By Pauline Lambert, Financial Institutions

DNB expects the transaction to be earnings accretive and to generate a return on investment exceeding 15% on a fully integrated basis, above the group’s return on equity target of at least 13%.

The economics of cross-border bank M&A generally remain challenging except in cases of large deals aimed at strengthening existing foreign franchises (see Government divestment of bank stakes could revitalise European bank M&A). A notable example here would be the potential merger of UniCredit and Commerzbank, where UniCredit already has a scale business in Germany with HypoVereinsbank.

DNB’s acquisition of Carnegie, a leading Nordic investment bank and asset manager, is more representative of transactions seen in recent years where banks have acquired specific businesses to round-out and strengthen their business models. These types of transactions entail reduced execution risks, especially when there appears to be a cultural fit and complementary strengths, as in the case of DNB and Carnegie.

Strong strategic fit, increasing business and geographic diversification

One of the primary positive impacts of the acquisition is the diversification of DNB’s income streams. The group has a long-standing ambition to grow fees and commissions by 4%-5% annually through the cycle. Currently, fees and commissions account for about 15% of total income, with net interest income accounting for more than 70%. With the transaction, fee and commission income increases by 29% (based on Q2 2024 rolling 12 months).
 

Investment banking and asset management have been key focus areas for increasing fees and commissions. DNB Markets generated NOK 2.8bn in net fee and commission income for the first nine months of 2024, with around 55% derived from fixed income, currencies, and commodities. The acquisition will add strong advisory capabilities to the group’s service offering.

In Nordic M&A, Carnegie ranked 3rd for mid-market transactions, 6th for small-cap deals, and 9th in all announced deals for the first nine months of 2024 . In EMEA ECM, Carnegie ranked 13th in secondary offerings and 15th in all ECM activity, the highest ranked Nordic player. The business will be rebranded DNB Carnegie.

DNB Asset Management generated NOK 1.6bn in net commission income for the first nine months of 2024, with assets under management of NOK 1,088bn, up from NOK 770bn as of Q3 2022. The group has consistently increased assets under management over the last few years. Post acquisition, Carnegie’s asset management business will continue to operate as an independent fund company although there are plans to explore potential collaborations.

The acquisition will also significantly expand DNB’s geographic reach, reducing its reliance on a single domestic market. International units currently account for about 22% of the group’s income and 13% of loans. With the acquisition, DNB is set to increase its income from the Nordic region, excluding Norway, by 45% (based on Q2 2024 rolling 12 months). Nearly 65% of Carnegie’s revenues are derived from Sweden.

Deploying excess capital for future growth

This acquisition also enables DNB to strategically deploy part of its excess capital. The group remains highly capital generative and in 2023 distributed 220bp of capital in dividends and 96bp in share buybacks. From the perspective of creditors, deploying excess capital for growth and bolstering the business is preferable to returning cash to shareholders, provided risks remain well controlled and financial impacts are well managed. Importantly, DNB’s management has reassured that the acquisition does not indicate a change in its risk appetite.

In our view, the transaction should be manageable from a financial standpoint, given the group’s strong capital position and organic capital generation capabilities. With an estimated purchase price of SEK 12bn in cash, the expected impact on DNB’s CET1 ratio is 120bp upon closing (in first half 2025).

The group’s CET1 ratio stood at 19% as of Q3 2024, 220bp above the Norwegian FSA’s expectation of around 16.8%, which is comprised of a minimum requirement of about 15.6% and a Pillar 2 guidance of 1.25%. Even after the acquisition, the group retains some headroom against potential regulatory changes. DNB expects the overall impact of CRR 3 to be minimal, but there could be an 80bp headwind from the Norwegian FSA’s proposed changes to risk weights for real estate exposures.

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