risk management and capital efficiency

Risk Management and Capital Efficiency

Presentation by Tom Grøndahl, CFO and deputy CEO Capital Markets Day, 9 October 2007

2

Balance Sheet as at 30 June 2007

Amounts in NOK billion

Cash and deposits with central banks 9.0 Loans and deposits from credit institutions 163.7

Lending to/deposits with credit institutions 127.3 Deposits from customers 527.9

Lending to customers 882.8 Borrowings through the issue of securities 328.5

Commercial paper and bonds 220.2 Insurance liabilities. customers bearing the risk 19.1

Shareholdings 67.0 Liabilities to life insurance policyholders 191.5

Fixed and intangible assets 39.2 Other liabilities and provisions 104.7

Financial assets. customers bearing the risk 19.1 Subordinated loan capital 34.2

Other assets 72.5 Total equity 67.4

Total assets 1437.1 Total liabilities and equity 1437.1

3

Commercial Paper and Bonds


Vital Hold to Maturity portfolio 62.9

Vital Trading portfolio 44.7

Bank Hold to Maturity portfolio -

Bank International Liquidity portfolio (98.3% AAA. 1.7% AA) 86.4

Bank Domestic Liquidity portfolio 10.1

Other 16.1

Total 220.2

4

Questions related to bank international liquidity portfolio

Do you have direct/indirect subprime exposure? No

NOK 66.4 billionDo you have RMBSs?

NOK 7.9 billion in CLOsDo you have CDOs or CLOs?

DnB NOR Bank: NOK 0.1 billion Vital: NOK 2.3 billion

Do you have investments in hedge funds?

DnB NOR Bank: NOK 0.7 billion Vital: NOK 4.3 billion

Do you have investments in P/E companies?

5

Bank international liquidity portfolioAsset Classes and RMBSs by Country

OTHER1 %

INSURANCE2 %

CLO9 %

RMBS77 %

CBO0 %

RECEIVE1 %

CMBS2 %

CONSLOAN2 %

AUTO2 %

LEASE0 %

CARD2 %

SL FFELP2 %

SL PRIVATE0 % Ireland

4.6 %

Portugal6.4 %

Netherlands16.7 %

UK20.4 %

Australia23.6 %

Spain24.0 %

Denmark0.5 %

Italy3.9 %

6

Bank international liquidity portfolio Asset Classes and CLOs by country

INSURANCE2 %

OTHER1 %

RECEIVE1 %

SL PRIVATE0 %

SL FFELP2 %

CARD2 %

RMBS77 %

AUTO2 %

LEASE0 %

CLO9 %

CBO0 %

CMBS2 %

CONSLOAN2 %

Australia2.3 % Denmark

8.2 %Germany

5.4 %

Italy5.3 %

Netherlands22.1 %

Spain25.1 %

UK26.3 %

USA5.3 %

7

Bank international liquidity portfolio: CLOs

BBVA Balance Sheet SME Loans

Banco Popular Balance Sheet SME Loans

Spanish Agri Banks SME Loans

Santander Balance Sheet SME Loans

HSBS Balance Sheet Corp Loans

RBS Balance Sheet Corp Loans

Barclays Balance Sheet Corp Loans

Advanta SME Credit Cards

Goldman Sachs Balance Sheet Corp Liquidity Lines

National Aus Bank Balance Sheet Corp Loans

ABN Amro Balance Sheet Corp Loans

Italian Savings Banks Senior Loans

Dresdner Balance Sheet Corp Loans

Danske Bank Balance Sheet Loans

Danish Savings Banks Subordinated Loans

Netherlands

Spain

UK

US

GER

AUS

IT

DK

All CLOs are Aaa/AAA

8






Commercial paper and bonds 220.2 Insurance liabilities. customers bearing the risk 19.1



Financial assets. customers bearing the risk 19.1 Subordinated loan capital 34.2



9

Lending


Lending to/deposits with credit institutions 127

Lending to customers 882

- retail 438

- shipping 76

- commercial real estate 128

- other 240

10

Questions related to loan portfolio

Do you have hedge fund loans outstanding/prime brokerage? No

Do you have loans outstanding to P/E companies? No

Do you have loans to companies owned by P/E? NOK 20 billion

How big is your syndication pipeline? NOK 16.9 billion

How much of synd. pipeline in P/E or LBOs? NOK 3.3 billion

How much undrawn lines to large corporates? NOK 58 billion

What exposure to financial institutions? Only to rated A or better

Sponsor/liquidity facilities to US conduits? No

11






Commercial paper and bonds 220.2 Insurance liabilities, customers bearing the risk 19.1



