Crisis Talk — with Thor Tellefsen, head of funding at DNB
DNB entered 2020 better capitalised than ever, and having taken the opportunity to get ahead with its regulatory funding at the end of last year, it was also better financed than ever. Even so, following the regulator's decision to delay implementation of MREL target by one year, DNB could return to the covered bond market in the latter half of 2020.
How has your funding changed since March 1?
Actually, it hasn’t really changed for us so far at all. DNB did some extraordinary pre-funding in the fourth quarter 2019, when we took on board close to €5bn in senior funding due to the expected implementation of MREL [minimum requirement for own funds and eligible liabilities]. In January 2020 we were able to communicate that, due to this pre-funding, we had a very limited need this year which means we probably won’t be in the market until after summer.
Originally we planned for a year without any public covered bond transaction. But the Norwegian regulator has now postponed the deadline for MREL implementation by one year. This means we will issue less MREL in the second half 2020, and that might in turn mean that DNB could be back in the covered bond market after summer. Apart from this, we don’t expect a change in the mix of the instruments that make up our market funding.
How helpful has Norges Bank being, in term of improving access to repo facilities?
We can get up to 12 months funding from a Norges Bank repo lending facility that, until now, commercial banks had not often used. The central bank improved the terms of this facility and made pricing a bit more interesting. We’ve currently drawn the equivalent of €5bn under this scheme, which means we are in a very comfortable liquidity position. DNB can’t use the ECB’s Targeted Longer-Term Refinancing Operations (TLTRO) and that’s why we might be in the covered bond market.
How has your balance sheet changed in Q1, has there been growth?
DNB had quite high loan growth in the first quarter but 80% of this was exchange rate related, due to the Norwegian krone’s depreciation. The 20% of DNB’s lending that is in foreign currencies increased in Norwegian krone terms.
DNB has most of its long term funding in foreign currency which means that when the Norwegian krone is weaker, the volume of long-term funding increases.
Even so, loan growth has not increased our funding needs. Deposits also grew strongly with domestic and international clients viewing DNB as a safe haven in the turbulent times during the Covid-19 pandemic.
What does this mean in terms of risk-weighted asset (RWA) growth and core equity?
RWA has grown significantly in the first quarter. Half of this was driven by exchange rates and then there were affects from IFRS 9 as exposures moved to different stages. In our first quarter presentation we disclosed total impairments of Nkr5.7bn, of which Nkr2.8bn were Stage 3. As a result, our common equity tier one ratio fell from 18.6% in December 2019 to 17.7% in March 2020, this being well above the regulatory requirement of 15.6%.
Do you have any visibility on how deferred loan payments and non-performing loans are likely to evolve?
Norway decided against implementing a national moratorium which means there is no official Norwegian payment holiday scheme. Clients can postpone instalments, but there has been no debate whatsoever on the cessation of interest rate payments. That means there is no interference with loans that could be categorised as non-performing or impaired loans. We have increased Stage 3 loans under the new IFRS classification, as stated, but many of these loans in stage 3 are still paying interest.
What have national regulators and supervisors done to help alleviate these problems?
The Norwegian government has earmarked Nkr50bn of enabling loans for financing businesses and it guarantees 90% of each loan. The government bond fund has also been reinstated with an investment budget of Nkr50bn, and this aims to increase liquidity and access to capital in the Norwegian bond market.
There is also a government scheme offering compensation to cover fixed costs for businesses losing revenue due to Covid-19 of up to Nkr20bn per month. The FCA also reduced the countercyclical capital buffer from 2.5% to 1% to promote lending. There have also been some changes to social benefit schemes for the unemployed and those temporarily laid-off. There have also been some temporary changes to Norway’s home mortgage regulation providing banks more flexibility to increase use of deferred amortisation. The Norges Bank has also cut rates from 1.5% to 0%.
The Norwegian government has been at the forefront with support initiatives and it has stated it will provide whatever support is needed. Even so, Norway is still not spending more than up to 4% of its oil fund, which used to be the old spending rule. The Norwegian government has plenty of room to spend more; no one can fight this better than Norway.
Do you expect to issue more additional tier one and tier two capital following the changes to Pillar 2 requirements?
Our tier one bucket is full so we’ve no need to issue for now. We just called a tier one in March 2020, but that was refinanced in autumn 2019. We have also called a tier two transaction, but this has also been refinanced. So we have no further needs for either this year.
In April 2018 the Norwegian FSA suggested that banks should include the Pillar 2 requirements in the calculation of the Maximum Distributable Amount (MDA) trigger. However, the Ministry of Finance has not yet expressed its view on this proposal, so it’s not certain it will be adopted. DNB currently has a buffer of 480bp down to the MDA trigger.
If Pillar 2 should be included in the MDA the buffer will be reduced to 310bp. DNB has currently postponed a decision to pay dividends and if it subsequently decides not to, the bank’s core equity tier one ratio would be expected to increase by 136bp.
And finally it’s also worth mentioning, that even if the countercyclical buffer in Norway has been decreased from 250bp to 100bp, it can still be reduced further, which again lowers DNB’s requirements.
Have there been any major challenges while from working from home?
I was working from home first three weeks after the corona outbreak, but I have now been back in the office for the last five weeks. I was positively surprised at just how well everything worked from home, but I admit that I missed my multiple large screens.