Digital overhaul helped Norway’s DNB weather pandemic

DNB, Norway’s biggest bank, is reaping the rewards of an early focus on digitalisation and cost control that has helped it weather the pandemic better than most other European lenders. It plans to pay a dividend for both 2019 and 2020.

DNB has benefited from the resilience of Norway’s economy — expected to be one of the best performers during the Covid-19 pandemic — but it has also overhauled its business model. It has reduced its exposure to oil and other cyclical companies, closed down 70 per cent of its bank branches, and developed technology for fully-automated loan decisions and simple mobile payments. This strategy could provide a potential path to success for European rivals, according to analysts.

“It has been a huge transformation,” Kjerstin Braathen, DNB’s chief executive, said in an interview. “Since the financial crisis, we have moved from physical to digital. Customer interactions have gone up as the number of branches has gone down. We have doubled revenues, and kept costs fairly stable — and the only reason why this could happen is the transition to digital.”

In the past year banks across Europe have had to deal with the fallout from the Covid-19 pandemic at the same time as grappling with how to digitise their operations and weighing up the future of their branches. All of this has played out in an environment where fintechs are trying to lure their customers with better technology.

Adam Barrass, analyst at Berenberg in London, said: “DNB is fairly representative of what many banks in the sector will need to go through. A bank, like any business, has to stay relevant to its customers’ needs and wants. If you assume digitalisation trends continue then banks will have to continue to evolve.”

DNB on Wednesday reported a better than expected fall in fourth-quarter earnings but announced its biggest annual impairment provisions since the 2008-09 financial crisis, owing to the impact of the pandemic. It said it would pay a dividend of NKr8.40 per share for 2019 and proposed NKr9 for 2020 after following Norwegian authorities’ advice to delay shareholder payouts at the height of the pandemic.

Speaking in an interview before the results, Braathen noted that DNB’s competitive landscape had changed. No longer was it competing purely against other banks, but with newer, digital entrants to the market.

“The benchmark today is not what other banks can offer; this whole transition happens with other companies entering the financial value chain and competing for our services,” she said. “The benchmark is more the Googles and Apples of this world and that type of user experience.”

DNB set up the Vipps app in 2015 to allow Norwegians to send small sums of money via their mobile to each other or to buy a hot-dog at a football match. It later spun it out as a separate company in which it retains a 40 per cent stake. Braathen said that fintechs had acted as a “wake-up call for where banks weren’t good enough” but argued that Vipps was in some ways “Norway’s largest fintech”.

She acknowledged that DNB had been helped by Norway’s strong digital focus in the public sector as well as the strength of its economy, but added that it had also benefited from decisive action internally.

“It’s always about dilemmas and choices and priorities. We’re not just a passenger on the ride. Not everything has been popular, like the branch closures. But at the end of the day, people didn’t go into the branches. There is a lot of thinking: ‘we like things the way they are’. That’s the problem in Europe,” said Braathen.

DNB’s strong focus on costs by reducing worker numbers as it closed branches means that it has one of the highest levels of profitability per employee of any bank, 84 per cent higher than European rivals, according to Berenberg.

Norway is western Europe’s largest petroleum producer, and as it slowly moves away from oil and gas so has DNB, even if investors still tend to see the bank as heavily correlated to the oil price. Braathen noted that oil-related companies were less than 5 per cent of its lending portfolio while shipping had moved from 10 per cent to 3 per cent. It has also cut its exposure to commercial real estate.

Braathen said that DNB had probably done “less than 10 per cent of digitalisation”. It still has lots of products, services and processes to simplify, such as those used in anti-money laundering measures. With almost a third of Norwegians as customers, DNB sees increasing value as a “distributor”, selling others’ products such as funds alongside its own.

Investors are focused in the short term on the prospect of interest rate increases in Norway, which could be one of the first countries to tighten policy after coronavirus. Barrass conceded that DNB’s 2022 target of a return on equity higher than 12 per cent would be tricky to achieve without higher rates.

“DNB is attractive and outperformance likely, given its leading position in a rational market, best-in-class cost efficiency and the better relative Norwegian Covid-19 recovery thus far,” he said.