DNB Bank ASA (incorporated with limited liability in Norway) U.S.$10,000,000,000 Medium-Term Note Program
Under the Medium-Term Note Program (the “Program”) described in this prospectus (the “Prospectus”), DNB Bank ASA (the “Issuer” or “the Bank”), subject to compliance with all relevant laws, regulations and directives, may from time to time issue Medium-Term Notes (the “Notes”) denominated in any currency agreed by the Issuer and the relevant Dealer(s) (as defined below). The aggregate nominal amount of Notes outstanding will not at any time exceed U.S.$10,000,000,000 (or the equivalent in other currencies). Notice of the aggregate principal amount of the Notes, interest (if any) payable in respect of the Notes, the issue price of the Notes and any other terms and conditions not contained herein, which are applicable to each offering of the Notes, will be set out in the relevant Final Terms (as defined herein), which, with respect to Notes to be admitted to trading on the regulated market of the Luxembourg Stock Exchange, will be delivered to the Commission de Surveillance du Secteur Financier (the “CSSF”) in its capacity as competent authority under the Luxembourg Act dated July 10, 2005 on prospectuses for securities (loi relative aux prospectus pour valeurs mobilières) (the “Prospectus Act 2005”) and the Luxembourg Stock Exchange.
The Notes have not been, and will not be, registered under the U.S. Securities Act of 1933, as amended (the “Securities Act”), or any state securities laws and, subject to certain exceptions, may not be offered or sold directly or indirectly within the United States or to or for the account or benefit of U.S. persons, as defined in Regulation S under the Securities Act (“Regulation S”). The Notes may be offered for sale only (i) in the United States, to qualified institutional buyers (“QIBs”) within the meaning of, and in reliance on, Rule 144A under the Securities Act (“Rule 144A”); or (ii) outside the United States to non-U.S. persons in reliance on, and in accordance with, Regulation S, in each case, in compliance with applicable laws, regulations and directives. Prospective purchasers are hereby notified that sellers of the Notes may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A. See “Plan of Distribution and Transfer Restrictions—Selling Restrictions.”
The Notes may be issued on a continuing basis to the Dealer and any additional Dealer(s) appointed under the Program from time to time, which appointment may be for a specific issue or on an ongoing basis (each, a “Dealer” and, together, the “Dealers”). References in this Prospectus to the “relevant Dealer” shall, in relation to any issue of Notes, be to the Dealer agreeing to subscribe for such Notes or, in the case of each issue of Notes syndicated amongst a group of Dealers, the Lead Manager(s) of such issue.
Prospective investors should have regard to the factors described under the section headed “Risk Factors” in this Prospectus.
Application has been made to the CSSF in its capacity as competent authority under the Prospectus Act 2005 for the approval of this document as a base prospectus for the purposes of Article 5.4 of Directive 2003/71/EC (the “Prospectus Directive”) as amended (which includes the amendments made by Directive 2010/73/EU (the “2010 PD Amending Directive”) to the extent that such amendments have been implemented in a Member State of the European Economic Area). Application has also been made to the Luxembourg Stock Exchange for Notes issued under the Program during the period of 12 months from the date of this Prospectus to be admitted to trading on the Luxembourg Stock Exchange’s regulated market and to be listed on the Official List of the Luxembourg Stock Exchange. References in this Prospectus to Notes being “listed” (and all related references) shall mean that such Notes have been admitted to the Official List and admitted to trading on the Luxembourg Stock Exchange’s regulated market. The Luxembourg Stock Exchange’s regulated market is a regulated market for the purposes of Directive 2004/39/EC of the European Parliament and of the Council on markets in financial instruments (“MiFID”). The CSSF assumes no responsibility as to the economic and financial soundness of the transactions contemplated by this Prospectus or the quality or solvency of the Issuer in accordance with Article 7(7) of the Prospectus Act 2005.
The date of this Prospectus is 21 March 2012 The Program provides that Notes may be listed or admitted to trading, as the case may be, on such other or further stock exchanges or markets as may be agreed between the Issuer and the relevant Dealer. The Issuer may also issue Notes which are not listed or admitted to trading on any market.
The Program has not yet been rated but may be rated in the future by Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies Inc. (“Standard & Poor’s”), by Moody’s Investors Service Limited (“Moody’s”) and by Dominion Bond Rating Service (“DBRS”). Notes issued pursuant to the Program may be rated or unrated. Where an issue of Notes is rated, its rating will be specified in the relevant Final Terms and will not necessarily be the same as the rating applicable to the Program. Whether or not each credit rating applied for in relation to relevant Notes will be issued by a credit rating agency established in the European Union and registered under Regulation (EC) No. 1060/2009 (the “CRA Regulation”) will be disclosed in the relevant Final Terms. A credit rating is not a recommendation to buy, sell or hold securities and may be subject to suspension, reduction or withdrawal at any time by the assigning rating agency.
EACH INITIAL AND SUBSEQUENT PURCHASER OF THE NOTES OFFERED HEREBY IN MAKING ITS PURCHASE WILL BE DEEMED TO HAVE MADE CERTAIN ACKNOWLEDGMENTS, REPRESENTATIONS AND AGREEMENTS INTENDED TO RESTRICT THE RESALE OR OTHER TRANSFER OF SUCH NOTES AND MAY IN CERTAIN CASES BE REQUIRED TO PROVIDE CONFIRMATION OF COMPLIANCE WITH SUCH RESALE OR OTHER TRANSFER RESTRICTIONS. SEE “PLAN OF DISTRIBUTION AND TRANSFER RESTRICTIONS—U.S. TRANSFER RESTRICTIONS.”
The Issuer may agree with any Dealer that Notes may be issued in a form not contemplated in “Terms and Conditions of the Notes,” in which event a supplement to this Prospectus, if appropriate, will be made available which will describe the effect of the agreement reached in relation to such Notes. Arranger Barclays Dealer Barclays
The date of this Prospectus is March 21, 2012 TABLE OF CONTENTS
Page
PRESENTATION OF CERTAIN FINANCIAL AND OTHER INFORMATION ...... 4
DOCUMENTS INCORPORATED BY REFERENCE ...... 7
OVERVIEW OF THE ISSUER ...... 8
GENERAL DESCRIPTION OF THE PROGRAM ...... 11
SUMMARY CONSOLIDATED FINANCIAL INFORMATION...... 15
RISK FACTORS...... 17
USE OF PROCEEDS...... 36
CAPITALIZATION...... 37
SELECTED CONSOLIDATED FINANCIAL INFORMATION ...... 38
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ...... 41
DESCRIPTION OF THE DNB BANK GROUP ...... 70
SELECTED STATISTICAL DATA...... 79
RISK MANAGEMENT AND RISK-ADJUSTED PERFORMANCE...... 101
MANAGEMENT ...... 116
SUPERVISION AND REGULATION...... 129
TERMS AND CONDITIONS OF THE NOTES ...... 135
FORM OF FINAL TERMS...... 162
TAXATION ...... 175
CERTAIN ERISA CONSIDERATIONS...... 184
PLAN OF DISTRIBUTION AND TRANSFER RESTRICTIONS...... 186
SETTLEMENT ...... 192
GENERAL INFORMATION...... 196
0029834-0000138 ICM:14641098.7 This Prospectus constitutes a base prospectus for the purposes of Article 5.4 of the Prospectus Directive. The Issuer accepts responsibility for the information contained in this Prospectus. To the best of the knowledge and belief of the Issuer (having taken all reasonable care to ensure that such is the case) the information contained in this Prospectus is in accordance with the facts and does not omit anything likely to affect the import of such information.
This Prospectus is to be read in conjunction with all documents which are deemed to be incorporated herein by reference. See “Documents Incorporated by Reference.” This Prospectus shall be read and construed on the basis that such documents are incorporated and form part of this Prospectus.
No representation, warranty or undertaking, express or implied, is made and no responsibility or liability is accepted by the Arranger or the Dealers as to the accuracy or completeness of the information contained or incorporated by reference in this Prospectus or any information provided by the Issuer in connection with the Program. No Arranger or Dealer accepts any liability in relation to the information contained or incorporated by reference in this Prospectus or any other information provided by the Issuer in connection with the Program.
The Issuer has not authorized any person to give any information or to make any representation not contained in or not consistent with this Prospectus or any other information supplied in connection with the Program or the Notes and, if given or made, such information or representation must not be relied upon as having been authorized by the Issuer, the Arranger or any of the Dealers.
Neither this Prospectus nor any other information supplied in connection with the Program or the Notes should be considered as a recommendation by the Issuer, the Arranger or the Dealers that any recipient of this Prospectus or any other information supplied in connection with the Program or any Notes should purchase any Notes. Each investor contemplating purchasing any Notes should make its own independent investigation of the Issuer’s financial condition and affairs, and its own appraisal of the Issuer’s creditworthiness. Investors should not construe the contents of this Prospectus as legal, business, financial or tax advice and should consult their own attorney, business advisor, financial advisor or tax advisor and make its own assessment of the risks involved. Neither this Prospectus nor any other information supplied in connection with the Program or the issue of any Notes constitutes an offer or invitation by or on the Issuer’s behalf or by or on behalf of the Arranger or any Dealer to any person to subscribe for or to purchase any Notes.
Neither the delivery of this Prospectus nor the offering, sale or delivery of any Notes shall in any circumstances imply that the information contained herein concerning the Issuer is correct at any time subsequent to the date hereof or that any other information supplied in connection with the Program is correct as of any time subsequent to the date indicated in the document containing the same. The Arranger and the Dealers expressly do not undertake to review the Issuer’s financial condition or affairs during the life of the Program or to advise any investor in the Notes of any information coming to their attention. Investors should review, among other things, the most recently published documents incorporated by reference into this Prospectus when deciding whether or not to purchase any Notes.
The Notes have not been, and will not be, registered under the Securities Act or any state securities laws. Unless otherwise specified in any supplement to this Prospectus, each series of Notes is initially being privately placed exclusively to persons reasonably believed by the Dealers to be QIBs within the meaning of Rule 144A or in other transactions exempt from registration in accordance with Regulation S. Notes offered to QIBs in reliance on Rule 144A will be represented by one or more global notes (the “Rule 144A Global Notes”) and the Notes offered outside the United States in reliance on Regulation S will be represented by one or more global notes (the Regulation S Global Notes” and, together with the Rule 144A Global Notes, the “Global Notes”). After their initial private placement, the Notes represented by Rule 144A Global Notes may be resold to QIBs in transactions satisfying the requirements of Rule 144A or in transactions exempt from registration in accordance with Regulation S. Prospective purchasers are hereby notified that sellers of the Notes may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A. See “Plan of Distribution and Transfer Restrictions—Selling Restrictions.” Neither this Prospectus nor any Final Terms constitute an offer to sell or the solicitation of an offer to buy any Notes in any jurisdiction to any person to whom it is unlawful to make the offer or solicitation in such jurisdiction. The distribution of this Prospectus and the offer or sale of the Notes may be restricted by law in certain jurisdictions. The Issuer, the Arranger and the Dealers do not represent that this Prospectus may be lawfully distributed, or that any Notes may be lawfully offered, in compliance with any
1 applicable registration or other requirements in any such jurisdiction, or pursuant to an exemption available thereunder, or assume any responsibility for facilitating any such distribution or offering. In particular, no action has been taken by the Issuer, the Arranger or the Dealers which is intended to permit a public offering of any Notes or distribution of this Prospectus in any jurisdiction where action for that purpose is required. Accordingly, no Notes may be offered or sold, directly or indirectly, and neither this Prospectus nor any advertisement or other offering material may be distributed or published in any jurisdiction, except under circumstances that will result in compliance with any applicable laws and regulations. This Prospectus may only be used for the purposes for which it has been published. Persons into whose possession this Prospectus or the Notes may come must inform themselves about, and observe, any such restrictions on the distribution of this Prospectus and the offering and sale of the Notes. In particular, there are restrictions on the distribution of this Prospectus and the offer or sale of the Notes in the United States. See “Plan of Distribution and Transfer Restrictions—U.S. Transfer Restrictions.”
This Prospectus has been prepared on the basis that any offer of Notes in any Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”) will be made pursuant to an exemption under the Prospectus Directive, as implemented in that Relevant Member State, from the requirement to publish a prospectus for offers of Notes. Accordingly, any person making or intending to make an offer in that Relevant Member State of Notes which are the subject of an offering contemplated in this Prospectus as completed by Final Terms in relation to the offer of those Notes may only do so in circumstances in which no obligation arises for the Issuer or any Dealer to publish a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive, in each case, in relation to such offer. Neither the Issuer nor any Dealer have authorized, nor do they authorize, the making of any offer of Notes in circumstances in which an obligation arises for the Issuer or any Dealer to publish or supplement a prospectus for such offer.
STABILIZATION
In connection with the issue of any Tranche of Notes, the Dealer or Dealers (if any) named as the Stabilizing Manager(s) (or persons acting on behalf of any Stabilizing Manager(s)) in the applicable Final Terms may over-allot Notes or effect transactions with a view to supporting the market price of the Notes at a level higher than that which might otherwise prevail. However, there is no assurance that the Stabilizing Manager(s) (or persons acting on behalf of a Stabilizing Manager) will undertake stabilization action. Any stabilization action may begin on or after the date on which adequate public disclosure of the terms of the offer of the relevant Tranche of Notes is made and, if begun, may be ended at any time, but it must end no later than the earlier of 30 days after the issue date of the relevant Tranche of Notes and 60 days after the date of the allotment of the relevant Tranche of Notes. Any stabilization action or over-allotment must be conducted by the relevant Stabilizing Manager(s) (or persons acting on behalf of any Stabilizing Manager(s)) in accordance with all applicable laws and rules.
NOTICE TO PROSPECTIVE INVESTORS IN THE UNITED STATES
In the United States, this Prospectus is being furnished on a confidential basis solely for the purpose of enabling a prospective investor to consider purchasing the Notes and it may not be forwarded or redistributed to any other person.
The Notes have not been, and will not be, registered under the Securities Act, or any state securities laws and, subject to certain exceptions, may not be offered or sold directly or indirectly within the United States or to or for the account or benefit of U.S. persons, as defined in Regulation S. The Notes may be offered for sale only (i) in the United States, to QIBs within the meaning of, and in reliance on, Rule 144A, or in a transaction not subject to the registration requirements of the Securities Act; or (ii) outside the United States to non-U.S. persons in reliance on, and in accordance with, Regulation S, in each case, in compliance with applicable laws, regulations and directives. Prospective purchasers are hereby notified that sellers of the Notes may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A. See “Plan of Distribution and Transfer Restrictions—Selling Restrictions.”
The Notes have not been recommended, approved or disapproved by any U.S. federal or state securities commission or regulatory authority. Furthermore, the foregoing authorities have not passed upon the merits of the Program or confirmed the accuracy or determined the adequacy of this Prospectus. Any representation to the contrary is a criminal offense in the United States.
2 NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES (“RSA”) WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF NEW HAMPSHIRE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
INTERNAL REVENUE SERVICE CIRCULAR 230 DISCLOSURE
PURSUANT TO INTERNAL REVENUE SERVICE CIRCULAR 230, PROSPECTIVE PURCHASERS ARE HEREBY INFORMED THAT THE DESCRIPTION SET FORTH HEREIN WITH RESPECT TO U.S. FEDERAL TAX ISSUES WERE NOT INTENDED OR WRITTEN TO BE USED, AND SUCH DESCRIPTION CANNOT BE USED BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED ON THE TAXPAYER UNDER THE U.S. INTERNAL REVENUE CODE. SUCH DESCRIPTION WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE NOTES. TAXPAYERS SHOULD SEEK ADVICE BASED ON THE TAXPAYER’S PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.
3 PRESENTATION OF CERTAIN FINANCIAL AND OTHER INFORMATION
In this Prospectus, "the Bank" and "the Issuer" refer to DNB Bank ASA, a subsidiary of DNB ASA. The "DNB Bank Group" refers to the Bank together with the Bank's subsidiaries. The "DNB Group" refers to DNB ASA together with its subsidiaries.
The Issuer’s audited consolidated financial statements as of and for the years ended December 31, 2009, 2010 and 2011 incorporated by reference in this Prospectus have been prepared and presented in accordance with International Financial Reporting Standards (“IFRS”), as approved by the European Union, in accordance with Section 3-9 of the Norwegian Accounting Act, and have been audited by the Issuer’s independent auditors, Ernst & Young AS. Unless otherwise indicated, the financial data included or incorporated by reference in this Prospectus is extracted or derived from the audited consolidated financial statements of the Issuer.
For the convenience of the reader, certain summary consolidated financial information and certain selected consolidated financial information has been included in this Prospectus. See “Summary Consolidated Financial Information” and “Selected Consolidated Financial Information.” This information is not complete and should be read together with the financial statements incorporated by reference in this Prospectus.
In this Prospectus, references to “NOK”, “Norwegian kroner” and “kroner” are to the currency of Norway, references to “U.S.$” and “U.S. dollars” are to the currency of the United States, references to “euro” and “€” are to the currency introduced at the start of the third stage of European economic and monetary union pursuant to the Treaty on the Functioning of the European Union, as amended, references to “SEK” are to the currency of Sweden, references to “GBP” are to the currency of the United Kingdom, references to “JPY” are to the currency of Japan, references to “RUB” are to the currency of the Russian Federation, references to “LTL” are to the currency of Lithuania, references to “LVL” are to the currency of Latvia and references to “SGD” are to the currency of Singapore. Except as otherwise noted, all interest rates are on a per annum basis. Solely for the convenience of the reader, this Prospectus contains translations of certain NOK amounts into U.S. dollars at specified rates. Unless otherwise noted, all translations of NOK amounts into U.S. dollars for the year ended December 31, 2011 have been at the rate of NOK 5.99 = U.S.$1.00, being the representative market rate prevailing in Oslo on December 30, 2011, as reported by the Central Bank of Norway (the “Central Bank” or “Norges Bank”). No representation is made that kroner or U.S. dollar amounts referred to herein have been, could have been or could be converted into U.S. dollars or kroner, as the case may be, at this rate, at any particular rate, or at all. On March 19, 2012, the representative market rate was NOK 5.74 = U.S.$1.00. See “—Exchange Rates and Currency Information.”
Certain figures included in this Prospectus have been subject to rounding adjustments; accordingly, figures shown for the same category presented in different tables may vary slightly and figures shown as totals in certain tables may not be an arithmetic aggregation of the figures which precede them.
In this Prospectus, references to “Norway” are to the Kingdom of Norway and references to the “Government” are to the Norwegian government.
This Prospectus includes certain statistics and market share data. The Issuer believes that the statistics and market share data included in this Prospectus are useful in understanding the markets in which it operates. However, unless indicated otherwise, these figures are based on the Issuer’s internal calculations and estimates of market data and have not been independently verified. Accordingly, no assurances can be given that such internal calculations and estimates of market data are accurate.
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements, which reflect management's current expectations with respect to future events, financial and operating performance and future market conditions. Words such as “believe”, “anticipate”, “expect”, “aim”, “project”, “expect”, “intend”, “predict”, “target”, “may”, “might”, “assume”, “could”, “will” and “should” or other variations or comparable terminology are intended to identify forward-looking statements. Forward-looking statements appear in a number of places in this Prospectus including, without limitation, in the documents referred to in “Documents Incorporated by Reference” and in “Risk Factors.” These forward-looking statements address matters such as:
4 ● Performance of the global financial markets and the markets where the DNB Bank Group operates;
● The DNB Bank Group's ability to maintain its customer base and the financial condition of the DNB Bank Group's customers;
● Future exposure to credit risk, including counterparty risk and credit concentration risk;
● Future exposure to market risk, including changes or volatility in interest rates, lending spreads, deposit spreads, foreign exchange rates, asset prices and risks relating to the DNB Bank Group's pension and medical care obligations towards its employees;
● Future exposure to liquidity and funding risks and systemic risk;
● The DNB Bank Group's ability to manage operational risk and information technology systems;
● Political and economic conditions in markets outside the Nordic countries where the DNB Bank Group operates, including Poland and the Baltic states;
● Future changes to regulation of the financial services industry, including capital adequacy requirements, and other governmental intervention;
● Future exposure to legal risks related to the DNB Bank Group's business; and
● Changes in applicable laws and regulations, including taxes, or accounting standards or practices.
By their nature, forward-looking statements involve risk and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. While the Issuer has prepared these forward-looking statements in good faith and on the basis of assumptions it believes to be reasonable, any such forward-looking statements are not guarantees or warranties of future performance. The Issuer’s actual financial condition, results of operation and cash flows, and the development of the markets in which it operates, may differ materially from those expressed or implied in the forward-looking statements contained in this Prospectus.
The Issuer does not intend, and does not assume any obligation, to update any forward-looking statements contained herein, except as may be required by law. All subsequent written and oral forward-looking statements attributable to the Issuer or to persons acting on its behalf are expressly qualified in their entirety by the cautionary statements referred to above and contained elsewhere in this Prospectus.
AVAILABLE INFORMATION
The Issuer has agreed that, for so long as any Notes issued by it are “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act, it will, during any period in which it is neither subject to Section 13 or 15(d) of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”) nor exempt from reporting pursuant to Rule 12g3-2(b) thereunder, provide to any holder or beneficial owner of such restricted securities or to any prospective purchaser of such restricted securities designated by such holder or beneficial owner upon the request of such holder, beneficial owner or prospective purchaser, the information required to be provided by Rule 144A(d)(4) under the Securities Act.
EXCHANGE RATES AND CURRENCY INFORMATION
The following table sets forth, for the periods and dates indicated, average, high, low and period-end exchange rates, based on the representative market rate for the Norwegian kroner in relation to the U.S. dollar. The rates are expressed in NOK per U.S. dollar. The average rate means the annual average or period average, as applicable, of daily rates as of 2:15 PM Oslo time. Average High Low Period-end
2007...... 5.86 6.47 5.28 5.41 2008...... 5.64 7.22 4.96 7.00
5 Average High Low Period-end
2009...... 6.28 7.20 5.54 5.78 2010...... 6.05 6.68 5.60 5.86 2011...... 5.61 6.03 5.24 5.99 January 2012...... 5.95 6.05 5.81 5.81 February 2012...... 5.71 5.84 5.53 5.53 March 2012 (through March 19) ...... - 5.80 5.58 5.74
Source: Norges Bank
These rates are provided solely for the convenience of the reader and are not necessarily the rates used in the preparation of the Issuer's consolidated financial statements. No representation is made that Norwegian kroner amounts have been, could have been or could be converted into U.S. dollars at any of the exchange rates herein indicated or any other rate.
ENFORCEMENT OF CIVIL LIABILITIES
The Bank is a Norwegian company, and a majority of its assets are located outside the United States. In addition, all of its directors and executive officers reside or are located outside the United States. As a result, investors may not be able to serve process within the United States upon these persons, or to enforce judgments obtained against us or these persons in foreign courts predicated solely upon the civil liability provisions of the securities laws of jurisdictions other than Norway.
The United States and Norway do not currently have a treaty providing for reciprocal recognition and enforcement of judgments, other than arbitration awards, in civil and commercial matters. Therefore, a final judgment for the payment of a fixed debt or a sum of money rendered by any U.S. court based on civil liability, whether or not predicated solely upon the U.S. federal securities laws, would not automatically be enforceable in Norway. In addition, there is doubt that a foreign judgment based upon U.S. securities laws would be enforced in Norway. There also is doubt as to the enforceability of judgments of this nature in several of the other jurisdictions in which the Bank operates and where its assets are located.
6 DOCUMENTS INCORPORATED BY REFERENCE
The Issuer has incorporated by reference in this Prospectus important information about the Issuer, which means that (i) the incorporated documents are considered part of this Prospectus, and (ii) the Issuer can disclose important information to prospective purchasers of Notes by referring prospective purchasers to those documents. The following documents, which have previously been published and have been filed with the CSSF, shall be incorporated in, and form part of, this Prospectus:
● the audited consolidated annual financial statements of the Issuer for the financial years ended December 31, 2009, 2010 and 2011, prepared in accordance with IFRS as approved by the European Union, in accordance with Section 3-9 of the Norwegian Accounting Act, including the information set out at the following pages of the Issuer’s Annual Report 2009, Annual Report 2010, and Annual Report 2011, respectively: 2009 2010 2011
Income statement page 12 page 10 page 16 Balance sheet page 13 page 11 page 17 Statement of changes in equity pages 14-15 page 12 page 18 Cash flow statement page 16 page 13 page 19 Accounting principles pages 17-25 pages 14-22 pages 20-29 Notes to the accounts pages 26-103 pages 23-105 pages 30-112 Auditor’s report page 106 page 108 page 115
Any other information not listed above but contained in the Issuer's Annual Report 2009, Annual Report 2010, or Annual Report 2011 is not relevant to investors and is not incorporated by reference into this Prospectus.
In relation to each issue of Notes, the relevant Final Terms shall be deemed to form a part of, and should be read together with, this Prospectus. Should any of the documents incorporated by reference in this Prospectus themselves incorporate by reference further information, such information does not form a part of this Prospectus.
Following the publication of this Prospectus, a supplement to this Prospectus may be prepared by the Issuer and approved by the CSSF in accordance with Article 16 of the Prospectus Directive. Statements contained in any such supplement or contained in any document incorporated by reference therein, including any relevant Final Terms, shall, to the extent applicable (whether expressly, by implication or otherwise), be deemed to modify or supersede statements contained in this Prospectus or in a document which is incorporated by reference in this Prospectus. Any statement so modified or superseded shall not, except as so modified or superseded, constitute a part of this Prospectus.
Copies of documents incorporated by reference in this Prospectus can be obtained from the Luxembourg Stock Exchange's website at www.bourse.lu and, upon request, free of charge, from the registered office of the Issuer and the specified offices of the Paying Agents for the time being.
The Issuer has undertaken to the Dealers in the Program Agreement that, in the event of any significant new factor, material mistake or inaccuracy relating to the information included in this Prospectus which is capable of affecting the assessment of any Notes or any change in the condition of the Issuer which is material in the context of the Program or the issue of any Notes, the Issuer will prepare and publish a supplement to this Prospectus or publish a new prospectus for use in connection with any subsequent issue of Notes.
7 OVERVIEW OF THE ISSUER
The following overview should be read as an introduction to, in conjunction with, and as being qualified in its entirety by, the more detailed information that appears elsewhere in this Prospectus, including the DNB Bank Group’s audited consolidated financial statements incorporated by reference into this Prospectus. See “Risk Factors” for a discussion of certain factors that should be considered in connection with an investment in the Notes. Any decision to invest in the Notes should be based on the consideration of this Prospectus as a whole together with the relevant Final Terms. Certain terms used in this overview are defined elsewhere in this Prospectus, including under “Terms and Conditions of the Notes.”
Business Overview
DNB Bank ASA is Norway's largest bank by gross lending and deposits (source: Norges Bank), offering corporate, retail and investment banking services and products to customers in Norway and internationally, including in Sweden, Poland, Russia and the Baltic states of Estonia, Latvia and Lithuania, under the DNB brand name. As of September 30, 2011, the Bank's market share among Norwegian commercial banks (including the Postal Bank and savings banks, finance companies and mortgage companies) was approximately 30 per cent; the Bank's market share across retail lending and deposits was also approximately 30 per cent (source: Norges Bank). As of December 31, 2011, the DNB Bank Group had total assets of NOK 1,885 billion and net lending to customers of NOK 1,292 billion. The DNB Bank Group's profit for the year ended December 31, 2011 was NOK 12.5 billion.
The DNB Bank Group's core businesses are retail and commercial banking, which it operates through its Retail Banking and Large Corporate and International business areas, respectively. It provides commercial banking services to corporate and retail customers in Poland and the Baltic states through its newly formed Baltics Division (formerly trading under the name “DNB NORD”), which is organized as part of its Large Corporates and International business area but is operated as an independent profit center. The DNB Bank Group also provides investment banking services through DNB Markets, Norway's largest investment bank. Through its Retail Banking and Large Corporate and International business areas, the DNB Bank Group cross-sells certain asset management and life insurance products offered by the Insurance and Asset Management business area of the DNB Group, for which the DNB Bank Group receives fee and commission income. The Bank is also the largest private settlement bank in Norway.
DNB Bank ASA is a subsidiary of DNB ASA and part of the DNB Group. Other companies owned by DNB ASA, including Vital Forsikring and DNB Kapitalforvaltning, are not part of the DNB Bank Group. The legal structure of the DNB Group as of December 31, 2011 is presented below:
8 DNB ASA
DNB Asset DNB DNB Bank Management Livsforsikring DNB Skade- ASA Holding AS ASA forsikring AS
Major subsidiaries Nordlandsbanken ASA DNB Næringsmegling AS Postbanken Eiendom AS DNB Eiendom AS DNB Meglerservice AS DNB Boligkreditt AS DNB Næringskreditt AS DNB Luxembourg S.A. OAO DnB NOR Monchebank Svensk Fastighetsförmedling AB SalusAnsvar AB Bank DNB A/S (Denmark)(1) AB DNB Bankas (Lithuania)(1) AB DNB Banka (Latvia)(1)
Note:
(1) Operations in DNB Baltics and Poland will be integrated in DNB and are thus under restructuring. As part of the integration, ownership of the banks in Lithuania and Latvia was transferred to DNB at end-June 2011 and the ownership of AS DNB Liising, which constitutes a significant portion of operations in Estonia, was transferred in March 2012. Bank DNB A/S in Denmark still owns the operations in Poland and the banking activities in Estonia, but ownership will be transferred as soon as possible in 2012. Following the restructuring, Bank DNB A/S in Denmark will only engage in investment activity.
Group Strategy, Vision and Values
The Bank's strategy is closely coordinated with the DNB Group's overall strategy. The DNB Group's strategic ambitions are to:
● Strengthen and consolidate the DNB Group's position in Norway. The DNB Group intends to build and strengthen long-term relations with high-quality customers by:
● offering extensive distribution under one brand and a uniform corporate image;
● offering a complete range of attractive products that meet customer needs, which includes seeking to develop the best mobile phone and online services;
● offering competitive prices and products that create value for customers;
● engaging in long-term, honest and relevant communication with customers; and
● meeting the needs of the largest corporate customers in Norway through industry expertise and intimate, local knowledge that puts the DNB Group in an advantageous position vis-à-vis its foreign competitors in the Norwegian market.
9 ● Achieve profitable international growth. The DNB Group intends to capitalize on its Norwegian expertise to become a leading international financial services company within selected industries and product areas. The DNB Group's target industries are shipping, energy and seafood. The DNB Group also plans further to develop its operations in the Baltic states and Poland. The DNB Group will focus on building long-term relations with the largest corporate customers based on its core competencies. The DNB Group expects that the integration of its operations, the streamlining of its organization and its branding strategy will promote long-term value creation.
● Be among the most cost-effective market players in Europe. The DNB Group will coordinate group and support functions to ensure consistent deliveries, standardized processes and greater automation. High priority will be given to cost-efficiency by:
● strengthening and coordinating procurement functions across the DNB Group;
● coordinating and consolidating IT functions; and
● standardizing and automating products, services and customer service where expedient, and coordinating and rationalizing staff and support functions.
An important goal for the DNB Group is to achieve even stronger customer orientation in its operations and improve customer satisfaction. The DNB Group's vision, creating value through the art of serving the customer, is supported by the values of being helpful, professional and showing initiative. Employees who are helpful, professional and show initiative are vital if the DNB Group is to succeed in implementing its strategy.
Recent Developments
Norwegian banks are subject to ongoing capital adequacy requirements, which implement EU Directives based on the Basel Committee regimes. Due to the recent period of financial and economic stress in the financial markets, a number of initiatives have been taken both globally (the “Basel Committee and G20”) and regionally (EU/EEA) to raise the level and quality of banks' regulatory capital.
On December 16, 2010, the Basel Committee published a number of fundamental reforms to the regulatory capital framework. These reforms, known as Basel III, include a substantial strengthening of existing capital rules, including by raising the minimum common equity requirement and the total Tier 1 capital requirement. The implementation of Basel III reforms will begin on January 1, 2013. However, the requirements are subject to a series of transitional arrangements and will be phased in over a period of time.
In October 2011, in response to the European sovereign debt crisis, the European Banking Authority published an additional plan for the recapitalization of banks. The plan includes a temporary, stricter requirement that common equity Tier 1 capital must be minimum 9 per cent after any losses on European sovereign debt exposures have been recorded. This requirement is scheduled to become effective on June 30, 2012.
Board of Directors
The Board of Directors of the Bank comprises Anne Carine Tanum (Chairman), Jarle Bergo (Vice-chairman), Kai Nyland, Torill Rambjør, Ingjerd Skjeldrum, Berit Svendsen, Sverre Finstad, Hans-Kristian Sætrum (Deputy for employee representative) and Jorunn Løvås (Deputy for employee representative).
10 GENERAL DESCRIPTION OF THE PROGRAM
The following is a brief overview only and should be read in conjunction with the rest of this Prospectus and, in relation to any Notes, in conjunction with the applicable Final Terms and, to the extent applicable, the Terms and Conditions of the Notes set out herein. Any decision to invest in any Notes should be based on a consideration of this Prospectus as a whole by any investor.
Issuer DNB Bank ASA, a public limited company incorporated under the laws of the Kingdom of Norway on September 10, 2002 with registration number 984 851 006
Arranger Barclays Bank PLC
Dealer Barclays Capital Inc.
Trustee The Law Debenture Trust Corporation p.l.c.
Issuing and Principal Paying Agent Citibank, N.A., London Branch
Registrar Citigroup Global Markets Deutschland AG
Amount The aggregate principal amount of Notes outstanding at any time shall not exceed U.S.$10,000,000,000 (or its equivalent in other currencies). The Program size may be increased from time to time without the consent of the holders of the Notes.
Distribution Notes may be distributed on a syndicated or non-syndicated basis or may be sold directly by the Issuer.
Currencies Any currency agreed between the Issuer and the relevant Dealer(s), subject to any applicable legal or regulatory restrictions.
Status The Notes may be issued by the Issuer on a subordinated or unsubordinated basis.
(a) The Unsubordinated Notes will constitute direct, unconditional, unsubordinated and unsecured obligations of the Issuer and will rank pari passu among themselves and (save for certain debts required to be preferred by law) equally with all other unsecured obligations (including deposits) (other than subordinated obligations, if any) of the Issuer, present and future, from time to time outstanding.
(b) The Subordinated Notes will constitute unsecured subordinated obligations of the Issuer, subject to cancellation as described in Condition 3(e), and will rank pari passu without any preference among themselves and at least equally with all other subordinated obligations of the Issuer (whether actual or contingent) having a fixed maturity from time to time outstanding.
Maturities Such maturities as may be agreed between the Issuer and the relevant Dealer(s), subject to such minimum or maximum maturity as may be allowed or required from time to time by the
11 relevant central bank (or equivalent body) or any laws or regulations applicable to the Issuer or the relevant Specified Currency.
Issue Price The Notes may be issued at par, at a discount to, or premium over, par as specified in the relevant Final Terms. The price and amount of the Notes to be issued will be determined by the Issuer and the relevant Dealer(s) at the time of issue in accordance with prevailing market conditions.
Issuance in Series The Notes will be issued in separate series (each, a “Series”) and the Notes of each Series will be subject to identical terms whether as to currency, denomination, interest or maturity or otherwise. Notes will be issued in tranches (each, a “Tranche”). The Notes of each Tranche that constitute the same Series will be subject to identical terms, except that the issue date, the issue price and the amount and date of the first payment of interest may be different in respect of different Tranches.
Denominations Notes will be issued in minimum denominations of U.S.$200,000 and integral multiples of U.S.$1,000 in excess thereof or in such other denominations as are specified in the applicable Final Terms.
Interest Notes may be interest bearing or non-interest bearing. Interest may accrue at a fixed rate or a floating rate, which will be calculated by referring to an index and/or formula. The floating rate may be determined by reference to one or more base rates, such as LIBOR, and be adjusted by a spread or a spread multiplier or other interest rate formula, in each case as agreed by the Issuer and the relevant Dealer(s) and described in the applicable Final Terms.
Interest Payments Interest may be paid monthly, quarterly, semi-annually, annually or at such other intervals as are described in the applicable Final Terms.
Redemption The Notes may be redeemable at par or at such other redemption amount (linked to an index or otherwise) as may be specified in the relevant Final Terms.
Early redemption of the Notes will be permitted for taxation reasons. In relation to Subordinated Notes only, no early redemption or purchase by the Issuer or any of its subsidiaries is permitted in any circumstance without the prior written comment of the Norwegian Financial Services Authority (Finanstilsynet). Early redemption will otherwise be permitted only to the extent specified in the relevant Final Terms.
Taxation All payments in respect of the Notes will be made without withholding or deduction for or on account of Norwegian withholding taxes unless required by law. If such withholdings are required by Norwegian law, the Issuer will in certain circumstances pay certain additional amounts as described in, and subject to the exceptions set out in, Condition 7.
All payments in respect of the Notes will be made subject to any
12 withholding or deduction required by FATCA. If such withholding or deduction is required, no additional amounts will be paid with respect to the withholding or deduction.
Further Issues The Issuer may from time to time, without the consent of the Holders of the Notes of any Series, create and issue further Notes and other debt securities having the same terms and conditions as any Series of Notes in all respect (or in all respects except for the issue date, issue price and the amount of the first payment of interest, if any, on them), which may be consolidated and form a single Series with the outstanding Notes of such Series.
Listing, Approval and Admission to Application has been made to the CSSF to approve this document Trading as a base prospectus. Application has also been made to the Luxembourg Stock Exchange for Notes issued under the Program during the 12 months from the date of this Prospectus to be admitted to trading on the Luxembourg Stock Exchange’s regulated market and to be listed on the Official List of the Luxembourg Stock Exchange.
Notes issued under the Program may be listed or admitted to trading, as the case may be, on such other or further stock exchanges or markets as may be agreed between the Issuer and the relevant Dealer(s) in relation to each Series. Notes which are neither listed nor admitted to trading on any market may also be issued.
The applicable Final Terms will state whether or not the relevant Notes are to be listed and/or admitted to trading and, if so, on which stock exchanges and/or markets.
Form, Clearance and Settlement Notes offered in the United States to qualified institutional buyers in reliance on Rule 144A will be represented by one or more Rule 144A Global Notes and Notes offered outside the United States in reliance on Regulation S will be represented by one or more Regulation S Global Notes.
Notes will be in fully registered form, unless otherwise specified in the applicable Final Terms. Global Notes representing the Notes will be held by or on behalf of The Depository Trust Company (“DTC”) for the benefit of participants in DTC or be registered in the name of a nominee for, and deposited with, a common depositary or common safekeeper for Euroclear Bank S.A./N.V. (“Euroclear”) and Clearstream Banking, société anonyme (“Clearstream, Luxembourg”).
Governing Law The Notes will be governed by, and construed in accordance with, English law except for the provisions of Condition 3 which will be governed by, and construed in accordance with, Norwegian law.
Ratings The rating (if any) of certain Series of Notes to be issued under the Program may be specified in the applicable Final Terms. Whether or not each credit rating applied for in relation to relevant Series of Notes will be issued by a credit rating agency established in the European Union and registered under the CRA Regulation will be disclosed in the Final Terms.
13 Selling Restrictions and Transfer The Notes have not been, and will not be, registered under the Restrictions Securities Act and may not be offered or sold within the United States or to or for the account or benefit of U.S. persons, except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. See “Plan of Distribution and Transfer Restrictions—U.S. Transfer Restrictions.”
Risk Factors There are certain factors that may affect the Issuer’s ability to fulfill its obligations under the Notes. These are set out under the heading “Risk Factors.” Investors should carefully consider these risk factors and all of the information in this Prospectus before deciding to buy Notes.
14 SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The summary consolidated income statement and balance sheet data presented below have been derived from the Issuer's audited consolidated financial statements as of and for the years ended December 31, 2011, 2010 and 2009 incorporated by reference in this Prospectus. Those financial statements have been prepared in accordance with IFRS, as approved by the European Union. The data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements incorporated by reference in this Prospectus.
Summary Consolidated Income Statement Data
Year ended December 31,
2011 2010 2009
(NOK million) Net interest income...... 25,232 23,387 23,112 Net other operating income ...... 14,713 13,067 11,824 Total income...... 39,945 36,454 34,935 Total operating expenses ...... (18,708) (17,042) (16,841) Pre-tax operating profit ...... 17,811 16,437 10,410 Profit for the year ...... 12,498 11,685 6,139
Summary Consolidated Balance Sheet Data
As of December 31,
2011 2010 2009 (NOK million) Lending to customers ...... 1,291,660 1,184,100 1,128,791 Total assets ...... 1,884,948 1,637,639 1,615,999 Loans and deposits from credit institutions ...... 279,553 257,931 302,694 Deposits from customers ...... 750,102 664,012 613,627 Debt securities issued ...... 640,277 509,447 500,907 Subordinated loan capital ...... 24,156 33,474 39,051
Total liabilities...... 1,780,644 1,547,780 1,532,685
Total equity...... 104,304 89,859 83,314
Total liabilities equity...... 1,884,948 1,637,639 1,615,999
15 Key Figures
As of (or for the year ended) December 31,
™Ratios 2011 2010 2009
Cost/income ratio (%)(1)...... 45.9 47.6 45.9 Write-downs divided by average net lending to customers (%) ...... 0.28 0.25 0.67 Return on equity (%)(2) ...... 13.5 13.9 10.0 Equity Tier 1 capital adequacy ratio (%)...... 9.3 8.3 7.5 Tier I capital adequacy ratio (%) ...... 9.9 9.2 8.4 Capital adequacy ratio (%) ...... 11.5 11.7 11.4 Equity ratio (%)(3) ...... 5.5 5.5 5.2
______
Notes: (1) Total operating expenses divided by total income. Operating expenses include impairment losses for goodwill and other intangible assets and reversals of provisions for contractual early retirement pensions. Total income excludes a gain resulting from the merger between the payment services company Nordito and Danish PBS Holding in 2010. (2) Profit for the year divided by average total equity. (3) Equity divided by total assets.
16 RISK FACTORS
Before investing in the Notes, prospective investors should consider carefully the following risks and uncertainties in addition to the other information presented in this Prospectus. If any of the following risks actually occurs, the DNB Bank Group's business, results of operations, financial condition or prospects could be materially adversely affected. In that event, the value of the Notes could decline, and you may lose part or all of your investment. The risks and uncertainties described below are those that the DNB Bank Group believes are material, but these risks and uncertainties are not the only ones the DNB Bank Group faces. Additional risks and uncertainties not presently known to the DNB Bank Group or that the DNB Bank Group currently deems immaterial may also have a material adverse effect on the business, results of operations, financial condition or prospects of the DNB Bank Group and could negatively affect the price of the Notes.
Prospective investors should carefully review the entire Prospectus and should reach their own views and decisions on the merits and risks of investing in the Notes in light of the investor’s personal circumstances. Furthermore, investors should consult their financial, legal and tax advisors to carefully review the risks associated with an investment in the Notes.
Risks Related to the Issuer
Risks Related to Macroeconomic Conditions
Disruptions and volatility in the global financial markets may adversely impact the DNB Bank Group.
Financial markets are subject to periods of volatility which may impact the DNB Bank Group's ability to raise financing in a similar manner, and at a similar cost, to the funding it has raised in the past. Changes in financial markets, including changes in interest rates, exchange rates and returns from equity, property and other investments, may adversely affect the financial performance of the DNB Bank Group. Since the second half of 2007, disruption in the global credit markets, coupled with the repricing of credit risk, has created increasingly difficult conditions in the financial markets. The global financial system has experienced unprecedented credit and liquidity conditions and disruptions leading to a reduction in liquidity, greater volatility, general widening of spreads and, in some cases, lack of price transparency in interest rates. Although financial markets have shown some degree of stabilization and economic recovery has continued in 2010 and 2011, the recovery has been fragile and uncertainty about future developments in the market remains. For example, the systemic risk resulting from the continued sovereign debt crisis in the euro area, and public budget deficits, weak economic conditions and disruptions in the capital markets have necessitated rescue packages for Greece and Ireland in 2010, and for Portugal and Greece in 2011, resulting in increased volatility in the global credit and liquidity markets. Recently, the possibility of a Greek sovereign default and the contagion effect it may have on other European Union economies continues to create market instability.
Although Norway is not a member of the European Union, these developments significantly affect Norway since the European Union is one of its principal trading partners. The potential impact of the sovereign debt crisis has exacerbated investors' fears and led to uncertainty with respect to the European financial sector. These developments have created an unfavorable environment for banking activity generally. Any further turbulence in these or other markets could have a material adverse effect on the DNB Bank Group's ability to access capital and liquidity on financial terms acceptable to it. Any of the foregoing factors could have a material adverse effect on the DNB Bank Group's business, financial condition and results of operations.
Negative economic developments and conditions in the markets in which the DNB Bank Group operates may adversely affect the DNB Bank Group’s business and results of operations.
The DNB Bank Group's business activities are dependent on the level of banking, finance and financial services required by its customers. In particular, levels of borrowing are heavily dependent on customer confidence, employment trends, the state of the economy and market interest rates at the time. The DNB Bank Group’s performance is significantly influenced by general economic conditions in the countries in which it operates (in particular, Norway, and to a lesser degree, Poland, the Baltic states and the other Nordic countries) as well as general global economic conditions as they may affect particular sectors of the economy that are important to the DNB Bank Group's business (for example, the shipping industry and real estate sector). As the DNB Bank Group
17 currently conducts the majority of its business in Norway, its performance is influenced by the level and development of business activity in Norway, which is in turn affected by both domestic and international economic and political events.
The economic situation in all Nordic markets as well as the other markets in which the DNB Bank Group operates was in various ways and to differing extents adversely affected by deteriorating economic conditions and turmoil in the global financial markets, in particular in 2008 and 2009, which resulted in declines in economic growth (and in the case of certain Baltic states, contraction), increasing rates of unemployment as well as decreasing asset values in these countries. In Norway, increases in real wages and low interest rates have combined with a relatively low supply of housing to contribute to a significant increase in housing prices, and a correction in housing prices could have a material adverse effect on the Norwegian economy. In many countries in Europe, the credit quality of business and households is expected to remain under considerable pressure due to the effect of economic uncertainty and austerity measures on business profitability and household disposable income.
Adverse economic developments of the kind described above, along with market turmoil and recessionary economic conditions, especially in European countries, have affected the DNB Bank Group's business in a number of ways, and such developments may continue to affect, among other things, the income, wealth, liquidity, businesses and/or financial condition of the DNB Bank Group's customers, which, in turn, could further reduce the credit quality of the DNB Bank Group's loan portfolio and demand for the DNB Bank Group’s financial products and services. In addition, in a context of continued market turmoil, recessionary economic conditions and increasing unemployment coupled with declining consumer spending, the value of assets collateralizing the DNB Bank Group’s secured loans could decline significantly, which could result in increased write-downs. See "—The DNB Bank Group is exposed to the risk of material deterioration in the quality of its loan portfolio and resulting write-downs."
Any or all of the conditions described above could continue to have a material adverse effect on the DNB Bank Group’s business, financial condition and results of operations, and measures implemented by the DNB Bank Group might not be satisfactory to reduce any credit, market and liquidity risks.
Risks Related to the DNB Bank Group's Loan Portfolio
The DNB Bank Group's business is significantly affected by credit risk.
Risks arising from changes in the credit quality of borrowers and other counterparties and the recoverability of loans and amounts due from borrowers and counterparties are inherent in a wide range of the DNB Bank Group's businesses. Accordingly, the DNB Bank Group is subject to credit risk, or the risk that DNB Bank Group's borrowers and other counterparties are unable to fulfill their payments obligations. Adverse changes in the credit quality of the DNB Bank Group's borrowers or counterparties or a general deterioration in Norwegian, U.S., European or global economic conditions, or adverse changes arising from systemic risk in the global financial system, could affect the recoverability and value of the DNB Bank Group's assets and require an increase in the DNB Bank Group's write-downs. Any significant increase in the DNB Bank Group's credit risk may have a material adverse effect on its results of operations, financial condition or prospects.
The DNB Bank Group is exposed to the risk of material deterioration in the quality of its loan portfolio and resulting write-downs.
The DNB Bank Group records write-downs on its loans and guarantees in accordance with IFRS; however, the write-downs made are based on available information, estimates and assumptions and are subject to uncertainty, and there can be no assurance that they will be sufficient to cover the amount of actual losses as they occur. The DNB Bank Group's write-downs on loans and guarantees totalled NOK 3,445 million in 2011, NOK 2,997 million in 2010 and NOK 7,710 million in 2009. Adverse changes in the credit quality of the DNB Bank Group’s borrowers and counterparties or a decline in collateral values would likely affect the recoverability and value of the DNB Bank Group’s assets and require an increase in individual write-downs and potentially in collective write-downs, which in turn would adversely affect the DNB Bank Group’s financial performance. The DNB Bank Group’s exposure to corporate customers is particularly subject to adverse changes in credit quality in the current economic environment in the DNB Bank Group's markets. Further, actual loan losses and losses on other commitments vary over the business cycle. For example, as some of the economies of the markets in which the DNB Bank Group operates have deteriorated since 2008, credit risk associated with certain borrowers and counterparties in these markets has
18 increased. A significant increase in the size of the DNB Bank Group’s write-downs on loans and guarantees, or write-offs on loans and guarantees not covered by write-downs, would have a material adverse effect on the DNB Bank Group’s business, financial condition and results of operations.
A deterioration in the quality of the DNB Bank Group's loan portfolio, and the resulting increase in write-downs, could also result from the foreign exchange risk to which the DNB Bank Group is exposed in respect of its operations outside of Norway. For example, the DNB Bank Group's lending to the international shipping industry and to customers in the Baltic states exposes it to the risk that devaluation or depreciation of the relevant local currency against the EUR would adversely affect these customers’ ability to repay their loans. See "—The DNB Bank Group is exposed to foreign exchange rate risk and the risk of devaluation or depreciation of any of the currencies in which it operates."
The shipping industry
The DNB Bank Group is a major supplier of credit to the shipping industry. As of December 31, 2011, its net lending to the international shipping industry amounted to NOK 143.9 billion, representing 11.1 per cent of its total net lending to customers. The international shipping industry is driven, among other things, by growth in international trade. The downturn in the global economy has negatively impacted world trade, and this has in turn resulted in material decreases in freight volumes and rates in the shipping industry, and corresponding material decreases in the revenues of businesses in the shipping industry. The tanker, dry bulk and container sectors have been particularly affected. Though the DNB Bank Group bases its internal credit analysis of the shipping industry on low expected rate estimates, actual rates for DNB's shipping segments have historically been volatile and could be lower than expected; over the past three years, shipping rates have exhibited significant downward pressure. Furthermore, deterioration in economic conditions may continue to impact the shipping industry, resulting in a material adverse effect on the cash flows of the companies operating in this industry as well as the ship values and values of other assets that serve as collateral for credit provided to lenders within this industry. Any of these adverse effects could have a significant impact on shipping companies' profitability, and consequently on their credit quality, and thus lead to a material increase in write-downs and losses experienced by the DNB Bank Group on its loan portfolio. See "Selected Statistical Data—Gross and net impaired commitments."
The real estate market
The DNB Bank Group provides mortgage lending both in the retail and corporate markets. As of December 31, 2011, the DNB Bank Group’s net lending to the real estate market amounted to NOK 188.0 billion, representing 14.5 per cent of its total net lending to customers. Accordingly, a significant decline in the value of real estate, whether as a result of developments in the broader economy, a reduction in the availability of credit or otherwise, could have a material adverse effect on the quality of the DNB Bank Group's real estate loans and could reduce the value of the collateral for these loans significantly. This could in turn lead to a material increase in write-downs recorded by the DNB Bank Group on its loan portfolio within this sector. See "Selected Statistical Data—Gross and net impaired commitments."
The Baltic states
The DNB Bank Group is also a supplier of credit in the Baltic states. As of December 31, 2011, the DNB Bank Group's net lending in DNB NORD amounted to NOK 55,467 million, representing 4.3 per cent of its total net lending to customers. The Baltic states were severely affected by the global financial crisis, and gross domestic product has contracted considerably. Private consumption has also contracted and unemployment levels have surged. For a discussion of the potential impact of the recession on the quality of the DNB Bank Group's Baltic loan portfolio, see "—The DNB Bank Group is subject to a variety of risks as a result of its operations outside the Nordic markets, including in Poland and the Baltic states."
Counterparty defaults could have a material adverse effect on the DNB Bank Group.
The DNB Bank Group routinely executes transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, funds and other institutional and corporate customers. Many of these transactions expose the DNB Bank Group to the risk that its counterparty in a foreign exchange, interest rate, commodity, equity or credit derivative contract defaults on its obligations prior to maturity
19 when the DNB Bank Group has an outstanding claim against that counterparty. Due to volatility in foreign exchange and fixed income markets since 2007, this risk has remained at an elevated level compared to the period preceding the global financial and economic crisis. This counterparty risk may also be exacerbated when the collateral held by the DNB Bank Group cannot be realized or is liquidated at prices not sufficient to recover the full amount of counterparty exposure. Any of the foregoing could have a material adverse effect on the DNB Bank Group’s business, financial condition and results of operations. As a consequence of its transactions in financial instruments, including foreign exchange rate and derivative contracts, the DNB Bank Group is also exposed to settlement risk and transfer risk. Settlement risk is the risk of losing the principal on a financial contract due to default by the counterparty or after the DNB Bank Group has given irrevocable instructions for a transfer of a principal amount or security, but before receipt of the corresponding payment or security has been finally confirmed. Transfer risk is the risk attributable to the transfer of money from a country other than the country where a borrower is domiciled, which is affected by the changes in the economic conditions and political situation in the relevant countries.
The DNB Bank Group is exposed to sectoral credit concentration risks.
DNB has significant credit exposure to certain sectors, with the largest sector being retail customers followed to a lesser extent by international shipping (including off-shore) and real estate. In the event that any of these sectors experiences a material increase in write-downs, it could have an impact on the DNB Bank Group’s asset quality and results of operations, financial condition or prospects.
Risks Related to Market Exposure
The DNB Bank Group’s business is sensitive to volatility in interest rates and to changes in the competitive environment affecting spreads on its lending and deposits.
The DNB Bank Group is subject to the risks typical of banking activities, including interest rate fluctuations. Changes in interest rate levels, yield curves and spreads may affect the DNB Bank Group's lending and deposit spreads. The DNB Bank Group is exposed to changes in the spread between the interest rates payable by it on deposits or its wholesale funding costs, and the interest rates that it charges on loans to customers and other banks. Although both the interest rates payable by DNB Bank Group on deposits, as well as the interest rates that it is able to charge on loans to customers and credit institutions, are in each case mainly floating rates or swapped into floating rates, there is a risk that the DNB Bank Group will not be able to reprice its floating rate assets and liabilities at the same time, giving rise to repricing gaps in the short or medium term. The DNB Bank Group is also subject to intense competition for customer deposits and the current low interest rate environment puts pressure on the DNB Bank Group's deposit spreads. The DNB Bank Group may not be able to lower its funding costs, whether relating to deposits or wholesale funding, in line with decreases in interest rates on its interest-bearing assets.
Interest rates are sensitive to several factors that are out of the DNB Bank Group’s control, including fiscal and monetary policies of governments and central banks, as well as domestic and international political conditions. An increase in interest rates could reduce the demand for credit,as well as contribute to an increase in defaults by the DNB Bank Group's customers. Conversely, a reduction in the level of interest rates may adversely affect the DNB Bank Group through, among other things, a decrease in demand for deposits and an increase in competition in deposit-taking and lending to customers. As a result of these factors, significant changes or volatility in the interest rates could have a material adverse impact on the business, financial condition or results of operations of the DNB Bank Group.
The DNB Bank Group has implemented risk management methods to mitigate and control these and other market risks, and exposures are constantly measured and monitored. However, it is difficult to predict changes in economic or market conditions and to anticipate the effects that such changes could have on the DNB Bank Group's financial performance and results of operations. While the DNB Bank Group undertakes hedging operations in order to reduce its exposure to interest rate risk, it does not hedge all its risk exposure and cannot assure its hedging strategies will be successful. If the DNB Bank Group is unable to adjust the interest rate payable on deposits in line with the changes in market interest rates receivable by it on loans, or if the DNB Bank Group’s monitoring procedures are unable to manage adequately the interest rate risk, its interest income could rise less or decline more than its interest expense, in which case the DNB Bank Group’s results of operations and financial condition or prospects could be negatively affected.
20 The DNB Bank Group is exposed to foreign exchange rate risk and the risk of devaluation or depreciation of any of the currencies in which it operates.
Changes in exchange rates, particularly in the NOK-USD and NOK-EUR exchange rates, affect the value of assets and liabilities denominated in foreign currencies, and may affect income from foreign exchange dealing. The DNB Bank Group's reporting currency is the Norwegian kroner. However, a substantial portion of its assets and liabilities are denominated in currencies other than the Norwegian kroner, giving rise to translation risk. Although the majority of lending is in Norwegian kroner, foreign currency lending, primarily denominated in USD, EUR and SEK, represented a material portion of the DNB Bank Group's total loan portfolio. Balance sheet items, including monetary assets and liabilities, of foreign branches and subsidiaries in currencies other than the Norwegian kroner are translated into Norwegian kroner according to exchange rates prevailing on the balance sheet date, while profit and loss items are translated according to exchanges rates on the transaction date. Changes in net assets resulting from exchange rate movements are recognized in the income statement. A devaluation or depreciation of any such other currency in which the DNB Bank Group operates or in which it has credit exposures may result in significant losses for the DNB Bank Group. In addition, a depreciation of NOK against other currencies in which loans are made to customers would result in an increase in the DNB Bank Group’s loan portfolio, which would result in an increase in risk-weighted assets and have a negative impact on capital ratios. In order to mitigate this translation risk, the DNB Bank Group seeks to hedge foreign exchange risk by seeking to match the currency of its assets with the currency of the liabilities that fund them. However, there can be no assurance that these hedging activities will be effective, and hedge counterparties are subject to credit risk.
Furthermore, the DNB Bank Group may suffer losses because certain of its customers’ income is in local currencies while they must make payments on their loans in NOK, EUR or another currency. This is particularly the case with respect to the DNB Bank Group's Baltic customers. For example, a large part of the DNB Bank Group’s lending in the Baltic states is denominated in EUR while customers in the region typically derive the majority of their income in local currencies. A devaluation or depreciation of the relevant local currency against the EUR would adversely affect these customers’ ability to repay their loans, and the credit risk associated with these customers would increase.
The DNB Bank Group is exposed to market price risk.
The DNB Bank Group’s customer-driven trading operations (where positions, within certain defined limits, are taken) and its treasury operations (where the DNB Bank Group holds investment and liquidity portfolios for its own account, including entering into interest rate, credit, liquidity and exchange rate derivative transactions as well as taking positions in fixed income and equity instruments in the domestic and international markets and trading in the primary and secondary markets for government securities) are the key contributors to market price risk in the DNB Bank Group. The fair value of financial instruments held by the DNB Bank Group, including bonds (government, corporate and mortgage), equities, cash in various currencies, investments in private equity, hedge and credit funds, commodities and derivatives (including credit derivatives), are sensitive to volatility of and correlations between various market variables, including interest rates, credit spreads, equity prices and foreign exchange rates. To the extent volatile market conditions persist or recur, the fair value of the DNB Bank Group’s bond, derivative and structured credit portfolios, as well as other classes of assets, could fall more than estimated, and therefore cause the DNB Bank Group to record mark to market losses. Future valuations of the assets for which the DNB Bank Group has already recorded or estimated mark to market losses, which will reflect the then prevailing market conditions, may result in significant changes in the fair values of these assets. Further, certain financial instruments are recorded at fair value, which is determined by using financial models incorporating assumptions, judgments and estimations that are inherently uncertain and which may change over time or may ultimately be inaccurate. Any of these factors could require the DNB Bank Group to recognize further mark to market losses, which may have a material adverse effect on the DNB Bank Group’s business, financial condition and results of operations. In addition, because the DNB Bank Group’s trading and investment income depends to a great extent on the performance of financial markets, volatile market conditions could result in a significant decline in the DNB Bank Group’s trading and investment income, or result in a trading loss, which in turn could have a material adverse effect on the DNB Bank Group’s business, financial condition and results of operations.
Moreover, due to the recent persistent economic turmoil, the fair value of certain of the DNB Bank Group’s exposures has proven difficult to estimate. Valuations in future periods, reflecting then-prevailing market conditions, may result in significant changes in the fair values of the DNB Bank Group’s exposure, even in respect
21 of exposures such as credit market exposures, for which the DNB Bank Group has previously recorded valuation losses. In addition, the values of financial instruments are subject to uncertainty as they are based on estimates, assumptions and available information. As a result, estimates of fair value may differ materially both from estimates made by other financial institutions and from the values that would have been used if a market for these assets had been readily available. Thus, the value ultimately realized by the DNB Bank Group may be materially different from the current or estimated fair value. Any such difference could have a material adverse effect on the financial condition and/or liquidity of the DNB Bank Group.
To mitigate its exposure to the volatility in market pricing of certain of its assets, the DNB Bank Group uses fair value hedging to manage interest rate risk on long-term borrowings. In dislocated markets, hedging and other risk management strategies have proven not to be as effective as they are in normal market conditions due in part to the decreasing credit quality of hedge counterparties, including credit derivative product companies. A continued deterioration in economic and financial market conditions could lead to impairment charges and further mark- downs, and an illiquid market for financial instruments could cause spreads to widen, adversely affecting the pricing of financial instruments.
The DNB Bank Group has implemented risk management methods to mitigate and control these and other market risks to which it is exposed, and exposures are constantly measured and monitored. However, it is difficult to predict changes in economic or market conditions and to anticipate the effects that such changes could have on the DNB Bank Group's financial performance and business operations.
The DNB Bank Group is exposed to actuarial and financial risks related to its pension and medical care obligations towards its employees.
The DNB Bank Group faces risks that returns on its pension fund may be less positive than expected or even negative. In such a case, the DNB Bank Group will be required to recognize actuarial losses on the difference between the greater of the expected value of the assets and the actual value. Similarly, demographic factors, such as an increase in life expectancy among active employees and pensioners, can result in changes in mortality tables used by insurance companies and thus negatively affect the DNB Bank Group's defined benefit obligations, generating actuarial losses that require contributions to the DNB Bank Group's pension fund in order to guarantee that fund liabilities are fully funded. With effect from January 1, 2011, the DNB Bank Group's defined benefit scheme for retirement and disability pensions for employees in Norway was closed, and as from January 1, 2011, employees who take up employment in the DNB Bank Group are included in a newly established defined contribution scheme for retirement pensions and a new defined benefit scheme for disability coverage. As of 31 December 2011, the DNB Bank Group's pension fund liabilities were fully funded. Any possible future actuarial losses will require the DNB Bank Group to make contributions to finance its pension fund in order to meet its defined benefit obligations and may adversely impact the DNB Bank Group's business, results of operations and financial condition (including capital requirements).
Risks Related to Liquidity and Funding
Liquidity risk is inherent in the DNB Bank Group’s operations; this risk is exacerbated by current conditions in the global financial markets.
The DNB Bank Group is dependent on access to sufficient liquidity on acceptable terms in order to be able to meet its obligations as they fall due. This liquidity risk is inherent in banking operations and can be heightened by a number of enterprise specific factors, including over-reliance on a particular source of funding (including, for example, short-term and overnight funding), changes in credit ratings or market-wide phenomena such as market dislocation and major disasters.
The DNB Bank Group is dependent on sufficient funding in order to carry out its lending business. The DNB Bank Group’s funding requirements are, as for most commercial banks, primarily covered through customer deposits. As of December 31, 2011, 58.1 per cent of the DNB Bank Group’s net lending to customers was funded by customer deposits. Deposits are subject to fluctuation due to certain factors outside the DNB Bank Group’s control, such as competitive pressures, loss of customer confidence, depositors’ concerns relating to the economy in general, the financial services industry or the DNB Bank Group specifically, ratings downgrades, further deterioration in economic conditions and the existence and extent of deposit guarantees (which, under Norwegian law, apply to
22 deposits up to NOK 2 million). Any of these factors on their own or in combination could lead to a reduction in the DNB Bank Group’s ability to access customer deposit funding on acceptable terms in the future and to sustained deposit outflows within a short period of time, both of which would have an impact on the DNB Bank Group’s ability to fund its operations and meet its minimum liquidity requirements. In addition, any uncertainty regarding the DNB Bank Group’s financial position may lead to withdrawal of deposits, resulting in a funding deficit for the DNB Bank Group.
A substantial part of the DNB Bank Group’s liquidity and funding requirements is also met through ongoing access to wholesale lending markets, including issuance of long-term debt market instruments such as covered bonds. The volume of these funding sources, in particular long-term funding, may be constrained during periods of reduced liquidity. Access to the financial markets has been volatile since the disruptions in the credit markets experienced in 2007. Obtaining funding in the interbank markets or via the capital markets has been more difficult generally. Even a perception among market participants that a financial institution is experiencing greater liquidity risk can cause significant damage to the institution. As of December 31, 2011, the DNB Bank Group had a negative cumulative liquidity gap, with longer-term assets, such as mortgages and loans, and shorter-term deposits supplemented by wholesale funding.
The DNB Bank Group’s liquidity could also be impaired by an inability to sell assets or redeem its investments, other outflows of cash or deterioration in the value of its collateral. These situations may arise due to circumstances that the DNB Bank Group is unable to control, such as continued general market disruption, loss in confidence in financial markets, uncertainty and speculation regarding the solvency of market participants, credit rating downgrades or operational problems that affect third parties. Although the DNB Bank Group expends significant effort in liquidity risk management and focuses on maintaining liquidity surplus in the short term, the DNB Bank Group is exposed to the general risk of liquidity shortfalls and cannot ensure that the procedures in place to manage such risks will be suitable to eliminate liquidity risk. Turbulence in the global financial markets and economy may adversely affect the DNB Bank Group’s liquidity and the willingness of certain counterparties and customers to do business with the DNB Bank Group, and the inability of the DNB Bank Group to anticipate and provide for unforeseen decreases or changes in funding sources could have a material adverse effect on the DNB Bank Group’s business, results of operations, financial condition or prospects.
The DNB Bank Group’s funding costs and its access to the debt capital markets depend significantly on its credit ratings.
