Luxembourg, Monchebank and various other portfolios Standardised Standardised Standardised
1) For mortgage loans, no distinction is made between the foundation and the advanced IRB approach.
132 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 5 Risk management
Risk management in DnB NOR The Board of Directors of DnB NOR ASA has a clearly stated goal to maintain a low overall risk profile, which is reflected in the DnB NOR Bank Group's aim to maintain at least an AA level rating for ordinary long-term debt. The profitability of DnB NOR will depend on the Group's ability to identify, manage and accurately price risk arising in connection with financial services.
Organisation and authorisation structure x Board of Directors. The Board of Directors of DnB NOR ASA sets long-term targets for the Group’s risk profile. The risk profile is operationalised through the risk management framework, including the establishment of authorisations. x Authorisations. Authorisations must be in place for the extension of credit and for position and trading limits in all critical financial areas. All authorisations are personal. Authorisations and group limits are determined by the Board of Directors and can be delegated in the organisation, though any further delegation requires approval by an immediate superior. x Annual review of limits. Risk limits are reviewed at least annually in connection with budget and planning processes. x Independent risk management functions. Risk management functions and the development of risk management tools are undertaken by units that are independent of operations in the individual business areas.
Monitoring and use x Accountability. All executives are responsible for risk within their own area of responsibility and must consequently be fully updated on the risk situation at all times. x Risk reporting. Risk reporting in the Group ensures that all executives have the necessary information about current risk levels and future developments. To ensure high-quality, independent risk reports, responsibility for reporting is assigned to units that are independent of the operative units. x Capital assessment. A summary and analysis of the Group's capital and risk situation is presented in a special risk report to the Board of Directors. x Use of risk information. Risk is an integral part of the management and monitoring of business areas. Return on risk-adjusted capital is reflected in product pricing, profit calculations and in monitoring performance in the business areas.
Relevant risk measures x A common risk measure for the Group. The Group's risk is measured in the form of risk-adjusted capital, calculated for main risk categories and for all of the Group's business areas. x Supplementary risk measure. In addition, risk is followed up through supplementary risk measures adapted to operations in the various business areas, for example monitoring of positions relative to limits, key figures and portfolio risk targets.
A further description of risk management and internal control in the DnB NOR Group can be found in the chapter "Risk management and internal control".
More about risk in Vital Forsikring ASA Risk measurement in Vital Forsikring ASA, Vital, includes market, insurance, credit, operational and business risk. Market and insurance risk in life insurance comprises the risk that the return on financial assets will not be sufficient to meet the obligations specified in insurance policies and the risk related to changes in future insurance payments due to changes in life expectancy and disability rates.
According to current parameters for life insurance operations in Norway, Vital carries the risk of fulfilling the company's commitments in contracts with policyholders. The return on financial assets must be sufficient to meet the guaranteed annual return to the company's policyholders. If this is not the case, additional allocations will have to be used, representing buffer capital built up from profits in previous years. Alternatively, the shortfall could be charged to equity.
Risk management in Vital is part of the company's strategy, which has been approved by the Board of Directors. Through regular assessments by the Group's Asset and Liability Committee, ALCO, the risk situation in Vital is reviewed relative to the Group’s overall risk profile. Vital's chief executive and Board of Directors are to help ensure that Vital’s risk management and strategy are consistent with the Group’s risk profile. The Risk Analysis and Control unit is responsible for reporting, monitoring and follow-up of total risk in Vital and is organised independent of the Group's financial management and business areas.
Processes have been established in DnB NOR to assess capital requirements relative to the Group's risk profile and the quality of established risk management and control systems. Developments in capital levels are a key element in long-term financial planning. The DnB NOR Group is required by the authorities to carry out an assessment of its risk profile and capital requirements, called ICAAP, Internal Capital Adequacy Assessment Process. Vital is part of this process, and a separate assessment is made of the company's capital requirements. The assessment is considered by Vital's Board of Directors. The assessment is subject to an annual review by Finanstilsynet through SREP, Supervisory Review and Evaluation Process. Finanstilsynet thus gives feedback on the capitalisation of the Group, including Vital.
DnB NOR ANNUAL REPORT 2009 133 ANNUAL ACCOUNTS DnB NOR GROUP
Note 5 Risk management (continued)
The Group's risk, including Vital, is measured in the form of risk-adjusted capital requirements. The capital requirements reflect market, insurance, operational and business risk. Primary capital in Vital is maintained at an adequate level relative to risk-adjusted capital, while the capitalisation of the company must also ensure the necessary buffers relative to the regulatory minimum capital adequacy and solvency margin requirements. The capitalisation of Vital takes into account that the company is part of the DnB NOR Group and that the Group's equity reserves can also be used to the benefit of Vital.
Risk-adjusted capital for Vital totalled NOK 11.2 billion at year-end 2009, compared with NOK 7.9 billion a year earlier. Approximately 65 per cent of the NOK 11.2 billion represented market risk, 15 per cent insurance risk, 15 per cent operational risk, and the remaining 5 per cent business risk. Diversification effects between the various risk categories have been taken into account. A significant increase in the company's equity exposure contributed to the rise in risk-adjusted capital through the year. In addition, the increase in the securities adjustment reserve during 2009 strengthened the buffer capital and thus reduced risk-adjusted capital. Notes 13 to 15 specify market risk for the DnB NOR Group, including risk linked to financial instruments in Vital Forsikring. Additional information concerning risk associated with operations in Vital is presented in notes 16, 17 and 18.
Risk categories For risk management purposes, DnB NOR distinguishes between the following risk categories: x Credit risk is the risk of losses due to failure on the part of the Group's counterparties or customers to meet their payment obligations towards the DnB NOR Group. Credit risk refers to all claims against counterparties or customers, including credit risk in trading operations, country risk and settlement risk. Note 6 contains an assessment of the Group's credit risk at year-end 2008 and 2009. x Market risk is the risk of losses or reduced future income due to fluctuations in market prices or exchange rates. The risk arises as a consequence of the bank's unhedged transactions and exposure in the foreign exchange, interest rate, commodity and equity markets. Notes 13 to 15 contain an assessment of the Group's market risk at year-end 2008 and 2009. x Liquidity risk is the risk that the Group will be unable to meet its obligations as they fall due, and risk that the Group will be unable to meet its liquidity obligations without a substantial rise in appurtenant costs. In a broader perspective, liquidity risk also includes the risk that the Group will be unable to finance increases in assets as its funding requirements rise. Note 17 contains an assessment of the Group's liquidity risk at year-end 2008 and 2009. x Risk in Vital Forsikring ASA, Vital, includes market, insurance, credit, operational and business risk. Market and insurance risk in life insurance comprises the risk that the return on financial assets will not be sufficient to meet the obligations specified in insurance policies and the risk related to changes in future insurance payments due to changes in life expectancy and disability rates. Note 18 contains an assessment of the Group's insurance risk at year-end 2008 and 2009. x Risk in DnB NOR Skadeforsikring includes insurance, market, credit, operational and business risk. Insurance risk is the risk of losses if insurance premiums fail to cover future claims payments. The company is exposed to market and credit risk in investment operations, and reassurance agreements encompass credit risk. x Operational risk is the risk of losses due to deficiencies or errors in processes and systems, errors made by employees or external events. x Business risk is the risk of losses due to changes in external factors such as the market situation or government regulations. This risk category also includes reputational risk.
DnB NOR uses a total risk model to quantify risk by calculating risk-adjusted capital. Risk-adjusted capital is calculated for individual risk categories, with the exception of liquidity risk, and for the Group's overall risk. Risk-adjusted capital should cover unexpected losses which may occur in the operations in exceptional circumstances. Quantifications are based on statistical probability calculations for the various risk categories where the parameters are determined after a review of historical data.
Risk measurement is a field in constant development, and measurement methods and tools are subject to continual improvement. In consequence of the Group's plans for IRB reporting of new portfolios, new large corporate models were taken into use for internal reporting during 2009. No other significant changes were made in routines and procedures for risk monitoring in 2009.
Concentrations of risk Concentrations of financial risk arise when financial instruments with identical characteristics are influenced in the same way by changes in economic or other factors. The identification of risk concentrations is subject to discretionary assessment. The general purpose of risk management in the Group is to reduce and control risk concentrations. The Group aims to avoid large credit risk concentrations, including large exposures to a customer or customer group as well as clusters of commitments in high-risk categories, industries and geographical areas, cf. notes 3, 7 and 8. Total credit risk as at 31 December 2009 is presented in note 6. With respect to market risk, concentration risk is restricted by limits ensuring that exposure is divided among a number of instruments, securing sound diversification to meet changes in share prices, exchange rates, commodity prices and interest rate levels. Concentrations of interest rate risk are presented in note 14. Currency risk is specified in note 15. The Group's largest investments in shares, mutual funds and equity certificates are specified in note 30. The Group generally has no material risk concentrations apart from in its core operations, including strategic priority areas, which are referred to above.
134 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 6 Credit risk
Credit risk represents the chief risk category for the Group and refers to all claims against customers, mainly loans, but also commitments in the form of other extended credits, guarantees, interest-bearing securities, approved, undrawn credits, as well as counterparty risk arising through derivatives and foreign exchange contracts. Settlement risk, which arises in connection with payment transfers as not all transactions take place in real time, also involves counterparty risk.
Maximum exposure to credit risk 1) DnB NOR Group Amounts in NOK million 31 Dec. 2009 31 Dec. 2008
Balance sheet items Deposits with central banks 28 246 49 007 Lending to and deposits with credit institutions 12 779 17 657 Lending to customers 962 873 1 014 121 Total lending and deposits carried at amortised cost 1 003 898 1 080 785 Lending to and deposits with credit institutions 49 538 42 061 Lending to customers 152 014 177 513 Total lending and deposits carried at fair value 201 552 219 574 Commercial paper and bonds 225 415 125 571 Financial derivatives 70 072 136 552 Commercial paper and bonds, held to maturity 179 832 155 156 Total credit risk exposure, balance sheet items 1 680 769 1 717 638
Off-balance sheet items Financial guarantees 66 510 85 399 Unutilised credit lines and offers of credit 376 282 361 259 Other guarantee commitments 17 697 25 436 Total credit risk exposure, off-balance sheet items 460 489 472 095
Total credit risk exposure 2 141 258 2 189 733
Loans and deposits designated as at fair value DnB NOR Group Amounts in NOK million 31 Dec. 2009 31 Dec. 2008 Loans and deposits designated as at fair value 151 286 177 025 Total exposure to credit risk 151 286 177 025 Credit risk 2) 717 526 Change in credit risk 191 110
1) Credit risk exposure according to IFRS is the amount that best represents the Group's maximum exposure to credit risk. For a financial asset, this is the gross carrying amount, net of any amounts offset in accordance with IAS 32 and recognised impairment losses. 2) Credit risk reflected in fair value measurements is based on normalised losses and changes in normalised losses in the relevant portfolio.
DnB NOR's risk classification 1) Probability of default (per cent) External rating
Risk class As from Up to Moody's Standard & Poor's 1 0.01 0.10 Aaa - A3 AAA - A- 2 0.10 0.25 Baa1 - Baa2 BBB+ - BBB 3 0.25 0.50 Baa3 BBB- 4 0.50 0.75 Ba1 BB+ 5 0.75 1.25 Ba2 BB 6 1.25 2.00 7 2.00 3.00 Ba3 BB- 8 3.00 5.00 B1 B+ 9 5.00 8.00 B2 B 10 8.00 impaired B3, Caa/C B-, CCC/C
1) DnB NOR’s risk classification system, where 1 represents the lowest risk and 10 the highest risk.
DnB NOR ANNUAL REPORT 2009 135 ANNUAL ACCOUNTS DnB NOR GROUP
Note 6 Credit risk (continued)
Commitments according to risk classification DnB NOR Group Undrawn Guarantee limits Total Amounts in NOK billion Gross loans commitments (committed) commitments Risk category based on probability of default 1 - 4 801 73 246 1 120 5 - 6 282 5 64 351 7 - 10 93 3 16 112 Non-performing and impaired commitments 16 0 0 16 Total commitments as at 31 December 2008 1) 1 192 81 326 1 599 Risk category based on probability of default 1 - 4 614 42 207 863 5 - 6 331 15 67 413 7 - 10 151 5 24 180 Non-performing and impaired commitments 27 0 0 27 Total commitments as at 31 December 2009 1) 1 123 62 298 1 483
1) Based on nominal amount.
1) Loan-loss level 2009 2008 Normalised losses including loss of interest income in per cent of net lending 0.42 0.33
1) The calculation of the loan-loss level is based on an evaluation of the probability of future losses (default frequency), exposure at default and the size of the estimated loss (loss ratio). Calculations are based on a certain level of discretion and estimation.
Collateral security Depending on the market and type of transaction, the Group uses collateral security to reduce risk. Collateral security can be in the form of physical assets, guarantees, cash deposits or netting agreements. The principal rule is that physical assets in the form of buildings, residential properties or warehouses should be insured. Evaluations of the value of collateral are based on a going concern assumption, with the exception of situations where write-downs have been made. In addition, factors which may affect the value of collateral, such as concession terms or easements, are taken into account. With respect to evaluations of both collateral in the form of securities and counterparty risk, the estimated effects of enforced sales and sales costs are also considered.
Write-down ratio DnB NOR Group Amounts in NOK million 31 Dec. 2009 31 Dec. 2008 Non-performing commitments (gross) 19 523 11 421 Impaired commitments (gross) 7 353 4 871 Gross non-performing and impaired commitments 26 876 16 292 Individual write-downs 7 749 4 370 Group write-downs 2 969 1 625 Write-down ratio (per cent) 39.9 36.8
Collateral for loans 18 928 9 789 Coverage ratio (per cent) 110.3 96.9
Past due loans not subject to write-downs The table below shows overdue amounts on loans and overdrafts on credits/deposits broken down on number of days after the due date that are not due to delays in payment transfers. Past due loans and overdrafts on credits/deposits are subject to continual monitoring. Commit- ments where a probable deterioration of customer solvency is identified are reviewed for impairment. Such reviews are also carried out for the commitments included in the table in cases where no deterioration of customer solvency has been identified. Past due loans subject to impairment are not included in the table.
DnB NOR Group Amounts in NOK million 31 Dec. 2009 31 Dec. 2008 No. of days past due/overdrawn 1 - 29 1 210 2 295 30 - 59 451 854 60 - 89 140 333 > 90 441 326 Past due loans not subject to write-downs 2 242 3 808
136 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 6 Credit risk (continued) Repossessed properties and other repossessed assets - recorded value Repossessed assets are assets acquired by units within the Group as part of the management of non-performing and impaired commitments. At the time of acquisition, such assets are valued at their estimated realisable value. Any deviation from the carrying value of non-performing and impaired commitments at the time of acquisition is classified as write-downs on loans. Repossessed assets are recorded in the balance sheet according to the type of asset. When acquiring shares or mutual fund holdings, the assets are evaluated according to the principles described in Accounting principles. Upon final sale, the difference relative to carrying value should be recognised in the income statement according to the type of asset. If assets are not intended for long-term possession or use, the assets are classified as current assets. If assets are acquired for own use or for long-term administration and development, the assets are classified as fixed assets.
DnB NOR Group Amounts in NOK million 2009 2008 Repossessed properties and other repossessed assets as at 1 January 197 169 Property additions 166 60 Property disposals 139 32 Repossessed properties and other repossessed assets as at 31 December 224 197
Effects of changes in credit margins The financial turmoil has caused a general rise in credit margins, which affects a number of items in the DnB NOR Group's balance sheet. Through 2009, there was a gradual normalisation of the markets, though credit margins remain higher than before the onset of the financial turmoil.
The DnB NOR Group has a 40 per cent ownership interest in Eksportfinans, and the company is recognised in the group accounts according to the equity method. Large parts of Eksportfinans' liabilities are carried at fair value through profit or loss. In the fourth quarter of 2008, the investors' required rate of return increased considerably, and the company was also downgraded. This resulted in significant unrealised gains on the company's existing liabilities. Unrealised gains after tax attributable to the DnB NOR Group were NOK 1 535 million at year-end 2008, but had been reduced to NOK 503 million at end-December 2009. Unrealised gains on the company's liabilities will be reversed over the remaining term to maturity.
Long-term borrowings in Norwegian kroner are carried at fair value through profit or loss. Due to narrowing credit margins, unrealised losses in the portfolio totalled NOK 138 million at year-end 2009, which will be reversed over the remaining term to maturity. At year-end 2008 unrealised gains in the portfolio totalled NOK 516 million.
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Note 7 Commitments for principal sectors 1)
Commitments as at 31 December 2009 DnB NOR Group Loans and Unutilized Total Amounts in NOK million receivables Guarantees credit lines commitments Retail customers 531 761 281 84 550 616 592 International shipping 122 500 7 510 28 063 158 072 Real estate 156 771 1 539 10 898 169 208 Manufacturing 46 097 10 345 34 127 90 569 Services 95 108 5 583 27 491 128 182 Trade 36 335 3 326 21 486 61 148 Oil and gas 17 063 6 261 18 490 41 814 Transportation and communication 26 105 4 899 28 380 59 384 Building and construction 29 843 7 342 14 358 51 544 Power and water supply 14 111 8 792 15 077 37 980 Seafood 14 438 395 3 234 18 068 Hotels and restaurants 5 706 119 1 179 7 004 Agriculture and forestry 7 664 58 889 8 611 Central and local government 5 142 2 958 4 510 12 610 Other sectors 7 044 2 135 5 642 14 821 Total customers, nominal amount after individual write-downs 1 115 690 61 543 298 374 1 475 608 – Group write-downs, customers 2 969 - - 2 969 + Other adjustments 2 165 (207) - 1 958 Lending to customers 1 114 886 61 336 298 374 1 474 597 Credit institutions, nominal amount after individual write-downs 62 228 4 891 10 933 78 052 + Other adjustments 89 0 - 89 Lending to and deposits with credit institutions 62 317 4 891 10 933 78 141
Commitments as at 31 December 2008 DnB NOR Group Loans and Unutilized Total Amounts in NOK million receivables Guarantees credit lines commitments Retail customers 498 853 339 71 375 570 567 International shipping 137 848 6 964 57 564 202 376 Real estate 180 272 4 238 20 487 204 998 Manufacturing 90 020 15 305 40 914 146 239 Services 87 993 12 752 26 757 127 502 Trade 47 683 4 513 22 314 74 510 Oil and gas 33 315 4 880 23 970 62 165 Transportation and communication 29 847 6 719 20 676 57 242 Building and construction 15 758 6 596 8 373 30 727 Power and water supply 14 615 10 428 15 358 40 402 Seafood 15 335 118 2 278 17 732 Hotels and restaurants 5 232 256 1 663 7 151 Agriculture and forestry 8 155 33 992 9 180 Central and local government 5 839 3 345 3 675 12 859 Other sectors 16 964 3 984 9 827 30 775 Total customers, nominal amount after individual write-downs 1 187 730 80 470 326 224 1 594 424 – Group write-downs, customers 1 625 - - 1 625 + Other adjustments 5 530 (76) - 5 454 Lending to customers 1 191 635 80 394 326 224 1 598 254 Credit institutions, nominal amount after individual write-downs 59 408 4 825 11 594 75 827 + Other adjustments 310 0 - 310 Lending to and deposits with credit institutions 59 717 4 825 11 594 76 137
1) The breakdown into principal sectors is based on standardised sector and industry categories set up by Statistics Norway. With effect from the second quarter of 2009, a new standard for industry codes has been introduced which corresponds to the new EU standard, NACE Rev. 2. Customers are classified according to their main line of business.
138 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 8 Commitments according to geographical location 1)
Commitments as at 31 December 2009 DnB NOR Group Loans and Unutilized Total Amounts in NOK million receivables Guarantees credit lines commitments Oslo 195 613 16 326 65 517 277 455 Eastern and southern Norway 376 933 18 681 86 646 482 260 Western Norway 137 234 8 708 35 458 181 400 Northern and central Norway 144 002 7 108 26 947 178 058 Total Norway 853 782 50 823 214 568 1 119 173 Sweden 65 607 1 907 14 690 82 204 United Kingdom 33 990 4 765 3 062 41 817 Other Western European countries 66 379 3 976 21 916 92 271 Russia 1 690 21 79 1 790 Estonia 2 327 8 172 2 507 Latvia 20 531 829 638 21 999 Lithuania 26 948 452 1 666 29 066 Poland 12 840 736 2 231 15 807 Other Eastern European countries 143 15 1 159 Total Europe outside Norway 230 454 12 710 44 456 287 620 USA and Canada 27 223 166 28 381 55 770 Bermuda and Panama 2) 16 222 527 5 258 22 007 Other South and Central American countries 3 492 620 5 473 9 585 Total America 46 937 1 313 39 111 87 361 Singapore 2) 13 707 770 2 426 16 903 Hong Kong 3 365 22 844 4 231 Other Asian countries 9 025 491 1 201 10 718 Total Asia 26 098 1 283 4 471 31 852 Liberia 2) 8 170 101 2 176 10 448 Other African countries 1 874 248 10 2 131 Australia, New Zealand and Marshall Islands 2) 18 277 32 4 515 22 824 Commitments 3) 1 185 592 66 510 309 307 1 561 409 – Individual write-downs 7 674 76 - 7 749 – Collective write-downs 2 969 - - 2 969 + Other adjustments 2 254 (207) - 2 047 Net commitments 1 177 203 66 227 309 307 1 552 737
1) Based on the customer's address. 2) Represents shipping commitments. 3) All amounts represent gross lending and guarantees respectively before individual write-downs.
DnB NOR ANNUAL REPORT 2009 139 ANNUAL ACCOUNTS DnB NOR GROUP
Note 8 Commitments according to geographical location 1) (continued)
Commitments as at 31 December 2008 DnB NOR Group Loans and Unutilized Total Amounts in NOK million receivables Guarantees credit lines commitments Oslo 209 963 17 823 57 694 285 480 Eastern and southern Norway 368 721 23 937 80 294 472 953 Western Norway 134 703 10 620 39 314 184 637 Northern and central Norway 141 225 7 250 25 906 174 382 Total Norway 854 613 59 631 203 209 1 117 452 Sweden 62 937 4 066 21 947 88 950 United Kingdom 38 925 3 344 7 422 49 690 Other Western European countries 83 035 12 503 31 684 127 222 Russia 2 435 131 130 2 695 Estonia 4 125 19 362 4 507 Latvia 27 096 842 1 200 29 138 Lithuania 34 877 675 3 677 39 229 Poland 12 535 722 4 585 17 842 Other Eastern European countries 257 34 44 336 Total Europe outside Norway 266 222 22 335 71 052 359 609 USA and Canada 41 559 530 29 575 71 663 Bermuda and Panama 2) 21 117 799 9 279 31 195 Other South and Central American countries 4 291 183 1 989 6 463 Total America 66 967 1 511 40 843 109 321 Singapore 2) 16 160 1 194 6 610 23 965 Hong Kong 1 784 17 1 695 3 496 Other Asian countries 12 684 367 4 207 17 259 Total Asia 30 628 1 579 12 513 44 720 Liberia 2) 11 080 1 4 734 15 816 Other African countries 1 683 292 253 2 228 Australia, New Zealand and Marshall Islands 2) 20 211 50 5 215 25 476 Commitments 3) 1 251 404 85 399 337 818 1 674 621 – Individual write-downs 4 266 104 - 4 370 – Collective write-downs 1 625 - - 1 625 + Other adjustments 5 840 (76) - 5 764 Net commitments 1 251 352 85 218 337 818 1 674 390
1) Based on the customer's address. 2) Represents shipping commitments. 3) All amounts represent gross lending and guarantees respectively before individual write-downs.
140 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 9 Impaired commitments for principal sectors 1)
DnB NOR Group Gross impaired Total individual Net impaired commitments write-downs commitments Amounts in NOK million 31 Dec. 2009 31 Dec. 2008 31 Dec. 2009 31 Dec. 2008 31 Dec. 2009 31 Dec. 2008 Retail customers 4 659 3 970 1 589 1 077 3 070 2 893 International shipping 1 608 52 513 15 1 095 37 Real estate 3 300 3 005 1 205 1 067 2 095 1 938 Manufacturing 4 339 2 563 1 151 598 3 188 1 965 Services and management 1 606 1 313 913 636 693 677 Trade 1 309 471 764 315 545 156 Oil and gas 0 328 0 156 0 172 Transportation and communication 912 265 515 134 397 131 Building and construction 1 314 316 778 142 536 174 Power and water supply 10 27 5 1 5 26 Seafood 57 446 47 79 10 367 Hotels and restaurants 340 112 135 47 205 65 Agriculture and forestry 245 194 108 53 137 141 Central and local government 0 0 0 0 0 0 Other sectors 145 103 24 40 122 63 Total customers 19 846 13 167 7 748 4 360 12 098 8 807 Credit institutions 1 10 1 10 0 0 Total impaired loans and guarantees 19 847 13 177 7 749 4 370 12 098 8 807 Non-performing loans and guarantees not subject to write-downs 7 029 3 115 - - 7 029 3 115 Total non-performing and impaired commitments 26 876 16 292 7 749 4 370 19 127 11 922
1) The breakdown into principal sectors is based on standardised sector and industry categories set up by Statistics Norway. With effect from the second quarter of 2009, a new standard for industry codes has been introduced which corresponds to the new EU standard, NACE Rev. 2. Customers are classified according to their main line of business.
Note 10 Write-downs on loans and guarantees
DnB NOR Group 2009 2008 Amounts in NOK million Lending 1) Guarantees Total Lending 1) Guarantees Total Write-offs 547 7 554 334 1 335 New individual write-downs 6 496 25 6 521 2 888 37 2 925 Total new individual write-downs 7 043 32 7 075 3 222 38 3 260 Reassessed individual write-downs 675 18 693 213 33 246 Total individual write-downs 6 368 14 6 382 3 009 5 3 014 Recoveries on commitments previously written off 317 0 317 335 0 335 Changes in collective write-downs on loans 1 645 - 1 645 830 - 830 Write-downs on loans and guarantees 7 696 14 7 710 3 504 5 3 509
Write-offs covered by individual write-downs made in previous years 1 610 17 1 627 678 0 678
1) Including write-downs on loans at fair value.
The weak trend in the international economy resulted in impaired credit quality and thus rising write-downs on loans in 2009. The most pronounced increase in write-downs took place in the Baltic States, where the Group is exposed through DnB NORD. There was also a rise in write-downs within shipping and port terminals. The portfolio of Norwegian-related loans appears to be robust and was subject to moderate write-downs. Write-downs remained very low in the Norwegian retail market due to low interest rate levels, rising housing prices and continuing low unemployment levels. This can be partly explained by the extensive stimulus measures implemented by the Norwegian authorities.
DnB NOR ANNUAL REPORT 2009 141 ANNUAL ACCOUNTS DnB NOR GROUP
Note 10 Write-downs on loans and guarantees (continued)
Credit quality declined in the shipping portfolio. In spite of an increase in freight rates in some segments, the shipping industry is expected to have a potential high loss exposure for some time due to the slow recovery of the global economy. The downward revision in market values due to lower rental prices resulted in higher credit risk for commercial property, though prices seem to have stabilised. DnB NOR's commercial property loans are primarily granted based on cash flow analyses. In the Nordic portfolio, credit risk increased primarily within acquisition finance in 2009. There are mixed experiences with private equity funds, though the funds generally seem to follow up their investments in a responsible manner. This portfolio is fairly limited, and the Group is exposed to the acquired companies, not the owners.
Over the past year, the Group has stepped up its efforts considerably to ensure the value of problem commitments. The uncertainty relating to DnB NORD will continue, and economic developments in the Baltic States will be vital to the level of write-downs. There is also uncertainty about macroeconomic developments in some industries in the Group's Norwegian and Norwegian-related credit operations.
