* Q1 operating profit hits $1.23 billion
* Loan losses seen below normal
* Maintains lending growth forecast
* Tier 1 capital ratio 11.9 pct vs 11.8 pct in Q4
(Adds analysts, share, outlook)
By Balazs Koranyi
OSLO, May 8 DNB, Norway's biggest bank,
said on Thursday its loan losses virtually evaporated in the
first quarter and would stay below normal all year, sending its
shares higher and erasing some of its discount to Swedish peers.
State-controlled DNB said its operating profit rose 69
percent as loan losses dropped nearly 90 percent, costs declined
and margins widened, improving its outlook with the Norwegian
economy moving past its recent dip.
"These numbers were very strong. Estimates should move up
after this and the stock should also move up," said Bengt
Kirkoen, an analyst at Swedbank. "The drop in the volumes of
problematic loans means losses ahead also will be lower than
what is in the estimates."
At 0716 GMT, DNB shares rose 1.9 percent, outperforming a
0.5 percent rise in the European banking index.
DNB shares have fallen out of favour this year and
underperformed the market over concerns that Norway's economy
will be dragged down by slowing oil investment growth and lower
house prices, adding to DNB's troubles from a soft shipping
market, a key focus for its lending activities.
Indeed, based on its price-to-earnings ratio, DNB is the
cheapest bank in the sector, Danske Bank said before the
The stock fell 4.5 percent in the three months before
Thursday's report, trailing a 6.9-percent rise in the Oslo
benchmark, leaving the stock with a 35-percent discount
to Swedish peers, based on its price to expected 2015 earnings
ratio, brokerage Fondsfinans said.
Although net interest income trailed expectations and
lending growth was just 2.2 percent, DNB raised investor
confidence as it predicted accelerating growth after a big
mortgage rate cut earlier this year.
"A cautious recovery is expected in both the Norwegian and
the international economy during the remainder of 2014," DNB
said. "Credit quality is expected to improve, while losses are
expected to be below the normalised level in 2014."
It also predicted lending would grow by 3-4 percent this
year, margins would hold after a big increase and costs would be
flat through 2016.
Analysts said DNB would continue to erase its discounts once
lending growth visibly picks up, the mortgage market gathers
strength and DNB moves closer to building the required capital
The bank cut mortgage rates in the first quarter, a
potential drag on its margins later this year, but the housing
market has unexpectedly rebounded, improving the bank's outlook
as it relies heavily on mortgage lending for growth.
DNB is one the best capitalised banks in Europe but still
needs to save more cash to meet the government's strict rules.
The bank earlier said it would pay out just 25 percent of its
profits through 2016 before returning to a 50-percent payout.
Common equity Tier 1 capital ratio, the key measure watched
by regulators, was 11.9 percent at the end of the quarter, up
from 11.8 percent at the end of last year. It needs to reach
13.5-14 percent by 2016.
(Editing by Matt Driskill/Mark Heinrich)