The DNB Bank Group's credit ratings are important to its business. As of the date of this Prospectus, the Bank was rated "Aa3" by Moody’s Investor Service (Moody’s) (on review), "A+" by Standard & Poor’s Rating Services (S&P) and "AA" by Dominion Bond Rating Service (DBRS). The DNB Bank Group's business is also significantly affected by the credit rating of the DNB Bank Group's subsidiary DNB Boligkreditt AS (Boligkreditt). As of December 31, 2011, Boligkreditt was rated "Aaa" by Moody's, "AAA" by S&P and "AAA" by Fitch Ratings (Fitch). There can be no assurance that the rating agencies will not downgrade the ratings of the Bank or Boligkreditt or the ratings of the Bank’s or Boligkreditt's debt instruments (including Notes issued under the Program) either as a result of the DNB Bank Group’s or Boligkreditt's financial position or changes to applicable rating methodologies used by Moody’s and S&P and any other relevant rating agency. A rating agency's evaluation of the DNB Bank Group or Boligkreditt may also be based on a number of factors not entirely within the control of the DNB Bank Group or Boligkreditt, such as conditions affecting the financial services industry generally. Any reduction in the DNB Bank Group’s or Boligkreditt's credit ratings or the ratings of its or Boligkreditt's debt instruments could adversely affect its liquidity and competitive position, undermine confidence in the DNB Bank Group, increase its borrowing costs, limit its access to the capital markets, or limit the range of counterparties willing to enter into transactions with the DNB Bank Group. Such development could have a material adverse effect on the DNB Bank Group’s business, financial situation, results of operations, liquidity and/or prospects.
Other Risks Related to the DNB Bank Group's Business
The DNB Bank Group’s success depends on its ability to maintain its customer base.
The DNB Bank Group’s success depends on its ability to maintain its customer base and to offer its customers a wide range of high quality and competitive products and consistently high levels of service. The DNB Bank Group has sought to achieve this objective by segmenting its branch networks to better serve the diverse needs of each
23 industry segment through, among other things, cross-selling the products and services of the DNB Group’s subsidiaries through its marketing and distribution networks. Any failure to maintain the DNB Bank Group’s customer base or to offer the DNB Bank Group’s customers a wide range of high quality and competitive products or consistently high levels of service could have a material adverse effect on the DNB Bank Group’s results of operations, financial condition or prospects.
The DNB Bank Group is exposed to systemic risk.
Given the high level of interdependence between financial institutions, the DNB Bank Group is and will continue to be subject to the risk of deterioration of the commercial and financial soundness, or perceived soundness, of other financial institutions. Within the financial services industry, the default of any one institution could lead to defaults by other institutions. Concerns about, or a default by, one institution could lead to significant liquidity problems, losses or defaults by other institutions, because the commercial and financial soundness of many financial institutions may be closely related as a result of their credit, trading, clearing or other relationships. Even the perceived lack of creditworthiness of, or questions about, a counterparty may lead to market-wide liquidity problems and losses or defaults by the DNB Bank Group or by other institutions. This risk is sometimes referred to as “systemic risk” and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges with whom certain of the DNB Bank Group’s subsidiaries interact on a daily basis. Systemic risk could have a material adverse effect on the DNB Bank Group’s ability to raise new funding and on its business, financial condition, results of operations, liquidity and/or prospects.
The DNB Bank Group is exposed to operational risks, including failures or inadequacies in risk management and internal control procedures.
The DNB Bank Group's business is dependent on its ability to process a very large number of transactions efficiently and accurately. Operations are carried out through a number of entities. Operational risk and losses, including monetary damages, reputational damage, costs and direct and indirect financial losses and/or write-downs, can result from inadequacies or failures in internal processes, systems (e.g., information technology systems) or licenses from external suppliers; fraud or other criminal actions; employee errors; outsourcing; failure to properly document transactions or agreements with customers, vendors, sub-contractors, co-operation partners and other third parties, or to obtain or maintain proper authorization; customer complaints; failure to comply with regulatory requirements, including but not limited to anti-money laundering, data protection and antitrust regulations, or conduct of business rules; equipment failures; failure to protect the DNB Bank Group's assets, including intellectual property rights and collateral; failure of physical and security protection; natural disasters or the failure of external systems, including those of the DNB Bank Group’s suppliers or counterparties; and failure to fulfill the DNB Bank Group's obligations, contractual or otherwise. Although the DNB Bank Group has implemented risk controls and loss mitigation precautions, and substantial resources are devoted to developing efficient procedures and to staff training, it is not possible to implement procedures which are fully effective in controlling each of the operational risks. Some of the risk mitigating measures used by the DNB Bank Group are based on historical information, and the DNB Bank Group’s current policies may not comprehensively address the full impact of the global financial crisis. Thus, as future development may significantly differ from observed historical development, there is a risk that such measures are inadequate in predicting future risk exposure. Furthermore, risk management methods may rely on estimates, assumptions and available information that may be incorrect or outdated. Any failure to successfully execute the DNB Bank Group’s operational risk management and control policies could have a material adverse effect on the DNB Bank Group’s financial condition and results of operations.
The DNB Bank Group is subject to a variety of risks as a result of its operations outside the Nordic markets, including in Poland and the Baltic states.
The DNB Bank Group’s operations in Poland and the Baltic states present various risks that do not apply, or apply to a lesser degree, to its businesses in the Nordic markets. Some of these markets are typically more volatile and less developed economically and politically than markets in Western Europe and North America. The DNB Bank Group faces significant economic and political risk, including economic volatility, recession, inflationary pressure, exchange rate fluctuation risk and interruption of business, as well as civil unrest, moratorium, imposition of exchange controls, sanctions relating to specific countries, expropriation, nationalization, renegotiation or nullification of existing contracts, sovereign default and changes in law or tax policy. For example, as a result of the recession experienced by the Baltic region in 2008 through 2010, the Baltic states' ability to react to weakened
24 conditions and the ability of such countries and their residents to continue to perform on their respective obligations were impaired. The DNB Bank Group's individual write-downs on loans and guarantees in DNB NORD totalled NOK 1,437 million in 2011, NOK 1,813 million in 2010 and NOK 3,929 million in 2009. Risks such as these could impact the ability or obligations of the DNB Bank Group’s borrowers to repay their loans, the value of the DNB Bank Group's collateral held as security, interest rates and foreign exchange rates, and levels of economic activity, which would have a material adverse effect on the DNB Bank Group’s business, financial condition and results of operations in these countries.
Competition in Norway and in the international markets in which the DNB Bank Group operates could have a negative effect on the DNB Bank Group’s business.
The DNB Bank Group faces intense competition in all of its areas of operation (including, among others, corporate and retail banking, investment banking, specialized credit and asset management), both in Norway and the international markets in which it operates. Competition for customer lending and deposits is affected by customer demand, technological changes, the impact of consolidation in the banking industry, regulatory actions and other factors. The DNB Bank Group’s competitors are principally commercial and investment banks. The current financial crisis could introduce additional competitive challenges, as many national governments seek to provide support in a variety of forms to banks organized in their jurisdictions. Depending on the level of government support and the financial strength of the banks in question, this support could strengthen the competitive position of these banks and intensify the competition faced by the DNB Bank Group. Mergers and acquisitions involving the largest Norwegian banks have resulted in a significant concentration of market share, a process which may continue. Competition has further increased with the emergence of non-traditional distribution channels such as internet and telephone banking. If the DNB Bank Group is unable to provide competitive product and service offerings, it may fail to attract new customers and/or retain existing customers, experience decreases in its interest income and fee and commission income, and/or lose market share, the occurrence of any of which could have a material adverse effect on its business, financial condition and results of operations. Although the DNB Bank Group believes that it is in a strong position to continue to compete in the markets in which it operates, there can be no assurance that it will be able to continue to do so.
The DNB Bank Group is increasingly dependent on information technology systems, which may fail, may not be adequate to the tasks at hand or may no longer be available.
Banks and their activities are increasingly dependent on highly sophisticated information technology (“IT”) systems. IT systems are vulnerable to a number of problems, such as software or hardware malfunctions, malicious hacking, physical damage to vital IT centres and computer viruses. Harmonizing IT systems across the DNB Bank Group to create a consistent IT architecture poses significant challenges.
IT systems need regular upgrading to meet the needs of changing business and regulatory requirements and to keep pace with possible expansion into new markets. The DNB Bank Group may not be able to implement necessary upgrades on a timely basis, and upgrades may fail to function as planned. In addition to costs that may be incurred as a result of any failure of its IT systems, the DNB Bank Group could face fines from bank regulators if its IT systems fail to enable it to comply with applicable banking or reporting regulations.
The DNB Bank Group maintains back-up systems for its operations, with one of those back-up systems being located in Norway outside of its premises. However, there are limited scenarios, for example in the event of a major catastrophe resulting in the failure of its information systems, where the DNB Bank Group could lose certain recently entered data with regard to its Norwegian operations or could lose more significant portions of data with regard to its international operations.
The DNB Bank Group is reliant on its outsourcing contracts with EDB Business Partner, CSE and HP for the maintenance and operation of its IT systems. Should these companies become unwilling or unable to fulfill their obligations under the outsourcing contract, the DNB Bank Group could find the smooth functioning of its IT systems compromised.
A major disruption to the DNB Bank Group’s IT systems, whether under the scenarios outlined above or under other scenarios, could have a material adverse effect on the normal operation of the DNB Bank Group’s business and thus on its financial condition and results of operations.
25 The DNB Bank Group could fail to attract or retain senior management or other key employees.
The DNB Bank Group’s performance is, to a large extent, dependent on the talents and efforts of highly skilled individuals, and the continued ability of the DNB Bank Group to compete effectively and implement its strategy depends on its ability to attract new employees and retain and motivate existing employees. Competition from within the financial services industry, including from other financial institutions, as well as from businesses outside the financial services industry for key employees is intense. Any loss of the services of key employees, particularly to competitors, or the inability to attract and retain highly skilled personnel in the future could have an adverse effect on the DNB Bank Group’s business.
Risks Related to the Legal and Regulatory Environments in which the DNB Bank Group Operates
The financial services industry is subject to intensive regulation, including capital adequacy regulation, and the regulatory framework is undergoing major changes.
The DNB Bank Group's business is subject to ongoing regulatory and associated risks. The DNB Bank Group is subject to financial services laws and regulation (including, but not limited to, those relating to capital adequacy, conduct of business, anti-money laundering, payments, consumer credits, reporting, and corporate governance), as well as administrative actions and policies in Norway and in each other jurisdiction in which the DNB Bank Group carries on business. Finanstilsynet is the DNB Bank Group's primary regulator, although the DNB Bank Group’s operations outside of Norway are subject to direct scrutiny from the local regulators in these jurisdictions. The DNB Bank Group is also subject to the oversight of regulators in each country where it has a branch or representative office, including Poland and the Baltic states.
The DNB Bank Group is required to maintain certain capital adequacy ratios, which are calculated in accordance with Basel II requirements, as implemented in Norwegian law and regulations. Any increase in the DNB Bank Group's risk-weighted assets, due to, among other things, a reduction in the internal credit ratings of borrowers, market volatility, widening credit spreads, changes in foreign exchange rates, decreases in collateral values, or further deterioration in the economic environment, could potentially reduce the DNB Bank Group's capital adequacy ratios. If the DNB Bank Group were to experience a reduction in its capital adequacy ratios, it may have to raise further capital, and if it could not raise further capital, it would have to reduce its lending or investments in other operations.
Changes in the supervision and regulation of financial institutions, particularly in Norway, could materially affect the DNB Bank Group's business, the products and services offered or the value of its assets. Areas where changes or developments in regulation and/or oversight could have an adverse impact include, but are not limited to (i) general changes in government and regulatory policies or regimes which may significantly influence investor decisions or may increase the costs of doing business in the Nordic markets and other European markets, and such other markets where the DNB Bank Group carries out its business, (ii) changes in the capital adequacy framework and imposition of onerous compliance obligations, (iii) changes in competition and pricing environments, (iv) differentiation among financial institutions by governments with respect to the extension of guarantees of customer deposits and the terms attaching to such guarantees, (v) expropriation, nationalization, confiscation of assets and changes in legislation relating to foreign ownership, and (vi) further developments in the financial reporting environment, in particular in the other European markets, producing social instability or legal uncertainty, which in turn may affect demand for the DNB Bank Group’s products and services.
As a result of the recent global financial and economic crisis, a number of regulatory initiatives have been introduced that are likely to have an impact on the business of the DNB Bank Group. Such initiatives include, but are not limited to, requirements relating to liquidity, capital adequacy and handling of counterparty risks, transparency, reporting, clearing, transaction execution methods and regulatory tools provided to authorities to allow them to intervene in scenarios of distress. These or any other requirements, restrictions, limitations on the operations of financial institutions and costs involved could have a material adverse effect on the DNB Bank Group’s business, financial condition and results of operations.
In particular, any increase in the DNB Bank Group's risk-weighted assets due to changes in the general capital adequacy framework or regulatory treatment of certain positions could reduce the DNB Bank Group's capital adequacy ratios, which could have a material adverse effect on the DNB Bank Group.
26 In December 2009, the Basel Committee on Banking Supervision (the “Basel Committee”) proposed a number of fundamental reforms to the Basel II regulatory capital framework. In December 2010, January 2011 and July 2011, the Basel Committee issued its final guidance on proposed changes to capital requirements (“Basel III”). The Basel III reforms include a substantial strengthening of existing capital rules, including by, among other things, raising the minimum common equity requirement and the total Tier 1 capital requirement. Banks will be required to maintain, in the form of common equity, a capital conservation buffer. Banks will also be required to build up a countercyclical capital buffer, also consisting of common equity, during periods of excessive credit growth. In addition, a leverage ratio will be introduced, together with a liquidity coverage ratio and net stable funding ratio. The Basel III reforms will also require Tier 1 and Tier 2 capital instruments to be more loss-absorbing. The implementation of the Basel III reforms will begin on January 1, 2013. However, the requirements are subject to a series of transitional arrangements and will be phased in over a period of time. In the European Economic Area, the Basel III reforms are expected to be implemented by way of a new Directive and a European Regulation (known as CRD IV), which will replace Directives 2006/48/EC and 2006/49/EC.
There can be no assurance that, prior to the implementation of the Basel III reforms, the Basel Committee will not amend the package of reforms described above. Furthermore, the European Commission and/or Finanstilsynet may implement the package of reforms, including the terms which capital securities are required to have, in a manner that is different from that which is currently envisaged, or may impose more onerous requirements on Norwegian financial institutions. Irrespective of the regulatory framework, there can be no assurance that debt and equity investors, analysts and other market professionals will not expect higher capital buffers and that such market perception will not increase the DNB Bank Group's borrowing costs, limit its access to the capital markets or result in a downgrade of its ratings.
Any of the changes in the supervision and regulation of financial institutions contemplated above, or any other future changes, may have a material adverse effect on the DNB Bank Group's business and operations. Although the DNB Bank Group works closely with its regulators and continually monitors the situation, the timing and form of future changes in regulation can be unpredictable and are beyond the control of the DNB Bank Group. No assurance can be given that laws and regulations will be adopted, enforced or interpreted in a manner that will not have a material adverse effect on the DNB Bank Group's business, financial situation, results of operations, liquidity and/or prospects.
Governmental responses to recent market disruptions may be inadequate and may have unintended consequences.
The DNB Bank Group may be adversely affected by governmental responses to recent market disruptions in the countries where it operates. As a result of the current financial crisis and subsequent government intervention, there has been, and there will continue to be, a substantial increase in governmental policy responses to recent market disruptions, including reductions in public spending and the imposition of further fiscal austerity measures, and changes in monetary and interest rate policies.
The DNB Bank Group has no control over governmental policy changes or over changes in the interpretation of fiscal legislation by any tax authority. The recent measures taken by various European governments to stimulate the economy and support the banking system may lead to an increase in the tax burden or to a reduction in tax benefits. Significant changes in governmental policy responses in Norway or in the other countries where the DNB Bank Group operates, or difficulties in implementing such responses or with the type and effectiveness of the impact of such responses, may have a relevant adverse impact on the activity, financial situation and operating results of the DNB Bank Group.
The DNB Bank Group is exposed to risks related to money laundering activities, especially in its operations in emerging markets, and compliance with anti-money laundering and anti-terrorism financing rules involves significant cost and effort.
The DNB Bank Group is subject to rules and regulations regarding money laundering and the financing of terrorism. In general, the risk that banks will be subjected to or used for money laundering has increased worldwide. The risk of money laundering is higher in emerging markets, such as the Baltic states, than in Norway and other more developed markets where the DNB Bank Group operates. The high turnover of employees, the difficulty in consistently implementing related policies and technology systems, and the general business conditions in emerging
27 markets mean that the risk of the occurrence of money laundering is higher in these countries. Monitoring compliance with anti-money laundering and anti-terrorism financing rules can put a significant financial burden on banks and other financial institutions and pose significant technical problems. Although the DNB Bank Group believes that its current policies and procedures are sufficient to comply with applicable rules and regulations, it cannot guarantee that its group-wide anti-money laundering and anti-terrorism financing policies and procedures completely prevent instances of money laundering or terrorism financing. Any violation of anti-money laundering rules, or even the suggestion of violations, may have severe legal and reputational consequences for the DNB Bank Group and may, as a result, have a material adverse effect on the DNB Bank Group’s financial condition and results of operations. The DNB Bank Group also faces increased compliance and operational risks in its emerging market operations for the reasons described above.
The legal relationships between the DNB Bank Group and its customers are based on standardized contracts and forms created for a large number of commercial transactions; as a result, problems with the conditions in this documentation, or errors in it, could affect a large number of contracts with customers.
The DNB Bank Group maintains contractual relationships with a large number of customers. The DNB Bank Group uses general terms and conditions and standard templates for contracts and forms in all of its business areas and departments. The use of standard contracts and forms poses a significant risk due to the large number of contracts. As a result of ordinary evolution of laws and new judicial decisions, and the growing influence of European legislation on national laws, it is possible that not all the general terms and conditions, standard contracts and forms used by the DNB Bank Group comply with all of the applicable legal requirements at all times. If there are drafting errors, interpretive issues, or if the individual contractual terms or the contracts are deemed invalid in their entirety or in part, a large number of customer relationships may be adversely affected, which may result in claims for compensation or other legal consequences that may have an adverse effect on the financial condition and operating results of the DNB Bank Group.
Legal and regulatory claims arise in the conduct of the DNB Bank Group’s business.
In the ordinary course of its business, the DNB Bank Group is subject to regulatory oversight and liability risk. The DNB Bank Group is subject to regulation in each jurisdiction in which it operates. Regulation and regulatory requirements are continuously amended and new requirements are imposed on the DNB Bank Group, including, but not limited to, regulations on conduct of business, anti-money laundering, payments, consumer credits, capital requirements, reporting and corporate governance.
Furthemore, as part of its banking activities, the DNB Bank Group provides its customers with investment advice and access to internally as well as externally managed funds, and serves as custodian of third party funds. In the event of losses incurred by its customers due to investment advice from the DNB Bank Group, or the misconduct or fraudulent actions of external fund managers, the DNB Bank Group’s customers may seek compensation from the DNB Bank Group. Such compensation might be sought even if the DNB Bank Group has no direct exposure to such risks, or has not recommended such counterparties to its customers.
The DNB Bank Group is involved in a variety of claims, disputes, legal proceedings and governmental investigations in jurisdictions where it is active. Such claims, disputes and legal proceedings are subject to many uncertainties, and their outcomes are often difficult to predict, particularly in the earlier stages of a case or an investigation. These types of claims and proceedings expose the DNB Bank Group to monetary damages, direct or indirect costs (including legal costs), direct or indirect financial loss, civil and criminal penalties, loss of licenses or authorizations, or loss of reputation, as well as the potential for regulatory restrictions on its businesses, all of which could have a material adverse effect on the DNB Bank Group’s business, financial condition and results of operations. Even if the DNB Bank Group believes it has appropriately provided for the contingent obligations in respect of claims, litigation and other proceedings, the outcome of any such claim, litigation or proceeding may differ from management expectations and expose the DNB Bank Group to unexpected costs and losses, reputational and other non-financial consequences and diversion of management attention. All of the above-mentioned factors and any other restrictions and limitations on the operations of financial institutions could have a material adverse effect on the DNB Bank Group’s business, financial condition, results of operations, liquidity and/or prospects.
28 The results of litigation in which the DNB Bank Group is not a party may have adverse consequences for the DNB Bank Group, including where disputes relate to products, practices and clauses in common use throughout the business of the DNB Bank Group.
Judicial and regulatory decisions and settlements that are unfavorable to other banks may also have implications for the DNB Bank Group, even in cases in which the DNB Bank Group is not a part of the proceedings. Where a decision or settlement against another bank involves products, contractual practices or clauses in common use throughout the business of the DNB Bank Group, third parties could use, or threaten to use, such decision or settlement against the DNB Bank Group. The DNB Bank Group could, as a consequence, be forced to change its products or practices or to pay compensation to avoid damage to its reputation, any of which could have a substantial adverse impact on the financial condition or results of operations of the DNB Bank Group.
The DNB Bank Group is exposed to the risk of changes in tax and VAT legislation and the interpretation of such legislation as well as changes in such rates.
The DNB Bank Group’s activities are subject to tax and VAT at various rates in the jurisdictions in which it operates, computed in accordance with local legislation and practice. Future actions by the Norwegian or other governments to increase tax or VAT rates or to impose additional taxes or duties would reduce the DNB Bank Group’s profitability. Revisions of tax or VAT legislation or changes in its interpretation as well as differences in opinion between the DNB Bank Group and tax authorities with respect to interpretation of relevant legislation might also affect the DNB Bank Group’s financial condition in the future. Such changes and the outcome of ongoing proceedings where the DNB Bank Group’s interpretation of tax and VAT legislation is challenged by tax authorities could have a material adverse effect on the DNB Bank Group’s business, financial situation, results of operations, liquidity and/or prospects. Further, there can be no assurance that any such change in tax and VAT legislation or the interpretation of tax and VAT legislation may not have a retroactive effect on the DNB Bank Group’s business, financial situation, results of operations, liquidity and/or prospects.
The DNB Bank Group may be exposed to changes in accounting policies or accounting standards and the interpretation of such policies and standards.
From time to time, the International Accounting Standards Board (the “IASB”) changes the financial accounting and reporting standards that govern the preparation of the DNB Bank Group’s financial statements. Further, changes may take place in the interpretation of, or differences of opinion may arise between the DNB Bank Group and competent authorities with regard to the application of, such standards. These changes can be difficult to predict and can materially impact how the DNB Bank Group records and reports its financial condition and results of operations. In some cases, the DNB Bank Group may be required to apply a new or revised standard, or alter the application of an existing standard, retroactively, rendering a restatement of prior period financial statements necessary. Any such change in the DNB Bank Group’s accounting policies or applicable accounting standards could materially affect its reported financial condition and/or results of operations.
Conflicts of interest, whether actual or perceived, may negatively impact the DNB Bank Group.
As the DNB Bank Group expands the scope of its business and its customer base, it must increasingly implement corporate governance policies on a group-wide level and address potential conflicts of interest, including situations where the DNB Bank Group provides services to a particular customer or its own proprietary investments or other interests conflict, or are perceived to conflict, with the interests of another customer, as well as situations where one or more of the DNB Bank Group’s businesses have access to material non-public information that may not be shared with other businesses within the DNB Bank Group. Appropriately identifying and dealing with conflicts of interest is complex, in part because internal breaches of policy can be difficult to discover. The DNB Bank Group’s reputation may be damaged, and the willingness of customers to enter into transactions in which such a conflict might arise may be affected, if the DNB Bank Group fails, or appears to fail, to identify and deal appropriately with conflicts of interest.
Financial services operations involve inherent reputational risk.
The DNB Bank Group’s reputation is one of its most important assets. Reputational risk, including the risk to earnings and capital from negative public opinion, is inherent in the financial services business. Negative public
29 opinion can result from any number of causes, including misconduct by employees, the activities of business partners over which the DNB Bank Group has limited or no control, severe or prolonged financial losses, uncertainty about the DNB Bank Group’s financial soundness or reliability or the DNB Bank Group’s conduct of its business. Negative public opinion may adversely affect the DNB Bank Group’s ability to keep and attract customers, depositors and investors, as well as its relationships with regulators and the general public. The DNB Bank Group cannot ensure that it will be successful in avoiding damage to its business from reputational risk.
Risks Related to the Notes
Substantially all of the DNB Bank Group's retail mortgage portfolio comprises the cover pool for the covered bonds issued by DNB Boligkreditt.
As of December 31, 2011, substantially all of the Bank's retail morgage portfolio was in the cover pool of the Bank’s wholly-owned subsidiary DNB Boligkreditt AS (Boligkreditt). The retail mortgages transferred by the Bank to Boligkreditt comprise the cover pool and thereby serve as security for holders of the covered bonds issued by Boligkreditt (and also counterparties under derivatives contracts entered into for hedging purposes in relation to such covered bonds). Once transferred, these mortgages do not form part of the general assets of the Bank that would be available to holders of the Notes in the case of insolvency or liquidation of the Bank. The DNB Bank Group intends to cover a significant part of its long-term funding requirement through the additional issuance of covered bonds, which will be secured by future transfers of retail mortgages from the Bank to Boligkreditt. The Notes are unsecured obligations of the Issuer, and the Noteholders are structurally subordinated to the covered bondholders and such hedge counterparties to the extent of the cover pool, and are not likely to ever have access to this cover pool should the Issuer become insolvent or be liquidated.
The Notes may not be a suitable investment for all investors
Each potential investor in the Notes must determine the suitability of that investment in light of its own circumstances. In particular, each potential investor should:
(i) have sufficient knowledge and experience to make a meaningful evaluation of the relevant Notes, the merits and risks of investing in the relevant Notes and the information contained or incorporated by reference in this Prospectus or any applicable supplement to this Prospectus;
(ii) have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in the relevant Notes and the impact such investment will have on its overall investment portfolio;
(iii) have sufficient financial resources and liquidity to bear all of the risks of an investment in the Notes, including Notes with principal or interest payable in one or more currencies, or where the currency for principal or interest payments is different from the currency in which such potential investor's financial activities are principally denominated;
(iv) understand thoroughly the terms of the relevant Notes and be familiar with the behaviour of any relevant indices and financial markets; and
(v) be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for economic, interest rate and other factors that may affect its investment and its ability to bear the applicable risks.
Some Notes are complex financial instruments and such instruments may be purchased as a way to reduce risk or enhance yield with an understood, measured, appropriate addition of risk to their overall portfolios. A potential investor should not invest in Notes which are complex financial instruments unless it has the expertise (either alone or with the assistance of a financial adviser) to evaluate how the Notes will perform under changing conditions, the resulting effects on the value of such Notes and the impact this investment will have on the potential investor's overall investment portfolio.
30 Risks related to the structure of a particular issue of Notes
A wide range of Notes may be issued under the Program. A number of these Notes may have features which contain particular risks for potential investors. Set out below is a description of the most common such features:
Notes subject to optional redemption by the Issuer
An optional redemption feature is likely to limit the market value of Notes. During any period when the Issuer may elect to redeem Notes, the market value of such Notes generally will not rise substantially above the price at which they can be redeemed. This also may be true prior to any redemption period. The Issuer may be expected to redeem Notes when its cost of borrowing is lower than the interest rate on the Notes. At those times, an investor generally would not be able to reinvest the redemption proceeds at an effective interest rate as high as the interest rate on the Notes being redeemed and may only be able to do so at a significantly lower rate. Potential investors should consider reinvestment risk in light of other investments available at that time.
Index Linked Notes, Dual Currency Notes and Notes linked to one or more underlyings
The Issuer may issue Notes with principal or interest determined by reference to an index or formula, to changes in the prices of securities or commodities, to movements in currency exchange rates or other factors (each, a “Relevant Factor”). In addition, the Issuer may issue Notes with principal or interest payable in one or more currencies which may be different from the currency in which the Notes are denominated. Potential investors should be aware that:
(i) the market price of such Notes may be volatile;
(ii) they may receive no interest;
(iii) payment of principal or interest may occur at a different time or in a different currency than expected;
(iv) the amount of principal payable at redemption may be less than the nominal amount of such Notes or even zero;
(v) a Relevant Factor may be subject to significant fluctuations that may not correlate with changes in interest rates, currencies or other indices;
(vi) if a Relevant Factor is applied to Notes in conjunction with a multiplier greater than one or contains some other leverage factor, the effect of changes in the Relevant Factor on principal or interest payable likely will be magnified; and
(vii) the timing of changes in a Relevant Factor may affect the actual yield to investors, even if the average level is consistent with their expectations. In general, the earlier the change in the Relevant Factor, the greater the effect on yield.
The historical experience of an index should not be viewed as an indication of the future performance of such index during the term of any Index Linked Notes. Accordingly, potential investors should consult their own financial and legal advisers about the risk entailed by an investment in any Index Linked Notes and the suitability of such Notes in light of their particular circumstances.
Variable rate Notes with a multiplier or other leverage factor
Notes with variable interest rates can be volatile investments. If they are structured to include multipliers or other leverage factors, or caps or floors, or any combination of those features or other similar related features, their market values may be even more volatile than those for securities that do not include those features.
31 Inverse Floating Rate Notes
Inverse Floating Rate Notes have an interest rate equal to a fixed rate minus a rate based upon a reference rate such as LIBOR. The market values of such Notes are typically more volatile than market values of other conventional floating rate debt securities based on the same reference rate (and with otherwise comparable terms). Inverse Floating Rate Notes are more volatile because an increase in the reference rate not only decreases the interest rate of the Notes, but may also reflect an increase in prevailing interest rates, which further adversely affects the market value of these Notes.
Fixed/Floating Rate Notes
Fixed/Floating Rate Notes may bear interest at a rate that converts from a fixed rate to a floating rate, or from a floating rate to a fixed rate. Where the Issuer has the right to effect such a conversion, this will affect the secondary market and the market value of such Notes since the Issuer may be expected to convert the rate when it is likely to produce a lower overall cost of borrowing. If the Issuer converts from a fixed rate to a floating rate in such circumstances, the spread on the Fixed/Floating Rate Notes may be less favourable than then prevailing spreads on comparable Floating Rate Notes tied to the same reference rate. In addition, the new floating rate at any time may be lower than the rates on other Notes. If the Issuer converts from a floating rate to a fixed rate in such circumstances, the fixed rate may be lower than then prevailing rates on its Notes.
Notes issued at a substantial discount or premium
The market values of securities issued at a substantial discount or premium to their nominal amount tend to fluctuate more in relation to general changes in interest rates than do prices for conventional interest bearing securities. Generally, the longer the remaining term of the securities, the greater the price volatility as compared to conventional interest-bearing securities with comparable maturities.
The Issuer's obligations under Subordinated Notes are subordinated
The Issuer's obligations under Subordinated Notes are unsecured subordinated obligations of the Issuer subject to cancellation as described in Condition 3(e), and rank pari passu without any preference among themselves and at least equally with all other subordinated obligations of the Issuer (whether actual or contingent) having a fixed maturity from time to time outstanding.
In the event of a liquidation, dissolution, administration or other winding-up of the Issuer by way of public administration, Noteholders are entitled to receive (in lieu of any other payment, but subject as provided in Condition 3), in respect of the principal amount of the Notes an amount equal to the principal amount of the Notes and, in the case of interest on the Notes, an amount equal to any interest accrued to but excluding the date of repayment but which is unpaid. The relevant Noteholders’ claim under such Notes shall be subordinated in right of payment only to the claims against the Issuer of all unsubordinated creditors of the Issuer and to claims preferred under Norwegian law generally.
Although Subordinated Notes may pay a higher rate of interest than comparable Notes which are not subordinated, there is a significant risk that an investor in such Notes will lose all or some of his investment should the Issuer become insolvent.
In certain circumstances, some or all of the principal amount of any Subordinated Notes may be cancelled
Under Norwegian legislation, if the Issuer's most recent audited accounts reveal that its net assets are less than 25 per cent of its share capital, the general meeting of shareholders of the Issuer can, or the relevant authorities can if the general meeting of shareholders of the Issuer does not do so: first, cancel share capital to compensate for the shortfall and secondly, if any remaining shortfall exceeds a substantial part (as determined by the general meeting of shareholders of the Issuer or by the relevant Norwegian authorities) of the Issuer's subordinated loan capital, cancel, in whole or in part, such subordinated loan capital (which would include principal in respect of all Subordinated Notes). In such circumstances, principal in respect of all Undated Subordinated Indebtedness will be cancelled before principal in respect of any Subordinated Notes.
32 There are no events of default in relation to Dated or Undated Subordinated Notes
In the event that the Issuer fails to pay interest or principal when due on any Dated Subordinated Note or Undated Subordinated Note, the holders of such Notes shall be entitled to bring proceedings against the Issuer for payment of such amounts.
Risks related to Notes generally
Set out below is a brief description of certain risks relating to the Notes generally:
Modification, waivers and substitution
The Terms and Conditions of the Notes contain provisions for calling meetings of Noteholders to consider matters affecting their interests generally. These provisions permit defined majorities to bind all Noteholders including Noteholders who did not attend and vote at the relevant meeting and Noteholders who voted in a manner contrary to the majority.
The Terms and Conditions of the Notes also provide that the Trustee may, without the consent of Noteholders, (i) agree to any modification of, or to the waiver or authorisation of any breach or proposed breach of, any of the provisions of Notes or the Trust Deed or (ii) determine that any Event of Default or potential Event of Default shall not be treated as such, where, in any such case, it is not, in the opinion of the Trustee, materially prejudicial to the interests of the Noteholders so to do. In addition, the Trustee may, without the consent of the Noteholders, agree with the Issuer to the substitution of another company as principal debtor under any Notes in place of the Issuer, in the circumstances described in Condition 14 of the Notes including the Trustee being satisfied that the interests of the Noteholders will not be materially prejudiced by the substitution.
EU Savings Directive
Under EC Council Directive 2003/48/EC on the taxation of savings income, Member States are required to provide to the tax authorities of another Member State details of payments of interest (or similar income) paid by a person within its jurisdiction to an individual resident in that other Member State or to certain limited types of entities established in that other Member State. However, for a transitional period, Luxembourg and Austria are instead required (unless during that period they elect otherwise) to operate a withholding system in relation to such payments (the ending of such transitional period being dependent upon the conclusion of certain other agreements relating to information exchange with certain other countries). A number of non-EU countries and territories including Switzerland have adopted similar measures (a withholding system in the case of Switzerland).
The European Commission has proposed certain amendments to the Directive which may, if implemented, amend or broaden the scope of the requirements described above. If a payment were to be made or collected through a Member State which has opted for a withholding system and an amount of, or in respect of, tax were to be withheld from that payment, neither the Issuer nor any Paying Agent nor any other person would be obliged to pay additional amounts with respect to any Note as a result of the imposition of such withholding tax. The Issuer is required to maintain a Paying Agent in a Member State that is not obliged to withhold or deduct tax pursuant to the Directive.
U.S. Foreign Account Tax Compliance Withholding
The Issuer and financial institutions through which payments on the Notes are made may be required to withhold U.S. tax at a rate of 30% on all of, or a portion of, certain payments made in respect of (i) any Notes characterized as debt (or which are not otherwise characterized as equity and have a fixed term) for U.S. federal tax purposes and that are issued after 31 December 2012 or are materially modified after that date, and (ii) any Notes characterized as equity or which do not have a fixed term for U.S. federal tax purposes, whenever issued, pursuant to Sections 1471 through 1474 of the U.S. Internal Revenue Code ("FATCA") or similar law implementing an intergovernmental approach thereto. This withholding tax may apply to an investor or to any non-U.S. financial institution through which payment on the Notes is made if that investor or financial institution does not meet certain requirements established under FATCA. If an amount in respect of U.S. withholding tax were to be deducted or withheld from interest, principal or other payments on the Notes, neither the Issuer nor any paying agent nor any other person would, pursuant to the conditions of the Notes, be required to pay additional amounts as a result of the deduction or
33 withholding of such tax. Noteholders therefore may, if FATCA is implemented as currently proposed by the U.S. Internal Revenue Service, receive less interest or principal than expected. See "Taxation—United States Federal Income Tax Considerations—U.S. Foreign Account Tax Compliance Withholding" for further information.
Change of law
The Terms and Conditions of the Notes are based on English law and, in respect of Condition 3, Norwegian law in effect as at the date of issue of the relevant Notes. No assurance can be given as to the impact of any possible judicial decision or change to English law, Norwegian law or administrative practice after the date of issue of the relevant Notes.
Risks related to the market generally
Set out below is a brief description of certain market risks, including liquidity risk, exchange rate risk, interest rate risk and credit risk:
The secondary market generally
Notes may have no established trading market when issued, and one may never develop. If a market does develop, it may not be liquid. Therefore, investors may not be able to sell their Notes easily or at prices that will provide them with a yield comparable to similar investments that have a developed secondary market. This is particularly the case for Notes that are especially sensitive to interest rate, currency or market risks, are designed for specific investment objectives or strategies or have been structured to meet the investment requirements of limited categories of investors. These types of Notes generally would have a more limited secondary market and more price volatility than conventional debt securities. Illiquidity may have a severely adverse effect on the market value of Notes.
Exchange rate risks and exchange controls
The Issuer will pay principal and interest on the Notes in the Specified Currency. This presents certain risks relating to currency conversions if an investor's financial activities are denominated principally in a currency or currency unit (the “Investor's Currency”) other than the Specified Currency. These include the risk that exchange rates may significantly change (including changes due to devaluation of the Specified Currency or revaluation of the Investor's Currency) and the risk that authorities with jurisdiction over the Investor's Currency may impose or modify exchange controls. An appreciation in the value of the Investor's Currency relative to the Specified Currency would decrease (i) the Investor's Currency-equivalent yield on the Notes, (ii) the Investor's Currency-equivalent value of the principal payable on the Notes and (iii) the Investor's Currency-equivalent market value of the Notes.
Government and monetary authorities may impose (as some have done in the past) exchange controls that could adversely affect an applicable exchange rate. As a result, investors may receive less interest or principal than expected, or no interest or principal.
Interest rate risks
Investment in Fixed Rate Notes involves the risk that subsequent changes in market interest rates may adversely affect the value of the Fixed Rate Notes.
Credit ratings may not reflect all risks
One or more independent credit rating agencies may assign credit ratings to the Notes. The ratings may not reflect the potential impact of all risks related to structure, market, additional factors discussed above, and other factors that may affect the value of the Notes. A credit rating is not a recommendation to buy, sell or hold securities and may be revised or withdrawn by the rating agency at any time. In general, European regulated investors are restricted under the CRA Regulation from using credit ratings for regulatory purposes, unless such ratings are issued by a credit rating agency established in the EU and registered under the CRA Regulation (and such registration has not been withdrawn or suspended), subject to transitional provisions that apply in certain circumstances whilst the registration application is pending. Such general restriction will also apply in the case of credit ratings issued by non-EU credit rating agencies, unless the relevant credit ratings are endorsed by an EU-registered credit rating
34 agency or the relevant non-EU rating agency is certified in accordance with the CRA Regulation (and such endorsement action or certification, as the case may be, has not been withdrawn or suspended). Certain information with respect to the credit rating agencies and ratings will be disclosed in the Final Terms.
Legal investment considerations may restrict certain investments
The investment activities of certain investors are subject to legal investment laws and regulations, or review or regulation by certain authorities. Each potential investor should consult its legal advisers to determine whether and to what extent (i) Notes are legal investments for it, (ii) Notes can be used as collateral for various types of borrowing and (iii) other restrictions apply to its purchase or pledge of any Notes. Financial institutions should consult their legal advisers or the appropriate regulators to determine the appropriate treatment of Notes under any applicable risk-based capital or similar rules.
35 USE OF PROCEEDS
The net proceeds from each issue of Notes will be used by the Issuer for general corporate purposes, including the repayment of borrowings incurred in the ordinary course of business. If, in respect of a particular Series of Notes, there is a specific, identified use of proceeds, this will be stated in the applicable Final Terms.
36 CAPITALIZATION
The following table sets forth the Issuer's consolidated capitalization as at December 31, 2011. Except as noted below,(1) there has been no material change in the Issuer's capitalization since December 31, 2011. This information should be read together with the Issuer's audited consolidated financial statements incorporated by reference in this Prospectus.
As of December 31, 2011,
(NOK millions)
Borrowings Commercial paper, nominal amount ...... 228,430 Bond debt, nominal amount(1) (2) ...... 391,326 Adjustments ...... 20,521 Subordinated loan capital ...... 24,156
Total borrowings 664,433
Equity Share capital ...... 18,314 Share premium reserve ...... 20,611 Other equity ...... 65,378
Total equity ...... 104,304
Total capitalization ...... 768,737
______Notes: (1) In January 2012, the Issuer and DNB Boligkreditt issued senior bonds and covered bonds, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments." (2) Minus own bonds. As of December 31, 2011, outstanding covered bonds issued by DNB Boligkreditt totalled NOK 351.3 billion and the cover pool represented NOK 458.7 billion.
37 SELECTED CONSOLIDATED FINANCIAL INFORMATION
The financial information set forth below is derived from the Issuer's audited consolidated financial statements as of and for the years ended December 31, 2011, 2010 and 2009.
The following data should be read in conjunction with the audited consolidated financial statements and the notes thereto incorporated by reference in this Prospectus as well as the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations."
The table below sets forth income statement data for the Issuer for the years indicated:
Year ended December 31,
2011 2010 2009 (NOK million) Total interest income ...... 60,563 53,885 59,047 Total interest expenses ...... 35,331 30,498 35,935
Net interest income...... 25,232 23,387 23,112 Commissions and fees receivable etc...... 6,233 6,337 5,956 Commissions and fees payable etc...... (2,015) (1,986) (1,890) Net gains/losses on financial instruments at fair value...... 7,628 4,973 6,180 Profit from companies accounted for by the equity method. 77 180 93 Net gains/losses on investment property ...... (32) 0 0 Other income ...... 2,822 3,562 1,485 Net other operating income ...... 14,713 13,067 11,824
Total income...... 39,945 36,454 34,935
Salaries and other personnel expenses...... (9,171) (8,170) (8,681) Other expenses ...... (7,475) (6,737) (6,067) Depreciation and impairment of fixed and intangible assets (2,062) (2,135) (2,094)
Total operating expenses...... (18,708) (17,042) (16,841)
Net gains/losses on fixed and intangible assets ...... 19 23 26 Write-downs on loans and guarantees ...... (3,445) (2,997) (7,710) Pre-tax operating profit ...... 17,811 16,437 10,410 Taxes ...... (5,308) (4,827) (4,351)
Profit from operations and non-current assets held for sale, after taxes (5) 75 80
Profit for the year...... 12,498 11,685 6,139 Profit attributable to shareholders...... 12,498 12,437 7,698 Profit attributable to minority interests...... 0 (752) (1,559)
Earnings/diluted earnings per share (NOK) ...... 71.09 66.72 43.95 Earnings per share for continuing operations excluding operations held 71.12 66.29 43.50 for sale (NOK) ......
38 The table below sets forth balance sheet data for the Issuer as of the years indicated:
As of December 31,
2011 2010 2009 (NOK million) Cash and deposits with central banks ...... 224,581 16,198 31,859 Lending to and deposits with credit institutions ...... 25,105 43,837 58,751 Lending to customers(1) ...... 1,291,660 1,184,100 1,128,791 Commercial paper and bonds ...... 106,000 162,071 177,613 Shareholdings ...... 12,300 14,954 13,396 Financial derivatives...... 96,264 76,781 69,173 Commercial paper and bonds, held to maturity...... 96,042 113,751 113,302 Investment property...... 5,165 2,872 614 Investments in associated companies ...... 2,173 2,291 2,502 Intangible assets ...... 4,854 5,001 5,554 Deferred tax assets...... 636 262 241 Fixed assets...... 6,322 5,767 5,434 Operations and non-current assets held for sale ...... 1,054 1,271 1,255 Other assets...... 12,792 8,482 7,513
Total assets ...... 1,884,948 1,637,639 1,615,999 Loans and deposits from credit institutions ...... 279,553 257,931 302,694 Deposits from customers(2) ...... 750,102 664,012 613,627 Financial derivatives...... 63,130 60,622 52,359 Debt securities issued ...... 640,277 509,447 500,907 Payable taxes ...... 400 4,822 8,715 Deferred taxes...... 4,531 113 575 Other liabilities...... 14,569 13,009 9,839 Operations held for sale...... 383 387 366 Provisions ...... 750 925 847 Pension commitments...... 2,793 3,038 3,707 Subordinated loan capital ...... 24,156 33,474 39,051
Total liabilities ...... 1,780,644 1,547,780 1,532,685 Minority interests ...... 0 0 2,755 Share capital ...... 18,314 17,514 17,514 Share premium reserve ...... 20,611 13,411 13,411 Other equity...... 65,378 58,933 49,633
Total equity ...... 104,304 89,859 83,314
Total liabilities and equity ...... 1,884,948 1,637,639 1,615,999
______Notes: (1) Lending to customers is net of write-downs but includes accrued interest, amortization and adjustments to fair value, as applicable. See "Selected Statistical Data—Loans and Guarantees." (2) Deposits from customers includes accrued interest.
39 The table below sets forth selected key figures as of and for the years indicated: As of or for the year ended December 31,
2011 2010 2009
Key figures: Rate of return/profitability Net other operating income, per cent of total income...... 36.8 35.8 33.8 Cost/income ratio (%)(1)...... 45.9 47.6 45.9 Return on equity (%)(2) ...... 13.5 13.9 10.0 Risk-adjusted return on risk-adjusted capital (RARORAC) (%)(3)...... 18.0 17.2 16.7 Return on risk-adjusted capital (RORAC) (%)(4)...... 21.6 22.2 12.0 Average equity including allocated dividend (NOK million)...... 92,538 84,276 77,061 Return on average risk-weighted volume (%)(5) ...... 1.30 1.22 0.59 Financial strength Equity Tier 1 capital ratio at end of period (%)...... 9.3 8.3 7.5 Core (Tier 1) capital ratio at end of period (%) ...... 9.9 9.2 8.4 Capital adequacy ratio at end of period (%) ...... 11.5 11.7 11.4 Core capital at end of period (NOK million)...... 101,336 84,441 80,400 Risk-weighted volume at end of period (NOK million) ...... 1,018,586 918,659 960,208 Loan portfolio and write-downs Individual write-downs divided by average net lending to customers (%)...... 0.26 0.34 0.52 Individual and collective write-downs divided by average net lending to customers (%)...... 0.28 0.25 0.66 Net non-performing and doubtful commitments, per cent of net lending . 1.49 1.53 1.71 Net non-performing and net doubtful commitments at end of period (NOK million) ...... 19,465 18,409 19,127 Liquidity Ratio of customer deposits to net lending to customers at end of period (%)...... 58.1 56.1 54.4 Staff Number of full-time positions at end of period ...... 12,560 11,970 12,263
______Notes: (1) Total operating expenses divided by total income. Expenses exclude impairment losses for goodwill and intangible assets. (2) Profit for the year divided by average total equity. (3) Risk-adjusted profits divided by the risk-adjusted capital requirement. Risk-adjusted profits indicate the level of profits in a normalized situation. (4) Profit for the period divided by the risk-adjusted capital requirement. Profit for the period excludes profit attributable to minority interests and is adjusted for the period’s change in fair value recognized directly in equity and for the difference between recorded interest on average equity and interest on risk adjusted capital. (5) Profit for the year divided by average risk-weighted volume.
40 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the information set out in “Selected Consolidated Financial Information” and the Bank's audited consolidated financial statements (including the notes thereto) as of and for the years ended December 31, 2011, December 31, 2010 and December 31, 2009 incorporated by reference in this Prospectus. The Bank's audited consolidated financial statements as of and for the years ended December 31, 2011, December 31, 2010 and December 31, 2009 have been prepared in accordance with IFRS as approved by the EU. See "Presentation of Certain Financial and Other Information."
The following discussion contains certain forward-looking statements that involve risks and uncertainties. The DNB Bank Group's future results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, without limitation, those discussed in the sections entitled “–Forward- Looking Statements”, “Risk Factors” and “Description of the DNB Bank Group” elsewhere in this Prospectus.
As used in this section, the term “DNB Bank Group” is used to denote the Bank and its consolidated subsidiaries and the term “Bank” is used to denote DNB Bank ASA on a stand-alone basis.
Overview
DNB Bank ASA is Norway's largest bank by gross lending and deposits (source: Norges Bank), offering corporate, retail and investment banking services and products to customers in Norway and internationally, including in Sweden, Poland, Russia and the Baltic states of Estonia, Latvia and Lithuania, under the DNB brand name. As of September 30, 2011, the Bank's market share among Norwegian commercial banks (including the Postal Bank and savings banks, finance companies and mortgage companies) was approximately 30 per cent; the Bank's market share across retail lending and deposits was also approximately 30 per cent (source: Norges Bank). As of December 31, 2011, the DNB Bank Group had total assets of NOK 1,885 billion and net lending to customers of NOK 1,292 billion. The DNB Bank Group's profit for the year ended December 31, 2011 was NOK 12.5 billion.
The Bank is wholly owned by DNB ASA, which is the holding company of the DNB Group. The DNB Group is Norway's largest financial services group in terms of total assets, with total assets of NOK 2,126 billion as of December 31, 2011. DNB ASA conducts its banking operations through the Bank and offers life insurance and pension saving products, non-life insurance products and asset management services through its wholly owned subsidiaries DNB Kapitalforvaltning Holding ASA, DNB Livforsikring ASA and DNB Skadeforsikring ASA, as set forth below in “Description of the DNB Bank Group—Legal Structure of the DNB Group.” As of December 31, 2010, the DNB Group had the largest market share in the Norwegian financial market in each of the following areas, based on total assets: credit institutions (banks, mortgage companies and finance companies), in which it had a 34 per cent market share; life insurance, in which it had a 29 per cent market share; and securities funds, in which it had a 21 per cent market share (source: Finanstilsynet). As of December 31, 2011, the DNB Group had more than 2.1 million private individual customers, more than 200,000 corporate customers and approximately 1,000,000 insurance customers in Norway.
The DNB Bank Group's core businesses are retail and commercial banking, which it operates through its Retail Banking and Large Corporate and International business areas, respectively. It provides commercial banking services to corporate and retail customers in Poland and the Baltic states through its newly formed Baltics Division (formerly trading under the name “DNB NORD”), which is organized as part of its Large Corporates and International business area but is operated as an independent profit center. The DNB Bank Group also provides investment banking services through DNB Markets, Norway's largest investment bank. Through its Retail Banking and Large Corporate and International business areas, the DNB Bank Group cross-sells certain asset management and life insurance products offered by the Insurance and Asset Management business area of the DNB Group, for which the DNB Bank Group receives fee and commission income. The Bank is also the largest private settlement bank in Norway. As of December 31, 2011, the DNB Bank Group's total assets represented 88.7 per cent of the DNB Group's total assets, and its profit for the year represented 96.3 per cent of the DNB Group's profit for the year.
41 As of the date of this Prospectus, the DNB Bank Group has operations in 19 countries worldwide, with operations in the Scandinavian countries, Finland, the Baltics Poland, Great Britain, Germany, Greece, Luxembourg, Russia, the United States, Chile, Brazil, India, Singapore and China. The DNB Bank Group meets the needs of customers for financial advisory services, products and services in Norway through 172 DNB branch offices and 15 Nordlandsbanken branches, 38 investment centers, 57 corporate advisory service centers, DNB Private Banking, 24- hour telephone customer service, and online and mobile banking services. In addition, the DNB Bank Group serves customers through 179 post offices in Norway and 2,256 in-store banking and postal outlets.
Significant Factors Affecting the DNB Bank Group’s Financial Condition and Results of Operations
The DNB Bank Group’s financial condition, results of operations and prospects depend significantly upon the macroeconomic conditions prevailing in Norway and the global economy in general, as well as certain other factors described below. The impact of these and other potential factors may vary significantly in the future and many of these factors are outside the control of the DNB Bank Group.
Macroeconomic Conditions
The macroeconomic environment is the most significant factor affecting the DNB Bank Group’s financial condition and results of operations. In particular, macroeconomic developments affect demand for, and pricing of, the DNB Bank Group's products and services, as well as the quality of its assets. Macroeconomic factors, such as GDP growth or decline, and rates of unemployment and inflation, affect the following factors:
● Corporate and retail customers’ investment activities, which in turn affect demand for credit and, as a result, the DNB Bank Group’s lending volumes.
● Write-offs and write-downs on the DNB Bank Group's loans.
● Developments in asset prices, including prices of equity and debt securities, which in turn particularly affect commission and fee income, gains on financial instruments at fair value and treasury, equity and corporate finance operations.
● Downgrades or upgrades in internal credit ratings of customers due to deterioration or improvement in their credit quality, which in turn directly affect the Bank's regulatory capital levels and indirectly affect its ability to increase lending volumes.
● Volatility in interest rates, currency rates and commodity prices, which in turn affect customers’ demand for risk management products.
Norway
The macroeconomic environment in Norway is of primary importance to the DNB Bank Group. As of December 31, 2011, the great majority of the DNB Bank Group's net lending to customers was extended by Norwegian business units, defined as business units of the DNB Bank Group located in Norway, and the great majority of the DNB Bank Group's deposits from customers originated from Norway. For the year ended December 31, 2011 the great majority of the DNB Bank Group's income was attributable to Norwegian business units.
In particular, the Norwegian residential mortgage market is important to the DNB Bank Group. Mortgages are a key product for the DNB Bank Group, representing a large portion of its retail lending portfolio in Norway and providing the Bank with cross-selling opportunities.
Norway has experienced moderate economic growth over the past couple of years. In 2011, growth increased moderately. There has been a decline in the rate of unemployment, which has stabilized at a level which is lower than the average for the past ten years. The level of inflation has been low, as have interest rates. There has been high real wage growth, which, along with rises in employment levels and the number of social benefit recipients, has contributed to strong growth in real household income. This, combined with low interest rates, has resulted in an increase in consumption levels and housing investment and contributed to economic growth. There has been a particularly high level of activity in the housing market, with a significant rise in home prices of approximately 19
42 per cent above the temporary peak in 2007 (source: Statistics Norway), even as the number of houses and completed dwellings continues to increase (source: Statistics Norway and Norges Bank). In an environment of low interest rates and falling inflation, a further increase in household demand is expected. In turn, this is expected to contribute to increasing corporate investment. In addition, greater investments in the petroleum industry and energy production are expected to result in higher activity levels. However, due to slow growth in the international economy, Norwegian export industries are expected to experience reduced demand and a weak price trend in the future. If the weak global trend continues, it will, over time, gradually also affect the rest of the Norwegian economy.
The following chart sets forth real GDP growth in Norway and selected countries, expressed as percentage change from the previous year, for the periods indicated.
8.0% Norway Sweden UK Euro Area
6.0%
4.0%
2.0%
0.0% 2005 2006 2007 2008 2009 2010 2011
-2.0%
-4.0%
-6.0%
Source: OECD Economic Outlook No. 90, November 2011
The following chart sets forth the unemployment rate, expressed as a percentage of total workforce, in Norway and selected countries for the periods indicated.
12.0% Norway Sweden UK Euro Area
10.0%
8.0%
6.0%
4.0%
2.0%
0.0% 2005 2006 2007 20 08 2009 20 10 2011
Source: OECD Economic Outlook No. 90, November 2011
43 According to the OECD Economic Outlook No. 90 published in November 2011, Norway and Sweden are among the only OECD Member countries that reported general government net financial assets as a percentage of GDP for the year 2011, compared to general government net financial liabilities for the remaining OECD Member countries. Norway and Switzerland are the only OECD Member countries projecting an annual budget surplus for the year 2012 (source: OECD).
Poland and Baltic states
The DNB Bank Group operates in Poland and the Baltic states of Estonia, Latvia and Lithuania through DNB NORD. See "Description of the DNB Bank Group—DNB NORD" and "—DNB Baltics and Poland." As of December 31, 2011, NOK 55,467 million, or 4.3 per cent of the DNB Bank Group's net lending to customers, was extended by business units in Poland and the Baltic states, defined as business units of the DNB Bank Group located in Poland and the Baltic states. However, of total write-downs on loans and guarantees for the year ended December 31, 2011, NOK 1,437 million, or 42 per cent, was attributable to DNB NORD, compared to NOK 1,813 million, or 60 per cent, for the full year 2010.
The Baltic states were severely affected during the financial crisis, but showed signs of recovery towards the end of 2010. GDP increased moderately in the three Baltic states at the end of 2010, whereas manufacturing production demonstrated strong growth. The upturn in exports, particularly to Germany and the Nordic region, was an important factor contributing to the recovery, while domestic demand remained comparatively weak. Unemployment, which rose steeply throughout the crisis, seemed to have passed a peak at the end of 2010. Conditions in 2011 were largely in line with 2010.
In 2009, the Baltic states experienced a pronounced contraction of GDP, with annual GDP declines of 14.3 per cent in Estonia, 17.7 per cent in Latvia and 14.8 per cent in Lithuania, compared to an average contraction across the 27 member states of the European Union of 4.3 per cent Throughout the period under review, Poland has experienced a more stable economic environment than the Baltic states.
The table below sets forth year-on-year changes in real GDP growth in the EU 27 countries, Baltic states and Poland from 2008 to 2011.
2008 (%) 2009 (%) 2010 (%) 2011 (%) EU 27 0.3 -4.3 2 1.5 Estonia -3.7 -14.3 2.3 7.5(1) Latvia -3.3 -17.7 -0.3 5.3(1) Lithuania 2.9 -14.8 1.4 5.9 Poland 5.1 1.6 3.9 4.3(1) Note: (1) These figures are estimated. Source: Eurostat
Interest Rates
Among the primary factors influencing the DNB Bank Group's profitability are lending and deposit spreads, in addition to the long-term cost of funding and the return on its securities portfolio.
The following table sets forth the key policy rate of the Norwegian central bank for the period under review. The key policy rate is the interest rate on banks' deposits (up to a specified limit) with the Norwegian central bank, the Norges Bank. Change Date Interest rate (per cent) December 15, 2011 1.75 May 13, 2011 2.25 May 6, 2010 2.00 December 17, 2009 1.75
44 October 30, 2009 1.50 June 18, 2009 1.25 May 7, 2009 1.50 March 26, 2009 2.00 February 5, 2009 2.50
Source: Norges Bank.
Fluctuations in short-term and medium- to long-term interest rates impact DNB Bank Group’s net interest income differently depending on the re-pricing profile of the DNB Bank Group’s interest-earning assets and interest-bearing liabilities. In general, declining short-term interest rates may negatively impact the spread on deposit products, particularly fixed-rate products and current accounts. For further information about the DNB Bank Group's average interest rates earned or paid on selected balance sheet items, see "Selected Statistical Data."
The DNB Bank Group's re-pricing profile is often characterized by a higher level of short-term liabilities than short-term assets, particularly with respect to its traded assets and related liabilities. As a result, in an environment of low short-term interest rates, the DNB Bank Group generally benefits from the re-pricing of more of its interest- bearing liabilities than of its interest-earning assets.
In assessing the profitability of its business, the DNB Bank Group also considers the cost of long-term funding in addition to lending and deposit spreads. Over the period under review, long-term funding costs for the DNB Bank Group have increased, driven principally by market conditions and widening spreads. In 2011, continuing market uncertainty reduced general access to funding during the second half of the year, resulting in a continued increase in funding costs for the year.
Lending spreads are one of the key drivers of net interest income, which is in turn the most important revenue source for the DNB Bank Group. For the year ended December 31, 2011, net interest income constituted 63.2 per cent of the DNB Bank Group's total income, compared to 64.2 per cent and 66.2 per cent in 2010 and 2009, respectively.
Write-downs on loans
The DNB Bank Group's results of operations can be significantly affected by the amount of write-offs and write-downs on loans and guarantees that it records in its income statement. Individual write-downs are recorded in the accounts if objective indications of a decrease in value can be found. Write-downs on both performing and non-performing loans are calculated as the difference between the value of the loan on the balance sheet and the net present value of estimated future cash flows discounted by the effective interest rate. When a loss is considered final any previously recorded write-downs on the balance sheet related to the commitment are reduced. This reduction is not recorded in the profit and loss statement. See "Selected Statistical Data—Developments in write-offs and write-downs."
Write-downs on loans and guarantees for the year ended December 31, 2011 increased by NOK 448 million to NOK 3,445 million from NOK 2,997 million for the year ended December 31, 2010. While individual write-downs decreased by NOK 856 million for 2011, collective write-downs increased for the year, partly due to weakening economic conditions. Net write-downs on loans represented 0.26 per cent of net lending to customers, of which individual write-downs represented 0.25 per cent In 2010, net individual write-downs came to 0.34 per cent of net lending. Net non-performing and doubtful commitments amounted to NOK 19.5 billion as of December 31, 2011, up from NOK 18.4 billion a year earlier. The increase was due to the fact that a few large commitments were classified as non-performing and doubtful after being subject to moderate write-downs. The Bank has sought to closely monitor the quality of its loan portfolio and take proactive measures in light of possible disruptions to certain sectors of the market in 2012.
Improved macroeconomic conditions in 2010 contributed to a 61.1 per cent reduction in write-downs, from NOK 7,710 million for the year ended December 31, 2009 to NOK 2,997 for the year ended December 31, 2010. Write-downs in DNB NORD remained relatively high in 2010 – at NOK 1,813 million, or 2.87 per cent of net lending, but markedly lower than in 2009, when write-downs amounted to NOK 3,929 million. Individual write-downs in DNB NORD were NOK 2,262 million for 2010, a decrease of 32.4 per cent from 2009, reflecting
45 the improved macroeconomic trend in the Baltic region. Write-downs in Large Corporates and International also decreased significantly, reflecting improved economic conditions and better credit quality. Excluding DNB NORD, individual write-downs were NOK 1,811 million for 2010, a decrease of 33.4 per cent from 2009.
Regulatory Framework
The DNB Bank Group expects the new regulatory framework applicable to the financial services industry to lead to higher long-term funding costs. The Basel III regulatory framework will introduce stricter capital adequacy and liquidity requirements. Within the European Union and European Economic Area, Basel III will be introduced in the form of a new capital requirements directive, CRD IV. The latest CRD IV draft proposal was circulated for comment in July 2011. It is planned to be presented to the EU Parliament in June 2012 and is expected to be approved by the end of 2012. The Norwegian Ministry of Finance has prepared draft legislation and a consultation paper for implementing CRD IV in Norway and aims to approve changes in regulations during the second half of 2012.
In response to the European sovereign debt crisis, the European Banking Authority (the "EBA") published an additional plan for the recapitalization of banks in October 2011. The plan includes a temporary, stricter requirement that common equity Tier 1 capital must be minimum 9 per cent after any losses on European sovereign debt exposures have been recorded. This requirement is scheduled to become effective on June 30, 2012. However, as a transitional measure applying during the transition from Basel I to Basel II, the Norwegian supervisory authorities require that risk-weighted volume must represent a minimum of 80 per cent of risk-weighted volume measured according to standard risk weights under the Basel I rules. This is a stricter definition, which requires more capital than the approach chosen by several European Union countries, including Sweden, where the full Internal Ratings Based (IRB) approach from the Basel II framework has been chosen for measurements.
The DNB Bank Group is working to be ready to meet the new capitalization and liquidity requirements. Until the new and stricter regulations are introduced, the DNB Bank Group's funding activities will reflect a gradual adaptation to the regulations.
Recent Developments
As of the date of this Prospectus, in the first quarter of 2012 DNB Boligkreditt has issued covered bonds including the following issuances, and the Bank has issued senior bonds and subordinated loan capital including the following issuances:
Maturity (years)
Covered Euro 2,000 million 5.25 Euro 2,000 million 10 NOK 2,000 million 6 Senior Euro 1,000 million 10 GBP 400,000 million 8 JPY 65,000,000 million 5 SEK 2,000 million 5 Subordinated loan capital Euro 750 million 10 (non-call 5 years)
46 Analysis of Results of Operations for the Years Ended December 31, 2011, 2010 and 2009
The table below presents the DNB Bank Group’s income statement for the years ended December 31, 2011, 2010 and 2009:
Year ended December 31,
2011 2010 2009 (NOK millions) Total interest income ...... 60,563 53,885 59,047 Total interest expense ...... 35,331 30,498 35,935
Net interest income...... 25,232 23,387 23,112 Commissions and fees receivable...... 6,233 6,337 5,956 Commissions and fees payable...... 2,015 1,986 1,890 Net gains on financial instruments at fair value ...... 7,628 4,973 6,180 Profit from companies accounted for by the equity method...... 77 180 93 Net gains on investment property...... (32) 0 0 Other income ...... 2,822 3,562 1,485
Net other operating income ...... 14,713 13,067 11,842
Total income...... 39,945 36,454 34,935 Salaries and other personnel expenses...... 9,171 8,170 8,681 Other expenses ...... 7,475 6,737 6,067 Depreciation and impairment of fixed and ...... intangible assets...... 2,062 2,135 2,094
Total operating expenses...... 18,708 17,042 16,841 Net gains on fixed and intangible assets...... 19 23 26 Write-downs on loans and guarantees ...... 3,445 2,997 7,710
Pre-tax operating profit ...... 17,811 16,437 10,410 Taxes ...... 5,308 4,827 4,351 Profit from operations and non-current assets held for sale, after taxes .... (5) 75 80
Profit for the year...... 12,498 11,685 6,139
Profit attributable to shareholders...... 12,498 12,437 7,698 Profit attributable to minority interests...... 0 (752) (1,559)
The DNB Bank Group recorded profit of NOK 12,498 million for the year ended December 31, 2011, an increase of NOK 813 million, or 7.0 per cent compared to NOK 11,685 million for the year ended December 31, 2010, which was in turn an increase of 88.7 per cent from NOK 6,139 million in 2009. In 2011, pre-tax operating profit before write-downs increased by NOK 1,826 million, to NOK 21,237 million but was offset in part by a higher tax charge and an increase in write-downs on loans. In 2010, higher total income and lower write-downs on loans, which decreased by 61.1 per cent to NOK 2,997 million for 2010 from NOK 7,710 million for 2009, had a positive effect on profit. Profit for 2010 also reflected non-recurring income of NOK 1,170 million resulting from the gain realized
47 on the merger between Nordito and Danish PBS Holding. Pre-tax operating profits before write-downs rose from NOK 18,094 million in 2009 to NOK 19,412 million in 2010.