Note 11 Write-downs on loans and guarantees for principal sectors 1)
DnB NOR Group 2009 2008 Recoveries on Recoveries on New Reassessed commitments New Reassessed commitments individual individual previously Net individual individual previously Net Amounts in NOK million write-downs write-downs written off write-downs write-downs write-downs written off write-downs Retail customers 1 444 129 253 1 062 931 23 274 635 International shipping 544 1 23 520 4 1 0 7 Real estate 1 076 105 1 970 973 39 8 926 Manufacturing 945 180 0 765 349 64 2 283 Services and management 617 39 5 574 408 29 11 368 Trade 959 79 2 878 173 59 2 113 Oil and gas 0 0 0 (0) 126 0 0 126 Transportation and communication 396 42 17 337 74 1 16 56 Building and construction 678 41 1 637 68 16 1 52 Power and water supply 1 0 0 1 1 0 0 1 Seafood 11 21 0 (10) 37 4 8 25 Hotels and restaurants 104 13 0 92 34 7 0 26 Agriculture and forestry 81 16 1 62 35 4 1 31 Central and local government 0 3 0 (3) (2) 0 0 (3) Other sectors 218 16 14 187 43 0 13 26 Total customers 7 075 686 317 6 072 3 253 247 335 2 672 Credit institutions 0 7 0 (7) 7 0 0 7 Changes in collective write-downs on loans - - - 1 645 - - - 830 Write-downs on loans and guarantees 7 075 693 317 7 710 3 260 247 335 3 509
Of which individual write-downs on guarantees 32 18 0 14 38 33 0 5
1) The breakdown into principal sectors is based on standardised sector and industry categories set up by Statistics Norway. With effect from the second quarter of 2009, a new standard for industry codes has been introduced which corresponds to the new EU standard, NACE Rev. 2. Customers are classified according to their main line of business.
142 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 12 Developments in write-downs on loans and guarantees
DnB NOR Group 2009 2008 Lending to Lending to credit Lending to credit Lending to Amounts in NOK million institutions customers Guarantees Total institutions customers Guarantees Total Write-downs as at 1 January 11 6 358 104 6 473 3 3 053 95 3 151 New write-downs 1 4 816 19 4 835 7 2 640 19 2 666 Increase in write-downs 0 1 679 6 1 685 0 241 18 259 Reassessed write-downs 11 664 18 693 0 213 33 246 Write-offs covered by previous write-downs 0 1 610 17 1 627 0 678 0 678 Changes in individual write-downs of accrued interest and amortisation 0 129 - 129 1 89 - 90 Changes in collective write-downs 0 1 645 - 1 645 0 830 - 830 Changes in group structure 0 (371) (13) (384) 0 12 0 12 Changes due to exchange rate movement 0 (733) (5) (738) 0 384 5 389 Write-downs as at 31 December 1 11 249 76 11 325 11 6 358 104 6 473
Of which: Individual write-downs 1 7 673 76 7 749 10 4 256 104 4 370 Individual write-downs of accrued interest and amortisation 0 607 - 607 1 477 - 478 Collective write-downs 0 2 969 - 2 969 0 1 625 - 1 625
DnB NOR ANNUAL REPORT 2009 143 ANNUAL ACCOUNTS DnB NOR GROUP
Note 13 Sensitivity analysis - market risk
Conditions for calculating market risk Market risk arises as a consequence of open positions in foreign exchange, interest rate, commodity and equity instruments. Risk is linked to variations in financial results due to fluctuations in market prices and exchange rates.
DnB NOR uses a total risk model to quantify risk and calculates risk-adjusted capital for individual risk categories and for the Group's overall risk. Risk-adjusted capital should cover unexpected losses, which may occur in operations in exceptional circumstances. Quantifications are based on statistical probability calculations for the various risk categories, using historical data. Methods for calculating risk-adjusted capital for market risk are described in further detail below.
The risk-adjusted capital for market risk should, at a confidence level of 99.97 per cent, cover all potential losses related to market risk on positions on the balance sheet date over a period of one year. Calculations of risk-adjusted capital are based on statistical methods. Loss simulations imply that there is a greater probability of major losses than if normal distribution is applied. Risk-adjusted capital calculations also reflect the fact that volatility may vary over time. In addition, calculations of risk-adjusted capital require a certain level of discretion and estimation. Key assumptions are described below.
The model has a one-year time horizon. Exposure could be actual exposure or the expected maximum utilisation of limits and is a conservative estimate based on an extreme scenario where, in a hypothetical situation, the Group is assumed at all times to be incorrectly positioned relative to market developments during the period. Each limit is modelled on the basis of a specific liquidation period. In addition, the model takes account of correlations between the defined portfolios. Longer liquidation periods result in higher risk-adjusted capital. A lower level of correlation results in reduced risk-adjusted capital.
Liquidation periods are estimated based on the time required to realise positions in highly volatile markets and vary from 250 trading days for the bank's investment portfolio for equity instruments to two days for positions in the most commonly traded currencies. To estimate annual losses, each underlying instrument is simulated over a period of one year. Subsequent to this, losses for each potential liquidation period are estimated. For most instruments, the Group's positions may entail a potential for both gains and losses.
In the model calculations, losses from each limit are combined, and an overall loss is calculated for each day during the year simulations are made. Calculations are repeated 500 000 times, resulting in a probability distribution of what the greatest loss during the year might be, based on the assumption that the Group is incorrectly positioned.
In 2009, financial instruments in the Group excluding Vital were divided into 24 portfolios, compared with 22 portfolios in 2008. Risk-adjusted capital for the portfolios is calculated on the basis of expected developments in the value of an instrument or index. An example of such a portfolio is the bank's equity investment portfolio, which is correlated against developments on Oslo Børs.
Financial assets in Vital are divided into eight portfolios. Risk-adjusted capital for the portfolios are calculated on the basis of developments in an index or a combination of several indices. Calculations of risk-adjusted capital for market risk in Vital are an isolated assessment of financial instruments in Vital. However, the calculation does not take account of Vital's obligations resulting from the guaranteed rate of return, insurance risk, equity buffers or dynamic portfolio management. See note 5 for a more detailed description of risk associated with the guaranteed rate of return.
Market risk specified below includes a deduction for diversification effects resulting from imperfect correlation between the portfolios in Vital and the rest of the Group. The diversification effect between market risk in Vital and the rest of the Group are estimated at 5 per cent in 2009. The diversification effect arises because it is highly unlikely that all loss events will occur at the same time. The calculation of the diversification effect for the aggregated market risk for the Group is based on the fact that loss distributions for market risk in Vital and in the rest of the Group are derived from underlying indices subject to different degrees of correlation, so-called driver-based aggregation.
Total market risk in the Group is estimated at NOK 16.2 billion and is carried by the policyholders in Vital and by DnB NOR's shareholders.
Market risk excluding Vital declined by NOK 0.5 billion from 2008 to 2009, to NOK 3.7 billion, reflecting a reduction in exposure from 2008 to 2009 following the sale of parts of the investment portfolio in DnB NOR Bank ASA to Vital Forsikring ASA. The exposure to equity instruments includes the guarantee issued by DnB NOR and the other owners for mark-to-market losses in Eksportfinans' liquidity portfolio. An increase in the unused guarantee limit raises the exposure to equity instruments and thus also market risk. Overall, there was a decline in market risk.
Market risk in Vital rose by NOK 6.4 billion from 2008 to 2009, reflecting a significant increase in Vital's shareholdings. Market risk in the Group increased by NOK 6.6 billion.
DnB NOR Group Amounts in NOK billion 2009 2008 Market risk excluding Vital 3.7 4.2 Market risk in Vital 13.4 7.0 Diversification effect 0.8 1.6 Total market risk 16.2 9.5 Diversification effect in per cent 5 14
144 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 14 Interest rate sensitivity
Interest rate sensitivity for different intervals The vaule of items on and off the balance sheet is affected by interest rate movements. The table shows potential losses for DnB NOR Group excluding Vital and DnB NORD resulting from parallel one percentage point changes in all interest rates. The calculations are based on a hypothetical situation where interest rate movements in all currencies are unfavourable for DnB NOR relative to the Group's positions. Also, all interest rate movements within the same interval will be unfavourable for the Group. The figures will thus reflect maximum losses for DnB NOR.
The calculations are based on the Group's positions as at 31 December and market rates on the same date. The table does not include administrative interest rate risk and interest rate risk tied to non-interest-earning assets.
DnB NOR Group excl. Vital and DnB NORD From From From Up to 1 month 3 months 1 year Over Amounts in NOK million 1 month to 3 months to 1 year to 5 years 5 years Total 31 December 2009 NOK 81 259 20 60 214 4 USD 11 55 5 25 1 97 EUR 1 1 4 7 10 19 GBP 3 4 6 2 2 5 Other currencies 17 50 70 16 12 36 31 December 2008 NOK 48 31 286 111 325 89 USD 31 31 130 3 2 135 EUR 9 2 26 9 63 53 GBP 2 7 4 1 0 12 Other currencies 4 30 17 26 16 30
Interest rate sensitivity for different intervals - financial current assets in Vital The table shows interest rate sensitivity associated with financial current assets in Vital. The table does not include administrative interest rate risk and interest rate risk related to non-interest-earning assets. Interest rate sensitivity has an impact on profit for distribution to the owner and funds transferred to policyholders. Commercial paper and bonds held to maturity are recorded at amortised cost.
Vital From From From Up to 1 month 3 months 1 year Over Amounts in NOK million 1 month to 3 months to 1 year to 5 years 5 years Total 31 December 2009 NOK 13 57 55 531 740 1 287 USD 3 86 140 57 198 198 EUR 5 96 4 80 229 205 GBP 1 35 0 4 70 38 Other currencies 2 5 15 5 22 5 31 December 2008 NOK 6 67 69 564 1 437 2 009 USD 2 31 7 70 165 257 EUR 2 55 2 89 263 406 GBP 0 0 0 6 63 70 Other currencies 0 0 1 21 22 44
DnB NOR ANNUAL REPORT 2009 145 ANNUAL ACCOUNTS DnB NOR GROUP
Note 14 Interest rate sensitivity (continued)
Duration Vital 31 Dec. 2009 31 Dec. 2008 Norwegian bonds - average residual maturity (years) 1) 3.92 4.33 International bonds - average residual maturity (years) 1) 5.79 6.08 Money market - average residual maturity (years) 1) 0.51 0.43 International credit - average residual maturity (years) 1) 5.30 5.22 Average effective interest rate - Norwegian bonds (per cent) 2) 4.26 4.12 Average effective interest rate - international bonds (per cent) 2) 3.24 4.12 Average effedtive interest rate - money market (per cent) 2) 2.62 3.56 Average effective interest rate - international credit (per cent) 2) 4.41 8.34
1) The calculation includes all interest-earning securities including derivatives. 2) The effective interest rate on individual bonds is calculated on the basis of the instrument's market value. Weighting to arrive at the average effective interest rate for the total holding is based on weights representing the bonds' percentage shares of total market value.
Interest rate sensitivity – liabilities to insurance policyholders Vital carries the risk of meeting liabilities in relation to policyholders. The return on financial assets must be sufficient to meet the guaranteed rate of return specified in insurance policies. Otherwise, inadequate returns will have to be covered by applying the securities adjustment reserve, additional allocations, equity or subordinated loan capital.
The guaranteed rate of return must be complied with on a yearly basis.
Measured in relation to customer funds the company's total guaranteed rate of return averages 3.4 per cent. The average duration for future insurance payments was 16 years as at 31 December 2009.
Note 18 gives a description of a liability adequacy test prepared in connection with IFRS 4 Insurance Contracts concerning liabilities to policy- holders as at 31 December 2009.
Note 15 Currency positions
The table shows net currency positions in the DnB NOR Group excluding Vital as at 31 December, including financial derivatives as defined by Norges Bank. Net positions in individual currencies may represent up to 15 per cent of eligible primary capital. Aggregate currency positions must be within 30 per cent of the eligible primary capital. Foreign exchange risk related to investments in subsidiaries is included in the currency position by the amount recorded in the accounts. DnB NOR Group excl. Vital Foreign of which: Amounts in NOK million currencies USD EUR GBP SEK DKK JPY Other Net currency positions as at 31 December 2009 (233) 78 (498) 13 30 568 19 (444) Net currency positions as at 31 December 2008 (1 965) (137) (1 306) 40 15 (116) 57 (519)
Foreign currency exposure arises when Vital invests parts of its securities portfolio and property portfolio in the international securities market. Under Vital’s current foreign currency hedging strategy, the total foreign currency exposure is reduced to a minimum. Vital Foreign of which: Amounts in NOK million currencies USD EUR GBP SEK DKK JPY Other Net currency positions as at 31 December 2009 2 231 248 179 58 567 0 0 1 179 Net currency positions as at 31 December 2008 524 (245) (133) 81 456 (3) (2) 370
146 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 16 Financial derivatives
General information on application of financial derivatives Financial derivatives are contracts stipulating financial values in the form of interest rate terms, exchange rates and the value of equity instruments for fixed periods of time. Corresponding contracts stipulating prices on commodities and indexes are also defined as financial derivatives. Derivatives include swaps, forward contracts and options as well as combinations thereof, including forward rate agreements (FRAs), financial futures and agreements on the transfer of securities. Financial derivatives in DnB NOR are traded to manage liquidity and market risk arising from the Group's ordinary operations. In addition, the Group employs financial derivatives in its own account trading.
"Over the counter" (OTC) derivatives are contracts entered into outside the stock exchange. The contracts are tailor-made according to investor requirements with respect to the underlying object, number, price, expiration terms and maturity. The advantage of OTC derivatives is that customers are not limited to standardised contracts and can buy the precise position they wish. The disadvantage compared with the standardised market is that it can be difficult to find other contracting parties and to sell the contracts in the secondary market.
The following derivatives are employed for both trading and hedging purposes in the DnB NOR Group: x Forward contracts: a contract to buy or sell interest rate terms, amounts in foreign currencies, shares or commodities on a specified future date at a fixed price. Forward contracts are tailor-made contracts traded between counterparties in the OTC market. x FRAs: agreements that fix the interest rate for a future period for an agreed amount. When the contract matures, only the difference between the agreed interest rate and the actual market interest rate is exchanged. x Interest rate futures: standardised contracts where the counterparties agree to exchange specific interest rate instruments at a fixed price on a specified date. The contracts are traded on an exchange. The value of interest rate futures follows the price trend on underlying interest rate instruments. x Swaps: transactions where two parties exchange cash flows on a fixed amount over an agreed period. The majority of swaps are tailor- made and traded outside exchanges. The most important types of swaps traded by DnB NOR are: - interest rate swaps in which fixed rates of interests are exchanged for floating or floating rates of interest are exchanged for fixed - cross-currency interest rate swaps in which parties exchange both currency and interest payments - equity swaps in which interest rate returns are exchanged for equity returns. x Options: agreements giving the buyer the right, but not the obligation, to either buy (call option) or sell (put option) a specific quantity of a financial instrument or commodity at a predetermined and fixed price. The buyer pays a premium to the seller for this right. Options are traded both as OTCs (tailor-made) and as standardised contracts.
DnB NOR ANNUAL REPORT 2009 147 ANNUAL ACCOUNTS DnB NOR GROUP
Note 16 Financial derivatives (continued)
The table shows nominal values on financial derivatives according to type of derivative as well as positive and negative market values. Positive market values are entered as assets in the balance sheet, whereas negative market values are entered as liabilities. See Accounting principles for a more detailed description of measurement of financial derivatives.
DnB NOR Group 31 December 2009 31 December 2008 Total Positive Negative Total Positive Negative nominal market market nominal market market Amounts in NOK million values value value values value value Interest rate contracts FRA-contracts 1 546 777 1 565 1 841 3 138 502 9 067 9 371 Swaps 1 233 596 45 549 26 344 1 996 504 64 417 26 303 OTC options, bought and sold 84 800 122 59 109 997 728 559 Other OTC contracts 1 687 38 0 287 19 0 Total OTC derivatives 2 866 860 47 274 28 244 5 245 290 74 231 36 233 Futures, bought and sold 18 846 0 0 38 372 1 1 Total exchange-traded contracts 18 846 0 0 38 372 1 1 Total interest rate contracts 2 885 706 47 274 28 244 5 283 662 74 232 36 235 Foreign exchange contracts Forward contracts 891 977 4 494 6 245 1 113 458 33 489 35 512 Swaps 406 049 16 196 16 043 511 378 27 221 23 121 OTC options, bought and sold 28 359 341 351 66 395 399 359 Total foreign exchange contracts 1 326 385 21 031 22 638 1 691 231 61 110 58 993 Equity-related contracts Forward contracts 9 261 82 719 5 440 654 15 Swaps 848 0 10 0 0 0 OTC options, bought and sold 16 258 776 299 22 813 404 179 Total OTC derivatives 26 367 858 1 028 28 253 1 058 194 Futures, bought and sold 8 936 0 113 3 311 5 27 Options, bought and sold 388 54 34 2 101 62 26 Total exchange-traded contracts 9 324 54 147 5 412 67 53 Total equity-related contracts 35 691 912 1 175 33 665 1 124 247 Commodity-related contracts Swaps 6 869 853 961 7 184 78 18 Options, bought and sold 19 2 1 145 8 6 Total commodity related contracts 6 888 855 962 7 328 86 24 Total financial derivatives 4 254 670 70 072 53 019 7 015 886 136 552 95 498
Of which: Applied for hedging purposes 114 170 4 663 770 126 906 5 766 956 - Interest rate swaps 4 045 310 4 664 152 - Interest rate and currency swaps 588 460 1 102 714 Collaterals received/paid (9 355) (12 273) (10 753) (19 969)
Use of financial derivatives in DnB NOR Markets DnB NOR Markets acts as market maker and is obliged to furnish both offer and bid prices for specified option, forward or futures series with a maximum differential between the offer and bid price, together with a minimum volume. Market makers always trade for their own account. The purpose of own account trading, in addition to making a market, is position taking, which means intentional risk-taking within the foreign exchange, interest rate and equity markets to achieve profits arising from favourable price, exchange rate and index fluctuations. Arbitrage, that is profit taking from fluctuations in prices, exchange rates and indices for the same product in various markets, is also part of own- account trading.
Customer trading entails structuring and marketing financial derivatives for customers, enabling them to transfer, modify, take or reduce prevailing or expected risk. The majority of derivative transactions relate to customer trading.
DnB NOR uses interest rate and currency swaps to convert foreign currency borrowings into the desired currency. As a typical example, the bank raises a loan in euro, which is swapped to US dollars through a basis swap. In this case, the bank will pay a US dollar interest rate based on a swap curve and receive a euro interest rate reduced by a margin. In the second half of 2008, there was a steep rise in the margin requirement on such transactions due to greater market demand for US dollars. The fair value of the contracts entered into increased by NOK 1 058 million in consequence of rising margin requirements on such basis swaps, while in 2009 reduced margin requirements gave a reduction in the fair value by NOK 357 million.
148 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 16 Financial derivatives (continued) Use of financial derivatives in Vital The purpose of employing financial derivatives in Vital is to be able to invest and allocate funds in accordance with the company's expectations of market trends, through swift and cost-effective asset and market exposure. In addition, the application of derivatives facilitates active risk management and adjustments in equity, interest rate and foreign exchange risk. See notes 14 and 15 for a further description.
Use of financial derivatives in DnB NOR Boligkreditt The purpose of employing financial derivatives in DnB NOR Boligkreditt is to uncover and reduce foreign exchange and interest rate risk.
Risk related to financial derivatives Derivatives are traded in portfolios which also include balance sheet products. The market risk on derivatives is handled, monitored and controlled as an integral part of the market risk of these portfolios. See notes 5 and 13. Derivatives are traded with many different counter- parties and most of these are also engaged in other types of business. The credit risk arising in connection with derivatives trading is included in the total credit risk of the DnB NOR Group. Netting agreements or bilateral agreements on collateral are entered into with a number of counterparties, thus reducing credit risk. The authorities' capital adequacy requirements take into account such agreements, resulting in a reduction of capital adequacy requirements.
Note 17 Liquidity risk
Liquidity risk is the risk that the Group will be unable to meet its payment obligations. Liquidity management in the DnB NOR Group is organised whereby DnB NOR Bank ASA is responsible for funding subsidiaries such as Nordlandsbanken and DnB NOR Finans, as well as international branches and subsidiaries. DnB NORD is funded with a share corresponding to the DnB NOR Group's holding in the bank. Liquidity risk is managed and measured by means of various measurement techniques.
The Board of Directors has established internal limits which restrict the short-term maturity of the bank's liabilities during various time periods. In addition, limits have been approved for structural liquidity risk, which implies that lending to the general public should largely be financed through customer deposits, subordinated capital and long-term funding. The Group's ratio of deposits to lending was 53.0 per cent at end-December 2009, up from 50.1 per cent at end-December 2008. The ratio of deposits to lending in DnB NOR Bank ASA was 92.7 per cent at end-December 2009.
During 2009, there was a gradual improvement in the financial markets, and during the second half of the year, the situation was sound and stable. Volumes and maturities practically returned to normalised levels, and the pricing of very short-term funding at end-December virtually corresponded to the levels before the financial turmoil. Nevertheless, investors showed little risk willingness in general, and strong emphasis continued to be placed on borrowers' credit ratings.
Following a substantial reduction in long-term funding costs during the summer of 2009, the situation was more stable towards the end of the year, and margins were significantly wider than before the financial crisis.
DnB NOR's liquidity situation at end-December 2009 can be characterised as sound. In consequence of wider credit margins in financial markets, however, costs relating to capital market funding have increased. At end-December 2009, the average remaining term to maturity for the portfolio of senior bond debt was 3.0 years, compared with 2.75 years a year earlier. The Group aims to achieve a sound and stable maturity structure for funding over the next five years.
Insurance obligations in Vital are not included in the table below. A major part of investments in Vital is in the form of easily marketable securities. Cf. note 18 for additional information about insurance risk.
DnB NOR ANNUAL REPORT 2009 149 ANNUAL ACCOUNTS DnB NOR GROUP
Note 17 Liquidity risk (continued)
Residual maturity as at 31 December 2009 1) DnB NOR Group Average From From From interest rate Up to 1 month 3 months 1 year Over No fixed Amounts in NOK million (per cent) 2) 1 month to 3 months to 1 year to 5 years 5 years maturity Total Loans and deposits from credit institutions 1.58 158 506 12 480 8 093 124 078 303 157 Deposits from customers 2.02 571 887 10 867 7 183 250 546 590 734 Debt securities issued 2.93 63 584 87 026 100 485 204 620 30 514 486 228 Sundry liabilities etc. 499 3 808 638 4 945 3) Subordinated loan capital 2.54 309 942 21 513 15 299 38 062 Financial derivatives, gross settlement (outgoing cash flows) *) 487 050 455 643 316 214 362 844 95 841 1 717 593 Financial derivatives, net settlement 680 431 6 086 17 998 6 658 31 853 Total payments 1 282 205 570 256 438 370 710 732 155 072 15 937 3 172 573
*) Financial derivatives, gross settlement (incoming cash flows) 498 780 462 040 323 363 364 558 100 911 1 749 652
Residual maturity as at 31 December 2008 1) DnB NOR Group Average From From From interest rate Up to 1 month 3 months 1 year Over No fixed Amounts in NOK million (per cent) 2) 1 month to 3 months to 1 year to 5 years 5 years maturity Total Loans and deposits from credit institutions 4.32 86 957 32 042 15 806 43 202 610 178 617 Deposits from customers 4.39 554 118 15 092 13 102 7 088 7 694 587 094 Debt securities issued 5.21 70 486 126 144 92 522 267 066 42 095 598 312 Sundry liabilities etc. 1 082 632 980 68 149 3 645 6 555 3) Subordinated loan capital 5.61 403 719 24 713 17 749 43 584 Financial derivatives, gross settlement (outgoing cash flows) *) 599 461 436 986 448 408 424 775 61 735 1 971 366 Financial derivatives, net settlement (487) 483 1 014 9 870 1 142 12 021 Total payments 1 311 617 611 380 572 234 752 787 138 137 31 298 3 397 549
*) Financial derivatives, gross settlement (incoming cash flows) 594 397 436 031 452 509 440 676 62 086 1 985 699
1) Not including value adjustments for financial instruments fair value. 2) Average interest rate in per cent is calculated as total interest in NOK for the specific products in relation to the appurtenant average capital (nominal amount). 3) The maturity structure for subordinated loan capital is based on final maturities and does not reflect options to make early redemptions.
Credit lines, commitments and documentary credit DnB NOR Group 31 Dec. 31 Dec. Amounts in NOK million 2009 2008 Unutilised credit lines under 1 year 222 557 210 478 Unutilised credit lines over 1 year 168 564 175 677
150 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 18 Insurance risk
INSURANCE RISK IN LIFE INSURANCE Risk in Vital Forsikring ASA includes financial risk and insurance risk, in addition to operational risk and business risk. Financial risk comprises credit and market risk, which is the risk that the return on financial assets will not be sufficient to meet the obligations specified in insurance policies (see description in notes 13-15). Insurance risk relates to changes in future insurance payments due to changes in life expectancy and disability rates.
Analysis of insurance liabilities, customers bearing the risk and liabilities to policyholders DnB NOR Group 1) Insurance liabilities, Liabilities to Amounts in NOK million customers bearing the risk policyholders Balance sheet as at 31 December 2007 19 868 191 626 Deposits 3 573 13 659 Return (4 544) (34) Inflow of reserves 1 170 3 203 Outflow of reserves 717 3 524 Insurance payments 2 771 16 442 Other changes (124) (3 696) Balance sheet as at 31 December 2008 16 454 184 791 Deposits 3 055 11 411 Return 4 021 10 225 Inflow of reserves 796 3 239 Outflow of reserves 846 3 754 Insurance payments 1 799 10 386 Other changes (344) (1 971) Balance sheet as at 31 December 2009 21 337 193 556
1) Refers only to Vital.
Description of the insurance products The company offers traditional life and pension insurance, unit-linked insurance and non-life insurance. A calculation rate is used to determine provisions and premiums. The highest calculation rate is set by Finanstilsynet (the Financial Supervisory Authority of Norway). This interest rate is often called the base rate, and is 2.75 per cent for new contracts. The base rate is the annual guaranteed rate of return on policy- holders' funds. In most unit-linked insurance products, policyholders bear the financial risk. Non-life insurance policies are products generating payments related to policyholders' life and health. These products are not subject to profit sharing and are repriced annually.
Group contracts Under group defined-benefit pensions, pension payments are disbursed from an agreed age and until the death of the policyholder. It can also be agreed that the pension payments cease at a certain age. A defined-benefit pension may include a retirement pension, disability pension, dependent's pension and children's pension. Group defined-benefit pensions follow the regulations for the insurance industry effective from 1 January 2008. This means that policyholders pay in advance an annual premium for interest rate risk, insurance risk and administration. The company is entitled to change the premium annually. Interest in excess of the guaranteed rate of return is awarded to policyholders in its entirety. If the interest is between 0 and the guaranteed rate of return, the company can use additional allocations to meet the guaranteed rate of return, otherwise the company must cover the deficit. A positive risk result may either be used to increase the risk equalisation fund or be distributed to the policyholders. No more than 50 per cent of annual profits may be allocated to the risk equalisation fund. The company must cover any remaining losses after the risk equalisation fund has been used. The administration result is allocated in its entirety to the company.
When a member terminates a pension agreement or a pension agreement ends, he or she is entitled to a paid-up policy. Rights earned on the termination date are continued in paid-up policies. Paid-up policies have a separate profit model where a minimum of 80 per cent of profits are distributed to policyholders. Profits for distribution consist of the interest result and the risk result. The administration result is allocated in its entirety to the company.
Group association insurance is pension insurance taken out by associations for their members. Association insurance can comprise retirement pensions, disability pensions, dependent pensions and children pensions.
Individual contracts Individual annuity and pension insurance policies are savings schemes whereby the company disburses monthly amounts up until the death of the policyholder, or until the policyholder reaches an agreed age. This usually comprises a retirement pension, disability pension, dependent's pension and children's pension.