Financial assets, customers bearing the risk 19.1 Subordinated loan capital 34.2



12

Robust funding

• Solid and well-diversified customer deposit base– 60 per cent deposit-to-loan ratio

• Conservative funding guidelines– More than 90 per cent of loans to customers is funded by customer

deposits, capital, subordinated debt or senior debt with >1-year residual maturity

• Inaugural Norwegian Covered Bond issued by DnB NOR in June 2007– Large, nearly untapped funding source for the bank– Replacement of senior unsecured debt by covered bonds reduces

cost of new funding• In spite of financial turmoil, new Covered Bond funding is cheaper

than existing Senior Unsecured

13






Commercial paper and bonds 220.2 Insurance liabilities, customers bearing the risk 19.1



Financial assets, customers bearing the risk 19.1 Subordinated loan capital 34.2



14

Capitalisation policy in DnB NOR

Capital management

Risk-Adjusted Capital DnB NOR Group

- 20- 10

10

20

30

40

50

60

0612 0703 0706

Business risk

Operational risk

Ownership risk for Vital

Market risk

Credit risk

Diversification

Too much:

inefficient returns to shareholders

Too little:

Missed opportunities, regulatory and rating agency pressure

ICAAP* : Regulatory minimum + buffer = Capitalisation target 6.5% Tier I

* ICAAP: Internal Capital Adequacy Assessment Process

15

Allocation of capital to business areas

We calculate Risk-Adjusted Capital (RAC) to each business area and allocate on a stand-alone basis

Corporate56 %

Life insurance16 %

Markets4 %

Retail14 %

Equity inv.2 %

DnB NORD 7 %

Asset man.1 %

30 June 2007

NOK billionDnB NOR

Group

Credit risk 37.7

Market risk 2.8

Vital risk 8.2

Operational risk 5.0Business rsik 2.4

Diversification within BAs -3.1

Gross RAC 53.0

Diversification between BAs -10.0

Net RAC 43.0

16

Allocation of capital to business areas

Split of RAC between domestic and international operations

30 June 2007

International 23 %

Norway77 %

NOK billionDnB NOR

Group

Credit risk 37.7

Market risk 2.8

Vital risk 8.2

Operational risk 5.0Business rsik 2.4

Diversification within BAs -3.1

Gross RAC 53.0

Diversification between BAs -10.0

Net RAC 43.0

17

Return on risk-adjusted capital in business areas

First half 2007Amounts in NOK million

Corporate Banking

Retail Banking

DnB NOR Markets

DnB NORD

Total income 5 685 4 963 2 058 2 144 867Operating expenses 1 971 3 147 794 1 083 574

Pre-tax operating profit before write-downs 3 714 1 817 1 264 1 061 293

Pre-tax operating profit 3 666 1 676 1 240 1 061 263

Profit for the period 1) 2 639 1 207 893 995 216

Return on risk-adjusted capital (per cent) 18.9 34.5 84.6 20.7 12.5

Average risk-adjusted capital (NOK billion) 28.1 7.1 2.1 9.7 3.5

Life and Asset Management

1) Profit for the period is calculated based on a tax rate of 28 per cent in Corporate Banking, Retail Banking, DnB NOR Markets and Asset Management, 18 per cent in DnB NORD and 0 per cent in Vital. Return on risk-adjusted capital in Life and Asset Management was 28.9 per cent after recorded tax in Vital.

18

Return on risk-adjusted capital in International and Norwegian operations

First half 2007Amounts in NOK million

Total Business areas 1)

BAs International operations 2)

BAs Norwegian operations

Total income 15 717 2 486 13 231Operating expenses 7 568 1 279 6 289

Pre-tax operating profit before write-downs 8 148 1 207 6 942

Pre-tax operating profit 7 906 1 161 6 745

Profit for the period 1) 5 950 863 5 088

Return on risk-adjusted capital (per cent) 23.8 14.7 26.6

Average risk-adjusted capital (NOK billion) 50.5 11.9 38.6

1) Figures for total business areas are before eliminations of double entries.

2) International operations in Corporate Banking is calculated based on the customer's address, thus the figures include international customers who are served from Norway. The operating expenses in international operations include some support functions in Norway.

19

Allocation of capital to business areasAll capital has to be serviced…

• Actual equity exceeds risk-adjusted capital allocated to business areas (BA)

• Group profits are generated by the BAs => total net profit in BAs must satisfy the Group target

Allocated capital 531)

Actual equity 67.41))

16% Group ROE target

20% Total required ROE in BAs=*

1) In NOK billion. In the actual calculations average annual numbers are being used, adjusted for minority interests.