Net interest income
The table below sets forth a breakdown of the DNB Bank Group's net interest income for the years ended December 31, 2011, 2010 and 2009.
Year ended December 31,
2011 2010 2009 (NOK millions) Total interest income ...... 60,563 53,885 59,047 Total interest expense ...... 35,331 30,498 35,935
Net interest income...... 25,232 23,387 23,112
Net interest income was NOK 25,232 million for the year ended December 31, 2011, an increase of NOK 1,846 million, or 7.9 per cent, from NOK 23,387 million for the year ended December 31, 2010, mainly due to an increase in customer lending volumes. The discontinuation of guarantee fund levies to the Norwegian Banks' Guarantee Fund in 2011 also contributed to the increase in net interest income, in the amount of NOK 732 million. Average customer lending volumes increased by NOK 72.4 billion, or 6.4 per cent, during 2011. At constant exchange rates, deposits measured in NOK increased almost as much as lending, which led to an increase in the ratio of customer deposits to net lending to customers, from 56.1 per cent as of December 31, 2010 to 58.1 per cent as of December 31, 2011. Both lending and deposit spreads remained stable during 2011, although lending spreads widened towards the end of the year, partially compensating for the increase in long-term funding costs. As a result of volatility in the financial markets, driven primarily by the European sovereign debt crisis, the cost of new funding remained at a significantly higher level than short-term money market rates. Exchange rate movements and long- term funding costs partially offset the increase in net interest income resulting from higher lending volumes.
Net interest income was NOK 23,387 million for the year ended December 31, 2010, an increase of NOK 275 million, or 1.2 per cent, compared to 2009. Average customer lending volumes in 2010 declined by 1.4 per cent compared with 2009. At constant exchange rates, average customer lending volumes increased by 1.4 per cent in 2010, reflecting both an improved economic situation and greater market activity. Average lending spreads remained unchanged from 2009. Average customer deposit volumes increased by NOK 31.1 billion from 2009 and deposit spreads widened. The ratio of customer deposits to net lending to customers increased to 56.1 per cent as of December 31, 2010 from 54.4 per cent as of December 31, 2009.
Net other operating income
The table below sets forth a breakdown of the DNB Bank Group's net other operating income for the years ended December 31, 2011, 2010 and 2009.
Year ended December 31,
2011 2010 2009 (NOK millions) Money transfer fees receivable...... 2,988 2,960 3,034 Fees on asset management services...... 237 252 263 Fees on custodial services ...... 317 301 275 Fees on securities...... 254 303 279 Corporate finance ...... 454 608 335 Interbank fees ...... 92 97 106
48 Year ended December 31,
2011 2010 2009 (NOK millions) Credit broking commissions...... 488 474 367 Sales commissions on insurance products...... 434 491 411 Sundry commissions and fees receivable on banking services...... 968 851 886
Total commissions and fees receivable ...... 6,233 6,337 5,956 Money transfer fees payable...... 1,049 1,111 1,015 Commissions payable on asset management services ...... 0 0 (16) Fees on custodial services payable ...... 122 112 107 Interbank fees ...... 130 140 153 Credit broking commissions...... 93 48 52 Sales commissions on insurance products...... 16 24 12 Sundry commissions and fees payable on banking services...... 605 550 568
Total commissions and fees payable ...... 2,015 1,986 1,890 Net gains on financial instruments at fair value ...... 7,628 4,973 6,180 Profit from companies accounted for by the equity method...... 77 180 93 Net gains on investment property ...... (32) 0 0 Total other income...... 2,822 3,562 1,485
Net other operating income ...... 14,713 13,067 11,824
Net other operating income for the year ended December 31, 2011 increased by NOK 1,646 million, or 12.6 per cent, to NOK 14,713 million from NOK 13,067 million for 2010. Excluding gains of NOK 1,170 million resulting from the merger between the payment services company Nordito and the Danish PBS Holding in 2010, other operating income increased by NOK 2,816 million. Volatility in the financial markets contributed to the increase in income from net gains on financial instruments at fair value.
Net other operating income for the year ended December 31, 2010 increased by NOK 1,243 million, or 10.5 per cent, to NOK 13,067 million from NOK 11,824 million for 2009. Excluding gains of NOK 1,170 million from the merger between the payment services company Nordito and the Danish PBS Holding in the second quarter of 2010, other operating income increased by 0.6 per cent in 2010. The improvement in the Norwegian economy compared with 2009 generally contributed to a slight increase in operating income. There was a significant reduction in trading income in DNB Markets compared to 2009. For the year ended December 31, 2009, the DNB Bank Group recorded particularly high income from hedging transactions related to foreign exchange and interest rate products due to the turbulent market situation in the wake of the financial crisis. This income returned to a more standard level for the year ended December 31, 2010.
Commissions and fees
Commissions and fees receivable were NOK 6,233 million and NOK 6,337 million for the years ended December 31, 2011 and 2010, respectively, a decrease of NOK 104 million, or 1.6 per cent, compared to 2010. Net commissions and fees receivable also decreased, to NOK 4,218 million, a decrease of NOK 133 million, or 3.1 per cent, compared to NOK 4,351 million in 2010. This decrease was primarily attributable to a slowdown in corporate finance activity.
Commissions and fees receivable were NOK 6,337 million and NOK 5,956 million for the years ended December 31, 2010 and 2009, respectively, representing an increase of NOK 381 million, or 6.4 per cent compared to 2009.
49 Net commission and fees receivable also increased to NOK 4,351 million, an increase of NOK 285 million, or 7.0 per cent, compared to NOK 4,066 million in 2009. This increase was primarily attributable to corporate finance activity.
Net gains on financial instruments at fair value
Net gains on financial instruments at fair value were NOK 7,628 million and NOK 4,973 million for the years ended December 31, 2011 and 2010, respectively, decreasing NOK 2,655 million, or 53.4 per cent compared to 2010. This increase was driven primarily by mark-to-market adjustments on foreign exchange and interest rate instruments. The Bank will record high levels of such income when the financial markets are volatile, although the income will be reversed over the instruments' term to maturity. In more stable markets, market values of such instruments, and thereby the mark-to-market adjustments, will be reduced.
Net gains on financial instruments at fair value were NOK 4,973 million and NOK 6,180 million for the years ended December 31, 2010 and 2009, respectively, representing a decrease of NOK 1,207 million, or 19.5 per cent compared to 2009. This decrease was driven primarily by decreases in net gains on financial instruments held in the trading book. As mentioned above, this decrease was driven by the significant reduction in trading income in DNB Markets as a consequence of the normalization of such income compared to the high levels in 2009, in the aftermath of the financial crisis.
Operating expenses
The table below sets forth a breakdown of the DNB Bank Group's operating expenses for the years ended December 31, 2011, 2010 and 2009 and has been extracted from the audited consolidated financial statements incorporated by reference in this Prospectus.
Year ended December 31,
2011 2010 2009 (NOK millions) Salaries ...... 6,804 6,272 6,323 Employer's national insurance contributions...... 867 903 949 Pension expenses...... 847 325 812 Restructuring expenses...... 17 47 63 Other personnel expenses ...... 637 624 534
Total salaries and other personnel expenses ...... 9,171 8,170 8,681 Fees...... 1,702 1,385 913 IT expenses...... 1,670 1,649 1,489 Postage and telecommunications...... 344 345 379 Office supplies...... 97 91 91 Marketing and public relations...... 938 775 529 Travel expenses ...... 246 212 198 Reimbursement to Norway post for transactions executed 167 151 203 Training expenses...... 68 67 67 Operating expenses on properties and premise(1) ...... 1,338 1,247 1,272 Operating expenses on machinery, vehicles and office equipment ...... 143 147 140 Other operating expenses ...... 763 667 786
Total other expenses...... 7,475 6,737 6,067
50 Year ended December 31,
2011 2010 2009 (NOK millions) Write-downs of machinery, vehicle and office equipment 1,046 960 738 Other depreciation of tangible and intangible assets ...... 553 533 533 Write-downs of activated systems development ...... 212 345 66 Impairment losses for goodwill (2) ...... 190 194 730 Other write-downs of fixed and intangible assets...... 60 103 27 Total depreciation and impairment of fixed and intangible assets...... 2,062 2,135 2,094
Total operating expenses...... 18,708 17,042 16,841
______Note: (1) Costs relating to leased premises were NOK 1,005 million for the DNB Bank Group in 2010, compared with NOK 1,005 million in 2009. (2) Impairment losses for goodwill of NOK 190 million relating to the DNB Baltics and Poland Division were recorded in 2011.
Operating expenses for the year ended December 31, 2011 increased by NOK 1,666 million, or 9.8 per cent, from 2010. Adjusted for impairment losses for goodwill and intangible assets and the reversal of costs related to the former contractual pension scheme in 2010, there was an increase in expenses of NOK 1,522 million, or 9.1 per cent. The increase in operating expenses reflected higher activity levels in the DNB Bank Group, which resulted in an increase in staff numbers. The DNB Bank Group escalated its IT initiatives during 2011, in line with its increase in market and customer activities both in and outside Norway. Systems development fees, recorded under the line item of Fees, totalled NOK 1,153 million for the DNB Bank Group in 2011, compared with NOK 986 million in 2010. In addition, there were significant non-recurring costs related to the conversion from Postbanken's IT system and the rebranding of the DNB Group from DnB NOR to DNB. Impairment losses for goodwill of NOK 190 million relating to DNB NORD were recorded in 2011. The cost to income ratio declined to 45.9 per cent for the year ended December 31, 2011, from 47.6 per cent for 2010.
Operating expenses for the year ended December 31, 2010 increased by NOK 201 million, or 1.2 per cent, from 2009. Due to a change of strategy for home mortgage activity in Sweden, impairment losses for goodwill of NOK 194 million were recorded in 2010 in relation to Svensk Fastighetsförmedling. In 2009, the DNB Bank Group 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. In addition, IT systems in DNB NORD were written down by NOK 346 million after new IT infrastructure plans in DNB NORD were approved. In 2010, DNB Bank decided to discontinue the use of the Postbanken brand. Accordingly, the value of the brand was written down by NOK 51 million. Total write-downs amounted to NOK 591 million. In 2009, corresponding write-downs amounted to NOK 796 million.
Adjusted for impairment losses for goodwill and intangible assets, operating expenses for the year ended December 31, 2010 increased by 2.5 per cent from 2009. The cost to income ratio increased from 45.9 per cent in 2009 to 47.6 per cent in 2010. Moreover, there were significant effects from the restructuring of pension schemes and the closing of the former contractual pension scheme. As a result, pension expenses for 2010 were reduced by NOK 355 million compared to 2009 due to the reversal of provisions for the former contractual pension scheme. There was an increase in IT expenses due to the DNB Bank Group's focus on new products and solutions, and adjustments to the systems portfolios. Systems development fees, recorded under the line item of Fees, totalled NOK 986 million in 2010 and NOK 583 million in 2009.
51 Write-downs on loans and guarantees
The table below sets forth a breakdown of the DNB Bank Group's write-downs on loans and guarantees for the years ended December 31, 2011, 2010 and 2009:
2011 2010 2009
Lending(1) Guarantees Total Lending(1) Guarantees Total Lending(1) Guarantees Total (NOK millions)
Write-offs(2) ...... 550 0 550 459 0 459 547 7 554
New individual write- downs(3) ...... 4,047 73 4,120 5,128 13 5,141 6496 25 6,521
Net new individual write- downs ...... 4597 73 4,670 5,587 13 5,581 7043 32 7,075
Reassessed individual write-downs...... 968 47 1,015 1,092 16 1,109 675 18 693
Recoveries on commitments previously written off...... 437 0 437 418 0 418 317 0 317
Net individual write- downs ...... 3,192 26 3,217 4,077 (3) 4,074 6,051 14 6,065
Changes in collective write-downs on loans(3).... 227 - 227 (1,077) - 1,077 1,645 - 1,645
Write-downs on loans and guarantees...... 3,419 26 3,445 3,000 (3) 2,997 7,696 14 7,710
Write-offs covered by individual write-downs made in previous years .... 2,740 13 2,753 2,209 8 2,217 1,610 17 1,627
Notes: (1) Including write-downs on loans at fair value. (2) Including a NOK 98 million adjustment for commitments previously written down in 2010. (3) In the first quarter of 2010, collective write-downs of NOK 284 million were reclassified as individual write-downs following more precise identification of impairment on individual commitments in sub-portfolios in DNB NORD.
Write-downs on loans and guarantees totalled NOK 3,445 million for the year ended December 31, 2011, an increase of NOK 448 million, or 14.9 per cent, from NOK 2,997 million for the year ended December 31, 2010. In 2010, reversals of collective write-downs represented NOK 1,077 million, compared to collective write-downs of NOK 227 million for 2011, partly driven by a weakening in the economy. Individual write-downs in the Retail Banking business area were reduced from NOK 1,225 million for 2010 to NOK 967 million for 2011, reflecting the relative resilience among both personal customers and small- and medium-sized enterprises. In the Large Corporates and International business area, there was a NOK 371 million increase in individual write-downs, while individual write-downs in the Baltics and Poland were reduced to NOK 1,103 million in 2011. Significant write-downs on certain specified commitments in the Baltics were recorded for 2011, including in relation to the Latvian home mortgage portfolio.
Write-downs on loans and guarantees totalled NOK 2,997 million for the year ended December 31, 2010, a decrease of 61.1 per cent from NOK 7,710 million in 2009. The decline in collective write-downs reflected the improved economic situation and better credit quality. Excluding DNB NORD, individual write-downs amounted to NOK 1,811 million for the year ended December 31, 2010, down 33.4 per cent from NOK 2,719 million for 2009. Large Corporates and International recorded the largest reduction, although write-downs also declined in Retail Banking.
52 Individual write-downs in DNB NORD amounted to NOK 2,262 million for the year ended December 31, 2010, compared to NOK 3,346 million in 2009, a decrease of 32.4 per cent The reduction reflected more stable macroeconomic trends in the Baltic region.
Net non-performing and doubtful commitments totalled NOK 18.4 billion as of December 31, 2010, down NOK 0.7 billion from December 31, 2009. Although non-performing commitments increased in the first quarter of 2010, they decreased during the rest of the year. Net non-performing and doubtful commitments represented 1.53 per cent of lending volume as of December 31, 2010, a reduction from 1.71 per cent a year earlier.
Taxes
The DNB Bank Group's tax charge for the year ended December 31, 2011 was NOK 5,308 million, an increase of NOK 481 million from NOK 4,827 million for 2010. The tax charge increased from 29.4 per cent of pre-tax operating profits for 2010 to 29.8 per cent for 2011.
The DNB Bank Group's total tax charge for the year ended December 31, 2010 was NOK 4,827 million, an increase of NOK 476 million from 2009. The tax charge declined from 41.8 per cent of pre-tax operating profits in 2009 to 29.4 per cent in 2010. The main factors contributing to the reduction were significant tax-exempt gains on shares within the EEA in 2010 and reduced losses in DNB NORD. Losses in DNB NORD provide no basis for recording a deferred tax asset on the balance sheet related to losses carried forward, as the losses cannot be expected to reduce tax on future profits within a reasonable time horizon. Losses in DNB NORD were much higher in 2009 than in 2010.
Business areas
Activities in the DNB Bank Group are organized in the business areas of Retail Banking, Large Corporates and International and DNB Markets. The business areas operate as independent profit centers. DNB NORD, encompassing the DNB Bank Group's operations in Poland and the Baltic states, is reported as a separate profit center. See Note 3 to the audited consolidated financial statements for the year ended December 31, 2011 incorporated by reference in this Prospectus for more information about the DNB Bank Group's segments.
Year ended December 31, 2011 compared to year ended December 31, 2010
Retail Banking
Pre-tax operating profits showed a positive trend, rising by NOK 495 million to NOK 7,214 million in 2011. There was a positive development in volumes, a reduction in write-downs and a decreasing trend in non-performing commitments. Retail Banking showed a stable trend in 2011. The growth rates for both home mortgages and lending to small- and medium-sized businesses increased through the year, parallel to a positive trend for deposits. Along with customer deposits, covered bonds based on home mortgages in DNB Boligkreditt were key sources of funding. As of December 31, 2011, 95 per cent of lending volume in Retail Banking was funded by deposits and covered bonds.
There was a moderate rise in net interest income from 2010. Increasing volumes and the discontinuation of guarantee fund levies compensated for the pressure on spreads, rising funding costs and lag effects related to the implementation of interest rate adjustments.
There was an increase in other operating income, reflecting high net income from payment transactions and a greater level of activity within real estate broking. High market activity and IT development contributed to increased operating expenses. The number of full-time positions was 5,040 as of December 31, 2011, with 4,695 in the business units in Norway.
The quality of the loan portfolio was improved, with relatively low write-downs in both the retail and corporate markets. Net write-downs represented 0.11 per cent of net lending, down from 0.17 per cent in 2010. Net non- performing and doubtful commitments amounted to NOK 6.2 billion as of December 31, 2011, down NOK 0.9 billion December 31, 2010.
53 See also the Norwegian lending and deposit market shares of the DNB Bank Group as of September 30, 2011 and September 30, 2010 in "—Competition."
Large Corporates and International
Pre-tax operating profits rose by NOK 609 million compared with 2010, to NOK 6,734 million. Average net lending to customers increased by 7.7 per cent from 2010. There were good opportunities in the markets towards the end of 2011, and the greater part of this increase took place during the second half of the year. Lending volumes expanded by NOK 23.8 billion from the third to the fourth quarter. Deposits from customers rose by 11.9 per cent from 2010, showing increased growth towards the end of the year.
Rising volumes and widening of lending spreads from 2010 contributed to an increase in net interest income, in spite of higher long-term funding costs. There was strong competition for deposits, and deposit spreads were under pressure.
The reduction in other operating income was mainly attributable to a negative development in the value of repossessed assets in the form of equities and ownership interests. There was an increase in operating expenses from 2010, mainly due to a rise in staff numbers in strategic priority areas, higher costs related to IT development activity and costs related to repossessed assets. As of December 31, 2011, staff in the business areas represented 1,174 full- time positions, including 670 positions outside Norway.
Net write-downs on loans represented 0.32 per cent of net lending to customers, of which individual write-downs represented 0.26 per cent. In 2010, net individual write-downs came to 0.17 per cent of net lending.
Net non-performing and doubtful commitments amounted to NOK 6.4 billion as of December 31, 2011, up from NOK 2.7 billion a year earlier. The increase was due to the fact that a few large commitments were classified as non-performing and doubtful after being subject to moderate write-downs.
DNB Markets
Pre-tax operating profits totalled NOK 4,160 million, up NOK 522 million from 2010. Total customer-related revenues increased by 2.5 per cent from 2010, reflecting, in particular, a higher level of income from foreign exchange, interest rate and commodity derivatives, while a low level of market activity within corporate finance caused a reduction in income in this product segment.
Both interest rate and currency markets were characterized by turmoil and volatility throughout the year, resulting in greater demand for various hedging instruments and strong customer revenues from foreign exchange and interest rate and commodity derivatives. Declining long-term interest rates in the second half of 2011 boosted demand for interest rate hedging.
Developments in customer-related income from the sale of securities and other investment products reflected stock market volatility and a lack of risk willingness among investors during parts of 2011. Due to a higher level of income from equity derivatives and bond brokerage, however, there was an 8.3 per cent increase in total income from this product segment compared with 2010. DNB Markets was the largest brokerage house on Oslo Børs in 2011 in these product segments.
Customer-related revenues from corporate finance services reflected the challenging market conditions in 2011, resulting in a low level of activity in the equity markets. On the other hand, there was brisk activity in the debt capital market during parts of the year, which helped ensure a stable level of income. DNB Markets established Debt Capital Markets units in Singapore and London during 2011 and thus established such operations at all of DNB’s large international offices: London, New York, Singapore and Stockholm, in addition to Norway.
Customer-related revenues from custodial and other securities services showed a positive trend due to a high level of activity for the year as a whole.
Total income from market making and other proprietary trading rose by 24.0 per cent from 2010. Widening credit spreads resulted in mark-to-market losses on bonds, which are expected to be reversed over time. These losses were
54 more than offset by rising income from trading in foreign exchange and interest rate instruments. The market turmoil thus had a negative impact on customer-related activities in the capital markets but had a positive effect on trading activities.
DNB NORD
DNB Bank Group held all the shares in DNB NORD with effect from year-end 2010. The operations in the Baltic region have been more closely integrated in DNB, and a new strategy has been prepared for operations in the Baltic states. Following the decision to continue operations in Poland as part of the DNB Bank Group, a strategy for Poland is in the process of being drawn up. Banking operations in DNB NORD in Copenhagen are being wound up, and the remaining loan portfolio was transferred to Large Corporates and International in the fourth quarter of 2011. The operations in Copenhagen will be continued as a pure investment company.
Overall, the operations in DNB NORD generated pre-tax operating losses of NOK 1,267 million in 2011, compared with a pre-tax operating loss of NOK 1,481 million in 2010. Performance in 2011 reflected a high level of write- downs on loans, especially in Latvia, while the level of costs was affected by impairment losses for goodwill relating to the operations in Poland and write-downs of capitalized IT systems development totalling NOK 380 million.
DNB Baltics and Poland
DNB Baltics and Poland offers financial services to corporate and personal customers in Estonia, Latvia, Lithuania and Poland. A pre-tax operating loss of NOK 673 million was recorded in 2011, an improvement of NOK 191 million compared with 2010.
Net lending to customers was reduced by 4.0 per cent, on average, from 2010 to 2011, but was relatively stable through 2011 and increased somewhat towards the end of the year. Lending volumes in Poland grew by 29.2 per cent from December 31, 2010 to December 31, 2011, while lending volumes in the Baltics were down 4.8 per cent during the same period. The decline in lending in the Baltics was due to general market conditions. In spite of an improved macroeconomic situation in all these countries and increasing growth, investment levels and rising credit demand have not yet occurred.
Average customer deposits were up 9.6 per cent from 2010. There was relatively strong growth in deposits towards the end of the 2011. The reduction in net interest income from 2010 to 2011 mainly reflected narrowing lending spreads. However, there was a positive trend in lending spreads through 2011, and new loans began to be granted at a higher margin than the average for the portfolio.
Net write-downs on loans were reduced by 7.6 per cent from 2010, but remained at a high level, mainly due to extensive write-downs in Latvia, accounting for 78 per cent of total write-downs on loans in DNB Baltics and Poland. The write-downs represented 2.39 per cent of average lending, a slight reduction from 2.48 per cent in 2010. The write-downs in Latvia related to home mortgages and were due to a reassessment of collateral values and rising costs associated with the repossessing of properties.
Year ended December 31, 2010 compared to year ended December 31, 2009
Retail Banking
Pre-tax operating profits were NOK 6,719 million, a decrease of NOK 522 million, or 7.2 per cent, from the previous year. Relatively low and stable interest rate levels, combined with strong competition, put pressure on spreads. The increase in home mortgages was somewhat lower than in 2009, while the growth in lending to the business sector picked up through 2010. Average deposits were up 2.1 per cent, and the ratio of deposits to lending was 51 per cent in 2010. Covered bonds based on home mortgages from DNB Boligkreditt were an important source of funding. Substantially all of lending volume was funded by deposits and bonds as of December 31, 2010. Net other operating income remained relatively stable compared with 2009. Income from real estate broking led to a rise in income, while income from insurance savings and payment transfers was lower than the previous year. Strict cost control and the implementation of cost-reduction measures contributed to limiting total cost growth to 1.9 per
55 cent compared with 2009. Net write-downs relative to average net lending declined from 0.22 per cent in 2009 to 0.17 per cent in 2010.
Large Corporates and International
Pre-tax operating profits were NOK 6,124 million for the year ended December 31, 2010, an increase of NOK 455 million, or 8.0 per cent, from the previous year due to a decline in write-downs on loans. Rising activity levels throughout 2010 resulted in an increase in net interest income. The effects of higher funding costs were offset by widening lending spreads in all sectors. Strong competition for deposits put pressure on deposit spreads. Average lending to customers declined by 6.1 per cent from 2009 to 2010, but increased by 4.4 per cent in absolute terms from December 31, 2009 to December 31, 2010 due to increasing market activity. Average deposits from customers were stable compared with 2009, but showed an increase towards the end of 2010. Net other operating income decreased from NOK 3,304 million in 2009 to NOK 3,157 million in 2010. Higher activity levels also caused a rise in costs compared with 2009, and the cost to income ratio increased from 27.9 per cent in 2009 to 30.4 per cent in 2010. Relative to average lending, net write-downs on loans were reduced from 0.30 per cent in 2009 to 0.17 per cent in 2010. The quality of the portfolio was satisfactory in all sectors and showed a significant improvement towards the end of 2010.
DNB Markets
Pre-tax operating profits decreased by 31.8 per cent from 2009, to NOK 3,638 million in 2010. High volatility in interest rates and exchange rates at the beginning of 2009 generated a high level of income in that year. The normalization of the markets resulted in a NOK 1.8 billion reduction in income from 2009 to 2010, of which NOK 1.4 billion represented a decline in income from market making and other proprietary trading. There was a high level of activity in 2010, especially towards the end of the year, which offset the pressure on fees resulting from an increasing share of electronic trading and strong competition in the market. Strong activity levels on the Oslo Børs with respect to both equity and debt issues led to an increase in income from corporate finance compared with 2009. Operating expenses were reduced by 4.1 per cent from 2009 to 2010.
DNB NORD
DNB NORD recorded a pre-tax operating loss of NOK 1,481 million for the year ended December 31, 2010, compared with a loss of NOK 4,289 million in 2009. Financial performance still reflected the recession, though there were signs of improvement through 2010 both in DNB NORD's profit and in the Baltic economies. From December 31, 2009 to December 31, 2010, lending was reduced by just over 12 per cent. The Danish loan portfolio, comprising legacy loans made through the former DNB NORD Bank, which is in the process of being downscaled, showed the largest percentage decline, though there was also a reduction in lending volumes in the Baltic region through 2010. In Poland, lending volume rose by 16.7 per cent during the year, measured in Norwegian kroner. A high level of write-downs on loans characterized DNB NORD's financial performance in 2010, though there was a significant reduction from 2009. Measured against average lending, write-downs declined from 4.70 per cent in 2009 to 2.89 per cent in 2010.
Financial Condition
Assets
The following table presents the assets of the DNB Bank Group as of December 31, 2011, 2010 and 2009 and has been extracted from the audited consolidated financial statements incorporated by reference in this Prospectus. For a further analysis of certain items of the DNB Bank Group's balance sheet, see "Selected Statistical Data."
As of December 31,
2011 2010 2009 (NOK millions) Cash and deposits with central banks ...... 224,581 16,198 31,859
56 As of December 31,
2011 2010 2009 (NOK millions) Lending to and deposits with credit institutions ...... 25,105 43,837 58,751 Lending to customers ...... 1,291,660 1,184,100 1,128,791 Commercial paper and bonds ...... 106,000 162,071 177,613 Shareholding...... 12,300 14,954 13,396 Financial derivatives...... 96,264 76,781 69,173 Commercial paper and bonds, held to maturity...... 96,042 113,751 113,302 Investment property...... 5,165 2,872 614 Investment in associated companies...... 2,173 2,291 2,502 Intangible assets ...... 4,854 5,001 5,554 Deferred tax assets...... 636 262 241 Fixed assets...... 6,322 5,767 5,434 Operations and non-current assets held for sale ...... 1,054 1,271 1,255
Other assets...... 12,796 8,482 7,513
Total assets ...... 1,884,948 1,637,639 1,615,999
As of December 31, 2011, the DNB Bank Group's total assets were NOK 1,885 billion, an increase of NOK 247,309 million, or 15.1 per cent, from NOK 1,638 billion as of December 31, 2010, itself an increase of NOK 22 billion, or 1.4 per cent, from NOK 1,616 billion as of December 31, 2009. Net lending to customers increased by NOK 108 billion, or 9.1 per cent, to NOK 1,292 billion as of December 31, 2011, compared to an increase of NOK 55 billion, or 4.9 per cent, from December 31, 2009 to December 31, 2010. Customer deposits increased by NOK 86 billion, or 13.0 per cent, during 2011, and by NOK 50 billion, or 8.2 per cent, during 2010.
For a breakdown of the DNB Bank Group's net lending to customers as of December 31, 2011, 2010 and 2009, see "Selected Statistical Data—Distribution of commitments by industry sector."
Liabilities and equity
The following table presents the total liabilities and equity of the DNB Bank Group as of December 31, 2011, 2010 and 2009 and has been extracted from the audited consolidated financial statements incorporated by reference in this Prospectus. For a further analysis of certain items of the DNB Bank Group's balance sheet, see "Selected Statistical Data." As of December 31,
2011 2010 2009 (NOK millions) Loans and deposits from credit institutions ...... 279,553 257,931 302,694 Deposits from customers ...... 750,102 664,012 613,627 Financial derivatives...... 63,130 60,622 52,539 Debt securities issued ...... 640,277 509,447 500,907 Payable taxes ...... 400 4,822 8,715 Deferred taxes...... 4,531 113 575
57 As of December 31,
2011 2010 2009 (NOK millions) Other liabilities...... 14,569 13,009 9,839 Operations held for sale...... 383 387 366 Provisions ...... 750 925 847 Pension commitments...... 2,793 3,038 3,707
Subordinated loan capital ...... 24,156 33,474 39,051
Total liabilities ...... 1,780,644 1,547,780 1,532,685
Minority interests ...... 0 0 2,755 Share capital ...... 18,314 17,514 17,514 Share premium reserve ...... 20,611 13,411 13,411 Other equity...... 65,378 58,933 49,633
Total equity ...... 104,304 89,859 83,314
Total liabilities and equity ...... 1,884,948 1,637,639 1,615,999
As of December 31, 2011, DNB Bank Group's total liabilities were NOK 1,781 billion, an increase of NOK 232,864 million, or 15.0 per cent, from NOK 1,548 billion as of December 31, 2010, itself an increase of NOK 15.1 billion, or 1.0 per cent, from NOK 1,533 billion as of December 31, 2009.
Off-Balance Sheet Arrangements
In the ordinary course of its business, the DNB Bank Group issues various forms of guarantees and credit commitments in favor of its customers and enters into derivatives transactions for trading and risk management purposes on standardized terms and conditions with off-balance sheet risk. See Note 16 and Note 51 to the audited consolidated financial statements for the years ended as of December 31, 2011 and 2010 incorporated by reference in this Prospectus.
Liquidity and Funding
In order to mitigate its liquidity risk, the majority of the DNB Bank Group's loans are financed through deposits from customers, with the remainder being financed through long-term securities, subordinated loan capital and equity. Until the end of 2011, the DNB Bank Group had a self-imposed limit requiring that such long-term or stable funding represent a minimum of 90 per cent of lending to customers. Stable long-term funding is defined for these purposes as deposits from customers, subordinated debt, covered bonds and senior debt with more than 12 months of residual maturity. As of December 31, 2011, this share was 110 per cent, compared to 104.6 per cent as of December 31, 2010. The DNB Bank Group was within its short-term funding limits for both 2011 and 2010.
With effect from 2012, the DNB Bank Group has adjusted liquidity risk management policy in line with the requirements of Basel III. The minimum requirements will gradually be phased in over an observation period as prescribed by the Basel Committee. These adjustments are expected to require extensive balance sheet adjustments.
In addition to external funding sources, and in line with the DNB Group's capitalization policy, the Bank has chosen to keep a significant liquidity reserve in DNB ASA, its immediate holding company. See "Supervision and Regulation—Regulatory Framework in Norway—Capital Requirements."
58 Loans and deposits from credit institutions
Set forth below is a breakdown of the DNB Bank Group's loans and deposits from credit institutions as of December 31, 2011, 2010 and 2009.
As of December 31,
2011 2010 2009 (NOK millions) Loans and deposits from credit institutions, trading...... 189,964 104,036 134,833 Loans and deposits from credit institutions, designated as at fair value.... 66,329 121,350 118,072
Loans and deposits from credit institutions, amortized cost...... 23,260 32,554 49,787
Loans and deposits from credit institutions ...... 279,553 257,931 302,694
Deposits from customers
Set forth below is a breakdown of the DNB Bank Group's deposits from customers as of December 31, 2011, 2010 and 2009. As of December 31,
2011 2010 2009 (NOK millions) Deposits from customers, trading...... 47,997 36,788 45,982 Deposits from customers, designated as at fair value...... 18,884 15,756 19,860
Deposits from customers, amortized cost...... 683,222 611,488 547,784
Deposits from customers...... 750,102 664,012 613,627
Customer deposits increased by NOK 86,090 million, or 13.0 per cent, to NOK 750,102 million as of December 31, 2011 compared to NOK 664,012 million as of December 31, 2010, which in turn represented an increase of NOK 50.4 billion, or 8.2 per cent from December 31, 2009. The DNB Bank Group's ratio of customer deposits to net lending to customers increased to 58.1 per cent as of December 31, 2011, from 56.1 per cent as of December 31, 2010 and 54.4 per cent as of December 31, 2009. The ratio of customer deposits to net lending for the Bank was 98.9 per cent as of December 31, 2011 and 93.3 per cent as of December 31, 2010. The difference between the DNB Bank Group's and the Bank's ratios primarily reflects the fact that loans not financed through DNB Boligkreditt were largely financed through customer deposits.
Debt securities issued
Set forth below is a breakdown by type of debt securities issued by the Bank issued as of December 31, 2011, 2010 and 2009. As of December 31,
2011 2010 2009 (NOK millions) Commercial paper issued, nominal amount...... 228,430 153,934 168,028 Bond debt, nominal amount ...... 391,326 344,392 319,917
Adjustments...... 20,521 11,122 12,962
Total debt securities issued ...... 640,277 509,447 500,907
59 Set forth below is a breakdown by type of debt securities issued by the Bank issued as of December 31, 2011 and December 31, 2010, and the securities issued and redeemed and exchange rate movements and changes in adjustments in the securities portfolio for the year ended December 31, 2011.
Exchange Balance sheet Matured/ rate Changes in Balance sheet December 31, Issued redeemed movements adjustments December 31, 2011 2011 2011 2011 2011 2010 (NOK millions)
Commercial paper issued, nominal amount ...... 228,430 228,424 153,928 153,934
Bond debt, nominal amount(1).... 391,326 136,451 90,353 836 344,392
Adjustments...... 20,521 9,399 11,122
Total debt securities issued ..... 640,277 364,876 244,281 836 9,399 509,447 ______Note: (1) Minus own bonds. Outstanding covered bonds issued by DNB Boligkreditt totalled NOK 351.3 billion as of December 31, 2011. The cover pool was NOK 458.7 billion as of December 31, 2011.
Set forth below is a breakdown by type of debt securities issued by the Bank issued as of December 31, 2010 and December 31, 2009, and the securities issued and redeemed and exchange rate movements and changes in adjustments in the securities portfolio for the year ended December 31, 2010.
Exchange Balance sheet Matured/r rate Changes in Balance sheet December 31, Issued edeemed movements adjustments December 31, 2010 2010 2010 2010 2010 2009 (NOK millions)
Commercial paper issued, nominal amount ...... 153,934 153,934 168,028 0 168,028
Bond debt, nominal amount(1). 344,392 124,303 88,985 (10,844) 319,917
Adjustments...... 11,122 (1,840) 12,962
Total debt securities issued .. 509,447 278,237 257,013 (10,844) (1,840) 500,907 ______
Note: (1) Minus own bonds. Outstanding covered bonds issued by DNB Boligkreditt totalled NOK 285.9 billion as of December 31, 2010. The cover pool was NOK 395.4 billion as of December 31, 2010.
On initial recognition, securities are recorded either at amortized cost or at fair value, according to internal risk management policies. For a more detailed explanation of which financial instruments are recorded at amortized cost and which are recorded at fair value, see paragraph 7, "Financial Instruments" of Note 1, "Accounting Principles", to the audited consolidated financial statements for the year ended as of December 31, 2011 incorporated by reference in this Prospectus.
Set forth below is a breakdown by maturity of the Bank's debt securities issued, recorded at amortized cost, as of December 31, 2011.
60 As of December 31, 2011(1) (2)
Foreign NOK currency Total (NOK millions) 2012...... 0 31,946 31,946 2013...... 0 36,617 36,617 2014...... 0 37,522 37,522 2015...... 0 46,171 46,171 2016...... 0 65,013 65,013 2017...... 0 28,713 28,713 2018 and later ...... 0 85,194 85,194
Total bond debt, recorded at amortized cost, nominal amount...... 0 331,176 331,176
Total debt securities issued recorded at amortized cost...... 0 331,190 331,190 Notes: (1) Minus own bonds. Outstanding covered bonds in DNB Boligkreditt totalled NOK 351.3 billion as of December 31, 2011. The cover pool represented NOK 458.7 billion. (2) Includes hedged items.
Set forth below is a breakdown by maturity of the Bank's debt securities issued, recorded at fair value, as of December 31, 2011.
As of December 31, 2011(1) (2)
Foreign NOK currency Total (NOK millions) 2012...... 1,291 1 1,292 2013...... 1,723 0 1,723 2014...... 16,160 0 16,160 2015...... 5,477 0 5,477 2016...... 10,563 0 10,563 2017...... 12,433 0 12,433 2018 and later ...... 12,502 0 12,502 Total bond debt, nominal amount...... 60,148 1 60,150 Total commercial paper issued, nominal amount...... 57 228,359 228,416
Total debt securities issued recorded at fair value, nominal amount . 60,205 228,360 288,565
Adjustments...... 2,105 18,416 20,521
Debt securities issued ...... 62,310 577,966 640,277 ______Notes: (1) Minus own bonds. Outstanding covered bonds in DNB Boligkreditt totalled NOK 351.3 billion as of December 31, 2011. The cover pool represented NOK 458.7 billion. (2) Includes hedged items.
61 Debt securities issued were NOK 640,277 million as of December 31, 2011, an increase of NOK 130,800 million, or 25.7 per cent, compared to NOK 509,477 million as of December 31, 2010. The majority of these securities were issued in the international capital markets. The Bank is a regular issuer of short- and long-term debt securities in the Norwegian and international capital markets. The Bank currently has a EUR 45 billion European Medium-Term Note program, a U.S.$ 18 billion U.S. Commercial Paper program, a U.S.$ 12 billion CD program and a EUR 10 billion European Commercial Paper/CD program. During 2011, the Bank issued debt securities in a total amount of NOK 364,876 million.
DNB Boligkreditt, which issues covered bonds secured on DNB Bank's mortgage loan portfolio, has become an increasingly important source of long-term funding of the DNB Bank Group's operations, and is the main funding source for the DNB Bank Group's mortgage lending operations in Norway. DNB Boligkreditt currently has a EUR 55 billion Covered Bond program, a U.S.$ 12 billion Covered Bond program and an AUD 4 billion Covered Bond program. As of December 31, 2011, DNB Boligkreditt had a mortgage loan portfolio of NOK 458.7 billion, consisting exclusively of Norwegian residential mortgages. As of December 31, 2011, debt securities issued by DNB Boligkreditt amounted to NOK 351.3 billion.
The average remaining term to maturity for the portfolio of debt securities issued was 4.5 years as of December 31, 2011, compared to 3.6 years as of December 31, 2010 and 3.0 years as of December 31, 2009.
Capital and Capital Adequacy
The DNB Bank 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 Norwegian regulations.
The DNB Bank Group had a capital adequacy ratio of 11.5 per cent and a Tier 1 capital ratio of 9.9 per cent as of December 31, 2011, compared to a capital adequacy ratio of 11.7 per cent and a Tier 1 capital ratio of 9.2 per cent as of December 31, 2010, and 11.4 per cent and 8.4 per cent, respectively, as of December 31, 2009. The DNB Bank Group had a common equity Tier 1 capital ratio of 9.3 per cent as of December 31, 2011, compared with 8.3 per cent a year earlier. After the allocation of profits for 2011 and share issues of NOK 8 billion aimed at DNB Bank ASA and NOK 3 billion aimed at DNB Livsforsikring, the holding company DNB ASA had a net liquidity reserve of NOK 4 billion.
In order to increase confidence in European banks, the European Banking Authority, EBA, issued new and stricter capitalization requirements for European banks in the autumn of 2011. By June 30, 2012, European banks are required to hold common equity Tier 1 capital of minimum 9 per cent after adjusting for any unrealized losses on investments in European sovereign debt. According to Finanstilsynet, the requirement applies both to the DNB Bank Group and the entire DNB Group. As of December 31, 2011, both the DNB Bank Group and DNB Group met the requirement.
In addition, because of the operations of the subsidiary DNB Markets Inc. in New York, the DNB Bank Group is required by U.S. banking regulation to maintain a Tier 1 capital ratio of 6 per cent and a total capital adequacy ratio of 10 per cent. As of December 31, 2011, this requirement was also fulfilled.
The Basel Committee published new capital and liquidity requirements (Basel III) on December 16, 2010. The EU’s new capital requirements directive, CRD IV, is expected to become effective on January 1, 2013. As part of the DNB Group's Internal Capital Adequacy Assessment Process, or ICAAP, the board of directors of the DNB Group is in dialogue with Finanstilsynet (the “Financial Supervisory Authority of Norway”) regarding the capitalization of the DNB Group. The basis for this dialogue in 2011 was that the DNB Group should target a common equity Tier 1 capital ratio of 10 per cent based on IRB measurement of risk-weighted volume under normal market conditions. Accordingly, the common equity Tier 1 capital ratio should not fall below 8.5 per cent during an economic recession, when risk-weighted volume can be expected to increase. During 2011, a number of countries proposed new capital adequacy requirements which are more stringent than the Basel III proposals, and the Basel Committee has proposed additional capital buffers for systemically important banks. As a consequence of these developments and feedback from Finanstilsynet, the DNB Group’s capitalization policy will be revised, and capital adequacy targets will be raised.
62 Currently, the DNB Group uses a combination of standardized and IRB methods to calculate and report credit risk in its portfolios. See "—Basel II implementation." Due to transitional rules, risk-weighted volume under the IRB approach cannot be reduced below 80 per cent relative to the Basel I requirements. Without the transitional rules, the Bank’s Tier 1 ratio would be higher. It is expected that these rules will be extended to apply through 2015. The transitional rules will be reviewed in connection with the implementation of CRD IV.
According to the DNB Group's capital strategy and dividend policy, the DNB Group aims to be among the most well-capitalized financial services groups in the Nordic region based on equal calculation principles. The DNB Group's capitalization policy is designed to support the Bank's "AA" rating target for ordinary long-term funding and otherwise support the Bank in achieving satisfactory ratings. The payment of dividends is determined based on factors such as the need to maintain satisfactory financial strength and developments in external parameters, in addition to an evaluation of expected profit levels in a normal situation.
In addition to the regulatory assessment and allocation of capital, an allocation of capital to the Bank's business areas is made for management purposes, based on a calculation of risk-adjusted capital requirements.
See also "Risk Management and Risk-Adjusted Performance—Capital Management" and "Supervision and Regulation—Capital Requirements."
Primary capital
As of December 31,
2011 2010 (NOK millions) Share capital ...... 18,314 17,514 Other equity...... 85,990 72,344 Total equity...... 104,304 89,859 Deductions...... Pension funds above pension commitments...... (22) (16) Goodwill...... (3,834) (3,472) Deferred tax assets ...... (664) (342) Other intangible assets...... (2,028) (1,963) Group contribution, payable...... 0 (6,000) Unrealized gains on fixed assets...... (30) (30) 50 per cent of investments in other financial institutions ...... (1,022) (1,024) 50 per cent of expected losses exceeding actual losses, IRB portfolios .... (835) (666) Adjustments for unrealized gains/(losses) on liabilities recorded at fair value ...... (713) (346) Equity Tier 1 Capital ...... 95,177 76,018 Perpetual subordinated loan capital securities(1) (2) ...... 6,159 8,423 Tier 1 Capital...... 101,336 84,441 Perpetual subordinated loan capital...... 4,153 7,004 Term subordinated loan capital(2) ...... 13,230 17,775 Deductions...... 50 per cent of investments in other financial institutions ...... (1,022) (1,024) 50 per cent of expected losses exceeding actual losses, IRB portfolios .... (835) (666)
63 As of December 31,
2011 2010 (NOK millions) Additions ...... 45 per cent of unrealized gains on fixed assets...... 18 18 Tier 2 capital...... 15,544 23,108 Total eligible primary capital(3) ...... 116,879 107,548 Risk-weighted volume (NOK million) ...... 1,018,586 918,659 Minimum capital requirement ...... 81,487 73,493 Equity Tier 1 capital ratio (%)...... 9.3 8.3 Tier 1 ratio (%)...... 9.9 9.2 Capital ratio (%) ...... 11.5 11.7 ______Notes: (1) Perpetual subordinated loan capital securities can represent up to 15 per cent of Tier 1 capital. The excess will qualify as Tier 2 capital. (2) As of December 31, 2011, calculations of capital adequacy for the DNB Bank Group included a total of NOK 557 million in subordinated loan capital in associated companies. (3) Primary capital and nominal amounts used in calculating risk-weighted volume deviate from figures in the DNB Bank Group's accounts since a different consolidation method is used. Associated companies are consolidated gross in the capital adequacy calculations while the equity method is used in the accounts.
Basel II implementation
The table below sets forth the status of Basel II reporting methods used by the DNB Bank Group. A 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. Status and a time schedule for the implementation of the different reporting methods used for the DNB Bank Group's portfolios are shown below.
Reporting methods for credit risk in capital adequacy calculations Portfolios December 31, 2011 December 31, 2012 Retail: - mortgage loans, DNB Bank and DNB Boligkreditt IRB (1) IRB (1) - qualifying revolving retail exposure, DNB Bank 2) IRB (1) IRB (1) - mortgage loans, Nordlandsbanken Standardized IRB (1) - loans in Norway, DNB Finans, DNB Bank IRB (1) IRB (1) Corporates: - small- and medium-sized corporates, DNB Bank Advanced IRB Advanced IRB - large corporate clients (scorecard models), DNB Bank Advanced IRB Advanced IRB - large corporate clients (simulation models), DNB Bank Standardized Advanced IRB - corporate clients, Nordlandsbanken Standardized Advanced IRB - leasing, DNB Bank Advanced IRB Advanced IRB - corporate clients, DNB Næringskreditt Standardized Advanced IRB Securitization positions: - international bond portfolio IRB (1) IRB (1) Institutions: - banks and financial institutions, DNB Bank Standardized Advanced IRB
64 Exceptions: - approved exceptions: government and municipalities, equity positions Standardized Standardized -temporary exceptions: DNB Baltics and Poland, DNB Luxembourg, DnB NOR Monchebank and various other small portfolios Standardized Standardized
Notes:
(1) There is only one IRB approach for retail exposures and securitization positions. (2) Reported according to the IRB category Retail – other exposures.
Due to transitional rules, the minimum capital adequacy requirements for 2010 and 2011 could not be reduced to below 80 per cent relative to the Basel I requirements.
State Funding Scheme and Capitalization Program
On October 28, 2008, the Norwegian Government introduced a swap scheme for treasury bills and covered bonds, pursuant to which banks were able to receive government debt securities in exchange for covered bonds in an amount not to exceed, in the aggregate, NOK 350 billion during 2008 and 2009. As of December 31, 2010, the Bank had, through DNB Boligkreditt AS, exchanged NOK 118.1 billion under this scheme. This scheme was terminated in the first quarter of 2010.
Participation in Eksportfinans
The Bank has a 40 per cent ownership interest in Eksportfinans. Financial market turbulence resulted in sizeable unrealized 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:
● 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.
● A portfolio hedge agreement was entered into, and the owners were invited to participate. The Bank's share of the agreement corresponded to 40 per cent. The agreement secures Eksportfinans against further decreases in portfolio values of up to NOK 5 billion effective from February 29, 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.
● During the first quarter of 2008, Eksportfinans' largest owner banks, the Bank, Nordea Bank AB and Danske Bank A/S, approved a committed credit line giving the company access to a liquidity reserve of up to U.S.$ 4 billion. The agreement was renewed in June 2009, June 2010 and June 2011. The renewal in 2010 resulted in a reduction in the limit for the liquidity reserve to U.S.$ 2 billion. The Bank's share of this agreement represents approximately U.S.$ 1.1 billion. Eksportfinans has 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.
Capital Expenditures
As a financial group, capital expenditures are not a material part of the DNB Bank Group's expenses.
Critical Accounting Policies and Estimates
The DNB Bank Group’s accounting policies and estimates are described in "Accounting Principles" and in Note 1 to the financial statements incorporated by reference in this Prospectus. Estimates and discretionary assessments are subject to continual evaluation and are based on historic experience and other factors, including expected future events. By definition, the resulting accounting estimates will rarely be fully consistent with the final outcome. Management’s assessment of important estimates and assumptions is discussed below.
65 Classification of financial instruments
On initial recognition, financial assets are classified in one of the following categories according to the type of instrument and the purpose of the investment:
● Financial assets held for trading and derivatives carried at fair value with changes in value recognized in profit or loss;
● Financial instruments designated as at fair value with changes in value recognized in profit or loss;
● Financial derivatives designated as hedging instruments;
● Loans and receivables, carried at amortized cost; and
● Held-to-maturity investments, carried at amortized cost.
On initial recognition financial liabilities are classified in one of the following categories:
● Financial liabilities held for trading and derivatives carried at fair value with changes in value recognized in profit or loss;
● Financial liabilities designated as at fair value with changes in value recognized in profit or loss;
● Financial derivatives designated as hedging instruments;
● Other financial liabilities carried at amortized cost; and
● Issued financial guarantees.
Guidelines for classification in the various portfolios of the DNB Bank Group are given below.
Financial assets and liabilities in the trading portfolio
The trading portfolio mainly includes financial assets in DNB Markets and financial derivatives excluding derivatives used for hedging. In addition, the portfolio includes securities issued and deposits where instruments are used actively in interest rate and liquidity management and have a short remaining maturity.
Financial assets and liabilities designated as at fair value with changes in value recognized in profit or loss
Financial instruments are classified in this category if one of the following criteria is fulfilled:
● The classification eliminates or significantly reduces measurement inconsistency that would otherwise have arisen from measuring financial assets or liabilities or recognizing the gain and losses on them on different bases; or
● The financial instruments are part of a portfolio that is managed and evaluated on a fair value basis, in accordance with a documented risk management or investment strategy.
These portfolios include commercial paper and bonds, equities, fixed-rate loans in Norwegian kroner, fixed-rate securities issued in Norwegian kroner, such as index-linked bonds and equity-linked bank deposits and other fixed- rate deposits in Norwegian kroner.
Financial derivatives designated as hedging instruments
This item includes hedging transactions entered into to manage interest rate risk on long-term borrowings and deposits in foreign currencies and currency risk on investments in subsidiaries.
Loans and receivables carried at amortized cost
66 This item includes portfolios of loans and receivables that are not traded in an active market or carried at fair value through profit or loss.
Other financial liabilities carried at amortized cost
This category includes deposits from customers and credit institutions, commercial paper issued, bonds, subordinated loan capital and perpetual subordinated loan capital securities.
Issued financial guarantees
Contracts resulting in the DNB Bank Group having to reimburse the holder for a loss incurred because a specific debtor fails to make payment when due, are classified as issued financial guarantees.
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 on the balance sheet and the net present value of estimated future cash flows discounted by the effective interest rate. Estimates of future cash flows are based on empirical data as well as discretionary assessments of future macroeconomic developments and developments in problem commitments, as of the balance sheet date. The estimates are the result of a process which involves 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 timing of future cash flows, including the assessment of any collateral supporting the loans.
Objective evidence of a decrease in value of a loan or loan portfolio includes serious financial problems on the part of the debtor, non-payment or other serious breaches of contract, the probability that the debtor will enter into debt negotiations or other special circumstances that have occurred.
Individual write-downs
Individual write-downs reduce the value of commitments on the balance sheet, and changes during the period are recorded under “Write-downs on loans and guarantees.” Interest calculated according to the effective interest method on the written-down value of the loan is included in “Net interest income.”
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 recapitalization 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 utilization 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.
67 Fair value of financial derivatives and other financial instruments
Changes in fair value are recorded in income as net gains on financial instruments at fair value. In the case of permanent impairment of held-to-maturity securities, such impairment losses are also recognized in income. As of December 31, 2011, 2010 and 2009, a total of NOK 543,619 million, NOK 417,977 million and NOK 466,537 million, respectively, of financial assets were recorded at fair value in the DNB Bank Group’s balance sheet, and a total of NOK 676,929 million, NOK 531,780 million and NOK 577,664 million of financial liabilities were so recorded, respectively.
The fair value of financial instruments that are not traded in an active market is determined by using different valuation techniques. The DNB Bank 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 DNB Bank 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 DNB Bank Group's financial instruments. See also Note 31 – Financial instruments at fair value to the financial statements incorporated by reference in this Prospectus.
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 on 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 1.4 percentage points higher than the risk-free interest rate.
Other fundamental assumptions for pension commitments include annual rise in salaries, annual rise in pensions and anticipated increase in the National Insurance basic amount (G). 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 26 – Pensions to the financial statements incorporated by reference in this Prospectus.
Income taxes
The DNB Bank Group’s tax charge as a percentage of pre-tax operating profits was 29.8 per cent in 2011, 29.4 per cent in 2010 and 41.8 per cent in 2009.
The DNB Bank Group is subject to income taxes in numerous jurisdictions. Significant discretion is required in determining the income tax in the consolidated accounts for the DNB Bank Group. The final tax liability relating to many transactions and calculations will be uncertain. The DNB Bank Group recognizes liabilities related to the the future outcome of tax disputes based on estimates of additional taxes. When assessing the uncertain tax liabilities to be recognized on 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.
Impairments
The DNB Bank 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. On the DNB Bank 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
68 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 capitalized values is done by discounting expected future cash flows from the unit. The assessments are based on value in use of the 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. In the medium term, projections beyond the plan period are based on the expected economic growth rate for the cash generating units. In the long-term an annual growth of 2.5 per cent is anticipated, which equals the expected long-term inflation rate. When a deviating long-term 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 2011 accounting year, a discount rate based on an adjusted capital asset pricing model has been used with a normalized risk-free interest rate in the unit's home market plus a normalized risk premium of 4 per cent Beta values are estimated for each cash-generating unit. Normalized risk-free interest rate is estimated to 5 per cent for units in Norway. For units in countries outside the Nordic region, such as the Baltic states, Poland and Russia, the discount rate is adjusted for country risk.
For units where recorded goodwill approximates the estimated value in use, DNB has carried out sensitivity analyses. These consider whether a change of key assumptions used in valuations of a unit would result in its capitalized value exceeding its value in use.
Contingencies
Due to its extensive operations in Norway and internationally, the DNB Bank Group will regularly be a party to a number of legal actions. Any impact on its financial statements will be considered in each case. See "Description of the DNB Bank Group—Litigation" and Note 51 to the financial statements incorporated by reference in the Prospectus for more information on contingencies.
69 DESCRIPTION OF THE DNB BANK GROUP
Introduction
DNB Bank ASA is Norway's largest bank by gross lending and deposits (source: Norges Bank), offering corporate, retail and investment banking services and products to customers in Norway and internationally, including in Sweden, Poland, Russia and the Baltic states of Estonia, Latvia and Lithuania, under the DNB brand name. As of September 30, 2011, the Bank's market share among Norwegian commercial banks (including the Postal Bank and savings banks, finance companies and mortgage companies) was approximately 30 per cent; the Bank's market share across retail lending and deposits was also approximately 30 per cent (source: Norges Bank). As of December 31, 2011, the DNB Bank Group had total assets of NOK 1,885 billion and net lending to customers of NOK 1,292 billion. The DNB Bank Group's profit for the year ended December 31, 2011 was NOK 12.5 billion.
The Bank is wholly owned by DNB ASA, which is the holding company of the DNB Group. The DNB Group is Norway's largest financial services group in terms of total assets, with total assets of NOK 2,126 billion as of December 31, 2011. DNB ASA conducts its banking operations through the Bank and offers life insurance and pension saving products, non-life insurance products and asset management services through its wholly owned subsidiaries DNB Kapitalforvaltning Holding ASA, DNB Livforsikring ASA and DNB Skadeforsikring ASA, as set forth below in “—Legal Structure of the DNB Group.” As of December 31, 2010, the DNB Group had the largest market share in the Norwegian financial market in each of the following areas, based on total assets: credit institutions (banks, mortgage companies and finance companies), in which it had a 34 per cent market share; life insurance, in which it had a 29 per cent market share; and securities funds, in which it had a 21 per cent market share (source: Finanstilsynet). As of December 31, 2011, the DNB Group had more than 2.1 million private individual customers, more than 200,000 corporate customers and approximately 1,000,000 insurance customers in Norway.
The DNB Bank Group's core businesses are retail and commercial banking, which it operates through its Retail Banking and Large Corporate and International business areas, respectively. It provides commercial banking services to corporate and retail customers in Poland and the Baltic states through its newly formed Baltics Division (formerly trading under the name “DNB NORD”), which is organized as part of its Large Corporates and International business area but is operated as an independent profit center. The DNB Bank Group also provides investment banking services through DNB Markets, Norway's largest investment bank. Through its Retail Banking and Large Corporate and International business areas, the DNB Bank Group cross-sells certain asset management and life insurance products offered by the Insurance and Asset Management business area of the DNB Group, for which the DNB Bank Group receives fee and commission income. The Bank is also the largest private settlement bank in Norway. As of December 31, 2011, the DNB Bank Group's total assets represented 88.7 per cent of the DNB Group's total assets, and its profit for the year represented 96.3 per cent of the DNB Group's profit for the year.
As of the date of this Prospectus, the DNB Bank Group has operations in 19 countries worldwide, with operations in the Scandinavian countries, Finland, the Baltics Poland, Great Britain, Germany, Greece, Luxembourg, Russia, the United States, Chile, Brazil, India, Singapore and China. The DNB Bank Group meets the needs of customers for financial advisory services, products and services in Norway through 172 DNB branch offices and 15 Nordlandsbanken branches, 38 investment centers, 57 corporate advisory service centers, DNB Private Banking, 24- hour telephone customer service, and online and mobile banking services. In addition, the DNB Bank Group serves customers through 179 post offices in Norway and 2,256 in-store banking and postal outlets.
History of the Bank
The Bank can trace its roots back to 1822, when Norway’s first savings bank, Christiana Sparebank, was founded. The Bank was formed through mergers of several Norwegian banks. The name DnB NOR Bank ASA was adopted in 2003, when DnB Holding ASA and Gjensidige NOR ASA merged. The bank subsidiaries of DNB Holding ASA and Gjensidige NOR ASA, Den norske Bank ASA and Gjensidige NOR Sparebank ASA, respectively, merged on January 19, 2004.
70 On November 11, 2011, the Bank changed its name from DnB NOR Bank ASA to DNB Bank ASA. On the same date, several other DNB Group companies changed their names, including the holding company of the DNB Group, which changed its name from DnB NOR ASA to DNB ASA.
Going forward, DNB NORD will be called DNB Baltics and Poland.
The registered office of the Bank is at Stranden 21, N-0021, Oslo, Norway and its telephone number is +47 915 03000.
Legal Structure of the DNB Group
In accordance with the requirements of the Norwegian regulatory authorities, the banking, asset management and insurance activities of the DNB Group are organized in separate limited companies under the holding company DNB ASA. Banking activities are conducted by the Bank and its subsidiaries. All asset management activities are organized under a common holding company, DNB Kapitalforvaltning Holding AS. DNB Livforsikring ASA offers life insurance and pension saving products, both products with guaranteed returns and products with a choice of investment profile. DNB Skadeforsikring AS offers non-life insurance products as part of a total product package for retail customers and small- and medium-sized companies.
The chart below sets forth the legal structure of the DNB Group as of December 31, 2011:
DNB ASA
DNB Asset DNB DNB Bank Management Livsforsikring DNB Skade- ASA Holding AS ASA forsikring AS
Major subsidiaries Nordlandsbanken ASA DNB Næringsmegling AS Postbanken Eiendom AS DNB Eiendom AS DNB Meglerservice AS DNB Boligkreditt AS DNB Næringskreditt AS DNB Luxembourg S.A. OAO DnB NOR Monchebank Svensk Fastighetsförmedling AB SalusAnsvar AB Bank DNB A/S (Denmark)(1) AB DNB Bankas (Lithuania)(1) AB DNB Banka (Latvia)(1)
Note:
(1) Operations in DNB Baltics and Poland will be integrated in DNB and are thus under restructuring. As part of the integration, ownership of the banks in Lithuania and Latvia was transferred to DNB at end-June 2011 and the ownership of AS DNB Liising, which constitutes a significant portion of operations in Estonia, was transferred in March 2012. Bank DNB A/S in Denmark still owns the operations in Poland and the banking activities in Estonia, but ownership will be transferred as soon as possible in 2012. Following the restructuring, Bank DNB A/S in Denmark will only engage in investment activity.
71 Strategy, Vision and Values
The Bank is the main subsidiary of the DNB Group and the Bank's strategy is therefore closely coordinated with the DNB Group's overall strategy.
By capitalizing on its strengths and unique position, the DNB Group's ambition is to be the leading Norwegian bank and a leading international financial services company, targeting the shipping, energy and seafood industries.
An important goal for the DNB Group is to achieve even stronger customer orientation in its operations and improve customer satisfaction.
The DNB Group's vision, creating value through the art of serving the customer, is supported by the values of being helpful, professional and showing initiative.
Employees who are helpful, professional and show initiative are vital if the DNB Group is to succeed in implementing its strategy.
The DNB Group's strategic ambitions are to strengthen and consolidate its position in Norway, achieve profitable international growth and be among the most productive banks in Europe. Specifically, the DNB Group aims to:
● Strengthen and consolidate the DNB Group's position in Norway. The DNB Group intends to build and strengthen long-term relations with high-quality customers by:
● offering extensive distribution under one brand and a uniform corporate image;
● offering a complete range of attractive products that meet customer needs, which includes seeking to develop the best mobile phone and online services;
● offering competitive prices and products that create value for customers;
● engaging in long-term, honest and relevant communication with customers; and
● meeting the needs of the largest corporate customers in Norway through industry expertise and intimate, local knowledge that puts the DNB Group in an advantageous position vis-à-vis its foreign competitors in the Norwegian market.
● Achieve profitable international growth. The DNB Group intends to capitalize on its Norwegian expertise to become a leading international financial services company within selected industries and product areas. The DNB Group's target industries are shipping, energy and seafood. The DNB Group also plans further to develop its operations in the Baltic states and Poland. The DNB Group will focus on building long-term relations with the largest corporate customers based on its core competencies. The DNB Group expects that the integration of its operations, the streamlining of its organization and its branding strategy will promote long-term value creation.
● Be among the most cost-effective market players in Europe. The DNB Group will coordinate group and support functions to ensure consistent deliveries, standardized processes and greater automation. High priority will be given to cost-efficiency by:
● strengthening and coordinating procurement functions across the DNB Group;
● coordinating and consolidating IT functions; and
● standardizing and automating products, services and customer service where expedient, and coordinating and rationalizing staff and support functions.
72 DNB Bank Group Structure
The activities of the DNB Bank Group are organized into the business areas Retail Banking, Large Corporates and International (including the Baltics Division) and DNB Markets. Through its Retail Banking and Large Corporates and International business areas, the DNB Bank Group also cross-sells certain asset management and life insurance products offered by the Insurance and Asset Management business area of the DNB Group, for which the DNB Bank Group receives fee and commission income. Each of the DNB Bank Group’s business areas (including the Baltics Division) operate as independent profit centers.
The DNB Group's staff and support units provide infrastructure services to the business areas. In addition, they perform functions for the governing bodies and management of the DNB Group. The size and capacity of support units in the DNB Group is a function of the volume of business and the DNB Group's strategy. The operational structure of the DNB Group differs from its legal structure; although the support units are each designated as separate and independent entities within the DNB Group's organizational chart, in practice, they each carry out infrastructure and operational tasks across multiple business areas. Operational and production tasks for the business areas are coordinated and are, as far as possible, based on joint solutions that ensure efficient operations, good service and high-quality deliverables.
The chart below shows the DNB Group’s operational structure(1), including its business areas and staff and support units, as of December 31, 2011:
Business areas/ DNB Group profit centres
Marketing, Communications Co rporate Centre and eBusiness
Large Insurance and Group Finance Retail Corporates DN B Asset Operations HR IT and Risk Banking and Markets Management Management International
DnB NORD (incl. Baltics and Poland Division) 2)
Notes:
(1) Reporting structure
(2) In the presentation DNB NORD is used as a description of the entire former DnB NORD Group, including activities in Copenhagen and the Baltics and Poland Division.
Business Areas
Retail Banking
For the year ended December 31, 2011, retail banking recorded pre-tax operating profit of NOK 7,214 million, compared to NOK 6,719 million for 2010, amounting to 40.5 per cent and 40.9 per cent of the DNB Bank Group's pre-tax operating profit for 2011 and 2010, respectively. As of December 31, 2011, net lending to customers was NOK 819 million, compared to NOK 759 billion as of December 31, 2010, while deposits from customers was NOK 426 million, compared to NOK 384 billion as of December 31, 2010.
Retail Banking is responsible for serving individual customers and small- and medium-sized corporate customers in Norway. Generally speaking, the Bank's segmentation methodology between small- and medium-sized corporate customers versus large corporates and international customers is based on a NOK 50 million turnover, although this methodology is subject to flexibility based on particular, case-by-case business considerations. The business area is divided into seven intra-Norwegian geographic divisions. In addition, DNB Private Banking, Telephone and Online Banking and DNB Finans are organized as separate divisions within Retail Banking. The subsidiaries
73 Nordlandbanken, DNB Eiendom and Postbanken Eiendom, together with Svensk Fastighetsformedling and SalusAnsvar in Sweden, are also part of the Retail Banking business area. In the Bank's consolidated financial statements, DNB Boligkreditt is reported as part of the Retail Banking business area.
Retail Banking offers a wide range of financial products and services. As of the date of this Prospectus, its primary distribution channels comprise 172 DNB and 15 Nordlandsbanken branch offices and customer service centers, 38 investment centers, 57 corporate advisory service centers, DNB Private Banking, 24-hour telephone customer service, and online and mobile banking services. In addition, customers are served through 179 post offices in Norway and 2,256 in-store banking and postal outlets. The Bank and Norway Post have an agreement relating to the distribution of financial services through the postal network and have established joint service solutions provided through in-store postal outlets where customers can carry out everyday banking transactions in their local supermarkets. The distribution of standard banking services through in-store banking outlets is based on an agreement between DNB and NorgesGruppen.