Individual endowment insurance policies are contracts whereby the company disburses an agreed amount upon the death of the policyholder or when the policyholder attains an agreed age. Individual endowment insurance may also include disability cover, which is a one-off benefit for permanent disability.
DnB NOR ANNUAL REPORT 2009 151 ANNUAL ACCOUNTS DnB NOR GROUP
Note 18 Insurance risk (continued)
For individual contracts sold prior to 1 January 2008, the past profit-sharing scheme applies, which implies that the interest result, the risk result and the administration result are included in the profits to be distributed between policyholders and the company. No less than 65 per cent of annual profits must be distributed to policyholders. The new regulations apply to contracts sold as of 1 January 2008.
Contracts where policyholders bear the risk Defined-contribution pensions are group pension schemes where the employees bear the financial risk. However, full or partial hedging of the paid amount can be bought upon retirement age.
Individual unit-linked insurance polices are endowment insurance policies or annuity insurance polices where policyholders bear the financial risk.
Other sectors Group life insurance policies are death-risk insurance policies taken out by employers or associations for their employees or members and, where applicable, also for their spouses and children. The amount recoverable under the policy is disbursed upon the death of the policyholder. Group life insurance may also comprise disability cover, which is a one-off benefit for permanent disability.
Employer's liability insurance is a one-year risk product which companies link to their pension agreements. This may be corporate group life insurance or accident insurance. Occupational injury insurance is mandatory for all enterprises.
Specification of liabilities to policyholders recorded in the balance sheet as at 31 December 2009 DnB NOR Group 1) Group life Individual insurance - defined-benefit pensions pension savings Group Annuity and Endow- Private Public association pension ment Other Total Total Amounts in NOK million sector sector insurance insurance insurance sectors 2009 2008 Premium reserve 105 867 24 917 3 875 34 588 11 053 431 180 731 172 847 Additional allocations 2 810 880 166 1 425 268 0 5 550 5 341 Premium fund/pensioners' profit fund 2 578 1 361 54 419 0 0 4 412 5 229 Claims reserve 0 1 31 238 317 827 1 414 1 278 Security reserve 0 0 0 0 0 143 143 97 Total insurance liabilities 111 256 27 158 4 127 36 669 11 638 1 401 192 249 184 791 Securities adjustment reserve 2) 748 193 29 255 78 4 1 306 0 Liabilities to policyholders 112 004 27 351 4 155 36 924 11 715 1 405 193 556 184 791 Unrealised gains on bonds held to maturity 3) 865 200
1) Refers only to Vital. 2) According to the accounting standard for insurance agreements (IFRS 4), the securities adjustment reserve is defined as a liability. The assumptions underlying the calculation of the insurance liabilities are described in a separate section under Accounting principles. 3) Unrealised gains on bonds held to maturity are not included in balance sheet values.
Insurance risk Within life insurance, insurance risk is mainly related to the likelihood of death and disability.
Insurance risk in Vital is divided, in varying degrees, between policyholders and the company. With respect to the non-life insurance products employers' liability insurance and certain pure risk products, the company is exposed to insurance risk. For group pension agreements and new individual pension and endowment insurance products, the company's risk represents its obligation to cover a possible negative risk result. The company is credited up to 50 per cent of any positive risk result in the form of allocations to the risk equalisation fund. With respect to individual insurance policies sold prior to 1 January 2008, the risk result is included in profits for allocation to policyholders and the company, where the company is entitled to receive up to 35 per cent of annual profits.
Risk for Vital related to changes in mortality rates is twofold. With respect to mortality risk coverage (mainly dependants' and children's pensions) lower mortality rates will give an improved risk result and a more limited need for provisions. For pensions that are currently payable, lower mortality rates will result in extended disbursement periods and thus require greater provisions. Pursuant to Sections 9-11 and 9-25 of the Insurance Act, it will be possible to cover the required increase in reserves relating to insurance risk by profits from future surpluses on investment results. Due to higher life expectancy, Vital needs to strengthen recorded premium reserves within individual pension insurance and group association insurance by an estimated NOK 2 billion. The premium reserve will be increased over a ten-year period starting in 2009. Vital made allocations of NOK 177 million in 2009 in accordance with an application sent to Finanstilsynet. Finanstilsynet has indicated a swifter escalation plan, however, the process has not been completed.
Disability risk is more exposed to short-term changes. Allocations covering incurred, unsettled insurance claims are under continuous review. No further needs for strengthening existing provisions relating to disability pensions or other disability products have been identified.
152 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 18 Insurance risk (continued)
With respect to existing contracts, insurance risk is subject to continual review by analysing and monitoring risk results within each business sector. In addition, the company applies reinsurance as an instrument to reduce insurance risk. The company's current reinsurance contracts cover catastrophes and significant individual risks within group and individual insurance. The reinsurance agreements imply that Vital is responsible for risk up to a certain level while the reinsurer covers excess risk up to a maximum defined limit.
In order to reduce insurance risk exposure, it is mandatory that policyholders undergo a health check before entering into a contract for individual risk products. Individual health checks are also required under small-scale group schemes. In connection with the sale of disability pensions, policyholders are divided into risk categories based on a concrete risk assessment in each individual case.
Vital Forsikring's operations are concentrated in Norway. In this market, the portfolio is well diversified and without any concentrations of risk in specific geographical areas or industries.
The risk result arises when empirical data for mortality, disability and exit risk deviate from the assumptions underlying the calculation base for premiums and provisions. When the risk result generates a surplus, the surplus can be allocated to the risk equalisation fund. The risk equalisation fund cannot exceed 150 per cent of the company's total risk premiums for the accounting year. If there is a deficit on the risk result, the risk equalisation fund can be used. The risk equalisation fund does not apply to risk insurance with a maximum term of one year, paid-up policies or individual contracts subject to the former profit sharing model.
Risk result Vital Group life Individual insurance - defined-benefit pensions pension savings Group Annuity and Endow- Private Public association pension ment Other Total Total Amounts in NOK million sector sector insurance insurance insurance sectors 2009 2008 Risk result Risk result in 2009 *) 262 25 22 (96) 78 (22) 269 - Risk result in 2008 17 160 21 (73) 47 (36) - 136 Sensitivities - effect on risk result in 2009 5 per cent reduction in mortality rate (16) (10) (1) (10) 2 12 (23) (15) 10 per cent increase in disability rate (113) (33) (1) (14) (9) (48) (218) (195)
*) Of which: Mortality risk 8 40 44 8 71 52 223 Pure endowment risk (208) 28 (35) (121) 0 0 (336) Disability rate 462 (43) 13 17 7 (74) 382
The table shows the effect on the risk result for 2009 of given changes in empirical mortality or disability data.
In 2009, additional allocations of NOK 177 million were made within group association, annuity and pension insurance to reflect changes in assumptions about life expectancy.
Permanent changes in the calculation assumptions will require changes in premiums and provisions. With respect to group life insurance and individual policies sold after 1 January 2008, it will be possible to finance higher premium reserve requirements by the risk result for the year, or by current or future investment results. For individual contracts sold prior to 1 January 2008, rising premium reserve requirements can be financed by profits for allocation or future profits for allocation in accordance with Section 9-25 of the Insurance Act. The table below shows the effect of changes in key calculation assumptions on gross premium reserves.
Calculation assumptions Vital Effect on gross Amounts in NOK million Change premiumreserve Mortality - 5% +1 740 Disability +10% +2 037
DnB NOR ANNUAL REPORT 2009 153 ANNUAL ACCOUNTS DnB NOR GROUP
Note 18 Insurance risk (continued) Mortality and disability The table shows the net annual risk premium for a sum assured of NOK 100 000. For dependant's pensions, the premium shown is for an annual disability pension of NOK 10 000 paid from the death of the primary policyholder until the spouse reaches the age of 77. For disability pensions, the premium shown is for an annual disability pension of NOK 10 000 paid until 67 years of age. Vital Men Women Amounts in NOK million 30 years 45 years 60 years 30 years 45 years 60 years Individual life insurance 136 340 1 447 68 170 724 Individual disability lump sum 223 695 0 333 1 177 0 Individual disability pension 394 1 000 3 229 630 1 900 4 858
Dependant's pensions in group schemes 20 164 698 17 79 224 Disability pensions in group schemes 254 556 1 114 388 975 1 672
Premiums for individual disability pensions are based on the company's own experience and were last changed in 2006. Dependant's pensions in group schemes follow the K2005 tariff rates with security margins. Group disability pension premiums are based on the company's own experience and were last changed in 2008.
Guaranteed rate of return The table shows long-term developments in the average guaranteed rate of return for each sector. The guaranteed rate of return is shown as a percentage of the premium reserve, premium fund and additional allocations, and is measured as at 31 December. The guaranteed rate of return is gradually reduced each year as the rate for premiums paid within group pensions is guaranteed at 3 per cent. Vital Per cent 2009 2008 2007 2006 Group pension insurance, private sector 3.5 3.6 3.7 3.7 Group pension insurance, public sector 3.1 3.1 3.2 3.2 Individual pension insurance 3.5 3.4 3.4 3.4 Individual endowment insurance 3.1 3.3 3.4 3.4 Group association insurance 4.1 4.1 4.1 4.1 Total 3.4 3.5 3.6 3.6
Description of liability adequacy test In accordance with IFRS 4, the company has assessed whether its premium reserves are adequate to cover its liabilities. If the test shows that the premium reserves are too low to bear the future liabilities of the company, the difference should be recorded on the test date. Adequacy tests are implemented each quarter based on the various profit-sharing models.
All tariff rates used by the company are based on past experience within product segments or business sectors. Thus, products may have different technical rates of interest, mortality and disability assumptions, and may incur different costs. The adequacy test assesses the margins in the tariff rates.
Long-term interest rate levels indicate the company's margin relative to the calculation rate used for premium reserves. Norwegian swap rates are used to estimate the risk-free interest rate in the test.
As at 31 December 2009, the average duration of the liabilities was approximately 16 years, while the average calculation rate was 3.4 per cent. Sensitivity analyses show that the premium reserve is adequate to tolerate long-term swap rates of approximately 4 per cent when future increases in life expectancy are taken into account. The swap rate with a 15-year duration was 4.92 per cent as at 31 December 2009. The adequacy test thus indicated no need for further provisions covering liabilities to policyholders. Solvency capital The solvency capital consists of the securities adjustment reserve, additional allocations, the security reserve, equity, subordinated loan capital and perpetual subordinated loan capital securities and unrealised gains on bonds held to maturity. All these elements, with the exception of part of the security reserve and risk equalisation fund, can be used to meet the guaranteed rate of return on policyholders' funds. The risk equalisation fund is included in equity. Vital 31 Dec. 31 Dec. Amounts in NOK million 2009 2008 Securities adjustment reserve 1 306 0 Additional allocations 5 550 5 360 Security reserve 143 97 Equity 10 018 8 740 Subordinated loan capital and perpetual subordinated loan capital securities 2 489 2 575 Unrealised gains on bonds held to maturity 865 200 Total solvency capital 20 372 16 972 Guaranteed return on policyholders' funds 6 413 6 376
154 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 18 Insurance risk (continued) Capital adequacy Capital adequacy regulations regulate the relationship between the company's primary capital and the investment exposure on the asset side of the balance sheet. Life insurance companies are subject to a minimum capital adequacy requirement of 8 per cent. At the end of 2009, Vital had a capital adequacy ratio of 11.6 per cent, compared with 12.3 per cent at the end of 2008. The Tier 1 capital ratio was 9.7 per cent, as against 9.8 per cent a year earlier.
Risk weighted volume and eligible primary capital Vital 31 December 2009 31 December 2008 Amounts in NOK million Recorded Weighted Recorded Weighted Total assets 232 465 96 226 224 129 84 608 Primary capital Tier 1 capital 9 465 8 277 Net Tier 2 capital 1 804 2 120 Financial deduction 0 0 Total eligible primary capital 11 269 10 398 Capital adequacy requirement 7 698 6 769 Capital in excess of requirement 3 571 3 629
Solvency margin capital Solvency margin capital is measured against the solvency margin requirement, which is linked to the company's insurance commitments. The solvency margin requirements for Norwegian life insurance companies are subject to regulations on the calculations of solvency margin capital requirements and solvency margin capital, as laid down by the Ministry of Finance on 19 May 1995.
Vital 31 Dec. 31 Dec. Amounts in NOK million 2009 2008 Total eligible primary capital 11 269 10 398 Additional allocations (50 per cent) 2 775 2 680 Risk equalisation fund (50 per cent) 203 124 Solvency margin capital 14 247 13 202 Solvency margin capital requirement 8 317 8 147
INSURANCE RISK IN NON-LIFE INSURANCE DnB NOR Skadeforsikring was established in 2008. Non-life insurance risk increased during 2009 in consequence of growth in the insurance portfolio. The premium portfolio totalled NOK 704 million at year-end 2009. More than 90 per cent of the premium portfolio represents insurance coverage for individual customers. A limited range of products is offered to small and medium-sized companies.
Risk in DnB NOR Skadeforsikring comprises insurance, market, credit, operational and business risk. Insurance risk includes the risk of losses if insurance premiums fail to cover future claims payments. An increase in claims frequency can be due to seasonal variations or reflect more lasting effects. A permanent change in claims frequency due to, for example, changes in customer behaviour and new types of claims, will have the most pronounced effect on profitability. Indemnity payments are influenced by a number of factors, including the number of catastrophic losses and inflation. Exposure to natural disasters is limited through the company's compulsory membership in the Norwegian Natural Perils Pool. Insufficient risk diversification with respect to risk categories and sums insured and the geographic locations and types of operations covered by the insurance policies could also have a negative effect on insurance risk.
DnB NOR Skadeforsikring has established a reinsurance programme to help neutralise the consequences of particularly serious insurance events. The programme is adapted to the company's overall risk, which is the sum of insurance risk, market risk and credit risk. Risk utilisation is measured relative to both the prevailing Solvency I regulations and the coming Solvency II regulations.
DnB NOR Skadeforsikring has an excess of loss programme which covers individual losses and events above a given limit within the individual product groups. The programme is at all times adapted to the risk profile of the portfolio and is divided between several reinsurers to spread the risk.
Insurance risk is subject to continual review by monitoring the profitability of all products. In addition, a quarterly evaluation is made of the claims reserve.
DnB NOR ANNUAL REPORT 2009 155 ANNUAL ACCOUNTS DnB NOR GROUP
Note 19 Net interest income
DnB NOR Group 2009 2008 Recorded Recorded Recorded Recorded at fair at amortised at fair at amortised Amounts in NOK million value cost 1) Total value cost 1) Total Interest on loans to and deposits with credit institutions 893 827 1 720 885 1 297 2 182 Interest on loans to customers 7 097 39 802 46 899 12 000 58 658 70 657 Interest on impaired loans, individually written down 0 459 459 0 338 338 Interest on commercial paper and bonds 5 420 0 5 420 4 547 0 4 547 Interest on commercial paper and bonds, held to maturity - 2 714 2 714 - 2 765 2 765 Front-end fees etc. 66 308 374 127 314 440 Other interest income 51 727 778 240 783 1 023 Total interest income 13 526 44 837 58 363 17 799 64 155 81 953 Interest on loans and deposits from credit institutions 3 565 1 261 4 826 4 194 3 068 7 262 Interest on deposits from customers 1 358 10 921 12 279 1 592 23 246 24 838 Interest on debt securities issued 8 240 5 529 13 769 9 105 12 479 21 583 Interest on subordinated loan capital 184 881 1 066 62 2 063 2 125 Other interest expenses 2) 2 829 962 3 791 3 827 409 4 235 Total interest expenses 16 176 19 553 35 730 18 779 41 264 60 044 Net interest income (2 651) 25 284 22 633 (981) 22 890 21 910
1) Includes hedged items. 2) Other interest expenses include interest rate adjustments resulting from interest rate swaps entered into. Derivatives are recorded at fair value.
Note 20 Interest rates on selected balance sheet items
DnB NOR Group 1) Average interest rate in per cent 2) Average volume in NOK million 2009 2008 2009 2008 Assets Lending to and deposits with credit institutions 0.96 3.89 174 987 103 249 Lending to customers 4.11 6.68 1 152 950 1 062 517 Commercial paper and bonds 6.96 9.07 107 490 72 077 Liabilities Loans and deposits from credit institutions 1.58 4.32 305 130 167 997 Deposits from customers 2.02 4.39 606 373 565 308 Securities issued 2.93 5.21 538 320 462 574
1) Applies to the DnB NOR Group excluding Vital. 2) Average interest rate in per cent is calculated as total interest in NOK for the specific products in relation to the appurtenant average capital (nominal amount).
156 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 21 Net other operating income
DnB NOR Group Amounts in NOK million 2009 2008 Money transfer fees receivable 3 031 2 887 Fees on asset management services 1 021 1 105 Fees on custodia l services 275 382 Fe es o n se curities brok ing 279 334 Corporate finance 312 378 Interbank fees 106 117 Credit broking commissions 367 406 Sa le s co mmissio ns on i nsurance pro ducts 2 447 2 612 Sundry commissions and fees receivable on banking services 886 985 Total commissions and fees receivable etc. 8 724 9 207
Money transfer fees payable 1 015 942 Commissions payable on asset management services 59 104 Fees on custodia l services payable 106 134 Interbank fees 153 180 Credit broking commissions 52 119 Commissions payable on the sale of insurance products 111 232 Sundry commissions and fees payable on banking services 573 602 Total commissions and fees payable etc. 2 069 2 313
Net gains on financial instruments at fair value 6 286 3 339 Net gains on assets in Vital 1) 2) 13 462 (701) Guaranteed returns and allocations to policyholders in Vital 12 712 (1 027) Premium income etc. included in the risk result in Vital 4 705 4 543 Insurance claims etc. included in the risk result in Vital 4 613 4 407 Premium income non-life insurance 593 - Insurance claims etc. non-life insurance 538 - Profit from companies accounted for by the equity method 3) 93 632
Income from owned/ leased premises 16 33 Fees on real estate broking 774 658 Net unrealised gains on investment property (109) 0 Miscellaneous operating income 383 419 Total other income 1 063 1 111
Net other operating income 14 994 12 438
1) Of which: Financial instruments at fair value 11 696 (5 238) Commercial paper and bonds, held to maturity 2 323 3 954 Loa ns and de posits (492) 941 Investment property 199 (368) Other, including eliminations (264) (102)
2) In consequence of improved recorded and value-adjusted returns in 2009 compared with 2008, net gains on assets in Vital rose by NOK 14 163 million to NOK 13 462 million. The recorded and value-adjusted returns were 4.7 and 5.4 per cent respectively for the common portfolio in 2009, compared with a return of 1.7 per cent and nil per cent in 2008. Vital achieved a value-adjusted return of 5.1 per cent in its corporate portfolio compared with 5.8 per cent in 2008. 3) Widening credit spreads have had a negative effect on Eksportfinans' liquidity portfolio of bonds. The company has entered into an agreement with a syndicate comprising most of Eksportfinans' owners. With effect from 1 March 2008, the agreement will protect Eksportfinans from further value reductions in the portfolio. Taking the guarantee into account, there was a negative profit contribution of NOK 200 million from the company in 2009. Liabilities in Eksportfinans are largely recorded at fair value, and narrowing credit margins have a negative effect on the company's profits. At end 2009, the accumulated effect of widening credit margins raised DnB NOR's share of profits in the company by approximately NOK 503 million.
DnB NOR ANNUAL REPORT 2009 157 ANNUAL ACCOUNTS DnB NOR GROUP
Note 22 Net gains on financial instruments at fair value
DnB NOR Group Amounts in NOK million 2009 2008 Dividends 22 36 Net gains on foreign exchange and financial derivatives 4 466 5 700 Net gains on commercial paper and bonds 1) 451 (884) Net gains on shareholdings 223 (69) Net gains on other financial assets 212 39 Net gains on financial liabilities 564 (891) Net gains on financial instruments, trading 5 938 3 931 Dividends 147 137 Net gains on loans at fair value 2) (323) 1 031 Net gains on financial guarantees 377 411 Net gains on commercial paper and bonds 193 124 Net gains on shareholdings 3) 121 (1 230) Net gains on financial liabilities (33) (939) Net gains on financial instruments, designated as at fair value 482 (465) Net gains on financial derivatives, hedging 4) 94 8 757 Net gains on financial assets, hedged items 32 124 Net gains on financial liabilities, hedged items 4) (261) (9 008) Net gains on hedged items 5) (135) (127) Net gains on financial instruments at fair value 6 286 3 339
1) The figures for 2008 include unrealised mark-to-market losses of NOK 1 333 million on DnB NOR Markets' liquidity portfolio up until the reclassification of the portfolio to the held-to-maturity category during the third quarter. 2) Throughout 2008, there was a pronounced decline in long-term Norwegian kroner interest rates, which resulted in significant unrealised gains on fixed-rate loans in Norwegian kroner. The 3-year interest rate was reduced from 5.59 to 3.18 per cent. In 2009, the 3-year rate increased to 3.89 per cent. Fixed-rate loans in Norwegian kroner primarily represent residential mortgages. 3) The financial turmoil during the second half of 2008 resulted in sizeable unrealised losses on shares in the investment portfolio. 4) Long-term US dollar and euro interest rates were significantly reduced during the fourth quarter of 2008. The 3-year US dollar interest rate declined from 3.67 to 1.75 per cent, while the corresponding euro interest rate was reduced from 4.63 to 2.96 per cent. This resulted in large unrealised losses on foreign currency borrowings, while the appurtenant derivatives used for hedging gave significant unrealised gains. 5) The DnB NOR Group uses hedge accounting for long-term borrowings in foreign currency in DnB NOR Boligkreditt and DnB NOR Bank ASA. Loans are hedged 1:1 through external contracts where there is a correlation between currencies, interest rate flows and the hedging instrument. At the time the loans are raised, DnB NOR Markets considers whether to enter into a hedging transaction for the relevant loan based on the Group's foreign currency positions and the underlying interest rate exposure for the loan. Hedging transactions which are entered into, are documented. For the bank, the NOK leg of a hedging transaction will be exposed to 3-month interest rates, while for DnB NOR Boligkreditt, hedging transactions are entered into to further reduce the interest rate risk on the NOK leg of the hedging transaction. In the table, the interest rate exposure of the NOK leg of the interest rate swaps are included in changes in value of the hedging instrument.
158 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 23 Operating expenses
DnB NOR Group Amounts in NOK million 2009 2008 Salaries 7 206 6 876 Employer's national insurance contributions 1 082 1 018 Pension expenses 960 1 042 Restructuring expenses 82 106 Other personnel expenses 587 421 Total salaries and other personnel expenses 9 917 9 463
Fees 1) 1 155 1 462 EDP expenses 1 741 1 559 Postage and telecommunications 412 421 Office supplies 99 118 Marketing and public relations 572 725 Travel expenses 234 272 Reimbursement to Norway Post for transactions executed 203 207 Training expenses 73 89 Operating expenses on properties and premises 2) 1 306 1 233 Operating expenses on machinery, vehicles and office equipment 145 147 Other operating expenses 846 807 Other expenses 6 784 7 040
Impairment losses for goodwill 3) 730 1 058 Depreciation and write-downs of fixed and intangible assets 1 479 1 159 Total depreciation and write-downs of fixed and intangible assets 2 210 2 217 Total operating expenses 18 911 18 721
1) Systems development fees totalled NOK 623 million in 2009 and NOK 874 million in 2008. 2) Costs relating to leased premises were NOK 1 039 million in 2009 and NOK 998 million in 2008. 3) For the full year 2009, DnB NOR recorded impairment losses for goodwill of NOK 201 million relating to operations in Sweden, Svensk Fastighetsförmedling AB and SalusAnsvar, and NOK 529 million relating to DnB NORD.
Note 24 Pensions
Description of the pension schemes The DnB NOR Group has a defined benefit occupational pension scheme for all employees in Norway in the form of a group pension scheme funded by Vital Forsikring. Pension benefits include retirement pensions, disability pensions and pensions for spouses and dependent children, which supplement benefits from the National Insurance Scheme. Full pension entitlements require 30 years of pensionable service and give the right to a retirement pension corresponding to the difference between 70 per cent of the employee's salary and estimated benefits from the National Insurance Scheme. The pension scheme is in compliance with the Act on Occupational Pensions. In addition to this scheme, around 630 employees in the former Postbanken are covered by a closed group pension plan in the Norwegian Public Service Pension Fund.
The right to a paid-up policy upon termination of employment only applies to retirement pensions. Disability pensions and survivor's pensions for employees and survivor's pensions for retirement pensioners represent risk coverage without accumulation of capital. The annual risk coverage premium is included in pension expenses.
The Norwegian companies in the Group have adopted the contractual pension (CPA) scheme for the banking and financial services industry. In addition, an agreement on contractual pensions according to public sector rules has been entered into with respect to employees who are members of the Public Service Pension Fund. Provisions have thus been made in the accounts to cover anticipated future CPA acceptance. Upon retirement under a contractual pension agreement, employees continue as members of the group pension scheme, earning benefits up till ordinary retirement age.
The CPA scheme is an early retirement option entitling employees aged between 62 and 66 to a pension. The scheme is coordinated with the National Insurance Scheme, where ordinary retirement pensions are granted from the age of 67. In consequence of changes in the National Insurance Scheme with effect from 2011 and the opportunity offered by the new scheme to take out a pension from the age of 62, a new act on contractual pensions has been adopted. The new CPA scheme will give a lifelong supplement to the retirement pension. The annual pension will be higher the later the pension is taken out. The new CPA scheme is regarded as a new defined benefit, multiple company scheme.
DnB NOR ANNUAL REPORT 2009 159 ANNUAL ACCOUNTS DnB NOR GROUP
Note 24 Pensions (continued)
The former scheme will be wound up over a period of several years. Commitments will no longer apply in relation to employees who are not entitled to the former CPA scheme, i.e. employees born after 1948.
For members of the Norwegian Public Service Pension Fund, the CPA scheme will continue unchanged after 2011.
The Group also has commitments relating to salaries exceeding 12G (12 times the National Insurance basic amount) and early retirement agreements. Commitments relating to salaries exceeding 12G and early retirement agreements are funded through the Group's operations. The top salary pension scheme was closed with effect from 30 June 2008. Under other forms of early retirement than CPA, employees resign from the company pension plans but are, upon reaching the ordinary retirement age, compensated for the reduction in benefits earned.
Employer's contributions are included in pension expenses and commitments. In pension schemes where pension funds exceed pension commitments, no allocation has been made for employer's contributions.
Subsidiaries and branches outside Norway have separate schemes for their employees, mainly in the form of defined-contribution schemes. Pension expenses for employees outside Norway represent NOK 90 million of the Group's total pension expenses of NOK 960 million.
Economic assumptions applied in calculating pension expenses and commitments:
Economic assumptions DnB NOR Group Expenses Commitments 31 Dec. 31 Dec. Per cent 2009 2008 2009 2008 Discount rate 1) 3.8 4.7 4.4 3.8 Anticipated return 2) 5.8 5.8 5.6 5.8 Anticipated rise in salaries 4.00 4.50 4.25 4.00 Anticipated increase in basic amount 3.75 4.25 4.00 3.75 Anticipated rise in pensions 2.00 2.25 2.25 2.00 Anticipated CPA acceptance 35.0 35.0 35.0 35.0 Demographic assumptions about mortality 3) K2005 K2005 K2005 K2005
1) The discount rate used is determined by reference to market yields at the balance sheet date on long term (10-year) government bonds, plus an addition that takes into account the relevant duration of the pension liabilities. 2) The anticipated return on pension funds was calculated by assessing the expected return on the assets encompassed by the current investment policy. The anticipated gain on fixed-rate investments is based on gross gains upon redemption on the balance sheet date. The anticipated return on equity and property investments reflects anticipated long-term real returns in the respective markets. 3) K2005 is a calculation base for statistical mortality assumptions, which includes two projected calculations of mortality based on empirical data from the period 1996 to 2001. One of the calculation bases is projected up until 2005, while the other is projected up until 2020. Mortality rates are expected to be lower in 2020 than in 2005. When calculating pension costs and pension commitments, a combination of both calculation bases has been used.
