The European Banking Authority (EBA) today announces the results of the 2014 EU-wide stress test, which also covers the DNB banking group.
The stress scenario brings a large increase in the DNB banking group's loan impairment write-downs and a large reduction in net interest income. The bank's profit is accordingly negative in the first of the three years of the stress test period. This, combined with an increase in risk weighted assets, causes the bank's CET1 ratio to fall from 11.3% to 10.8% in the first year. In the last two years of the stress test the write-downs are smaller than in the first year, contributing to a positive profit margin. This in turn causes the CET1 ratio to rise to 10.9% in the second year and to 11.3% in the final year of the stress period.
Based on the asset quality review (AQR) findings, the DNB banking group's CET1 capital is for stress test purposes reduced by EUR 45m, equivalent to NOK 377m. This constitutes 0.03% points of the DNB Group's CET1 ratio.
"Neither Finanstilsynet nor the DNB banking group needs to take particular measures as a direct consequence of the stress test," says Director General at Finanstilsynet, Morten Baltzersen.
Mr Baltzersen emphasises that the outcome of the stress test largely reflects a benign starting point for Norwegian banks and the Norwegian economy. The DNB banking group, along with the Norwegian banking industry in general, has for a prolonged period shown robust profit levels and low loan losses, while the Norwegian economy is robust with high capacity utilisation. The bank accordingly maintains sound profits in the stress test's baseline scenario, substantially improving the bank's capital adequacy ratio. However, Finanstilsynet is well aware that the Norwegian economy could well face more severe macroeconomic stress than posited in the 2014 EU-wide stress test, due for example to a steep, lasting fall in the oil price or a stronger fall in property prices.
Norwegian banks' profitability and capital are assessed under more severe scenarios in Finanstilsynet's own stress tests than in the EU-wide stress test.
Given the uncertainties of stress testing in general – in terms of assumptions and methodology alike – Finanstilsynet does not base its evaluation of the banks' robustness on the results of a single stress test and scenario. Mr Baltzersen underscores Finanstilsynet's assessment that Norwegian banks should build up their capital further by retaining the bulk of their profits so as to enable them to carry on lending during a severe economic set back.
Background and purpose
The 2014 EU-wide stress test assesses the resilience of European banks to severe shocks and losses in the form of credit losses, market risk, net interest income risk and potential conduct costs etc. It also seeks to improve transparency in the European banking sector, and is considered an important tool for supervisory authorities. It should be noted that the EU-wide stress test is a complement to and not a substitute for Finanstilsynet's own stress tests.
The stress test was carried out in April-October 2014. The test was conducted on a static balance sheet as of 31 December 2013 over a three-year time horizon (2014-2016).
The stress test is initiated and coordinated by the EBA and undertaken in collaboration with national supervisory authorities, the European Central Bank, the European Systemic Risk Board and the European Commission. The national supervisory authorities are responsible for ensuring that banks correctly apply the common methodology developed by the EBA, for quality assurance and for challenging the banks' results and, ultimately, for determining and taking any supervisory action needed.