The DNB Bank Group's real estate brokerage activities in Norway are carried out through DNB Eiendom and Postbanken Eiendom. As of December 31, 2011, DNB Eiendom was represented at 92 locations in Norway. Postbanken Eiendom had 36 offices, and Svensk Fastighetsförmedling, involved in real estate broking in Sweden, had 221 offices.
DNB Finans is a division of Retail Banking, and its main products are leasing, equipment leasing, factoring, vehicle financing and fleet management under the brand name Autolease, along with credit card and consumer finance services. In addition, DNB is licensed to issue American Express personal customer cards in Norway. DNB Finans also has operations in both Sweden and Denmark.
As of December 31, 2011, Retail Banking had more than 2.1 million private individual customers. As of December 31, 2011, 1.4 million customers participated in loyalty programs and product packages. Furthermore, Retail Banking had over 220,000 small- and medium-sized corporate customers as of December 31, 2011.
On March 20, 2012, the general meeting of DNB Boligkreditt AS authorized the issuance of 3,000,000 new shares, or 16.42 per cent of its existing share capital, to be subscribed entirely by DNB Bank ASA. The issuance and subscription of these shares is expected to close prior to the end of the first quarter of 2012, subject to certain conditions precedent, such as regulatory consent.
Large Corporates and International
For the year ended December 31, 2011, Large Corporates and International recorded pre-tax operating profit of NOK 6,734 million, compared to NOK 6,124 million for 2010, amounting to 37.8 per cent and 37.3 per cent of the DNB Bank Group's pre-tax operating profit for 2011 and 2010, respectively. As of December 31, 2011, net lending to customers was NOK 402 billion, compared to NOK 351 billion as of December 31, 2010, while deposits from customers were NOK 262 billion, compared to NOK 217 billion as of December 31, 2010.
Large Corporates and International serves the largest corporate customers in Norway and is responsible for the DNB Bank Group’s international operations. Long-term customer relationships based on sound industry and product expertise are key to the success of this business area. International initiatives are based on expertise within the business area’s strategic priority areas, which are shipping, energy and seafood. The subsidiary DNB Næringsmegling is Norway’s largest commercial property adviser and broker, and it manages portfolios which can be used to obtain long-term funding for the DNB Bank Group through the issuance of covered bonds.
Operations are managed along both an industry dimension and a geographic dimension. The Bank took over all the shares in DNB NORD with effect from year-end 2010. The operations in the Baltics have been more closely integrated in the Bank, and a new strategy has been prepared for those operations. The DNB Bank Group is also in the process of developing a strategy for continuing operations in Poland. Banking operations in DNB NORD in Copenhagen are being wound up, and the remaining loan portfolio was transferred to the Bank in the fourth quarter of 2011. Operations in Copenhagen will continue as a pure investment company. Operations in the Baltics and Poland will continue as a separate profit center. Unless otherwise indicated, data for the Large Corporates and International business area does not reflect the Baltics Division. The DNB Bank Group’s corporate clients are offered services internationally through offices in New York, Houston, Santiago, Rio de Janeiro, London,
74 Copenhagen, Hamburg, Helsinki, Stockholm, Gothenburg, Malmø, Luxembourg, Athens, Singapore, Shanghai and Mumbai. DNB NOR is represented in Murmansk in Russia through the subsidiary DNB Monchebank, which is licensed to engage in banking operations throughout Russia. In Luxembourg, DNB is represented by DNB Luxembourg S.A., a fully licensed bank serving customers in private banking and mortgage-financing of secondary homes outside Norway, serving the target customer base of Norwegians living outside Norway and/or with international interests. The Large Corporates and International business area serves Norwegian customers through central customer service departments, financial services and business centers and regional offices in Norway, as well as through the DNB Bank Group’s telephone and Internet banks.
The Large Corporates and International business area offers a broad range of financial products and services, including various types of financing solutions, deposits and investments, everyday banking services, insurance, e- commerce products, commercial property brokerage, foreign currency and interest rate products, trade finance, equity trading and corporate finance services. Large Corporates and International also cross-sells certain products and services offered by the DNB Group’s Insurance and Asset Management business area.
Large Corporates and International is responsible for payment services for its corporate clients in the DNB Bank Group, including cash management services, and for developing advanced payment and liquidity management systems. The international cash pool system gives customers a unique opportunity to optimize their liquidity management across countries and currencies through the creation of a single account through which holdings of various currencies are aggregated. The system makes it possible to offer local solutions and expertise in the individual regions.
DNB Markets
For the year ended December 31, 2011, DNB Markets recorded pre-tax operating profit of NOK 4,160 million, compared to NOK 3,638 million for 2010, amounting to 23.4 per cent and 22.1 per cent of the DNB Bank Group's pre-tax operating profit for 2011 and 2010, respectively. As of December 31, 2011, net lending to customers was NOK 3 billion, compared to NOK 4 billion as of December 31, 2010, while deposits from customers was NOK 28 billion, compared to NOK 21 billion as of December 31, 2010.
DNB Markets serves as a partner to Norwegian customers with respect to investment banking and securities services, and to international clients with respect to services relating to Norway and the Norwegian kronor. In selected fields and industry segments such as shipping, energy and seafood, DNB Markets engages in international operations together with the Large Corporates and International and Retail Banking divisions.
Key products 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.
DNB Markets believes it has a strong position within the foreign exchange, interest rate and bond trading markets. DNB Markets was manager for the greatest number of Norwegian kroner bond and commercial paper issues in the Norwegian domestic market in the fourth quarter of 2011 (source: Stamdata, Bloomberg). DNB Markets was the largest brokerage house on Oslo Bors within fixed income securities in the secondary market in the fourth quarter of 2011 (source: Oslo Stock Exchange). Furthermore, DNB Markets operated as registrar for 54.2 per cent of the limited companies registered in the Norwegian Central Securities Depository, VPS as of December 31, 2011 (source: Norwegian Central Securities Depository).
DNB Baltics and Poland Division
For the year ended December 31, 2011, a pretax operating loss of NOK 673 million was recorded in 2011, an improvement of NOK 191 million compared with 2010. As of December 31, 2011, average net lending to customers was reduced by 4.0 per cent, on average, from 2010 to 2011, but was relatively stable through 2011 and increased somewhat towards the end of the year.
Bank DNB A/S was established as a joint venture with Norddeutsche Landesbank in 2005 to carry out banking operations in Poland and the Baltic states of Estonia, Latvia and Lithuania. From the date of establishment of this joint venture until December 23, 2010, the Bank owned 51 per cent of the shares in the joint venture. DNB acquired
75 the remaining 49 per cent of the shares in Bank DNB A/S with effect from December 23, 2010. Operations formerly carried out through Bank DNB A/S have been continued through a separate division in Large Corporates and International, referred to as the DNB Baltics and Poland Division, but have been reported as an independent profit center.
The operations in Bank DNB A/S have been substantially integrated into the Bank. As part of the restructuring, Bank DNB A/S in Denmark transferred the ownership of the banks in Lithuania and Latvia to the Bank as of June 30, 2011. In November 2011 the loan portfolios in Denmark and Finland were transferred to the Bank, in Large Corporates and International. Bank DNB A/S still owns the operations in Poland and Estonia. The operations in Estonia are scheduled to be transferred to the Bank. Earlier this year, DNB announced that the future strategy in Poland was being assessed. One of the alternatives under consideration was the sale of the Polish operation. On November 17, 2011 DNB announced that it has decided to keep its shares and build a long-term strategy in close cooperation with the local management.
As of the date of this Prospectus, the DNB Baltics and Poland Division had 159 branches in four countries: Estonia, Latvia, Lithuania and Poland, and served more than 1,000,000 retail and corporate customers.
Competition
The DNB Bank Group operates in highly competitive markets, particularly for retail mortgages, which is the principal product of its Retail Banking business area. The DNB Bank Group’s competitors include Nordea Bank Norge (a subsidiary of the Nordic banking group Nordea), SpareBank 1, Fokus Bank and Handelsbanken. See also “Risk Factors—Competition in Norway and in the international markets in which the DNB Bank Group operates could have a negative effect on the DNB Bank Group's business.”
The following table sets out Norwegian lending and deposit market shares of the DNB Bank Group as of December 31, 2011, 2010 and 2009.
As of September 30, As of December 31, 2011 2010 2009 (%) Retail customers Total lending to households (1) (2) 31.7 31.8 28.4 Deposits from households (1) 32.3 32.3 32.4 Corporate customers Total lending to corporate customers (2) 34.3 32.8 14.0 Deposits from corporate customers (3) 37.2 35.5 35.5
Source: Norges Bank, DNB ______Notes: (1) Households are defined as employees, pensioners, social security recipients, students, unincorporated private enterprises, quasi- corporate private enterprises and private non-profit institutions serving households. (2) Total lending includes all credits extended to Norwegian customers by domestic commercial and savings banks, state banks, insurance companies and finance companies. (3) Market share reflects deposits held by domestic commercial and savings banks.
Employees
The DNB Bank Group's employees are its most important resource in developing and maintaining good customer relationships and creating value. The importance of high ethical standards and compliance with the DNB Bank Group's principles for corporate social responsibility is emphasized in all parts of the organization, and training in ethics is mandatory for all employees of the DNB Bank Group. The DNB Bank Group has established an ethics program and dilemma training. The purpose of this program is to increase employee awareness of the ethical dilemmas which may be encountered in contact with customers and in connection with internal processes.
76 As of December 31, 2011, the DNB Bank Group had 12,982 employees, calculated on a full-time equivalent basis, of whom 8,399 were located in Norway. The Bank's acquisition of the remaining shares in Bank DNB A/S resulted in DNB Bank Group, at the end of 2010, gaining approximately 3,200 new employees from offices in Estonia, Latvia, Lithuania, Poland and Denmark. Ethics play a central role in the integration process of Bank DNB A/S's employees in the DNB Bank Group.
The table below sets forth the number of full time employees in the different business areas and division as of December 31, 2011.
Full-time positions
Retail Banking(1) (2) 5,040 Large Corporates and International 1,174 DNB Markets 698 Operations 993 DNB Baltics and Poland 3,297 Staff and support units(2) 1,359 Total ordinary operations 13,620 Notes: (1) The increase in the number of full-time positions in the third and fourth quarter of 2011 was due to increased staff in the distribution network. (2) In the second quarter of 2011, 65 full-time positions were transferred to Marketing, Communications and eBusiness from other parts of the Group, of which 36 full-time positions were transferred from Retail Banking.
Management believes that the DNB Bank Group's relationship with its employees is good.
Information Technology
The IT support unit is an operational unit within the DNB Group and has responsibility for the development and operation of IT systems. This unit delivers IT services for the whole DNB Group, including to the DNB Bank Group, in cooperation with external IT vendors. In 2010, the IT support unit was involved in the further development and launch of new services, including the Norwegian and international corporate Internet bank, the customer portal and a number of applications for mobile devices. The consolidation and renewal of IT solutions ensured cost savings as well as improved operational stability.
The DNB Group’s IT strategy is designed to support the DNB Group’s overall strategy, which means supporting efficient and multiple sales channels, as well as developing a scalable and flexible infrastructure to support the DNB Group’s cross-border operating model.
Insurance
DNB Bank Group's insurance program is an integral part of its operational risk management. The DNB Bank Group enters into insurance contracts to limit the financial consequences of undesirable events which occur in spite of established security routines and other risk-mitigating measures. The DNB Bank Group has a broad-based insurance program that includes, among other things, coverage relating to professional indemnity (PI), directors and officers liability (D&O), and property and criminal attacks (internal and external fraud and crime, including “bankers blanket bond and computer crime”).
In the view of the Board of Directors, the DNB Bank Group's existing insurance coverage, including the level and conditions of coverage, provides reasonable protection, taking into account the costs for the insurance coverage and the potential risks of business operations. However, the DNB Bank Group can provide no assurances that losses will not be incurred or that claims will not be filed against it which go beyond the type and scope of the existing insurance coverage.
77 Real Property
The Bank's principal executive offices are located in Oslo, Norway. It also operates through a number of other offices and branches located throughout the Nordic markets, the Baltic markets and elsewhere internationally. The Bank does not own any material real property.
Litigation
Due to its extensive operations in Norway and abroad, the DNB Bank Group is regularly a party to a number of legal actions. None of the current disputes are expected to have any material impact on the DNB Bank Group’s financial position.
DNB 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). A settlement has been reached in the case, but it remains subject to court approval. The effects of the settlement are fully reflected in the accounts.
The Borgarting Court of Appeal found in favor of the Bank on September 30, 2011 in an action instituted by plaintiff Ivar Petter Røeggen against the Bank to declare two investment agreements for structured products null and void. The judgment is not final, and on October 28, 2011, Røeggen appealed the decision to the Norwegian Supreme Court.
A group action against the Bank involving 19 plaintiffs and relating to the sale of the same structured products as the action brought by Røeggen has been dismissed in a final judgment. Several of the plaintiffs from the original multi-party action, together with some of the other plaintiffs, have submitted a civil action against the Bank in accordance with the rules on joinder of parties. The action has been halted by the Oslo District Court awaiting a final decision in the civil action from Røeggen.
Other units in the DNB Bank Group are also involved in legal disputes relating to structured products. The DNB Bank Group contests these claims.
The Bank has brought an action against seven Norwegian municipalities for the settlement of interest swaps on commercial terms. The municipalities have ceased to make 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 854 million plus interest on overdue payments.
78 SELECTED STATISTICAL DATA
The following information is included for analytical purposes and should be read in conjunction with, and is qualified in its entirety by reference to, the financial statements incorporated by reference in this Prospectus and the information under “Selected Consolidated Financial Information.” All information provided is for the DNB Bank Group.
Average Balances and Interest Rates
The following table sets forth average balances and average interest rates on selected balance sheet items for each of the three years in the period ended December 31, 2011. Average balances have been calculated based on average monthly volumes.
Average interest rate(1) Average volume 2011 2010 2009 2011 2010 2009 (%) (NOK millions) Assets Lending to and deposits with credit institutions ...... 0.57 1.08 0.60 237,042 143,528 142,318 Lending to customers ...... 4.06 3.73 4.04 1,225,884 1,160,428 1,168,307 Commercial paper and bonds...... 3.08 2.23 2.27 123,451 168,896 113,499
Liabilities Loans and deposits from credit institutions ...... 1.35 1.53 1.73 328,338 327,896 278,737 Deposits from customers...... 2.04 1.81 2.05 708,795 637,823 610,574 Securities issued ...... 2.12 1.62 2.01 571,000 536,971 544,562
______Note: (1) Average interest rate is calculated as interest for the specified category of assets or liabilities divided by the relevant average volume.
Return on Equity and Risk-Adjusted Capital
Year ended December 31, 2011 2010 2009 (%) Return on equity(1) ...... 13.5 13.9 10.0 Risk-adjusted return on risk-adjusted capital (RARORAC)(2) ...... 18.0 17.2 16.7
Notes:
(1) Profit for the year divided by average total equity.
(2) Risk-adjusted profits relative to risk-adjusted capital requirement. Risk-adjusted profits indicate the level of profits in a normalized situation.
Loans and Guarantees
On initial recognition, the DNB Bank Group classifies loans in its loan portfolio as (i) financial assets designated as at fair value with changes in value recognized in profit or loss, or as (ii) loans and receivables carried at amortized cost. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Classification of financial instruments." The following table sets forth, as of
79 the dates indicated, the DNB Bank Group's loan portfolio classified by loans carried at amortized cost and loans designated at fair value:
As of December 31, 2011 2010 2009 (NOK millions) Loans carried at amortized cost Lending to customers, nominal amount...... 1,192,164 1,065,402 976,842 Individual write-downs ...... 9,521 9,207 7,673 Lending to customers, after individual write- 1,182,644 1,056,196 969,169 downs...... + Accrued interest and amortization ...... 2,265 1,996 1,746 Individual write-downs of accrued interest and amortization ...... 710 658 607 Collective write-downs ...... 2,119 1,872 2,969 Lending to customers, at amortized cost ...... 1,182,080 1,055,661 967,340
Loans designated at fair value Lending to customers, nominal amount...... 108,488 127,382 160,233 + Accrued interest ...... 559 674 802 + Adjustment to fair value...... 533 382 416 Lending to customers, at fair value(1) ...... 109,580 128,439 161,452 Lending to customers ...... 1,291,660 1,184,100 1,128,791
Distribution of commitments by industry sector(1)
The following tables set forth, as of the dates indicated, the DNB Bank Group's commitments by industry sector, net of individual write-downs:
As of December 31, 2011 Loans and Unutilized Total Industry receivables Guarantees credit lines commitments (NOK millions) Retail customers ...... 599,941 243 98,125 698,309 International shipping...... 143,921 10,980 41,167 196,067 Real estate...... 187,992 2,975 24,751 215,718 Manufacturing ...... 51,643 14,100 50,446 116,190 Services ...... 87,987 5,233 34,511 127,731 Trade...... 36,419 4,696 26,948 68,062 Oil and gas...... 24,502 14,357 42,470 81,329 Transportation and communication ...... 34,273 4,205 18,813 57,292 Building and construction...... 43,108 12,201 18,040 73,348 Power and water supply...... 28,801 16,206 26,740 71,746 Seafood...... 16,934 299 6,166 23,399 Hotels and restaurants...... 4,089 230 887 5,206 Agriculture and forestry ...... 8,856 52 1,420 10,328 Central and local government...... 6708 1,844 4,362 12,914 Other sectors...... 15,958 6,663 32,936 55,556 Total customers, nominal amount after 1,291,132 94,282 427,782 1,813,196 individual write downs ...... – Collective write-downs, customers...... 2,113 - - 2,119 + Other adjustments...... 2,647 (98) - 2,549 Lending to customers ...... 1,291,660 94,185 427,782 1,813,626 Credit institutions, nominal amount after individual write-downs...... 25,100 2,204 7,577 34,880
80 + Other adjustments...... 6 0 - 6 Lending to and deposits with credit institutions...... 25,105 2,204 7,577 34,886
______Note:
(1) The breakdown into principal industry sectors is based on standardized sector and industry categories set up by Statistics Norway. Customers are classified according to their main line of business.
As of December 31, 2010 Loans and Unutilized Total (2) Industry receivables Guarantees credit lines commitments (NOK millions) Retail customers ...... 559,062 283 99,357 658,701 International shipping...... 133,926 9,748 38,430 182,104 Real estate...... 175,806 2,173 19,828 197,807 Manufacturing ...... 47,897 10,438 38,856 97,191 Services ...... 75,601 5,105 23,941 104,647 Trade...... 33,942 4,413 20,662 59,016 Oil and gas...... 18,076 8,439 26,653 53,168 Transportation and communication ...... 29,421 4,139 17,418 50,979 Building and construction...... 35,790 8,931 15,222 59,943 Power and water supply...... 22,843 12,355 17,287 52,485 Seafood...... 13,893 191 4,652 18,737 Hotels and restaurants...... 5,121 127 1,053 6,300 Agriculture and forestry ...... 7,499 37 900 8,437 Central and local government...... 6,042 2,844 5,137 14,023 Other sectors...... 18,659 4,848 20,637 44,143 Total customers, nominal amount after individual write downs ...... 1,183,578 74,071 350,033 1,607,682 – Collective write-downs, customers...... 1,872 - - 1,872 + Other adjustments...... 2,394 (95) - 2,489 Lending to customers ...... 1,184,100 74,166 350,033 1,608,299 Credit institutions, nominal amount after individual write-downs...... 43,759 2,085 11,484 57,328 + Other adjustments...... 77 0 - 77 Lending to and deposits with credit institutions...... 43,837 2,085 11,484 57,405
______Notes:
(1) The breakdown into principal industry sectors is based on standardized sector and industry categories set up by Statistics Norway. Customers are classified according to their main line of business.
(2) With effect from 2010, documentary credit commitments which are not related to deliveries of goods have been reclassified from documentary credit commitments to performance guarantees. Figures for 2009 have been adjusted accordingly.
As of December 31, 2009 Loans and Unutilized Total Industry receivables Guarantees credit lines(2) commitments (NOK millions) Retail customers ...... 531,761 281 84,550 616,592 International shipping...... 122,500 15,973 28,063 166,536 Real estate...... 156,771 1,539 10,898 169,208 Manufacturing ...... 46,097 10,345 34,127 90,569
81 Services ...... 96,896 5,583 27,491 129,970 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...... 18,969 5,151 38,196 62,316 Total customers, nominal amount after individual write-downs...... 1,129,402 73,022 330,928 1,533,353 – Collective write-downs, customers...... 2,969 - - 2,969 + Other adjustments...... 2,358 (207) - 2,151 Lending to customers ...... 1,128,791 72,815 330,928 1,532,535 Credit institutions, nominal amount after individual write-downs...... 58,662 4,891 10,933 74,486 + Other adjustments...... 89 0 - 89 Lending to and deposits with credit institutions...... 58,751 4,891 10,933 74,575
______Notes:
(1) The breakdown into principal industry sectors is based on standardized sector and industry categories set up by Statistics Norway. Customers are classified according to their main line of business.
(2) Unutilized credit lines have been changed in line with the Basel II definition. Figures for 2009 have thus been restated, resulting in an increase of NOK 33 billion.
Distribution of customer deposits by industry sector(1)
The following table sets forth, as of the dates indicated, the DNB Bank Group's customer deposits by industry sector:
As of December 31, Industry 2011 2010 2009 (NOK millions) Retail customers ...... 274,444 247,241 234,199 International shipping...... 54,942 60,543 48,335 Real estate...... 40,249 32,556 30,192 Manufacturing ...... 26,271 21,980 21,115 Services ...... 125,747 104,608 92,729 Trade...... 33,408 34,826 28,102 Oil and gas...... 35,340 22,236 26,011 Transportation and communication ...... 22,716 23,117 26,255 Building and construction...... 18,128 15,085 13,652 Power and water supply...... 16,621 24,255 11,521 Seafood...... 5,270 4,961 3,442 Hotels and restaurants...... 2,075 1,838 1,782 Agriculture and forestry ...... 4,062 2,986 2,665 Central and local government...... 24,658 20,473 17,160 Finance ...... 65,287 46,585 56,015 Total deposits from customers, nominal amount...... 749,218 663,286 613,173 Adjustments...... 885 723 454 Deposits from customers...... 750,102 664,012 613,627
82 ______Note:
(1) The breakdown into principal industry sectors is based on standardized sector and industry categories set up by Statistics Norway. Customers are classified according to their main line of business.
Geographic distribution of commitments
The following tables set forth, as of the dates indicated, the geographic distribution by customer address of the DNB Bank Group's gross commitments before accounting for individual and collective write-downs:
As of December 31, 2011 Loans and Unutilized Total (1) (2) Location of customer, by address receivables Guarantees credit lines commitments (NOK millions) Oslo ...... 236,775 20,845 93,770 351,390 Eastern and southern Norway...... 418,195 23,109 112,070 553,374 Western Norway...... 154,741 9,342 41,330 205,414 Northern and central Norway ...... 170,257 11,265 32,818 214,339 Total Norway...... 979,968 64,561 279,989 1,324,518 Sweden ...... 68,740 4,882 29,187 102,809 United Kingdom...... 28,183 6,617 5,438 40,238 Other Western European countries...... 59,974 4,651 39,376 104,002 Russia ...... 1,660 204 175 2,040 Estonia...... 1,971 53 168 2,193 Latvia...... 17,352 554 1,593 19,499 Lithuania...... 21,503 612 1,117 23,233 Poland...... 19,600 722 2,680 23,001 Other Eastern European countries ...... 269 246 9 523 Total Europe outside Norway...... 219,253 18,541 79,744 317,538 USA and Canada ...... 33,793 8,127 32,610 74,531 Bermuda and Panama (3) ...... 17,661 497 5,535 23,693 Other South and Central American countries ...... 9,586 2,467 6,125 18,178 Total America...... 61,041 11,091 44,270 116,402 Singapore (3)...... 14,714 555 3,535 18,804 Hong Kong ...... 3,613 0 726 4,339 Other Asian countries...... 14,105 999 6,233 21,337 Total Asia ...... 32,433 1,554 10,493 44,480 Liberia (3) ...... 12,191 335 3,949 16,475 Other African countries ...... 399 104 1,263 1,767 Australia, New Zealand and Marshall Islands (3)...... 20,494 379 15,653 36,526 Gross commitments...... 1,325,778 96,564 435,359 1,857,700 – Individual write-downs...... 9,546 78 - 9,624 – Collective write-downs...... 2,119 - - 2,119 + Other adjustments...... 2,652 (98) - 2,555 Net commitments...... 1,316,765 96,389 435,359 1,848,512
______Notes:
(1) With effect from 2010, documentary credit commitments which are not related to deliveries of goods have been reclassified from documentary credit commitments to performance guarantees.
(2) Unutilized credit lines have been changed in line with the Basel II definition.
(3) Represents shipping commitments.
83 As of December 31, 2010 Loans and Unutilized Total Location of customer, by address receivables Guarantees(1) credit lines(2) commitments (NOK millions) Oslo ...... 220,822 19,648 72,656 313,126 Eastern and southern Norway...... 386,727 17,261 106,159 510,147 Western Norway...... 146,273 7,450 37,270 190,992 Northern and central Norway ...... 156,593 7,378 32,625 196,596 Total Norway...... 910,415 51,737 248,710 1,210,862 Sweden ...... 67,913 3,620 19,954 91,487 United Kingdom...... 25,094 4,450 1,147 30,691 Other Western European countries...... 60,225 5,476 28,987 94,688 Russia ...... 1,360 43 131 1,533 Estonia...... 2,841 29 80 2,951 Latvia...... 18,242 492 844 19,577 Lithuania...... 22,690 441 1,806 24,938 Poland...... 14,408 690 1,786 16,884 Other Eastern European countries ...... 251 73 3 326 Total Europe outside Norway...... 213,023 15,313 54,738 283,074 USA and Canada ...... 25,573 5,017 33,076 63,665 Bermuda and Panama (3) ...... 17,828 324 7,449 25,601 Other South and Central American countries. 6,109 2,353 6,004 14,466 Total America...... 49,510 7,694 46,529 103,733 Singapore (3)...... 14,845 332 2,301 17,479 Hong Kong ...... 3,780 7 856 4,643 Other Asian countries...... 13,027 386 990 14,403 Total Asia ...... 31,652 725 4,147 36,525 Liberia (3)...... 10,919 255 3,128 14,301 Other African countries ...... 2,394 112 398 2,905 Australia, New Zealand and Marshall Islands (3)...... 18,632 385 3,867 22,884 Gross commitments...... 1,236,547 76,220 361,517 1,674,283 – Individual write-downs...... 9,208 65 - 9,273 – Collective write-downs...... 1,872 - - 1,872 + Other adjustments...... 2,471 95 - 2,566 Net commitments...... 1,227,937 76,251 361,517 1,665,704
______Notes:
(1) With effect from 2010, documentary credit commitments which are not related to deliveries of goods have been reclassified from documentary credit commitments to performance guarantees.
(2) Unutilized credit lines have been changed in line with the Basel II definition.
(3) Represents shipping commitments.
As of December 31, 2009 Loans and Unutilized Total Location of customer, by address receivables Guarantees(1) credit lines(2) commitments (NOK millions) Oslo ...... 205,679 19,285 98,071 323,035 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 ...... 144,420 7,159 26,947 178,526 Total Norway...... 864,267 53,833 247,122 1,165,222
84 As of December 31, 2009 Loans and Unutilized Total Location of customer, by address receivables Guarantees(1) credit lines(2) commitments Sweden ...... 65,310 1,907 14,690 81,907 United Kingdom...... 33,990 5,671 3,062 42,722 Other Western European countries...... 66,374 3,982 21,916 92,272 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...... 230,152 13,622 44,456 288,231 USA and Canada ...... 27,202 7,659 28,381 63,242 Bermuda and Panama (3) ...... 16,222 527 5,258 22,007 Other South and Central American countries... 3,492 620 5,473 9,585 Total America...... 46,916 8,806 39,111 94,834 Singapore (3)...... 13,707 835 2,426 16,968 Hong Kong ...... 3,365 22 844 4,231 Other Asian countries...... 9,010 491 1,201 10,702 Total Asia ...... 26,082 1,348 4,471 31,902 Liberia (3) ...... 8,170 101 2,176 10,448 Other African countries ...... 1,874 248 10 2,131 Australia, New Zealand and Marshall Islands 18,277 32 4,515 22,824 (3)...... Gross commitments...... 1,195,739 77,989 341,861 1,615,589 – Individual write-downs...... 7,674 76 - 7,749 – Collective write-downs...... 2,969 - - 2,969 + Other adjustments...... 2,446 (207) - 2,239 Net commitments...... 1,187,542 77,706 341,861 1,607,110
______Notes:
(1) With effect from 2010, documentary credit commitments which are not related to deliveries of goods have been reclassified from documentary credit commitments to performance guarantees.
(2) Unutilized credit lines have been changed in line with the Basel II definition.
(3) Represents shipping commitments.
Loan concentration
As of December 31, 2011, the DNB Bank Group's twenty largest exposures were not material relative to total assets or net lending.
Non-performing, doubtful and impaired commitments
The DNB Bank Group records loans at their nominal value, with the exception of impaired commitments and reduced rate loans.
A loan is considered to be non-performing if the loan is not serviced in accordance with the loan agreement, and where the default is not due to delays or incidental circumstances concerning the customer. Commitments are classified as non-performing no later than 90 days past the formal due date. Guarantees are considered to be defaulted once a claim has been made against the Bank.
A performing loan is classified as doubtful if an individual write-down has been made.
85 Individual write-downs are recorded in the accounts if objective indications of a decrease in value can be found. Write-downs on both performing and non-performing loans are calculated as the difference between the value of the loan on the balance sheet and the net present value of estimated future cash flows discounted by the effective interest rate. Renegotiation of loan terms to ease the position of the borrower qualifies as objective indications of impairment. In accordance with IFRS, the best estimate is used to assess future cash flows. The effective interest rate used for discounting is not adjusted to reflect changes in the credit risk and terms of the loan due to objective indications of impairment being identified.
Impaired commitments comprise all doubtful commitments and the part of non-performing commitments where an individual write-down has been made.
Gross non-performing and gross doubtful commitments net of individual write-downs comprise net non-performing and net doubtful commitments.
Loans which have not been individually evaluated for impairment are evaluated collectively in groups. Loans which have been individually evaluated, but not written down, are also evaluated in groups. Collective write-downs are taken based on this evaluation.
The following table sets forth, as of the dates indicated, the write-down and coverage ratios for the DNB Bank Group's gross non-performing and gross doubtful commitments:
As of December 31, 2011 2010 2009 Non-performing commitments ...... 16,793 17,313 19,523 Doubtful commitments...... 12,296 10,369 7,353 Gross non-performing and gross doubtful 29,089 27,682 26,876 commitments ...... Individual write-downs...... 9,624 9,273 7,749 Collective write-downs...... 2,119 1,872 2,969 Write-down ratio (%)(1) ...... 40.4 40.3 39.9 Collateral for non-performing and doubtful 18,209 17,793 18,928 commitments ...... Coverage ratio (%)(2) ...... 103.0 104.5 110.3
______Notes:
(1) Individual and collective write-downs as a percentage of gross non-performing and gross doubtful commitments.
(2) Individual and collective write-downs and collateral as a percentage of gross non-performing and gross doubtful commitments.
Collateral security
Depending on the market and type of transaction, DNB Bank Group uses collateral security to reduce risk. Collateral security can be in the form of physical assets, guarantees, cash deposits or netting agreements. The main types of collateral used are mortgages on residential property, commercial property and other real property, ships, rigs, registrable movables, accounts receivable, inventories, plant and equipment, agricultural chattel and fish- farming concessions. The principal rule is that physical assets should be insured by the debtor. In addition, negative pledges are used, where the customer is required to keep all assets free from encumbrances vis-à-vis all lenders.
The credit process is based on an assessment of the customer's debt servicing capacity in the form of ongoing future cash flows. The source of such cash flows varies depending on customer segment and the customer’s operations or the loan object. The main sources of the cash flow included in such assessments are earned income and income from the business operations which are being financed. In addition, the extent to which the Bank’s exposure will be covered through the realization of collateral in connection with a possible future default or reduction in future cash flows is taken into account. When assessing mortgages backed by residential property, external appraisals are used. The large majority of home mortgages are within 80 per cent of the property’s appraised value, and external parameters are used to regularly review home values. Evaluations of the value of collateral in the corporate market
86 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 and sales costs, 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 are also considered. The main principle for valuing collateral is to use the expected realization value at the time the Bank may need to realize the collateral. Extensive rules have been prepared as part of the credit process, including maximum rates for all types of collateral and realization guidelines. Valuations of collateral are made when approving new loans and in connection with the annual renewal and are considered to be part of credit decisions. A procedure has been established for the periodic control of the values on which the extension of credit is based.
Repossessed properites and other assets
Repossessed assets are assets acquired by units within DNB Bank Group as part of the management of non- performing and impaired commitments. At the time of acquisition, such assets are valued at their estimated realizable value. Any deviation from the carrying value of non-performing and impaired commitments at the time of acquisition is classified as a write-down. Repossessed assets are recorded on 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 paragraph 7 of the "Accounting Principles" to the audited consolidated financial statements for the year ended December 31, 2011 incorporated by reference in this Prospectus. Upon final sale, the difference relative to carrying value is recognized in the income statement according to the type of asset. Property additions in 2010 mainly included the acquisition of the companies FB 40 ApS and København Ejendomme from DNB Baltics and Poland’s operations in Denmark and repossessed investment properties in Latvia and Lithuania. Other asset additions in 2010 mainly included machinery, equipment and vehicles taken over from DNB Baltics and Poland’s operations in Estonia. Property additions in 2011 mainly included the acquisition of the companies Royston/Propinvest. Disposals in 2011 mainly relateed to the residential market in Latvia.
Gross and net impaired commitments
The following table sets forth, for the periods indicated, the gross and net impaired commitments for the DNB Bank Group's principal industry sectors, based on standardized sector and industry categories set up by Statistics Norway:
Gross impaired Total individual write- Net impaired commitments downs commitments As of December 31,
2011 2010 2009 2011 2010 2009 2011 2010 2009 (NOK millions) Retail customers(1)(2) ... 6,557 6,727 5,428 2,786 2,246 1,589 3,771 4,481 3,838 International shipping. 4,045 1,144 1,610 494 335 513 3,551 810 1,097 Real estate...... 5,121 3,742 3,464 1,546 1,239 1,205 3,575 2,503 2,259 Manufacturing ...... 3,676 4,865 4,571 1,604 1,700 1,151 2,072 3,165 3,420 Services ...... 1,410 2,378 1,653 838 857 913 572 1,521 740 Trade...... 1,671 1,515 1,432 817 817 764 854 698 668 Oil and gas...... 0 0 0 0 0 0 0 0 0 Transportation and 761 977 1,048 427 487 515 334 490 533 communication ...... Building and 1,349 2,777 1,954 702 1,067 778 547 1,710 1,176 construction ...... Power and water 80 188 15 80 162 5 0 25 9 supply ...... Seafood...... 100 52 57 33 41 47 67 10 10 Hotels and restaurants. 429 481 361 131 130 135 298 351 226 Agriculture and 388 441 412 128 162 108 260 279 304 forestry ...... Central and local 0 0 0 0 0 0 0 0 0 government......
87 Gross impaired Total individual write- Net impaired commitments downs commitments As of December 31,
2011 2010 2009 2011 2010 2009 2011 2010 2009 (NOK millions) Other sectors...... 35 81 145 13 29 24 22 53 121 Total customers ...... 25,622 25,368 22,151 9,599 9,272 7,748 16,023 16,097 14,403 Credit institutions ...... 46 1 1 25 1 1 21 0 0 Gross impaired commitments ...... 25,667 25,369 22,152 9,624 9,273 7,749 16,043 16,097 14,403 Non-performing commitments not subject to write-downs 3,422 2,313 4,724 - - - 3,422 2,313 4,724 Gross non-performing and doubtful commitments ...... 29,089 27,682 26,876 9,624 9,273 7,749 19,465 18,409 19,127
______Notes:
(1) Figures for 2010 include an increase of NOK 817 million due to reclassification of non-performing commitments previously collectively written down in DNB NORD.
(2) Including a NOK 98 million adjustment for commitments previously written down in 2010.
Developments in write-offs and write-downs
When a loss is considered final any previously recorded write-downs on the balance sheet related to the commitment is reduced. This reduction is not recorded in the profit and loss statement. In the table below these write-offs are classified as “write-offs covered by individual write-downs made in previous years.”
Write-offs in excess of previously recorded individual write-downs and write-offs without individual write-downs are classified as “write-offs” in the profit and loss statement.
The following table sets forth, for the periods indicated, the DNB Bank Group's write-offs on loans and guarantees and changes in net individual and collective write-downs:
As of December 31, 2011 2010 2009 (NOK millions) Write-offs covered by individual write-downs made in previous years...... 2,753 2,217 1,627
Profit and loss Write-offs(1) ...... 550 459 554 New individual write-downs(2) ...... 4,120 5,141 6,521 Total new individual write-downs...... 4,670 5,600 7,075 Reassessed individual write-downs ...... 1,015 1,109 693 Recoveries on commitments previously written off .. 437 418 317 Net individual write-downs ...... 3,217 4,074 6,065 Change in collective write-downs on loans(2) ...... 227 (1,077) 1,645 Write-downs on loans and guarantees...... 3,445 2,997 7,710 Of which write-downs on loans...... 3,419 3,000 7,696 Of which write-downs on guarantees...... 26 (3) 14
______
88 Notes:
(1) Including a NOK 98 million adjustment for commitments previously written down in 2010.
(2) In the first quarter of 2010, collective write-downs of NOK 284 million were reclassified as individual write-downs following more precise identification of impairment on individual commitments in sub-portfolios in DNB NORD.
The following tables set forth, for the periods indicated, the total individual write-downs allocated according to the DNB Bank Group's principal industry sectors (1):
Year ended December 31, 2011 Recoveries on New Reassessed commitments individual individual previously Net write- write-downs write-downs written off downs (NOK millions) Retail customers ...... 1,758 225 360 1,174 International shipping (transportation by sea 417 77 4 336 and pipelines and vessel construction) ...... Real estate...... 917 167 12 738 Manufacturing ...... 281 109 1 171 Services and management ...... 213 73 4 135 Trade...... 316 105 7 203 Oil and gas...... 1 0 0 1 Transportation and communication ...... 74 52 7 15 Building and construction...... 527 105 5 416 Power and water supply...... 3 10 0 (7) Seafood...... 24 20 0 3 Hotels and restaurants...... 48 27 0 20 Agriculture and forestry ...... 59 43 1 16 Other sectors...... 8 1 5 2 Total customers ...... 4,644 1,015 406 3,222 Credit institutions ...... 26 0 31 (5) Change in collective write-downs on loans ... - - - 227 Write-downs on loans and guarantees...... 4,670 1,015 437 3,445
______Note:
(1) The breakdown into principal industry sectors is based on standardized sector and industry categories set up by Statistics Norway. Customers are classified according to their main line of business.
Year ended December 31, 2010 Recoveries on New Reassessed commitments individual individual previously Net write- write-downs write-downs written off downs (NOK millions) Retail customers(2) (3)...... 1,830 110 307 1,414 International shipping (transportation by sea 356 63 12 281 and pipelines and vessel construction) ...... Real estate...... 805 335 8 462 Manufacturing ...... 835 98 1 736 Services ...... 345 161 61 123 Trade...... 368 126 3 240 Oil and gas...... 3 0 0 3
89 Year ended December 31, 2010 Recoveries on New Reassessed commitments individual individual previously Net write- write-downs write-downs written off downs (NOK millions) Transportation and communication ...... 192 87 2 103 Building and construction...... 487 86 8 393 Power and water supply...... 158 1 0 158 Seafood...... 9 0 0 9 Hotels and restaurants...... 92 16 0 76 Agriculture and forestry ...... 95 25 1 69 Central and local government...... 0 0 0 0 Other sectors...... 22 0 14 9 Total customers ...... 5,600 1,109 416 4,076 Credit institutions ...... 0 0 2 (2) Change in collective write-downs on loans .. - - - (1,077) Write-downs on loans and guarantees...... 5,600 1,109 418 2,997
______Notes: (1) The breakdown into principal industry sectors is based on standardized sector and industry categories set up by Statistics Norway. Customers are classified according to their main line of business. (2) In the first quarter of 2010, collective write-downs of NOK 284 million were reclassified as individual write-downs following more precise identification of impairment on individual commitments in sub-portfolios in DNB NORD. (3) Including a NOK 98 million adjustment for commitments previously written down in 2010.
Year ended December 31, 2009 Recoveries on Reassessed commitments New individual individual previously Net write- write-downs write-downs written off downs (NOK millions) Retail customers ...... 1,444 129 253 1,061 International shipping (transportation by sea 544 1 23 520 and pipelines and vessel construction) ...... Real estate...... 1,076 105 1 970 Manufacturing ...... 945 180 0 765 Services ...... 617 39 5 574 Trade...... 959 79 2 878 Oil and gas...... 0 0 0 0 Transportation and communication ...... 396 42 17 337 Building and construction...... 678 41 1 637 Power and water supply...... 1 0 0 1 Seafood...... 11 21 0 (10) Hotels and restaurants...... 104 13 0 92 Agriculture and forestry ...... 81 16 1 62 Central and local government...... 0 3 0 (3) Other sectors...... 218 16 14 187 Total customers ...... 7,075 686 317 6,073 Credit institutions ...... 0 7 0 (8) Change in collective write-downs on loans .. - - - 1,645 Write-downs on loans and guarantees...... 7,075 693 317 7,710
______Note:
90 (1) The breakdown into principal industry sectors is based on standardized sector and industry categories set up by Statistics Norway. Customers are classified according to their main line of business.
Developments in write-downs on loans and guarantees
The following table sets forth, for the periods indicated, developments in write-downs and write-offs on loans and guarantees:
2011 2010 2009 (NOK millions) Write-downs as of January 1 11,803 11,325 6,473 New individual write-downs 2,399 3,321 4,835 Increased write-downs 1,722 1,821 1,685 Reassessed write-downs (1,015) (1,109) (693) Write-offs covered by individual write-downs made in (2,753) (2,217) (1,627) previous years Changes in individual write-downs and accrued interest 52 51 129 and amortization Changes in collective write-downs 227 (1,077) 1,645 Changes in group structure 0 0 (384) Changes due to exchange rate movement 19 (313) (738) Write-downs as of December 31 12,453 11,803 11,325 Of which individual write-downs 9,624 9,273 7,749 Of which individual write-downs of accrued interest 710 658 607 and amortization Of which collective write-downs 2,119 1,872 2,969
The amount of the write-downs charged to operating expenses was NOK 3,445 million in 2011, NOK 2,997 million in 2010 and NOK 7,710 million in 2009.
Liquidity portfolio
As part of ongoing liquidity management, the 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 from several central banks and as a basis for liquidity buffers to meet regulatory requirements. With effect from July 1, 2008, the liquidity portfolio, which is held entirely through DNB Markets, was reclassified from the category "fair value through profit or loss" to "held-to-maturity investments." Portfolios in this category are recorded at amortized cost and written down if there is objective evidence of a decrease in value.
As of December 31, 2011, the value of the Bank's liquidity portfolio was NOK 114,676 million. 91.6 per cent of the securities in the portfolio had a "AAA" rating, while 3.9 per cent were rated "AA." There were no synthetic securities in the portfolio and no investments in US sub-prime bonds or collateralized debt obligations, CDOs.
The structure of the Bank's liquidity portfolio is set forth below:
As of December 31, 2011 2010 2009 NOK NOK NOK (%) millions (%) millions (%) millions Asset class Residential mortgage backed securities 50 58,267 64 73,387 58 66,872 (RMBS) ...... Government-related(1) ...... 31 36,301 32 35,909 33 37,596 Covered bonds...... 16 18,729 - - - - Consumer credit(2) ...... 1 1,040 2 2,190 3 3,316
91 As of December 31, 2011 2010 2009 NOK NOK NOK (%) millions (%) millions (%) millions Corporate loans(3)...... 1 1,272 2 2,578 6 7,221 Insurance(4) ...... - - - - 0 66 Total liquidity portfolio, nominal values ...... 100 115,610 100 114,064 100 115,070 Accrued interest, amortization effects and fair value adjustments ...... (934) (1,497) (2,101) Total liquidity portfolio...... 100 114,676 100 112,567 100 112,969 Of which reclassified portfolio(5) ..... 39,825 54,087 68,600
______Notes:
(1) U.S., Nordics, Germany, Netherlands, France, Australia and Supranationals.
(2) Senior auto loan ABS, consumer loan ABS and private student loan ABS.
(3) Senior high grade balance sheet CLOs, senior small- and medium-sized enterprises CLOs, senior multifamily housing and senior insurance wrapped insurance.
(4) With effect from the second quarter of 2010, the exposure to this sector is included in the asset class corporate loans. The exposure to the insurance sector represented only 0.01 per cent of the total portfolio as of December 31, 2010.
(5) In 2008, the DNB Bank Group reclassified the liquidity portfolio in DNB Markets from a trading portfolio to the held-to-maturity category.
The DNB Bank Group's exposure to Portugal, Ireland, Italy, Greece and Spain is primarily through DNB Markets' international bond portfolio which comprises primarily residential mortgage-backed securities. The portfolio does not include any investment in treasury bonds issued by these countries. The DNB Bank Group's exposure to these countries as of December 31, 2011 is set forth below:
International Other units Government bond portfolio in the Bank Total DNB debt DNB Markets Group Bank Group (NOK millions) Portugal ...... 0 2,213 3 2,216 Ireland...... 0 2,407 40 2,447 Italy...... 0 2,757 730 3,487 Greece...... 0 0 0 0 Spain...... 0 10,049 2,789 12,838 Total...... 0 17,427 3,563 20,991
The average term to maturity of DNB Markets' liquidity portfolio is 3.1 years, and the change in value resulting from an interest rate adjustment of one basis point was NOK 22 million as of December 31, 2011.
Classification of financial instruments
Most financial assets and financial liabilities on DNB Bank Group's balance sheet are carried at amortized cost. This primarily applies to loans, deposits and borrowings, but also to 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 amortized cost. Hedge accounting may be applied. See paragraph 8 of the "Accounting Principles" to the audited consolidated financial statements for the year ended as of December 31, 2011 incorporated by reference in this Prospectus.
92 The tables below set forth, as of the dates indicated, the fair and book values, as applicable, of the DNB Bank Group's financial assets and financial liabilities:
As of December 31, 2011 Financial instruments at fair value through Financial Financial profit and loss derivatives instruments Designated designated as carried at Investments at fair hedging amortized held to Trading value instruments cost(1) maturity Total (NOK millions) Cash and deposits with central banks...... 192,783 22,001 9,797 224,581 Lending to and deposits with credit institutions ...... 15,711 459 8,935 25,105 Lending to customers ...... 936 108,644 1,182,080 1,291,660 Commercial paper and bonds 34,550 71,449 106,000 Shareholdings ...... 9,586 2,714 12,300 Financial derivatives...... 84,785 11,479 96,264 Commercial paper and bonds, held to maturity ...... 96,042 96,042 Other assets...... 12,792 12,792 Total financial assets ...... 338,352 205,267 11,479 1,213,604 96,042 1,864,744 Loans and deposits from credit institutions ...... 189,964 66,329 23,260 279,553 Deposits from customers ...... 47,997 18,884 683,222 750,102 Financial derivatives...... 61,631 1,498 63,130 Debt securities issued ...... 221,581 69,080 349,616 640,277 Other liabilities...... 14,569 14,569 Subordinated loan capital ...... 1,462 22,694 24,156 Total financial liabilities(2)... 521,173 155,756 1,498 1,093,360 0 1,771,787
______Notes:
(1) Includes hedged liabilities.
(2) Contractual obligations of financial liabilities designated as at fair value totalled NOK 155,128 million as of December 31, 2011.
As of December 31, 2010 Financial instruments Investments Total at fair value through Financial Financial held to profit and loss derivatives instruments maturity Designated designated as carried at at fair hedging amortized Trading value instruments cost(1) (NOK millions) Cash and deposits with central banks...... 8,208 0 7,990 16,198 Lending to and deposits with credit institutions ...... 35,287 641 7,908 43,837 Lending to customers ...... 2,647 125,792 1,055,661 1,184,100 Commercial paper and bonds 40,471 121,600 162,071 Shareholdings, including shares, mutual funds and equity certificates ...... 10,854 4,100 14,954 Financial derivatives...... 69,903 6,878 76,781
93 As of December 31, 2010 Financial instruments Investments Total at fair value through Financial Financial held to profit and loss derivatives instruments maturity Designated designated as carried at at fair hedging amortized Trading value instruments cost(1) (NOK millions) Commercial paper and bonds, held to maturity ...... 113,751 113,751 Other assets 8,482 8,482 Total financial assets ...... 167,370 252,133 6,878 1,080,042 113,751 1,620,173 Loans and deposits from credit institutions ...... 104,036 121,350 32,544 257,931 Deposits from customers ...... 36,768 15,756 611,488 664,012 Financial derivatives...... 58,794 1,828 60,622 Debt securities issued ...... 153,941 39,875 315,631 509,447 Other liabilities...... 13,009 13,009 Subordinated loan capital ...... 1,260 32,214 33,474 Total financial liabilities(2)... 353,539 178,241 1,828 1,004,887 0 1,538,495
______Notes:
(1) Includes hedged liabilities.
(2) Contractual obligations of financial liabilities designated as at fair value totalled NOK 177,777 million as of December 31, 2010.
As of December 31, 2009 Financial instruments at fair value through Financial Financial profit and loss derivatives instruments Designated designated as carried at Investments at fair hedging amortized held to Trading value instruments cost(1) maturity Total (NOK millions) Cash and deposits with central banks...... 31,859 31,859 Lending to and deposits with credit institutions ...... 48,844 694 9,214 58,751 Lending to customers ...... 1,422 160,030 967,340 1,128,791 Commercial paper and bonds 44,251 133,362 177,613 Shareholdings, including shares, mutual funds and equity certificates ...... 10,998 2,398 13,396 Financial derivatives...... 64,540 4,633 69,173 Commercial paper and bonds, held to maturity ...... 113,302 113,302 Other assets...... 7,513 7,513 Total financial assets ...... 170,053 296,484 4,633 1,015,926 113,302 1,600,399 Loans and deposits from credit institutions ...... 134,833 118,074 49,787 302,694 Deposits from customers ...... 45,982 19,860 547,784 613,627 Financial derivatives...... 51,589 770 52,359 Debt securities issued ...... 168,033 37,913 294,960 500,907 Other liabilities...... 9,839 9,839
94 As of December 31, 2009 Financial instruments at fair value through Financial Financial profit and loss derivatives instruments Designated designated as carried at Investments at fair hedging amortized held to Trading value instruments cost(1) maturity Total (NOK millions) Subordinated loan capital ...... 1,379 37,672 39,051 Total financial liabilities(2) ..... 400,437 177,227 770 940,042 0 1,518,476
______Notes:
(1) Includes hedged liabilities.
(2) Contractual obligations of financial liabilities designated as at fair value totalled NOK 177,346 million as of December 31, 2009.
Maturity profiles of assets, liabilities and financial derivatives
The tables below set forth, as of the dates indicated, the DNB Bank Group's maturity structure for liquidity and funding:
Residual maturity as of December 31, 2011(1) From 1 month From From Up to 1 to 3 3 months 1 year Over 5 No fixed month months to 1 year to 5 years years maturity Total (NOK millions) Assets Cash and deposits with 224,584 224,584 central banks...... Lending to and deposits with credit institutions 11,092 5,645 5,896 2,393 125 25,152 Lending to customers 214,201 110,999 85,762 166,814 717,462 (2,119) 1,293,119 Commercial paper and 139 11,418 50,199 38,680 7,028 107,465 bonds ...... Securities held to maturity ...... 522 718 2,301 28,722 64,709 96,973 Shareholdings ...... 13,054 13,054 Other assets...... 1,471 860 2,331 Total ...... 450,539 130,252 144,157 237,469 789,325 10,935 1,762,677 Liabilities Loans and deposits from credit institutions ...... 200,670 7,490 6,227 65,419 42 279,849 Deposits from customers 729,862 13,812 4,949 893 73 749,589 Debt securities issued 86,164 138,820 43,491 219,245 138,899 626,619 Sundry liabilities etc. 1,351 3,372 324 5,047 Subordinated loan capital(2) ...... 124 85 12,773 10,131 23,114 Total ...... 1,018,047 163,618 54,667 285,643 151,787 10,455 1,684,218 Financial derivatives Financial derivatives, gross settlement ...... Incoming cash flows 485,922 468,529 352,867 563,610 286,695 2,157,623 Outgoing cash flows 486,088 469,708 353,455 560,760 289,890 2,159,901 Financial derivatives, net 735 897 1,713 13,292 10,937 27,574
95 Residual maturity as of December 31, 2011(1) From 1 month From From Up to 1 to 3 3 months 1 year Over 5 No fixed month months to 1 year to 5 years years maturity Total (NOK millions) settlement ...... Total financial 569 (282) 1,124 16,142 7,742 25,296 derivatives ......
______Notes:
(1) Not including value adjustments for financial instruments fair value.
(2) The maturity structure for subordinated loan capital is based on final maturities and does not reflect options to make early redemptions.
Residual maturity as of December 31, 2010(1) From From 3 From Up to 1 1 month months 1 year Over 5 No fixed month to 3 months to 1 year to 5 years years maturity Total (NOK millions) Assets Cash and deposits with 16,198 16,198 central banks...... Lending to and deposits with credit institutions ...... 18,209 19,993 5,603 43,805 Lending to customers...... 168,590 86,549 87,244 188,147 655,061 (1,872) 1,183,718 Commercial paper and bonds ...... 19,426 45,788 68,681 30,925 164,819 Securities held to maturity.. 798 32,464 80,271 113,533 Shareholdings ...... 16,252 16,252 Other assets...... 1,662 755 1,163 1,851 25 18,201 23,657 Total...... 224,085 153,084 163,489 253,387 735,356 32,581 1,561,982 Liabilities Loans and deposits from credit institutions ...... 128,343 7,636 45,115 76,811 327 258,232 Deposits from customers 647,761 10,102 5,226 434 187 663,710 Debt securities issued ...... 44,603 85,090 99,698 189,311 79,622 498,325 Sundry liabilities etc...... 1,758 757 2,410 13 17,357 22,294 Subordinated loan capital(2) 234 86 17,081 15,246 32,648 Total...... 822,699 103,584 152,449 266,656 97,218 32,603 1,475,209 Financial derivatives Financial derivatives, gross settlement...... Incoming cash flows...... 437,709 462,403 329,076 424,567 206,999 1,860,754 Outgoing cash flows ...... 440,868 464,576 327,759 427,238 212,226 1,872,666 Financial derivatives, net settlement...... 39 395 3,375 10,341 7,689 21,838 Total financial derivatives (3,120) (1,778) 4,692 7,670 2,462 9,926
______Notes:
(1) Not including value adjustments for financial instruments fair value.
96 (2) The maturity structure for subordinated loan capital is based on final maturities and does not reflect options to make early redemptions.
Residual maturity as of December 31, 2009(1) From 1 month From From Up to 1 to 3 3 months 1 year Over No fixed month months to 1 year to 5 years 5 years maturity Total (NOK millions) Assets Cash and deposits with central banks...... 31,272 587 31,859 Lending to and deposits with credit institutions ...... 40,677 4,012 7,158 4,781 1,318 24 57,969 Lending to customers...... 146,149 55,707 56,756 180,839 685,851 801 1,126,103 Commercial paper and bonds ...... 15,426 57,497 86,151 48,986 84,509 292,568 Shareholdings ...... 0 15,898 15,898 Other assets...... 0 0 0 0 0 20,612 20,612 Total...... 233,524 117,215 150,064 234,605 771,678 37,922 1,545,009 Liabilities Loans and deposits from credit institutions ...... 158,531 12,480 8,093 124,078 303,182 Deposits from customers ...... 594,757 10,875 7,183 250 546 613,611 Debt securities issued ...... 63,779 87,026 100,485 210,999 30,912 493,201 Sundry liabilities etc...... 499 3,346 638 4,483 Subordinated loan capital(2)...... 309 942 21,512 15,299 38,062 Total...... 817,565 113,727 116,070 336,269 52,970 15,937 1,452,539 Financial derivatives Financial derivatives, gross settlement...... Incoming cash flows...... 498,982 462,285 336,539 415,813 123,569 1,837,187 Outgoing cash flows ...... 470,887 455,208 332,968 427,140 125,908 1,812,110 Financial derivatives, net settlement...... (339) 534 4,328 12,091 5,452 22,066 Total financial derivatives ...... 27,756 7,611 7,899 764 3,113 47,144
______Notes:
(1) Not including value adjustments for financial instruments fair value.
(2) The maturity structure for subordinated loan capital is based on final maturities and does not reflect options to make early redemptions.
Specification of the DNB Bank Group's largest investments in shares, mutual funds and equity certificates(1) as of December 31, 2011
Ownership Number of shares share (%)(2) Recorded value (NOK thousands) Financial institutions Gjensidige Forsikring(3) ...... 416,638 0.1 28,790 Storebrand(3) ...... 1,252,887 0.3 38,965 Other financial institutions ...... 177,911 Total financial institutions ...... 245,666
97 Ownership Number of shares share (%)(2) Recorded value
Norwegian companies Aker Solutions(3) ...... 666,093 0.2 42,048 Algeta(3) ...... 272,770 0.6 41,836 DnB NOR Eiendomsinvest I(3) ...... 9,859,178 23.6 315,495 DnB NOR Shippinginvest I(3) ...... 915,084 100.0 53,945 E6 Logistikk(3) ...... 1,388,979 96.5 138,928 Finn Eiendom ...... 755 7.6 82,317 IT-Fornebu Holding ...... 16,198,752 12.6 207,930 Marine Harvest(3) ...... 113,564,519 3.2 292,772 Norsk Hydro(3) ...... 6,483,963 0.3 181,141 Orkla(3)...... 4,799,275 0.5 214,239 Petroleum Geo-Services(3) ...... 875,183 0.4 57,267 Polaris Media(3)...... 3,651,236 7.5 96,758 Statoil(3) ...... 3,379,238 0.1 518,632 Telenor(3) ...... 2,898,932 0.2 284,018 Yara International(3) ...... 1,677,485 0.6 407,934 Other Norwegian companies ...... 1,068,453 Total Norwegian companies ...... 4,003,713
Companies based abroad ...... Axfood(3)...... 2,695,196 5.1 595,752 Calpine(3) ...... 9,261 13.9 49,598 Cape Investment ...... 4,221,539 3.3 115,857 Ensco plc American Depositary Shares(3). 3,856,228 1.7 1,083,000 Golar(3)...... 968,927 2.0 254,778 Nets Holding...... 33,547,173 18.2 1,640,469 North Atlantic Drilling(3) ...... 17,710,000 1.8 163,817 Rowan Cos.(3) ...... 6,240,000 4.9 1,132,000 Royal Caribbean Cruises(3) ...... 468,771 0.2 70,244 Seadrill(3) ...... 6,767,638 1.4 1,351,956 Subsea 7(3)...... 946,221 0.3 107,785 Teekay(3) ...... 870,000 0.1 142,700 Other companies based abroad...... 161,679 Total companies based abroad ...... 6,869,634
Equity related derivatives(3) ...... 367,365
Mutual funds...... Interest funds...... 5,282 Combination funds...... 17,203 Mutual funds...... 171,505 Private equity funds...... 369,000 Other funds ...... 250,969 Total mutual funds ...... 813,958
Total investments in shares, mutual funds and equity certificates...... 12,300,336 ______Notes: (1) Primary capital certificates (PCCs) 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
98 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 Markets totalled NOK 9,388 million as of December 31, 2011, and equity-related derivatives represented NOK 367 million. DNB Markets' equity investments 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 Markets represented approximately NOK 3.4 million as of December 31, 2011.
As of December 31, 2010 and 2009, the DNB Bank Group's total short-term investments in shares, mutual funds and equity certificates totalled NOK 14.95 million and 13.40 million, respectively.
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. Financial 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. The DNB Bank Group enters into financial derivatives transactions in order to manage liquidity and market risk arising from the DNB Bank Group's ordinary operations. In addition, the Bank trades financial derivatives for its own account.
“Over the counter” (OTC) options or forward contracts are contracts entered into outside any formal exchange. The contracts are customized according to the customer's requirements with respect to the underlying object, number, price, expiration terms and maturity. The advantage of OTC derivatives compared with the standardized market is that customers are not limited to standardized contracts and can buy the precise position they wish. The disadvantage is that it can be difficult to find other contracting parties and to sell the contracts on the secondary market. Clearing of non-standardized OTC options is regulated by separate standard conditions stipulated by the clearing house NOS ASA, and the relationship between the actors in the market, is regulated through agreements similar to those in the standardized market.
The following derivatives are employed for both trading and hedging purposes by the DNB Bank Group:
● Forward contracts: contracts 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 customized contracts traded between counterparties in the OTC market.
● Forward rate agreements: 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.
● Interest rate futures: standardized contracts whereby 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.
● Swaps: transactions in which two parties exchange cash flows on a fixed amount over an agreed period. The majority of swaps are customized and traded outside any formal exchange. The most important types of swaps traded by the DNB Bank Group are:
interest rate swaps in which fixed rates of interest 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
● 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 fixed price. The buyer pays a premium to the seller for this right. Options are traded both as OTC (customized) and standardized contracts.
99 ● Interest swaptions: option contracts affording protection against an interest rate rise (for the buyer/borrower) or an interest rate fall (for the seller/lender). By paying a premium in advance, the customer gains the right, but not the obligation, to use predetermined interest rate swap contracts in the future. Depending on the structure, the swaption may be exercised on a specific future date (European option) or at any time during the term of the option (American option).
The table below shows the nominal values of financial derivatives according to type of derivative as well as the positive and negative market values. Positive market values are entered as assets on the balance sheet, whereas negative market values are entered as liabilities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Fair Value of Financial Derivatives and Other Financial Instruments" for a more detailed description of the measurement of financial derivatives. As of December 31, 2011 2010 2009
Total Positive Negative Total Positive Negative Total Positive Negative nominal market market nominal market market nominal market market values value value values value value values value value
(NOK millions) Interest rate contracts ...... 2,179,282 1,519 1,993 Forward rate agreements...... 2,372,248 77,289 43,340 1,338,391 704 906 1,469,687 1,409 1,700 Swaps ...... 75,113 245 155 1,379,199 49,951 29,764 1,228,890 55,482 39,292 OTC options, bought and sold ...... 75,113 245 155 78,098 115 141 84,800 122 57 Other OTC contracts...... 1,562 22 0 1,562 21 0 1,687 38 0
Total OTC derivatives...... 4,628,205 79,074 45,488 2,797,251 50,791 30,811 2,785,064 57,051 41,049 Exchange-traded contracts - futures, bought and sold ...... 311 0 0 23,550 0 0 804 0 0
Total interest rate contracts ...... 4,628,516 79,074 45,488 2,820,801 50,791 30,811 2,785,868 57,051 41,049 Foreign exchange contracts...... Forward contracts ...... 1,018,201 1,953 2,594 955,780 3,390 3,499 897,381 4,514 6,317 Swaps ...... 624,225 34,383 35,557 510,496 28,098 41,684 380,450 15,558 15,759 OTC options, bought and sold ...... 26,586 284 274 24,588 414 402 30,073 358 351
Total foreign exchange contracts ...... 1,669,013 36,620 38,425 1,490,863 31,903 45,585 1,307,904 20,430 22,429
Equity-related contracts Forward contracts ...... 5,342 185 220 4,687 36 505 3,849 72 689 OTC options, bought and sold ...... 4,336 83 72 8,345 202 210 13,544 667 299 Total OTC derivatives ...... 9,679 268 292 13,032 238 715 17,393 739 988 Futures, bought and sold...... 748 0 0 3,320 11 37 6,022 0 113 Options, bought and sold ...... 1,864 20 23 511 44 46 388 54 34
Total exchange-traded contracts ...... 2,612 20 23 3,831 55 83 6,410 54 147
Total equity-related contracts...... 12,290 288 316 16,863 292 798 23,803 793 1,135 Equity related derivatives recorded as shareholdings...... (230) (258) (124) (645) (601) (942) Commodity-related contracts Swaps ...... 52,996 1,883 1,700 17,172 1,029 1,228 6,869 853 961 Options, bought and sold ...... 0 0 0 0 0 0 19 2 1 Total commodity related contracts...... 52,996 1,883 1,700 17,172 1,029 1,228 6,888 855 962
Collaterals received/paid Total collaterals received/paid ...... (21,372) (22,540) (7,110) (17,156) (9,355) (12,273)
Total financial derivatives...... 6,362,815 96,264 63,130 4,345,699 76,781 60,622 4,124,463 69,173 52,359 Of which: Applied for hedging purposes 244,619 11,479 1,498 174,360 8,384 1,828 114,170 4,633 770 Interest rate swaps...... 10,097 462 7,280 1,046 4,045 310 Interest rate- and currency swaps...... 1,381 1,036 1,104 782 588 460
100 RISK MANAGEMENT AND RISK-ADJUSTED PERFORMANCE
Risk Management
Monitoring and managing risk is an integral part of financial operations. For the DNB Group, sound risk management is a strategic tool to enhance value generation. The DNB Group relies on internal controls to ensure effective operations and prudent management of risks.
A description of risk management and internal controls in the DNB Group is given below. According to the DNB Group policy on risk management, the DNB Group aims to maintain a low risk profile and will only assume risk which is comprehensible and possible to monitor, and which will not harm its reputation. The DNB Group's corporate culture is characterized by transparent methods and processes which promote sound risk management.
All managers are responsible for risk within their own area of responsibility. Risk is managed through personal authorizations and risk limits. Risk management functions and the development of risk management tools are undertaken by units which are independent of operations in individual business areas.
As an integral part of the DNB Group, the DNB Bank Group is subject to the DNB Group risk management policies as summarized in this section.