Pension expenses DnB NOR Group 2009 2008 Amounts in NOK million Funded Unfunded Total Funded Unfunded Total Net present value of pension entitlements 440 120 560 445 112 557 Interest expenses on pension commitments 459 87 547 524 114 639 Anticipated return on pension funds (537) 0 (537) (484) (19) (502) Changes in pension schemes 0 0 0 0 0 0 Amortisation of changes in estimates not recorded in the accounts 72 18 90 86 7 94 Administrative expenses 55 0 55 10 0 10 Employer's contributions 49 29 78 68 28 96 Risk coverage premium 0 80 80 0 74 74 Defined-contribution pension schemes 0 88 88 0 75 75 Net pension expenses 538 421 960 650 392 1 042
160 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 24 Pensions (continued)
Pension commitments DnB NOR Group 31 Dec. 2009 31 Dec. 2008 Amounts in NOK million Funded Unfunded Total Funded Unfunded Total Accrued pension commitments 10 087 1 884 11 971 10 443 1 887 12 330 Estimated effect of future salary adjustments 1 836 465 2 302 2 071 536 2 607 Total pension commitments 11 923 2 349 14 272 12 514 2 423 14 937 Value of pension funds (9 892) 0 (9 892) (9 443) 0 (9 443) Net pension commitments 2 031 2 349 4 381 3 070 2 423 5 493 Changes in the estimates not recorded in the accounts (1 225) 122 (1 103) (2 312) 34 (2 279) Employer's contributions 271 327 598 425 335 760 Recorded pension commitments 1 077 2 798 3 875 1 183 2 792 3 975
Pension commitments DnB NOR Group Amounts in NOK million 2009 2008 Opening balance 14 937 14 292 Accumulated pension entitlements 560 557 Interest expenses 547 639 Pension payments (687) (634) Changes in pension schemes 0 0 Changes in estimates not recorded in the accounts (1 084) 84 Closing balance 14 272 14 937
Pension funds DnB NOR Group Amounts in NOK million 2009 2008 Opening balance 9 443 8 831 Anticipated return 537 502 Premium transfers 678 680 Pension payments (431) (378) Changes in pension schemes 0 0 Changes in estimates not recorded in the accounts (281) (181) Administrative expenses (55) (10) Closing balance 9 892 9 443
Premium transfers in 2010 are expected to be NOK 660 million. Payments through operations are estimated at NOK 290 million.
Past developments DnB NOR Group 31 Dec. 31 Dec. 31 Dec. 31 Dec. 31 Dec. Amounts in NOK million 2009 2008 2007 2006 2005 Gross pension commitments 1) 14 870 15 696 14 996 15 631 14 627 Gross pension funds (9 892) (9 443) (8 831) (8 853) (8 672) Commitments not recorded in the accounts (1 103) (2 279) (2 060) (3 031) (2 537) Net recorded pension commitments 3 875 3 975 4 105 3 747 3 417
1) Gross pension commitments include employer’s contributions.
Members DnB NOR Group 31 Dec. 31 Dec. 2009 2008 Number of persons covered by pension schemes 16 046 16 583 - of which in employment 10 261 10 778 - of which on retirement and disability pensions 5 785 5 805
DnB NOR ANNUAL REPORT 2009 161 ANNUAL ACCOUNTS DnB NOR GROUP
Note 24 Pensions (continued)
Pension funds investments The table below shows a percentage breakdown of pension funds in the group pension schemes administered by Vital Forsikring. Vital Forsikring administers NOK 8 466 million of the Group's total pension funds. The recorded return on assets in the common portfolio administered by Vital Forsikring was 4.7 per cent in 2009 and 1.7 per cent in 2008. DnB NOR Group 31 Dec. 31 Dec. Per cent 2009 2008 Commercial paper and bonds at fair value 23 30 Commercial paper and bonds, held to maturity 36 29 Money market 9 14 Equities 14 4 Real estate 17 17 Other 2 7 Total 100 100
Sensitivity analysis for pension calculations The following estimates are based on facts and conditions prevailing on 31 December 2009, assuming that all other parameters are constant. Actual results may deviate significantly from these estimates. DnB NOR Group Annual rise in salaries/ Annual rise Discount rate basic amount in pensions Retirement rate Change in percentage points +1% -1% +1% -1% +1% -1% +1% -1% Percentage change in pensions Pension commitments 15-17 15-17 9-11 9-11 11-13 11-13 1-2 1-2 Net pension expenses for the period 16-18 17-19 19-21 17-19 17-19 15-17 1-2 1-2
Pension commitments are particularly susceptible to changes in the discount rate. A reduction in the discount rate will, as an isolated factor, result in an increase in pension commitments. A one percentage point change in the discount rate will cause a change in pension commitments in the order of 15 to 17 per cent.
Higher salary increases and adjustments in pensions will also cause a rise in pension commitments. A one percentage point rise in salaries or the basic amount will give an anticipated rise of 9 to 11 per cent, while a corresponding increase in pensions will give a 11 to 13 per cent rise in commitments.
Note 25 Number of employees/full-time positions
DnB NOR Group 2009 1) 2008 Number of employees as at 31 December 13 691 14 454 - of which number of employees abroad 4 524 4 973
Number of employees calculated on a full-time basis as at 31 December 13 317 14 057 - of which number of employees calculated on a full-time basis abroad 4 436 4 877
Average number of employees 14 159 14 223 Average number of employees calculated on a full-time basis 13 768 13 859
1) Due to changes in the agreement with Norway Post, 162.6 full-time positions were transferred from Norway Post on 1 May 2009. Costs and corresponding head-count figures were included with effect from the first quarter of 2009.
162 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 26 Taxes
Taxes DnB NOR Group Amounts in NOK million 2009 2008 Payable taxes 9 001 67 Changes in deferred taxes (4 915) 3 185 Total taxes 4 086 3 252
Balancing tax charges against pre-tax operating profit Amounts in NOK million 2009 2008 Operating profit before taxes 11 032 12 170 Estimated income tax - nominal tax rate (28 per cent) 3 089 3 408 Tax effect of income taxable abroad 1 159 (43) Tax effect of debt interest distribution with international branches (36) 312 Tax effect of tax-exempt income and non-deductible expenses 204 (403) Taxes payable abroad (71) 351 Other changes in estimates 0 (239) Excess tax provision previous year (259) (134) Total taxes 4 086 3 252 Effective tax rate 37% 27%
Deferred tax assets/(deferred taxes) 28 per cent deferred tax calculation on all temporary differences (Norway) Amounts in NOK million 2009 2008 Annual changes in deferred tax assets/(deferred taxes) Deferred tax assets/(deferred taxes) as at 1 January (5 194) (1 858) Changes recorded against profits 4 915 (3 185) Other changes: Acquisition of companies 0 (151) Deferred tax assets/(deferred taxes) as at 31 December (279) (5 194)
Deferred tax assets and deferred taxes in the balance sheet affect the following temporary differences: 31 Dec. 31 Dec. Amounts in NOK million 2009 2008 Deferred tax assets Net prepaid pension entitlements 0 10 Financial instruments 13 0 Net other tax-deductable temporary differences 80 215 Losses carried forward 153 38 Total deferred tax assets 246 263 Deferred taxes Fixed assets 874 1 094 Net pension commitments (1 048) (1 110) Financial instruments 1 022 11 288 Loan assessment rules 119 238 Net other taxable temporary differences 42 918 Losses and credit allowances carried forward (484) (6 971) Total deferred taxes 525 5 457
Deferred taxes in the profit and loss accounts affect the following temporary differences: Amounts in NOK million 2009 2008 Fixed assets (220) (218) Pensions 72 23 Financial instruments (10 279) 10 868 Loan assessment rules (119) (120) Other temporary differences (741) (687) Losses and credit allowances carried forward 6 372 (6 681) Deferred taxes (4 915) 3 185
DnB NOR ANNUAL REPORT 2009 163 ANNUAL ACCOUNTS DnB NOR GROUP
Note 26 Taxes (continued)
Deferred tax assets are capitalised to the extent it is probable that the Group will have taxable income against which temporary differences can be utilised. Net deferred taxes on temporary differences within the same tax group are assessed and entered net in the accounts.
The DnB NOR Group's total tax charge for 2009 was NOK 4 086 million, a rise of NOK 834 million from 2008. Relative to pre-tax operating profits, the tax charge increased from 26.7 to 37.0 per cent from 2008 to 2009. The main factor behind the rise in taxes was impairment losses for goodwill in DnB NORD, with resulting write-downs on the owners' shareholdings. The above-mentioned impairment losses give no tax deduction. In addition, DnB NOR has not recorded the change in deferred tax assets relating to the increase in losses carried forward in DnB NORD due to uncertainty regarding the economic value of the tax deductions arising when using the right to carry such losses forward. Unrecorded deferred tax assets relating to losses carried forward totalled NOK 354 million at year-end 2009. The increase in deferred taxes relating to financial instruments was mainly due to the reversal of exchange rate effects on currency instruments and bond holdings. Developments in share prices and exchange rates are other key factors with a negative impact on the 2009 tax charge.
Payable taxes for 2009 are strongly influenced by the reversal of taxable temporary differences for previous years. DnB NOR's payable taxes were low for 2008, but high in 2009. Differences in payable tax levels mainly reflect different rules for the treatment of financial instruments in the accounts and for tax purposes. A significant share of the financial instruments are carried at fair value in the accounts, while for tax purposes, the same instruments are recorded on an accrual basis in accordance with the realisation principle. This gives rise to large differences between profits stated in the accounts and profits computed for tax purposes for the individual accounting years, especially in years with significant fluctuations in interest rate levels and exchange rates. These differences are offset in the longer term.
Key factors behind tax-exempt income and non-deductible expenses are joint taxation of Norwegian and international operations, tax-exempt income from share investments and goodwill amortisation.
Tax group DnB NOR's tax group consists of the parent company DnB NOR ASA and the wholly-owned Norwegian subsidiaries DnB NOR Bank ASA, Vital Forsikring ASA, DnB NOR Kapitalforvaltning ASA and DnB NOR Skadeforsikring AS, all with Norwegian subsidiaries where DnB NOR owns more than 90 per cent of the shares and has a corresponding share of the votes which can be cast at general meetings.
At the end of 2009, net deferred taxes of NOK 399 million were capitalised for the tax group, as against NOK 5 284 million in 2008.
Note 27 Classification of financial instruments
As at 31 December 2009 DnB NOR Group Financial instruments Financial at fair value derivatives Financial through profit and loss designated instruments Investments Designated as as hedging carried at am- held to Amounts in NOK million Trading at fair value instruments ortised cost 1) maturity Total Cash and deposits with central banks 31 859 31 859 Lending to and deposits with credit institutions 48 844 694 12 779 62 317 Lending to customers 1 422 150 592 962 873 1 114 886 Commercial paper and bonds 44 251 181 164 225 415 Shareholdings 10 638 47 589 58 227 Financial assets, customers bearing the risk 21 337 21 337 Financial derivatives 65 438 4 633 70 072 Commercial paper and bonds, held to maturity 179 832 179 832 Other assets 8 979 8 979 Total financial assets 170 592 401 376 4 633 1 016 490 179 832 1 772 924 Loans and deposits from credit institutions 134 833 118 074 49 762 302 669 Deposits from customers 43 208 19 860 527 676 590 745 Financial derivatives 52 249 770 53 019 Debt securities issued 168 033 35 622 290 076 493 732 Other liabilities 12 331 12 331 Subordinated loan capital 1 379 37 672 39 051 Total financial liabilities 398 324 174 936 770 917 517 0 1 491 546
1) Includes hedged liabilities.
164 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 27 Classification of financial instruments (continued)
As at 31 December 2008 DnB NOR Group Financial instruments Financial at fair value derivatives Financial through profit and loss designated instruments Investments Designated as as hedging carried at am- held to Amounts in NOK million Trading at fair value instruments ortised cost 1) maturity Total Cash and deposits with central banks 51 147 51 147 Lending to and deposits with credit institutions 40 758 1 303 17 657 59 717 Lending to customers 1 791 175 722 1 014 121 1 191 635 Commercial paper and bonds 28 253 97 318 125 571 Shareholdings 6 989 29 850 36 839 Financial assets, customers bearing the risk 16 454 16 454 Financial derivatives 130 786 5 766 136 552 Commercial paper and bonds, held to maturity 155 156 155 156 Other assets 9 236 9 236 Total financial assets 208 578 320 647 5 766 1 092 162 155 156 1 782 308 Loans and deposits from credit institutions 84 370 29 181 65 272 178 822 Deposits from customers 33 658 23 164 540 421 597 242 Financial derivatives 94 542 956 95 498 Debt securities issued 190 109 29 208 386 905 606 222 Other liabilities 15 410 15 410 Subordinated loan capital 1 401 43 824 45 225 Total financial liabilities 402 678 82 955 956 1 051 830 0 1 538 420
1) Includes hedged liabilities.
Note 28 Fair value of financial instruments at amortised cost
DnB NOR Group Recorded Recorded value Fair value value Fair value Amounts in NOK million 31 Dec. 2009 31 Dec. 2009 31 Dec. 2008 31 Dec. 2008 Cash and deposits with central banks 31 859 31 859 51 147 51 147 Lending to and deposits with credit institutions 12 779 12 779 17 657 17 657 Lending to customers 962 873 957 490 1 014 121 1 000 715 Commercial paper and bonds, held to maturity 179 832 180 174 155 156 152 255 Total financial assets 1 187 344 1 182 302 1 238 081 1 221 774 Loans and deposits from credit institutions 49 762 49 762 65 272 65 272 Deposits from customers 527 676 527 676 540 421 540 421 Securities issued 290 076 291 357 386 905 375 248 Subordinated loan capital 37 672 35 200 43 824 30 694 Total financial liabilities 905 185 903 995 1 036 421 1 011 634
Financial instruments at amortised cost in the DnB NOR Group Most assets and liabilities in the DnB NOR Group's balance sheet are carried at amortised cost. This primarily applies to loans, deposits and borrowings in the banking group's balance sheet, but also investments in bonds held to maturity. Long-term borrowings in Norwegian kroner are carried at fair value, while long-term borrowings in other currencies are carried at amortised cost. Hedge accounting may be applied.
Recording balance sheet items at amortised cost implies that the originally agreed cash flows are used, possibly adjusted for impairment. Such valuations will not always give values which are consistent with market assessments of the same instruments. Discrepancies may be due to diverging views on macro-economic prospects, market conditions, risk aspects and return requirements, as well as varying access to accurate information. The above table shows estimated fair values of items carried at amortised cost. Values are measured based on prices quoted in an active market where such information is available, internal models calculating a theoretical value when no such active market exists, or comparisons of prices on instruments in the portfolio relative to the last available transaction prices.
DnB NOR ANNUAL REPORT 2009 165 ANNUAL ACCOUNTS DnB NOR GROUP
Note 28 Fair value of financial instruments at amortised cost (continued)
Valuations are based on the individual instruments' characteristics and values on the balance sheet date. However, these values do not include the total value of customer relationships, market access, brands, organisational aspects, employees and structural capital. Consequently, such intangible assets are generally not recorded in the accounts. In addition, most transactions with customers are assessed and priced collectively for several products, and products recorded in the balance sheet are considered along with other products and services used by the customer. Individual assets and liabilities recorded in the balance sheet thus give no adequate reflection of the total value of the Group's operations.
Lending to and deposits with credit institutions and lending to customers The valuation of loans in a turbulent financial market is a highly challenging process. The market for the purchase and sale of loan portfolios was restricted at year-end 2009.
Through 2009, there was a gradual normalisation in credit margins, though the margins remain significantly higher than before the onset of the financial crisis. When valuing loans, the loan portfolio has been divided into the following categories: retail customers, shipping/ offshore/logistics, international corporates, Nordic corporates, regional corporate clients, credit institutions, Sweden, DnB NOR Finans and Nordlandsbanken. In addition, separate calculations have been made for DnB NORD.
The valuations are based on average margins in December, considered relative to the business units' best estimate of the potential margin requirement at year-end 2009 if the loans had been extended at that time. Differentiated margin requirements have been calculated for each category, as specified above, based on estimated costs related to lending. The margin requirement includes costs covering normalised losses, which, as opposed to write-downs recorded in the annual accounts, represent a long-term assessment of loss levels. Normalised losses for shipping, offshore and logistics and in DnB NORD are above the Group's average normalised losses.
In DnB NORD loan terms, especially in Poland, are much longer than for other units in the Group. These calculations are based on the units' best estimates for duration. An additional dimension with respect to the valuation of loans in the Baltic region and Poland is the country risk associated with economic developments, which is reflected in funding costs when calculating margin requirements.
Lending in Vital's balance sheet totalled NOK 3.1 billion at year-end 2009, mainly representing loans guaranteed by GIEK - The Norwegian Guarantee Institute for Export Credits. In the opinion of the Group, there is consistency between the recorded and fair values of these loans.
There is fierce competition in the Norwegian retail market. There were no notified interest rate adjustments which had not been implemented in this market at year-end 2009. The fair value of retail loans and deposits at current prices has thus been set at amortised cost.
With respect to impaired loans, an assessment has been made of potential cash flows for the loans discounted by the effective rate of interest adjusted for changes in market conditions for corresponding non-impaired loans. Lending rates prior to provisions being made reflect the increased credit risk of the commitment. Given the general uncertainty in fair value measurements, DnB NOR believes that the impaired value gives a good reflection of the fair value of these loans.
Customers will often use loan products which are carried partly at amortised cost and partly at fair value. The profitability of a customer relationship is considered on an aggregate basis, and prices are set based on an overall evaluation. Correspondingly, a possible reduction in the customer relationship value is based on an overall assessment of all products. Any decline or change in the value of products recorded at fair value is assessed based on the difference between the agreed price and the corresponding price of new products on the balance sheet date. Any decline in value apart from price changes on specific products is included in the overall assessment of credits in the relevant customer relationship. Any reduction in the total customer relationship value is measured on the basis of amortised cost and reported under write-downs on loans.
Commercial paper and bonds, held to maturity (see note 32 Commercial paper and bonds, held to maturity) The bond market improved somewhat through 2009, though it is still not possible to observe prices for large parts of the portfolio. Thus, models have been used to stipulate the value of parts of the bond portfolios. These models are based on available indices representing credit risk and liquidity aspects.
Lending to and deposits from credit institutions and deposits from customers The estimated fair value equals the balance sheet value for credit institutions. With respect to deposits from customers, fair value is assessed to equal amortised cost.
Securities issued and subordinated loan capital Fair value measurement of securities issued and subordinated loan capital raised in foreign currency is based on future cash flows and assessed credit risk on the balance sheet date. The valuation is based on broker quotes. Values in connection with potential new issues are used, in the same way as for loans.
166 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 29 Financial instruments at fair value
31 December 2009 DnB NOR Group Valuation Valuation based on Valuation based on quoted prices based on other than in an active observable observable market market data market data Accrued Amounts in NOK million Level 1 Level 2 Level 3 interest 1) Total
Assets Lending to and deposits with credit institutions 0 49 503 0 34 49 537 Lending to customers 0 1 425 149 893 695 152 013 Commercial paper and bonds 172 751 48 959 2 180 1 525 225 415 Shareholdings 2) 49 055 3 549 5 623 58 227 Financial assets, customers bearing the risk 21 337 0 0 21 337 Financial derivatives 0 69 619 453 70 072
Liabilities Loans and deposits from credit institutions 0 252 251 0 656 252 907 Deposits from customers 0 62 827 0 242 63 069 Debt securities issued 0 202 514 0 1 142 203 656 Subordinated loan capital 0 1 367 0 12 1 379 Financial derivatives 0 52 669 350 53 019
31 December 2008 DnB NOR Group Valuation Valuation based on Valuation based on quoted prices based on other than in an active observable observable market market data market data Accrued Amounts in NOK million Level 1 Level 2 Level 3 interest 1) Total
Assets Lending to and deposits with credit institutions 0 41 986 0 74 42 061 Lending to customers 0 1 791 174 012 1 711 177 514 Commercial paper and bonds 49 386 70 259 3 913 2 013 125 571 Shareholdings 2) 14 361 17 045 5 433 36 839 Financial assets, customers bearing the risk 16 454 0 0 16 454 Financial derivatives 0 134 760 1 792 136 552
Liabilities Loans and deposits from credit institutions 0 113 211 0 339 113 551 Deposits from customers 0 56 683 0 138 56 822 Debt securities issued 0 218 591 0 726 219 317 Subordinated loan capital 0 1 388 0 13 1 401 Financial derivatives 0 94 221 1 277 95 498
1) Accrued interest on financial derivatives is included in the amounts in levels 2 and 3. 2) In addition to pure equity investments, this item includes mutual fund holdings and equity-related derivatives linked to DnB NOR Markets' market- making activities (level 2). See note 30 Shareholdings.
Valuation based on prices in an active market Classified as level 1 are financial instruments valued by using quoted prices in active markets for identical assets or liabilities.
Instruments in this category include listed shares, Treasury bills and commercial paper traded in active markets.
Valuation based on observable market data Classified as level 2 are financial instruments which are valued by using inputs other than quoted prices, but where prices are directly or indirectly observable for the assets or liabilities, including quoted prices in non-active markets for identical assets or liabilities.
Included in this category are, among others, interbank derivatives such as interest rate swaps, currency swaps and forward contracts with prices quoted on Reuters or Bloomberg, basis swaps between the currencies NOK, EUR, USD and GBP and cross-currency interest rate derivatives with customers with insignificant credit margins. Exchange-traded options are classified as level 2 if it is possible to scan or interpolate/extrapolate implicit volatility based on observable prices.
Valuation based on other than observable market data Included in this category are loans to customers and instruments where credit margins constitute a major part of adjustments to market value.
DnB NOR ANNUAL REPORT 2009 167 ANNUAL ACCOUNTS DnB NOR GROUP
Note 29 Financial instruments at fair value (continued)
Lending to and deposits with credit institutions (level 2) Lending to and deposits with credit institutions are primarily relevant for DnB NOR Markets. The valuation is mainly based on agreed interest rate terms measured against a swap curve. The fixed-rate period is relatively short.
Lending to customers (level 3) Loans consist primarily of fixed-rate loans in Norwegian kroner and parts of the portfolio of margin loans in Norwegian kroner. The value of fixed-rate loans is determined by discounting agreed interest flows over the term of the loan, using a discount factor adjusted for margin requirements. A margin requirement is calculated for margin loans, and the difference between the agreed and the actual margin is discounted over the average expected time to the repricing of the loan.
In addition, DnB NORD has a small portfolio of loans carried at fair value. The value of this portfolio converted into Norwegian kroner will be affected by exchange rate movements when converting the company's balance sheet from local currency.
Commercial paper and bonds (levels 2 and 3) The valuation under level 2 is primarily based on observable market data in the form of interest rate curves, exchange rates and credit margins related to the characteristics of the individual credit or bond. For paper classified as level 3, the valuation is based on indicative prices from third parties or comparable paper.
The value of DnB NORD's portefolio converted into Norwegian kroner will be affected by exchange rate movements in connection with the conversion of the company's balance sheet from local currency.
Equities including mutual fund holdings and equity-related derivatives related to market-making (levels 2 and 3) Equities classified as level 2 comprise equity derivatives used in DnB NOR Markets' market-making activities. Most of these derivatives are related to the most traded equities on Oslo Børs, and the valuation is based on the price development of the relevant/underlying equity and observable or estimated volatility. Instruments which are classified as level 3 essentially comprise property funds, limited partnership units, private equity investments, as well as hedge fund units and investments in unquoted equities.
Financial assets, customers bearing the risk (level 1) The item applies in its entirety to unit-linked products in Vital, and the value development of the underlying funds is available on a daily basis.
Financial derivatives (levels 2 and 3) The market values classified as level 2 are primarily currency forward contracts and interest rate and currency swaps. The valuation is based on swap curves, and credit margins constitute a minor part of the value. In addition, the item comprises derivatives related to commodities and forward rate agreements. These are valued based on observable market prices. The market values classified as level 3 are primarily connected to currency options, interest rate options in Norwegian kroner, as well as index derivatives. The valuation is based on indicative prices from third parties.
Loans and deposits from credit institutions (level 2) See "Lending to and deposits with credit institutions" above. The item also includes borrowings from Norges Bank in connection with the Norwegian government's covered bonds exchange scheme. The funding obtained through this scheme totalled NOK 118.1 billion at year-end 2009. See note 46 Information on related parties.
Deposits from customers (level 2) Deposits carried at fair value include special-term deposits. The valuation is primarily based on measurement in relation to a swap curve, and changes in credit margins have an insignificant effect.
Debt securities issued (level 2) The valuation is primarily based on observable market data in the form of interest rate curves and credit margins. The item consists mainly of funding in Norwegian kroner. For foreign currency funding, hedge accounting is used. In all other respects, securities are carried at amortised cost.
Subordinated loan capital (level 2) Subordinated loans carried at fair value consist of two loans in Norwegian kroner, and the valuation is based on observable interest rate curves and credit margins.
168 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 29 Financial instruments at fair value (continued)
Financial instruments at fair value, level 3 DnB NOR Group Financial Financial assets liabilities Commercial Lending to paper and Share- Financial Financial Amounts in NOK million customers bonds holdings 1) derivatives derivatives Balance as at 31 December 2008 174 012 3 913 5 433 1 792 1 277 Net gains on financial instruments (323) (19) (679) (311) (107) Additions/purchases 11 094 5 390 880 Sales 0 5 204 535 Settled 34 608 1 123 1 028 821 Transferred from Level 1 or Level 2 0 42 1 066 Transferred to Level 1 or Level 2 0 661 542 Other 2) (282) (157) 0 Balance as at 31 December 2009 149 893 2 180 5 623 453 350
1) Equities classified as level 3 comprise, in addition to pure equity investments, property fund units, limited partnership units, private equity investments and hedge fund units. 2) Includes exchange rate effects arising from the translation of foreign operations.
Lending to customers The portfolio of loans carried at fair value consists primarily of fixed-rate loans in Norwegian kroner and a share of margin loans in Norwegian kroner. In addition, DnB NORD has a small loan portfolio which is recorded at fair value.
Fixed-rate loans The valuation of the loans is based on interest rates agreed with the customers concerned, discounted by a margin requirement based on the market situation at year-end 2009, as evaluated by Retail Banking. Fierce competition and transparency in the form of interest rate barometers within this market segment mean that there is relatively little uncertainty surrounding the margin requirement for such loans. With respect to these loans, customers have, as a rule, no possibility to withdraw from the agreements without paying compensation for the difference between the estimated and the registered margin. Fixed-rate loans carried at fair value totalled NOK 23 526 million at year-end 2009.
Margin loans carried at fair value A typical margin loan is a loan with a reference interest rate and a margin add-on. Reference rates will normally be set for a period of three months, but the margin can be determined for considerably longer periods. In times of significant interest rate fluctuations and reduced liquidity in the market, as was the case during the financial turmoil, long-term funding costs increased. This is of significance for the margin requirements used by the bank in its calculations. The margin requirements are measured against agreed margins, and discrepancies are discounted over average periods up until the expected margin adjustment. This period is based on feedback from the Group's business areas, but will require significant judgment based on past experience. The period up until the actual adjustment of the margin represents the largest element of uncertainty in these calculations. Margin loans carried at fair value totalled NOK 126 367 million at year-end 2009.
Commercial paper and bonds Investments classified as level 3 primarily consisted of municipal and government securities with short fixed-interest terms. The securities were of high quality, but with limited liquidity. NOK 500 million of the portfolio represented investments in savings banks, county municipalities and energy companies. For this part of the portfolio, the value of one basis point was NOK 0.15 million. In total, there was an unrealised loss on commercial paper and bonds classified as level 3 of NOK 22 million at year-end 2009.