20

Capitalisation of the Group today ICAAP

Total loss distribution for DnB NOR as at 30 June 2007


30 06 07

4.25% of risk weighted assets 38.6

0 10 20 30 40 50

0.0

0.0

00

05

0.0

00

15

0.0

00

25

98.00 %-quantile

99.97 %-quantile

14.2 43.098% Capital buffer 14.2

Core capital target excl hybrid 52.8

Statutory deductions in core capital 6.8

Equity target 59.7

Actual equity incl. retained earnings 67.4

- 1h 07 dividend allocation 3.1Actual equity incl. 50% of retained earnings 64.3

Equity reserve 4.6

NOK billion

21

Capitalisation of the Group today NOK 67.4 billion: too much – OK – or too little?

59.7 + 4.6 + 3.1 = 67.4Equity target

Equity reserve

1h 07 dividend allocation

Too much:

inefficient returns to shareholders

Too little:

Missed opportunities, regulatory and rating agency pressure

Risk-Adjusted Capital DnB NOR Group

- 20- 10

10

20

30

40

50

60

0612 0703 0706

Business risk

Operational risk

Ownership risk for Vital

Market risk

Credit risk

Diversification

22

Projections on equity reserveAssumptions

• Volume Growth alternatives (2008-2010 average annual Basel I RWA growth)– Base Line: 12%– Low growth: 8%– High growth: 16%

• ROE alternatives: 14.5% 16.0% 17.5%

• Dividend: 50% pay-out ratio

• Stable risk profile and diversification effects

23

Projections on equity reserve Base line and Basel I

-7 000

-6 000

-5 000

-4 000

-3 000

-2 000

-1 000

0

1 000

2 000

3 000

4 000

2006 2007 2008 2009 2010

Equity

rese

rve,

acc

., N

OK m

illio

n

Average annual volume growth: 12 %

ROE 17.5 %

ROE 16.0 %

ROE 14.5%

24

Projections on equity reserveBase line plus high and low growth alternatives. Basel I

-16 000

-14 000

-12 000-10 000

-8 000

-6 000

-4 000

-2 000

02 000

4 000

6 000

2006 2007 2008 2009 2010

Equity

rese

rve,

acc

., N

OK m

illio

n

High growth, average:

ROE 16.0 %

Low growth, average: 8 %

16 %

Base line, average: 12 %

25

Projections on equity reserveAssumptions

• Volume Growth alternatives (2008-2010 average annual Basel I RWA growth)– Base Line: 12%– Low growth: 8%– High growth: 16%

• ROE alternatives: 14.5% 16.0% 17.5%• Dividend: 50% pay-out ratio• Stable risk profile and diversification effects• Basel II implementation

– 2010 Basel II RWA = 80% of 2010 Basel I RWA

75 %

80 %

85 %

90 %

95 %

100 %

2006 2007 2008 2009 2010

Basel I RWA

Basel II RWA in % of Basel I RWA

26

Projections on equity reserveDnB NOR and Basel II

• Foundation IRB approach from 1 January 2007

• Standardised Approach for operational risk– Go to AMA in some years' time

• Ambition to upgrade to IRB advanced from 1 January 2008

• QIS5 indicates a reduction in RWA of 38 per cent after full implementation of IRB advanced– Due to safety margins and conservatism in the calibration

required by the regulator, the final reduction will be less

• ICAAP/pillar 2 dialogue with FSA Norway started

27

Projections on equity reserve Base line. Basel II

Average annual volume growth: 12 %

0

1 000

2 000

3 000

4 000

5 000

6 000

7 000

8 000

9 000

2006 2007 2008 2009 2010

ROE 17.5 %

ROE 16.0 %

ROE 14.5%

Equity

rese

rve,

acc

., N

OK m

illio

n

28

Projections on equity reserveBase line plus high and low growth alternatives. Basel II

ROE 16.0 %

-4 000

-2 000

0

2 000

4 000

6 000

8 000

10 000

12 000

14 000

16 000

2006 2007 2008 2009 2010

High growth, average:

Low growth, average: 8 %

16 %

Base line, average: 12 %

Equity

rese

rve,

acc

., N

OK m

illio

n

29

Conclusions

• Healthy growth prospects require capital– …50% pay-out ratio and 16% ROE finance "only" 8% volume

growth…

• Still – a gradual Basel II reduction in RWA is expected to increase equity reserve towards 2010

• Likely scenarios should open for a potential annual share buy-back of NOK 1.5-2 billion over the next three years (assuming no acquisitions)

risk management and capital efficiency

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