Boards of Directors
Organization and responsibilities
The board of directors of DNB ASA, the holding company board, has principal responsibility for the DNB Group’s business operations, which includes ensuring that operations, financial reporting and asset management are subject to adequate controls. The holding company board carries out a review of developments within the DNB Group’s most significant risk areas every four months and annually reviews its internal controls system.
The profitability of the DNB Group depends on the DNB Group’s ability to identify, manage and accurately price risk arising in connection with financial services. The holding company board has a clearly stated goal to maintain a low risk profile. The DNB Bank Group seeks to maintain an "AA" level rating for ordinary long-term debt.
The DNB Group’s risk is measured in the form of risk-adjusted capital requirements, calculated by risk categories and for all of the DNB Group’s business areas. See “—Capital Management—Risk categories.” In addition, risk is monitored through supplementary risk measures adapted to operations in the various business areas, such as the monitoring of exposure relative to risk limits, key figures and portfolio risk targets.
The holding company board is responsible for ensuring that the DNB Group is adequately capitalized relative to the risk and scope of operations and that capital requirements stipulated by law and regulation are met. Rules have also been set forth for internal controls and operational risk management at group level.
Internal and external reporting must be of high quality, and the DNB Group must comply with relevant laws, regulations and internal guidelines, including the DNB Group’s values and rules governing ethics and corporate social responsibility. The organizational structure of the DNB Group is designed to ensure independent risk reporting.
The holding company board has approved rules governing ethics and corporate social responsibility in order to raise awareness of and ensure compliance with the ethical standards of the DNB Group. The DNB Group’s code of ethics requires employees to promptly inform their immediate superior or the group executive vice president, Group Audit, if they become aware of circumstances that are contrary to prevailing laws or regulations or if they become aware of major breaches of internal regulations.
The DNB Group’s credit policy is set forth in a joint meeting of the boards of directors of the holding company and the Bank. The Bank’s Board of Directors determines credit strategies and annual limits for liquidity risk and market risk for the DNB Bank Group. Market risk reflects equity, currency, interest rate and commodity exposure. The
101 boards of directors of the other operating companies in the DNB Group set limits for relevant risks pertaining to their operations.
Implementation and monitoring
The holding company board annually reviews the DNB Group’s principal risk areas and internal controls. The review, which is based on reporting from the CEO, is meant to document the quality of the work performed in key risk areas and to identify any weaknesses and areas for improvement. The review is designed to ensure that changes in the risk profile are identified, so that any necessary improvement measures can be implemented.
The Audit Committee monitors the DNB Group’s internal controls and risk management systems and makes sure that they function effectively. The Audit Committee also evaluates the quality of the work performed by the internal auditors. The Board of Directors of the Bank annually evaluates the Bank's key risk areas and internal controls.
Every four months, the Audit Committee and the boards of directors of the holding company and the Bank receive a report on developments in the DNB Group’s defined risk categories.
Information about the DNB Group’s risk situation is made available to the market, shareholders and the authorities through quarterly reports. In addition, information is released about the DNB Group’s adoption of and compliance with the capital adequacy regulations, including information on processes, models and quantitative information about the various risk categories. Information is made available on the DNB Group’s website.
The holding company board has approved a capitalization policy to ensure that the DNB Group’s equity is adapted to the scope and risk profile of operations, based on regulatory capital adequacy requirements and the DNB Group’s internal estimated capital requirements. The board of directors continually monitors the DNB Group’s capital situation.
DNB Group Chief Executive and Executive Bodies
Organization and responsibilities
The CEO is responsible for implementing risk management measures that help achieve targets for operations set by the holding company board, including the development of effective management systems and internal controls.
The group management meeting is the CEO’s executive body for management at the DNB Group level. All important decisions concerning risk and capital management will generally be made in consultation with the group management team.
The group management meetings are attended by the group executive vice presidents in charge of the business areas and staff and support units. A number of advisory bodies have been established to assist in preparing documentation and carrying out follow-ups and controls within various specialist areas:
● The Asset and Liability Committee ("ALCO") is an advisory body that assists the CFO and handles matters relating to the management of market and liquidity risk, risk modelling, capital structure and return targets.
● The DNB Group has three central credit committees: the Group Advisory Credit Committee, the Advisory Credit Committee for Large Corporates and International, and the Advisory Credit Committee for Retail Banking. The Group Advisory Credit Committee approves credits which affect both business areas according to assigned authorizations and advises the CEO and the Board of Directors in connection with large individual credit proposals and other credits of an extraordinary nature. The committee plays a key role in formulating the DNB Group’s credit policy, credit strategies and credit regulations, as well as in assessing portfolio risk. The Advisory Credit Committees for Large Corporates and International and for Retail Banking approve credits according to assigned authorizations for their respective business areas.
● The Investment Committee advises on the DNB Group’s purchases and sales of equity instruments in the Bank’s strategic and financial equity portfolios. Decisions on purchases and sales are delegated based on
102 authorized amounts and trading limits. Decisions on transactions in excess of NOK 250 million must be presented to the Bank’s Board of Directors.
● The Operational Risk and Compliance Committee helps ensure effective and consistent monitoring and reporting of operational risk throughout the DNB Group. A key task is to make sure that the DNB Group’s procedures relating to internal controls and quality assurance are designed to provide added value relative to group operations.
Implementation and monitoring
Group Audit carries out operational and financial audits of units in the DNB Group. An audit plan is prepared, which is discussed with group management, reviewed by the Audit Committee and approved by the board of directors. Group Audit's risk assessments form the basis for determining which units should be given priority in the auditing process. Special audit reports are prepared, which include the results of the audit, a description of any identified weaknesses or deficiencies, proposed measures, a specification of responsible persons and deadlines for the implementation of proposed measures. The audit reports are sent to the heads of the relevant audited units, while the companies' boards of directors receive a summary report. The Board of Directors of DNB Bank ASA receives a monthly summary of the audit reports for the units in the DNB Bank Group. Reports from Group Audit are also presented to the Control Committee and the statutory auditor.
The statutory auditor must provide a report to the Audit Committee on the main features of the audit carried out in the previous accounting year, including particular mention of any material weaknesses identified in internal control relating to the financial reporting process.
Supervisory authorities
The operations of the DNB Group are supervised by Finanstilsynet (the “Financial Supervisory Authority of Norway”). Among other things, Finanstilsynet reviews annual and interim reports and the DNB Group's Internal Capital Adequacy Assessment Process, ICAAP. The Board of Directors aims to have an open and constructive dialogue with Finanstilsynet.
DNB Group Finance and Risk Management
Organization and responsibilities
Group Finance and Risk Management has overall responsibility for risk measurement and management and internal controls and for assessing and reporting on the DNB Group’s overall risk profile. The Group Risk Management division is organized in Group Finance and Risk Management and is headed by the DNB Group’s chief risk officer. All of the DNB Group’s risk entities are organized in this division.
Implementation and monitoring
Group Risk Management prepares periodic reports to the boards of directors of the holding company and the Bank regarding developments in the various risk categories. The group chief credit officer presents a report to the Bank’s Board of Directors regarding the trend in the DNB Bank Group's credit risk. The DNB Group’s risk is measured in the form of risk-adjusted capital requirements. Calculations of the business areas’ capital requirements are based on the DNB Group’s internal risk model, see “—Capital Management” and “—Risk categories.” Return on risk- adjusted capital is a factor in product pricing, profit calculations and in monitoring performance in the business areas.
DNB Group Compliance
Organization and responsibilities
The DNB Group must comply with all laws and regulations applicable to the DNB Group’s operations, hereinafter referred to as compliance. The Board of Directors has approved a compliance policy which describes the main principles for compliance and how the compliance function is organized in the DNB Group. The compliance
103 function is an independent function which identifies, evaluates, gives advice on, monitors and reports on the DNB Group’s compliance risk. In all business areas and support units, as well as in large subsidiaries and international entities, compliance officers have been appointed with responsibility for ensuring compliance with relevant regulations.
Implementation and monitoring
The group compliance officer is responsible for the DNB Group’s overall control of and reporting on compliance risk and any breach of laws and regulations pertaining to the DNB Group. The group compliance officer is within the Group Risk Management division and reports to the Board of Directors through the CEO at least once a year. Compliance officers in the business areas and support units issue periodic reports on the current status of compliance and on any violations of regulations to the group compliance officer and to the heads of their respective units. The identification, assessment and monitoring of the DNB Group’s financial compliance risk is carried out by Group Financial Reporting on behalf of the CFO.
Audit
Organization and responsibilities
Independent and effective audits help ensure satisfactory risk management and internal controls as well as reliable financial reporting. Group Audit receives its instructions from the holding company board, which also approves the department’s annual plans and budgets.
Implementation and monitoring
As a quality check to ensure compliance with the conditions set by the holding company board, Group Audit carries out independent risk assessments of and checks on group activities. The results of the audit activities are reported to the boards of directors of the relevant companies in the DNB Group, the holding company board, the Audit Committee and group management. Reports from Group Audit are also presented to the Control Committee and the statutory auditor. Group Audit monitors the implementation of any necessary measures.
Capital Management
Assessment of risk profile and capital requirements
Pursuant to the Norwegian Public Limited Liability Companies Act, all companies must at all times have an adequate equity base which takes into account the extent of the company’s activities and the risk they involve. Capital adequacy regulations set a minimum primary capital requirement, which encompasses credit risk, market risk and operational risk. In addition, financial institutions are required to complete an Internal Capital Adequacy Assessment Process ("ICAAP").
Finanstilsynet has established guidelines for what such a process should include. The ICAAP should encompass risks which are not included in the calculation of the minimum capital adequacy requirement. In addition, it should reflect the fact that risk quantification and capital requirements are based on methods and data which entail uncertainty. ICAAPs should be forward-looking and take account of business plans, growth and access to capital markets. The capital base should be adequate to get through a recession characterized by negative results and difficulties in obtaining new capital. The ICAAP is reported to Finanstilsynet as part of the capital adequacy assessment process.
In 2011, the Board of Directors of DNB ASA approved a capitalization policy which was adapted to the anticipated new requirements resulting from the Basel III proposals. The capitalization policy is designed to ensure that the DNB Group’s equity is adequate relative to the scope and risk profile of operations. The capitalization policy must balance the need for a competitive return on equity with the need for stability required by the supervisory authorities, bondholders, market players and other stakeholders, including rating agencies.
The capitalization policy sets out a target of a minimum 8.5 per cent common equity Tier 1 capital upon full implementation of the Internal Ratings-Based ("IRB") approach. As risk-weighted volume is affected by cyclical
104 fluctuations, this means that the common equity Tier 1 capital ratio must be well over 8 per cent in positive economic environments and a minimum of 8.5 per cent during an economic downturn. Thus, the target level for common equity Tier 1 capital ratio is approximately 10 per cent.
In consequence of feedback from Finanstilsynet and more stringent future international regulatory requirements regarding the size and composition of financial institutions’ primary capital, DNB will review its capitalization policy during 2012, and target levels are expected to be raised.
As part of its supervisory process, Finanstilsynet prepares an annual overall risk assessment for the DNB Group, including feedback on the capitalization of the DNB Group. Based on the new regulatory requirements for the level of common equity Tier 1 capital, the DNB Group’s actual equity will be higher than risk-adjusted capital. The DNB Group will take this into account in the return targets set for risk-adjusted capital.
Processes have been established in the DNB Group to assess capital requirements relative to the DNB Group’s risk profile and the quality of established risk management and control systems. The DNB Group’s risk and capital situation is assessed and summarized in a separate risk report to the holding company board every four months. The DNB Group’s capitalization target is an important element in the budget and strategy process. Risk is quantified by calculating risk-adjusted capital. Capital required will generally exceed the measured risk.
The process of assessing the risk profiles and capital requirements of DNB ASA and all major subsidiaries is completed each year, and is based on risk-adjusted capital, regulatory requirements and qualitative assessments. Stress tests for credit and market risk are also used. The boards of directors of the subsidiaries make independent assessments of capital levels and future capital requirements based on guidelines in the DNB Group’s capitalization policy. The results are verified by the specialist units in the respective subsidiaries and in DNB ASA. The process and the result thereof are documented in writing in an ICAAP report.
The DNB Group’s CFO is responsible for ensuring that the ICAAP process is completed.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Capital and Capital Adequacy."
Basel II implementation
The Basel II regulations entered into force on January 1, 2007. These capital adequacy regulations are intended to lead to greater consistency between the regulatory capital adequacy requirements for financial institutions and the methods applied by the institutions themselves in calculating capital requirements. For credit risk, capital requirements can be calculated according to the standardized approach or based on internal models under the IRB approach. The standardized approach, which is largely based on Basel I, assigns risk weights to claims on various debtors. Use of the IRB approach is subject to approval by Finanstilsynet.
In 2007, the DNB Group was granted permission to use its own classification systems as a basis for capital adequacy reporting for parts of the credit portfolio. This has subsequently been extended to include use of the DNB Group's own models for severity and credit exposure, and an increasing share of the portfolio is included.
The DNB Group uses the IRB approach to calculate capital adequacy for a majority of the DNB Group’s credit risk, measured in terms of exposure at default. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Basel II implementation." In the retail market, supervisory approval was sought in 2010 in order to apply the IRB approach to capital adequacy reporting for mortgage loans in Nordlandsbanken. A large part of the portfolio for small- and medium-sized businesses is reported according to the advanced IRB approach. The DNB Group has applied for approval to use the advanced IRB approach for large corporate customers in DNB Bank, Nordlandsbanken and DNB Næringskreditt. The DNB Group has also applied for permission to use the advanced IRB approach for loans to banks. Moreover, such permission will be sought for additional small portfolios.
Virtually all of the DNB Bank Group’s mortgages secured by real property and a large part of the corporate portfolio are reported according to the IRB approach. This means that the Bank’s models for expected default
105 frequency, loss given default and exposure are used for both internal management purposes and capital adequacy calculations.
The Basic Indicator Approach, the Standardized Approach and the Advanced Measurement Approach can all be used to measure operational risk under Basel II. The Bank reports according to the Standardized Approach, while some subsidiaries use the Basic Indicator Approach. A shift to the most advanced reporting standard, the Advanced Measurement Approach ("AMA"), will be considered at a later date. The use of AMA is subject to approval by Finanstilsynet.
Market risk can be reported according to the Standardized Approach or based on internal models by using the Internal Model Method. The DNB Group reports according to the Standardized Approach.
Risk measurement is a field in constant development, and measurement methods and tools are subject to continual improvement. As part of the IRB introduction process, new models have been implemented for calculating expected default frequency, loss given default and exposure at default. See "—Classification models and the IRB system."
Capital adequacy
Risk-weighted volume included in the calculation of the DNB Bank Group's formal capital adequacy requirement increased by NOK 100 billion in 2011, to NOK 1,018.6 billion as of December 31, 2011. Due to transitional rules, the minimum capital adequacy requirements for 2010 and 2011 could not be reduced below 80 per cent relative to the Basel I requirements. Without the transitional rules, the Bank's Tier 1 ratio would be higher. In December 2009, the transitional rules were extended to apply until year-end 2011.
The DNB Bank Group's Tier I capital adequacy ratio was 9.9 per cent as of December 31, 2011, while the capital adequacy ratio was 11.5 per cent.
Risk-adjusted capital requirements
The DNB Bank Group quantifies risk by measuring risk-adjusted capital requirements. The quantification of risk- adjusted capital is based on statistical probability calculations for the various risk categories on the basis of historical data. As it is impossible to guard against all potential losses, DNB has stipulated that risk-adjusted capital should cover 99.97 per cent of potential losses within a one-year horizon. This level is in accordance with an "AA" level rating target for ordinary long-term debt.
Risk-adjusted capital and average losses over a normal business cycle are elements in calculations of risk-adjusted return, which is a key financial management parameter in the internal management of the DNB Group. The calculations are included in the financial planning for the business areas and are reported each quarter. Risk-adjusted return is a measurement parameter in the pricing model and is reported monthly in automated management systems. Risk-adjusted capital is also used as decision support for risk management.
The similarities between the framework for risk-adjusted capital and the capital adequacy regulations increase as a greater part of the DNB Group's portfolios are reported according to the IRB approach. The underlying risk drivers for credit risk, and in part operational risk, are largely the same. Nevertheless, the confidence levels differ, and risk- adjusted capital provides a more conservative calculation.
The DNB Group quantifies risk-adjusted capital for the following risk categories: credit risk, market risk, market risk in life insurance, insurance risk, operational risk and business risk. A significant diversification or portfolio effect arises when the various risks are considered together, as it is unlikely that all losses will occur at the same time. An economic downturn will normally have a negative effect on most areas, but there will be a diversification effect, as not all areas will be affected equally negatively. The diversification effect between risk categories and business areas implies that the DNB Group's risk-adjusted capital will be much lower than if the business areas had been independent companies.
106 Estimated risk level
As of December 31, 2011, the net risk-adjusted capital requirement for the DNB Bank Group was estimated at NOK 56.1 billion, an increase of NOK 4.1 billion from December 31, 2010. Risk-adjusted capital for credit increased by NOK 4.6 billion from a year earlier, to NOK 50.1 billion, due to rising volumes.
Risk-adjusted capital for market risk was estimated at NOK 4.9 billion as of December 31, 2011, a decline of NOK 0.1 billion from December 31, 2010, as a consequence of lower equity exposure toward the end of 2011. There were no significant changes in market risk limits during 2011. Mark-to-market adjustments of swap contracts entered into in connection with the DNB Bank Group's financing of loans, basis swaps, are not included in the measurement of risk-adjusted capital for market risk. These contracts may have significant effects on the DNB Bank Group's financial statements from one quarter to the next. However, as the contracts are generally held to maturity, these effects will generally be balanced out over time.
Stress testing
Stress testing is an important management tool that the DNB Group uses to assess the risk of losses on credit exposures in connection with severe changes in macroeconomic conditions. Stress tests of the DNB Group in its entirety may also illustrate corresponding changes in capital ratios. The total risk model measures risk-adjusted capital within the DNB Group by calculating overall risk for all risk categories.
The credit portfolios of the DNB Group are stress tested annually in order to identify factors that may affect developments in credit risk and capital adequacy. The DNB Group uses stress tests in the ICAAP and the capital planning process in order to determine how severe changes in the macroeconomic environment will affect the need for capital. The scope of the changes will depend on both the macroeconomic scenario and the quality of the portfolio. Stress testing of specific risk elements in individual sub-portfolios is not mandatory, but may be performed in conjunction with industry analyses.
In 2011, the DNB Group took part in stress tests initiated by the European Banking Authority ("EBA") and the Norwegian supervisory authorities. The DNB Group was deemed to have an adequate level of capital in these scenarios, although the Bank had to receive a capital injection from the holding company to reach the new capital requirements set by the EBA. See "Supervision and Regulation—Capital Requirements."
The EBA has issued recommendations (GL 32) which the DNB Group uses as guidance for how the stress tests should be implemented in the organization. The DNB Group will start adapting to the EBA's requirements regarding reverse stress testing during 2012.
Risk categories
Risk measurement and monitoring constitute an integral part of the DNB Group’s management processes. For risk management purposes, the DNB Group distinguishes between the following risk categories: credit risk, market risk, liquidity risk, market risk in life insurance, insurance risk, operational risk and business risk. Since the DNB Bank Group does not carry out any insurance activities, risks relating to insurance are not discussed in this Prospectus.
Credit risk
Credit risk is the risk of losses due to failure on the part of the DNB Group’s counterparties or customers to meet their payment obligations towards the DNB Group. Credit risk refers to all claims against counterparties or customers, including credit risk in trading operations, country risk and settlement risk.
The credit portfolio includes loans, liabilities in the form of other extended credits, guarantees, leasing, factoring, interest-bearing securities and approved undrawn credits and counterparty risk arising through derivatives and foreign exchange contracts. Settlement risk arises in connection with payment transfers, as not all transactions take place in real time.
107 Credit policy
According to the DNB Group’s credit policy, approved by the boards of directors of DNB ASA and the Bank, the principal objective for credit activity is that the loan portfolio should have a quality and a composition which secure the DNB Group’s profitability in the short and long term. The quality of the credit portfolio should be consistent with the DNB Group’s low risk profile target.
Credit risk management
The DNB Group’s credit policy regulates credit activity in the Bank. A customer’s debt servicing capacity is the key element when considering whether to approve a credit. If a customer has not proven a satisfactory debt servicing capacity, credit should normally not be extended even if the collateral is adequate. The value of collateral should be assessed based on estimated realization value. The portfolio should be sufficiently flexible and liquid to permit sales, syndication and securitization of credits and the use of credit derivatives.
Credit operations must comply with business, credit and industry strategies approved by the Board of Directors. According to the DNB Group’s corporate social responsibility guidelines, the DNB Group has undertaken not to offer products and services or perform acts representing a material risk of involvement in unethical conduct, infringement of human or labor rights, corruption or harm to the environment.
The DNB Group aims to reduce large risk concentrations, whereby significant changes in one or a few risk drivers may markedly affect the DNB Group’s profitability. Risk concentrations include large exposures to a customer or customer group as well as clusters of commitments in high-risk classes, industries and geographical areas. Credit exposure within shipping and commercial property is monitored closely.
Credit approval authorizations are personal and graded on the basis of customers’ risk class. For large credits, there is a two-layered decision-making procedure where credit approval authority rests with the business units while final credit approval requires endorsement by a credit officer who is organizationally independent of the business units.
Commitments showing a negative development are identified and monitored separately.
All corporate customers granted credit must be classified according to risk in connection with every significant credit approval and, unless otherwise decided, at least once a year. In the personal banking market, where there is a large number of customers, the majority of credit decisions should be made on the basis of automated scoring and decision support systems. Risk classification should reflect long-term risk associated with each customer and the customer’s credit commitment.
Approval of a mortgage loan is based on the borrower's credit score, the borrower's calculated ability to repay the loan (including,where applicable, an adequate margin to accommodate the effects of a possible increase in interest rates) and the collateral value ratio. Credit is not approved solely on the basis of the proposed collateral. All borrowers are subsequently classified monthly by behavior scoring. The standard payment method under DNB mortgage loans is monthly in arrears. The great majority of customers pay their mortgages by fixed debit from their bank account.
The unit responsible for the classification system is organizationally independent of the operating units. The classification models have been developed to cover specific loan portfolios. If a model is considered to place a commitment in a highly misleading risk class, the generated class may be overridden by a unit which is independent of the operating units, based on a recommendation from the business areas. All overrides must be well-founded and be made only in exceptional cases based on a thorough assessment. The effect of overrides is tested by an independent unit once a year.
The risk classification systems are used for decision support, risk monitoring and reporting. The risk parameters used in the classification systems are an integrated part of the credit process and ongoing monitoring, including the follow-up of credit strategies.
108 Detailed rules are in place for the use and monitoring of collateral, including guidelines for the valuation of various pledged assets and guarantees. Such valuations are part of credit decisions and are reviewed in connection with the annual renewal of the commitments. A procedure has been established for the periodic control of collateral.
Classification models and the IRB system
The DNB Group has extensive experience with classification systems as support for credit decisions and monitoring. Data and analytical tools are an integrated part of risk management.
The DNB Group’s credit risk models provide a basis for statistically based calculations of expected losses from a long-term perspective and risk-adjusted capital from a portfolio perspective. The calculations are based on several risk parameters, with the most important being:
● Probability of default, which is used to measure credit quality. Customers are classified based on the probability of default.
● Exposure at default, which is an estimated figure which includes amounts drawn under credit limits or loans as well as a percentage share of committed, undrawn credit lines.
● Loss given default, which indicates how much the DNB Group expects to lose if the customer fails to meet his obligations, taking into account the collateral provided by the customer and other relevant factors.
Based on these parameters, the DNB Group puts customers into risk classes, which are defined on the basis of the scales used by international rating agencies. There are ten risk classes for performing loans. In addition, impaired and non-performing commitments are placed in classes 11 and 12 respectively for reporting purposes.
The DNB Group’s models for risk classification of customers are subject to continual improvement and testing. The models are adapted to different industries and segments and are regularly upgraded to ensure that the variables 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 external rating has been given, such rating may be taken into consideration when classifying individual commitments. The classification of institutional and country risk is based on classifications by external rating agencies.
In 2007, the DNB Group was granted permission to use its own models for risk classification as a basis for capital adequacy reporting for parts of the credit portfolio. This has subsequently been extended to include use of the DNB Group’s own models for severity and credit exposure, and to include an increasing share of the credit portfolio. Use of the DNB Group’s own calculations of risk parameters in capital adequacy reporting is part of the IRB system, 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. The IRB system thus affects a major part of the DNB Group’s operations across business areas and support and staff units. Extensive efforts have been made over a number of years to establish the IRB system. In addition, the Bank has long and extensive experience using risk models and systems and maintaining sound credit control. The introduction of the IRB system has contributed to better credit risk management through improved monitoring systems.
Validation is a key element in assuring the quality of the IRB system and can be divided into quantitative and qualitative validation. Quantitative validation tests the risk models, whereas qualitative validation tests the structure of the IRB system and whether it is used as intended. At least once a year, the Board of Directors is required to present a validation report detailing whether the DNB Group’s credit risk is adequately classified and quantified. Responsibility for all validation has been assigned to the CFO, while Group Credit Risk Management has responsibility for carrying out the validation process.
The table below indicates the development of credit quality for loans, guarantees and commitment limits to customers for the DNB Bank Group. As of December 31, 2011 2010 2009 (NOK billions)
109 Expected loss below 0.25%...... 1,236 1,093 968 Expected loss between 0.25% and 0.75% ...... 72 58 53 Expected loss above 0.75%(1) ...... 274 267 300 Non-performing and doubtful commitments ...... 22 17 15 (2) Total loans, guarantees and commitments ...... 1,604 1,435 1,336
Notes:
(1) This risk category also includes commitments with normalized (expected) loss below 0.75 per cent in cases where the loss ratio is low but combined with a high probability of future losses. (2) Exposure at default (EAD).
Credit risk measurement
Credit risk is monitored by following developments in risk parameters, migration and distribution over the various risk classes. Developments in risk concentrations are monitored closely with respect to exposure, risk classes and allocated risk-adjusted capital. Large customers and customer groups are monitored based on risk class and allocated risk-adjusted capital.
In the corporate segment, all commitments which are considered to require special follow-up during the credit approval process are identified. This ensures management attention and follow-up.
The models’ calculations of estimated probability of default should show the average probability of default during a business cycle. This implies that the models overestimate the credit risk during a period of strong economic expansion and underestimate the credit risk during a recession. Consequently, stress testing is also used to assess the effects of a recession on capital requirements. The stress tests should identify possible future changes in economic conditions which could have a negative impact on the DNB Group’s credit exposure and ability to withstand such changes. These assessments are taken into account in the DNB Group’s risk and capital assessment process to determine the correct level of capital.
Risk-adjusted capital for credit risk is aggregated based on individual commitments, where each commitment is classified by expected default frequency and the amount of loss anticipated in the event of default. The portfolio classification provides a basis for statistically based calculations of normalized losses and risk-adjusted capital. Calculations of risk-adjusted capital include the effect of industry concentrations, diversification and large exposures.
Market risk
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 positions and exposure in the foreign exchange, interest rate, commodity and equity markets. The risk level reflects market price volatility and the positions taken.
Market risk is divided into risk related to trading and risk related to banking activities. Trading activities include trading and taking positions in financial instruments, as well as seeking a profit by capitalizing on differences and fluctuations in interest rates and exchange rates, and is typically short-term in perspective. Banking activities include the DNB Group’s ordinary funding and lending operations, where mismatches between assets and liabilities represent sources of market risk. The DNB Group also has investments in equity instruments which are included in banking activities. The portfolio of fixed income securities in DNB Markets, the majority of which are classified as held-to-maturity investments, is defined as credit risk in the internal measurement of risk-adjusted capital.
Market risk in the trading portfolio arises through trading activities in the interest rate, foreign exchange, commodity and equity markets. The risk relates partly to customer business, though there is scope for moderate risk-taking within proprietary trading in foreign exchange and financial instruments. Positions are generated by trading in balance sheet products such as bonds and commercial paper, as well as in financial derivatives such as interest rate swaps, options, forward contracts and forward rate agreements. Such instruments are used to hedge positions in the trading portfolio. Overall, market risk represents a small share of the DNB Group’s total risk. Hedging of positions
110 by use of derivatives may also entail basis risk due to a mismatch between the position which is hedged and the derivative used for hedging.
The value of items on and off the balance sheet is affected by interest rate movements. The interest rate sensitivity table below shows potential losses for the DNB Bank Group 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 unfavorable for the DNB Bank Group relative to the Bank's positions. Also, all interest rate movements within the same interval are unfavorable for the DNB Bank Group. The figures will thus reflect maximum losses for the DNB Bank Group.
From 1 From 3 Up to 1 month to 3 months to 1 From 1 year Over 5 month months year to 5 years years Total (NOK millions)
December 31, 2011(1)
NOK...... 358 25 564 236 557 141 U.S.$...... 28 16 63 12 2 120 EUR ...... 22 32 52 13 22 10 GBP...... 12 50 1 8 1 30 SEK...... 2 4 5 3 1 4 Other currencies ...... 4 21 43 19 9 52
December 31, 2010(1)
NOK...... 53 338 560 275 273 274 U.S.$...... 28 86 9 6 5 116 EUR ...... 5 26 72 8 43 16 GBP...... 1 1 1 2 1 1 Other currencies ...... 8 14 14 19 14 53 Note: (1) The figures do not include the operations in DNB Baltics and Poland, and are for the rest identical to DNB Bank ASA.
Market risk management
Responsibility for all trading activities in the DNB Bank Group rests with DNB Markets. Limits and guidelines for managing market risk on trading activities are reviewed at least once a year and are determined by the Board of Directors of the Bank. A unit independent of brokerage operations checks positions in relation to limits and results on a daily basis. Limit utilization is reported through a risk report. Hedging activities which entail significant basis risk are subject to risk limits in line with other types of risk.
The Treasury function in the DNB Bank Group handles interest rate risk on the banking book. Principles, methods, limits and follow-ups are based on the same guidelines as trading activities, which includes daily measurement of interest rate risk. Interest rate and currency risk in the DNB Bank Group is centralized, as all units in the DNB Bank Group must hedge their positions through the Treasury function. DNB Monchebank has its own risk limits. This ensures the quality and transparency of position-taking both locally and in the DNB Group as a whole.
Limits for equity instruments are determined by the Board of Directors of the Bank. The limits are reviewed at least once a year.
Primary responsibility for monitoring, further developing and reporting on all types of investments in and purchases of equity instruments, including mutual fund holdings invested in through DNB Asset Management, rests with Group Investments, which is organized under Group Finance and Risk Management. The unit is part of the Bank’s
111 contingency team handling non-performing commitments as it is also responsible for credit commitments where the Bank takes ownership positions. Follow-ups take place on a monthly basis.
Market risk measurement
When measuring market risk, a distinction is made between measurements of risk under normal market conditions and measurements which focus on extreme market conditions.
Several tools have been established to measure the DNB Group’s total market risk exposure under normal conditions. Interest rate risk is measured as the change in value resulting from an interest rate adjustment of one basis point. Limits for foreign exchange, equity and commodity risk represent nominal amounts for individual positions. In addition, Value-at-Risk calculations are used in operational management and control in DNB Markets.
Risk measurement tools designed to simulate extreme market conditions include stress tests and calculations of risk- adjusted capital. Stress tests are also used to monitor non-linear instruments and interest rate risk.
Risk-adjusted capital for market risk is calculated by simulating potential losses on the basis of expected maximum exposure, liquidation periods for positions and correlations between the portfolios. Correlations are based on a stressed scenario. The liquidation period ranges from 250 trading days for equity instruments in the banking book to two trading days for positions in the most commonly traded currencies. Calculations of risk-adjusted capital distinguish between trading and banking activities.
The risk-adjusted capital for market risk for the DNB Bank Group was NOK 4.9 billion, NOK 5.0 billion and NOK 3.7 billion as of December 31, 2011, 2010 and 2009, respectively.
Liquidity risk
Liquidity risk is the risk that the DNB Group will be unable to meet its obligations as they fall due or that the DNB Group will be unable to meet its obligations as they fall due without a substantial rise in related costs. Liquidity risk also includes the risk that the DNB Group will be unable to finance increases in assets as its funding requirements rise.
Liquidity risk is designed to be low and to promote the Bank’s financial strength and ability to withstand various events and developments. In order to do this, the Bank seeks to have a balance sheet structure that reflects the liquidity profile of an international bank with an "AA/Aa" level long-term credit rating from recognized rating agencies.
Liquidity risk management
The Board of Directors regularly reviews the Bank’s liquidity risk and determines limits and guidelines. The Board reviews the limits each year, or more frequently if required.
The Bank’s liquidity management is organized based on a clear authorization and reporting structure. In accordance with the regulations on prudent liquidity management, the Bank makes a distinction between premise-setting and performing units. The premise-setting units are generally organized in the group staff unit and report to the CFO, while the performing units are organized in DNB Markets and report to the head of DNB Markets.
Group Finance and Risk Management have divided the responsibility for determining principles and limits for liquidity management and for arranging long-term funding between the Asset and Liability Management unit and the IR/Long-term Funding unit. The Treasury function is responsible for modifying the DNB Group’s total short- term liquidity risk and for ensuring that liquidity requirements are within the short-term limits established by the Board of Directors. The unit also has operative responsibility for long-term bond debt in Norwegian kroner, while the operative responsibility for liquidity management in other currencies lies with DNB Markets. ALCO is the advisory body for the DNB Group’s CFO with respect to principles and methods for liquidity risk measurement.
The DNB Bank Group manages overall liquidity by having the Bank provide funding to domestic subsidiaries such as Nordlandsbanken, as well as international branches and subsidiaries. Liquidity risk is managed through both
112 short-term limits which restrict the net refinancing requirement falling due within one week and within one month, along with a long-term management target which specifies the share of lending to be financed by customer deposits or funding with a residual maturity of at minimum 12 months. Liquidity risk limits reduce the Bank’s dependence on short-term funding from the money and capital markets in Norway and abroad. The limits have been established as funding from such sources is generally more unstable than ordinary deposits.
Effective liquidity management in the DNB Group requires the maintenance of a broad deposit and funding base, representing both retail and corporate customers, along with diversified funding of other operations. As an element in this strategy, a number of funding programs have been established in different markets. The DNB Bank Group has a commercial paper program of U.S.$ 18 billion in the US and a commercial paper program of EUR 10 billion in Europe. The short-term funding sources are further diversified through a U.S.$ 12 billion Yankee CD program, where commercial paper is issued by the DNB Bank Group’s New York branch. The Bank also has a European Medium Term Note Programme of EUR 45 billion and a U.S.$ 8 billion long-term funding program in the US market.
An important instrument for long-term funding is the issue of covered bonds. The bonds are issued by the Bank’s subsidiaries DNB Boligkreditt AS and DNB Næringskreditt AS, and are secured by the companies’ home mortgage and commercial mortgage portfolios, respectively. DNB Boligkreditt currently has a EUR 55 billion Covered Bond program, a U.S.$ 12 billion Covered Bond program and an AUD 4 billion Covered Bond program. During the financial market turmoil, covered bonds proved to be a more robust and considerably lower priced funding instrument than ordinary bonds. Over the next few years, the DNB Bank Group will thus seek to cover a large share of its long-term funding requirement through the issuance of covered bonds.
As an element in ongoing liquidity management, the Bank holds securities that can be used in various ways to regulate the DNB Bank Group’s liquidity requirements and serve as collateral for operations in the main currencies in which the Bank is active. The securities are used, among other things, as collateral for short-term loans in a number of central banks and serve as liquidity buffers to fulfil regulatory requirements. The Bank has chosen to meet its need for liquid securities by holding international bonds of high credit quality. As of December 31, 2011, the international bond portfolio totalled NOK 114,676 million, of which 91.6 per cent were securities with an "AAA" rating, while 3.9 per cent had an "AA" rating.
The DNB Bank Group gives priority to maintaining sound business relations with a large number of international investors and banks and to promoting the DNB Bank Group in international capital markets.
For the DNB Bank Group's liquidity and funding maturity structure, see "Selected Statistical Data—Maturity profiles of assets, liabilities and financial derivatives."
Liquidity risk measurement
Liquidity risk is managed and measured using various techniques, as no single technique can fully quantify this type of risk. The techniques include monitoring refinancing needs, balance sheet key ratios, average residual maturity and future funding requirements. For average residual maturity measures, see "Selected Statistical Data—Maturity profiles of assets, liabilities and financial derivatives." The DNB Group also uses stress testing, simulating the liquidity effect of a downgrading of the Bank’s international credit rating following one or more negative events. The results of such stress testing are included in the DNB Bank Group’s contingency plan for liquidity management during a financial crisis.
The refinancing requirement limits are intended to enable the Bank to be self-sufficient with regard to liquidity for a minimum period of one month in an acute situation. The limit for structural liquidity risk implies that a minimum 90 per cent of lending to the general public should be financed through customer deposits, long-term funding and primary capital.
With effect from 2012, liquidity risk limits have been changed to ensure that they are consistent with the structure in the Basel III regulations. Short-term and long-term liquidity risk limits are measured by the new international standards, Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). Observation periods will ensure a gradual adaptation to the minimum requirements within the deadlines, as prescribed by the Basel Committee.
113 Parallel to this, liquidity risk limits have been extended, whereby there are short-term limits for one week and three months, in addition to the LCR, which has a time horizon of one month. The short-term and long-term limits apply for each main currency and in total.
The Bank regularly reviews the premises underlying its liquidity management. This includes considering whether assets which are classified as liquid may be realized or used as collateral in accordance with the underlying premises, and to what extent assumptions regarding stable funding are realistic in a bank-specific crisis or in a deteriorating market.
Operational risk
Operational risk is the risk of losses due to deficiencies or errors in processes and systems, errors made by employees or external events. Operational risk is a consequence of the DNB Bank Group’s operations.
Operational risk management
The board of directors has laid down a policy for the management of operational risk in the DNB Group. Operational risk should be low, and risk management should ensure that the risk of unwanted losses is reduced.
All managers are responsible for knowing and managing operational risk within their own area of responsibility. This is ensured through risk assessments of everyday operations, of all major changes in operations as well as of particularly critical functions. When a need for improvement is identified, special follow-ups are initiated. In order to limit the consequences of serious events, operational disruptions, etc., comprehensive contingency and business continuity plans have been drawn up in order to handle a crisis situation in a rational and effective manner, thus contributing to limiting damage and restoring a normal situation.
In all business areas, special groups have been established to support management in managing operational risk. Responsibilities include assessing and reporting identified risks and helping to prevent operational losses. To ensure independence relative to business operations, these persons are organized in the business areas’ respective staff units. Their work also includes ensuring that operations are in compliance with relevant laws and regulations. All reporting is a two-way process, both through the line organization and through the DNB Group’s central risk unit. Operational risk management and compliance at group level is organized in a separate unit within Group Risk Management, which is organized under the staff area Group Finance and Risk Management.
The DNB Group’s insurance coverage is an element in operational risk management. Insurance contracts are entered into to limit the financial consequences of undesirable events which occur in spite of established security routines and other risk-mitigating measures. The contracts will typically provide coverage against criminal attacks, damage to the DNB Group’s assets, various types of business liabilities, operational disruptions etc. The insurance program also covers legal liabilities the DNB Group may face related to its operations, i.e., professional liability. The insurance program is cost-effective and primarily aims to cover serious loss events in line with the DNB Group’s insurance policy.
Operational risk measurement
Operational loss events in the DNB Group which result in losses of more than NOK 50,000 and near-events with a loss potential of more than NOK 100,000 are registered, reported and monitored on an ongoing basis in the DNB Group’s event database. Information about operational risk and loss events in the DNB Group is provided in the DNB Group’s risk report. Undesirable events which cause, or could have caused, financial losses for the DNB Group, represent valuable information and learning about necessary improvement needs. In addition to learning from internal events, the DNB Group’s membership in an external database, Operational Risk Exchange ("ORX"), as from 2011 will ensure access to external events which will strengthen the work on operational risk management.
The Board of Directors is kept updated on the status of operational risk through the DNB Group’s periodic risk report, which provides a basis for analyzing the risk situation and for considering the capitalization of the DNB Group. In addition, the Board of Directors is kept updated on the DNB Group’s operational risk in the annual status report on ongoing management and control of operational and business risk. The status report includes a
114 presentation of key group-wide risks, relevant improvement measures and a detailed qualitative assessment based on the DNB Group’s ambitions within key areas for risk management and quality assurance.
Risk-adjusted capital for operational risk is calculated based on external capital requirements, where income and the type of business operations are the drivers for capital volumes, and is adjusted upward to reflect the DNB Group’s risk tolerance. The DNB Group reports operational risk according to the Standardized Approach.
The risk-adjusted capital for operational risk for the DNB Bank Group was NOK 6.1 billion, NOK 5.8 billion and NOK 5.4 billion as of December 31, 2011, 2010 and 2009, respectively.
Business risk
Business risk is the risk of losses due to external factors such as the market situation or government regulations. Such risk also includes loss of income due to a weakened reputation.
Business risk is manifested in an unexpected decline in profits. Such a decline can be caused by competitive conditions resulting in lower volumes and pressure on prices, competitors introducing new products, government regulations or negative media coverage. Losses arise if the DNB Group fails to adapt its cost base to such changes.
Negative media coverage may be a consequence of other risk factors, but is handled as business risk in the DNB Group. A damaged reputation can have an adverse impact on all business areas, independent of where in the DNB Group or in the rest of the financial industry the original incident occurred.
Business risk management and measurement
As business risk may arise due to various risk factors, a broad range of tools is applied to identify and report such risk.
Sound strategic planning is instrumental in reducing business risk. Reputational risk is managed through policies and business activities, including compliance.
The DNB Group’s active commitment to corporate social responsibility and the code of ethics for employees also have a positive impact on business risk.
Reputational risk is managed by monitoring media coverage, while the competitive situation is managed by analyzing market trends and developments in market shares.
The DNB Group has developed a model for calculating business risk per business area. The model is based on past fluctuations in income and costs and is structured so that if all other factors are kept constant, high income volatility raises the risk level and thus risk-adjusted capital. Vice versa, a highly flexible cost structure will reduce risk- adjusted capital.
115 MANAGEMENT
Supervisory Board
Responsibilities and organization
The Bank has a supervisory board (the “Supervisory Board”) which is in accordance with the Norwegian Financial Institutions Act and the Bank's articles of association. The Supervisory Board consists of thirty members (and ten to twenty deputies); twenty members are elected by the shareholders and ten members are elected by the employees. The members of the Supervisory Board are elected for two-year terms.
The Supervisory Board annually elects its chairman and vice-chairman from among its members. The current chairman is Amund Skarholt and the vice-chairman is Eldbjørg Løwer. The main responsibility of the Supervisory Board is to supervise the Board of Directors' (the “Board of Directors”) and the chief executive officer’s (the “CEO”) management of the Bank. The Supervisory Board must also submit a statement to the general meeting of shareholders as to whether the Board of Directors’ proposal for the profit and loss account and balance sheet should be approved, as well as to the Board of Directors’ proposal for allocation of the profit or loss cover. Pursuant to the Bank's articles of association, the Supervisory Board elects the members of the Board of Directors and their deputies (including the Chairman and the Vice-chairman), the election committee and the external auditor and determines their remuneration. The Supervisory Board also determines the remuneration of the CEO. Furthermore, the Supervisory Board has established guidelines for the Control Committee (as defined below) and may adopt recommendations to the Board of Directors on all matters. The Supervisory Board approves, based on recommendations from the Board of Directors, matters concerning investments of considerable size in relation to the resources of the Bank, and rationalization or restructuring of operations which would result in major changes to or the reorganization of employees.
The Supervisory Board holds meetings as necessary and when requested by the Board of Directors, its Control Committee or at least one-sixth of the members of the Supervisory Board. The remuneration of the members of the Supervisory Board is determined by the annual general meeting. The remuneration paid to the members of the Supervisory Board in 2011 was NOK 1,199,000.
Members of the Supervisory Board
The table below sets out the name, current position, place of residence, year of first appointment to the Supervisory Board and year of end of current term of office for each of the members of the Supervisory Board.
Members elected by shareholders
Name Current position Member since End of current term
Amund Skarholt Chairman 2009 2013 Eldbjørg Løwer Vice-chairman 2006 2012 Inge Andersen Member 2011 2013 Nils Halvard Bastiansen Member 1997 2012 Toril Eidesvik Member 2006 2012 Camilla Marianne Grieg Member 2010 2012 Leif O. Høegh Member 2006 2013 Nalan Koc Member 2011 2013 Tomas Leire Member 2006 2013 Per Otterdahl Møller Member 2010 2012 Dag J. Opedal Member 2005 2012
116 Name Current position Member since End of current term
Ole Robert Reitan Member 2010 2012 Gudrun B. Rollefsen Member 2006 2012 Arthur Sletteberg Member 2005 2012 Merethe Smith Member 2006 2013 Birger Solberg Member 1999 2013 Ståle Svenning Member 2011 2013 Turid Sørensen Member 2011 2013 Gine Wang Member 2007 2013 Hanne Rigmor Egenæss Wiig Member 2005 2012
Deputies elected by shareholders
End of Name Current position Member since current term
Erik Buchmann Deputy 2002 2013 Turid Dankertsen Deputy 1992 2013 Rolf Domstein Deputy 2001 2013 Harriet Hagan Deputy 2005 2013 Bente Hagem Deputy 2006 2013 Rolf Hodne Deputy 2001 2013 Liv Johannson Deputy 2002 2013 Herman Mehren Deputy 2002 2013 Gry Nilsen Deputy 2006 2013 Asbjørn Olsen Deputy 2002 2013 Oddbjørn Paulsen Deputy 2003 2013 Anne Bjørg Thoen Deputy 2002 2013 Elsbeth Sande Tronstad Deputy 2010 2013 Lars Wenaas Deputy 2001 2013
Members elected by employees
End of Name Current position Member since current term
Terje Bakken Member 2011 2013 Rune André Bernbo Member 2011 2013 Bente H. Espenes Member 2004 2013 Lillian Hattrem Member 2007 2013 Bjørn Hennum Member 2005 2013 Irene Buskum Olsen Member 2011 2013 Einar Pedersen Member 2007 2013
117 End of Name Current position Member since current term
Eli Solhaug Member 2005 2013 Marianne Steinsbu Member 2004 2013 Arvid Åsen Member 2011 2013
Deputies elected by employees
End of Name Current position Member since current term
Tore Müller Andresen Deputy 2007 2013 Randi Bergsveen Deputy 2009 2013 Marion Hagland Deputy 2011 2013 Anne Grethe Johnsen Deputy 2011 2013 Even Jørgensen Deputy 2011 2013 Svein-Ove Kvalheim Deputy 2011 2013 Vigdis Mathisen Deputy 2009 2013 Ingvild Rekdal Deputy 2011 2013 Sissel Tove Rist Deputy 2011 2013 Stian Samuelsen Deputy 2011 2013 Mia Strand Deputy 2011 2013 Viktor Sæther Deputy 2009 2013 Astrid Waaler Deputy 2005 2013
The Issuer does not consider the principal activities outside the Issuer of any of the persons listed in the tables above to be significant with respect to the Issuer.
The business address of the Supervisory Board is c/o DNB ASA, Stranden 21, 0021 Oslo, Norway.
Board of Directors
Responsibilities and organization
The Board of Directors establishes, plans and budgets for the Bank's business, remains informed of the Bank's financial position and ensures that the Bank's business, its accounts and the management of its assets and liabilities are subject to adequate control. In order to perform its responsibilities, the Board of Directors must make such enquiries as it considers necessary, and must also supervise the day-to-day management of the Bank and its business in general. In accordance with the Bank's articles of association, the Board of Directors must consist of up to nine members elected by the Supervisory Board for terms of up to two years. Two of those members represent the employees of the Bank. The CEO is a mandatory member of the Board of Directors according to the Act on Commercial Banks, Section 9. One-fourth of the board members may neither be employed by, nor have other honorary posts in, the Bank or its direct or indirect subsidiaries. The Chairman and Vice-chairman are elected separately by the Supervisory Board for a term of up to two years. The current Chairman is Anne Carine Tanum and the current Vice-chairman is Jarle Bergo. The remuneration paid to the Board of Directors in 2011 was NOK 3,451,000.
Set forth below are details regarding the members of the Bank’s Board of Directors:
118 Name Current position Member since End of current term
Anne Carine Tanum Chairman 1999 2012 Jarle Bergo Vice-chairman 2011 2013 Kai Nyland Member 2008 2013 Torill Rambjør Member 2002 2013 Ingjerd Skjeldrum Member 1990 2012 Berit Svendsen Member 2010 2012 Sverre Finstad Member 1998 2013 Hans-Kristian Sætrum Deputy for employee representative 2011 2013 Jorunn Løvås Deputy for employee representative 2006 2012
The business address of the Board of Directors is c/o DNB ASA, Stranden 21, 0021 Oslo, Norway.
Biographies of the Board of Directors
Set out below are brief biographies of the members of the Board of Directors, including their relevant management expertise and experience, an indication of any significant principal activities performed by them outside the DNB Group and the names of companies and partnerships of which any member of the Board of Directors is or has been a member of the administrative, management or supervisory bodies or partner during the previous five years (not including directorships and executive management positions in subsidiaries of the Company).
Anne Carine Tanum, Chairman, (born 1954) was appointed Chairman of the Board of Directors in 2008. Ms. Tanum is also Chairman of the board of directors of DNB ASA. Ms. Tanum has been a board member of DnB Holding ASA, Den norske Bank ASA and Vital Forsikring. Ms. Tanum is also chairman of the board of directors of the House of Literature Foundation and is a board member of the South-Eastern Norway Regional Health Authority, Cappelen Damm AS, Try AS, the Henie Onstad Art Centre, IRIS and the WWF. Ms. Tanum has previously been chairman of the Norwegian Broadcasting Corporation (NRK), board vice-chairman of the Norwegian National Opera and long-standing managing director and owner of Tanum AS. Ms. Tanum holds a law degree from the University of Oslo, Norway.
Principal activity/position outside the DNB Group: Professional board member Business address: Krusegate 11, 0263 Oslo, Norway Current directorships and management positions: Helse Sør-øst RHF (member of the board of directors), Cappelen Damm Holding AS (member of the board of directors), Stiftelsen Litteraturhuset (Chairman of the board of directors), Iris AS (member of the board of directors), Henie Onstad Kunstsenter (Deputy chairman of the board of directors), Stiftelsen WWF Verdens Naturfond (member of the board of directors) and Try AS (member of the board of directors) Previous directorships and management positions last Tanum AS (owner and CEO), Den Norske five year: Bokhandelforening (Deputy chairman of the board of directors), Helse Øst RHF (member of the board of directors), Den Norske opera og ballett AS (Deputy chairman of the board of directors)
Jarle Bergo, Vice-chairman, (born 1945) has been a member of the Board of Directors and Vice-chairman of DNB Bank since 2011. He held various positions in Norges Bank from the late 1960s and ended his career as deputy governor in 2008. Mr. Bergo was alternate executive director of the International Monetary Fund (IMF) until year-
119 end 2010. He has also previously served as business manager for the Norwegian Banks’ Guarantee Fund, a member of the Board of Directors of Oslo Børs (the “Oslo Stock Exchange”) and a member of various committees and expert groups, including the Council of Ethics for the Government Pension Fund – Global in 2002. Mr. Bergo holds an economics degree from the University of Oslo.
Principal activity/position outside the DNB Group: Professional board member Business address- Rådyrveien 5, 1914 Ytre-Enebakk, Norway Current directorships and management positions: None Previous directorships and management positions last International Monetary Fund (IMF) (Alternate executive five year: director)
Kai Nyland, board member, (born 1945) has served as a member of the Board of Directors since 2008. He was educated at the Norwegian Banking Academy and has completed various courses at BI Norwegian School of Management. He was senior vice president of DnC/DnB from 1989 to 1999 and was regional manager for Hedmark from 1999 to 2007. Since retiring from the bank, Mr. Nyland has been working as a senior adviser. Mr. Nyland completed the Solstrand management program in 1987-1988 and has also completed DnC’s management program and a number of courses within finance and credit.
Principal activity/position outside the DNB Group: Senior advisor Business address: Aluvegen 65 B, 2319 Hamar, Norway Current directorships and management positions: None Previous directorships and management positions last None five year:
Torill Rambjør, board member, (born 1951) has served as a member of the Board of Directors since 2002. Ms. Rambjør has a diploma from Eidgenössische Technische Hochschule, Zurich, Switzerland. She completed a commercial exam from the Oslo Commercial Academy in 1977-1979 and a college course at BI Norwegian School of Management in Moss in 1987, and she has a Master of Management degree from BI Norwegian School of Management and a Master’s Degree in art history from the University of Oslo. Ms. Rambjør worked in DnC, later DnB, from 1987 to 1998, in the corporate market, property, energy and shipping segments both in Norway and internationally. From 1998 to 2001, she was managing partner at Wiersholm, Mellbye og Bech. Since 2001, she has worked as an independent consultant.
Principal activity/position outside the DNB Group: Professional board member Business address: Helgerødveien 170, 3145 Tjøme, Norway Current directorships and management positions: TK Rambjør (Chairman of the board) Previous directorships and management positions last Rød Golf (board member), Preus Museum (Chairman of five year: the board)
Ingjerd Skjeldrum, board member, (born 1957) has served as an employee-elected member of the Board of Directors since 1999 and as an employee of DNB Bank since 1999. Ms. Skjeldrum has been chief group employee representative for the savings bank since February 1, 2000 and group employee representative of DNB since 2003. Ms. Skjedrum is a member of the national board of the Finance Sector Union. Ms. Skjedrum has previously served as a member of the board of directors of Union Bank of Norway and Gjensidige NOR, and she has previously held positions within the retail market in Gjensidige NOR.
Principal activity/position outside the DNB Group: Full time employee of DNB Bank Business address: Tollbugata 12, 0021 Oslo, Norway Current directorships and management positions: None.
120 Previous directorships and management positions last None five year:
Berit Svendsen, board member, (born 1963) has been nominated as a new member of the Board of Directors. Ms. Svendsen is a graduate engineer from the Norwegian University of Science and Technology (NTNU) and has a master of technology management degree from NTNU in cooperation with the Norwegian School of Economics and Business Administration and the Massachusetts Institute of Technology. She is CEO of Conax, a wholly-owned subsidiary of Telenor, and has held a number of executive positions in the Telenor Group. She is a board member of EMGS and has previously been board chairman of Data Respons ASA and a board member of Ekornes ASA.
Principal activity/position outside the DNB Group: Executive Vice President Business address: Kongensgate 8, PO Box 425 Sentrum, 0103 Oslo, Norway Current directorships and management positions: Telenor ASA (Executive Vice President), Techno Venture AS (Chairman of the board), Norkring (board member), Telenor Satelitte Broadcasting (board member), EMGS (board member) Previous directorships and management positions last Conax (CEO) five year:
Sverre Finstad, board member, (born 1955) has been a board employee representative of DNB and DNB Bank ASA since 2011. He was also a DNB board member during a previous period. Mr. Finstad is vice-chairman of the Finance Sector Union, Hedmark region. He was employed in Ringsaker Sparebank in 1977 and has been a full-time employee representative since 1986. Mr. Finsta has also served as a board member in Gjensidige NOR Sparebank.
Principal activity/position outside the DNB Group: Full time employee of DNB Bank Business address: DNB Bank ASA, 0021 Oslo, Norway Current directorships and management positions: None Previous directorships and management positions last None five year:
Jorunn Løvås, deputy – employee elected, (born 1957) is a board employee representative of DNB and DNB Bank ASA. Ms. Løvås is a full-time employee representative for Retail Banking in DNB. She was employed in Bergens Kredittbank in 1974, and has been a full-time employee representative since 2000.
Principal activity/position outside the DNB Group: Full time employee of DNB Bank
Business address: DNB Bank ASA, 0021 Oslo, Norway
Current directorships and management positions: None
Previous directorships and management positions last None five year:
Hans-Kristian Sætrum, deputy – employee elected, (born 1949) is a Deputy Board employee representative of DNB and a board employee representative of DNB Bank ASA. Mr. Sætrum was employed in Oslo Sparebank in 1966. He is also a former full-time chief safety representative in Gjensidige NOR and former board member in Gjensidige NOR. Mr. Sætrum is currently employee representative and health and safety representative for Operations, and chairman of the Finance Sector Union, Oslo and Akershus. He works in the Security and Contingency Planning section.
121 Principal activity/position outside the DNB Group: Full time employee in DNB Bank Business address: DNB Bank ASA, 0021 Oslo, Norway Current directorships and management positions: None Previous directorships and management positions last None five year:
Independence
The Bank complies with applicable rules regarding the independence of the Board of Directors. Anne Carine Tanum, Jarle Bergo, Kai Nyland, Torill Rambjør and Berit Svendsen are independent.
Board committees
The DNB ASA board of directors has established an audit committee and a remuneration committee. The DNB Bank Group's operations are within the purview of both of these committees.
Audit committee
The audit committee assists the board of directors of DNB Bank ASA in fulfilling its supervisory responsibilities by, among other things, monitoring the Bank's financial reporting process, the effectiveness of the internal control and risk management systems established by the board of directors of DNB Bank ASA, the CEO and Bank's management and the effectiveness of the Bank's internal audit function. The audit committee is further accountable for keeping itself informed as to the statutory audit of the annual and consolidated accounts and reviewing and monitoring the impartiality and independence of the external auditors and in particular the provision of additional services. In addition, the audit committee is accountable for the guidance and evaluation of the Bank's internal audit function. Members of the audit committee are currently Tore Olaf Rimmereid, Jarle Bergo and Bente Brevik, as appointed by the board of directors at the statutory meeting following the annual general meeting of shareholders in 2011. The CEO and the Chief Audit Executive are present at meetings with the right to participate in discussions, but not in decisions. The members of the audit committee are independent of the Bank, the executive management of the Bank and the Bank’s major shareholders.
Remuneration committee
The remuneration committee is responsible for preparing and presenting proposals on remuneration issues to the board of directors. When preparing such proposals, the remuneration committee takes into account the long-term interests of shareholders, investors and other stakeholders in the Bank. The duties of the remuneration committee include preparing proposals regarding the Bank’s remuneration policy and underlying instructions and guidelines for remuneration of the executive officers to be decided by the annual general meeting of shareholders. Furthermore, the committee prepares proposals regarding the remuneration of the CEO, other members of the Bank's management as well as the Chief Audit Executive and, based on the proposal by the CEO, of the Group Compliance Officer and the Head of Group Credit Control. The remuneration committee follows up annually, at minimum, on the application of the Bank’s remuneration policy and underlying instructions through an independent review by the Group Internal Audit as well as assesses the Bank’s remuneration policy and remuneration system with the participation of the appropriate Group Control Functions. The remuneration committee also has the duty to annually monitor, evaluate and report to the board of directors on programs of variable remuneration for members of the Bank management as well as on the application of the guidelines for remuneration of executive officers. At the request of the board of directors, the remuneration committee also prepares other issues for the consideration of the board of directors. Members of the remuneration committee are currently Anne Carine Tanum, Bjørn Sund and Tore Olaf Rimmereid. The CEO participates in the meetings, without the right to vote. Further, the CEO does not participate in the consideration of his own employment terms and conditions. The members of the remuneration committee are independent of the Bank and the executive management of the Bank. All members are independent of the Bank’s major shareholders.
122 Control Committee
Responsibilities and organization
The Bank must have a control committee (the “Control Committee”), which is identical to the Control Committee of DNB ASA. The Control Committee must consist of three to six members and two deputies. One member must meet the requirements set for Norwegian judges. Finanstilsynet must approve the appointment of this member. The chairman, vice-chairman, members and deputy members of the Control Committee are appointed by the general meeting of shareholders for two-year terms. The Control Committee’s main responsibility is to supervise the Bank's activities to ensure that they comply with laws, regulations and licenses, as well as with the Bank's articles of association and resolutions adopted by the Bank's decision-making bodies. To the extent the Control Committee deems necessary, it shall examine the Bank's records and documents. The Control Committee may require officers and employees to furnish such information as the committee considers necessary for it to perform its tasks.
Members of the Control Committee
The table below sets out the name, current position, year of first appointment to the Control Committee, year of end of current term of office and remuneration paid in 2011 (NOK) for each of the members.
End of Paid Member current remuneration Name Current position since term in 2011
Frode Hassel Chairman 2001 2013 384,000 Thorstein Øverland Vice-chairman 2003 2013 283,000 Svein Norvald Eriksen Member 2007 2013 251,000 Karl Olav Hovden Member 2009 2013 251,000 Svein Brustad Deputy 2004 2013 251,000 Merete Smith Deputy 2008 2013 276,000
The Issuer does not consider the principal activities outside the Issuer of any of the persons listed in the table above to be significant with respect to the Issuer.
Bank Management
Responsibilities and organization
The Bank's executive management consists of eleven members. The CEO is appointed at a joint meeting of the Supervisory Board and the Board of Directors and is responsible for the Bank's day-to-day management. Responsibility for the management of the Bank is distributed among the business areas. The table below sets out the name, current position, year of appointment and business address for each of the members of the executive management team.
Year of Name Current position appointment Business address
Rune Bjerke CEO 2007 DnB ASA, Stranden 21, 0021 Oslo Bjørn Erik Næss CFO 2008 DnB ASA, Stranden 21, 0021 Oslo Karin Bing Orgland Group executive vice president 2009 DnB ASA, Stranden Retail Banking 21, 0021 Oslo
123 Year of Name Current position appointment Business address
Leif Teksum Group executive vice president 1999 DnB ASA, Stranden Large Corporates and International 21, 0021 Oslo Ottar Ertzeid Group executive vice president 2003 DnB ASA, Stranden DNB Markets 21, 0021 Oslo Tom Rathke Group executive vice president 2007 Vital Forsikring Life and Asset Management ASA, 5020 Bergen Solveig Hellebust Group executive vice president 2009 DnB ASA, Stranden HR 21, 0021 Oslo Cathrine Klouman Group executive vice president 2007 DnB ASA, Stranden IT 21, 0021 Oslo Liv Fiksdahl Group executive vice president 2007 DnB ASA, Stranden Operations 21, 0021 Oslo Trond Bentestuen Group executive vice president 2008 DnB ASA, Stranden Marketing and Communications 21, 0021 Oslo Kari Olrud Moen Group executive vice president 2007 DnB ASA, Stranden Corporate Centre 21, 0021 Oslo
Brief biographies of the members of Bank management
Set out below are brief biographies of the members of Bank management, including their relevant management expertise and experience and names of companies and partnerships of which a member of Bank management is or has been a member of the administrative, management or supervisory bodies or partner during the previous five years (not including directorships and executive management positions in subsidiaries of the Company).
Rune Bjerke, Group chief executive officer, (born 1960) was appointed CEO of the DNB Bank Group in 2007. He was formerly president and CEO of Hafslund ASA and has also been president and CEO of Scancem International. Mr. Bjerke has held a number of board positions in large companies. He has also served as finance commissioner of the Oslo City Council and as political adviser of Norway’s Ministry of Petroleum and Energy. Mr. Bjerke is Chairman of the board of directors of the Norwegian Bankers Association. He holds an economics degree from the University of Oslo, Norway, and a master’s degree in public administration from Harvard University, USA.
Current directorships and management positions: Statoil ASA (member of the supervisory board), Orkla ASA (member of the supervisory board) and Oscars gate 43 AS (member of the board of directors). Previous directorships and management positions last Hafslund ASA (President and CEO), Hafslund Marked five year: AS (member of the board of directors), Board of Directors (member of the board of directors), Hafslund Venture AS (member of the board of directors), Hafslund Sikkerhet AS (member of the board of directors) Tomra ASA (member of the board of directors) EBL (Energibedriftenes Landsforening) (member of the board of directors), REC ASA (member of the board of directors) and NET AS (Nordic Exchanger Technology) (member of the board of
124 directors).
Bjørn Erik Næss, CFO, (born 1954) was appointed CFO of the DNB Bank Group in March 2008. Prior to this he was executive vice president & CFO of Aker Kværner ASA, Orkla ASA and Carlsberg Breweries AS (Denmark). Mr. Næss has extensive experience from executive positions both in Norway and abroad over the past 25 years. Mr. Næss is a graduate of the Norwegian School of Economics and Business Administration and completed an executive program at Darden Business School, USA.
Current directorships and management positions: None. Previous directorships and management positions last Aker Kværner ASA (CFO), Aker Pensjonskasse AS five year: (Chairman of the board of directors), Aker Insurance AS(Chairman of the board of directors), Aker Kværner Shared Services AS (Chairman of the board of directors), Aker Kværner Oil and Gas Group AS (Chairman of the board of directors), Aker Solutions AS (Chairman of the board of directors), Aker PLC Group AS (member of the board of directors) Aker Kværner E&C Group AS (member of the board of directors), Aker Kværner E&C Europe AS (Chairman of the board of directors), Aker Kværner E&C Americas AS (Chairman of the board of directors).
Karin Bing Orgland, Group executive vice president – Retail Banking, (born 1959) was appointed Group executive vice president of Retail Banking on 1 July 2009, moving from her position as head of Regional Division East in Corporate Banking and Payment Services. Ms. Bing Orgland has extensive experience from a number of specialist and managerial positions in product and customer units in the DNB Bank Group. Ms. Bing Orgland has studied at the University of Pittsburgh, USA, and holds a business degree from the Norwegian School of Economics and Business Administration in Bergen, Norway.
Current directorships and management positions: Bankenes Betalingssentral AS (Deputy member of the board of directors). Previous directorships and management positions last None. five year:
Leif Teksum, Group executive vice president – Large Corporates and International, (born 1952) was appointed Group executive vice president of Large Corporates and International in July 2009. Prior to this Mr. Teksum was Group executive vice president of Corporate Banking and Payment Services since 2003. Mr. Teksum has experience in the petroleum industry and in various executive positions in the former DnB and Bergen Bank. Within the DNB Bank Group, Mr. Teksum has held several leadership positions, including positions in DNB Markets, Asset Management, IT and staff functions. Mr. Teksum is a graduate of the Norwegian School of Economics and Business Administration.