Equities including mutual fund holdings Of the total invested amount of NOK 5 623 million, NOK 2 573 million was invested in private equity funds, NOK 1 020 million in property funds, NOK 17 million in limited partnerships, NOK 1 083 million in unquoted hedge funds and NOK 930 million in unquoted equities. A common denominator for these investments is that there is a lag in the access to information from the units. In times of financial market turmoil, there may be considerable uncertainty related to the valuation of these investments.
Financial derivatives, assets and liabilities Items classified as level 3 are primarily currency options, interest rate options in Norwegian kroner and derivatives related to developments in the consumer price index.
DnB NOR ANNUAL REPORT 2009 169 ANNUAL ACCOUNTS DnB NOR GROUP
Note 30 Shareholdings
Investments in shares, mutual funds and equity certificates 1) DnB NOR Group Amounts in NOK million 31 Dec. 2009 31 Dec. 2008 Total investments in shares, mutual funds and equity certificates, excluding Vital 13 272 9 875 Total investments in shares, mutual funds and equity certificates, Vital 44 955 26 964 Total investments in shares, mutual funds and equity certificates 58 227 36 839
Specification of the largest investments in shares, mutual funds and equity certificates as at 31 December 2009
DnB NOR Group excl. Vital Vital Ownership Ownership Number share in Recorded Number share in Recorded Recorded value in NOK 1 000 of shares per cent 2) value Recorded value in NOK 1 000 of shares per cent 2) value
Financial institutions Financial institutions Storebrand 3) 3 167 172 0.7 125 515 Storebrand 3 244 188 0.7 128 340 Other financial institutions 8 610 Other financial institutions 807 326 Total financial institutions 134 125 Total financial institutions 935 666
Norwegian companies Norwegian companies Aker Solutions 3) 1 786 963 0.7 135 237 Aker Solutions 1 589 907 0.6 119 958 TGS NOPEC Geophysical Company 3) 876 528 0.8 92 123 Imarex 1 618 707 10.7 92 266 IT-Fornebu 1 464 294 12.6 179 707 Marine Harvest 22 193 946 0.6 93 903 Kongsberg Automotive Holding 26 835 050 6.6 149 203 Media Norge 1 717 149 1.7 94 443 Marine Harvest 3) 126 201 415 3.5 533 832 Norsk Hydro 5 779 526 0.5 281 521 Norsk Hydro 3) 7 758 224 0.6 378 058 Orkla 9 211 696 0.7 523 685 Odfjell ser. A 3) 2 987 305 4.5 156 475 Oslo Børs VPS Holding 8 233 680 19.1 494 021 Orkla 3) 9 529 267 0.9 542 025 Petroleum Geo-Services 1 774 408 0.9 117 998 Petroleum Geo-Services 3) 3 258 084 1.6 217 216 Renewable Energi 2 501 005 0.4 111 920 Renewable Energy Corporation 3) 5 732 174 0.9 256 515 Schibsted 719 934 0.7 93 663 Statoil 3) 10 592 211 0.3 1 534 811 Statoil 10 002 034 0.3 1 448 295 Hurtigruten 26 979 125 6.4 103 870 Tandberg 908 134 0.8 149 842 Tandberg 3) 934 510 0.8 154 661 Telenor 7 098 390 0.4 575 325 Telenor 3) 8 958 095 0.5 725 864 TGS Nopec Geophysical 1 329 001 1.3 139 279 Schibsted 3) 652 010 0.6 84 990 Yara International 1 642 028 0.6 433 003 Yara International 3) 2 365 485 0.8 625 316 Other Norwegian companies 853 365 Other Norwegian companies 741 127 Total Norwegian companies 5 622 486 Total Norwegian companies 6 611 031 Companies based abroad Companies based abroad Acergy 1 987 776 1.0 182 180 Acergy 3) 1 705 902 0.9 156 653 Apple 141 792 0.0 172 716 Cape Investment 9 261 13.9 106 731 AT&T 888 687 0.0 143 899 Noble 3) 470 000 0.2 111 421 BP Plc 2 849 912 0.0 159 515 Norvestor IV LP 1 19.2 149 946 Exxon Mobil 765 248 0.0 301 446 Pride International 3) 8 070 800 4.7 1 485 904 General Electric 2 292 413 0.0 200 364 Royal Caribbean Cruises 3) 1 083 473 1.3 159 758 Google 41 900 0.0 150 065 Scorpion Offshore 3) 12 000 000 13.4 294 000 Johnson & Johnson 423 216 0.0 157 472 Seadrill 3) 10 762 141 2.7 1 592 259 Microsoft 1 266 290 0.0 223 038 Subsea 7 3) 816 716 0.6 78 462 Nestle 555 668 0.1 155 880 Teekay 3) 2 000 000 0.3 271 409 Pfizer 1 378 297 0.0 144 831 Transocean 3) 250 006 0.1 123 016 Procter and Gamble 463 303 0.0 162 271 Other companies based abroad 575 473 Seadrill 2 075 102 0.5 307 115 Total companies based abroad 5 105 032 Other companies based abroad 13 170 911 Total companies based abroad 15 631 703 3) Equity related derivatives (341 210) Mutual funds Mutual funds Interest funds 17 360 274 Interest funds 1 612 040 Combination funds 33 353 Combination funds 1 941 Mutual funds 1 305 585 Mutual funds 130 060 Hedge funds 1 835 778 Other funds 19 429 Private equity funds 2 230 031 Total mutual funds 1 763 471 Total mutual funds 22 765 022
Total investments in shares, mutual funds and equity certificates 13 272 450 Total investments in shares, mutual funds and equity certificates 44 954 878
1) Primary capital certificates were savings banks' form of "shares", but did not give full ownership rights to equity, as is the case with shares. During 2009, a change was made to primary capital certificates, whereby the name was changed to equity certificates. The main difference between equity certificates and primary capital certificates is that investors' ownership interests in savings banks can now be held stable. This is possible as a larger share of profits can be distributed in the form of gifts. Savings banks can thus avoid dilution effects. 2) Ownership share in per cent is based on the company's total share capital and does not include derivative contracts. 3) Shares and funds carried at fair value in DnB NOR Markets totalled NOK 10 448 million at year-end 2009, and equity-related derivatives represented minus NOK 341 million. DnB NOR Markets' equity investment are mainly an instrument in hedging its equity derivative exposure through the business area's market making activities. Value at Risk for the equity operations in DnB NOR Markets represented approximately NOK 1 million at year-end 2009.
170 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 31 Financial assets and insurance liabilities, customers bearing the risk
DnB NOR Group Amounts in NOK million 31 Dec. 2009 31 Dec. 2008 Mutual funds 10 718 5 907 Bond funds 3 868 3 041 Money market funds 1 636 1 325 Combination funds 2 747 2 549 Bank deposits 2 368 3 631 Total financial assets, customers bearing the risk 1) 21 337 16 454 Total insurance liabilities, customers bearing the risk 21 337 16 454
1) The figures show a breakdown of customer assets invested in products with a choice of investment profile. For such assets, the customers carry the financial risk.
Note 32 Commercial paper and bonds, held to maturity
As part of ongoing liquidity management, DnB NOR Bank has invested in a portfolio of securities. The portfolio can be used in different ways to regulate the liquidity requirement and as a basis for furnishing collateral for operations in various countries. Among other things, the securities serve as collateral for short and long-term borrowing in a number of central banks and as a basis for liquidity buffers to meet regulatory requirements. With effect from 1 July 2008, the liquidity portfolio in DnB NOR Markets was reclassified from the category "fair value through profit or loss" to " held-to-maturity investments". Portfolios in this category are recorded at amortised cost and written down if there is objective evidence of a decrease in value.
Measurement The reclassification in accordance with the amendments to IAS 39 Financial Instruments: Recognition and Measurements requires that the value of the liquidity portfolio based on the principles applied before the reclassification must be reported. In a normal market situation, the liquidity portfolio would have been recorded at external observable prices before the reclassification. Due to the financial turmoil, there were no such observable prices in the market. The markets normalised during 2009, though there are still no observable prices for large parts of the portfolio. In order to meet the disclosure requirement at end-December 2009, the liquidity portfolio has been measured at fair value according to models used for financial instruments not traded in an active market. The model applied is based on a regression analysis whereby historical market data (explanatory variables) which have been observable even during the financial turmoil are used to explain historical changes in value in the liquidity portfolio. During the period from the fourth quarter of 2006 up to and including the second quarter of 2008, the model shows a high level of correlation between changes in given market data and changes in value in the liquidity portfolio, which at the time was priced in an active market or through broker quotes which were believed to be fairly reliable. If the model had been applied to the liquidity portfolio in 2009, profits would have risen by NOK 2 275 million.
Effects of the reclassifications of the liquidity portfolio The reclassification of the liquidity portfolios resulted in a rise in profits of NOK 741 million at end- December 2009 compared with the result if the previous valuation principle had been retained. On the reclassification date, the book value of the portfolio was NOK 88.0 billion, compared with NOK 68.6 billion at year-end 2009.
Effects of the reclassification of the liquidity portfolio DnB NOR Group Amounts in NOK million 2009 2008
Effects on profits Recorded amortisation effect 544 339 Net gain if valued at fair value 2 819 (2 678) Effects of reclassification on profits (2 275) 3 017
Effects on the balance sheet Recorded, unrealised losses at end of period 1 662 2 206 Unrealised losses, if valued at fair value 2 404 5 223 Effects of reclassification on the balance sheet 741 3 017
Development in the liquidity portfolio after the reclassification DnB NOR Group 31 Dec. 31 Dec. Beløp i millioner kroner 2009 2008 Liquidity portfolio, recorded value 68 600 92 914 Liquidity portfolio, if valued at fair value 67 859 89 898 Effects of reclassification on the balance sheet 741 3 017
DnB NOR ANNUAL REPORT 2009 171 ANNUAL ACCOUNTS DnB NOR GROUP
Note 32 Commercial paper and bonds, held to maturity (continued) DnB NOR Markets' liquidity portfolio After the reclassification date, DnB NOR Markets has chosen to increase its investments in held-to-maturity securities. As at 31 December 2009, DnB NOR Markets' portfolio represented NOK 113 billion. 97.2 per cent of the securities in the portfolio had an AAA rating, while 2.5 per cent were rated AA. There were no synthetic securities in the portfolio and no investments in US sub-prime bonds or Collateralised Debt Obligations, CDOs. The structure of DnB NOR Markets' liquidity portfolio is shown below. DnB NOR Group Per cent NOK million Rating 31 Dec. 2009 31 Dec. 2009 Asset class Consumer credit AAA 3 3 316 Residential mortgages AAA/AA 58 66 872 Corporate loans AAA/AA/A 6 7 221 Government-related AAA 33 37 596 Insurance AAA/AA/A/BB 0 66 Total liquidity portfolio DnB NOR Markets, nominal values 100 115 070 Accrued interest, including amortisation effects (2 101) Total liquidity portfolio DnB NOR Markets 100 112 969 Of which reclassified portfolio 68 600
The average term to maturity of DnB NOR Markets' liquidity portfolio is estimated at three years and three months, and the value of one basis point was NOK 25 million at end-December 2009.
Commercial paper and bonds, held to maturity, in the DnB NOR Group DnB NOR Group Amounts in NOK million 31 Dec. 2009 31 Dec. 2008 DnB NOR Markets 112 969 99 106 Vital 68 128 57 089 Other units 1) (1 265) (1 039) Commercial paper and bonds, held to maturity 179 832 155 156
1) Including eliminations of Vital's investments in bonds issued by DnB NOR Boligkreditt.
Vital Forsikring Vital Forsikring's portfolio of held-to-maturity bonds represents bonds issued by highly creditworthy borrowers. At end-December 2009, bonds with government guarantees represented approximately 24 per cent of the portfolio. The remaining bonds are generally issued by municipalities/county municipalities and finance companies with sound creditworthiness. All investments in bonds issued by finance companies represent senior debt, which has the highest ranking in the capital structure and first priority if the issuer goes bankrupt. Only in exceptional cases does Vital invest in bonds issued by traditional manufacturing companies.
172 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 33 Investment properties
Investment properties owned by the Group are principally owned by Vital Forsikring. The properties in Vital are part of the common portfolio and are owned with the intention to achieve long-term returns for policyholders. Vital's property portfolio is recorded at fair value on the balance sheet date. Vital values the properties based on internal models and external valuations. In the internal models, the present value of expected cash flows is estimated. Contractual cash flows are discounted with a normalised nominal required rate of return, whereas future non-contractual cash flows are discounted with a required rate of return which includes an extra risk premium. The model stipulates a required rate of return of 6.25 per cent during the contract period and, subsequent to this, 9.25 per cent for office premises. The anticipated inflation rate and the implicit assumption regarding real interest rates are kept unchanged during the two periods. The difference in the required rates of return thus solely reflects an increase in the risk premium. The increase in the risk premium of 3 percentage points is intended to compensate for the shift from a reliable and known cash flow to a cash flow which does not have the same degree of predictabi- lity. In principle, the same rate of return is used for hotels and shopping centres, but following an individual assessment, the required rate of return was revised downwards by up to 0.75 percentage points for certain properties and upwards by up to 1.75 percentage points for others.
DnB NOR bases the calculation of the normalised required rate of return on a risk-free rate of interest, normally a government bond yield with a duration of three to five years, where a relevant risk premium related to the asset class or the project to be valued is subsequently added. After an overall assessment of the market and risk situation, the required rates of return used in the internal valuation in the fourth quarter of 2009 were reduced by 0.25 percentage points to 6.25 per cent for contractual cash flows and 9.25 per cent for future cash flows.
Future market rents are considered individually for each property based on a wide range of information, including external market statistics, external analyses and market assessments, internal market interpretations and information and knowledge of local market conditions and the properties' technical condition. During 2009, market rents for parts of the office portfolio were revised downwards. Both market rents and other parameters in the valuation model are considered to be quite consistent with market developments.
At end-December 2009, a complete review was made of the investment properties. The properties in Sweden were valued based on external appraisals from a highly professional, independent appraiser with a leading market position. The properties in Norway were valued based on the company's own valuation model. As a supplement to the values in the internal model, appraisals were obtained from two independent, external appraisers for a representative selection of properties corresponding to approximately 23 per cent of the property portfolio in Norway. The purpose of the external appraisals is to benchmark the internal valuations against independent references. Calculations and recorded values are within an acceptable reliability interval of plus/minus 5 per cent in relation to average external appraisals. Relevant market transactions are important benchmarks for both internal valuations and external appraisals. There was a generally low level of activity in the transaction market in 2009, and there was thus a limited number of relevant benchmarks.
The property market has experienced a negative trend over the past couple of years, characterised by higher vacancy levels, falling rental prices and values and sluggish activity in both the rental and the transaction markets. During 2009, total contractual rent for the wholly- owned portfolio in Norway declined by NOK 6 million to NOK 1 591 million. During the same period, estimated market rents for the portfolio were reduced by NOK 48 million to NOK 1 720 million. Rental prices appeared to have stabilised towards the end of 2009. Economic vacancy in the portfolio increased from 2.7 per cent to 4.4 per cent during the year. The valuations resulted in total write-downs of NOK 887 million in Vital's property portfolio in 2009, of which write-downs on ongoing projects represented NOK 218 million. Costs relating to projects in Vital will normally be guaranteed through turnkey contracts, while income will generally be ensured through contracts concluded before the projects are started.
Tenants in Vital's properties are subject to a semi-annual credit evaluation. In 2009, 1 per cent of the tenants were categorised as non- creditworthy and unable to provide collateral. The overall outcome of the credit evaluations was approximately the same as in the previous year.
Valuations are particularly sensitive to changes in required rates of return and assumptions regarding future income flows. Other things equal, a 0.25 percentage point change in the required rate of return will change the value of the property portfolio by 3.5 per cent. Other things equal, a 5 per cent change in future market rents will change the value of the property portfolio by 3.7 per cent.
DnB NOR ANNUAL REPORT 2009 173 ANNUAL ACCOUNTS DnB NOR GROUP
Note 33 Investment properties (continued)
DnB NOR Group Amounts in NOK million Investment properties Recorded value as at 31 December 2007 1) 33 078 Additions, purchases of new properties 1 680 Additions, capitalised investments 830 Net gains resulting from adjustment to fair value (3 201) Value changes due to restructuring 806 Disposals 956 Exchange rate movements 321 Recorded value as at 31 December 2008 1) 32 558 Additions, purchases of new properties 1 844 Additions, capitalised investments 749 Additions, acquired companies 520 Net gains resulting from adjustment to fair value (778) Net gains resulting from fair value adjustment of projects (218) Disposals 720 Exchange rate movements (575) Recorded value as at 31 December 2009 1) 33 381
Amounts included in the income statement: Rental income from investment properties 2 069 Direct expenses (including repairs and maintenance) related to investment properties generating rental income 414 Direct expenses (including repairs and maintenance) related to investment properties not generating rental income 0
Contractual commitments related to the acquisition or construction of investment properties, not capitalised as at 31 December 2009 1 785
1) The value of investment properties in Vital was NOK 32 908 million as at 31 December 2007, NOK 32 392 million as at 31 December 2008 and NOK 32 766 million as at 31 December 2009.
Note 34 Investments in associated companies
DnB NOR Group Amounts in NOK million 2009 2008 Book value as at 1 January 2 517 1 435 Share of profits after tax 93 632 Additions/disposals 17 478 Dividends (106) (26) Recorded value as at 31 December 1) 2 521 2 517
DnB NOR Group Ownership Recorded Recorded Assets Liabilities share (%) value value 31 Dec. 31 Dec. Income Profit 31 Dec. 31 Dec. 31 Dec. Amounts in NOK million 2009 2) 2009 2) 2009 2) 2009 2) 2009 2009 3) 2008 Eksportfinans AS 225 254 219 846 2 088 1 913 40 1 911 2 112 Nordito AS 3 226 1 850 1 998 262 40 395 309 Doorstep AS 10 0 3 2 50 8 7 Other associated companies 206 89 Total 2 521 2 517
1) Recorded values as at 31 December include deferred tax positions and value adjustments not reflected in the company's balance sheet. 2) Values in the accounts of associated companies. 3) Through a guarantee agreement, a syndicate consisting of the owners of Eksportfinans AS took over the risk of potential losses in value in the company's liquidity portfolio with effect from 1 March 2008. After this time, Eksportfinans AS will be compensated for shortfalls in portfolio values for up to NOK 5 billion. Any increase in value will accrue to the guarantors. DnB NOR's costs related to the guarantee are recorded in the accounts under the same items as profits from and investments in Eksportfinans AS, and totalled NOK 249 million as at 31 December 2009 and NOK 772 million as at 31 December 2008.
174 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 35 Intangible assets
DnB NOR Group Amounts in NOK million 31 Dec. 2009 31 Dec. 2008 Goodwill 1) 5 405 6 665 Postbanken brand name 1) 51 51 Capitalised systems development 1 490 1 108 Sundry intangible assets 699 656 Total intangible assets 7 644 8 480
1) See note 36 for information regarding goodwill and intangible assets with an indefinite useful life.
DnB NOR Group Capitalised Sundry Postbanken systems intangible Amounts in NOK million Goodwill brand name development assets Total Recorded value as at 31 December 2007 6 660 51 653 379 7 742 Additions 594 594 Additions from the acquisition/establishment of other companies 673 487 1 160 Disposals 10 12 103 126 Impairment 1 000 18 14 1 032 Depreciation 128 137 265 Exchange rate movements 343 20 45 407 Recorded value as at 31 December 2008 6 665 51 1 108 656 8 480
Original cost 10 038 119 2 171 954 13 282 Total depreciation and impairment 3 372 68 1 063 298 4 792 Recorded value as at 31 December 2008 6 665 51 1 108 656 8 481 Additions 711 254 965 Additions from the acquisition/establishment of other companies 29 29 Increase/reduction in cost price (153) (153) Disposals 84 84 Impairment 730 52 24 807 Depreciation 0 265 132 397 Exchange rate movements (322) (13) (56) (390) Recorded value as at 31 December 2009 5 405 51 1 490 699 7 644
Original cost 9 668 119 2 601 1 181 13 569 Total depreciation and impairment 4 264 68 1 112 482 5 925 Recorded value as at 31 December 2009 5 405 51 1 490 699 7 644
DnB NOR ANNUAL REPORT 2009 175 ANNUAL ACCOUNTS DnB NOR GROUP
Note 36 Goodwill and intangible assets with an indefinite useful life
The DnB NOR Group continually reviews whether the value of recorded goodwill and other intangible assets with an indefinite useful life is intact, and a complete impairment test of all cash-generating units is performed at least once a year. In the DnB NOR Group's balance sheet, the individual goodwill items and intangible assets with an indefinite useful life are allocated to cash-generating units according to which units benefit from the acquired asset. The cash-generating unit is chosen based on considerations relating to where it is possible to identify and distinguish cash flows related to the unit. A cash-generating unit may record goodwill from several transactions, and an impairment test is then performed on the total goodwill entered in the accounts in the cash-generating unit.
Testing of values and key assumptions used in value in use calculations Impairment testing of capitalised values is done by discounting expected future cash flows from the unit. The assessments are based on the value in use of the different cash-generating units. The value in use represents the sum total of the estimated present value of expected cash flows for the plan period and projected cash flows after the plan period. Cash flows for the plan period normally have a three-year perspective based on budgets and plans approved by management. It must be possible to prove that budgets and plans based on past performance in the relevant unit are realistic. Projections beyond the plan period are based on the general expected economic growth rate, unless there are strong arguments for using a different growth rate. In the medium term, up until 2019, an annual growth rate of 5 per cent has been set, which corresponds to the anticipated long-term nominal GDP growth rate. After 2019, annual growth of 2.5 per cent is anticipated, which equals the expected long-term inflation rate. When a deviating growth rate is used for cash-generating units, an explanation is provided in the description below.
The discount rate is based on an assessment of the market's required rate of return for the type of activity performed in the cash-generating unit. This required rate of return reflects the risk of operations. Impairment tests are generally performed on cash flows after tax in order to be able to directly employ the market's required rate of return. If the test shows that there may be a need for impairment, an assessment is also made of the pre-tax value of the cash flows. In assessments for the 2009 accounting year, a discount rate of 9 per cent after tax is generally used. For units in countries outside the Nordic region, such as the Baltic States, Poland and Russia, the discount rate is adjusted for country risk and long-term interest rates in the respective units' home markets.
For units where recorded goodwill approximates the estimated value in use, DnB NOR has carried out sensitivity analyses. These consider whether a change of key assumptions used in valuations of a unit would result in its capitalised value exceeding its value in use.
Goodwill and intangible assets with an indefinite useful life
Goodwill DnB NOR Group Recorded Recorded Unit 31 Dec. 2009 31 Dec. 2008 DnB NOR Kapitalforvaltning 1 568 1 899 DnB NORD 1) 223 874 Retail Banking 987 987 Cresco 502 502 Nordlandsbanken 478 478 DnB NOR Finans - Car financing in Norway 365 365 DnB NOR Finans - Car financing in Sweden 319 357 Svensk Fastighetsförmedling AB 188 290 SalusAnsvar 215 349 Vital 215 215 Other 344 341 Total goodwill 5 405 6 658
Intangible assets with an indefinite useful life DnB NOR Group Recorded Recorded Unit 31 Dec. 2009 31 Dec. 2008 Postbanken 51 51
1) DnB NOR's share (51 per cent) of recorded goodwill in DnB NORD.
176 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 36 Goodwill and intangible assets with an indefinite useful life (continued)
DnB NOR Asset Management The unit includes asset management operations, mainly in Norway and Sweden. Total goodwill from units in the business area is assessed collectively, and the cash-generating unit represents the entire business area. Operations are integrated, and synergies and rationalisation effects have been realised throughout the organisation. The business area is the lowest level at which cash flows can be identified. DnB NOR's management agreement with Skandia Liv was renegotiated in 2009. Thus, volumes were reduced while previous requirements for an inter- national presence were removed. However, the negotiation of the agreement has not resulted in changes in the level of follow-ups, and the cash-generating unit is thus unchanged. The most critical assumptions for cash flows during the plan period are developments in the securities markets, net sales of mutual funds and margins. See the description under impairment losses for goodwill below.
DnB NORD DnB NORD was established in 2005 and thus took over NORD/LB's existing subsidiaries in the Baltic States and Poland. Recorded goodwill in DnB NORD stems from the establishment and from the acquisition of BISE Bank in Poland in 2007. Valuations are made by DnB NORD, which regards the various subsidiary banks as separate cash-generating units. Goodwill recorded by DnB NOR represents 51 per cent of recorded goodwill in DnB NORD. Key assumptions for cash flows during the plan period are expected growth, developments in funding costs and margins and the level of write-downs on loans. DnB NORD has prepared specific plans for the period up until 2019 which are used in the impairment tests.
Retail Banking – parent bank The unit encompasses banking operations (loans and deposits) in the regional network in Norway, excluding Nordlandsbanken and Postbanken, and recorded goodwill mainly represents goodwill from the merger between DnB and Gjensidige NOR and some goodwill from previously acquired offices in Gjensidige NOR. The new Retail Banking business area was established with effect from 1 July 2009. After the reorganisation, activities in the regional network in Norway were coordinated in one cash-generating unit, while there was previously a distinction between personal customers in Retail Banking and SME clients in Corporate Banking and Payment Services. Key assumptions for cash flows during the plan period are developments in margins, volumes and write-downs on loans.
Cresco The unit encompasses external distribution of credit cards under the Cresco brand. Goodwill stems from the merger between DnB and Gjensidige NOR and the previous acquisition premium from the acquisition of Gjensidige Bank's credit card portfolio. Key assumptions for cash flows during the plan period are developments in margins, volumes and write-downs on loans. Due to the assumption of rising interest rate levels combined with high funding costs, margins are expected to be under pressure.
Nordlandsbanken The unit encompasses banking operations (loans and deposits) in Nordlandsbanken. Goodwill represents the acquisition premium from the acquisition of Nordlandsbanken. Nordlandsbanken remains a separate company in the DnB NOR Group and is a logical cash-generating unit. Key assumptions for cash flows during the plan period are developments in margins, volumes and write-downs on loans.
DnB NOR Finans – car financing in Norway The unit encompasses DnB NOR's car financing operations in Norway, and goodwill stems from DnB NOR's acquisition of SkandiaBanken Bilfinans' operations in Norway with effect from 31 January 2008. Critical assumptions for cash flows during the plan period are car sales figures in Norway and DnB NOR Finans' ability to retain customer relations with important car dealers, along with long-term margin developments and the level of write-downs on loans.
DnB NOR Finans – car financing in Sweden The unit encompasses DnB NOR Finans' car financing operations and leasing portfolio in Sweden. Goodwill stems from the previous acquisition of leasing portfolios and operations within vendor-based car financing in Sweden, and from the acquisition of SkandiaBanken's car financing operations in Sweden in 2008. For 2008, the respective acquired operations were classified as separate cash-generating units, but from 2009, operations in Sweden are integrated and followed up as one cash-generating unit. Key assumptions for cash flows are car sales figures in Sweden, DnB NOR Finans' ability to retain customer relations with important car dealers, along with long-term margin developments and the level of write-downs on loans.
Svensk Fastighetsförmedling The unit encompasses Svensk Fastighetsförmedling, real estate broking in Sweden, which was acquired in the second quarter of 2007, and the value of greater distribution power in the Swedish market for the sale of housing loans. The cash-generating unit thus represents overall results from real estate broking and housing loan sales. Key assumptions for cash flows during the plan period are housing sales in Sweden and long-term developments in margins, volumes and write-downs on loans.
DnB NOR ANNUAL REPORT 2009 177 ANNUAL ACCOUNTS DnB NOR GROUP
Note 36 Goodwill and intangible assets with an indefinite useful life (continued)
SalusAnsvar In the fourth quarter of 2007, DnB NOR acquired 96 per cent of the shares in SalusAnsvar, which is an independent distributor of life and pension insurance, non-life insurance and banking products to members of associations and trade unions in Sweden. The remaining 4 per cent of the shares was acquired in 2008. Key assumptions for cash flows during the plan period are developments in the sales volume of insurance and banking products.
Vital The unit encompasses life insurance operations. Goodwill consists of the acquisition premium from the acquisition of Vital and Gjensidige NOR Spareforsikring's portfolio. Key assumptions for cash flows during the plan period are developments in securities markets and the risk result.
Postbanken – brand The capitalised value of the brand stems from the merger with Postbanken in 1999. Postbanken is a strong brand in the Norwegian retail market.
Impairment losses for goodwill in 2009
Impairment losses per unit DnB NOR Group Amounts in NOK million 31 Dec. 2009 Svensk Fastighetsförmedling AB 99 SalusAnsvar 102 DnB NORD 1) 529 Total impairment losses on intangible assets 730
1) DnB NOR's share of impairment losses for DnB NORD.
Recorded goodwill for Svensk Fastighetsförmedling AB including the housing loan portfolio in Sweden was SEK 232 million, the equivalent of NOK 188 million, at year-end 2009. In the third quarter of 2009, impairment losses of SEK 120 million, the equivalent of NOK 99 million, were recorded. In addition, impairment losses corresponding to NOK 100 million were recorded in 2008. The impairment losses for 2009 were based on updated plan figures according to the company's current strategy, whereby housing loans will continue to be recorded in the company's balance sheet. Housing loan activity in Sweden is in a start-up phase, and future income from the sale of housing loans has been conservatively estimated. No income is assumed to be generated from sales of other types of financial products in the Swedish market. No further impairment losses were required in the fourth quarter of 2009, though the Group's strategy in Sweden is being reviewed, and a revised strategy could require a new assessment in the first quarter of 2010. A required rate of return of 9.0 per cent after tax has been used, which corresponds to around 10.8 per cent before tax. The cash-generating unit is included in the Retail Banking profit centre, see note 3 Segments.
Goodwill relating to SalusAnsvar totalled SEK 266 million, the equivalent of NOK 215 million, at year-end 2009. DnB NOR has changed its strategy for these operations, whereby SalusAnsvar has now been given more independent responsibility for its strategic direction, and the investment is regarded more as a financial investment. Profit performance in SalusAnsvar reflects the current recessionary climate, and the company's plan figures were adjusted significantly downwards in relation to the estimates on which the valuation in 2008 was based. Cash flows include no income from the distribution of DnB NOR products. A required rate of return of 9.0 per cent after tax has been used, which corresponds to around 10.8 per cent before tax. The test identified an impairment loss of SEK 124 million, which is the equivalent of NOK 102 million. The cash-generating unit is included in the Retail Banking profit centre, see note 3 Segments.
DnB NORD has major parts of its operations in the Baltic States and Poland, a region, which experienced very strong economic growth for an extended period. There was a serious cool-down in the Baltic economies in 2008, and the macroeconomic situation deteriorated through 2009, creating greater uncertainty regarding operations in the region. Extensive write-downs on loans were recorded in 2009, causing large net losses, in spite of sound underlying operations in the banks. DnB NORD has prepared plans covering the period up till 2019, which have been used in the impairment tests. Plan figures for the banks are based on continuing large write-downs on loans in the Baltic region, and a gradual normalisation of the situation is not expected until 2012. The cash flows underlying the valuation thus reflect expectations of low growth and relatively large write-downs on loans. Lower profit estimates and the need for capital injections in the banks to enable them to meet capital adequacy requirements will cause pressure on cash flows from operations. The cash flows are based on financial plans approved by DnB NORD's Board of Directors.
178 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 36 Goodwill and intangible assets with an indefinite useful life (continued)
At year-end 2009, recorded goodwill in DnB NORD relating to operations in Lithuania, Latvia and Estonia was impaired to nil. These entities were tested for impairment at end-June 2009, whereby total impairment losses of EUR 63.5 million. New tests carried out at year-end 2009 identified impairment losses for the remaining goodwill in the Baltic States, in relation to the unit in Lithuania, of EUR 6.0 million. Total impairment losses in the Baltic States were thus 69.5 million euro in 2009, the equivalent of NOK 613 million, of which DnB NOR's share was NOK 313 million. A required rate of return of 12.2 per cent after tax has been used in valuations of Lithuania, which corresponds to around 14.9 per cent before tax.
DnB NORD's recorded goodwill relating to operations in Poland represented EUR 52.7 million or NOK 437 million at end-December 2009. DnB NORD's operations in Poland have shown low profitability, but Poland has a relatively strong economy, and the situation with respect to write-downs on loans is better than in the Baltic States. DnB NORD has initiated measures to reduce costs and increase income. Combined with relatively strong annual growth of 11 per cent in net lending during the plan period, these measures are gradually expected to increase profitability. Long-term growth is estimated at 3 per cent. The test identified an impairment loss of EUR 35.3 million, the equivalent of NOK 311 million, relating to operations in Poland, of which DnB NOR's share was NOK 159 million. A required rate of return of 10.7 per cent after tax has been used in valuations of Poland, which corresponds to around 13.2 per cent before tax.
At year-end 2008, DnB NORD had recorded goodwill of EUR 2.0 million related to he Finnish operations. The Finnish branch was closed down in 2009 and most of the loan portfolio was transferred to DnB NOR. At year-end 2009, the goodwill relating to this unit was impaired to nil. Total impairment losses for goodwill recorded in DnB NORD's income statement for 2009 amounted to EUR 106.7 million, the equivalent of NOK 941 million. The cash-generating units are included in the DnB NORD profit centre, see note 3 Segments.
At year-end 2008, recorded goodwill in DnB NOR's accounts relating to the acquisition of DnB NORD represented EUR 4.5 million. Based on the fact that impairment losses for goodwill were recorded for all DnB NORD units in 2009, it has been decided that this goodwill item will be impaired to nil, with an effect of NOK 40 million in the 2009 income statement. The write-down of acquisition costs and DnB NOR's share of impairment losses for goodwill in DnB NORD gave an overall cost of NOK 529 million in DnB NOR's accounts for 2009.
Impairment losses for goodwill relating to DnB NOR Asset Management of SEK 947 million, equivalent to NOK 824 million, were recorded in 2008. Market conditions have improved considerably since early 2009. A renegotiated agreement with Skandia Liv will also have a positive effect compared with the assumptions underlying the test implemented in 2008. The new agreement entails lower volumes, but also the possibility for higher fees based on strong asset management performance. In addition, costs will be lowered due to reduced international presence. Upon signing the new agreement, Skandia Liv paid a lump-sum compensation of SEK 225 million. SEK 186 million, equivalent to NOK 153 million, of this amount was recorded as a reduction in goodwill, as a refund of previously paid VAT, while SEK 39 million was allocated to restructuring measures in connection with the approved closing of international offices. No impairment losses relating to DnB NOR Asset Management had been identified at year-end 2009.
DnB NOR ANNUAL REPORT 2009 179 ANNUAL ACCOUNTS DnB NOR GROUP
Note 37 Fixed assets
DnB NOR Group Amounts in NOK million 31 Dec. 2009 31 Dec. 2008 Bank buildings and other properties 506 570 Machinery, equipment and vehicles 4 861 4 577 Other fixed assets 115 180 Total fixed assets 5 482 5 326
DnB NOR Group Bank buildings Machinery, and other equipment and Amounts in NOK million properties vehicles Total 1) Recorded value as at 31 December 2007 424 2 955 3 379 Additions 120 2 371 2 492 Additions from the aquisition/establishment of other companies Fixed assets, reclassified as held for sale Disposals 10 335 345 Impairment 1 2 2 Depreciation 2) 21 779 800 Exchange rate movements 57 366 424 Recorded value as at 31 December 2008 570 4 577 5 146
Original cost 676 8 218 8 894 Total depreciation and impairment 106 3 641 3 747 Recorded value as at 31 December 2008 570 4 577 5 146 Additions 185 1 809 1 994 Additions from the aquisition/establishment of other companies Fixed assets, reclassified as held for sale Disposals 161 469 630 Impairment Depreciation 2) 29 986 1 015 Exchange rate movements (59) (69) (128) Recorded value as at 31 December 2009 506 4 861 5 367
Original cost 632 8 836 9 468 Total depreciation and impairment 126 3 976 4 102 Recorded value as at 31 December 2009 506 4 861 5 367
The DnB NOR Group has not furnished security for loans/funding of fixed assets, including property.
1) The total does not include "Other fixed assets". 2) Based on cost less any residual value, other assets are subject to straight-line depreciation over their expected useful life within the following limits: Technical installations 10 years Machinery 3-10 years Fixtures and fittings 5-10 years Computer equipment 3-5 years Means of transport 5-7 years
180 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 38 Leasing
Financial leasing (as lessor) DnB NOR Group 31 Dec. 31 Dec. Amounts in NOK million 2009 2008 Gross investment in the lease Due within 1 year 8 126 5 607 Due in 1-5 years 25 099 25 492 Due in more than 5 years 2 900 2 980 Total gross investment in the lease 36 126 34 079 Present value of minimum lease payments Due within 1 year 7 775 3 475 Due in 1-5 years 20 674 20 777 Due in more than 5 years 1 975 5 081 Total present value of lease payments 30 425 29 332 Unearned financial income 5 701 4 746
Unguaranteed residual values accruing to the lessor 38 34 Accumulated loan-loss provisions 759 367 Variable lease payments recognised as income during the period 133 28
Operational leasing (as lessor) DnB NOR Group 31 Dec. 31 Dec. Amounts in NOK million 2009 2008 Future minimum lease payments under non-cancellable leases Due within 1 year 1 904 2 061 Due in 1-5 years 5 955 5 959 Due in more than 5 years 3 332 1 640 Total future minimum lease payments under non-cancellable leases 11 191 9 660
Operational leasing (as lessee) DnB NOR Group 31 Dec. 31 Dec. Amounts in NOK million 2009 2008 Minimum future lease payments under non-cancellable leases Due within 1 year 89 99 Due in 1-5 years 916 1 265 Due in more than 5 years 7 573 7 835 Total minimum future lease payments under non-cancellable leases 8 578 9 200 Total minimum future sublease payments expected to be received under non-cancellable subleases 76 115 Leases recognised as an expense during the period 0 Minimum lease payments 765 734 Variable lease payments 0 1 Total leases recognised as an expense during the period 765 735
Write-downs on leases 17 19
Financial leasing (as lessor) The DnB NOR Group's financial leasing operations apply to DnB NOR Finans and DnB NORD in Poland and the Baltic States.
Operational leasing (as lessor) Comprises operational leasing operations in DnB NOR Finans and DnB NORD in Poland, in addition to leasing of investment properties in Vital.
Operational leasing (as lessee) Mainly comprises premises leased by DnB NOR Bank. The strong growth in contractual minimum lease payments which are due in more than five years must be seen in conjunction with the agreement to lease new headquarters in Bjørvika in Oslo, which will be ready in 2012.
DnB NOR ANNUAL REPORT 2009 181 ANNUAL ACCOUNTS DnB NOR GROUP
Note 39 Other assets
Amounts in NOK million 31 Dec. 2009 31 Dec. 2008 Past due, unpaid insurance premiums 1 408 1 583 Unsettled contract notes 1 041 958 Accrued expenses and prepaid revenues 1 127 937 Amounts outstanding on documentary credits and other payment services 744 585 Other amounts outstanding 4 660 5 173 Total other assets 8 979 9 236
Note 40 Deposits from customers for principal sectors 1)
DnB NOR Group Amounts in NOK million 31 Dec. 2009 31 Dec. 2008 Retail customers 234 199 229 737 International shipping 48 335 58 123 Real estate 30 192 30 511 Manufacturing 21 115 28 555 Services 92 729 104 684 Trade 28 102 30 915 Oil and gas 26 011 21 573 Transportation and communication 26 255 17 194 Building and construction 13 652 11 133 Power and water supply 11 521 11 497 Seafood 3 442 3 287 Hotels and restaurants 1 782 1 805 Agriculture and forestry 2 665 2 677 Central and local government 17 160 23 924 Finance 33 142 20 861 Total deposits from customers, nominal amount 590 300 596 474 Adjustments 444 769 Deposits from customers 590 745 597 242
1) The breakdown into principal sectors is based on standardised sector and industry categories set up by Statistics Norway. With effect from the second quarter of 2009, a new standard for industry codes has been introduced which corresponds to the new EU standard, NACE Rev. 2. Customers are classified according to their main line of business.
182 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 41 Debt securities issued
DnB NOR Group Amounts in NOK million 31 Dec. 2009 31 Dec. 2008 Commercial paper issued, nominal amount 168 028 194 852 Bond debt, nominal amount 1) 313 141 397 443 Adjustments 12 563 13 927 Total debt securities issued 493 732 606 222
Changes in debt securities issued DnB NOR Group Balance sheet Matured/ Exchange rate Changes in Balance sheet 31 Dec. Issued redeemed movements adjustments 31 Dec. Amounts in NOK million 2009 2009 2009 2009 2009 2008 Commercial paper issued, nominal amount 168 028 168 028 194 852 0 194 852 Bond debt, nominal amount 1) 313 141 51 193 91 343 (44 152) 397 443 Adjustments 12 563 (1 364) 13 927 Total debt securities issued 493 732 219 220 286 195 (44 152) (1 364) 606 222
Maturity of debt securities issued recorded at amortised cost as at 31 December 2009 1) 2) DnB NOR Group Amounts in NOK million NOK Foreign currency Total 2010 0 38 38 Total commercial paper issued, nominal amount 0 38 38 2010 0 72 218 72 218 2011 0 73 071 73 071 2012 0 34 619 34 619 2013 0 37 775 37 775 2014 0 32 805 32 805 2015 0 2 267 2 267 2016 and later 0 26 473 26 473 Total bond debt, recorded at amortised cost, nominal amount 0 279 229 279 229 Total debt securities issued recorded at amortised cost, nominal amount 0 279 267 279 267
Maturity of debt securities issued recorded at fair value as at 31 December 2009 1) DnB NOR Group Amounts in NOK million NOK Foreign currency Total 2010 60 167 930 167 990 Total commercial paper issued, nominal amount 60 167 930 167 990 2010 5 779 9 5 788 2011 5 293 3 5 296 2012 1 406 6 1 412 2013 1 968 0 1 968 2014 17 673 0 17 673 2015 254 0 254 2016 and later 1 521 0 1 521 Total bond debt, nominal amount 33 894 17 33 911 Total debt securities issued recorded at fair value, nominal amount 33 954 167 947 201 901
Adjustments 1 683 10 880 12 563 Debt securities issued 35 638 458 094 493 732
1) Minus own bonds. Outstanding covered bonds in DnB NOR Boligkreditt totalled NOK 230.6 billion as at 31 December 2009. The cover pool represented NOK 322.8 billion. 2) Includes hedged items.
DnB NOR ANNUAL REPORT 2009 183 ANNUAL ACCOUNTS DnB NOR GROUP
Note 42 Subordinated loan capital and perpetual subordinated loan capital securities
DnB NOR Group Amounts in NOK million 31 Dec. 2009 31 Dec. 2008 Term subordinated loan capital, nominal amount 22 455 25 432 Perpetual subordinated loan capital, nominal amount 6 830 8 007 Perpetual subordinated loan capital securities, nominal amount 1) 8 468 9 742 Adjustments 1 297 2 044 Total subordinated loan capital and perpetual subordinated loan capital securities 39 051 45 225
Changes in subordinated loan capital and perpetual subordinated loan capital securities DnB NOR Group Matured/ Exchange rate Changes in Balance sheet Issued redeemed movements adjustments Balance sheet Amounts in NOK million 31 Dec. 2009 2009 2009 2009 2009 31 Dec. 2008 Term subordinated loan capital, nominal amount 22 455 (2 978) 25 432 Perpetual subordinated loan capital, nominal amount 6 830 (1 177) 8 007 Perpetual subordinated loan capital securities, nominal amount 1) 8 468 (1 274) 9 742 Adjustments 1 297 (747) 2 044 Total subordinated loan capital and perpetual subordinated loan capital securities 39 051 0 0 (5 428) (747) 45 225
DnB NOR Group Recorded value in Recorded value Year raised foreign currency Interest rate MaturityCall date in NOK Term subordinated loan capital 2003 GBP 200 5.125% p.a. 2015 2010 1 861 2003 EUR 15 6-month EURIBOR + 0.61% 2013 125 2004 EUR 200 3-month EURIBOR + 0.30% 2016 2011 1 661 2004 EUR 11 6-month EURIBOR + 2.40% 2014 2009 91 2004 EUR 14 6-month EURIBOR + 0.61% 2014 116 2005 EUR 200 3-month EURIBOR + 0.20% 2015 2010 1 661 2005 EUR 3 4.39% p.a. 2015 21 2005 EUR 15 6-month EURIBOR + 0.60% 2015 125 2005 EUR 13 6-month EURIBOR + 0.60% 2015 108 2006 USD 500 3-month LIBOR + 0.23% 2016 2011 2 881 2006 EUR 500 3-month EURIBOR + 0.20% 2017 2012 4 152 2007 GBP 150 6.52% p.a. 2017 2012 1 396 2007 EUR 19 6-month EURIBOR + 0.90% 2017 154 2008 GBP 250 6.17% p.a. 2018 2013 2 327 2008 NOK 1 200 3-month NIBOR +1.60% 2018 2013 1 200 2008 NOK 250 7.60% p.a. 2018 2013 250 2008 GBP 400 7.25% p.a. 2020 2015 3 723 2008 EUR 49 6-month EURIBOR + 2.40% 2013 407 2008 EUR 25 6-month EURIBOR + 2.40% 2013 203 Other (5) Total, nominal amount 22 455 Perpetual subordinated loan capital 1985 USD 215 3-month LIBOR + 0.25% 1 239 1986 USD 150 6-month LIBOR + 0.15% 864 1986 USD 200 6-month LIBOR + 0.125% 1 152 1996 JPY 3 000 4.00% p.a. 2011 187 1996 JPY 7 000 4.00% p.a. 2011 437 1999 JPY 10 000 4.51% p.a. 2029 624 2006 GBP 250 4.875% p.a. 2011 2 327 Total, nominal amount 6 830 Perpetual subordinated loan capital securities 1) 2001 USD 400 7.729% p.a. 2011 2 305 2002 EUR 350 7.068% p.a. 2012 2 906 2007 GBP 350 6.0116% p.a. 2017 3 257 Total, nominal amount 8 468
1) Perpetual subordinated loan capital securities are eligible for inclusion in core capital by an amount not exceeding 15 per cent of total core capital. Finanstilsynet may require the securities to be written down proportionally to equity if the bank's core capital ratio falls below 5 per cent or the capital adequacy ratio falls below 6 per cent. Amounts written down on the securities must be revalued before the distribution of dividends to shareholders or revaluation of equity.
184 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 43 Provisions
DnB NOR Group Issued financial Pension Other Total Amounts in NOK million guarantees 1) commitments 2) provisions 3) provisions Recorded value as at 31 December 2008 203 4 186 529 4 918 New provisions, recorded in the accounts 156 0 320 476 Amounts used 35 0 85 120 Reversals of unutilised provisions 18 0 136 154 Other changes (4) (150) (44) (198) Recorded value as at 31 December 2009 303 4 036 584 4 923
1) Issued financial guarantees are measured at the higher of the consideration received for the guarantee excluding any amortised amounts recorded in the income statement and the best estimate of the consideration due if the guarantee is honoured. The liabilities are of a short-term nature. 2) Pension commitments before net overfunding are included. See note 24 Pensions for a specification of changes in pension commitments recorded in 2009. 3) Other provisions mainly include short-term liabilities which are assumed to be settled during 2010.
Note 44 Other liabilities
DnB NOR Group Amounts in NOK million 31 Dec. 2009 31 Dec. 2008 Short-term funding 638 1 307 Accrued expenses and prepaid revenues 3 808 4 220 Liabilities related to factoring 102 154 Documentary credits, cheques and other payment services 682 925 Unsettled contract notes 2 050 3 139 Accounts payable 484 474 Other liabilities 4 567 5 190 Total other liabilities 12 331 15 410
DnB NOR ANNUAL REPORT 2009 185 ANNUAL ACCOUNTS DnB NOR GROUP
Note 45 Remunerations etc.
Pursuant to Section 6-16a of the Norwegian Public Limited Companies Act, the Board of Directors will present the following remuneration guidelines to the Annual General Meeting:
"The Board of Directors' statement on the stipulation of salaries and other remunerations to senior executives DnB NOR's guidelines for determining remunerations to the group chief executive and other members of the group management team should, at all times, support prevailing strategy and values, while contributing to the attainment of the Group’s targets. The remunerations should inspire conduct to build the desired corporate culture with respect to performance and profit orientation. In connection with this statement, the Board of Directors has passed no resolution entailing changes to the principles for the stipulation of remunerations compared with statements presented previously.
Decision-making process The Board of Directors in DnB NOR ASA has established a compensation committee consisting of three members: the chairman of the Board, the vice-chairman and one board member.
The Compensation Committee prepares matters for the Board of Directors and has the following main responsibilities: x Annually evaluate and present its recommendations regarding the total remuneration awarded to the group chief executive x Annually prepare a recommendation for the group chief executive’s score card x Based on suggestions from the group chief executive, decide the remuneration and other key benefits awarded to the group executive vice president, Group Audit x Act in an advisory capacity to the group chief executive regarding remunerations and other key benefits for members of the group management team and, when applicable, for others who report to the group chief executive x Consider other matters as decided by the Board of Directors and/or the Compensation Committee x Evaluate other personnel-related issues which can be assumed to entail great risk to the Group's reputation
A. Guidelines for the coming accounting year Remuneration to the group chief executive The total remuneration to the group chief executive consists of basic salary (main element), benefits in kind, variable salary, and pension and insurance schemes. The total remuneration is determined based on a total evaluation, and the variable part of the salary is primarily based on the following elements: financial performance, customer satisfaction, employee satisfaction and the DnB NOR Group's reputation.
The basic salary is subject to an annual evaluation and is determined based on general salary levels in the labour market and especially in the financial industry.
Variable salary to the group chief executive is determined based on specific performance measurements of defined target areas stipulated in the group chief executive's score card and an overall discretionary assessment. Variable salary cannot exceed 50 per cent of fixed salary. The group chief executive is not awarded performance-based payments other than the stated bonus.
In addition to variable salary, the group chief executive can be granted benefits in kind such as company car, newspapers/periodicals and telephone schemes. Benefits in kind should be relevant to the group chief executive's function or in line with market practice, and should not be significant relative to the group chief executive’s basic salary.
The Group will respect the agreement entered into with the group chief executive, whereby his retirement age is 60 years with a pension representing 70 per cent of fixed salary. If employment is terminated prior to the age of 60, the pension will be paid from the age of 60 with the deduction of 1/14 of the pension amount for each full year remaining to his 60th birthday. According to the agreement, the group chief executive is entitled to a termination payment for two years if employment is terminated prior to the age of 60. If, during this period, the group chief executive receives income from other employment, the termination payment will be reduced by an amount corresponding to the salary received from this employment. Benefits in kind will be maintained for a period of three months.
Remuneration to other senior executives The group chief executive determines the remunerations to senior executives in agreement with the Chairman of the Board of Directors. The Board of Directors will honour existing binding agreements.
The total remuneration to senior executives consists of basic salary (main element), benefits in kind, variable salary, and pension and insurance schemes. The total remuneration is determined based on the need to offer competitive terms in the various business areas. The remunerations should promote the Group's competitiveness in the relevant labour market, as well as the Group's profitability, including the desired trend in income and costs. The total remuneration must neither pose a threat to DnB NOR's reputation nor be market-leading, but should ensure that DnB NOR attracts and retains senior executives with the desired skills and experience.
The basic salary is subject to an annual evaluation and is determined based on general salary levels in the labour market and especially in the financial industry.
Benefits in kind may be offered to senior executives to the extent the benefits have a relevant connection to the employee's function in the Group or are in line with market practice. The benefits should not be significant relative to the employee's basic salary.
186 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 45 Remunerations etc. (continued)
Variable salary is determined based on specific performance measurements of defined target areas stipulated in the executive's score card and an overall discretionary assessment. The scheme should be performance-based without exposing the Group to unwanted risk, nor should the scheme pose a threat to DnB NOR's reputation. Variable salary (bonus) cannot exceed 50 per cent of fixed salary. The Board of Directors can make exceptions for certain positions if this is necessary to ensure competitive terms. Though the total remuneration in the latter case should be competitive, it should not be market-leading.
Pension schemes and any agreements on termination payments etc. should be considered relative to other remuneration and should ensure competitive terms. The various components in pension schemes and severance pay, either alone or together, must not be such that they could pose a threat to DnB NOR’s reputation.
As a main rule, senior executives are entitled to a pension at the age of 65, though this can be deviated from. In accordance with the Group's pension scheme for all employees, defined-benefit pension entitlements should not exceed 70 per cent of fixed salary and should constitute maximum 12 times the National Insurance basic amount. However, the DnB NOR Group will honour existing agreements.
As a main rule, no termination payment agreements will be signed. However, the Group will honour existing agreements.
When entering into new agreements, the guidelines generally apply and comprise all senior executives.
See table of remunerations for senior executives below.
B. Binding guidelines for shares, subscription rights, options etc. for the coming accounting year An amount corresponding to 20 per cent of the gross earned variable salary of the group chief executive and senior executives is invested in shares in DnB NOR ASA. The shares have a minimum holding period of two years. Guidelines have been established.
No additional shares, subscription rights, options or other forms of remuneration only linked to shares or only to developments in the share price of the company or other companies within the Group, will be awarded to the group chief executive or senior executives. The group chief executive and senior executives are, however, given the opportunity to participate in a share subscription scheme on the same terms as other employees in the DnB NOR Group.
C. Statement on the senior executive salary policy in the previous account year A new group executive vice president joined the Group on 1 April 2009, whose employment agreement stipulates ordinary pension terms and a retirement age of 65 years. In addition, a group executive vice president was appointed on 1 July 2009 from another position in the Group, whose existing pension agreement has been retained.
Group chief executive Rune Bjerke chose to renounce nominal wage increases and bonus payments in 2009 (based on the Group's financial performance in 2008).
As in previous years, the performance-based pay agreement for 2009 for the head of DnB NOR Markets deviates from the model used for the other group executive vice presidents. The agreement has a higher maximum limit, and the performance-based pay earned in 2009, excluding tax, will in its entirety be invested in shares in DnB NOR ASA. The shares have a minimum holding period of three years.
In all other respects, the guidelines determined for 2009 have been followed.
D. Statement on the effects for the company and the shareholders of remuneration agreements awarding shares, subscription rights, options etc. An amount corresponding to 20 per cent of the gross earned variable salary of the group chief executive and senior executives is invested in shares in DnB NOR ASA. The Board of Directors believes that the awarding of shares to senior executives, in view of the total number of shares in the company, will have no negative consequences for the company or the shareholders."
Terms for the chairman of the Board of Directors Anne Carine Tanum has been chairman of the Board of Directors of DnB NOR ASA since 18 June 2008. She received a total remuneration of NOK 430 000 in 2009, compared with NOK 358 000 in 2008. In addition, she received NOK 355 000 as chairman of the Board of Directors of DnB NOR Bank ASA, compared with NOK 188 000 in 2008.
Terms for the group chief executive Rune Bjerke received an ordinary salary of NOK 4 639 000 in 2009, compared with NOK 4 311 000 in 2008. The increase is due to the full- year effect of the salary increase granted in 2008. The Board of Directors of DnB NOR ASA stipulated the group chief executive's bonus payment for 2009 at NOK 676 000. The bonus will be paid in 2010. Rune Bjerke chose to renounce the bonus earned in 2008. Benefits in kind were estimated at NOK 305 000, compared with NOK 246 000 in 2008. Costs for DnB NOR in connection with the group chief executive’s pension scheme were NOK 3 272 000 for the 2009 accounting year, compared with NOK 2 995 000 in 2008. Costs are divided between DnB NOR ASA and DnB NOR Bank ASA.