Current directorships and management positions: Hurtigruten ASA (Chairman of the corporate assembly and Chairman of General assembly), Norsk Hydro ASA (Vice-chairman of the corporate assembly). Previous directorships and management positions last Oslo Børs VPS Holding ASA (Chairman of the board of five year: directors), Oslo Børs ASA (Chairman of the board of directors), VPS Holding ASA (Chairman of the board of directors), VPS ASA (Chairman of the board of directors) and VPS Clearing ASA (Chairman of the board of directors).
Ottar Ertzeid, Group executive vice president – DNB Markets, (born 1965) was appointed Group executive vice president of DNB Markets in 2003. Mr. Ertzeid has previously been head and deputy head of DnB Markets and has
125 also worked in various other positions within the FX/Treasury area in the former DnB. Mr. Ertzeid’s professional experience includes time spent as CFO of DnB Boligkreditt AS and head of finance of Realkreditt AS. Mr. Ertzeid is Deputy chairman of the board of directors of Bankenes Sikringsfond and a member of the board of directors of Verdipapirforetakenes Sikringsfond. Mr. Ertzeid is a graduate of BI Norwegian School of Management, Norway.
Current directorships and management positions: Oslo Børs VPS Holding ASA (member of the board of directors) and Dextra Artes AS (Deputy chairman of the board of directors). Previous directorships and management positions last Oslo Børs ASA (member of the board of directors). five year:
Tom Rathke, Group executive vice president – Life and Asset Management, (born 1956) was appointed Group executive vice president of Life and Asset Management in 2007. Mr. Rathke is CEO of Vital Forsikring and Chairman of the board of directors of DNB Asset Management. Mr. Rathke was previously managing director of Gjensidige NOR’s investment fund company Avanse, prior to which he held managerial positions in Vesta and If Skadeforsikring. Mr. Rathke also has experience from the SAS aviation group in Norway and Germany and Dyno Industrier, Kjemidivisjonen. Mr. Rathke is a graduate of BI Norwegian School of Management, holds a master’s degree in business administration from the University of Wisconsin, USA, and has completed the Advanced Management Program at Harvard University, USA.
Current directorships and management positions: Norske Skog ASA (member of the corporate assembly), Verdane Private Equity AS (member of the board of directors), Verdane Capital IV AS (member of the board of directors) and Verdane Capital IV Twin AS (member of the board of directors). Previous directorships and management positions last Four Season Venture V (member of the board of five year: directors and member of the advisory board).
Solveig Hellebust, Group executive vice president – HR, (born 1967) was appointed Group executive vice president of HR on 1 April 2009. Prior to this, Ms. Hellebust was vice president of Human Resources and Communications at Pronova BioPharma ASA. Her prior professional experience includes several years at Telenor ASA (corporate staff HR) and at BI Norwegian School of Management (associate professor in economics). Ms. Hellebust holds a PhD in international economics from the Norwegian University of Life Sciences, an MSc in agricultural economics from the University of Illinois, USA, and an MSc in business and economics from BI Norwegian School of Management, Norway.
Current directorships and management positions: None. Previous directorships and management positions last Pronova BioPharma ASA (vice president human five year: resources and communications).
Cathrine Klouman, Group executive vice president – IT, (born 1962) was appointed Group executive vice president IT in 2007. Ms. Klouman has previously held several positions within the DNB Bank Group, including head of Business Development and head of the Telephone and Internet Banking division in Retail Banking. Ms. Klouman has previous management experience from Union Bank of Norway, ICA Banken, BankAxept and IBM. Ms. Klouman holds an MSc in business administration from BI Norwegian School of Management, Norway.
Current directorships and management positions: Dextra Musica AS (member of the board of directors) and Doorstep AS (member of the board of directors). Previous directorships and management positions last None. five year:
Liv Fiksdahl, Group executive vice president – Operations, (born 1965) was appointed Group executive vice president of Operations in 2007. Ms. Fiksdahl is former head of Bank Production in Corporate Banking and
126 Payment Services. Prior to this, Ms. Fiksdahl held customer-oriented positions in Union Bank of Norway, Handelsbanken and Fokus Bank. Ms. Fiksdahl is a member of the board of directors of Sparebankforeningen. Ms. Fiksdahl holds a degree as Høgskolekandidat (undergraduate) from Trondheim Business School, Norway.
Current directorships and management positions: None. Previous directorships and management positions last None. five year:
Trond Bentestuen, Group executive vice president – Marketing and Communications, (born 1970) has been head of Marketing and Communications since 2009 and head of Corporate Communications since January 2008. Prior to this, he was head of Marketing and Communications in Expert and worked as a press officer and communications adviser in Telenor. Mr. Bentestuen has a bachelor of arts degree in journalism and political science from Temple University, California, and training from the Armed Forces.
Current directorships and management positions: None Previous directorships and management positions last Group executive vice president – Expert ASA five year:
Kari Olrud Moen, Group executive vice president – Corporate Centre, (born 1969) 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 previously served as state secretary in the Ministry of Finance (2001-2005) and worked as a consultant in McKinsey & Co, as an adviser for the Conservative Party’s parliamentary group and as a consultant in the Budget Department in the Ministry of Finance. Ms. Moen is a graduate of the Norwegian School of Economics and Business Administration and has an MBA from the University of California, Berkeley.
Current directorships and management positions: None Previous directorships and management positions last None five year:
No company in the DNB Bank Group has issued loans or securities to any members of the Supervisory Board, the Board of Directors, the Control Committee or the Bank's management that are not on ordinary terms for employees of the DNB Bank Group. The DNB Bank Group is not aware of any potential conflicts of interest between the duties to the DNB Bank Group of each of the persons listed above under the headings “—Supervisory Board”, “—Board of Directors”, “—Control Committee” and “—Bank Management” and his or her private interests or other duties.
Shareholders
The Bank is wholly owned by DNB ASA, a publicly traded company on the Oslo Stock Exchange. The following table sets forth as of December 31, 2011 the 20 largest shareholders of DNB ASA, the number of shares held by each shareholder, the percentage of outstanding shares represented by each shareholding and the jurisdiction of incorporation of the shareholders:
Number of shares Name of shareholders (000) Percentage Country
Norwegian Government/Ministry of 553,792 34.00 Norway Trade and Industry DNB NOR Savings Bank Foundation 164,368 10.09 Norway National Insurance Scheme Fund 87,441 5.37 Norway Blackrock Investments 33,653 2.07 United States Capital Research/Capital International 25,790 1.58 United States
127 People's Bank of China 24,826 1.52 China Fidelity Investments 23,945 1.47 United States Threadneedle Investment Funds 21,116 1.30 United Kingdom Newton Investment Management 20,318 1.25 United Kingdom DNB Funds 17,277 1.06 Norway Standard Life 15,259 0.94 United Kingdom Jupiter Asset Management 14,357 0.88 United Kingdom Vanguard Investment Funds 13,142 0.81 United States State Street Global Advisors 12,084 0.74 United States Schroder Investment 11,420 0.70 United Kingdom Nordea Funds 10,386 0.64 Finland Kuwait Investment Authority Funds 10,328 0.63 Kuwait Storebrand Funds 10,293 0.63 Norway T. Rowe Price 9,131 0.56 United States Legal and General 8,628 0.53 United Kingdom
128 SUPERVISION AND REGULATION
Overview
The Bank is the result of a merger between Gjensidige NOR Sparebank ASA and Den norske Bank ASA, as registered in the Register of Business Enterprises on January 19, 2004, and in which Gjensidige NOR Sparebank ASA was the acquiring entity. This entity subsequently changed its name to DnB NOR Bank ASA and further changed its name to DNB Bank ASA in November 2011. The most relevant Norwegian legislation applicable to Norwegian commercial banks is:
● the Public Limited Liability Company Act of 1997 ("PLCA");
● the Commercial Bank Act of 1961 (the "Commercial Bank Act"), which regulates the governing bodies and activities of a commercial bank;
● the Financial Institutions Act of 1988 (the "Financial Institutions Act"), which through regulations implements the Banking Directive and the Capital Adequacy Directive, and which regulates, among other things, the authorization of financial institutions, organizational requirements, finance activity and capital adequacy requirements;
● the Bank Security Act of 1996 (the "Bank Security Act"), which relates to the bank deposit guarantee fund and the public administration of banks that encounter financial difficulties; and
● the Norwegian Financial Supervision Act of 1956, which regulates the supervision of, among other things, financial institutions and investments firms by the Financial Supervisory Authority of Norway (the "FSAN").
Supervisory and Other Regulatory Authorities
Several governmental bodies are responsible for administering legislation governing financial institutions in Norway.
The Ministry of Finance
The Ministry of Finance grants all licenses to engage in banking activities. The Ministry of Finance also issues regulations pursuant to the Commercial Banks Act, the Savings Banks Act and the Financial Institutions Act on many important issues relating to financial institutions, including capital adequacy ratios. The Ministry of Finance may revoke any license to engage in banking and insurance activities for violations of applicable laws and regulations.
Finanstilsynet (The Financial Supervisory Authority of Norway, or FSAN)
FSAN was created pursuant to the Banking, Insurance and Securities Commission Act, which sets forth the responsibilities and powers of FSAN. FSAN is an independent governmental entity with its own administrative staff and a five-member board of directors. However, the Ministry of Finance oversees the activities of FSAN and administrative decisions made by FSAN may be appealed to the Ministry of Finance.
FSAN’s mission is to ensure that financial institutions and financial markets in Norway function safely and efficiently. It establishes general rules and regulations for the entire financial industry in Norway and grants licenses to financing companies, securities brokerage firms and collective investment fund management companies. Any amendments to the articles of association of such institutions must be approved by FSAN.
FSAN is responsible primarily for supervising and inspecting banks, insurance companies, financing companies, securities brokerage firms, collective investment fund management companies, real estate brokers, debt collectors, auditors, accountants, insurance brokers and financial holding companies.
129 Norges Bank
Norges Bank, or the Central Bank, is the executive and advisory body for Norwegian monetary, credit and foreign exchange policy. Norges Bank is a separate legal entity owned by the Government and its executive board has seven members, all appointed by the King. Norges Bank carries out ordinary and central bank functions and has important functions in relation to the banking sector. Norges Bank is required to ensure that the financial system functions satisfactorily and may provide liquidity loans and make deposits with banks. Norges Bank also carries out money market operations.
Regulatory Framework in Norway
Overview
The Bank and its subsidiaries are subject to the supervision of the FSAN. The FSAN prepares and/or issues regulations and supervises the operations of Norwegian financial institutions, among other things with regard to capital adequacy, accounting, governance structures and risk control and procedures. The FSAN has a range of tools to facilitate its supervision, such as the right to carry out site visits, and to interview the employees of an institution under its supervision and inspect the books and record of such institutions. In the event that the FSAN considers the operations of an institution to be unsound or that the institution is in breach of applicable laws or regulations within the FSAN's jurisdiction, it may impose administrative sanctions on that institution, and it may also revoke the institution's license to operate.
Norway is not a member of the EU, but as a member of the European Economic Area (the "EEA"), it has implemented almost all relevant EU directives and regulations relating to financial services in its local legislation.
Authorizations
Under Norwegian law, any institution that accepts deposits from the general public and provides credit must obtain a banking license. The Bank, as a savings bank, was originally granted a license according to the Norwegian Savings Bank Act of 24 May 1961 No. 1. However, since its conversion into a public limited company, the Bank is subject to the ongoing regulatory requirements of the Commercial Bank Act and the Financial Institutions Act.
Under the Financial Institutions Act a bank cannot own another bank, unless an exemption is granted by the Norwegian Ministry of Finance. The Bank was granted such an exemption when it acquired Nordlandsbanken in 2003, following that bank's financial difficulties. The exemption was scheduled to expire after two years, but the Bank was granted new exemptions to own Nordlandsbanken as a separate entity in 2005 (limited to three years) and in 2008 (also limited to three years). The last exemption expired on June 13, 2011. The Ministry did not grant a new exemption and Nordlandsbanken is to be merged into the Bank. The merger is scheduled to be completed by September 1, 2012.
Regulation of Banking Activities
The Commercial Bank Act contains rules on incorporation, articles of association and share capital, governing bodies, business and dissolution/liquidation of commercial banks. The Commercial Bank Act also sets out rules relating to deposits and the proportion of total assets which may consist of real estate (including shares in companies which are established to own or develop real estate) and the proportion of total assets which may consist of other shares and equity interests.
A commercial bank may engage in all the business and services customary or natural for banks. A bank may not undertake, or act as a primary participant or primary co-owner in the operation of trading, industry, shipping, insurance or other commercial activities, unless such business is customary or natural for banks. This does not prevent the bank from temporarily operating or participating in the operation of such business to the extent necessary for the bank to recover a claim.
As a commercial bank, the Bank is subject to a number of specific rules under the Financial Institutions Acts. According to these rules, the articles of association of the Bank must be approved by the FSAN. The same applies to any subsequent amendments to the articles of association. Furthermore, the equity of the Bank may not be increased
130 by means other than through retained profits, unless approved by the FSAN. Resolutions regarding a decrease of share capital are only valid when approved by the FSAN, and the Bank needs the consent of the FSAN to take up subordinated loans.
Capital Requirements
Norwegian banks are subject to ongoing capital adequacy requirements, which implement EU Directives based on the Basel II regime. Investors should consider the following discussion in connection with "Risk Management and Risk-Adjusted Performance—Capital Management."
In line with the recommendations of the Basel Committee on Banking Supervision (the "Basel Committee"), the regulatory approach in the Financial Institutions Act is divided into three pillars;
● Pillar 1 – Calculation of minimum regulatory capital: Banks shall at all times satisfy capital adequacy requirements reflecting credit risk, operational risk and market risk. The current requirement is that equity shall constitute at least 8 per cent of risk-weighted assets. Equity can be in the form of core and supplementary capital. Core capital will typically consist of equity capital, while supplementary capital can be subordinated loan capital. The capital requirements must be complied with at all times. Banks are obligated to document their compliance with these requirements by reporting to the FSAN on quarterly basis.
● Pillar 2 – Assessment of overall capital needs and individual supervisory review: banks must have a process for assessing their overall capital adequacy in relation to their risk profile and strategy for maintaining their capital levels. The FSAN shall review and evaluate such internal capital adequacy assessments and strategies and may take supervisory action if it is not satisfied with the result of such an evaluation process.
● Pillar 3 – Disclosure of information: Banks are required to disclose relevant information on their activities, risk profile and capital situation.
Due to the recent period of financial and economic stress in the financial markets, a number of initiatives have been taken both globally (the “Basel Committee” and “G20”) and regionally (EU/EEA) to raise the level and quality of banks' regulatory capital.
In December 2009, the Basel Committee proposed a number of fundamental reforms to the regulatory capital framework. In December 2010, January 2011 and July 2011, the Basel Committee issued its final guidance on proposed changes to the capital requirements (“Basel III”). The Basel III reforms include a substantial strengthening of existing capital rules, including by raising the minimum common equity requirement and the total Tier 1 capital requirement. Banks will be required to maintain, in the form of common equity, a capital conservation buffer. Banks will also be required to build up a countercyclical capital buffer, also consisting of common equity, during periods of excessive credit growth. In addition, a leverage ratio will be introduced, together with a liquidity coverage ratio and net stable funding ratio. The Basel III reforms will also require Tier 1 and Tier 2 capital instruments to be more loss-absorbing.
The implementation of the Basel III reforms will begin on January 1, 2013. However, the requirements are subject to a series of transitional arrangements and will be phased in over a period of time. In the EEA, the Basel III reforms are expected to be implemented by way of a new Directive and a European Regulation (known as CRD IV, or an amended Capital Requirements Directive), which will replace Directives 2006/48/EC and 2006/49/EC.
The EU has also adopted or is in the process of adopting amendments to the Capital Requirements Directive (“CRD”), which will include the following:
● an EU/EEA-wide harmonization of the definition and availability of hybrid capital for banks;
● a binding obligation on banks to have sound remuneration policies;
131 ● a requirement that extra capital must be held if supervisors are concerned about the adequacy of a bank's risk management;
● increased capital requirements for complex resecuritization transactions;
● non-risk-sensitive measures complementing the Basel II capital requirements; and
● a requirement for banks to build up extra capital buffers in economic upturns, which they can draw on in a downturn (“dynamic provisioning”).
CRD is fully implemented into Norwegian law, and any amendments to the CRD will therefore be implemented into Norwegian law. The Banking Law Commission, which was appointed by Royal Decree on April 6, 1990, was commissioned to undertake a full review of current financial legislation with a view to modernization, coordination and revision of the legislative framework. The Banking Law Commission has put considerable emphasis on the coordinated implementation in Norwegian legislation of the EU/EEA regulatory system in the financial services field.
In November 2011, the European Banking Authority (the "EBA") published the formal recommendation and final aggregate results of a recapitalization exercise. The purpose of the exercise was to test the resilience of European banks' capital in the case of valuation losses due to sovereign credit shocks. Based on the exercise, the EBA concluded that the Bank passed the sovereign debt exposure buffer requirements, and that it has no government bonds which have been written down in its portfolio. The Bank does not have a need for a buffer to be held against sovereign debt exposures based on current market prices.
The EBA has set the limit for common equity Tier 1 capital at a minimum 9 per cent. According to the recapitalization exercise, the Bank had a common equity Tier 1 capital ratio of 7.82 per cent. The DNB Group raised this level to 9 per cent with immediate effect by using available internal funds during the fourth quarter of 2011. The FSAN supports the EBA's recommendation for bank recapitalization, and agrees that all banks, finance companies and mortgage institutions should hold a minimum 9 per cent core Tier 1 capital by the end of June 2012. Any bank, finance company or mortgage institution with a lower level, or with a level only slightly greater than 9 per cent, will be monitored closely.
In line with the DNB Group's capitalization policy, the DNB Group keeps a significant liquidity reserve in DNB ASA (the holding company) for capitalization of the Bank and other subsidiaries. The DNB Group was able to meet the EBA's sovereign exposure buffer requirements by redistributing available internal capital resources. No external capital injection was required.
Limitations on Large Exposures
A Norwegian bank cannot have a risk-weighted engagement with a single customer exceeding an amount corresponding to 25 per cent of the bank’s own funds. The EU has adopted certain amendments to the large exposures rules in the CRD (including restricting exposures in the inter-bank market), which were implemented into Norwegian law in 2011.
Regulation of Investment Services Provided by the Bank (DnB Markets)
The Bank also holds a license as an investment firm and is therefore also regulated by the Securities Trading Act. The Securities Trading Act implements the EEA rules corresponding to Directive 2004/39/EC (the Markets in Financial Instruments Directive (the "MiFID")). The investment services provided by the Bank (other than investment advice) are performed by DNB Markets, which is a department within the Bank and not a separate legal entity.
Deposit Guarantee Schemes
The Norwegian Act on Guarantee Schemes for Banks and Public Administration of Financial Institutions of 6 December 1996 No. 75 (Norwegian: “Banksikringsloven”) (the “Guarantee Schemes Act”) requires that all savings banks and commercial banks incorporated in Norway shall be members of the Norwegian Banks’ Guarantee
132 Fund. The Guarantee Fund provides a deposit guarantee of NOK 2 million per depositor per bank, should a member bank be unable to meet its commitments. The Norwegian deposit guarantee scheme implements Directive 94/19/EC. The EU has proposed adopting certain amendments to this directive that will impose an EU-wide harmonization of the deposit guarantee protection of EUR 100,000 with effect from January 1, 2011. However, the final amending directive has not yet been adopted. The Norwegian Ministry of Finance has appealed to the EU for an exemption to maintain its NOK 2 million guarantee, but no resolution has been reached as of the date of this Prospectus.
Payment and Capital Adequacy Problems in a Financial Institution
The Bank Security Act regulates liquidity and capital adequacy problems in certain financial institutions, including banks. All savings banks and commercial banks incorporated in Norway are required by the Bank Security Act to be members of the Norwegian Banks' Guarantee Fund.
Chapter 3 of the Bank Security Act contains various notification and intervention rules that escalate based on the seriousness of the liquidity and capital adequacy problems of the bank in question.
The board of directors and the chief executive officer of a financial institution each have a duty to notify the FSAN if there is reason to fear that:
● the institution will not be able to fulfil its obligations as they fall due;
● the institution will not be able to satisfy the minimum requirements for capital or other soundness and stability requirements specified by act or regulation; or
● circumstances have occurred that may result in a serious loss of confidence or a financial loss which will significantly weaken or threaten the soundness of the institution.
In such instances (regardless of whether notification has been given or not) the FSAN is given relatively broad powers to promptly enforce measures it considers necessary. In the first instance, the institution itself shall be involved in the process. One of the FSAN's powers is to ensure that the institution prepares an "audited statement of financial position," which is a vital policy instrument for determining the institution's financial situation.
If the audited statement of financial position shows that a "significant part" of the equity and/or 25 per cent of the share capital is lost, the board of directors is immediately obligated to call for a general meeting. "Equity" in this regard is the total amount of core capital and additional capital. Determining what is "significant" will depend on a discretionary assessment. The general meeting shall decide whether the institution has sufficient capital for continued, sound operations and, if so, whether operations should continue. Such decision to continue must be made with a two-thirds majority. If it is decided not to continue operations, the general meeting may vote by simple majority to transfer the institution's business in its entirety to other financial institutions. If such a resolution is not passed, the general meeting shall pass a resolution to liquidate the institution. If the general meeting does not pass such a resolution (or passes resolutions which the FSAN does not approve of), the FSAN shall appoint a liquidation board to liquidate the company. In this case, the below rules on public administration will apply.
If the audited statement of financial position shows that 75 per cent or more of the share capital is lost, the board of directors shall present a proposal to the general meeting for a write-down of the share capital corresponding to the losses incurred. If the general meeting does not pass a resolution to this effect, the Norwegian Ministry of Finance may decide that the share capital shall be written down by the amount of capital which pursuant to the audited statement of financial position is lost. Corresponding resolutions may be passed for write-downs of subordinated loan capital (unless otherwise expressly stated in the loan agreements). In addition, the Ministry of Finance may (if necessary in order to ensure continued, sound operations) decide that the share capital must be increased. In this connection, the Ministry of Finance can specify subscription conditions and decide that the pre-emptive right of existing shareholders shall be waived. The share increase of share capital assumes that private or public capital is available in the share issue. If not, the alternative will be public administration as further described below. It is this process that resulted in the state obtaining ownership interests in a number of Norwegian banks at the beginning of the 1990s.
133 Public Administration and Winding-up
Norwegian banks are not subject to normal insolvency proceedings, i.e. debt settlement proceedings and/or bankruptcy proceedings initiated pursuant to the normal insolvency legislation. Instead, a special regime of proceedings – public administration proceedings – applies to banks as further described in Chapter 4 of the Bank Security Act.
In the event of illiquidity, or failure to satisfy capital requirements, the FSAN immediately notifies the Ministry of Finance. The Ministry of Finance may decide that the bank shall be placed under public administration, provided that the bank is unable to meet its liabilities as they fall due and that sufficient financial basis for continued, sound operations cannot be secured. The same applies if the bank is unable to meet the capital adequacy requirements unless these are waived by the FSAN. If the parent company in a financial group is placed under public administration, the Ministry of Finance may also decide that all or parts of the group shall be placed under public administration. The decision of the Ministry of Finance is made on a discretionary basis. If the Ministry of Finance decides not to place the bank under public administration, the provisions in Chapter 3 of the Bank Security Act as described above will apply.
134 TERMS AND CONDITIONS OF THE NOTES
The following are the Terms and Conditions of the Notes which (subject to the removal of the wording in italics in Condition 3(e) and Condition 9(a) which shall not form part of the Terms and Conditions) will be incorporated by reference into each global Note and each definitive Note, in the latter case only if permitted by the relevant stock exchange or other relevant authority (if any) and agreed by the Issuer and the relevant Dealer at the time of issue but, if not so permitted and agreed, such definitive Note will have endorsed thereon or attached thereto such Terms and Conditions. Part A of the applicable Final Terms in relation to any Tranche of Notes may specify other terms and conditions which shall, to the extent so specified or to the extent inconsistent with the following Terms and Conditions, replace or modify the following Terms and Conditions for the purpose of such Notes. The applicable Final Terms (or the relevant provisions thereof) will be endorsed upon, or attached to, each global Note and definitive Note.
This Note is one of a Series (as defined below) of Notes issued by DNB Bank ASA (the “Issuer”) constituted by a Trust Deed (such Trust Deed as modified and/or supplemented and/or restated from time to time, the “Trust Deed”) dated 21 March 2012 made between the Issuer and The Law Debenture Trust Corporation p.l.c. (the “Trustee”, which expression shall include any successor as Trustee).
References herein to the “Notes” shall be references to the Notes of this Series and shall mean, in relation to any Notes represented by a global Note, units of each Specified Denomination in the Specified Currency.
An Agency Agreement (as amended, supplemented or restated from time to time, the “Agency Agreement”) dated 21 March 2012 has been entered into in relation to the Notes between the Issuer, the Trustee, Citibank, N.A., London Branch as issuing and principal paying agent and agent bank (the “Agent”, which expression shall include any successor agent), the other paying agents named therein (together with the Agent, the “Paying Agents”, which expression shall include any additional or successor paying agents), Citibank, N.A., London Branch as Exchange Agent (the “Exchange Agent”, which expression shall include any successor exchange agent), Citigroup Global Markets Deutschland AG as registrar (the “Registrar”, which expression shall include any successor registrar) and Citigroup Global Markets Deutschland AG as transfer agent (the “Transfer Agent”, which expression shall include any additional or successor transfer agent). Unless specified otherwise, references herein to the “Calculation Agent” shall be references to the person so identified in the applicable Final Terms.
The final terms for this Note (or the relevant provisions thereof) are set out in Part A of the Final Terms attached to or endorsed on this Note. Part A of the Final Terms (or such relevant provisions thereof) must be read in conjunction with these Terms and Conditions and may specify other terms and conditions which shall, to the extent so specified or to the extent inconsistent with these Terms and Conditions, replace or modify these Terms and Conditions for the purposes of this Note. References to the “applicable Final Terms” are to Part A of the Final Terms (or the relevant provisions thereof) which are attached to or endorsed on this Note.
The Trustee acts for the benefit of the holders for the time being of the Notes (the “Noteholders”, which expression shall, in relation to any Notes represented by a global Note, be construed as provided below) in accordance with the provisions of the Trust Deed.
As used herein, “Tranche” means all Notes which are identical in all respects (including as to listing) and “Series” means a Tranche of Notes together with any further Tranche or Tranches of Notes which are (i) expressed to be consolidated and form a single series and (ii) identical in all respects (including as to listing) except for their respective Issue Dates, Interest Commencement Dates and/or Issue Prices.
Copies of the Trust Deed and the Agency Agreement are obtainable during normal business hours by prior appointment at the registered office for the time being of the Trustee being at Fifth Floor, 100 Wood Street, London EC2V 7EX and at the specified office of each of the Paying Agents, the Registrar and the Transfer Agent. The Noteholders are deemed to have notice of, and are entitled to the benefit of, all the provisions of the Trust Deed and the relevant Final Terms which are applicable to them and are deemed to have notice of all the provisions of the Agency Agreement. The statements in these Terms and Conditions include summaries of, and are subject to, the detailed provisions of the Trust Deed.
135 Words and expressions defined in the Trust Deed, the Agency Agreement or used in the applicable Final Terms shall have the same meanings where used in these Terms and Conditions unless the context otherwise requires or unless otherwise stated and provided that, in the event of inconsistency between the Trust Deed and the Agency Agreement, the Trust Deed will prevail and, in the event of any inconsistency between the Trust Deed or the Agency Agreement and the applicable Final Terms, the applicable Final Terms will prevail.
1 Form, Denomination and Title
The Notes are in registered form and, in the case of definitive Notes, serially numbered, in the Specified Currency and the Specified Denomination(s). Save as provided in Condition 11, Notes of one Specified Denomination may not be exchanged for Notes of another Specified Denomination.
This Note is a Fixed Rate Note, a Floating Rate Note, a Zero Coupon Note, an Index Linked Interest Note, a Dual Currency Note or a combination of any of the foregoing, depending upon the Interest Basis shown in the applicable Final Terms.
This Note may be an Index Linked Redemption Note, an Instalment Note, a Dual Currency Note or a combination of any of the foregoing, depending on the Redemption/Payment Basis shown in the applicable Final Terms.
This Note is an Unsubordinated Note or a Subordinated Note, as indicated in the applicable Final Terms.
Subject as set out below, title to the Notes will pass upon registration of transfers in accordance with the provisions of the Agency Agreement. The Issuer, the Trustee, the Replacement Agent (as defined in the Agency Agreement), the Registrar, any Transfer Agent and any Paying Agent may deem and treat the registered holder of any Note as the absolute owner thereof (whether or not overdue and notwithstanding any notice of ownership or writing thereon or notice of any previous loss or theft thereof) for all purposes but, in the case of any global Note, without prejudice to the provisions set out in the next succeeding paragraph, the expressions “Noteholder” and “holder of Notes” and related expressions shall be construed accordingly.
For so long as DTC or its nominee is the registered holder of a global Note or for so long as any common nominee for Euroclear and/or Clearstream, Luxembourg is the registered holder of a global Note, each person (other than DTC or Euroclear and/or Clearstream, Luxembourg, as the case may be) who is for the time being shown in the records of DTC or Euroclear or Clearstream, Luxembourg, as the case may be, as the holder of a particular nominal amount of such Notes (in which regard any certificate or other document issued by such clearing system as to the nominal amount of such Notes standing to the account of any person shall, save in the case of manifest error, be conclusive and binding for all purposes, including any form of statement or print out of electronic records provided by the relevant clearing system in accordance with its usual procedures and in which the holder of a particular nominal amount of such Notes is clearly identified together with the amount of such holding) shall be treated by the Issuer, the Trustee, the Agent, the Replacement Agent and any other Paying Agent as the holder of such nominal amount of such Notes for all purposes other than with respect to the payment of principal or interest on the Notes, for which purpose, in the case of Notes represented by global Notes, the registered holder or, in the case of a global Note registered in the name of DTC or its nominee, DTC or its nominee or, in the case of a global Note registered in the name of any common nominee for Euroclear and/or Clearstream, such common nominee shall be treated by the Issuer, the Trustee, the Agent and any other Paying Agent as the holder of such Notes in accordance with and subject to the terms of the relevant global Note and the expressions “Noteholder” and “holder of Notes” and related expressions shall be construed accordingly.
Notes which are represented by a global Note will be transferable only in accordance with the rules and procedures for the time being of DTC and/or Euroclear and/or Clearstream, Luxembourg, as the case may be.
References to DTC and/or Euroclear and/or Clearstream, Luxembourg shall, whenever the context so permits, be deemed to include a reference to any additional or alternative clearing system approved by the Issuer, the Trustee, the Agent and the Registrar.
136 2 Status of the Unsubordinated Notes
This Condition applies only to Unsubordinated Notes and references to “Notes” in this Condition shall be construed accordingly.
The Notes are direct, unconditional, unsubordinated and unsecured obligations of the Issuer and rank pari passu among themselves and (save for certain debts required to be preferred by law) equally with all other unsecured obligations (including deposits) (other than subordinated obligations, if any) of the Issuer, present and future, from time to time outstanding. So long as any of the Notes remains outstanding (as defined in the Trust Deed), the Issuer undertakes to ensure that the obligations of the Issuer under the Notes rank and will rank pari passu with all other unsecured and unsubordinated obligations (including deposits) of the Issuer and with all its unsecured and unsubordinated obligations under guarantees of obligations of third parties, in each case except for any obligations preferred by mandatory provisions of applicable law.
3 Status of the Subordinated Notes
This Condition 3 applies only to Subordinated Notes and references to “Notes” and “Noteholders” in this Condition 3 shall be construed accordingly.
(a) Status and ranking
The Notes constitute unsecured subordinated obligations of the Issuer, subject to cancellation as described in Condition 3(e), and rank pari passu without any preference among themselves and at least equally with all other subordinated obligations of the Issuer (whether actual or contingent) having a fixed maturity from time to time outstanding.
(b) Liquidation, dissolution or other winding-up
In the event of a liquidation, dissolution, administration or other winding-up of the Issuer by way of public administration, there shall be payable on the Notes (in lieu of any other payment, but subject as provided in this Condition 3), in respect of the principal amount of the Notes an amount equal to the principal amount of the Notes and, in the case of interest on the Notes, an amount equal to any interest accrued to but excluding the date of repayment but which is unpaid and such Notes shall be subordinated in right of payment only to the claims against the Issuer of all unsubordinated creditors of the Issuer and to claims preferred under Norwegian law generally.
(c) Limitation on subordinated indebtedness
The Issuer shall not, without the prior approval of an Extraordinary Resolution (as defined in the Trust Deed) of the Noteholders, incur, create, assume, grant or permit to be outstanding any subordinated indebtedness (whether actual or contingent) having a fixed maturity unless such indebtedness is subordinated, subject to applicable law, in the event of liquidation, dissolution, administration or other winding-up of the Issuer by way of public administration in right of payment so as to rank pari passu with or junior to the claims of the Noteholders.
(d) Limitation on Undated Subordinated Indebtedness
The Issuer shall not, without the prior approval of an Extraordinary Resolution of the Noteholders, incur, create, assume, grant or permit to be outstanding any Undated Subordinated Indebtedness (whether actual or contingent) unless such Undated Subordinated Indebtedness is subordinated in right of payment, subject to applicable law, in the event of liquidation, dissolution, administration or other winding-up of the Issuer by way of public administration so as to rank junior to the claims of the Noteholders.
137 (e) Loss Absorption
Under Norwegian legislation, if the Issuer's most recent audited accounts reveal that its net assets are less than 25 per cent of its share capital, the general meeting of shareholders of the Issuer can or the relevant authorities can if the general meeting of shareholders of the Issuer does not do so: first, cancel share capital to compensate for the shortfall and secondly, if any remaining shortfall exceeds a substantial part (as determined by the general meeting of shareholders of the Issuer or by the relevant Norwegian authorities) of the Issuer's subordinated loan capital, cancel, in whole or in part, such subordinated loan capital (which would include principal in respect of all Subordinated Notes).
Norwegian legislation does not grant the Issuer or the relevant Norwegian authorities the right to cancel accrued but unpaid interest in respect of subordinated loan capital and currently there is no legal basis for the Norwegian courts to permit the Issuer or the Norwegian authorities to cancel such interest.
Pursuant to the above, for the benefit of holders of Subordinated Notes, the Issuer undertakes that it will cancel all principal in respect of all Undated Subordinated Indebtedness before cancelling any principal in respect of any Subordinated Notes.
The Norwegian FSA has, in a letter dated 20th September, 2000, stated that “any right for the authorities in Norway to depart from the agreed order of priority must be based in law. It is abundantly clear that such a basis is not present where the institution has been under public administration. If the authorities are to depart from the agreed order of priority outside public administration, there must be a basis for them to do so in the Guaranty Schemes Act of 6th December, 1996. Such a basis does not exist.”
The Issuer shall give not more than 30 nor less than 5 Business Days’ (as defined in Condition 4(b)(i)) prior notice to the Trustee, the Agent and the Registrar and to the Noteholders in accordance with Condition 13 of any cancellation of principal in respect of any Subordinated Notes pursuant to this Condition 3(e).
To the extent that part only of the outstanding principal amount of any Subordinated Notes has been cancelled as provided above, interest will continue to accrue in accordance with the terms hereof on the then outstanding principal amount of such Subordinated Notes, as the case may be.
(f) Definitions
In these Terms and Conditions, the following terms shall bear the following meanings:
“Norwegian FSA” means the Financial Supervisory Authority of Norway (Finanstilsynet) (or such other agency of the Kingdom of Norway which assumes or performs the functions, as at the Issue Date, of such Authority).
“Undated Subordinated Indebtedness” means any indebtedness of the Issuer:
(a) that by its terms or otherwise is in any respect junior or subordinate in right of payment (whether upon liquidation, dissolution, administration or other winding-up of the Issuer or otherwise) to any other indebtedness of the Issuer; and
(b) the principal of which has no fixed maturity.
4 Interest
(a) Interest on Fixed Rate Notes
138 Each Fixed Rate Note bears interest from (and including) the Interest Commencement Date at the rate(s) per annum equal to the Rate(s) of Interest. Interest will be payable in arrear on the Interest Payment Date(s) in each year up to (and including) the Maturity Date.
If the Notes are in definitive form, except as provided in the applicable Final Terms, the amount of interest payable on each Interest Payment Date in respect of the Fixed Interest Period ending on (but excluding) such date will amount to the Fixed Coupon Amount. Payments of interest on any Interest Payment Date will, if so specified in the applicable Final Terms, amount to the Broken Amount(s) so specified.
As used in these Terms and Conditions, “Fixed Interest Period” means the period from (and including) an Interest Payment Date (or the Interest Commencement Date) to (but excluding) the next (or first) Interest Payment Date.
Except in the case of Notes in definitive form where a Fixed Coupon Amount or Broken Amount is specified in the applicable Final Terms, interest shall be calculated in respect of any period by applying the Rate of Interest to:
(A) in the case of Fixed Rate Notes which are represented by a global Note, the aggregate outstanding nominal amount of the Fixed Rate Notes represented by such global Note; or
(B) in the case of Fixed Rate Notes in definitive form, the Calculation Amount specified in the applicable Final Terms, and, in each case, multiplying such sum by the applicable Day Count Fraction, and rounding the resultant figure to the nearest sub-unit of the relevant Specified Currency, half of any such sub-unit being rounded upwards or otherwise in accordance with applicable market convention. Where the Specified Denomination of a Fixed Rate Note in definitive form comprises more than one Calculation Amount, the amount of interest payable in respect of such Fixed Rate Note shall be the aggregate of the amounts (determined in the manner provided above) for each Calculation Amount comprising the Specified Denomination without any further rounding.
“Day Count Fraction” means, in respect of the calculation of an amount of interest in accordance with this Condition 4(a):
(i) if “Actual/Actual (ICMA)” is specified in the applicable Final Terms:
(a) in the case of Notes where the number of days in the relevant period from (and including) the most recent Interest Payment Date (or, if none, the Interest Commencement Date) to (but excluding) the relevant payment date (the “Accrual Period”) is equal to or shorter than the Determination Period during which the Accrual Period ends, the number of days in such Accrual Period divided by the product of (1) the number of days in such Determination Period and (2) the number of Determination Dates (as specified in the applicable Final Terms) that would occur in one calendar year; or
(b) in the case of Notes where the Accrual Period is longer than the Determination Period during which the Accrual Period ends, the sum of:
(1) the number of days in such Accrual Period falling in the Determination Period in which the Accrual Period begins divided by the product of (x) the number of days in such Determination Period and (y) the number of Determination Dates (as specified in the applicable Final Terms) that would occur in one calendar year; and
(2) the number of days in such Accrual Period falling in the next Determination Period divided by the product of (x) the number of days in such Determination Period and (y) the number of Determination Dates that would occur in one calendar year; and
139 (ii) if “30/360” is specified in the applicable Final Terms, the number of days in the period from (and including) the most recent Interest Payment Date (or, if none, the Interest Commencement Date) to (but excluding) the relevant payment date (such number of days being calculated on the basis of a year of 360 days with 12 30-day months) divided by 360.
In these Terms and Conditions:
“Determination Period” means the period from (and including) a Determination Date to (but excluding) the next Determination Date (including, where either the Interest Commencement Date or the final Interest Payment Date is not a Determination Date, the period commencing on the first Determination Date prior to, and ending on the first Determination Date falling after, such date); and
“sub-unit” means, with respect to any currency other than euro, the lowest amount of such currency that is available as legal tender in the country of such currency and, with respect to euro, means one cent.
(b) Interest on Floating Rate Notes and Index Linked Interest Notes
(i) Interest Payment Dates
Each Floating Rate Note and Index Linked Interest Note bears interest from (and including) the Interest Commencement Date and such interest will be payable in arrear on either:
(A) the Specified Interest Payment Date(s) in each year specified in the applicable Final Terms; or
(B) if no Specified Interest Payment Date(s) is/are specified in the applicable Final Terms, each date (each such date, together with each Specified Interest Payment Date, an “Interest Payment Date”) which falls the number of months or other period specified as the Specified Period in the applicable Final Terms after the preceding Interest Payment Date or, in the case of the first Interest Payment Date, after the Interest Commencement Date.
Such interest will be payable in respect of each Interest Period (which expression shall, in these Terms and Conditions, mean the period from (and including) an Interest Payment Date (or the Interest Commencement Date) to (but excluding) the next (or first) Interest Payment Date).
If a Business Day Convention is specified in the applicable Final Terms and (x) if there is no numerically corresponding day in the calendar month in which an Interest Payment Date should occur or (y) if any Interest Payment Date would otherwise fall on a day which is not a Business Day, then, if the Business Day Convention specified is:
(1) in any case where Specified Periods are specified in accordance with Condition 4(b)(i)(A) above, the “Floating Rate Convention”, such Interest Payment Date (i) in the case of (x) above, shall be the last day that is a Business Day in the relevant month and the provisions of (B) below shall apply mutatis mutandis or (ii) in the case of (y) above, shall be postponed to the next day which is a Business Day unless it would thereby fall into the next calendar month, in which event (A) such Interest Payment Date shall be brought forward to the immediately preceding Business Day and (B) each subsequent Interest Payment Date shall be the last Business Day in the month which falls in the Specified Period after the preceding applicable Interest Payment Date occurred; or
(2) the “Following Business Day Convention”, such Interest Payment Date shall be postponed to the next day which is a Business Day; or
(3) the “Modified Following Business Day Convention”, such Interest Payment Date shall be postponed to the next day which is a Business Day unless it would thereby fall into the
140 next calendar month, in which event such Interest Payment Date shall be brought forward to the immediately preceding Business Day; or
(4) the “Preceding Business Day Convention”, such Interest Payment Date shall be brought forward to the immediately preceding Business Day.
In these Terms and Conditions, “Business Day” means a day which is both:
(A) a day on which commercial banks and foreign exchange markets settle payments and are open for general business (including dealing in foreign exchange and foreign currency deposits) in London and any Additional Business Centre specified in the applicable Final Terms; and
(B) either (1) in relation to any sum payable in a Specified Currency other than euro, a day on which commercial banks and foreign exchange markets settle payments and are open for general business (including dealing in foreign exchange and foreign currency deposits) in the principal financial centre of the country of the relevant Specified Currency (which, if the Specified Currency is Australian dollars or New Zealand dollars, shall be Sydney and Auckland, respectively) or (2) in relation to any sum payable in euro, a day on which the Trans-European Automated Real-Time Gross Settlement Express Transfer (TARGET2) System (the “TARGET2 System”) is open.
(ii) Rate of Interest
The Rate of Interest payable from time to time in respect of Floating Rate Notes and Index Linked Interest Notes will be determined in the manner specified in the applicable Final Terms.
(A) Screen Rate Determination for Floating Rate Notes
Where Screen Rate Determination is specified in the applicable Final Terms as the manner in which the Rate of Interest is to be determined, the Rate of Interest for each Interest Period will, subject as provided below, be either:
(1) the offered quotation; or
(2) the arithmetic mean (rounded if necessary to the fifth decimal place, with 0.000005 being rounded upwards) of the offered quotations,
(expressed as a percentage rate per annum) for the Reference Rate which appears or appear, as the case may be, on the Relevant Screen Page as at the Specified Time on the Interest Determination Date in question plus or minus (as indicated in the applicable Final Terms) the Margin (if any), all as determined by the Agent. If five or more of such offered quotations are available on the Relevant Screen Page, the highest (or, if there is more than one such highest quotation, one only of such quotations) and the lowest (or, if there is more than one such lowest quotation, one only of such quotations) shall be disregarded by the Agent for the purpose of determining the arithmetic mean (rounded as provided above) of such offered quotations.
The Agency Agreement contains provisions for determining the Rate of Interest in the event that the Relevant Screen Page is not available or if, in the case of (1) above, no such offered quotation appears or, in the case of (2) above, fewer than three such offered quotations appear, in each case as at the Specified Time.
If the Reference Rate from time to time in respect of Floating Rate Notes is specified in the applicable Final Terms as being other than the London inter-bank offered rate (“LIBOR”) or the Euro-zone inter-bank offered rate (“EURIBOR”), the Rate of Interest in respect of such Notes will be determined as provided in the applicable Final Terms.
141 (B) ISDA Determination for Floating Rate Notes
Where ISDA Determination is specified in the applicable Final Terms as the manner in which the Rate of Interest is to be determined, the Rate of Interest for each Interest Period will be the relevant ISDA Rate plus or minus (as indicated in the applicable Final Terms) the Margin (if any). For the purposes of this Condition 4(b)(ii)(B), “ISDA Rate” for an Interest Period means a rate equal to the Floating Rate that would be determined by the Agent under an interest rate swap transaction if the Agent were acting as Calculation Agent for that swap transaction under the terms of an agreement incorporating the 2006 ISDA Definitions, as published by the International Swaps and Derivatives Association, Inc. and as amended and updated as at the Issue Date of the first Tranche of the Notes (the “ISDA Definitions”) and under which:
(1) the Floating Rate Option is as specified in the applicable Final Terms;
(2) the Designated Maturity is a period specified in the applicable Final Terms; and
(3) the relevant Reset Date is either (i) if the applicable Floating Rate Option is based on LIBOR or on EURIBOR the first day of that Interest Period or (ii) in any other case, as specified in the applicable Final Terms.
For the purposes of this Condition 4(b)(ii)(B), “Floating Rate”, “Calculation Agent”, “Floating Rate Option”, “Designated Maturity” and “Reset Date” have the meanings given to those terms in the ISDA Definitions.
(iii) Minimum Rate of Interest and/or Maximum Rate of Interest
If the applicable Final Terms specifies a Minimum Rate of Interest for any Interest Period, then, in the event that the Rate of Interest in respect of such Interest Period determined in accordance with the provisions of Condition 4(b)(ii) above is less than such Minimum Rate of Interest, the Rate of Interest for such Interest Period shall be such Minimum Rate of Interest.
If the applicable Final Terms specifies a Maximum Rate of Interest for any Interest Period, then, in the event that the Rate of Interest in respect of such Interest Period determined in accordance with the provisions of Condition 4(b)(ii) above is greater than such Maximum Rate of Interest, the Rate of Interest for such Interest Period shall be such Maximum Rate of Interest.
(iv) Determination of Rate of Interest and Calculation of Interest Amounts
The Agent, in the case of Floating Rate Notes, and the Calculation Agent, in the case of Index Linked Interest Notes, will at or as soon as practicable after each time at which the Rate of Interest is to be determined, determine the Rate of Interest for the relevant Interest Period. In the case of Index Linked Interest Notes, the Calculation Agent will notify the Agent of the Rate of Interest for the relevant Interest Period as soon as practicable after calculating the same.
The Agent, in the case of Floating Rate Notes, or the Calculation Agent, in the case of Index Linked Interest Notes, will calculate the amount of interest (the “Interest Amount”) payable on the Floating Rate Notes or Index Linked Interest Notes, in each case for the relevant Interest Period, by applying the Rate of Interest to:
(A) in the case of Floating Rate Notes or Index Linked Interest Notes which are represented by a global Note, the aggregate outstanding nominal amount of the Notes represented by such global Note; or
(B) in the case of Floating Rate Notes or Index Linked Interest Notes in definitive form, the Calculation Amount specified in the applicable Final Terms;
142 and, in each case, multiplying such sum by the applicable Day Count Fraction, and rounding the resultant figure to the nearest sub-unit of the relevant Specified Currency, half of any such sub- unit being rounded upwards or otherwise in accordance with applicable market convention. Where the Specified Denomination of a Floating Rate Note or an Index Linked Interest Note in definitive form comprises more than one Calculation Amount, the Interest Amount payable in respect of such Note shall be the aggregate of the amounts (determined in the manner provided above) for each Calculation Amount comprising the Specified Denomination without any further rounding.
“Day Count Fraction” means, in respect of the calculation of an amount of interest in accordance with this Condition 4(b):
(i) if “Actual/Actual (ISDA)” or “Actual/Actual” is specified in the applicable Final Terms, the actual number of days in the Interest Period divided by 365 (or, if any portion of that Interest Period falls in a leap year, the sum of (A) the actual number of days in that portion of the Interest Period falling in a leap year divided by 366 and (B) the actual number of days in that portion of the Interest Period falling in a non-leap year divided by 365);
(ii) if “Actual/365 (Fixed)” is specified in the applicable Final Terms, the actual number of days in the Interest Period divided by 365;
(iii) if “Actual/365 (Sterling)” is specified in the applicable Final Terms, the actual number of days in the Interest Period divided by 365 or, in the case of an Interest Payment Date falling in a leap year, 366;
(iv) if “Actual/360” is specified in the applicable Final Terms, the actual number of days in the Interest Period divided by 360;
(v) if “30/360”, “360/360” or “Bond Basis” is specified in the applicable Final Terms, the number of days in the Interest Period divided by 360, calculated on a formula basis as follows:
[360(Y2 - y1)] 30(M2 - M1)] (D2 - D1) Day Count Fraction = 360
where:
“Y1” is the year, expressed as a number, in which the first day of the Interest Period falls;
“Y2” is the year, expressed as a number, in which the day immediately following the last day of the Interest Period falls;
“M1” is the calendar month, expressed as a number, in which the first day of the Interest Period falls;
“M2” is the calendar month, expressed as a number, in which the day immediately following the last day of the Interest Period falls;
“D1” is the first calendar day, expressed as a number, of the Interest Period, unless such number is 31, in which case D2 will be 30; and
“D2” is the calendar day, expressed as a number, immediately following the last day included in the Interest Period, unless such number would be 31 and D2 is greater than 29, in which case D2 will be 30;
143 (vi) if “30E/360” or “Eurobond Basis” is specified in the applicable Final Terms, the number of days in the Interest Period divided by 360, calculated on a formula basis as follows:
[360(Y2 - y1)] 30(M2 - M1)] (D2 - D1) Day Count Fraction = 360
where:
“Y1” is the year, expressed as a number, in which the first day of the Interest Period falls;
“Y2” is the year, expressed as a number, in which the day immediately following the last day of the Interest Period falls;
“M1” is the calendar month, expressed as a number, in which the first day of the Interest Period falls;
“M2” is the calendar month, expressed as a number, in which the day immediately following the last day of the Interest Period falls;
“D1” is the first calendar day, expressed as a number, of the Interest Period, unless such number would be 31, in which case D1 will be 30; and
“D2” is the calendar day, expressed as a number, immediately following the last day included in the Interest Period, unless such number would be 31, in which case D2 will be 30; and
(vii) if “30E/360 (ISDA)” is specified in the applicable Final Terms, the number of days in the Interest Period divided by 360, calculated on a formula basis as follows:
[360(Y2 - y1)] 30(M2 - M1)] (D2 - D1) Day Count Fraction = 360
where:
“Y1” is the year, expressed as a number, in which the first day of the Interest Period falls:
“Y2” is the year, expressed as a number, in which the day immediately following the last day of the Interest Period falls;
“M1” is the calendar month, expressed as a number, in which the first day of the Interest Period falls;
“M2” is the calendar month, expressed as a number, in which the day immediately following the last day of the Interest Period falls;
“D1” is the first calendar day, expressed as a number, of the Interest Period, unless (i) that day is the last day of February or (ii) such number would be 31, in which case D1 will be 30; and
“D2” is the calendar day, expressed as a number, immediately following the last day included in the Interest Period, unless (i) that day is the last day of February but not the Maturity Date or (ii) such number would be 31, in which case D2 will be 30.
(v) Notification of Rate of Interest and Interest Amounts
144 The Agent or the Calculation Agent will cause the Rate of Interest and each Interest Amount for each Interest Period and the relevant Interest Payment Date to be notified to the Issuer, the Trustee and any stock exchange on which the relevant Floating Rate Notes or Index Linked Interest Notes are for the time being listed (by no later than the first day of each Interest Period) and notice thereof to be published in accordance with Condition 13 as soon as possible after their determination but in no event later than the fourth London Business Day (as defined below) thereafter. Each Interest Amount and Interest Payment Date so notified may subsequently be amended (or appropriate alternative arrangements made by way of adjustment) without prior notice in the event of an extension or shortening of the Interest Period. Any such amendment will be promptly notified to each stock exchange on which the relevant Floating Rate Notes or Index Linked Interest Notes are for the time being listed and to the Noteholders in accordance with Condition 13. For the purposes of this Condition 4(b)(v), the expression “London Business Day” means a day (other than a Saturday or a Sunday) on which banks and foreign exchange markets are open for general business in London.
(vi) Determination or Calculation by Trustee
If for any reason at any relevant time the Agent or, as the case may be, the Calculation Agent defaults in its obligation to determine the Rate of Interest or the Agent defaults in its obligation to calculate any Interest Amount in accordance with the above provisions or as otherwise specified in the applicable Final Terms, as the case may be, and in each case in accordance with Condition 4(b)(iv) above, the Trustee or an expert appointed on its behalf shall determine the Rate of Interest at such rate as, in its absolute discretion (having such regard as it shall think fit to the foregoing provisions of this Condition, but subject always to any Minimum Rate of Interest or Maximum Rate of Interest specified in the applicable Final Terms), it shall deem fair and reasonable in all the circumstances or, as the case may be, the Trustee shall calculate the Interest Amount(s) in such manner as it shall deem fair and reasonable in all the circumstances and each such determination or calculation shall be deemed to have been made by the Agent or the Calculation Agent, as applicable.
(vii) Certificates to be Final
All certificates, communications, opinions, determinations, calculations, quotations and decisions given, expressed, made or obtained for the purposes of the provisions of this Condition 4(b), whether by the Agent or, if applicable, the Calculation Agent, shall (in the absence of wilful default, bad faith or manifest error) be binding on the Issuer, the Trustee, the Agent, the Calculation Agent (if applicable), the other Paying Agents, the Registrar, the Exchange Agent, the Transfer Agent and all Noteholders and (in the absence as aforesaid) no liability to the Issuer or the Noteholders shall attach to the Agent or, if applicable, the Calculation Agent or the Trustee in connection with the exercise or non-exercise by it of its powers, duties and discretions pursuant to such provisions.
(c) Dual Currency Notes
In the case of Dual Currency Notes, if the rate or amount of interest is to be determined by reference to an exchange rate, the rate or amount of interest payable shall be determined in the manner specified in the applicable Final Terms.
(d) Accrual of Interest
Each Note (or in the case of the redemption of part only of a Note, that part only of such Note) will cease to bear interest (if any) from the date for its redemption unless payment of principal is improperly withheld or refused or, in the case of Subordinated Notes, the consent of the Norwegian FSA for such payment has not been given or, having been given, has been withdrawn and not replaced. In such event, interest will continue to accrue as provided in the Trust Deed and these Terms and Conditions.
145 To the extent that part only of the outstanding principal amount of any Subordinated Notes has been cancelled as provided above, interest will continue to accrue in accordance with the terms hereof on the then outstanding principal amount of such Subordinated Notes, as the case may be.
5 Payments
(a) Method of Payment
Subject as provided below:
(i) payments in a Specified Currency other than euro will be made by credit or transfer to an account in the relevant Specified Currency (which, in the case of a payment in Japanese Yen to a non- resident of Japan, shall be a non-resident account) maintained by the payee with, or, at the option of the payee, by a cheque in such Specified Currency drawn on, a bank in the principal financial centre of the country of such Specified Currency (which, if the Specified Currency is Australian dollars or New Zealand dollars, shall be Sydney and Auckland respectively); and
(ii) payments in euro will be made by credit or transfer to a euro account (or any other account to which euro may be credited or transferred) specified by the payee or, at the option of the payee, by a euro cheque.
Payments will be subject in all cases to any fiscal or other laws and regulations applicable thereto in the place of payment, but without prejudice to the provisions of Condition 7. References to “Specified Currency” will include any successor currency under applicable law.
(b) Presentation of Notes
The holder of a global Note shall be the only person entitled to receive payments in respect of Notes represented by such global Note and the Issuer will be discharged by payment to, or to the order of, the holder of such global Note in respect of each amount so paid. Each of the persons shown in the records of DTC, Euroclear or Clearstream, Luxembourg as the beneficial holder of a particular nominal amount of Notes represented by such global Note must look solely to either DTC, Euroclear or Clearstream, Luxembourg, as the case may be for such beneficial holder’s share of each payment so made by the Issuer to, or to the order of, the holder of such global Note.
All amounts payable to DTC or its nominee as registered holder of a global Note in respect of Notes denominated in a Specified Currency other than U.S. dollars shall be paid by transfer by the Registrar to an account in the relevant Specified Currency of the Exchange Agent on behalf of DTC or its nominee for payment in such Specified Currency or conversion into U.S. dollars in accordance with the provisions of the Agency Agreement.
Payments of principal (other than instalments of principal (if any) prior to the final instalment) in respect of any Notes (whether in definitive or global form) will be made in the manner provided in Condition 5(a) above to the persons in whose name such Notes are registered at the close of business on the business day (being for this purpose a day on which banks are open for business in the city where the Registrar is located) immediately prior to the relevant payment date against presentation of such Notes at the specified office of the Registrar or a Transfer Agent.
Payments of interest due on a Note (whether in definitive or global form) and payments of instalments (if any) of principal on a Note, other than the final instalment, will be made in the manner specified in Condition 5(a) above to the person in whose name such Note is registered (i) where the Notes are in global form, at the close of the business day (being for this purpose a day on which DTC and/or Euroclear and Clearstream, Luxembourg, as the case may be, are open for business) before the relevant due date and (ii) where the Notes are in definitive form, at the close of business on the fifteenth day (whether or not such fifteenth day is a business day (being for this purpose a day on which banks are open for business in the city where the specified office of the Registrar is located)) prior to such due date (in the case of (i) and (ii), each the “Record Date”). In the case of payments by cheque, cheques will be mailed to the holder (or the
146 first named of joint holders) at such holder's registered address on the business day (as described above) immediately preceding the due date.
If payment in respect of any Notes is required by credit or transfer as referred to in Condition 5(a), application for such payment must be made by the holder to the Registrar not later than the relevant Record Date.
(c) Payment Day
If the date for payment of any amount in respect of any Note is not a Payment Day, the holder thereof shall not be entitled to payment until the next following Payment Day in the relevant place and shall not be entitled to further interest or other payment in respect of such delay. For these purposes, “Payment Day” means any day which is (subject to Condition 8):
(i) a day on which commercial banks and foreign exchange markets settle payments and are open for general business (including dealing in foreign exchange and foreign currency deposits) in:
(A) in the case of Notes in definitive form only, the relevant place of presentation;
(B) any Additional Financial Centre specified in the applicable Final Terms; and
(ii) either (1) in relation to any sum payable in a Specified Currency other than euro, a day on which commercial banks and foreign exchange markets settle payments and are open for general business (including dealings in foreign exchange and foreign currency deposits) in the principal financial centre of the country of the relevant Specified Currency (which, if the Specified Currency is Australian dollars or New Zealand dollars, shall be Sydney and Auckland respectively) or (2) in relation to any sum payable in euro, a TARGET Settlement Day.
(d) Interpretation of Principal and Interest
Any reference in these Terms and Conditions to principal in respect of the Notes shall be deemed to include, as applicable:
(i) any additional amounts which may be payable with respect to principal under Condition 7 or under any undertaking or covenant given in addition thereto, or in substitution therefor, pursuant to the Trust Deed;
(ii) the Final Redemption Amount of the Notes;
(iii) the Early Redemption Amount of the Notes;
(iv) the Optional Redemption Amount(s) (if any) of the Notes;
(v) in relation to Notes redeemable in instalments, the Instalment Amounts;
(vi) in relation to Zero Coupon Notes, the Amortised Face Amount (as defined in Condition 6(e)); and
(vii) any premium and any other amounts (other than interest) which may be payable by the Issuer under or in respect of the Notes.
Any reference in these Terms and Conditions to interest in respect of the Notes shall be deemed to include, as applicable, any additional amounts which may be payable with respect to interest under Condition 7 or under any undertaking or covenant given in addition thereto, or in substitution therefor, pursuant to the Trust Deed.
6 Redemption and Purchase
(a) At Maturity
147 Unless previously redeemed or purchased and cancelled as specified below, each Note (including each Index Linked Redemption Note) will be redeemed by the Issuer at its Final Redemption Amount specified in, or determined in the manner specified in, the applicable Final Terms in the relevant Specified Currency on the Maturity Date.
(b) Redemption for Tax Reasons
Subject, in the case of Subordinated Notes, as provided in Condition 6(j), the Notes may be redeemed at the option of the Issuer in whole, but not in part, at any time (if this Note is not a Floating Rate Note, an Index Linked Interest Note nor a Dual Currency Note) or on any Interest Payment Date (if this Note is a Floating Rate Note, an Index Linked Interest Note or a Dual Currency Note), on giving not less than 30 nor more than 60 days' notice to the Trustee and the Agent and, in accordance with Condition 13, the Noteholders (which notice shall be irrevocable), if the Issuer satisfies the Trustee immediately before the giving of such notice that:
(i) on the occasion of the next payment due under the Notes, the Issuer has or will become obliged to pay additional amounts as provided or referred to in Condition 7 as a result of any change in, or amendment to, the laws or regulations of the Kingdom of Norway or any political subdivision or any authority thereof or any authority or agency therein having power to tax, or any change in the application or official interpretation of such laws or regulations, which change or amendment becomes effective on or after the Issue Date of the first Tranche of the Notes; and
(ii) such obligation cannot be avoided by the Issuer taking reasonable measures available to it,
provided that no such notice of redemption shall be given earlier than 90 days prior to the earliest date on which the Issuer would be obliged to pay such additional amounts were a payment in respect of the Notes then due.
Prior to the publication of any notice of redemption pursuant to this Condition, the Issuer shall deliver to the Trustee a certificate signed by two Directors of the Issuer stating that the Issuer is entitled to effect such redemption and setting forth a statement of facts showing that the conditions precedent to the right of the Issuer so to redeem have occurred, and an opinion of independent legal advisers of recognised standing to the effect that the Issuer has or will become obliged to pay such additional amounts as a result of such change or amendment and the Trustee shall be entitled to accept the certificate and opinion as sufficient evidence of the satisfaction of the conditions precedent set out above, in which event it shall be conclusive and binding on the Noteholders.
Notes redeemed pursuant to this Condition 6(b) will be redeemed at their Early Redemption Amount referred to in Condition 6(e) below together (if appropriate) with interest accrued to (but excluding) the date of redemption.
(c) Redemption at the Option of the Issuer (Issuer Call)
This Condition 6(c) is not applicable for Subordinated Notes prior to five years from their Issue Date and references to “Notes” in this Condition 6(c) shall be construed accordingly.
Subject, in the case of Subordinated Notes, to obtaining the prior written consent of the Norwegian FSA as provided in Condition 6(j), if the Issuer Call is specified in the applicable Final Terms to apply, the Issuer shall, having given:
(i) not less than 15 nor more than 30 days' notice to the Noteholders in accordance with Condition 13; and
(ii) not less than 15 days before the giving of the notice referred to in (i), notice to the Trustee, the Agent and the Registrar,
148 (which notices shall be irrevocable and shall specify the date fixed for redemption), redeem all or some only of the Notes then outstanding on any Optional Redemption Date and at the Optional Redemption Amount(s) specified in, or determined in the manner specified in, the applicable Final Terms together, if appropriate, with interest accrued to (but excluding) the relevant Optional Redemption Date. Any such redemption must be of a nominal amount not less than the Minimum Redemption Amount or not more than the Higher Redemption Amount, in each case as may be specified in the applicable Final Terms. In the case of a partial redemption of Notes, the Notes (or, as the case may be, parts of Notes) to be redeemed (“Redeemed Notes”) will be selected individually by lot (without involving any part only of a Note in the case of Redeemed Notes represented by definitive Notes) and in accordance with the rules of DTC and/or Euroclear and/or Clearstream, Luxembourg (to be reflected in the records of Euroclear and Clearstream, Luxembourg as either a pool factor or a reduction in nominal amount, at their discretion), as the case may be, in the case of Redeemed Notes represented by a global Note, in each case not more than 30 days prior to the date fixed for redemption (such date of selection being hereinafter called the “Selection Date”). In the case of Redeemed Notes represented by definitive Notes, a list of the serial numbers of such Redeemed Notes will be published in accordance with Condition 13 not less than 15 days prior to the date fixed for redemption. No exchange of the relevant global Note will be permitted during the period from (and including) the Selection Date to (and including) the date fixed for redemption pursuant to this Condition 6(c) and notice to that effect shall be given by the Issuer to the Noteholders in accordance with Condition 13 at least 5 days prior to the Selection Date.
(d) Redemption at the Option of the Noteholders (Investor Put)
This Condition 6(d) is not applicable for Subordinated Notes prior to five years from their Issue Date and references to “Notes” in this Condition 6(d) shall be construed accordingly.
Subject, in the case of Subordinated Notes, to obtaining the prior written consent of the Norwegian FSA as provided in Condition 6(j), if the Investor Put is specified in the applicable Final Terms to apply, upon the holder of any Note giving to the Issuer in accordance with Condition 13 not less than 15 nor more than 30 days' notice the Issuer will, upon the expiry of such notice, redeem, subject to, and in accordance with, the terms specified in the applicable Final Terms, in whole (but not in part), such Note on the Optional Redemption Date and at the Optional Redemption Amount together, if appropriate, with interest accrued to (but excluding) the Optional Redemption Date. It may be that before an Investor Put can be exercised, certain conditions and/or circumstances will need to be satisfied. Where relevant, such provisions will be set out in the applicable Final Terms.
If this Note is in definitive form and held outside DTC or Euroclear or Clearstream, Luxembourg, to exercise the right to require redemption of this Note under this Condition the holder of this Note must deliver such Note at the specified office of any Transfer Agent or the Registrar at any time during normal business hours of such Transfer Agent or the Registrar falling within the notice period, accompanied by a duly completed and signed notice of exercise in the form (for the time being current) obtainable from any specified office of any Transfer Agent or the Registrar (a “Put Notice”) and in which the holder must specify a bank account (or, if payment is by cheque, an address) to which payment is to be made under this Condition.
If this Note is cleared through DTC, to exercise the right to require redemption of this Note under this Condition the holder of this Note must, within the notice period, give notice to the Registrar of such exercise in the form of a Put Notice acceptable to the Registrar and irrevocably instruct DTC to debit such holder's securities account with this Note on or before the Optional Redemption Date in accordance with applicable DTC practice.