DnB NOR ANNUAL REPORT 2009 187 ANNUAL ACCOUNTS DnB NOR GROUP
Note 45 Remunerations etc. (continued)
Remunerations etc. in 2009 DnB NOR Group Fixed annual Paid Bonus Bonus earned Current value salary as remunera- Paid earned in Benefits Total in 2009, Loans as Accrued of pension at 31 Dec. tion in salaries 2008, paid in kind remunera- to be paid at 31 Dec. pension agree- Amounts in NOK 1 000 2009 1) 2009 2) in 2009 3) in 2009 4) 5) in 2009 6) tion in 2009 in 2010 5) 2009 7) expenses ment 8) Board of Directors of DnB NOR ASA Anne Carine Tanum (chairman) 9) - 785 - - 0 785 - 0 - - Bjørn Sund (vice-chairman) 9) - 393 - - 0 393 - 0 - - Gunilla Berg (from 17 June 2009) - 139 - - 0 139 - 0 - - Per Hoffmann 561 520 573 0 23 1 116 10 1 656 44 1 706 Jørn O. Kvilhaug 908 455 1 011 40 17 1 523 10 745 128 4 700 Bent Pedersen 10) - 630 - - 0 630 - 0 - - Tore Olaf Rimmereid 9) 10) - 328 - - 0 328 - 0 - - Trine Sæther Romuld (until 17 June 2009) - 173 - - 0 173 - 0 - - Ingjerd Skjeldrum 613 520 637 0 12 1 169 10 496 70 1 966 Siri Pettersen Strandenes 10) - 540 - - 1 541 - 0 - - Total Board of Directors 2 082 4 481 2 221 40 53 6 795 30 2 897 242 8 372 Group management Rune Bjerke, CEO 4 437 - 4 639 0 305 4 945 676 106 3 272 8 846 Bjørn Erik Næss, CFO 3 186 - 3 187 956 195 4 339 1 045 2 644 2 704 4 646 Ottar Ertzeid, group EVP 1 650 - 2 520 6 300 166 8 986 8 410 6 509 5 598 Liv Fiksdahl, group EVP 1 715 - 1 744 497 184 2 425 696 2 728 637 5 543 Solveig Hellebust, group EVP (from 1 April 2009) 1 850 - 1 308 - 127 1 435 565 0 142 107 Cathrine Klouman, group EVP 2 098 - 2 133 629 161 2 923 797 3 639 952 5 657 Kari Olrud Moen, acting group EVP (until 1 April 2009) 1 383 - 1 498 277 146 1 921 598 0 381 1 327 Jarle Mortensen, acting group EVP (until 1 July 2009) 1 500 - 1 718 200 176 2 094 710 2 722 382 5 829 Karin Bing Orgland, group EVP (from 1 July 2009) 2 700 - 2 351 1 144 160 3 655 924 67 1 113 15 055 Tom Rathke, group EVP 2 800 - 3 005 420 219 3 644 1 200 362 2 019 11 814 Åsmund Skår, group EVP (until 20 February 2009) 2 913 - 3 058 437 91 3 586 701 269 1 335 17 366 Leif Teksum, group EVP 3 195 - 3 244 959 233 4 436 1 048 1 939 2 071 30 137 Total group management 29 426 - 30 406 11 818 2 165 44 390 17 370 14 482 15 517 111 923 Control Committee Frode Hassel (chairman) - 389 - - - 389 - 0 - - Svein Brustad - 243 - - - 243 - 0 - - Svein Norvald Eriksen - 245 - - - 245 - 1 264 - - Ingebjørg Harto (until 14 May 2009) - 216 - - - 216 - 0 - - Karl Ove Hovden (until 21 April 2009) - 36 - - 122 158 - 0 - - Merete Smith - 282 - - - 282 - 0 - - Thorstein Øverland - 283 - - - 283 - 0 - - Total Control Committee - 1 694 - - 122 1 816 - 1 264 - - Total Supervisory Board - 1 278 - - - 1 278 - - - - Total 31 508 7 454 32 627 11 858 2 340 54 280 17 400 18 643 15 760 120 295 Total lending to other employees 14 191 189
188 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 45 Remunerations etc. (continued)
Remunerations etc. in 2008 DnB NOR Group Fixed annual Paid Bonus Bonus earned Current value salary as remunera- Paid earned in Benefits Total in 2008, Loans as Accrued of pension at 31 Dec. tion in salaries 2007, paid in kind remunera- to be paid at 31 Dec. pension agree- Amounts in NOK 1 000 2008 1) 2008 2) in 2008 3) in 2008 5) in 2008 6) tion in 2008 in 2009 4) 5) 2008 7) expenses ment 8) Board of Directors of DnB NOR ASA Olav Hytta (chairman until 18 June 2008) 9) - 393 - - 4 396 - 164 - - Anne Carine Tanum (chairman from 18 June 2008) 9) - 545 - - 1 546 - 0 - - Johan Nic. Vold (vice-chairman until 18 June 2008) 9) - 183 - - 0 183 - 25 - - Bjørn Sund (vice-chairman from 18 June 2008) 9) 10) - 378 - - 2 379 - 0 - - Per Hoffmann 559 505 588 16 192 1 301 0 1 699 47 1 762 Nina Britt Husebø (until 18 June 2008) - 123 457 53 199 831 - 4 40 784 Jørn O. Kvilhaug 869 443 1 269 61 150 1 922 0 415 87 3 869 Bent Pedersen 10) - 610 - - 0 610 - 0 - - Tore Olaf Rimmereid (from 18 June 2008) 9) - 253 - - 1 253 - 0 - - Trine Sæther Romuld 10) - 333 - - 0 333 - 0 - - Ingjerd Skjeldrum 600 505 656 16 325 1 502 0 93 68 1 978 Siri Pettersen Strandenes 10) - 499 - - 1 499 - 0 - - Total Board of Directors 2 028 4 766 2 970 146 873 8 755 0 2 399 242 8 393 Group management Rune Bjerke, CEO 4 437 - 4 311 1 276 246 5 833 0 98 2 995 5 583 Tom Grøndahl, deputy CEO (until 1 March 2008) - - 2 893 819 349 4 061 - 675 2 492 31 196 Ottar Ertzeid, group EVP 1 650 - 2 600 7 016 357 9 973 6 300 0 617 6 385 Liv Fiksdahl, group EVP 1 715 - 1 794 725 417 2 936 497 2 908 768 6 206 Anne-Brit Folkvord, group EVP (until 29 September 2008) - - 1 755 500 339 2 594 - 819 1 054 10 148 Cathrine Klouman, group EVP 2 098 - 2 140 610 191 2 941 629 3 185 1 146 6 012 Bjørn Erik Næss, CFO (from 9 March 2008) 3 186 - 2 422 - 150 2 573 956 7 844 3 593 3 489 Kari Olrud Moen, acting group EVP (from 29 September 2008) 1 383 - 1 486 447 146 2 079 277 0 506 1 322 Tom Rathke, group EVP 2 800 - 3 144 797 194 4 135 420 1 610 2 042 10 472 Åsmund Skår, group EVP 2 912 - 3 035 841 551 4 427 437 1 539 1 641 20 618 Leif Teksum, group EVP 3 195 - 3 283 916 359 4 558 959 2 070 2 118 30 361 Total group management 23 376 - 28 862 13 948 3 300 46 110 10 474 20 747 18 974 131 793 Control Committee Frode Hassel (chairman) - 385 - - - 385 - 0 - - Svein Brustad - 240 - - - 240 - 0 - - Svein Norvald Eriksen - 245 - - - 245 - 1 398 - - Ingebjørg Harto - 240 - - - 240 - 0 - - Merete Smith (from 30 April 2008) - 200 - - - 200 - 0 - - Thorstein Øverland - 270 - - - 270 - 0 - - Total Control Committee - 1 581 - - - 1 581 - 1 398 - - Total Supervisory Board - 1 264 - - - 8 242 - - - - Total 25 404 7 611 31 833 14 093 4 173 64 688 10 474 24 543 19 216 140 185 Total lending to other employees 12 810 324
DnB NOR ANNUAL REPORT 2009 189 ANNUAL ACCOUNTS DnB NOR GROUP
Note 45 Remunerations etc. (continued)
1) Fixed annual salary at year-end for employees who were members of the Board of Directors or the group management team during the year. 2) Includes remuneration received from all companies within the DnB NOR Group for service on Boards of Directors and committees. Remuneration from DnB NOR ASA was NOK 3 321 000 in 2009. 3) Includes salary payments for the entire year and holiday pay on bonuses. Some employees were members of the Board of Directors or the group management team for only parts of the year. 4) 20 per cent of bonuses paid in 2009 was in the form of shares at the market price prevailing at the time of allotment, which was 7 May 2009. A total of 20 436 shares were bought in the market at a price of NOK 44.89 per share. The shares have a minimum holding period of two years. 5) Group executive vice president Ottar Ertzeid, head of DnB NOR Markets, has a performance-based salary including both fixed and variable payments. The size of the performance-based pay depends on results achieved by the business area and on long-term performance. The performance-based pay earned in 2009, excluding tax, will in its entirety be invested in shares in DnB NOR ASA. The shares have a minimum holding period of three years. 6) Benefits in kind include payments from the employee investment funds in 2008 and pension payments. 7) Loans to shareholder-elected representatives are extended on ordinary customer terms. Loans to DnB NOR employees are extended on special terms, which are close to ordinary customer terms. 8) The net present value of pension agreements represents accrued pension commitments excluding payments into funded pension schemes. Assumptions used in actuarial calculations of accrued pension expenses and the present value of pension agreements are shown in note 24 Pensions. 9) Also a member of the Compensation Committee. 10) Also a member of the Audit Committee.
Other information on pension agreements Rune Bjerke has a pension agreement entitling him to a pension representing 70 per cent of fixed salary from the age of 60. Ottar Ertzeid, Liv Fiksdahl, Cathrine Klouman, Bjørn Erik Næss, Kari Olrud Moen, Tom Rathke and Leif Teksum have pension agreements entitling them to a pension representing 70 per cent of fixed salary from the age of 62. Karin Bing Orgland has a pension agreement entitling her to a pension representing 70 per cent of fixed salary from the age of 65. Solveig Hellebust has a pension agreement entitling her to a pension representing 70 per cent of fixed salary, limited to 12 times the National Insurance basic amount, from the age of 65.
Subscription rights programme for employees There was no subscription rights programme for employees in the DnB NOR Group at year-end 2009.
Remuneration to the statutory auditor DnB NOR ASA DnB NOR Group Amounts in NOK 1 000 2009 2008 2009 2008 Statutory audit 1) 597 775 23 136 20 018 Other certification services 775 175 2 083 3 271 Tax-related advice 2) 4 0 4 164 2 532 Other services 1 247 5 1 988 908 Total remuneration to the statutory auditor 2 623 755 31 371 24 949 Additional services 1 January - 30 April 2008 3) 180 896
1) Includes fees for auditing funds managed by DnB NOR. 2) Mainly related to assistance in tax matters for employees outside Norway. 3) The auditing firm Ernst & Young AS was elected new auditor for DnB NOR ASA with effect from 2008 at the general meeting on 30 April 2008. Additional services in the period 1 January to 30 April 2008 were performed by the previous auditor.
190 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 46 Information on related parties
The largest owner of the DnB NOR Group is the Norwegian government, represented by the Ministry of Trade and Industry, which owns and controls 34 per cent of the shares in the parent company DnB NOR ASA. See note 48 Largest shareholders.
A large number of bank transactions are entered into with related parties as part of ordinary business transactions, comprising loans, deposits and foreign exchange transactions. These transactions are based on market terms. The table below shows transactions with related parties, including balance sheets at year-end and related expenses and income for the year. Related companies are associated companies plus Sparebankstiftelsen DnB NOR (the Savings Bank Foundation). See note 34 for a specification of associated companies. Loans to board members and their spouses/partners and under-age children are extended on ordinary customer terms. Loans to group management, like loans to other group employees, are extended on special terms, which are close to ordinary customer terms.
Transactions with related parties DnB NOR Group Group management and Board of Directors Related companies Amounts in NOK million 2009 2008 2009 2008 Loans as at 1 January 26 16 9 14 New loans/repayments during the year (7) 6 372 (5) Changes in related parties 3 4 - - Loans as at 31 December 22 26 381 9
Interest income 1 1 0 1
Deposits as at 1 January 1) 18 13 11 084 10 109 Deposits/withdrawals during the year 7 10 (1 382) 984 Changes in related parties (2) (5) - (9) Deposits as at 31 December 22 18 9 702 11 084
Interest expenses 1 1 188 400
Guarantees 1) - - 20 869 17 220
1) DnB NOR carries loans in its balance sheets which according to a legal agreement have been transferred to Eksportfinans and are guaranteed by DnB NOR. According to the agreement, DnB NOR still carries interest rate risk and credit risk associated with the transferred portfolio. These portfolios totalled NOK 9 215 million and NOK 9 999 million respectively at year-end 2009 and 2008. The loans are set off by deposits/payments from Eksportfinans. DnB NOR has also issued guarantees for other loans in Eksportfinans.
No write-downs were made on loans to related parties in 2009 and 2008. Reference is made to note 45 for information on loans to group management members and directors. Transactions with deputy members of the Board of Directors are not included in the table above. In general, DnB NOR employee loans should be paid by automatic debit in monthly instalments in arrear. Employees' commitments are within the term limits applying to general customer relationships. Security is furnished for employee loans in accordance with legal requirements.
Major transactions and agreements with related parties
Eksportfinans DnB NOR Bank ASA has a 40 per cent ownership interest in Eksportfinans. Financial market turbulence resulted in sizeable unrealised losses in Eksportfinans' liquidity portfolio in the first quarter of 2008. In order to ensure an adequate capital base for the company, its Board of Directors implemented three measures: x A share issue of NOK 1.2 billion aimed at the company's owners was implemented, and all owners participated based on their proportional shares x A portfolio hedge agreement was entered into, and the owners were invited to participate. DnB NOR Bank ASA's share of the agreement corresponded to 40.43 per cent. The agreement secures Eksportfinans against further decreases in portfolio values of up to NOK 5 billion effective from 29 February 2008. Any recovery of values relative to nominal values will accrue to the participants in the portfolio hedge agreement as payment for their hedging commitment x During the first quarter of 2008, Eksportfinans' largest owner banks, DnB NOR Bank ASA, Nordea Bank AB and Danske Bank A/S approved a committed credit line giving the company access to a liquidity reserve of up to USD 4 billion. The agreement was renewed in June 2009. DnB NOR Bank ASA's share of this agreement represents approximately USD 2.2 billion. At end-December 2009, Eksportfinans had not availed itself of this credit line
The transactions with Eksportfinans have been entered into on ordinary market terms as if they had taken place between independent parties.
DnB NOR ANNUAL REPORT 2009 191 ANNUAL ACCOUNTS DnB NOR GROUP
Note 46 Information on related parties (continued)
Stimulus packages On 24 October 2008, the Norwegian parliament authorised the Ministry of Finance to launch a scheme whereby the government and the banks exchange Treasury bills for covered bonds for an agreed period. Norges Bank administers the scheme on commission from the Ministry of Finance.
Under the swap scheme, the government sells Treasury bills to the banks in a time-limited swap for covered bonds. The banks have free disposal over the Treasury bills they acquire and may sell them in the market if they so wish. Treasury bill maturities will be between three and six months. The swap agreements last for periods of up to five years, and the banks undertake to purchase new Treasury bills with six- month maturities when the agreement period expires. The Treasury bills are priced at NIBOR plus a premium corresponding to the margin at the time the agreement was concluded. As an additional requirement, there must be a spread of minimum 40 basis points between the agreed interest rate and the Treasury bill yield. Upon expiry of the agreements, the banks are under an obligation to repurchase the covered bonds from the government at the original selling price. Payments related to the covered bonds are credited to the banks on the same day as the payments are made, unless default occurs during the duration of the swap agreement.
DnB NOR Bank ASA has purchased bonds from DnB NOR Boligkreditt, which have been used as collateral for swap agreements with Norges Bank. The bank is required to repurchase the covered bonds at the original selling price. The bank receives yield from the covered bonds as if they never had been sold. The accounting treatment of sales of financial instruments where the seller retains substantially all the risks and returns associated with the instrument, is described in IAS 39.20 Financial Instruments – Recognition and Measurement. The bank is of the opinion that the requirement for transfer of risk and returns associated with the bonds in accordance with this standard have not been fulfilled, and that the bonds thus cannot be derecognised from the balance sheet of the bank. On a consolidated basis, the bonds will be treated as own bonds and netted against issued bonds in DnB NOR Boligkreditt.
In practice, the swap agreements imply that the bank purchases Treasury bills from Norges Bank. These are initially recorded as investments in Treasury bills. The obligation to repurchase the bonds at a price corresponding to the value of the Treasury bills is recorded as funding from Norges Bank. At end-December 2009, this funding represented NOK 118.1 billion. At end-December 2009, the bank's investments in Treasury bills used in the swap agreements represented a corresponding amount.
Note 47 Earnings per share
DnB NOR Group 2009 2008 Profit for the year (NOK million) 7 026 8 918 Profit attributable to shareholders (NOK million) 8 585 9 211 Profit attributable to shareholders excluding operations held for sale (NOK million) 8 505 9 211 Profit from operations and non-current assets held for sale, after taxes 80 0 Average number of shares (in 1 000) 1) 1 335 838 1 332 654 Average number of shares, fully diluted (in 1 000) 1) 1 335 838 1 332 654 Earnings/diluted earnings per share (NOK) 6.43 6.91 Earnings per share excluding operations held for sale (NOK) 6.37 6.91 Earnings per share, operations held for sale (NOK) 0.06 0.00
1) Holdings of own shares are not included in calculations of the number of shares.
192 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR GROUP
Note 48 Largest shareholders
Shares Ownership in Shareholder structure in DnB NOR ASA as at 31 December 2009 in 1 000 per cent Norwegian Government/Ministry of Trade and Industry 553 792 34.00 Savings Bank Foundation 163 369 10.03 National Insurance Scheme Fund 62 512 3.84 Capital Research/Capital International 40 831 2.51 Fidelity Investments 36 532 2.24 Jupiter Asset Management 31 682 1.95 People's Bank of China 18 649 1.14 DnB NOR Funds 16 853 1.03 Blackrock Investments 15 305 0.94 Nordea Funds 14 251 0.87 Standard Life 13 575 0.83 State of New Jersey Com Pension Fund 12 611 0.77 Schroder Investment Management 9 721 0.60 Vanguard 9 441 0.58 L&G Legal and General 7 756 0.48 Storebrand Funds 7 569 0.46 Deutsche Bank AG/DWS Investments 7 438 0.46 Bessemer 7 041 0.43 DFA Dimentional Fund Advisors 7 019 0.43 State Street Global Advisors 6 639 0.41 Total largest shareholders 1 042 585 64.01 Other 586 214 35.99 Total 1 628 799 100.00
Note 49 Off-balance sheet transactions, contingencies and post-balance sheet events
Off-balance sheet transactions DnB NOR Group 31 Dec. 31 Dec. Amounts in NOK million 2009 2008 Performance guarantees 26 000 34 367 Payment guarantees 19 250 24 582 Loan guarantees 1) 11 774 16 202 Guarantees to the Norwegian Banks' Guarantee Fund 939 0 Guarantees for taxes etc. 4 655 4 801 Other guarantee commitments 3 892 5 448 Total guarantee commitments 66 510 85 399 Support agreements 8 045 4 499 Total guarantee commitments etc. *) 74 555 89 899 Unutilised credit lines and loan offers 376 282 361 259 Documentary credit commitments 14 839 24 896 Other commitments 2 858 540 Total commitments 393 979 386 695 Total guarantee and off-balance commitments 468 534 476 594
Securities 151 067 202 611 - are pledged as security for: Loans 2) 150 934 202 464 Other activities 133 147
*) Of which counter-guaranteed by financial institutions 209 566
1) DnB NOR carries loans in its balance sheet that subject to legal agreement have been transferred to Eksportfinans and for which DnB NOR has issued guarantees. According to the agreement, DnB NOR still carries interest rate risk and credit risk for the transferred portfolio. Customer loans in the portfolio totalling NOK 9 215 million were recorded in the balance sheet as at 31 December 2009. 2) NOK 60 780 million in securities as at 31 December 2009 has been pledged as collateral for credit facilities with Norges Bank (the Norwegian central bank). According to regulations, these loans must be fully collateralised by a mortgage on interest-bearing securities and/or the bank’s deposits with Norges Bank.
DnB NOR ANNUAL REPORT 2009 193 ANNUAL ACCOUNTS DnB NOR GROUP
Note 49 Off-balance sheet transactions, contingencies and post-balance sheet events (continued)
As a member of Continuous Linked Settlement Bank (CLS Bank) DnB NOR has an obligation to contribute to cover any deficit in CLS Bank's central settlement account for member banks, even if the default is caused by another member bank. Initially, such deficit will be sought covered by other member banks based on transactions the respective banks have had with the member bank which has caused the deficit in CLS Bank. Should there remain an uncovered deficit in CLS Bank, this will be covered pro rata by the member banks in CLS (currently 71 of the world's largest banks), according to Article 9 "Loss Allocations" of CLS Bank's International Rules. According to the agreements between CLS and the member banks, the pro rata payment obligations related to such coverage of any remaining deficit are limited to USD 30 million per member bank. At the end of 2009, DnB NOR had not recorded any obligations in relation to CLS.
Contingencies In the autumn of 2008, an investigation was initiated against DnB NOR following allegations that the bank had traded Treasury bills after receiving insider information in connection with the Norwegian government’s stimulus package. The investigation was closed on 17 February 2010 and resulted in a fine of NOK 12 million against DnB NOR ASA and the forfeiture of estimated gains of NOK 14 million. At the same time, the case against two employees was dropped. DnB NOR accepted the fine without a judicial review, but maintains that no unlawful insider information was given in the case. Thus, DnB NOR is also of the opinion that no employees broke the law on behalf of the bank. In its assessment, DnB NOR emphasised that a judicial review would be resource-intensive for management and other employees over a long period.
Due to its extensive operations in Norway and abroad, the DnB NOR Group will regularly be party to a number of legal actions. None of the current disputes are expected to have any material impact on the Group's financial position.
Reference is made to the previous reported dispute between HeidelbergCement Pensjonskasse/Norcem AS and Vital Forsikring concerning a claim for damages of up to NOK 110 million. It was alleged that Vital Forsikring gave incorrect advice in connection with the transfer of assets from a premium fund under the company's pension scheme. Legal proceedings were held in the Bergen District Court in May 2009. Vital Forsikring was held not liable on all counts and awarded full costs in the judgment passed on 16 June 2009. The judgement is final and enforceable.
Bovista ApS in Copenhagen, which is a wholly-owned subsidiary of RC Real Estate, has sued Bank DnB NORD for up to DKK 180 million plus interest, claiming that the bank has wrongfully used proceeds from the sale of properties as loan repayments without consulting the company. The bank contests the claim.
DnB NOR Markets Inc. in New York has been sued for up to USD 25 million plus interest and charges in connection with the underwriting of a bond issue (Lehman Brothers). The company contests the claim.
Ivar Petter Røeggen has instituted legal proceedings against DnB NOR Bank ASA, claiming that two investment agreements for structured products be declared null and void and that the bank be ordered to pay costs of NOK 266 000 plus interest on late payments. It is not the size of the amount disputed that is significant, rather whether this will serve as a test case for similar cases. The bank contests the claim.
In addition to the above-mentioned civil action brought against DnB NOR Bank ASA by Ivar Petter Røeggen, a group action with 19 plaintiffs has been brought against the bank, relating to the sale of the same structured products as the action brought by Rødeggen. The bank main- tains that there is no legal basis for a group action and contests the claim. In the previously mentioned action brought by Hans Bjarne Voster relating to the sale of structured products, with a claim totalling NOK 500 000, an out-of-court settlement was reached.
DnB NOR Bank ASA has brought an action against seven Norwegian municipalities for the settlement of interest swaps on commercial terms. The municipalities have stopped their payments under the agreements citing that full settlement took place upon payment of the residual value of the investments made. The bank's total claim in the civil action is NOK 968 million plus interest on overdue payments.
Post balance-sheet events On 9 March 2010, Vital Forsikring received a response to its application to Finanstilsynet dated 15 June 2009 concerning the introduction of a new calculation base for individual annuity and pension insurance and group association insurance to reflect longer life expectancy. The application was turned down, and Finanstilsynet required that the company build up adequate provisions by the end of 2012. Vital has appealed the decision.
No additional information has come to light about important matters which had occurred on the balance sheet date 31 December 2009 and up until the Board of Directors' final consideration of the annual accounts on 17 March 2010.
194 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR ASA Income statement
DnB NOR ASA Amounts in NOK million Note 2009 2008 Total interest income 122 261 Total interest expenses 523 538 Net interest income (401) (277) Commissions and fees payable etc. 5 5 Other income 1) 1 5 114 179 Net other operating income 5 109 173 Total income 4 708 (104) Salaries and other personnel expenses 6 5 Other expenses 202 241 Depreciation and write-downs of fixed and intangible assets 0 850 Total operating expenses 208 1 097 Pre-tax operating profit 4 500 (1 201) Taxes 3 1 286 (736) Profit for the year 3 214 (465)
Earnings/diluted earnings per share (NOK) 2.41 (0.35) Earnings per share excluding operations held for sale (NOK) 2.41 (0.35)
1) Dividends from group companies/group contributions.
Balance sheet
DnB NOR ASA Amounts in NOK million Note 31 Dec. 2009 31 Dec. 2008
Assets Deposits with DnB NOR Bank ASA 22 747 4 426 Lending to other group companies 228 231 Investments in group companies 4 51 126 51 058 Other receivables due from group companies 0 179 Other assets 0 125 Total assets 74 101 56 019
Liabilities and equity Loans from DnB NOR Bank ASA 5 11 161 11 324 Loans from other group companies 95 0 Other liabilities and provisions 3 937 1 Paid-in capital 38 844 24 994 Retained earnings 20 064 19 700 Total liabilities and equity 74 101 56 019
DnB NOR ANNUAL REPORT 2009 195 ANNUAL ACCOUNTS DnB NOR ASA Statement of changes in equity
DnB NOR ASA Share Share premium Other Total Amounts in NOK million capital reserve equity equity Balance sheet as at 31 December 2007 13 327 11 668 20 165 45 159 Profit for the period (261) (261) Balance sheet as at 31 December 2008 13 327 11 668 19 700 44 694 Profit for the period 3 214 3 214 Dividends for 2009 (2 850) (2 850) Issue of share capital 2 961 10 889 13 850 Balance sheet as at 31 December 2009 16 288 22 556 20 064 58 908
The share premium reserve can be used to cover financial losses. Other equity can be used in accordance with stipulations in the Public Limited Companies Act.
The share capital increase pertaining to the rights issue in DnB NOR ASA, adopted by the general meeting on 19 November 2009, was completed during December, and the registration of the capital increase in the Norwegian Register of Business Enterprises was announced on 21 December 2009. In consequence of the rights issue, DnB NOR received NOK 14 007 670 135.80 before the deduction of transaction costs. The company's share capital was thus increased by NOK 2 961 452 460 through the issue of 296 145 246 new shares. The new share capital of DnB NOR ASA is NOK 16 287 988 610 divided into 1 628 798 861 shares, each with a nominal value of NOK 10.
Cash fl ow statement
DnB NOR ASA Amounts in NOK million 2009 2008
Operations Payments to operations (17) (46) Taxes paid 6 0 Net cash flow relating to operations (11) (46)
Investment activity Receipts on the sale of long-term investments in shares 0 0 Payments on the acquisition of long-term investments in shares 0 (265) Net cash flow relating to investment activity 0 (265)
Equity funding Group contributions from subsidiaries 85 3 268 Dividend payments 0 (5 997) Issue of new shares 13 789 0 Net cash flow relating to equity funding 13 874 (2 729)
Other liquidity financing Net receipts/payments on long-term liabilities (193) 4 783 Net investments in credit institutions (13 113) (1 646) Net interest payments on other liquidity financing (557) (97) Net cash flow relating to other liquidity financing (13 863) 3 040 Net cash flow 0 0
196 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR ASA Accounting principles
Basis for preparing the accounts DnB NOR ASA is the parent company in the DnB NOR Group. DnB NOR ASA has prepared accounts according to the Norwegian Ministry of Finance's regulations on annual accounts, Section 1-5, on the use of IFRS, hereinafter called the Norwegian IFRS regulations. These regulations give permission to record provisions for dividends and group contributions in subsidiaries as income and record the Board of Directors' proposed dividends and group contributions as liabilities on the balance sheet date. According to IFRS, dividends should be classi- fied as equity until approved by the general meeting.
Changes in accounting principles The effects of changes in accounting principles are recorded directly against equity.
Ownership interests in group companies Subsidiaries are defined as companies in which DnB NOR ASA has control, directly or indirectly, through a long-term ownership interest and a holding of more than 50 per cent of the voting share capital or primary capital. DnB NOR ASA's subsidiaries are DnB NOR Bank ASA, Vital Forsikring ASA, DnB NOR Kapitalforvaltning Holding AS and DnB NOR Skadeforsikring AS. All subsidiaries are 100 per cent owned.
In the accounts of DnB NOR ASA, investments in subsidiaries are recorded at cost.
Transactions with group companies Transactions with subsidiaries are conducted in accordance with general business conditions and principles whereby income, expenses, losses and gains are distributed as correctly as possible between the group companies.
Dividends and group contributions Dividends and group contributions from group companies are recorded in the accounts in the same year as provisions are made in the relevant companies. Group contributions received are classified as dividends when considered to represent return on invested capital. Distributed dividends and group contributions are recorded as liabilities in accordance with the Board of Directors proposal on the balance sheet date.
Taxes Taxes for the year comprise payable taxes for the financial year and changes in the value of deferred taxes and deferred tax assets.
Deferred taxes are calculated on the basis of differences between the profits stated in the accounts and the profits computed for tax purposes, which will be offset in the future. Evaluations are based on the balance sheet and tax position on the balance sheet date. Taxable and tax-deductible timing differences will be netted against each other within the same time interval. Deferred tax assets can be recognised as assets in the balance sheet when it is considered probable that the tax-deductible timing differences may be realised.
DnB NOR ANNUAL REPORT 2009 197 ANNUAL ACCOUNTS DnB NOR ASA
Note 1 Dividends/group contributions from subsidiaries
Dividends/group contributions from subsidiaries DnB NOR ASA Amounts in NOK million 2009 2008 Group contributions received from: DnB NOR Bank ASA 5 208 0 Vital Forsikring ASA 0 74 Other group companies (94) 105 Total dividends/group contributions from subsidiaries 5 114 179
Allocations DnB NOR ASA Amounts in NOK million 2009 2008 Proposed dividends per share (NOK) 1.75 0.00 Share dividend 2 850 0 Transfers to/from other equity 364 (465) Total allocations 3 214 (465)
Note 2 Remunerations etc.
All employees in DnB NOR ASA are also employed in one of the underlying companies within the Group. The holding company purchases services from other units within the Group. The group chief executive and group executive vice presidents are employed in both DnB NOR ASA and one of the subsidiaries in the Group. Personnel expenses and other administrative expenses relating to these individuals are divided between the subsidiaries and DnB NOR ASA according to use.
See note 45 for the DnB NOR Group for further details on remunerations etc. See also note 6 for DnB NOR ASA, specifying shares in DnB NOR ASA owned by senior executives and members of governing bodies.
Note 3 Taxes
DnB NOR ASA Amounts in NOK million 2009 2008
Tax base Operating profit in DnB NOR ASA 4 500 (1 201) Calculated effect from dividends/group contributions from subsidiaries 94 (95) Tax-exempt income and non-deductible expenses 0 850 Tax base for the year 4 594 (446)
Taxes Payable taxes 1 161 0 Changes in deferred taxes 125 (125) Other changes in estimates 0 (611) Total taxes 1 286 (736)
198 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR ASA
Note 4 Investments in subsidiaries as at 31 December 2009 1)
DnB NOR ASA Ownership Amounts in 1 000 Share Number Nominal share in Recorded Values in NOK unless otherwise indicated capital of shares value per cent value DnB NOR Bank 17 514 311 175 143 110 17 514 311 100.0 41 892 503 DnB NORD EUR 1 082 095 551 868 501 EUR 551 868 51.0 Den Norske Syndicates GBP 200 200 000 GBP 200 100.0 DnB NOR Asia SGD 20 000 20 000 000 SGD 20 000 100.0 DnB NOR Bogstadveien 45 A 12 181 12 181 162 12 181 100.0 DnB NOR Boligkreditt 1 577 000 15 770 000 1 577 000 100.0 DnB NOR Bygg 112 826 112 826 112 826 100.0 DnB NOR Eiendom 10 003 100 033 10 003 100.0 DnB NOR Eiendomsutvikling 91 000 91 000 000 91 000 100.0 DnB NOR Finans 1 032 000 10 320 000 1 032 000 100.0 DnB NOR Invest Holding 100 000 200 000 100 000 100.0 DnB NOR Luxembourg EUR 17 352 70 000 EUR 17 352 100.0 DnB NOR Markets Inc. USD 1 1 000 USD 1 100.0 DnB NOR Meglerservice 1 200 12 1 200 100.0 DnB NOR Monchebank RUB 500 000 500 000 000 RUB 500 000 100.0 DnB NOR Næringskreditt 550 000 550 000 550 000 100.0 DnB NOR Næringsmegling 1 000 10 000 1 000 100.0 DnB NOR Reinsurance 21 000 21 000 21 000 100.0 Hafjell Holding 10 000 1 000 10 000 100.0 Lørenfaret NE 1 500 5 000 500 100.0 Nordlandsbanken 625 062 50 004 984 625 062 100.0 Postbanken Eiendom 2 000 20 000 2 000 100.0 SalusAnsvar SEK 85 614 21 403 568 SEK 85 614 100.0 Svensk Fastighetsförmedling SEK 8 940 89 400 SEK 8 940 100.0 Viul Hovedgård 7 500 750 000 7 500 100.0 DnB NOR Kapitalforvaltning Holding 220 050 220 050 220 050 100.0 1 365 929 DnB NOR Kapitalforvaltning 109 680 548 402 109 680 100.0 DnB NOR Asset Management Holding (Sweden) SEK 135 200 1 352 000 SEK 135 200 100.0 DnB NOR Private Equity 10 000 10 000 10 000 100.0 DnB NOR Skadeforsikring 265 000 265 000 265 000 100.0 372 530 Vital Forsikring 1 320 682 52 827 288 1 320 682 100.0 7 495 045 Vital Eiendom 10 000 20 000 10 000 100.0 Vital Eiendomsforvaltning 3 000 3 000 3 000 100.0 Vital Pekon 1 400 1 400 1 400 100.0 Total investments in subsidiaries 51 126 007
1) Major subsidiaries and sub-subsidiaries in the DnB NOR Group.
Note 5 Loans and deposits from credit institutions
Loan totalling NOK 10 222 million have been granted by DnB NOR Bank ASA at general market terms. Other loans from DnB NOR Bank ASA total NOK 939 million.
DnB NOR ANNUAL REPORT 2009 199 ANNUAL ACCOUNTS DnB NOR ASA
Note 6 Shares in DnB NOR ASA held by members of governing bodies and senior executives
Number of shares Number of shares 31 Dec. 2009 31 Dec. 2009
Supervisory Board of DnB NOR ASA Control Committee of DnB NOR ASA Members elected by shareholders Frode Hassel, chairman 0 Amund Skarholt, chairman 1 222 Svein Norvald Eriksen 0 Anne Cathrine Frøstrup, vice-chairman 719 Karl Olav Hovden 0 Nils Halvard Bastiansen 0 Thorstein Øverland 0 Jan-Erik Dyvi 13 811 Toril Eidesvik 0 Board of Directors of DnB NOR ASA Elisabeth Grændsen 244 Anne Carine Tanum, chairman 300 000 Herbjørn Hansson 20 000 Bjørn Sund, vice-chairman 31 196 Leif O. Høegh 0 Gunilla Berg 0 Knut Hartvig Johannson 24 502 Per Hoffmann 2 142 Alf I. Kirkesæther 0 Jørn O. Kvilhaug 1 151 Tomas Leire 1 466 Bent Pedersen 15 523 Eldbjørg Løwer 0 Tore Olaf Rimmereid 6 111 Dag J. Opedal 1 705 Ingjerd Skjeldrum 5 882 Gudrun B. Rollefsen 0 Siri Pettersen Strandenes 200 Arthur Sletteberg 2 444 Merethe Smith 0 Senior executives Birger Solberg 4 888 Rune Bjerke, CEO 13 138 Tove Storrødvann 255 Bjørn Erik Næss, CFO 18 230 Gine Wang 0 Ottar Ertzeid, group executive vice president 67 746 Hanne Rigmor Egenæss Wiig 1 705 Liv Fiksdahl, group executive vice president 3 902 Solveig Hellebust, group executive vice president 0 Members elected by employees Cathrine Klouman, group executive vice president 8 248 Rune André Bernbo 0 Karin Bing Orgland, group executive vice president 2 444 Else Carlsen 1 896 Tom Rathke, group executive vice president 4 120 Bente H. Espenes 182 Leif Teksum, group executive vice president 37 904 Bjørn Hennum 875 Svein Ove Kvalheim 1 222 Carl A. Løvvik 116 Group Audit Svein Kåre Mikkelsen 0 Tor Steenfeldt-Foss, group executive vice president 0 Einar Pedersen 1 481 Marianne Steinsbu 3 482 Per Åge Sørby 0 The statutory auditor owns no shares in DnB NOR ASA
The figures also include shares held by the immediate family and companies in which the shareholder has such influence as stated in Section 7-26 of the Act relating to annual accounts, etc.
Oslo, 17 March 2010 The Board of Directors of DnB NOR ASA
Anne Carine Tanum Bjørn Sund (chairman) (vice-chairman)
Gunilla Berg Per Hoffmann Jørn O. Kvilhaug Bent Pedersen
Tore Olaf Rimmereid Ingjerd Skjeldrum Siri Pettersen Strandenes
Rune Bjerke (group chief executive)
200 DnB NOR ANNUAL REPORT 2009 ANNUAL ACCOUNTS DnB NOR ASA Statement pursuant to Section 5-5 of the Securities Trading Act
We hereby confi rm that the annual accounts for the Group and the company for 2009 to the best of our knowledge have been prepared in accordance with applicable accounting standards and give a true and fair view of the assets, liabilities, fi nancial position and profi t or loss of the Group and the company taken as a whole.
The directors’ report gives a true and fair view of the development and performance of the business and the position of the Group and the company, as well as a description of the principal risks and uncertainties facing the Group.
Oslo, 17 March 2010 The Board of Directors of DnB NOR ASA
Anne Carine Tanum Bjørn Sund (chairman) (vice-chairman)
Gunilla Berg Per Hoffmann Jørn O. Kvilhaug Bent Pedersen
Tore Olaf Rimmereid Ingjerd Skjeldrum Siri Pettersen Strandenes
Rune Bjerke Bjørn Erik Næss (group chief executive) (chief fi nancial offi cer)
DnB NOR ANNUAL REPORT 2009 201 AUDITOR’S REPORT Auditor’s report
To the Annual Shareholders’ Meeting and Supervisory Board of DnB NOR ASA
AUDITOR’S REPORT FOR 2009 We have audited the annual fi nancial statements of DnB NOR ASA as of 31 December 2009, showing a profi t of NOK 3,214 million for the Parent Company and a profi t of NOK 7,026 million for the Group. We have also audited the information in the Directors’ report concerning the fi nancial state- ments, the going concern assumption, and the proposal for the allocation of the profi t. The fi nancial statements comprise the fi nancial statements for the Parent Company and the Group. The fi nancial statements of the Parent Company comprise the balance sheet, the statements of income, cash fl ows and changes in equity as well as the accompanying notes. The fi nancial statements of the Group comprise the balance sheet, the statements of income, comprehensive income, cash fl ows and changes in equity as well as the accompanying notes. Simplifi ed IFRSs pursuant to the Norwegian Accounting Act § 3-9 have been applied in the preparation of the fi nancial statements of the Parent Company. IFRSs as adopted by the EU have been applied in the preparation of the fi nancial statements of the Group. These fi nancial statements and the Directors’ report are the responsibility of the Company’s Board of Directors and Group Chief Executive. Our responsibility is to express an opinion on these fi nancial statements and on other information according to the requirements of the Norwegian Act on Auditing and Auditors.
We conducted our audit in accordance with laws, regulations and auditing standards and practices generally accepted in Norway, including the auditing standards adopted by the Norwegian Institute of Public Accountants. These auditing standards require that we plan and perform the audit to obtain reasonable assurance about whether the fi nancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the fi nancial statements. An audit also includes assessing the accounting principles used and signifi cant estimates made by management, as well as evaluating the overall fi nancial statement presentation. To the extent required by law and auditing standards, an audit also comprises a review of the management of the Company’s fi nancial affairs and its accounting and internal control systems. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, • the fi nancial statements of the Parent Company are prepared in accordance with laws and regulations and present fairly, in all material respects the fi nancial position of the Company as of 31 December 2009, and the results of its operations, cash fl ows and changes in equity for the year then ended, in accordance with simplifi ed IFRSs pursuant to the Norwegian Accounting Act § 3-9
• the fi nancial statements of the Group are prepared in accordance with laws and regulations and present fairly, in all material respects, the fi nancial position of the Group as of 31 December 2009, and the results of its operations, cash fl ows and changes in equity for the year then ended, in accordance with IFRSs as adopted by the EU
• the Company’s management has fulfi lled its duty to properly record and document the Company’s accounting information as required by law and book- keeping practice generally accepted in Norway
• the information in the Directors’ report concerning the fi nancial statements, the going concern assumption, and the proposal for the allocation of the profi t is consistent with the fi nancial statements and complies with law and regulations.
Oslo, 17 March 2010 ERNST & YOUNG AS Erik Mamelund State Authorised Public Accountant (Norway) (sign.) Note: The translation to English has been prepared for information purposes only.
202 DnB NOR ANNUAL REPORT 2009 CONTROL COMMITTEE’S REPORT Control Committee’s Report
TO THE SUPERVISORY BOARD AND THE ANNUAL GENERAL MEETING OF DnB NOR ASA
The Control Committee has carried out supervision of DnB NOR ASA and the Group in accordance with law and instructions laid down by the Supervisory Board.
In connection with the closing of the accounts for the 2009 fi nancial year, the Control Committee has examined the Directors’ Report, the annual accounts and the Auditor’s Report for DnB NOR ASA.
The Committee fi nds that the Board of Directors gives an adequate description of the fi nancial position of DnB NOR and the Group, and recommends the approval of the Directors’ Report and annual accounts for the 2009 fi nancial year.
Oslo, 17 March 2010
Frode Hassel (chairman)
Svein N. Eriksen Karl Olav Hovden Thorstein Øverland
Svein Brustad Merethe Smith (deputy) (deputy)
DnB NOR ANNUAL REPORT 2009 203 KEY FIGURES Key fi gures
DnB NOR Group 2009 2008 Interest rate analysis 1. Average combined spread for lending and deposits (%) 1.15 1.04 2. Spread for ordinary lending to customers (%) 1.61 1.01 3. Spread for deposits from customers (%) 0.29 1.08
Rate of return/profitability 4. Net other operating income, per cent of total income 39.8 36.2 5. Cost/income ratio (%) 48.3 51.4 6. Return on equity (%) 10.6 12.4 7. RARORAC (%) 17.2 13.6 8. RORAC (%) 12.6 15.3 9. Average equity including allocated dividend (NOK million) 81 236 74 005 10. Return on average risk-weighted volume (%) 0.83 0.79
Financial strength 11. Core (Tier 1) capital ratio at end of period (%) 9.3 6.7 12. Capital adequacy ratio at end of period (%) 12.1 9.5 13. Core capital at end of period (NOK million) 98 208 80 010 14. Risk-weighted volume at end of period (NOK million) 1 052 566 1 200 590
Loan portfolio and write-downs 15. Individual write-downs relative to average net lending to customers (%) 0.53 0.25 16. Write-downs relative to average net lending to customers (%) 0.67 0.33 17. Net non-performing and impaired commitments, per cent of net lending 1.71 0.99 18. Net non-performing and impaired commitments at end of period (NOK million) 19 127 11 922
Liquidity 19. Ratio of customer deposits to net customer lending at end of period (%) 53.0 50.1
Total assets owned or managed by DnB NOR 20. Assets under management at end of period (NOK billion) 468 510 21. Total combined assets at end of period (NOK billion) 2 076 2 141 22. Average total assets (NOK billion) 1 906 1 635 23. Customer savings at end of period (NOK billion) 1 059 1 108
Staff 24. Number of full-time positions at end of period 13 317 14 057 The DnB NOR share 25. Number of shares at end of period (1 000) 1 628 799 1 332 654 26. Average number of shares (1 000) 1 335 838 1 332 654 27. Earnings per share (NOK) 6.43 6.91 28. Earnings per share excluding operations held for sale (NOK) 6.37 6.91 29. Dividend per share (NOK) 1) 1.75 0.00 30. Total shareholders' return (%) 144.7 (65.5) 31. Dividend yield (%) 2.79 0.00 32. Equity per share including allocated dividend at end of period (NOK) 60.56 57.83 33. Share price at end of period (NOK) 62.75 27.00 34. Diluted share price at end of period, adjusted for rights issue (NOK) 62.75 25.64 35. Price/earnings ratio 9.85 3.91 36. Price/book value 1.04 0.47 37. Market capitalisation (NOK billion) 102.2 36.0
1) Proposed dividend for 2009.
For definition of selected key figures, see next page.
204 DnB NOR ANNUAL REPORT 2009 KEY FIGURES
Key figures (continued) Definitions 1, 2, 3 Based on nominal values excluding lending to and deposits with credit institutions and impaired loans, measured against the 3-month money market rate. 5 Total operating expenses relative to total income. Expenses exclude impairment losses for goodwill. 6 Profit for the period, excluding profit attributable to minority interests, adjusted for the period’s change in fair value recognised in equity. Average equity is calculated on the basis of recorded equity excluding minority interests. 7 RARORAC (Risk-Adjusted Return On Risk-Adjusted Capital) is defined as risk-adjusted profits relative to risk-adjusted capital requirements. Risk-adjusted profits indicate the level of profits in a normalised situation. The risk-adjusted capital requirement is described in further detail in the chapter "Management in DnB NOR". 8 RORAC (Return On Risk-Adjusted Capital) is defined as profits for the period relative to risk-adjusted capital requirements. Profits for the period are exclusive of profits attributable to minority interests and are adjusted for the period’s change in fair value recognised directly in equity and for the difference between recorded interest on average equity and interest on risk-adjusted capital. 10 Profit for the period relative to average risk-weighted volume. 20 Total assets under management for customers in Life and Asset Management. 21 Total assets and assets under management. 23 Total deposits from customers, assets under management and equity-linked bonds. 27 Excluding profits attributable to minority interests. Holdings of own shares are not included in calculations of the number of shares. 28 Excluding operations held for sale and profits attributable to minority interests. Holdings of own shares are not included in calculations of the number of shares. 30 Closing price at end of period less closing price at beginning of period, including dividends reinvested in DnB NOR shares on the dividend payment date, relative to closing price at beginning of period. 32 Equity at end of period excluding minority interests relative to the number of shares at end of period. 35 Closing price at end of period relative to annualised earnings per share. 36 Closing price at end of period relative to recorded equity at end of period. 37 Number of shares multiplied by closing price at end of period.
DnB NOR ANNUAL REPORT 2009 205 CONTACT INFORMATION Contact information
DnB NOR ASA DnB NOR Eiendom AS Group chief executive: Rune Bjerke Mailing address: NO-0021 Oslo Mailing address: NO-0021 Oslo Visiting address: Kirkegata 21, Oslo Visiting address: Stranden 21, Oslo dnbnoreiendom.no dnbnor.com Tel: +47 915 03000 Tel: +47 915 03000 Postbanken Eiendom AS DnB NOR Markets Mailing address: NO-0021 Oslo Mailing address: NO-0021 Oslo Visiting address: Kirkegata 21, Oslo Visiting address: Stranden 21, Oslo postbankeneiendom.no dnbnor.no/markets Tel: +47 915 03820 Tel: +47 915 03000 DnB NOR Boligkreditt AS Vital Forsikring ASA Mailing address: NO-0021 Oslo Mailing address: P.O. Box 7500, NO-5020 Bergen Visiting address: Kirkegata 21, Oslo Visiting addresses: Tel: +47 915 03000 Folke Bernadottes vei 40, Fyllingsdalen Beddingen 16, Trondheim DnB NOR Næringsmegling AS Vollsveien 17 A, Lysaker Mailing address: NO-0021 Oslo vital.no Visiting address: Stranden 21, Oslo Tel: +47 55 17 70 00 dnbnornaringsmegling.no Tel: +47 22 94 86 60 DnB NOR Skadeforsikring AS Mailing address: NO-0021 Oslo Visiting address: Kongens gate 18, Oslo INTERNATIONAL BRANCHES dnbnor.no DnB NOR Bank ASA, Denmark Branch Tel: +47 915 03000 Mailing address: Amerikakaj, P.O. Box 879, DK-2100 Copenhagen Ø, Denmark DnB NOR Kapitalforvaltning ASA Visiting address: Dampfærgevej 28, Copenhagen Mailing address: NO-0021 Oslo Tel: + 45 333 66 200 Visiting address: Øvre Slottsgate 3, Oslo dnbnor.no/kapitalforvaltning DnB NOR Bank ASA, Finland Branch Tel: +47 915 03000 Address: Urho Kekkosen katu 7B, 5 krs, FI-00100 Helsinki, Finland Nordlandsbanken ASA Tel: +358 10 548 2100 Mailing address: NO-8002 Bodø Visiting address: Moloveien 16, Bodø DnB NOR Bank ASA, Sweden Branch nordlandsbanken.no Mailing address: P.O. Box 3041, SE-103 63 Stockholm, Sweden Tel: +47 915 08900 Visiting address: Kungsgatan 18, Stockholm Tel: +46 8 473 41 00 Postbanken Mailing address: NO-0021 Oslo DnB NOR Bank ASA, Filiale Deutschland Visiting address: Kirkegata 21, Oslo Mailing address: Postfach 301260, DE-20305 Hamburg, Germany postbanken.no Visiting address: Neuer Wall 72, Hamburg Tel: +47 915 03800 Tel: +49 40 3575200
DnB NOR Finans AS DnB NOR Bank ASA, London Branch Mailing address: P.O. Box 7125, NO-5020 Bergen Address: 20, St. Dunstan’s Hill, Visiting address: Lars Hillesgate 30, Bergen GB-London EC3R 8HY, England dnbnorfi nans.no Tel: +44 207 621 1111 Tel: +47 56 12 85 00
206 DnB NOR ANNUAL REPORT 2009 CONTACT INFORMATION
DnB NOR Bank ASA, New York Branch REPRESENTATIVE OFFICES Address: 200 Park Avenue 31st Floor, Houston, USA New York, N.Y. 10166-0396, USA Address: Three Allen Center 333 Clay Street, Tel: +1 212 681 3800 Suite 3950 Houston, Texas 77002, USA Tel: + 1 832 214 5800 DnB NOR Bank ASA, Singapore Branch Address: 8 Shenton Way, #48-02, Temasek Tower, Rio de Janeiro, Brazil Singapore 068811 Mailing address: Caixa Postal 1620, Tel: +65 6220 6144 CEP 20001-970 Rio de Janeiro, RJ Brazil Visiting address: Praia do Flamengo 66, Bloco, DnB NOR Bank ASA, Shanghai Branch B Grupo 1014, 22210-903 Rio de Janeiro Address: 901 Shanghai Central Plaza, 381 Huai Hai Zhong Lu, Tel: +55 21 2285 1795 Shanghai 200020, China Tel: +86 21 6132 2888 DnB NOR Bank ASA, India Representative Offi ce Address: Offi ce no. 35, 3rd fl oor, DnB NOR Bank ASA, Santiago Branch Maker Chambers VI, Nariman Point, Address: Magdalena 140, piso 19, Mumbai 400 021, India Las Condes, Santiago, Chile Tel: +91 22 6144 4200 Tel: +56 2 923 0100 Athens, Greece Address: 38, Patriarchou Ioakim Street, SUBSIDIARIES 106 75 Athens, Greece Bank DnB NORD A/S Tel: +30 210 720 9574 Address: Dampfærgevej 28, DK-2100 Copenhagen Ø, Denmark Tel: +45 76 70 02 00 INVESTOR RELATIONS Bjørn Erik Næss DnB NOR Luxembourg S.A. Chief fi nancial offi cer Mailing address: P.O. Box 867, L-2018 Luxembourg Tel: +47 22 48 29 22 Visiting address: 13, rue Goethe, Luxembourg [email protected] Tel: +352 45 49 451 Per Sagbakken DnB NOR Markets, Inc. New York Head of Investor Relations/Long-term Funding Address: 200 Park Avenue 31st Floor, Tel: +47 22 48 20 72 New York, N.Y. 10166-0396, USA [email protected] Tel: +1 212 681 3800 Thor Tellefsen DnB NOR Asset Management AB Tel: +47 22 94 93 88 Mailing address: Box 3510, SE-103 69 Stockholm, Sweden [email protected] Visiting address: Kungsgatan 18, Stockholm Tel: +46 8 473 41 00 Trond Sannes Marthinsen Tel: +47 22 94 93 76 OAO DnB NOR Monchebank [email protected] Address: Lenina Avenue 14, 183032 Murmansk, Russia Tel: +7 8152 555 301 Corporate Communications Trond Bentestuen Group executive vice president Tel: +47 950 28 448 [email protected]
For information about customer service, branch offi ces and Internet banks, see dnbnor.no or call +47 915 04800 (Retail Banking) or +47 915 07700 (Corporate Banking). For information about press contacts, see dnbnor.com
DnB NOR ANNUAL REPORT 2009 207 ANNUAL GENERAL MEETING The Annual General Meeting will be held on 27 April 2010 at 6 p.m. at DnB NOR’s premises in Kirkegt. 21, Oslo. Information on how to register attendance and items on the agenda can be found at: www.dnbnor.com/agm.
Shareholders registered as owners in DnB NOR ASA with the Norwegian Central Securities Depository (VPS) may opt to receive the notice of the Annual General Meeting electronically. The individual VPS registrar can give further information about Investor Account Services. Shareholders with VPS accounts in DnB NOR who do not wish to receive notices by regular mail, may register at: www.dnbnor.no/en/markets/securities_services.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This annual report contains statements regarding the future prospects of DnB NOR, including estimates, strategies and objectives. The risks and uncertainties inherent in all forward-looking statements can lead to actual developments and profi ts differing materially from what has been expressed or implied.
208 DnB NOR ANNUAL REPORT 2009 The annual report has been produced by Group Financial Reporting and Marketing and Communications in DnB NOR // Design, counselling and production: Itera Gazette // Photo: Johs. Bø (cover, pages 12, 15, 18, 24, 28, 32, 35, 41, 74, 83, 85, 87) / DnB NOR (page 10) / GettyImages (pages 42, 78, 88) Yvonne Holth (pages 44–47) // Translation: Gina Fladmoe and Nathalie Samuelsen, Marketing and Communications // Paper: 300g Profi Matt, 130g Profi Matt and 80g Kaskad light grey // No. of copies: 5 000 // Print: Rolf Ottesen AS > DnB NOR is the Norwegian bank and a leading international niche player. Our vision is to create value through the art of serving the customer. All customers should feel valued in their contact with DnB NOR.
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