If this Note is represented by a global Note or is a Note in definitive form and held through Euroclear or Clearstream, Luxembourg, to exercise the right to require redemption of this Note under this Condition the holder of this Note must, within the notice period, give notice to the Agent or the Registrar of such exercise, where applicable, in accordance with the standard procedures of Euroclear and Clearstream, Luxembourg (which may include notice being given on his instruction by Euroclear, Clearstream, Luxembourg, or any common depositary or common safekeeper, as the case may be, for them to the Agent
149 by electronic means) in a form acceptable to Euroclear or Clearstream, Luxembourg, as the case may be, from time to time.
Any Put Notice given by a holder of any Note pursuant to this Condition 6(d) shall be irrevocable except, in the case of Unsubordinated Notes, where prior to the due date of redemption an Event of Default shall have occurred and the Trustee has declared the Notes to be immediately due and repayable pursuant to Condition 9 in which event such holder, at its option, may elect by notice to the Issuer to withdraw the notice given pursuant to this Condition 6(d).
(e) Early Redemption Amounts
For the purpose of Condition 6(b) above and Condition 9, the Notes will be redeemed at the Early Redemption Amount calculated as follows:
(i) in the case of Notes with a Final Redemption Amount equal to the Issue Price, at the Final Redemption Amount thereof;
(ii) in the case of Notes (other than Zero Coupon Notes but including Instalment Notes) with a Final Redemption Amount which is or may be less or greater than the Issue Price or which is payable in a Specified Currency other than that in which the Notes are denominated; or
(iii) in the case of Zero Coupon Notes, at an amount (the “Amortised Face Amount”) calculated in accordance with the following formula:
Y Early Redemption Amount = RP (1AY)
where:
“RP” means the Reference Price;
“AY” means the Accrual Yield expressed as a decimal; and
“y” is a fraction the numerator of which is equal to the number of days (calculated on the basis of a 360-day year consisting of 12 months of 30 days each) from (and including) the Issue Date of the first Tranche of the Notes to (but excluding) the date fixed for redemption or (as the case may be) the date upon which such Note becomes due and repayable and the denominator of which is 360,
or on such other calculation basis as may be specified in the applicable Final Terms.
(f) Instalments
Instalment Notes will be redeemed in the Instalment Amounts and on the Instalment Dates. In the case of early redemption, the Early Redemption Amount will be determined pursuant to Condition 6(e) above.
(g) Purchases
Subject, in the case of Subordinated Notes, as provided in Condition 6(i), the Issuer or any of its subsidiaries may at any time purchase beneficially or procure others to purchase beneficially for its account Notes at any price in the open market or otherwise. Such Notes may be held, reissued, resold or, at the option of the Issuer, surrendered to any Paying Agent and/or the Registrar for cancellation.
(h) Cancellation
All Notes which are redeemed will forthwith be cancelled. All Notes so cancelled and the Notes purchased and cancelled pursuant to Condition 6(g) shall be forwarded to the Agent.
150 (i) Late payment on Zero Coupon Notes
If the amount payable in respect of any Zero Coupon Note upon redemption of such Zero Coupon Note pursuant to Conditions 6(a), (b), (c) or (d) above or upon its otherwise becoming due and repayable as provided in Condition 9 is improperly withheld or refused, the amount due and repayable in respect of such Zero Coupon Note shall be the amount calculated as provided in Condition 6(e)(ii) above as though the references therein to the date fixed for the redemption or the date upon which such Zero Coupon Note becomes due and payable were replaced by references to the date which is the earlier of:
(i) the date on which all amounts due in respect of such Zero Coupon Note have been paid; and
(ii) five days after the date on which the full amount of the moneys payable in respect of such Zero Coupon Notes has been received by the Agent, the Registrar or the Trustee and notice to that effect has been given to the Noteholders in accordance with Condition 13.
(j) Consent
In the case of Subordinated Notes, no early redemption in any circumstances or purchase under Condition 6(g) shall take place without the prior written consent of the Norwegian FSA. For the avoidance of doubt, redemption of Subordinated Notes under Condition 6(a) shall not require the consent of the Norwegian FSA.
7 Taxation
All payments of principal and interest in respect of the Notes by the Issuer will be made without withholding or deduction for or on account of any present or future taxes, duties, assessments or governmental charges of whatever nature (a) imposed or levied by or on behalf of the Kingdom of Norway or any political subdivision or any authority or agency thereof or therein having power to tax, or (b) required pursuant to an agreement described in Section 1471(b) of the U.S. Internal Revenue Code of 1986 (the “Code”) or otherwise imposed pursuant to Sections 1471 through 1474 of the Code, any regulations or agreements thereunder, official interpretations thereof or law implementing an intergovernmental approach thereto (“FATCA”), unless such withholding or deduction is required by law (including pursuant to an agreement described in Section 1471(b) of the Code or otherwise imposed pursuant to FATCA). In such event, the Issuer will pay such additional amounts as shall be necessary in order that the net amounts received by the holders of the Notes after such withholding or deduction shall equal the respective amounts of principal and interest which would otherwise have been receivable in respect of the Notes, as the case may be, in the absence of such withholding or deduction; except that no such additional amounts shall be payable with respect to any Note:
(i) presented for payment in the Kingdom of Norway; or
(ii) presented for payment by or on behalf of a holder who is liable for such taxes, duties, assessments or governmental charges in respect of such Note by reason of his having some connection with the Kingdom of Norway other than the mere holding of such Note; or
(iii) presented for payment more than 30 days after the Relevant Date (as defined below) except to the extent that the holder thereof would have been entitled to an additional amount on presenting the same for payment on such thirtieth day assuming that day to have been a Payment Day (as defined in Condition 5(c)); or
(iv) where such withholding or deduction is imposed on a payment to an individual and is required to be made pursuant to European Council Directive 2003/48/EC or any law implementing or complying with, or introduced in order to conform to, such Directive; or
(v) presented for payment by or on behalf of a holder who would be able to avoid such withholding or deduction by presenting the relevant Note to another Paying Agent in a Member State of the European Union; or
151 (vi) where such withholding or deduction is required pursuant to an agreement described in Section 1471(b) of the Code or is otherwise required by FATCA.
As used herein, the “Relevant Date” means the date on which such payment first becomes due, except that, if the full amount of the moneys payable has not been duly received by the Trustee or the Agent or the Registrar, as the case may be, on or prior to such due date, it means the date on which, the full amount of such moneys having been so received, notice to that effect is duly given to the Noteholders in accordance with Condition 13.
8 Prescription
The Notes will become void unless claims in respect of principal and/or interest are made within a period of 10 years (in the case of principal) and five years (in the case of interest) after the Relevant Date (as defined in Condition 7) therefor.
9 Events of Default and Enforcement relating to Unsubordinated Notes
This Condition shall apply only to Unsubordinated Notes and references to “Notes” in this Condition shall be construed accordingly.
(a) The Trustee at its discretion may, and if so requested in writing by the holders of at least one-fifth in nominal amount of the Notes then outstanding or if so directed by an Extraordinary Resolution, shall (subject in each case to being indemnified and/or secured and/or prefunded to its satisfaction), (but in the case of the happening of any of the events described in Conditions 9(a)(ii), (iii) and (in the case of the Principal Subsidiaries only) (iv), (v) and (vi), only if the Trustee shall have certified in writing to the Issuer that such event is, in its opinion, materially prejudicial to the interests of the Noteholders), give notice in writing to the Issuer that each Note is, and each Note shall thereupon immediately become, due and repayable at its Early Redemption Amount (as described in Condition 6(e)) together with accrued interest as provided in the Trust Deed if any of the following events (each an “Event of Default”) shall occur:
(i) the Issuer is in default, for any reason whatsoever, for more than 14 days in the payment of any interest in respect of the Notes or for more than 7 days in the payment of any principal due on the Notes; or
(ii) the Issuer is in default in the performance of any of its obligations (other than to make payments in respect of the Notes) contained in the Notes or the Trust Deed and (except where the Trustee considers such failure to be incapable of remedy when no such continuation or notice as is hereinafter referred to would be required) such default shall continue for more than 30 days (or such longer period as the Trustee may permit) after written notice requiring such default to be remedied shall have been given by the Trustee to the Issuer; or
(iii) any payment obligation under any indebtedness (including deposits) (“Indebtedness”) of the Issuer or any of its Principal Subsidiaries becomes due and repayable prematurely by reason of an event of default (howsoever described) or the Issuer or any of its Principal Subsidiaries fails to make any payment in respect of any Indebtedness within 30 days of the due date for payment (or within the applicable grace period, if such period is longer than 30 days) or any security given by the Issuer or any of its Principal Subsidiaries for any Indebtedness becomes enforceable or if default is made by the Issuer or any of its Principal Subsidiaries in making any payment due under any guarantee and/or indemnity given by it in relation to any obligation of any other person for 30 days (or within the applicable grace period, if such period is longer than 30 days),
PROVIDED that no such event shall constitute an Event of Default unless the Indebtedness or other relative liability either alone or when aggregated with other Indebtedness and/or liabilities relative to all (if any) other events which shall have
152 occurred and be outstanding or not discharged, as the case may be, shall amount to at least U.S.$25,000,000 (or its equivalent in any other currency) and PROVIDED further that, for the purposes of this Condition 9(a)(iii)), neither the Issuer nor any of its Principal Subsidiaries shall be deemed to be in default with respect to any such Indebtedness, guarantee or indemnity if it shall be contesting in good faith by appropriate means its liability to make payment thereunder; or
(iv) the Issuer or any of its Principal Subsidiaries goes into liquidation (except in connection with a merger or reorganisation in such a way that all assets and liabilities of the Issuer or any of its Principal Subsidiaries, as the case may be, pass to another legal person in universal succession by operation of law); or
(v) the Issuer or any of its Principal Subsidiaries suspends payment or announces its inability to meet its financial obligations when they fall due; or
(vi) public administration, insolvency, or moratorium proceedings are instituted against the Issuer or any of its Principal Subsidiaries which shall not have been dismissed or stayed within 60 days after institution, or if the Issuer or any of its Principal Subsidiaries applies for institution of such proceedings in respect of itself or offers or makes an arrangement for the benefit of creditors.
There are no events of default in relation to Subordinated Notes.
According to the Norwegian Regulations no. 435 of 1st June, 1990 (as amended) adopted by the Norwegian FSA and circulation letter no. 36/96 from the Norwegian FSA, Subordinated Notes must not contain provisions permitting a Noteholder to exercise an option to redeem a Subordinated Note before the stated redemption date. Notwithstanding the foregoing, in the event that the Issuer fails to pay interest or principal when due on any Subordinated Note the Trustee on behalf of holders of such Notes shall be entitled to bring proceedings against the Issuer for payment of such amounts.
(b) Enforcement
The Trustee may at any time, at its discretion and without notice, take such steps, actions or proceedings against the Issuer as it may think fit to enforce the provisions of the Trust Deed and the Notes, but it shall not be bound to take any such steps, actions or proceedings or any other action in relation to the Trust Deed or the Notes unless (i) it shall have been so directed by an Extraordinary Resolution or so requested in writing by the holders of at least one-fifth in nominal amount of the Notes then outstanding and (ii) it shall have been indemnified and/or secured and/or prefunded to its satisfaction.
No Noteholder shall be entitled to proceed directly against the Issuer unless the Trustee, having become bound so to proceed, fails to do so within a reasonable period and the failure shall be continuing.
(c) Definitions
For the purposes of this Condition 9, “Principal Subsidiary” at any time shall have the meaning given in the Trust Deed, in summary being a subsidiary (as defined in the Trust Deed) of the Issuer (inter alia):
(i) whose operating income attributable to the Issuer (consolidated in the case of a subsidiary which itself has subsidiaries) or whose total assets (consolidated in the case of a subsidiary which itself has subsidiaries) represent not less than 10 per cent of the consolidated operating income attributable to the shareholders of the Issuer, or, as the case may be consolidated total assets, of the Issuer and its subsidiaries taken as a whole, all as calculated respectively by reference to the then latest audited accounts
153 (consolidated or, as the case may be, unconsolidated) of the subsidiary and the then latest audited consolidated accounts of the Issuer and its subsidiaries; or
(ii) to which is transferred the whole or substantially the whole of the undertaking and assets of a subsidiary of the Issuer which immediately prior to the transfer is a Principal Subsidiary of the Issuer; or
(iii) to which is transferred an undertaking or assets which, taken together with the undertaking or assets of the transferee subsidiary, generated (or, in the case of the transferee subsidiary being acquired after the end of the financial period to which the then latest relevant audited consolidated accounts of the Issuer and its subsidiaries relate, generate operating income attributable to the Issuer equal to) not less than 10 per cent of the consolidated operating income attributable to the shareholders of the Issuer, or represent (or, in the case aforesaid, are equal to) not less than 10 per cent of the consolidated total assets, of the Issuer and its subsidiaries taken as a whole, all as calculated as referred to in Condition 9(c)(i) above,
all as more particularly defined in the Trust Deed (and, for the avoidance of doubt, in the event of inconsistency between the summary set out in this Condition 9(c) and the Trust Deed, the Trust Deed will prevail).
10 Replacement of Notes
Should any Note be lost, stolen, mutilated, defaced or destroyed, it may be replaced at the specified office of the Registrar outside the United Kingdom, upon payment by the claimant of such costs and expenses as may be incurred in connection therewith and on such terms as to evidence and indemnity as the Issuer may reasonably require. Mutilated or defaced Notes must be surrendered before replacements will be issued.
11 Transfer and Exchange of Notes
(a) Form of Notes
Notes of each Tranche sold to qualified institutional buyers within the meaning of Rule 144A under the Securities Act (“QIBs”) will initially be represented by a permanent global Note in registered form, without interest coupons (the “Rule 144A Global Note”), deposited with a custodian for, and registered in the name of a nominee of, DTC. Notes in definitive form issued in exchange for Rule 144A Global Notes or otherwise sold or transferred in accordance with the requirements of Rule 144A under the Securities Act, together with the Rule 144A Global Notes, are referred to herein as “Rule 144A Notes.”
Rule 144A Notes shall bear the legend set forth in the Rule 144A Global Note (the “Legend”). Upon the transfer, exchange or replacement of Rule 144A Notes, or upon specific request for removal of the Legend, the Registrar shall (save as provided in Condition 11(f)) deliver only Rule 144A Notes with such legend or refuse to remove such Legend, as the case may be, unless there is delivered to the Issuer such satisfactory evidence as may reasonably be required by the Issuer, which may include an opinion of U.S. counsel, that neither the Legend nor the restrictions on transfer set forth therein are required to ensure compliance with the provisions of the Securities Act.
Notes of each Tranche sold outside the United States in reliance on Regulation S under the United States Securities Act of 1933, as amended (the “Securities Act”), will initially be represented by a permanent global Note in registered form, without interest coupons (the “Regulation S Global Note” and, together with the Rule 144A Global Note, the “Registered Global Notes”), which will either (i) be deposited with a custodian for, and registered in the name of a nominee of, DTC for the accounts of Euroclear and Clearstream, Luxembourg or (ii) be deposited with a common depositary or common safekeeper, as the case may be, for Euroclear and Clearstream, Luxembourg, and registered in the name of a common nominee of, Euroclear and Clearstream, Luxembourg or in the name of a nominee of the common safekeeper, as specified in the applicable Final Terms. Notes in definitive form issued in exchange for Regulation S Global Notes or otherwise sold or transferred in reliance on Regulation S under the Securities
154 Act, together with the Regulation S Global Notes, are referred to herein as “Regulation S Notes.” Beneficial interests in a Regulation S Global Note registered in the name of a nominee of DTC may be held only through DTC directly, by a participant in DTC, or indirectly, through a participant in DTC, including Euroclear or Clearstream, Luxembourg.
Subject as otherwise provided in this Condition 11, Notes in definitive form may be exchanged or transferred in whole or in part in the authorised denominations for one or more definitive Notes of like aggregate nominal amount.
(b) Exchange of interests in Registered Global Notes for Notes in definitive form
Interests in the Regulation S Global Note and the Rule 144A Global Note will be exchangeable for Notes in definitive form if (i) DTC or Euroclear and/or Clearstream, Luxembourg, as the case may be, notifies the Issuer that it is unwilling or unable to continue as depositary for such Registered Global Note or (ii) if applicable, DTC ceases to be a “Clearing Agency” registered under the United States Securities Exchange Act of 1934, as amended (“Exchange Act”), or the Issuer has been notified that either Euroclear or Clearstream, Luxembourg has been closed for business for a continuous period of 14 days (other than by reason of holiday, statutory or otherwise) or has announced its intention permanently to cease business or has in fact done so, and a successor depositary or alternative clearing system satisfactory to the Issuer, the Trustee and the Agent is not available, or (iii) in the case of Unsubordinated Notes, an Event of Default (as defined in Condition 9) has occurred and is continuing with respect to such Notes or, in the case of Subordinated Notes, a payment default has occurred and is continuing with respect to such Notes, or (iv) if the applicable Final Terms so permit, a written request for one or more Notes in definitive form is made by a holder of a beneficial interest in a Registered Global Note; provided that in the case of (iv) such written notice or request, as the case may be, is submitted to the Registrar by the beneficial owner not later than 60 days prior to the requested date of such exchange. Upon the occurrence of any of the events described in the preceding sentence, the Issuer will cause the appropriate Notes in definitive form to be delivered provided that, notwithstanding the above, no Regulation S Notes in definitive form will be issued until the expiry of the period that ends 40 days after completion of the distribution of each Tranche of Notes, as certified by or on behalf of the relevant distributors (the “Distribution Compliance Period”).
(c) Transfers of Registered Global Notes
Transfers of a Registered Global Note registered in the name of a nominee for DTC shall be limited to transfers of such Registered Global Note, in whole but not in part, to a nominee of DTC or to a successor of DTC or such successor's nominee.
(d) Transfers of interests in Rule 144A Notes
Transfers of Rule 144A Notes or beneficial interests therein may be made:
(i) to a transferee who takes delivery of such interest through a Rule 144A Note where the transferee is a person whom the transferor reasonably believes is a QIB in a transaction meeting the requirements of Rule 144A, without certification; or
(ii) to a transferee who takes delivery of such interest through a Regulation S Global Note, upon receipt by the Registrar of a written certification substantially in the form set out in the Agency Agreement, duly completed and amended as appropriate (a “Transfer Certificate”), copies of which are available from the specified office of the Registrar or any Transfer Agent, from the transferor to the effect that such transfer is being made in accordance with Regulation S and that, if such transfer is being made prior to expiry of the applicable Distribution Compliance Period, the interests in the Notes being transferred will be held immediately thereafter through Euroclear and/or Clearstream, Luxembourg; or
(iii) otherwise pursuant to the Securities Act or an exemption therefrom, subject to receipt by the Issuer of such satisfactory evidence as the Issuer may reasonably require, which may include an
155 opinion of U.S. counsel, that such transfer is in compliance with any applicable securities laws of any state of the United States,
and in each case, in accordance with any applicable securities laws of any state of the United States or any other jurisdiction.
(e) Transfers of interests in Regulation S Global Notes
Prior to expiry of the applicable Distribution Compliance Period, transfers by the holder of, or of a beneficial interest in, a Regulation S Global Note to a transferee in the United States will only be made:
(i) upon receipt by the Registrar of a duly completed Transfer Certificate from the transferor of the Note or beneficial interest therein to the effect that such transfer is being made to a person whom the transferor reasonably believes is a QIB in a transaction meeting the requirements of Rule 144A; or
(ii) otherwise pursuant to the Securities Act or an exemption therefrom, subject to receipt by the Issuer of such satisfactory evidence as the Issuer may reasonably require, which may include an opinion of U.S. counsel, that such transfer is in compliance with any applicable securities law of any state of the United States,
and, in each case, in accordance with any applicable securities laws of any state of the United States or any other jurisdiction.
After expiry of the applicable Distribution Compliance Period (i) beneficial interests in Regulation S Global Notes registered in the name of a nominee for DTC may be held through DTC directly, by a participant in DTC, or indirectly through a participant in DTC and (ii) such certification requirements will no longer apply to such transfers.
(f) Exchanges and transfers of Notes generally
Holders of Notes in definitive form may exchange such Notes for interests in a global Note of the same type at any time.
Transfers of beneficial interests in global Notes will be effected by DTC, Euroclear or Clearstream, Luxembourg, as the case may be, and, in turn, by participants and, if appropriate, indirect participants in such clearing systems acting on behalf of beneficial transferors and transferees of such interests. A beneficial interest in a global Note will be transferable and exchangeable for Notes in definitive form or for a beneficial interest in another global Note only in accordance with the rules and operating procedures for the time being of DTC, Euroclear or Clearstream, Luxembourg, as the case may be (the “Applicable Procedures”).
Upon the terms and subject to the conditions set forth in the Agency Agreement, a Note in definitive form may be transferred in whole or in part (in the authorised denominations set out in the applicable Final Terms) by the holder or holders surrendering the Note for registration of the transfer of the Note (or the relevant part of the Note) at the specified office of the Registrar or any Transfer Agent, with the form of transfer thereon duly executed by the holder or holders thereof or their attorney or attorneys duly authorised in writing and upon the Registrar or, as the case may be, the relevant Transfer Agent, after due and careful enquiry, being satisfied with the documents of title and the identity of the person making the request and subject to such reasonable regulations as the Issuer, the Trustee and the Registrar, or as the case may be, the relevant Transfer Agent prescribe, including any restrictions imposed by the Issuer on transfers of Notes originally sold to a U.S. person. Subject as provided above, the Registrar or, as the case may be, the relevant Transfer Agent will, within three business days (being for this purpose a day on which banks are open for business in the city where the specified office of the Registrar or, as the case may be, the relevant Transfer Agent is located) of the request (or such longer period as may be required to comply with any applicable fiscal or other laws or regulations) authenticate and deliver, or procure the authentication and delivery of, at its specified office to the transferee or (at the risk of the transferee) send by mail to such
156 address as the transferee may request, a new Note in definitive form of a like aggregate nominal amount to the Note (or the relevant part of the Note) transferred. In the case of the transfer of part only of a Note in definitive form, a new Note in definitive form in respect of the balance of the Note not transferred will be so authenticated and delivered or (at the risk of the transferor) sent to the transferor.
Exchanges or transfers by a holder of a Note in definitive form for an interest in, or to a person who takes delivery of such Note through, a global Note will be made no later than 60 days after the receipt by the Registrar or as the case may be, relevant Transfer Agent of the Note in definitive form to be so exchanged or transferred and, if applicable, upon receipt by the Registrar of a written certification from the transferor.
(g) Registration of transfer upon partial redemption
In the event of a partial redemption of Notes under Condition 6, the Issuer shall not be required to register the transfer of any Note, or part of a Note, called for partial redemption.
(h) Closed Periods
No Noteholder may require the transfer of a Note to be registered during the period of 30 days ending on the due date for any payment of principal or interest on that Note.
(i) Costs of exchange or registration
The costs and expenses of effecting any exchange or registration of transfer pursuant to the foregoing provisions (except for the expenses of delivery by other than regular mail (if any) and, if the Issuer shall so require, for the payment of a sum sufficient to cover any tax or other governmental charge or insurance charges that may be imposed in relation thereto which will be borne by the Noteholder) will be borne by the Issuer.
12 Agent, Paying Agents, Exchange Agent, Transfer Agent and Registrar
The names of the initial Agent, the initial Registrar and the other initial Paying Agents, the initial Exchange Agent and the initial Transfer Agent and their initial specified offices are set out in the Agency Agreement.
The Issuer is entitled, with the prior written approval of the Trustee (such approval not to be unreasonably withheld or delayed), to vary or terminate the appointment of any Paying Agent or the Registrar or the Exchange Agent or the Transfer Agent or any Calculation Agent and/or appoint additional or other Paying Agents or additional or other Registrars, Exchange Agents, Transfer Agents or Calculation Agents and/or approve any change in the specified office through which any Paying Agent, Registrar, Exchange Agent, Transfer Agent or Calculation Agent acts, provided that:
(i) so long as the Notes are listed on any stock exchange or admitted to listing by any other relevant authority there will at all times be a Transfer Agent (which may be the Registrar), with a specified office in such place as may be required by the rules and regulations of such stock exchange or other relevant authority;
(ii) there will at all times be a Paying Agent (which may be the Agent) with a specified office in a city in continental Europe outside Norway;
(iii) there will at all times be an Agent;
(iv) there will at all times be a Transfer Agent having a specified office in a place approved by the Agent;
(v) so long as any of the global Notes are held through DTC or its nominee, there will at all times be an Exchange Agent with a specified office in London;
157 (vi) there will at all times be a Registrar with a specified office outside the United Kingdom and, so long as the Notes are listed on any stock exchange or admitted to listing by any other relevant authority, in such place as may be required by the rules and regulations of the relevant stock exchange or other relevant authority; and
(vii) there will at all times be a Paying Agent in a Member State of the European Union that will not be obliged to withhold or deduct tax pursuant to European Council Directive 2003/48/EC or any law implementing or complying with, or introduced in order to conform to, such Directive.
Any variation, termination, appointment or change shall only take effect (other than in the case of insolvency, or where the Agent or Paying Agent is an FFI and does not become, or ceases to be, a Participating FFI, when it shall be of immediate effect) after not less than 30 nor more than 45 days' prior notice thereof shall have been given to the Noteholders in accordance with Condition 13.
In acting under the Agency Agreement, the Agent, the Paying Agents, the Exchange Agent, the Transfer Agent and the Registrar act solely as agents of the Issuer and, in certain circumstances specified therein, of the Trustee and do not assume any obligation to, or relationship of agency or trust with, any Noteholders. The Agency Agreement contains provisions permitting any entity into which the Agent, any Paying Agent, the Exchange Agent, the Transfer Agent and the Registrar is merged or converted or with which it is consolidated or to which it transfers all or substantially all of its assets to become the successor agent.
In these Terms and Conditions, the following terms shall bear the following meanings:
“FFI” means a “foreign financial institution” as such term is defined pursuant to FATCA; and
“Participating FFI” means an FFI that, as from the effective date of withholding on “passthru payments” (as such term is defined pursuant to FATCA), meets the requirements of Section 1471(b) of the Code and any regulations or other official guidance issued thereunder and that has not elected withholding pursuant to Section 1471(b)(3) of the Code.
13 Notices
All notices regarding the Notes to be given by the Issuer will be deemed to be validly given if sent by first class mail or (if posted to an address overseas) by airmail to the holders (or the first named of joint holders) at their respective addresses recorded in the Register and will be deemed to have been given on the fourth day after mailing and, in addition, for so long as any Notes are listed on a stock exchange or are admitted to listing, quotation or trading by another relevant authority and the rules of that stock exchange or relevant authority so require, such notice will be published in a daily newspaper of general circulation in the place or places required by those rules.
Until such time as any definitive Notes are issued, there may (provided that, in the case of Notes listed on a stock exchange, the rules of such stock exchange (or other relevant authority) permit), so long as the global Note(s) is or are held in its/their entirety on behalf of DTC or Euroclear and/or Clearstream, Luxembourg, be substituted for such publication in such newspaper(s) or mailing the delivery of the relevant notice to DTC and/or Euroclear and/or Clearstream, Luxembourg, as the case may be, for communication by them to the holders of the Notes. Any such notice shall be deemed to have been given to the holders of the Notes on the day after the day on which the said notice was given to DTC and/or Euroclear and/or Clearstream, Luxembourg, as the case may be.
Notices to be given by any holder of the Notes shall be in writing and given by lodging the same, together with the relative Note or Notes, with the Registrar. Whilst any of the Notes is represented by a global Note, such notice may be given by any holder of a Note to the Registrar via DTC and/or Euroclear and/or Clearstream, Luxembourg, as the case may be, in such manner as the Registrar and/or DTC and/or Euroclear and/or Clearstream, Luxembourg, as the case may be, may approve for this purpose.
158 14 Meetings of Noteholders, Modification, Waiver and Substitution
(a) Meetings of Noteholders
The Trust Deed contains provisions for convening meetings of the Noteholders to consider any matter affecting their interests, including the sanctioning by Extraordinary Resolution of a modification of the Notes or any of the provisions of the Trust Deed. The Issuer, with the agreement of the Trustee, may modify or vary such provisions for convening meetings to reflect the requirements from time to time of DTC, Euroclear, and/or Clearstream, Luxembourg. Any such modification or variation will be notified to the Noteholders in accordance with Condition 13. Such a meeting may be convened by the Issuer or the Trustee and shall be convened by the Issuer if required in writing by Noteholders holding not less than 5 per cent in nominal amount of the Notes for the time being remaining outstanding. The quorum at any such meeting for passing an Extraordinary Resolution is one or more persons holding or representing not less than 50 per cent in nominal amount of the Notes for the time being outstanding, or at any adjourned meeting one or more persons being or representing Noteholders whatever the nominal amount of the Notes so held or represented, except that at any meeting the business of which includes the modification of certain provisions of the Notes or the Trust Deed (including, but not limited to, modifying the date of maturity of the Notes or any date for payment of interest thereof, reducing or cancelling the amount of principal or the rate of interest payable in respect of the Notes or altering the currency of payment of the Notes), the quorum shall be one or more persons holding or representing not less than two-thirds in aggregate nominal amount of the Notes for the time being outstanding, or at any adjourned such meeting one or more persons holding or representing not less than one-third in aggregate nominal amount of the Notes for the time being outstanding. An Extraordinary Resolution passed at any meeting of the Noteholders shall be binding on all the Noteholders, whether or not they are present at the meeting.
(b) Modification, Waiver and Substitution
The Trustee may agree, without the consent of the Noteholders, to any modification of, or to the waiver or authorisation of any breach or proposed breach of, any of the provisions of the Notes or the Trust Deed, or determine, without any such consent as aforesaid, that any Event of Default or Potential Event of Default (as defined in the Trust Deed) shall not be treated as such, where, in any such case, it is not, in the opinion of the Trustee, materially prejudicial to the interests of the Noteholders so to do or may agree, without any such consent as aforesaid, to any modification which is of a formal, minor or technical nature or to correct a manifest or (to the satisfaction of the Trustee) proven error or to comply with mandatory provisions of Norwegian law. Any such modification shall be binding on the Noteholders and any such modification shall be notified to the Noteholders in accordance with Condition 13 as soon as practicable thereafter.
In connection with the exercise by it of any of its trusts, powers, authorities and discretions (including, without limitation, any modification, waiver, authorisation, determination or substitution), the Trustee shall have regard to the general interests of the Noteholders as a class (but shall not have regard to any interests arising from circumstances particular to individual Noteholders (whatever their number)) and, in particular but without limitation, shall not have regard to the consequences of any such exercise for individual Noteholders (whatever their number) resulting from their being for any purpose domiciled or resident in, or otherwise connected with, or subject to the jurisdiction of, any particular territory or any political sub- division thereof and the Trustee shall not be entitled to require, nor shall any Noteholder be entitled to claim, from the Issuer, the Trustee or any other person any indemnification or payment in respect of any tax consequences of any such exercise upon individual Noteholders except to the extent already provided for in Condition 7 and/or any undertaking or covenant given in addition to, or in substitution for, Condition 7 pursuant to the Trust Deed.
The Trustee may, without the consent of the Noteholders agree with the Issuer, to the substitution in place of the Issuer (or of any previous substitute under this Condition) (the “Substituted Obligor”) as the principal debtor under the Notes and the Trust Deed of another company, being a subsidiary of the Issuer or a successor in business of the Issuer or a subsidiary of the successor in business of the Issuer, subject to (a) unless such substituted company is a successor in business of the Issuer, the Notes being unconditionally and irrevocably guaranteed by the Issuer or its successor in business, (b) the Trustee being satisfied that the interests of the Noteholders will not be materially prejudiced by the substitution and (c)
159 certain other conditions set out in the Trust Deed being complied with. In the case of such a substitution the Trustee may agree, without the consent of the Noteholders, to a change in the law governing the Notes and/or the Trust Deed provided that such change would not in the opinion of the Trustee be materially prejudicial to the interests of the Noteholders.
Notice of any such substitution shall be given by the Substituted Obligor to the Noteholders in accordance with Condition 13 and the provisions of the Trust Deed.
15 Indemnification of the Trustee and Trustee Contracting with the Issuer
The Trust Deed contains provisions for the indemnification of the Trustee and for its relief from responsibility, including provisions relieving it from taking action unless indemnified and/or secured and/or prefunded to its satisfaction.
The Trust Deed also contains provisions pursuant to which the Trustee is entitled, inter alia, (a) to enter into business transactions with the Issuer and/or any of its subsidiaries and to act as trustee for the holders of any other securities issued or guaranteed by, or relating to, the Issuer and/or any of its subsidiaries, (b) to exercise and enforce its rights, comply with its obligations and perform its duties under or in relation to any such transactions or, as the case may be, any such trusteeship without regard to the interests of, or consequences for, the Noteholders, and (c) to retain and not be liable to account for any profit made or any other amount or benefit received thereby or in connection therewith.
16 Further Issues
The Issuer shall be at liberty from time to time, without the consent of the Noteholders, to create and issue further notes having terms and conditions the same as the Notes or the same in all respects save for the issue date, the issue price and the amount and date of the first payment of interest thereon and so that the same shall be consolidated and form a single Series with the outstanding Notes provided, however, that for purposes of U.S. federal income taxation (regardless of whether any Noteholders are subject to U.S. federal income tax laws) are either (i) not issued with original issue discount, (ii) issued with less than a de minimis amount of original issue discount, or (iii) issued in a “qualified reopening” for U.S. federal income tax purposes.
17 Provision of Information
For so long as any Notes remain outstanding and are “restricted securities” (as defined in Rule 144(a)(3) under the Securities Act), the Issuer shall, during any period in which it is neither subject to Sections 13 or 15(d) of the Exchange Act nor exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act, make available to any holder of, or beneficial owner of an interest in, such Notes in connection with any resale thereof and to any prospective purchaser designated by such holder or beneficial owner, in each case upon request, the information specified in, and meeting the requirements of, Rule 144A(d)(4) under the Securities Act.
18 Third Party Rights
Save as provided in Condition 17, no rights are conferred on any person under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of the Notes, but this does not affect any right or remedy of any person which exists or is available apart from that Act.
19 Governing Law and Submission to Jurisdiction
(a) The Trust Deed, Agency Agreement and the Notes and any non-contractual obligations arising therefrom or in connection therewith are governed by, and shall be construed in accordance with, English law except for the provisions of Condition 3 which shall be governed by, and shall be construed in accordance with, the laws of the Kingdom of Norway.
160 (b) The Issuer agrees, for the exclusive benefit of the Trustee, the Paying Agents and the Noteholders that the courts of England are to have jurisdiction to settle any disputes which may arise out of or in connection with the Trust Deed, the Agency Agreement and/or the Notes (including a dispute relating to any non- contractual obligations arising therefrom or in connection therewith) and that accordingly any suit, action or proceedings (together referred to as “Proceedings”) arising out of or in connection with the Trust Deed, the Agency Agreement and the Notes (including any Proceedings relating to any non-contractual obligations arising out of or in connection therewith) may be brought in such courts.
The Issuer hereby irrevocably waives any objection which it may have now or hereafter to the laying of the venue of any such Proceedings in any such court and any claim that any such Proceedings have been brought in an inconvenient forum and hereby further irrevocably agrees that a judgment in any such Proceedings brought in the English courts shall be conclusive and binding upon it and may be enforced in the courts of any other jurisdiction.
Nothing contained in this Condition shall limit any right to take Proceedings against the Issuer in any other court of competent jurisdiction, nor shall the taking of Proceedings in one or more jurisdictions preclude the taking of Proceedings in any other jurisdiction, whether concurrently or not.
The Issuer appoints DNB Bank ASA (London Branch) at its registered office for the time being at 20 St Dunstan's Hill, London EC3R 8HY as its agent for service of process, and undertakes that, in the event of DNB Bank ASA (London Branch) ceasing so to act or ceasing to be registered in England, it will appoint another person approved by the Trustee as its agent for service of process in England in respect of any Proceedings.
Nothing herein shall affect the right to serve proceedings in any other manner permitted by law.
161 FORM OF FINAL TERMS
Set out below is the form of Final Terms which will be completed for each Tranche of Notes issued under the Program.
[Date]
DNB Bank ASA
Issue of [Aggregate Nominal Amount of Tranche] [Title of Notes]
under the U.S.$[●] Medium Term Note Program
PART A – CONTRACTUAL TERMS
Terms used herein shall be deemed to be defined as such for the purposes of the Conditions set forth in the Prospectus dated [date] [and the supplement[s] to the Prospectus dated [date]] which [together] constitute[s] a base prospectus for the purposes of Directive 2003/71/EC (the “Prospectus Directive”) as amended (which includes the amendments made by Directive 2010/73/EU (the “2010 PD Amending Directive”) to the extent that such amendments have been implemented in a relevant Member State). This document constitutes the Final Terms of the Notes described herein for the purposes of Article 5.4 of the Prospectus Directive and must be read in conjunction with the Prospectus [as so supplemented]. Full information on the Issuer and the offer of the Notes is only available on the basis of the combination of these Final Terms and the Prospectus [as so supplemented]. The Prospectus [and the supplement[s]] [is] [are] available for viewing [at [website]] [and] during normal business hours at [address] and copies may be obtained from [address].
[The following alternative language applies if the first Tranche of a Series which is being increased was issued under a Prospectus with an earlier date.
Terms used herein shall be deemed to be defined as such for the purposes of the Conditions (the “Conditions”) set forth in the Prospectus dated [original date]. This document constitutes the Final Terms of the Notes described herein for the purposes of Article 5.4 of Directive 2003/71/EC (the “Prospectus Directive”) as amended (which includes the amendments made by Directive 2010/73/EU (the “2010 PD Amending Directive”) to the extent that such amendments have been implemented in a relevant Member State) and must be read in conjunction with the Prospectus dated [current date] [and the supplement[s] to the Prospectus dated [date]] which [together] constitute[s] a base prospectus for the purposes of the Prospectus Directive, save in respect of the Conditions which are extracted from the Prospectus dated [original date] and are attached hereto. Full information on the Issuer and the offer of the Notes is only available on the basis of the combination of these Final Terms and the Prospectuses dated [original date] and [current date] [as so supplemented]. Copies of such Prospectuses [and the supplement[s]] are available for viewing [at [website]] [and] during normal business hours at [address] and copies may be obtained from [address].]
[Include whichever of the following apply or specify as “Not Applicable” (N/A). Note that the numbering should remain as set out below, even if “Not Applicable” is indicated for individual paragraphs or sub-paragraphs. Italics denote directions for completing the Final Terms.]
[When adding any other final terms or information, consideration should be given as to whether such terms or information constitute “significant new factors” and consequently trigger the need for a supplement to the Prospectus under Article 16 of the Prospectus Directive.]
162 1 Issuer: DNB Bank ASA
2 (i) Series Number: [ ]
(ii) Tranche Number: [ ] (If fungible with an existing Series, details of that Series, including the date on which the Notes become fungible)
3 Specified Currency or Currencies: [ ]
4 Aggregate Nominal Amount:
[Series: [ ]]
[Tranche: [ ]]
5 Issue Price: [ ] per cent of the Aggregate Nominal Amount [plus accrued interest from [insert date] (if applicable)]
6 (i) Specified Denomination(s): [ ]
(N.B. This means the minimum integral amount in which transfers can be made)
(ii) Calculation Amount: [ ] (If only one Specified Denomination, insert the Specified Denomination. If more than one Specified Denomination, insert the highest common factor. N.B. There must be a common factor in the case of two or more Specified Denominations.)
7 (i) Issue Date: [ ]
(ii) Interest Commencement Date: [specify/Issue Date/Not Applicable] (N.B. An Interest Commencement Date will not be relevant for certain Notes, for example Zero Coupon Notes.)
8 Maturity Date: [Fixed rate – specify date/Floating Rate – Interest Payment Date falling in or nearest to [specify month]]
9 Interest Basis: [[ ] per cent Fixed Rate] [[LIBOR/EURIBOR] +/- [ ] per cent Floating Rate] [Zero Coupon] [Index Linked Interest] [Dual Currency] (further particulars specified below)
10 Redemption/Payment Basis: [Redemption at par] [Index Linked Redemption] [Dual Currency] [Instalment] [specify other] (N.B. If the Final Redemption Amount is other than 100 per cent of the nominal amount, the Notes will constitute
163 derivative securities for the purposes of the Prospectus Directive and the requirements of Annex XII to Commission Regulation (EC) No 809/2004 (the “Prospectus Regulation”) will apply)
11 Change of Interest Basis or [Specify details of any provision for change of Notes into Redemption/Payment Basis: another Interest Basis or Redemption/Payment Basis]
12 Put/Call Options: [Investor Put] [Issuer Call] [(further particulars specified below)]
13 Status of the Notes: [Unsubordinated Subordinated]
14 .Method of distribution: [Syndicated/Non-syndicated]
PROVISIONS RELATING TO INTEREST (IF ANY) PAYABLE
15 Fixed Rate Note Provisions [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph)
(i) Rate(s) of Interest: [ ] per cent per annum [payable [annually/semi- annually/quarterly/other (specify)] in arrear] (If payable other than annually, consider amending Condition 4)
(ii) Interest Payment Date(s): [ ] in each year up to and including the Maturity Date/[specify other] (N.B. This will need to be amended in the case of long or short coupons)
(iii) Fixed Coupon Amount(s): [ ] per Calculation Amount (Applicable to Notes in definitive form)
(iv) Broken Amount(s): [ ] per Calculation Amount, payable on the Interest (Applicable to Notes in definitive Payment Date falling [in/on] [ ] form)
(v) Day Count Fraction (subject to [Actual/Actual (ICMA) or 30/360 or [specify other]] paragraph 27):
(vi) Determination Date(s): [ ] in each year [Insert regular interest payment dates, ignoring issue date or maturity date in the case of a long or short first or last coupon N.B. This will need to be amended in the case of regular interest payment dates which are not of equal duration N.B. Only relevant where Day Count Fraction is Actual/Actual (ICMA)]
(vii) Other terms relating to the method of [None/Give details] calculating interest for Fixed Rate Notes:
164 16 Floating Rate Note Provisions [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph)
(i) Specified Period(s)/Specified Interest [ ] Payment Dates:
(ii) First Interest Payment Date: [ ]
(iii) Business Day Convention: [Floating Rate Convention/Following Business Day Convention/Modified Following Business Day Convention/Preceding Business Day Convention/[specify other]]
(iv) Additional Business Centre(s): [ ]
(v) Manner in which the Rate of Interest [Screen Rate Determination/ISDA Determination/ and Interest Amount is to be [specify other]] determined:
(vi) Party responsible for calculating the [ ] Rate of Interest and Interest Amount (if not the Agent):
(vii) Screen Rate Determination:
Reference Rate: [ ] (Either LIBOR, EURIBOR or other, although additional information is required if other – including the fall back provisions in the Agency Agreement)
Interest Determination [ ] Date(s): (Second day on which commercial banks are open for general business (including dealings in foreign exchange and foreign currency deposits) in London prior to the start of each Interest Period if LIBOR (other than euro LIBOR or Sterling LIBOR), first day of each Interest Period if Sterling LIBOR and the second day on which the TARGET2 System is open prior to the start of each Interest Period if EURIBOR or euro LIBOR)
Relevant Screen Page: [ ] (In the case of EURIBOR, if not Reuters EURIBOR01 ensure it is a page which shows a composite rate or amend the fall back provisions appropriately)
(viii) ISDA Determination
Floating Rate Option: [ ]
Designated Maturity: [ ]
Reset Date: [ ]
(ix) Margin(s): [+/-] [ ] per cent per annum
165 (x) Minimum Rate of Interest: [ ] per cent per annum
(xi) Maximum Rate of Interest: [ ] per cent per annum
(xii) Day Count Fraction: [Actual/Actual (ISDA) Actual/365 (Fixed) Actual/365 (Sterling) Actual/360 30/360 30E/360 Other] (See Condition 4 for alternatives)
(xiii) Fall back provisions, rounding [ ] provisions and any other terms relating to the method of calculating interest on Floating Rate Notes, if different from those set out in the Conditions:
17 Zero Coupon Note Provisions [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph)
(i) Accrual Yield: [ ] per cent per annum
(ii) Reference Price: [ ]
(iii) Any other formula/basis of [ ] determining amount payable:
(iv) Day Count Fraction in relation to [Conditions 6(e)(iii) and 6(j) apply/specify other] Early Redemption Amounts and late (Consider applicable day count fraction if not U.S. payment: dollar denominated)
18 Index Linked Interest Note Provisions [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph)
(N.B. If the Final Redemption Amount is other than 100 per cent of the nominal amount, the Notes will be derivative securities for the purposes of the Prospectus Directive and the requirements of Annex XII to the Prospectus Regulation will apply.)
(i) Index/Formula: [Give or annex details]
(ii) Party responsible for calculating the [Give name and address of Calculation Agent] Rate of Interest and Interest Amount (if not the Agent):
(iii) Provisions for determining Coupon (Need to include a description of market disruption or where calculation by reference to settlement disruption events and adjustment provisions) Index and/or Formula is impossible or impracticable:
166 (iv) Specified Period(s)/Specified Interest [ ] Payment Dates:
(v) Business Day Convention: [Floating Rate Convention/Following Business Day Convention/Modified Following Business Day Convention/Preceding Business Day Convention/specify other]
(vi) Additional Business Centre(s): [ ]
(vii) Minimum Rate of Interest: [ ] per cent per annum
(viii) Maximum Rate of Interest: [ ] per cent per annum
(ix) Day Count Fraction: [ ]
19 Dual Currency Note Provisions [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph)
(N.B. If the Final Redemption Amount is other than 100 per cent of the nominal amount, the Notes will be derivative securities for the purposes of the Prospectus Directive and the requirements of Annex XII to the Prospectus Regulation will apply.)
(i) Rate of Exchange/method of [Give or annex details] calculating Rate of Exchange:
(ii) Party, if any, responsible for [Give name and address of Calculation Agent] calculating the principal and/or interest due (if not the Agent):
(iii) Provisions applicable where (Need to include a description of market disruption or calculation by reference to Rate of settlement disruption events and adjustment provisions) Exchange impossible or impracticable:
(iv) Person at whose option Specified [ ] Currency(ies) is/are payable:
PROVISIONS RELATING TO REDEMPTION
20 Issuer Call [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph)
(i) Optional Redemption Date(s): [ ]
(ii) Optional Redemption Amount(s) and [[ ] per Calculation Amount/specify other/see method, if any, of calculation of such Appendix] amount(s):
(iii) If redeemable in part:
(a) Minimum Redemption [ ] Amount:
167 (b) Higher Redemption Amount: [ ]
(iv) Notice period (if other than as set out [ ] in the Conditions): (N.B. If setting notice periods which are different to those provided in the Conditions, the Issuer is advised to consider the practicalities of distribution of information through intermediaries, for example, clearing systems and custodians, as well as any other notice requirements which may apply, for example, as between the Issuer and the Agent or the Trustee)
21 Investor Put [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph)
(i) Optional Redemption Date(s): [ ]
(ii) Optional Redemption Amount(s) and [[ ] per Calculation Amount/specify other/see method, if any, of calculation of such Appendix] amount(s):
(iii) Notice period (if other than as set out [ ] in the Conditions): (N.B. If setting notice periods which are different to those provided in the Conditions, the Issuer is advised to consider the practicalities of distribution of information through intermediaries, for example, clearing systems and custodians, as well as any other notice requirements which may apply, for example, as between the Issuer and the Agent or the Trustee)
22 Final Redemption Amount: [[ ] per Calculation Amount/specify other/see Appendix] (N.B. If the Final Redemption Amount is other than 100 per cent of the nominal amount, the Notes will constitute derivative securities for the purposes of the Prospectus Directive and the requirements of Annex XII to the Prospectus Regulation will apply)
23 Early Redemption Amount(s) payable on [[ ] per Calculation Amount/specify other/see redemption for taxation reasons or on event of Appendix] default and/or the method of calculating the same (if required or if different from that set out in Condition 6(e)):
GENERAL PROVISIONS APPLICABLE TO THE NOTES
24 Form of Notes:
Form: [Registered Notes:
[Regulation S Global Note ([ ] nominal amount) registered in the name of a nominee for [DTC/a common depositary for Euroclear and Clearstream, Luxembourg/a common safekeeper for Euroclear and
168 Clearstream, Luxembourg]]
[Rule 144A Global Note ([ ] nominal amount) registered in the name of a nominee for DTC]
[Definitive Notes (specify nominal amounts)]
25 Additional Financial Centre(s) or other special [Not Applicable/give details] provisions relating to Payment Days: (Note that this paragraph relates to the place of payment, and not Interest Period end dates to which sub-paragraphs 16(iv) and 18(vi) relate)
26 Details relating to Instalment Notes:
(i) Instalment Amount(s): [Not Applicable/give details]
(ii) Instalment Date(s): [Not Applicable/give details]
27 Redenomination applicable: Redenomination [not] applicable
(If Redenomination is applicable, specify the terms of the redenomination in an annex to the Final Terms)
28 Other final terms: [Not Applicable/give details]
[When adding any other final terms consideration should be given as to whether such terms constitute “significant new factors” and consequently trigger the need for a supplement to the Prospectus under Article 16 of the Prospectus Directive]
(Consider including a term providing for tax certification if required to enable interest to be paid gross by the Issuer.)
29 Additional U.S. federal income tax [Not Applicable/give details] considerations:
DISTRIBUTION
30 (i) If syndicated, names of Managers: [Not Applicable/give names] (If the Notes are derivative securities to which Annex XII of the Prospectus Regulation applies, include names of entities agreeing to underwrite the issue on a firm commitment basis and names of the entities agreeing to place the issue without a firm commitment or on a “best efforts” basis if such entities are not the same as the Managers)
(ii) Date of Subscription Agreement: [ ]
(The above is only relevant if the Notes are derivative securities to which Annex XII of the Prospectus Regulation applies)
(iii) Stabilising Manager(s) (if any): [Not Applicable/give name(s)]
169 31 If non-syndicated, name of relevant Dealer: [Not Applicable/give name]
32 (i) U.S. Selling Restrictions: [Reg. S Category 2; TEFRA not applicable]
(ii) [Whether sales to QIBs under Rule [Yes: Rule 144A only/No] 144A are permitted to be made:]
33 Additional selling restrictions: [Not Applicable/give details]
PURPOSE OF FINAL TERMS
These Final Terms comprise the final terms required for issue and admission to trading on [specify relevant regulated market (for example, the Bourse de Luxembourg) or other exchange and, if relevant, admission to an official list] of the Notes described herein pursuant to the U.S.$[●] Medium-Term Note Program of DNB Bank ASA.
RESPONSIBILITY
The Issuer accepts responsibility for the information contained in these Final Terms. [[Relevant third party information, for example in compliance with Annex XII to the Prospectus Regulation in relation to an index or its components] has been extracted from [specify source]. The Issuer confirms that such information has been accurately reproduced and that, so far as it is aware and is able to ascertain from information published by [specify source], no facts have been omitted which would render the reproduced information inaccurate or misleading.]
Signed on behalf of DNB Bank ASA:
By: ...... Duly authorised
170 PART B – OTHER INFORMATION
1 LISTING AND ADMISSION TO TRADING:
(i) Listing and admission to trading: [Application has been made by the Issuer (or on its behalf) for the Notes to be admitted to trading on [specify relevant regulated market (for example the Bourse de Luxembourg) and, if relevant, admission to an official list] with effect from [ ].]
[Application is expected to be made by the Issuer (or on its behalf) for the Notes to be admitted to trading on [specify relevant regulated market (for example the Bourse de Luxembourg) and, if relevant, admission to an official list] with effect from [ ].]
(ii) Estimate of total expenses related to admission [ ] to trading:
2 RATINGS: [The Notes to be issued [[have been]/[are expected to be]] rated [insert details] by [insert credit rating agency name(s)].]
(The above disclosure should reflect the rating allocated to Notes issued under the Program generally or, where the issue has been specifically rated, that rating.)
[[Insert credit rating agency] is established in the European Union and has applied for registration under Regulation (EC) No. 1060/2009, although notification of the corresponding registration decision has not yet been provided by the relevant competent authority.]
[[Insert credit rating agency] is established in the European Union and is registered under Regulation (EC) No. 1060/2009.]
[[Insert credit rating agency] is established in the European Union and is neither registered nor has it applied for registration under Regulation (EC) No. 1060/2009.]
[[Insert credit rating agency] is not established in the European Union and is not registered in accordance with Regulation (EC) No. 1060/2009.]
[[Insert credit rating agency] is not established in the European Union and has not applied for registration under Regulation (EC) No. 1060/2009. However, the application for registration under Regulation (EC) No. 1060/2009 of [insert the name of the relevant EU CRA affiliate that applied for registration], which is established in the European Union, disclosed the intention to endorse credit ratings of [insert credit rating agency].]
171 [[Insert credit rating agency] is not established in the European Union and has not applied for registration under Regulation (EC) No. 1060/2009. The ratings [[have been]/[are expected to be]] endorsed by [insert the name of the relevant EU-registered credit rating agency] in accordance with Regulation (EC) No. 1060/2009. [Insert the name of the relevant EU- registered credit rating agency] is established in the European Union and registered under Regulation (EC) No. 1060/2009.]
[[Insert credit rating agency] is not established in the European Union and has not applied for registration under Regulation (EC) No. 1060/2009, but it is certified in accordance with such Regulation.]
[[Insert credit rating agency] is not established in the European Union and has not applied for registration under Regulation (EC) No. 1060/2009 and is not certified in accordance with such Regulation. The ratings of [[Insert credit rating agency] are not endorsed by a credit rating agency established in the European Union and registered under such Regulation.]
[A list of credit rating agencies registered under the Regulation is published by the European Securities and Markets Authority on its website (http://www.esma.europa.eu/page/List-registered-and- certified-CRAs).]
3 INTERESTS OF NATURAL AND LEGAL PERSONS INVOLVED IN THE ISSUE:
[Save for any fees payable to the [Managers/Dealers], so far as the Issuer is aware, no person involved in the issue of the Notes has an interest material to the offer.] [Amend as appropriate if there are other interests]
[(When adding any other description, consideration should be given as to whether such matters described constitute “significant new factors” and consequently trigger the need for a supplement to the Prospectus under Article 16 of the Prospectus Directive.)]
4 REASONS FOR THE OFFER, ESTIMATED NET PROCEEDS AND TOTAL EXPENSES:
(i) [Reasons for the offer: [ ]] (See “Use of Proceeds” wording in Prospectus – if reasons for offer different from making profit and/or hedging certain risks will need to include those reasons here)
(ii) [Estimated net proceeds: [ ]] (If proceeds are intended for more than one use will need to split out and present in order of priority. If proceeds insufficient to fund all proposed uses state amount and sources of other funding)
(iii) [Estimated total expenses: [ ]] (Expenses are required to be broken down into each principal intended “use” and presented in order of
172 priority of such “uses”)
(N.B. If the Notes are derivative securities to which Annex XII of the Prospectus Regulation applies, (i) above is required where the reasons for the offer are different from making profit and/or hedging certain risks and, where such reasons are inserted in (i), disclosure of net proceeds and total expenses at (ii) and (iii) above are also required.)
5 YIELD: (Fixed Rate Notes only)
Indication of yield: [ ]
[Calculated as [include details of method of calculation in summary form] on the Issue Date.]
The yield is calculated at the Issue Date on the basis of the Issue Price. It is not an indication of future yield.
6 PERFORMANCE OF INDEX/FORMULA/OTHER VARIABLE AND OTHER INFORMATION CONCERNING THE UNDERLYING: (Index Linked Notes only)
(Need to include details of where past and future performance and volatility of the index/formula/other variable can be obtained.)
(Where the underlying is an index need to include the name of the index and a description if composed by the Issuer and if the index is not composed by the Issuer need to include details of where the information about the index can be obtained.)
(Where the underlying is a security need to include the name of the issuer of the security and the International Securities Identification Number (ISIN) or equivalent identification number. Where the underlying is a basket of underlyings, need to include the relevant weightings of each underlying in the basket.)
(Where the underlying does not fall within the categories specified above, include equivalent information.)
(Include other information concerning the underlying required by paragraph 4.2 of Annex XII of the Prospectus Regulation.)
(When completing this paragraph, consideration should be given as to whether such matters described constitute “significant new factors” and consequently trigger the need for a supplement to the Prospectus under Article 16 of the Prospectus Directive.)
The Issuer [intends to provide post-issuance information [specify what information will be reported and where it can be obtained]] [does not intend to provide post-issuance information].
(N.B. The above applies if the Notes are derivative securities to which Annex XII of the Prospectus Regulation applies.)
7 PERFORMANCE OF RATE[S] OF EXCHANGE: (Dual Currency Notes only)
(Need to include details of where past and future performance and volatility of the relevant rates can be obtained.)
(When completing this paragraph, consideration should be given as to whether such matters described constitute “significant new factors” and consequently trigger the need for a supplement to the Prospectus under Article 16 of the Prospectus Directive.)
(N.B. The above applies if the Notes are derivative securities to which Annex XII of the Prospectus Regulation
173 applies.)
8 OPERATIONAL INFORMATION:
(i) CUSIP: [ ]
(ii) ISIN Code: [ ]
(iii) Common Code: [ ]
(iv) Clearing system(s) other than and the [DTC/Euroclear Bank SA/NV and Clearstream Banking, relevant identification number(s): société anonyme/Not Applicable/(give name(s) and number(s))]
(v) Delivery: Delivery [against/free of] payment
(vi) Names and addresses of additional [ ] Paying Agent(s):
(vii) Intended to be held in a manner which [Yes] [No] would allow Eurosystem eligibility: [Note that the designation “yes” simply means that the Notes are intended upon issue to be deposited with one of the ICSDs as common safekeeper and does not necessarily mean that the Notes will be recognised as eligible collateral for Eurosystem monetary policy and intra-day credit operations by the Eurosystem either upon issue or at any or all times during their life. Such recognition will depend upon satisfaction of the Eurosystem eligibility criteria.] (Include this text if “yes” selected)
174 TAXATION
United States Federal Income Tax Considerations
TO ENSURE COMPLIANCE WITH INTERNAL REVENUE SERVICE (IRS) CIRCULAR 230, EACH TAXPAYER IS HEREBY NOTIFIED THAT: (A) ANY TAX DISCUSSION HEREIN IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED BY THE TAXPAYER FOR THE PURPOSE OF AVOIDING U.S. FEDERAL INCOME TAX PENALTIES THAT MAY BE IMPOSED ON THE TAXPAYER; (B) ANY SUCH TAX DISCUSSION WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTIONS OR MATTERS ADDRESSED HEREIN; AND (C) THE TAXPAYER SHOULD SEEK ADVICE BASED ON THE TAXPAYER'S PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISER.
The following is a summary of certain U.S. federal income tax considerations relevant to U.S. Holders (as defined below) acquiring, holding and disposing of Notes. This summary addresses only the U.S. federal income tax considerations for initial purchasers of Notes at their issue price (as defined below) that will hold the Notes as capital assets (generally, property held for investment). This summary is based on the U.S. Internal Revenue Code of 1986 (the "Code"), final, temporary and proposed U.S. Treasury regulations, administrative and judicial interpretations, all of which are subject to change, possibly with retroactive effect.
This summary does not address the material U.S. federal income tax consequences of every type of Note which may be issued under the Program, and the relevant Final Terms may contain additional or modified disclosure concerning the material U.S. federal income tax consequences relevant to such type of Note as appropriate. This summary does not discuss all aspects of US federal income taxation that may be relevant to investors in light of their particular circumstances, such as investors subject to special tax rules (including, without limitation: (i) financial institutions; (ii) insurance companies; (iii) dealers or traders in stocks, securities, or currencies or notional principal contracts; (iv) regulated investment companies; (v) real estate investment trusts; (vi) tax-exempt organizations; (vii) partnerships, pass-through entities, or persons that hold Notes through pass-through entities; (viii) holders that are not US Holders; (ix) investors that hold Notes as part of a straddle, hedge, conversion, constructive sale or other integrated transaction for US federal income tax purposes; (x) investors that have a functional currency other than the U.S. Dollar and (xi) US expatriates and former long-term residents of the United States), all of whom may be subject to tax rules that differ significantly from those summarized below. This summary does not address U.S. federal estate, gift or alternative minimum tax considerations, or non-US, state or local tax considerations. This discussion assumes that there will be no substitution of another entity in place of the Issuer as principal debtor in respect of the Notes. Moreover, the summary deals only with Notes with a term of 30 years or less. The U.S. federal income tax consequences of owning Notes with a longer term may be discussed in the applicable Final Terms.
For the purposes of this summary, a "US Holder" is a beneficial owner of Notes that is for U.S. federal income tax purposes (i) an individual who is a citizen or resident of the United States, (ii) a corporation created in, or organized under the laws of, the United States or any state thereof, including the District of Columbia, (iii) an estate the income of which is includible in gross income for US federal income tax purposes regardless of its source or (iv) a trust the administration of which is subject to the primary supervision of a U.S. court and which has one or more United States persons who have the authority to control all substantial decisions of the trust.
This summary should be read in conjunction with any discussion of U.S. federal income tax consequences in the applicable Final Terms. To the extent there is any inconsistency in the discussion of U.S. tax consequences to holders between this Prospectus and the applicable Final Terms, holders should rely on the tax consequences described in the applicable Final Terms instead of this Prospectus. The Issuer generally intends to treat Notes issued under the Program as debt, unless otherwise indicated in the applicable Final Terms. Certain Notes, however, such as certain Index Linked Interest Notes or Notes with extremely long maturities, may be treated as other than debt for U.S. federal income tax purposes. The tax treatment of Notes to which a treatment other than as debt may apply may be discussed in the applicable Final Terms. The following disclosure applies only to Notes that are treated as debt for U.S. federal income tax purposes.
175 Payments of Interest
General
Interest on a Note, including the payment of any additional amounts whether payable in U.S. Dollars or a currency other than U.S. Dollars (a "foreign currency"), other than interest on a "Discount Note" that is not "qualified stated interest" (each as defined below under "Original Issue Discount—General"), will be taxable to a U.S. Holder as ordinary income at the time it is received or accrued, in accordance with the holder's method of accounting for tax purposes. Interest paid by the Issuer on the Notes and OID (as defined below), if any, accrued with respect to the Notes (as described below under "Original Issue Discount") and payments of any additional amounts will generally constitute income from sources outside the United States.
Foreign Currency Denominated Interest
If an interest payment is denominated in, or determined by reference to, a foreign currency, the amount of income recognized by a cash basis U.S. Holder will be the U.S. Dollar value of the interest payment, based on the exchange rate in effect on the date of receipt, regardless of whether the payment is in fact converted into U.S. Dollars.
An accrual basis U.S. Holder may determine the amount of income recognized with respect to an interest payment denominated in, or determined by reference to, a foreign currency in accordance with either of two methods. Under the first method, the amount of income accrued will be based on the average exchange rate in effect during the interest accrual period (or, with respect to an accrual period that spans two taxable years of a U.S. Holder, the part of the period within the taxable year).
Under the second method, the U.S. Holder may elect to determine the amount of income accrued on the basis of the exchange rate in effect on the last day of the accrual period or, in the case of an accrual period that spans two taxable years, the exchange rate in effect on the last day of the part of the period within the taxable year. Additionally, if a payment of interest is actually received within five business days of the last day of the accrual period or taxable year, an electing accrual basis U.S. Holder may instead translate the accrued interest into U.S. Dollars at the exchange rate in effect on the day of actual receipt. Any such election will apply to all debt instruments held by the U.S. Holder at the beginning of the first taxable year to which the election applies or thereafter acquired by the U.S. Holder, and will be irrevocable without the consent of the IRS.
Upon receipt of the interest payment (including a payment attributable to accrued but unpaid interest upon the sale or other disposition of a Note) denominated in, or determined by reference to, a foreign currency, the U.S. Holder will recognize U.S. source exchange gain or loss (taxable as ordinary income or loss) equal to the difference, if any, between the amount received (translated into U.S. Dollars at the spot rate on the date of receipt) and the amount previously accrued, regardless of whether the payment is in fact converted into U.S. Dollars.
Original Issue Discount
General
The following is a summary of the principal U.S. federal income tax consequences of the ownership of Notes issued with original issue discount ("OID"). The following summary does not discuss Notes that are characterized as contingent payment debt instruments for U.S. federal income tax purposes. In the event that the Issuer issues contingent payment debt instruments, the applicable Final Terms may describe the material U.S. federal income tax consequences thereof.
A Note, other than a Note with a term of one year or less (a "Short-Term Note"), will be treated as issued with OID (a "Discount Note") if the excess of the Note's "stated redemption price at maturity" over its issue price is at least a de minimis amount (0.25% of the Note's stated redemption price at maturity multiplied by the number of complete years to its maturity). An obligation that provides for the payment of amounts other than qualified stated interest before maturity (an "instalment obligation") will be treated as a Discount Note if the excess of the Note's stated redemption price at maturity over its issue price is equal to or greater than 0.25% of the Note's stated redemption price at maturity multiplied by the weighted average maturity of the Note. A Note's weighted average maturity is the sum of the following amounts determined for each payment on a Note (other than a payment of qualified stated
176 interest): (i) the number of complete years from the issue date until the payment is made multiplied by (ii) a fraction, the numerator of which is the amount of the payment and the denominator of which is the Note's stated redemption price at maturity. Generally, the "issue price" of a Note under the applicable Final Terms will be the first price at which a substantial amount of such Notes included in the issue of which the Note is a part is sold to persons other than bond houses, brokers or similar persons or organizations acting in the capacity of underwriters, placement agents, or wholesalers. The "stated redemption price at maturity" of a Note is the total of all payments provided by the Note that are not payments of "qualified stated interest." A "qualified stated interest" payment is generally any one of a series of stated interest payments on a Note that are unconditionally payable at least annually at a single fixed rate (with certain exceptions for lower rates paid during some periods), or a variable rate (in the circumstances described below under "Variable Interest Rate Notes"), applied to the outstanding principal amount of the Note. Solely for the purpose of determining whether a Note has OID, the Issuer will be deemed to exercise any call option that has the effect of decreasing the yield on the Note, and the U.S. Holder will be deemed to exercise any put option that has the effect of increasing the yield on the Note. If a Note has de minimis OID, a U.S. Holder must include the de minimis amount in income as stated principal payments are made on the Note, unless the holder makes the election described below under “—Election to Treat All Interest as Original Issue Discount.” A U.S. Holder can determine the includible amount with respect to each such payment by multiplying the total amount of the Note’s de minimis OID by a fraction equal to the amount of the principal payment made divided by the stated principal amount of the Note.
U.S. Holders of Discount Notes must include OID in income calculated on a constant-yield method before the receipt of cash attributable to the income, and will generally have to include in income increasingly greater amounts of OID over the life of the Discount Notes. The amount of OID includible in income by a U.S. Holder of a Discount Note is the sum of the daily portions of OID with respect to the Discount Note for each day during the taxable year or portion of the taxable year on which the U.S. Holder holds the Discount Note ("accrued OID"). The daily portion is determined by allocating to each day in any "accrual period" a pro rata portion of the OID allocable to that accrual period. Accrual periods with respect to a Note may be of any length selected by the U.S. Holder and may vary in length over the term of the Discount Note as long as (i) no accrual period is longer than one year and (ii) each scheduled payment of interest or principal on the Note occurs on either the final or first day of an accrual period. The amount of OID allocable to an accrual period equals the excess of (a) the product of the Discount Note's adjusted issue price at the beginning of the accrual period and the Discount Note's yield to maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period) over (b) the sum of the payments of qualified stated interest on the Discount Note allocable to the accrual period. The "adjusted issue price" of a Discount Note at the beginning of any accrual period is the issue price of the Note increased by (x) the amount of accrued OID for each prior accrual period and decreased by (y) the amount of any payments previously made on the Note that were not qualified stated interest payments.
Acquisition Premium
A U.S. Holder that purchases a Discount Note for an amount less than or equal to the sum of all amounts payable on the Note after the purchase date, other than payments of qualified stated interest, but in excess of its adjusted issue price (any such excess being "acquisition premium") and that does not make the election described below under "—Election to Treat All Interest as Original Issue Discount", is permitted to reduce the daily portions of OID by a fraction, the numerator of which is the excess of the U.S. Holder's adjusted basis in the Note immediately after its purchase over the Note's adjusted issue price, and the denominator of which is the excess of the sum of all amounts payable on the Note after the purchase date, other than payments of qualified stated interest, over the Note's adjusted issue price.
Further Issuances
The Issuer may, from time to time, without notice to or the consent of the holders of the outstanding Notes, create and issue additional debt securities with identical terms and ranking pari passu with the Notes in all respects. The Issuer may consolidate such additional debt securities with the outstanding Notes to form a single series. The Issuer may offer additional debt securities with OID for U.S. federal income tax purposes as part of a further issue. Purchasers of debt securities after the date of any further issue may not be able to differentiate between debt securities sold as part of the further issue and previously issued Notes. If the Issuer were to issue additional debt securities with OID, purchasers of debt securities after such further issue may be required to accrue OID (or greater
177 amounts of OID than they would have otherwise accrued) with respect to their debt securities. This may affect the price of outstanding Notes following a further issuance.
Election to Treat All Interest as Original Issue Discount
A U.S. Holder may elect to include in gross income all interest that accrues on a Note using the constant-yield method described above under "Original Issue Discount—General" with certain modifications. For purposes of this election, interest includes stated interest, OID, de minimis OID, as adjusted by any amortizable bond premium (described below under "Notes Purchased at a Premium") or acquisition premium. If a U.S. Holder makes this election for the Note, then, when the constant-yield method is applied, the issue price of the Note will equal its cost, the issue date of the Note will be the date of acquisition, and no payments on the Note will be treated as payments of qualified stated interest. This election will generally apply only to the Note with respect to which it is made and may not be revoked without the consent of the IRS. However, if the Note has amortizable bond premium, the U.S. Holder will be deemed to have made an election to apply amortizable bond premium against interest for all debt instruments with amortizable bond premium, other than debt instruments the interest on which is excludible from gross income, held as of the beginning of the taxable year to which the election applies or any taxable year thereafter.
Variable Interest Rate Notes
Notes that provide for interest at variable rates ("Variable Interest Rate Notes") will generally bear interest at a "qualified floating rate" and thus will be treated as "variable rate debt instruments" under U.S. Treasury regulations governing accrual of OID. A Variable Interest Rate Note will qualify as a "variable rate debt instrument" if (a) its issue price does not exceed the total noncontingent principal payments due under the Variable Interest Rate Note by more than a specified de minimis amount and (b) it provides for stated interest, paid or compounded at least annually, at (i) one or more qualified floating rates, (ii) a single fixed rate and one or more qualified floating rates, (iii) a single objective rate, or (iv) a single fixed rate and a single objective rate that is a qualified inverse floating rate, and (c) it does not provide for any principal payments that are contingent (other than as described in (a) above).
A "qualified floating rate" is any variable rate where variations in the value of the rate can reasonably be expected to measure contemporaneous variations in the cost of newly borrowed funds in the currency in which the Variable Interest Rate Note is denominated. A fixed multiple of a qualified floating rate will constitute a qualified floating rate only if the multiple is greater than 0.65 but not more than 1.35. A variable rate equal to the product of a qualified floating rate and a fixed multiple that is greater than 0.65 but not more than 1.35, increased or decreased by a fixed rate, will also constitute a qualified floating rate. In addition, two or more qualified floating rates that can reasonably be expected to have approximately the same values throughout the term of the Variable Interest Rate Note (e.g., two or more qualified floating rates with values within 25 basis points of each other as determined on the Variable Interest Rate Note's issue date) will be treated as a single qualified floating rate. Notwithstanding the foregoing, a variable rate that would otherwise constitute a qualified floating rate but which is subject to one or more restrictions such as a maximum numerical limitation (i.e., a cap) or a minimum numerical limitation (i.e., a floor) may, under certain circumstances, fail to be treated as a qualified floating rate unless the cap or floor is fixed throughout the term of the Note.
An "objective rate" is a rate that is not itself a qualified floating rate but which is determined using a single fixed formula and which is based on objective financial or economic information (e.g., one or more qualified floating rates or the yield of actively traded personal property). A rate will not qualify as an objective rate if it is based on information that is within the control of the Issuer (or a related party) or that is unique to the circumstances of the Issuer (or a related party), such as dividends, profits or the value of the Issuer’s stock (although a rate does not fail to be an objective rate merely because it is based on the credit quality of the Issuer). Other variable interest rates may be treated as objective rates if so designated by the IRS in the future. Despite the foregoing, a variable rate of interest on a Variable Interest Rate Note will not constitute an objective rate if it is reasonably expected that the average value of the rate during the first half of the Variable Interest Rate Note's term will be either significantly less than or significantly greater than the average value of the rate during the final half of the Variable Interest Rate Note's term. A "qualified inverse floating rate" is any objective rate where the rate is equal to a fixed rate minus a qualified floating rate, as long as variations in the rate can reasonably be expected to inversely reflect contemporaneous variations in the qualified floating rate. If a Variable Interest Rate Note provides for stated interest at a fixed rate for an initial period of one year or less followed by a variable rate that is either a qualified floating
178 rate or an objective rate for a subsequent period and if the variable rate on the Variable Interest Rate Note's issue date is intended to approximate the fixed rate (e.g., the value of the variable rate on the issue date does not differ from the value of the fixed rate by more than 25 basis points), then the fixed rate and the variable rate together will constitute either a single qualified floating rate or objective rate, as the case may be.
A qualified floating rate or objective rate in effect at any time during the term of the instrument must be set at a "current value" of that rate. A "current value" of a rate is the value of the rate on any day that is no earlier than three months prior to the first day on which that value is in effect and no later than one year following that first day.
If a Variable Interest Rate Note that provides for stated interest at either a single qualified floating rate or a single objective rate throughout the term thereof qualifies as a "variable rate debt instrument", then any stated interest on the Note which is unconditionally payable in cash or property (other than debt instruments of the Issuer) at least annually will constitute qualified stated interest and will be taxed accordingly. Thus, a Variable Interest Rate Note that provides for stated interest at either a single qualified floating rate or a single objective rate throughout the term thereof and that qualifies as a "variable rate debt instrument" will generally not be treated as having been issued with OID unless the Variable Interest Rate Note is issued at a "true" discount (i.e., at a price below the Note's stated principal amount) in excess of a specified de minimis amount. OID on a Variable Interest Rate Note arising from "true" discount is allocated to an accrual period using the constant yield method described above by assuming that the variable rate is a fixed rate equal to (i) in the case of a qualified floating rate or qualified inverse floating rate, the value, as of the issue date, of the qualified floating rate or qualified inverse floating rate, or (ii) in the case of an objective rate (other than a qualified inverse floating rate), a fixed rate that reflects the yield that is reasonably expected for the Variable Interest Rate Note.
In general, any other Variable Interest Rate Note that qualifies as a "variable rate debt instrument" will be converted into an "equivalent" fixed rate debt instrument for purposes of determining the amount and accrual of OID and qualified stated interest on the Variable Interest Rate Note. Such a Variable Interest Rate Note must be converted into an "equivalent" fixed rate debt instrument by substituting any qualified floating rate or qualified inverse floating rate provided for under the terms of the Variable Interest Rate Note with a fixed rate equal to the value of the qualified floating rate or qualified inverse floating rate, as the case may be, as of the Variable Interest Rate Note's issue date. Any objective rate (other than a qualified inverse floating rate) provided for under the terms of the Variable Interest Rate Note is converted into a fixed rate that reflects the yield that is reasonably expected for the Variable Interest Rate Note. In the case of a Variable Interest Rate Note that qualifies as a "variable rate debt instrument" and provides for stated interest at a fixed rate in addition to either one or more qualified floating rates or a qualified inverse floating rate, the fixed rate is initially converted into a qualified floating rate (or a qualified inverse floating rate, if the Variable Interest Rate Note provides for a qualified inverse floating rate). Under these circumstances, the qualified floating rate or qualified inverse floating rate that replaces the fixed rate must be such that the fair market value of the Variable Interest Rate Note as of the Variable Interest Rate Note's issue date is approximately the same as the fair market value of an otherwise identical debt instrument that provides for either the qualified floating rate or qualified inverse floating rate rather than the fixed rate. Subsequent to converting the fixed rate into either a qualified floating rate or a qualified inverse floating rate, the Variable Interest Rate Note is converted into an "equivalent" fixed rate debt instrument in the manner described above.
Once the Variable Interest Rate Note is converted into an "equivalent" fixed rate debt instrument pursuant to the foregoing rules, the amount of OID and qualified stated interest, if any, are determined for the "equivalent" fixed rate debt instrument by applying the general OID rules to the "equivalent" fixed rate debt instrument and a U.S. Holder of the Variable Interest Rate Note will account for the OID and qualified stated interest as if the U.S. Holder held the "equivalent" fixed rate debt instrument. In each accrual period, appropriate adjustments will be made to the amount of qualified stated interest or OID assumed to have been accrued or paid with respect to the "equivalent" fixed rate debt instrument in the event that these amounts differ from the actual amount of interest accrued or paid on the Variable Interest Rate Note during the accrual period.
If a Variable Interest Rate Note, such as a Note the payments on which are determined by reference to an index, does not qualify as a "variable rate debt instrument", then the Variable Interest Rate Note will be treated as a contingent payment debt obligation. The proper U.S. federal income tax treatment of Variable Interest Rate Notes that are treated as contingent payment debt may be more fully described in the applicable Final Terms.
Short-Term Notes
179 In general, an individual or other cash basis U.S. Holder of a Short-Term Note is not required to accrue OID (calculated as set forth below for the purposes of this paragraph) for U.S. federal income tax purposes unless it elects to do so (but may be required to include any stated interest in income as the interest is received). Accrual basis U.S. Holders and certain other U.S. Holders are required to accrue OID on Short-Term Notes on a straight-line basis or, if the U.S. Holder so elects, under the constant-yield method (based on daily compounding). In the case of a U.S. Holder not required and not electing to include OID in income currently, any gain realized on the sale or other disposition of the Short-Term Note will be ordinary income to the extent of the OID accrued on a straight-line basis (unless an election is made to accrue the OID under the constant-yield method) through the date of sale or other disposition. U.S. Holders who are not required and do not elect to accrue OID on Short-Term Notes will be required to defer deductions for interest on borrowings allocable to Short-Term Notes in an amount not exceeding the deferred income until the deferred income is realized.
For purposes of determining the amount of OID subject to these rules, all interest payments on a Short-Term Note are included in the Short-Term Note's stated redemption price at maturity. A U.S. Holder may elect to determine OID on a Short-Term Note as if the Short Term Note had been originally issued to the U.S. Holder at the U.S. Holder's purchase price for the Short-Term Note. This election shall apply to all obligations with a maturity of one year or less acquired by the U.S. Holder on or after the first day of the first taxable year to which the election applies, and may not be revoked without the consent of the IRS.
Foreign Currency Notes
OID for any accrual period on a Discount Note that is denominated in, or determined by reference to, a foreign currency will be determined in the foreign currency and then translated into U.S. Dollars in the same manner as stated interest accrued by an accrual basis U.S. Holder, as described above under "Payments of Interest." Upon receipt of an amount attributable to OID (whether in connection with a payment of interest or the sale or other disposition of a Note), a U.S. Holder may recognize exchange gain or loss, which will be ordinary gain or loss measured by the difference between the amount received (translated into U.S. Dollars at the exchange rate on the date of receipt) and the amount previously accrued, regardless of whether the payment is in fact converted into U.S. Dollars.
Notes Purchased at a Premium
A U.S. Holder that purchases a Note for an amount in excess of its principal amount, or for a Discount Note, its stated redemption price at maturity, may elect to treat the excess as "amortizable bond premium", in which case the amount required to be included in the U.S. Holder's income each year with respect to interest on the Note will be reduced by the amount of amortizable bond premium allocable (based on the Note's yield to maturity) to that year. In the case of a Note that is denominated in, or determined by reference to, a foreign currency, bond premium (including acquisition premium) will be computed in units of foreign currency, and any such bond premium that is taken into account currently will reduce interest income in units of the foreign currency. On the date bond premium offsets interest income, a U.S. Holder may recognize U.S. source exchange gain or loss (taxable as ordinary income or loss) measured by the difference between the spot rate in effect on that date, and on the date the Notes were acquired by the U.S. Holder. Any election to amortize bond premium shall apply to all bonds (other than bonds the interest on which is excludable from gross income for U.S. federal income tax purposes) held by the U.S. Holder at the beginning of the first taxable year to which the election applies or thereafter acquired by the U.S. Holder, and is irrevocable without the consent of the IRS. See also "Original Issue Discount – Election to Treat All Interest as Original Issue Discount." A U.S. Holder that does not elect to take bond premium (other than acquisition premium) into account currently will recognize a capital loss when the Note matures.
Sale or Other Disposition of Notes
A U.S. Holder's tax basis in a Note will generally be its cost, increased by the amount of any OID included in the U.S. Holder's income with respect to the Note and the amount, if any, of income attributable to de minimis OID included in the U.S. Holder's income with respect to the Note, and reduced by (i) the amount of any payments that are not qualified stated interest payments, and (ii) the amount of any amortizable Note premium applied to reduce interest on the Note. A U.S. Holder’s tax basis in a foreign currency Note will be determined by reference to the U.S. Dollar cost of the Notes. The U.S. Dollar cost of a Note purchased with a foreign currency will generally be the U.S. Dollar value of the purchase price on the date of purchase or, in the case of Notes traded on an established
180 securities market, as defined in the applicable U.S. Treasury regulations, that are purchased by a cash basis U.S. Holder (or an accrual basis U.S. Holder that so elects), on the settlement date for the purchase.
A U.S. Holder will generally recognize gain or loss on the sale or other disposition of a Note equal to the difference between the amount realized on the sale or other disposition and the tax basis of the Note. The amount realized on a sale or other disposition for an amount in foreign currency will be the U.S. Dollar value of this amount on the date of sale or other disposition or, in the case of Notes traded on an established securities market, as defined in the applicable U.S. Treasury regulations, sold by a cash basis U.S. Holder (or an accrual basis U.S. Holder that so elects), on the settlement date for the sale. Such an election by an accrual basis U.S. Holder must be applied consistently from year to year and cannot be revoked without the consent of the IRS. Except to the extent described above under "Original Issue Discount – Short-Term Notes" or attributable to accrued but unpaid interest or changes in exchange rates, gain or loss recognized on the sale or other disposition of a Note will be capital gain or loss and will generally be treated as from U.S. sources for purposes of the U.S. foreign tax credit limitation. In the case of a U.S. Holder that is an individual, estate or trust, the maximum marginal federal income tax rate applicable to capital gains is currently lower than the maximum marginal rate applicable to ordinary income if the Notes are held for more than one year. The deductibility of capital losses is subject to significant limitations.
Gain or loss recognized by a U.S. Holder on the sale or other disposition of a Note that is attributable to changes in exchange rates will be treated as U.S. source ordinary income or loss. However, exchange gain or loss is taken into account only to the extent of total gain or loss realized on the transaction.
Disposition of Foreign Currency
Foreign currency received as interest on a Note or on the sale or other disposition of a Note will have a tax basis equal to its U.S. Dollar value at the time the interest is received or at the time of the sale or other disposition. Foreign currency that is purchased will generally have a tax basis equal to the U.S. Dollar value of the foreign currency on the date of purchase. Any gain or loss recognized on a sale or other disposition of a foreign currency (including its use to purchase Notes or an exchange for U.S. Dollars) will be U.S. source ordinary income or loss.
Backup Withholding and Information Reporting
In general, payments of principal, interest and accrual of OID on, and the proceeds of a sale, redemption or other disposition of, the Notes, payable to a U.S. Holder by a U.S. paying agent or other U.S. intermediary will be reported to the IRS and to the U.S. Holder as may be required under applicable regulations. Backup withholding will apply to these payments (including payments of OID) if the U.S. Holder fails to provide an accurate taxpayer identification number or certification of exempt status or otherwise to comply with the applicable backup withholding requirements. Certain U.S. Holders are not subject to backup withholding.
Disclosure Requirements
U.S. Treasury Regulations meant to require the reporting of certain tax shelter transactions ("Reportable Transactions") could be interpreted to cover transactions generally not regarded as tax shelters, including certain foreign currency transactions. Under the U.S. Treasury Regulations, certain transactions with respect to the Notes may be characterized as Reportable Transactions including, in certain circumstances, a sale, exchange, retirement or other taxable disposition of a foreign currency Note. Persons considering the purchase of such Notes should consult with their tax advisers to determine the tax return obligations, if any, with respect to an investment in such Notes, including any requirement to file IRS Form 8886 (Reportable Transaction Disclosure Statement).
Foreign Financial Asset Reporting
Recently enacted legislation may require individual U.S. Holders to report to the IRS certain information with respect to their beneficial ownership of the Notes not held through an account with a financial institution (which account, if held with a foreign financial institution, may be reportable). Investors who fail to report required information could be subject to substantial penalties.
181 U.S. Foreign Account Tax Compliance Withholding
The Issuer and other financial institutions through which payments on the Notes are made may be required to withhold U.S. tax at a rate of 30% on all, or a portion of, payments made after 31 December 2016 in respect of any Notes characterized as debt (or which are not otherwise characterized as equity and have a fixed term) for U.S. federal tax purposes and that are issued after 31 December 2012 or are materially modified after that date pursuant to FATCA or similar law implementing an intergovernmental approach thereto. This withholding tax may be triggered if (i) the Issuer is a foreign financial institution (FFI) (as defined in FATCA) that enters into and complies with an agreement with the U.S. Internal Revenue Service (IRS) to provide certain information about its account holders (making the Issuer a Participating FFI), (ii) the Issuer has a positive "passthru payment percentage" (as determined under FATCA), and (iii) any FFI that is an investor, or through which payment on such Notes is made, is not a Participating FFI. In certain circumstances, the withholding may be refundable or creditable.
The application of FATCA to interest, principal or other amounts paid with respect to the Notes is not clear. If an amount in respect of U.S. withholding tax were to be deducted or withheld from interest, principal or other payments on the Notes, neither the Issuer nor any paying agent nor any other person would, pursuant to the conditions of the Notes, be required to pay additional amounts as a result of the deduction or withholding of such tax. Holders of Notes should consult their own tax advisers on how these rules may apply to payments they receive under the Notes.
FATCA is particularly complex and its application is uncertain at this time. The application of FATCA to Notes issued after 31 December 2012 (or whenever issued, in the case of Notes treated as equity or which do not have a fixed term for U.S. federal tax purposes) may be addressed in the relevant Final Terms or a Supplement to the Offering Circular, as applicable.
Norwegian Taxation
Payments of principal and interest on the Notes issued under the Program to persons who have no connection with Norway other than the holding of such Notes issued by the Issuer are, under present Norwegian law, not subject to Norwegian tax, and may hence be made without any withholding tax or deduction for any Norwegian taxes, duties, assessments or governmental charges.
Capital gains or profits realised on the sale, disposal or redemption of such Notes by persons who have no connection with Norway other than the holding of the Notes are not, under present Norwegian law, subject to Norwegian taxes or duties.
No Norwegian issue tax or stamp duty is payable in connection with the issues of the Notes. The Notes will not be subject to any Norwegian estate duties provided that, at the time of death of the holder, such holder has no connection with Norway other than the holding of such Notes and provided that the Notes have not been used in, or in connection with, any business activity operated through a permanent establishment situated in Norway.
Persons considered domiciled in Norway for tax purposes will be subject to Norwegian income tax of a flat rate of 28 per cent on interest received in respect of the Notes. Likewise, capital gains or profits realised by such persons on the sale, disposal or redemption of the Notes will be subject to Norwegian taxation.
Luxembourg Taxation
The following summary is of a general nature and is included herein solely for information purposes. It is based on the laws presently in force in Luxembourg, though it is not intended to be, nor should it be construed to be, legal or tax advice. Prospective investors in the Notes should therefore consult their own professional advisers as to the effects of state, local or foreign laws, including Luxembourg tax law, to which they may be subject.
Withholding Tax
Non-resident holders of Notes
182 Under Luxembourg general tax laws currently in force and subject to the laws of June 21, 2005 (the "Laws") mentioned below, there is no withholding tax on payments of principal, premium or interest made to non-resident holders of Notes, nor on accrued but unpaid interest in respect of the Notes, nor is any Luxembourg withholding tax payable upon redemption or repurchase of the Notes held by non-resident holders of Notes.
Under the Laws implementing EC Council Directive 2003/48/EC of June 3, 2003 on taxation of savings income in the form of interest payments and ratifying the treaties entered into by Luxembourg and certain dependent and associated territories of EU Member States (the "Territories"), payments of interest or similar income made or ascribed by a paying agent established in Luxembourg to or for the immediate benefit of an individual beneficial owner or a residual entity, as defined by the Laws, which is a resident of, or established in, an EU Member State (other than Luxembourg) or one of the Territories will be subject to a withholding tax unless the relevant recipient has adequately instructed the relevant paying agent to provide details of the relevant payments of interest or similar income to the fiscal authorities of his/her/its country of residence or establishment, or, in the case of an individual beneficial owner, has provided a tax certificate issued by the fiscal authorities of his/her country of residence in the required format to the relevant paying agent. Responsibility for the withholding of the tax will be assumed by the Luxembourg paying agent. Payments of interest under the Notes coming within the scope of the Laws would at present be subject to withholding tax of 35 per cent.
Resident holders of Notes
Under Luxembourg general tax laws currently in force and subject to the law of December 23, 2005 (the "Law") mentioned below, there is no withholding tax on payments of principal, premium or interest made to Luxembourg resident holders of Notes, nor on accrued but unpaid interest in respect of Notes, nor is any Luxembourg withholding tax payable upon redemption or repurchase of Notes held by Luxembourg resident holders of Notes.
Under the Law, payments of interest or similar income made or ascribed by a paying agent established in Luxembourg to or for the benefit of an individual beneficial owner who is a resident of Luxembourg will be subject to a withholding tax of 10 per cent. Such withholding tax will be in full discharge of income tax if the beneficial owner is an individual acting in the course of the management of his/her private wealth. Responsibility for the withholding of the tax will be assumed by the Luxembourg paying agent. Payments of interest under the Notes coming within the scope of the Law would be subject to withholding tax of 10 per cent.
EU Savings Directive
Under EC Council Directive 2003/48/EC on the taxation of savings income, Member States are required to provide to the tax authorities of another Member State details of payments of interest (or similar income) paid by a person within its jurisdiction to an individual resident in that other Member State or to certain limited types of entities established in that other Member State. However, for a transitional period, Luxembourg and Austria are instead required (unless during that period they elect otherwise) to operate a withholding system in relation to such payments (the ending of such transitional period being dependent upon the conclusion of certain other agreements relating to information exchange with certain other countries). A number of non-EU countries and territories including Switzerland have adopted similar measures (a withholding system in the case of Switzerland).
The European Commission has proposed certain amendments to the Directive, which may, if implemented amend or broaden the scope of the requirements described above.
183 CERTAIN ERISA CONSIDERATIONS
Unless otherwise provided in the applicable Final Terms, the Notes should be eligible for purchase by employee benefit plans and other plans subject to Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and/or the provisions of section 4975 of the Code and by governmental, church and non-U.S. plans that are subject to state, local, other federal law of the United States or non-U.S. law that is substantially similar to ERISA or the Code ("Similar Law") subject to consideration of the issues described in this section. ERISA imposes certain requirements on "employee benefit plans" (as defined in section 3(3) of ERISA) subject to ERISA, including entities such as collective investment funds and separate accounts whose underlying assets include the assets of such plans (collectively, "ERISA Plans"), and on those persons who are fiduciaries with respect to ERISA Plans. Investments by ERISA Plans are subject to ERISA's general fiduciary requirements, including the requirements of investment prudence and diversification and the requirement that an ERISA Plan's investments be made in accordance with the documents governing the ERISA Plan. The prudence of a particular investment must be determined by the responsible fiduciary of an ERISA Plan by taking into account the ERISA Plan's particular circumstances and all of the facts and circumstances of the investment including, but not limited to, the matters discussed under "Risk factors."
Section 406 of ERISA and section 4975 of the Code prohibit certain transactions involving the assets of an ERISA Plan (as well as those plans that are not subject to ERISA but which are subject to section 4975 of the Code, such as individual retirement accounts (together with ERISA Plans, the "Plans")) and certain persons (referred to as "parties in interest" or "disqualified persons") having certain relationships to such Plans, unless a statutory or administrative exemption is applicable to the transaction. A party in interest or disqualified person, including a Plan fiduciary, who engages in a prohibited transaction may be subject to excise taxes and other penalties and liabilities under ERISA and the Code.
The Issuer, the Trustee, the Dealers, the Arranger or any other party to the transactions referred to in this Prospectus may be parties in interest or disqualified persons with respect to many Plans. Prohibited transactions within the meaning of section 406 of ERISA or section 4975 of the Code may arise if any of the Notes is acquired or held by a Plan, including but not limited to where the Issuer, the Trustee, the Dealers, the Arranger or any other party to such transactions is a party in interest or a disqualified person. Certain exemptions from the prohibited transaction provisions of section 406 of ERISA and section 4975 of the Code may be applicable, however, depending in part on the type of Plan fiduciary making the decision to acquire any Notes and the circumstances under which such decision is made. Included among these exemptions are section 408(b)(17) of ERISA and section 4975(d)(20) of the Code (relating to transactions between a person that is a party in interest (other than a fiduciary or an affiliate that has or exercises discretionary authority or control or renders investment advice with respect to assets involved in the transaction) solely by reason of providing services to the plan, provided that there is adequate consideration for the transaction), Prohibited Transaction Class Exemption ("PTCE") 91-38 (relating to investments by bank collective investment funds), PTCE 84-14 (relating to transactions effected by a qualified professional asset manager), PTCE 95-60 (relating to transactions involving insurance company general accounts), PTCE 90-1 (relating to investments by insurance company pooled separate accounts) and PTCE 96-23 (relating to transactions determined by in-house asset managers). Prospective investors should consult with their advisors regarding the prohibited transaction rules and these exceptions. There can be no assurance that any of these exemptions or any other exemption will be available with respect to any particular transaction involving any Notes.
Governmental plans (as defined in section 3(32) of ERISA) and certain church plans (as defined in section 3(33) of ERISA) and other plans, while not subject to the fiduciary responsibility provisions of ERISA or the prohibited transaction provisions of section 406 of ERISA and section 4975 of the Code, may nevertheless be subject to Similar Law. Fiduciaries of any such plans should consult with their counsel before purchasing the Notes to determine the need for, if necessary, and the availability of, any exemptive relief under any Similar Law.
Accordingly, except as otherwise provided in the applicable Final Terms, each purchaser and subsequent transferee of any Notes will be deemed by such purchase or acquisition of any such Notes to have represented and warranted, on each day from the date on which the purchaser or transferee acquires such Notes (or any interest therein) through and including the date on which the purchaser or transferee disposes of such Notes (or any interest therein), either that (a) it is not a Plan or any entity whose underlying assets include, or are deemed for purposes of ERISA or the Code to include, the assets of any Plan or a governmental, church or non-U.S. plan which is subject to any Similar
184 Law or (b) its acquisition, holding and disposition of such Notes (or any interest therein) will not constitute or result in a prohibited transaction under section 406 of ERISA or section 4975 of the Code (or, in the case of a governmental, church or non-U.S. plan subject to Similar Law, a violation of any Similar Law) for which an exemption is not available.
Each Plan fiduciary who is responsible for making the investment decisions whether to purchase or commit to purchase and to hold any of the Notes should determine whether, under the documents and instruments governing the Plan, an investment in such Notes is appropriate for the Plan, taking into account the overall investment policy of the Plan and the composition of the Plan's investment portfolio. Any Plan proposing to invest in such Notes (including any governmental, church or non-U.S. plan) should consult with its counsel to confirm that such investment will not constitute or result in a non-exempt prohibited transaction and will satisfy the other requirements of ERISA and the Code (or, in the case of a governmental, church or non-U.S. plan, any Similar Law).
The sale of any Notes to a Plan is in no respect a representation by the Issuer, the Trustee, the Dealers, the Arranger or any other party to the transactions that such an investment meets all relevant legal requirements with respect to investments by Plans generally or any particular Plan, or that such an investment is appropriate for Plans generally or any particular Plan.
Any further ERISA considerations with respect to the Notes may be found in the relevant Final Terms.
185 PLAN OF DISTRIBUTION AND TRANSFER RESTRICTIONS
The Notes are being offered on a continuous basis for sale by the Issuer to or through Barclays Capital Inc., together with such other Dealers as may be appointed by the Issuer with respect to a particular Series of Notes (the “Dealers”), pursuant to a program agreement entered into on March 21, 2012 (as amended and modified or supplemented from time to time, the “Program Agreement”). One or more Dealers may purchase the Notes, as principal or agent, from the Issuer from time to time for resale to investors and other purchasers at varying prices relating to prevailing market prices at the time of resale as determined by any Dealer, or, if so specified in the relevant Final Terms, for resale at a fixed offering price. Any Dealers of the Notes that are not U.S. registered broker-dealers will agree that they will offer and sell the Notes within the United States only through U.S. registered broker-dealers. If the Issuer and a Dealer agree, a Dealer may also utilize its reasonable efforts on an agency basis to solicit offers to purchase the Notes.
Unless otherwise specified in the relevant Final Terms, any Notes sold to one or more Dealers as principal will be purchased by such Dealer(s) at a price equal to 100 per cent of the principal amount thereof or such other price as may be set forth in the relevant Final Terms less a percentage of the principal amount equal to a commission as agreed upon by the Issuer and the relevant Dealer(s). A Dealer may sell the Notes it has purchased from the Issuer as principal to certain dealers less a concession equal to all or any portion of the discount received in connection with such purchase. Such Dealer may allow, and such dealers may reallow, a discount to certain other dealers. After the initial offering of the Notes, the offering price (in the case of Notes to be resold at a fixed offering price), the concession and the reallowance may be changed.
The Issuer may withdraw, cancel or modify the offering contemplated hereby without notice and may reject offers to purchase the Notes in whole or in part. Each Dealer shall have the right, in its discretion reasonably exercised, without notice to the Issuer, to reject in whole or in part any offer to purchase the Notes received by it on an agency basis.
The Issuer has agreed to indemnify the Dealers severally against certain liabilities (including liabilities under the Securities Act) or to contribute to payments the Dealers may be required to make in respect thereof. The Issuer has also agreed to reimburse the Dealers for certain other expenses.
The Dealers and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, principal investment, hedging, financing and brokerage activities. Certain of the Dealers and their respective affiliates have, from time to time, performed, and may in the future perform, various financial advisory and investment banking services for the Issuer, for which they received or will receive customary fees and expenses.
In the ordinary course of their various business activities, the Dealers and their respective affiliates may make or hold a broad array of investments, including serving as counterparties to certain derivative and hedging arrangements, and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers and may at any time hold long and short positions in such securities and instruments. Such investment and securities activities may involve securities and instruments of the Issuer. The Dealers and their respective affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long and/or short positions in such instruments.
Price Stabilization and Short Positions
In connection with the issue of Notes under the Program, the Dealers, acting directly or through subsidiaries, may over-allot or effect transactions that stabilize, maintain or otherwise affect the market price of the Notes with a view to supporting the market price of the Notes at a level higher than that which might otherwise prevail for a limited period. Such stabilizing, if any, shall be in compliance with all relevant laws and regulations. These transactions may include stabilizing transactions pursuant to which the Dealers, acting directly or through subsidiaries, may bid for or purchase Notes in the open market or otherwise for the purpose of stabilizing the market price of the Notes. Each of the Dealers, acting directly or through subsidiaries, may also create a short position for its account by
186 selling more Notes in connection with the offering than it is committed to purchase from the Issuer, and in such case may purchase Notes in the open market following completion of the offering to cover all or a portion of such short position.
The Dealers may also impose a penalty bid. This occurs when a particular Dealer repays to the Dealers a portion of the subscription price discount received by it because the Dealers have repurchased Notes sold by or for the account of such Dealer in stabilizing or short covering transactions.
Neither the Issuer nor any of the Dealers makes any representation or prediction as to the direction or magnitude of any effect that the transactions described in the immediately preceding paragraph may have on the price of the Notes. In addition, neither the Issuer nor the Dealers makes any representation that the Dealers will engage in any such transactions or that such transactions, once commenced, will not be discontinued without notice.
Selling Restrictions
United States
The Notes have not been and will not be registered under the Securities Act and the Notes may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except in certain transactions exempt from, or in transactions not subject to the registration requirements of, the Securities Act.
Each Dealer has represented and each further Dealer appointed under the Program will be required to represent that, except as permitted by the Program Agreement, it will not offer or sell the Notes of any Series (i) as part of their distribution at any time or (ii) otherwise until 40 days after the completion of the distribution of an identifiable tranche of which such Notes are a part, except in accordance with Rule 903 of Regulation S or Rule 144A under the Securities Act (“Rule 144A”) as set forth below. Accordingly, neither it, its affiliates nor any persons acting on its or their behalf have engaged or will engage in any directed selling efforts with respect to the Notes, and it and they have complied and will comply with the offering restrictions requirement of Regulation S. Each Dealer agrees, and each further Dealer appointed to the Program will be required to agree, that, at or prior to confirmation of sale of Notes (other than a sale pursuant to Rule 144A), it will have sent to each distributor, dealer or person receiving a selling concession, fee or other remuneration that purchases Notes from it during the distribution compliance period a confirmation or notice to substantially the following effect:
“The Notes covered hereby have not been registered under the U.S. Securities Act of 1933, as amended (the “Securities Act”) and may not be offered and sold within the United States or to, or for the account or benefit of, U.S. persons (i) as part of their distribution at any time or (ii) otherwise until 40 days after the later of the commencement of the offering and the completion of the distribution of an identifiable tranche of Notes, except in either case in accordance with Regulation S or Rule 144A under the Securities Act. Terms used above have the meanings given to them by Regulation S under the Securities Act.”
In addition, until 40 days after the commencement of the offering of the Notes, an offer or sale of Notes within the United States by any Dealer (whether or not participating in the offering) may violate the registration requirements of the Securities Act if such offer or sale is made otherwise than in accordance with Rule 144A under the Securities Act.
Terms used in the preceding paragraphs have the meanings given to them by Regulation S under the Securities Act.
Public Offer Selling Restriction under the Prospectus Directive
In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”), each Dealer has represented and agreed, and each further Dealer appointed under the Program will be required to represent and agree, that with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the “Relevant Implementation Date”) it has not made and will not make an offer of Notes which are the subject of the offering contemplated by the Prospectus as completed by the Final Terms in relation thereto to the public in that Relevant Member State except that it may, with effect from and including the Relevant Implementation Date, make an offer of such Notes to the public in that Relevant Member State:
187 (a) at any time to any legal entity which is a qualified investor as defined in the Prospectus Directive;
(b) at any time to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive), subject to obtaining the prior consent of the relevant Dealer or Dealers nominated by the Issuer for any such offer; or
(c) at any time in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of Notes referred to in (a) to (c) above shall require the Issuer or any Dealer to publish a prospectus pursuant to Article 3 of the Prospectus Directive, or supplement a prospectus pursuant to Article 16 of the Prospectus Directive.
For the purposes of this provision, the expression “an offer of Notes to the public” in relation to any Notes in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the Notes to be offered so as to enable an investor to decide to purchase or subscribe the Notes, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State, the expression “Prospectus Directive” means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in the Relevant Member State and the expression “2010 PD Amending Directive” means Directive 2010/73/EU.
United Kingdom
Each Dealer has represented and agreed, and each further Dealer appointed under the Program will be required to represent and agree, that:
(a) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000 (the “FSMA”)) received by it in connection with the issue or sale of any Notes in circumstances in which Section 21(1) of the FSMA would not, if the Issuer was not an authorised person, apply to the Issuer; and
(b) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to any Notes in, from or otherwise involving the United Kingdom.
Norway
Notes denominated in Norwegian kroner may not be offered or sold within Norway or outside Norway to Norwegian citizens abroad, without the Notes prior thereto having been registered in the Norwegian Central Securities Depository.
Japan
The Notes have not been and will not be registered under the Financial Instruments and Exchange Act of Japan (Act No. 25 of 1948, as amended; the “FIEA”) and each Dealer has represented and agreed, and each further Dealer appointed under the Program will be required to represent and agree, that it will not offer or sell any Notes, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (as defined under Item 5, Paragraph 1, Article 6 of the Foreign Exchange and Foreign Trade Act (Act No. 228 of 1949, as amended)), or to others for re- offering or resale, directly or indirectly, in Japan or to, or for the benefit of, a resident of Japan, except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the FIEA and any other applicable laws and regulations of Japan.
General
No action has been or will be taken in any jurisdiction by the Issuer or any Dealer that would, or is intended to, permit a public offering of the Notes, or possession or distribution of this Prospectus or any other offering material,
188 in any country or jurisdiction where action for that purpose is required. Persons into whose hands this Prospectus comes are required by the Issuer and the Dealers to comply with all applicable laws and regulations in each country or jurisdiction in which they purchase, offer, sell or deliver Notes or have in their possession, distribute or publish this Prospectus or any other offering material relating to the Notes, in all cases at their own expense.
Without prejudice to the above paragraphs, each Dealer has agreed that it will (to the best of its knowledge and belief) comply with all applicable securities laws and regulations in force in any jurisdiction in which it purchases, offers, sells or delivers Notes or possesses or distributes the Prospectus and will obtain any consent, approval or permission required by it for the purchase, offer, sale or delivery by it of Notes under the laws and regulations in force in any jurisdiction to which it is subject or in which it makes such purchases, offers, sales or deliveries and none of the Issuer, the Trustee, any Agent, the Arranger nor any other Dealer shall have any responsibility therefor.
None of the Issuer, the Trustee or the Dealers represent that the Notes may at any time lawfully be sold in compliance with any applicable registration or other requirements in any jurisdiction, or pursuant to any exemption available thereunder, or assumes any responsibility for facilitating such sale.
With regard to each Tranche of Notes, the relevant Dealer will be required to comply with such other restrictions as the Issuer and the relevant Dealer shall agree and as shall be set out in the applicable Final Terms.
U.S. Transfer Restrictions
As a result of the following restrictions, purchasers of the Notes are advised to consult legal counsel prior to making any offer, resale, pledge or transfer of such Notes.
Rule 144A Notes
Each purchaser of Notes within the United States pursuant to Rule 144A, by accepting delivery of this Prospectus, will be deemed to have represented, agreed and acknowledged that:
(a) It is (i) a qualified institutional buyer within the meaning of Rule 144A (a “QIB”), (ii) acquiring such Notes for its own account or for the account of a QIB and (iii) aware, and each beneficial owner of such Notes has been advised, that the sale of such Notes to it is being made in reliance on Rule 144A.
(b) The Notes have not been and will not be registered under the Securities Act and may not be offered, sold, pledged or otherwise transferred except (i) in accordance with Rule 144A to a person that it and any person acting on its behalf reasonably believe is a QIB purchasing for its own account or for the account of a QIB, (ii) in an offshore transaction in accordance with Rule 903 or Rule 904 of Regulation S or (iii) pursuant to an exemption from registration under the Securities Act provided by Rule 144 thereunder (if available), or (iv) pursuant to an effective registration statement under the Securities Act, in each case in accordance with any applicable securities laws of any State of the United States.
(c) It will deliver to each person to whom it transfers the Notes notice of any restrictions on transfer of such Notes.
(d) Such Notes, unless the Issuer determines otherwise in compliance with applicable law, will bear a legend to the following effect:
THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR WITH ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE OR OTHER JURISDICTION OF THE UNITED STATES AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (1) IN ACCORDANCE WITH RULE 144A UNDER THE SECURITIES ACT TO A PERSON THAT THE HOLDER AND ANY PERSON ACTING ON ITS BEHALF REASONABLY BELIEVE IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER (2) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 OF REGULATION S UNDER THE SECURITIES ACT OR (3)
189 PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE); OR (4) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. NO REPRESENTATION CAN BE MADE AS TO THE AVAILABILITY OF THE EXEMPTION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT FOR RESALES OF THIS NOTE. THE HOLDER HEREOF, BY PURCHASING THIS NOTE, REPRESENTS AND AGREES FOR THE BENEFIT OF THE ISSUER THAT IT WILL NOTIFY ANY PURCHASER OF THIS SECURITY FROM IT OF THE RESALE RESTRICTIONS REFERRED TO ABOVE.
(e) It understands that the Issuer, the Agent, the Registrar, the Dealers and their affiliates, and others will rely upon the truth and accuracy of the foregoing acknowledgments, representations and agreements, and agrees that if any of the acknowledgments, representations or agreements deemed to have been made by it by its purchase of the Notes are no longer accurate, it shall promptly notify the Issuer and the Dealers. If it is acquiring any Notes for the account of one or more qualified institutional buyers it represents that it has sole investment discretion with respect to each such account and that it has full power to make the foregoing acknowledgments, representations and agreements on behalf of each such account.
(f) It understands that the Notes offered in reliance on Rule 144A will be represented by the Rule 144A Global Note. Before any interest in the Rule 144A Global Note may be offered, sold, pledged or otherwise transferred to a person who takes delivery in the form of an interest in a Regulation S Global Note, it will be required to provide a Transfer Agent with a written certification (in the form provided in the Agency Agreement) as to compliance with applicable securities laws.
(g) It has received the information, if any, requested by it pursuant to Rule 144A and has had full opportunity to review such information.
Prospective purchasers are hereby notified that sellers of the Notes may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A.
Regulation S Notes
Each purchaser of Notes outside the United States pursuant to Regulation S and each subsequent purchaser of such Notes in resales prior to the expiration of the distribution compliance period, by accepting delivery of this Prospectus and the Notes, will be deemed to have represented, agreed and acknowledged that:
(a) It is, or at the time Notes are purchased will be, the beneficial owner of such Notes and (i) it is not a U.S. person and it is located outside the United States (within the meaning of Regulation S) and (ii) it is not an affiliate of the Issuer or a person acting on behalf of such an affiliate.
(b) It understands that such Notes have not been and will not be registered under the Securities Act and that, prior to the expiration of the distribution compliance period, it will not offer, sell, pledge or otherwise transfer such Notes except (i) in accordance with Rule 144A under the Securities Act to a person that it and any person acting on its behalf reasonably believe is a QIB purchasing for its own account or the account of a QIB or (ii) in an offshore transaction in accordance with Rule 903 or Rule 904 of Regulation S, in each case in accordance with any applicable securities laws of any State of the United States.
(c) It agrees that it will deliver to each person to whom it transfers the Notes notice of any restrictions on transfer of such Notes.
(d) It understands that such Notes, unless otherwise determined by the Issuer in accordance with applicable law, will bear a legend to the following effect:
THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR WITH ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE OR OTHER JURISDICTION OF THE UNITED STATES. THE HOLDER HEREOF, BY PURCHASING THIS NOTE, (1) REPRESENTS THAT IT IS
190 NOT A U.S. PERSON AND IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION; AND (2) AGREES FOR THE BENEFIT OF THIS ISSUER THAT DURING THE PERIOD COMMENCING ON THE DATE OF COMMENCEMENT OF THE NOTES AND THE DATE THAT IS 40 DAYS AFTER SUCH DATE (THE "DISTRIBUTION COMPLIANCE PERIOD"), THE NOTES MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OF BENEFIT OF, ANY U.S. PERSON EXCEPT PURSUANT TO AN EXEMPTION FROM REGISTRATION OR PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT. AS USED HEREIN, THE TERMS “OFFSHORE TRANSACTION,” “UNITED STATES,” AND “U.S. PERSON” HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT.
(e) It understands that the Issuer, the Registrar, the Dealers and their affiliates, and others will rely upon the truth and accuracy of the foregoing acknowledgments, representations and agreements, and agrees that if any of the acknowledgments, representations or agreements deemed to have been made by it by its purchase of the Notes are no longer accurate, it shall promptly notify the Issuer and the Dealers.
(f) It understands that the Notes offered in reliance on Regulation S will be represented by the Regulation S Global Note. Prior to the expiration of the distribution compliance period, before any interest in the Regulation S Global Note may be offered, sold, pledged or otherwise transferred to a person who takes delivery in the form of an interest in the Rule 144A Global Note, it will be required to provide a Transfer Agent with a written certification (in the form provided in the Agency Agreement) as to compliance with applicable securities laws.
191 SETTLEMENT
The information set out below is subject to any change in or reinterpretation of the rules, regulations and procedures of DTC, Euroclear or Clearstream, Luxembourg (together, the “Clearing Systems”) currently in effect. Investors wishing to use the facilities of any of the Clearing Systems are advised to confirm the continued applicability of the rules, regulations and procedures of the relevant Clearing System. None of the Issuer, the Trustee, the Agent, the Registrar or any other party to the Agency Agreement will have any responsibility or liability for any aspect of the records relating to, or payments made on account of, beneficial ownership interests in the Notes held through the facilities of any Clearing System or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests.
Book-Entry Systems
DTC
DTC has advised the Issuer that it is a limited purpose trust company organized under the New York Banking Law, a member of the Federal Reserve System, a “banking organization” within the meaning of the New York Banking Law, a “clearing corporation” within the meaning of the New York Uniform Commercial Code and a “clearing agency” registered pursuant to Section 17A of the Exchange Act. DTC holds securities that its participants (“Direct Participants”) deposit with DTC. DTC also facilitates the settlement among Direct Participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in Direct Participants’ accounts, thereby eliminating the need for physical movement of securities certificates. Direct Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. DTC is a wholly owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as securities brokers and dealers, banks, trust companies and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants” and, together with Direct Participants, “Participants”).
Under the rules, regulations and procedures creating and affecting DTC and its operations (the “DTC Rules”), DTC makes book-entry transfers of Registered Notes among Direct Participants on whose behalf it acts with respect to Notes accepted into DTC’s book-entry settlement system (“DTC Notes”) as described below and receives and transmits distributions of principal and interest on DTC Notes. The DTC Rules are on file with the U.S. Securities and Exchange Commission. Direct Participants and Indirect Participants with which beneficial owners of DTC Notes (each, a “Beneficial Owner”) have accounts with respect to the DTC Notes similarly are required to make book-entry transfers and receive and transmit such payments on behalf of their respective Beneficial Owners. Accordingly, although Beneficial Owners who hold DTC Notes through Direct Participants or Indirect Participants will not possess Registered Notes, the DTC Rules, by virtue of the requirements described above, provide a mechanism by which Direct Participants will receive payments and will be able to transfer the interest of the Beneficial Owners in respect of the DTC Notes.
Purchases of DTC Notes under the DTC system must be made by or through Direct Participants, which will receive a credit for the DTC Notes on DTC’s records. The ownership interest of each Beneficial Owner is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase, but Beneficial Owners are expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participants through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the DTC Notes are to be accomplished by entries made on the books of Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in DTC Notes, except in the event that use of the book-entry system for the DTC Notes is discontinued.
To facilitate subsequent transfers, all DTC Notes deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of DTC Notes with DTC and their registration in the name of Cede & Co. or such other DTC nominee effect no change in beneficial ownership. DTC has no knowledge of the actual Beneficial
192 Owners of the DTC Notes; DTC’s records reflect only the identity of the Direct Participants to whose accounts such DTC Notes are credited, which may or may not be the Beneficial Owners. The Participants will remain responsible for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.
Redemption notices shall be sent to DTC. If less than all of the DTC Notes within an issue are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.
Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to DTC Notes unless authorized by a Direct Participant in accordance with DTC’s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Issuer as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts the DTC Notes are credited on the record date (identified in a listing attached to the Omnibus Proxy).
Principal and interest payments on the DTC Notes will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from the Issuer or the relevant agent (or such other nominee as may be requested by an authorized representative of DTC), on the relevant payment date in accordance with their respective holdings shown in DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name”, and will be the responsibility of such Participant and not of DTC or the Issuer, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to DTC is the responsibility of the Issuer, disbursement of such payments to Direct Participants is the responsibility of DTC, and disbursement of such payments to the Beneficial Owners is the responsibility of Direct and Indirect Participants.
Under certain circumstances, including if there is an Event of Default under the Notes, DTC will exchange the DTC Notes for definitive Notes in registered form, which it will distribute to its Participants in accordance with their proportionate entitlements and which, if representing interests in a Rule 144A Global Note, will be legended as set forth under “Plan of Distribution and Transfer Restrictions—U.S. Transfer Restrictions.”
A Beneficial Owner shall give notice to elect to have its DTC Notes purchased or tendered, through its Participant, to the relevant agent, and shall effect delivery of such DTC Notes by causing the Direct Participant to transfer the Participant’s interest in the DTC Notes, on DTC’s records, to the relevant agent. The requirement for physical delivery of DTC Notes in connection with an optional tender or a mandatory purchase will be deemed satisfied when the ownership rights in the DTC Notes are transferred by Direct Participants on DTC’s records and followed by a book-entry credit of tendered DTC Notes to the relevant agent’s DTC account.
DTC may discontinue providing its services as depository with respect to the DTC Notes at any time by giving reasonable notice to the Issuer or the relevant agent. Under such circumstances, in the event that a successor depository is not obtained, DTC Note certificates are required to be printed and delivered.
The Issuer may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, DTC Note certificates will be printed and delivered to DTC.
Since DTC may only act on behalf of Direct Participants, who in turn act on behalf of Indirect Participants, any Beneficial Owner desiring to pledge DTC Notes to persons or entities that do not participate in DTC, or otherwise take actions with respect to such DTC Notes, will be required to withdraw its Registered Notes from DTC as described below.
193 Euroclear and Clearstream, Luxembourg
Euroclear and Clearstream, Luxembourg each holds securities for its customers and facilitates the clearance and settlement of securities transactions by electronic book-entry transfer between their respective account holders.
Euroclear and Clearstream, Luxembourg provide various services including safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. Euroclear and Clearstream, Luxembourg also deal with domestic securities markets in several countries through established depository and custodial relationships. Euroclear and Clearstream, Luxembourg have established an electronic bridge between their two systems across which their respective participants may settle trades with each other.
Euroclear and Clearstream, Luxembourg customers are world-wide financial institutions, including underwriters, securities brokers and dealers, banks, trust companies and clearing corporations. Indirect access to Euroclear and Clearstream, Luxembourg is available to other institutions that clear through or maintain a custodial relationship with an account holder of either system.
Book-Entry Ownership and Payment in Respect of DTC Notes
The Issuer may apply to DTC in order to have any Tranche of Notes represented by a Global Note accepted in its book-entry settlement system. Upon the issue of any such Global Note, DTC or its custodian will credit, on its internal book-entry system, the respective nominal amounts of the individual beneficial interests represented by such Global Note to the accounts of persons who have accounts with DTC. Such accounts initially will be designated by or on behalf of the relevant Dealer. Ownership of beneficial interests in such a Global Note will be limited to Direct Participants or Indirect Participants, including, in the case of any Regulation S Global Note (as defined herein), the respective depositaries of Euroclear and Clearstream, Luxembourg. Ownership of beneficial interests in a Global Note accepted by DTC will be shown on, and the transfer of such ownership will be effected only through, records maintained by DTC or its nominee (with respect to the interests of Direct Participants) and the records of Direct Participants (with respect to interests of Indirect Participants).
Payments in U.S. dollars of principal and interest in respect of a Global Note accepted by DTC will be made to the order of DTC or its nominee as the registered holder of such Note. In the case of any payment in a currency other than U.S. dollars, payment will be made to the Exchange Agent on behalf of DTC or its nominee and the Exchange Agent will (in accordance with instructions received by it) remit all or a portion of such payment for credit directly to the beneficial holders of interests in the Global Note in the currency in which such payment was made and/or cause all or a portion of such payment to be converted into U.S. dollars and credited to the applicable Participants’ account.
The Issuer expects DTC to credit accounts of Direct Participants on the applicable payment date in accordance with their respective holdings as shown in the records of DTC unless DTC has reason to believe that it will not receive payment on such payment date. The Issuer also expects that payments by Participants to beneficial owners of Notes will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers, and will be the responsibility of such Participant and not the responsibility of DTC, the Principal Paying Agent, the Registrar or the Issuer. Payment of principal, premium, if any, and interest, if any, on Notes to DTC is the responsibility of the Issuer.
Transfers of Notes Represented by Global Notes
Transfers of any interests in Notes represented by a Global Note within DTC, Euroclear and Clearstream, Luxembourg will be effected in accordance with the customary rules and operating procedures of the relevant clearing system. The laws in some States within the United States require that certain persons take physical delivery of securities in definitive form. Consequently, the ability to transfer Notes represented by a Global Note to such persons may depend upon the ability to exchange such Notes for Notes in definitive form.
Similarly, because DTC can only act on behalf of Direct Participants in the DTC system who in turn act on behalf of Indirect Participants, the ability of a person having an interest in Notes represented by a Global Note accepted by DTC to pledge such Notes to persons or entities that do not participate in the DTC system or otherwise
194 to take action in respect of such Notes may depend upon the ability to exchange such Notes for Notes in definitive form. The ability of any holder of Notes represented by a Global Note accepted by DTC to resell, pledge or otherwise transfer such Notes may be impaired if the proposed transferee of such Notes is not eligible to hold such Notes through a direct or indirect participant in the DTC system.
Subject to compliance with the transfer restrictions applicable to the Notes described under “Plan of Distribution and Transfer Restrictions—Transfer Restrictions”, cross-market transfers between DTC, on the one hand, and directly or indirectly through Clearstream, Luxembourg or Euroclear account holders, on the other hand will be effected by the relevant clearing system in accordance with its rules and through action taken by the Registrar, a Paying Agent and any custodian (“Custodian”) with whom the relevant Global Notes have been deposited.
On or after the Issue Date for any Series, transfers of Notes of such Series between account holders in Clearstream, Luxembourg and Euroclear and transfers of Notes of such Series between participants in DTC will generally have a settlement date three business days after the trade date (T+3). The customary arrangements for delivery versus payment will apply to such transfers.
Cross-market transfers between account holders in Clearstream, Luxembourg or Euroclear and DTC participants will need to have an agreed settlement date between the parties to such transfer. Because there is no direct link between DTC, on the one hand, and Clearstream, Luxembourg and Euroclear, on the other, transfers of interests in the relevant Global Notes will be effected through the Registrar, a Paying Agent and the Custodian receiving instructions (and, where appropriate, certification) from the transferor and arranging for delivery of the interests being transferred to the credit of the designated account for the transferee. In the case of cross-market transfers, settlement between Euroclear or Clearstream, Luxembourg account holders and DTC participants cannot be made on a delivery versus payment basis. The securities will be delivered on a free delivery basis and arrangements for payment must be made separately.
DTC, Clearstream, Luxembourg and Euroclear have each published rules and operating procedures designed to facilitate transfers of beneficial interests in Global Notes among participants and account holders of DTC, Clearstream, Luxembourg and Euroclear. However, they are under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued or changed at any time. None of the Issuer, the Agents or any Dealer will be responsible for any performance by DTC, Clearstream, Luxembourg or Euroclear or their respective direct or indirect participants or account holders of their respective obligations under the rules and procedures governing their operations and none of them will have any liability for any aspect of the records relating to or payments made on account of beneficial interests in the Notes represented by Global Notes or for maintaining, supervising or reviewing any records relating to such beneficial interests.
195 GENERAL INFORMATION
Authorization
The establishment of the Program and the issue of Notes have been duly authorized by a resolution of the Board of Directors of the Issuer dated 7th December 2011.
Listing
Application has been made to the CSSF for the approval of this document as a base prospectus for the purposes of Article 5.4 of the Prospectus Directive. Application has also been made to the Luxembourg Stock Exchange for Notes issued under the Program during the period of 12 months from the date of this Prospectus to be admitted to trading on the Luxembourg Stock Exchange’s regulated market and to be listed on the Official List of the Luxembourg Stock Exchange.
The Luxembourg Stock Exchange’s regulated market is a regulated market for the purposes of MiFID.
Documents Available
For the period of 12 months from the date of this Prospectus, copies of the following documents will be available for inspection at the registered office of the Issuer and from the specified offices of the Paying Agents for the time being:
(i) the constitutional documents (with an English translation thereof) of the Issuer;
(ii) the Program Agreement, the Trust Deed, the Agency Agreement, the Issuer-ICSDs Agreement and the forms of the Notes (in global and definitive form);
(iii) the audited consolidated annual financial statements of the Issuer for the financial years ended December 31, 2009, 2010 and 2011, together with the auditor’s reports prepared in connection therewith;
(iv) the most recently published audited consolidated annual financial statements of the Issuer and the most recently published unaudited interim financial statements (if any) of the Issuer, in each case together with any audit or review reports prepared in connection therewith; and
(v) this Prospectus, any supplement to this Prospectus, each document incorporated by reference in this Prospectus from time to time and each Final Terms (save that Final Terms relating to Notes which are neither admitted to trading on a regulated market in the European Economic Area nor offered in the European Economic Area in circumstances where a prospectus is required to be published under the Prospective Directive will only be available for inspection by a holder of such Notes and such holder must produce evidence satisfactory to the Issuer and the relevant Paying Agent as to its holding of Notes and identity).
In addition, a copy of this Prospectus, any supplement to this Prospectus, each document incorporated by reference in this Prospectus from time to time and each Final Terms relating to Notes which are admitted to trading on the Luxembourg Stock Exchange’s regulated market will also be available on the website of the Luxembourg Stock Exchange (www.bourse.lu).
Clearing Systems
The Notes have been accepted for clearance through Euroclear and Clearstream, Luxembourg. The appropriate common code and International Securities Identification Number (ISIN) allocated by Euroclear, Clearstream, Luxembourg for each Tranche of Notes will be specified in the relevant Final Terms. In addition, the Issuer will make an application for Notes to be accepted for trading in book-entry form by DTC. The CUSIP number for each Tranche of Notes, together with the relevant common code and ISIN (if applicable), will be specified in the relevant Final Terms. If the Notes are to clear through an additional or alternative clearing system, the appropriate
196 information will be specified in the relevant Final Terms. Euroclear, Clearstream, Luxembourg and DTC are the entities in charge of keeping the book-entry records.
The address of Euroclear is Euroclear Bank, 1, Boulevard du Roi Albert II, B-1210 Brussels, Belgium; the address of Clearstream, Luxembourg is Clearstream Banking SA, 42 Avenue JF Kennedy, L-1855 Luxembourg, Luxembourg; and the address of DTC is 55 Water Street, New York, NY 10041–0099, United States.
Conditions for Determining Price
The issue price and amount of the Notes of any Tranche to be issued will be determined at the time of the offering of such Tranche in accordance with prevailing market conditions.
Material Change
There has been no material adverse change in the prospects of the Issuer, and save as disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments," there has been no significant change in the financial position of the Issuer or the DNB Bank Group since December 31, 2011.
Litigation
Save as disclosed in "Description of the DNB Bank Group—Litigation," neither the Issuer nor any member of the DNB Bank Group is or has been involved in any governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the Issuer is aware) in the 12 months preceding the date of this Prospectus which may have, or have in such period had, a significant effect on the financial position or profitability of the Issuer or the DNB Bank Group.
Certificates
The Trust Deed provides that the Trustee may rely on any certificate or report from an expert or any other person in accordance with the provisions of the Trust Deed whether or not any such certificate or report or any engagement letter or other document entered into by the Trustee in connection therewith contains any limit on the liability of such expert or such other person.
Post-issuance Information
The Issuer does not intend to provide any post-issuance information in relation to any assets underlying issues of Notes constituting derivative securities, except as otherwise specified in the Final Terms relating to such Notes.
Investments in subsidiaries as of December 31, 2011
DNB Bank ASA
Amounts in NOK thousands
Ownership Values in NOK unless Number of Nominal share in per otherwise indicated Share capital shares Value cent Book value
Foreign subsidiaries
Bank DNB A/S EUR 1,715,595 1,715,595,100 EUR 1,715,595 100.0 9,050,921
AB DNB bankas LTL 656,665 5,710,134 LTL 656,665 100.0 2,871,727
AS DNB banka LVL 134,361 134,360,900 LVL 134,361 100.0 2,320,160
Den Norske Syndicates GBP 200 200,000 GBP 200 100.0 1,860
DNB Asia SGD 20,000 20,00,000 SGD 20,000 100.0 92,358
197 Ownership Values in NOK unless Number of Nominal share in per otherwise indicated Share capital shares Value cent Book value
DNB Luxembourg EUR 17,352 70,000 EUR 17,352 100.0 134,758
DNB Markets Inc. USD 1 1,000 USD 1 100.0 2,193
DNB Monchebank RUB 800,000 800,000,000 RUB 800,000 100.0 243,048
DNB Reinsurance 21,000 21,000 21,000 100.0 21,000
SalusAnsvar SEK 85,614 21,403,568 SEK 85,614 100.0 509,065
SC Finans SEK 126,025 1,260,250 SEK 126,025 100.0 166,118
Svensk Fastighetsförmedling SEK 8,940 89,400 SEK 8,940 100.0 33,795
Domestic subsidiaries
DNB Boligkreditt 1,827,000 18,270,000 1,827,000 100.0 12,420,000
Bryggetorget 2,500 2,500 2,500 100.0 110,000
DNB Eiendom 10,003 100,003 10,003 100.0 150,349
DNB Eiendomsutvikling 91,000 91,000,000 91,000 100.0 226,331
DNB 3,000 30 3,000 100.0 3,000 Gjenstandsadministrasjon
DNB Invest Holding 100,000 200,000 100,000 100.0 243,000
DNB Meglerservice 1,200 12 1,200 100.0 10,221
DNB Næringskreditt 550,000 550,000 550,000 100.0 5,240,942
DNB Næringsmegling 1,000 10,000 1,000 100.0 24,000
Hafjell Holding 10,000 1,000 10,000 100.0 12,400
Nordlandsbanken 625,062 50,004,984 625,062 100.0 1,864,444
Postbanken Eiendom 2,000 20,000 2,000 100.0 7,672
Viul Drift 2,629 2,628 2,629 100.0 3,118
Total investments in 35,762,581 subsidiaries
198 INDEPENDENT AUDITORS
Independent Auditors
The Issuer’s consolidated financial statements at and for the years ended December 31, 2009, 2010 and 2011 incorporated by reference in this Prospectus have been audited by Ernst & Young AS, an independent public accounting firm, as stated in their report incorporated by reference herein.
The address of Ernst & Young AS is Dronning Eufemias gate 6, P.O. Box 20, NO-0051 Oslo, Norway. Ernst & Young AS is a member of the Norwegian Institute of Public Accountants.
Legal Matters
Certain legal matters in connection with the offering of the Notes will be passed upon for the Issuer by Allen & Overy LLP, U.S. legal counsel to the Issuer. Certain legal matters in connection with the offering of the Notes will be passed upon for the Arranger and Dealers by Linklaters LLP, U.S. and English legal counsel to the Arranger and Dealers, and Wiersholm, Mellbye & Bech, advokatfirma AS, Norwegian legal counsel to the Arranger and Dealers.
199 THE ISSUER DNB Bank ASA Stranden 21 Aker Brygge N-0021 Oslo Norway ARRANGER Barclays Bank PLC 5 The North Colonnade Canary Wharf London E14 4BB United Kingdom DEALER Barclays Capital Inc. 745 Seventh Avenue New York, New York 10019 United States TRUSTEE LUXEMBOURG LISTING AGENT The Law Debenture Trust Corporation p.l.c. KBL European Private Bankers S.A. Fifth Floor 43 Boulevard Royal 100 Wood Street L-2955 Luxembourg London EC2V 7EX United Kingdom
ISSUING AND PRINCIPAL PAYING AGENT and REGISTRAR EXCHANGE AGENT Citibank, N.A., London Branch Citigroup Global Markets Deutschland AG Citigroup Centre Reuterweg 16 Canada Square, Canary Wharf 60323 Frankfurt London E14 5LB Germany United Kingdom LEGAL ADVISERS To the Issuer as to English law as to United States law Allen & Overy LLP Allen & Overy LLP One Bishops Square 52 avenue Hoche London E1 6AD CS 90005 United Kingdom 75379 Paris Cedex 08 France To the Arranger and the Dealers as to Norwegian law as to United States and English law Wiersholm, Mellbye & Bech Linklaters LLP PO Box 1400 Vika One Silk Street N-0115 Oslo London EC2Y 8HQ Norway United Kingdom LEGAL ADVISERS AUDITORS To the Trustee as to English law Ernst & Young AS Linklaters LLP Dronning Eufemias gate 6 One Silk Street P.O. Box 20 London EC2Y 8HQ NO-0051 Oslo United Kingdom Norway
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