Credit risk (continued)

Collateral security and other risk-mitigating measures

The Group's credit policy regulates credit activity in DNB. The customer's debt servicing capacity is the key element when considering whether to approve a credit. If the customer has not proven a satisfactory debt servicing capacity, credit should normally not be extended even if the collateral is adequate. Before credit is granted, extensive credit assessments are made according to prevailing policy and guidelines. In addition, DNB has a group policy for investments in commercial paper and bonds, where external ratings are a key factor. See note 37, which includes a description of DNB Markets’ international bond portfolio.

In addition to extensive processes for credit assessment and monitoring, the Group uses collateral security to reduce risk, depending on the market and type of transaction. Collateral security can be in the form of physical assets, guarantees, cash deposits or netting agreements.

The main types of collateral used are mortgages on residential property, commercial property and other real property, ships, rigs, registrable movables, accounts receivable, inventories, plant and equipment, agricultural chattel and fish-farming concessions. The principal rule is that physical assets should be insured. In addition, so-called negative pledges are used, where the customer is required to keep all assets free from encumbrances vis-à-vis all lenders. The credit process is based on an assessment of the customer's debt servicing capacity in the form of ongoing future cash flows. The source of such cash flows varies depending on customer segment and the customer’s operations or the loan object. The main sources of the cash flow included in such assessments are earned income and income from the business operations which are being financed. In addition, the extent to which the bank’s exposure will be covered through the realisation of collateral in connection with a possible future default or reduction in future cash flows is taken into account. When assessing mortgages backed by residential property, external appraisals are used. The large majority of home mortgages are within 80 per cent of the property’s appraised value, and external parameters are used to regularly review house values. Evaluations of the value of collateral in the corporate market are based on a going concern assumption, with the exception of situations where write-downs have been made. In addition, factors which may affect the value of collateral, such as concession terms or easements and sales costs, are taken into account. With respect to evaluations of both collateral in the form of securities and counterparty risk, the estimated effects of enforced sales are also considered. The main principle for valuing collateral is to use the expected realisation value at the time the bank may need to realise the collateral. Extensive rules have been prepared as part of the credit process, including maximum rates for all types of collateral and realisation guidelines. Valuations of collateral should be made when approving new loans and in connection with the annual renewal and are considered to be part of credit decisions. A procedure has been established for the periodic control of the values on which the extension of credit is based.

The main categories of guarantors are private individuals, companies, guarantee institutes and banks. Guarantors are classified according to risk based on the bank's rating models. Debtors can only be assigned the guarantor's risk category provided that the guarantor is placed in risk class 6 or higher and the guarantee applies to the entire commitment. Guarantees can only serve as collateral and affect calculation of losses in the event of default if they are placed in risk class 6 or higher. Guarantees represent a limited part of total collateral.

The Group's netting rights are in compliance with general rules in Norwegian legislation. Netting clauses have been included in all of the bank’s standard loan agreements and in product agreements in DNB Markets.

In addition to an assessment of the customer’s debt servicing capacity, the future realisation value of collateral and netting rights, financial clauses are included in credit agreements. These clauses are a supplement to reduce risk and ensure adequate follow-up and management of the commitments. Such clauses may include minimum cash flow and equity ratio requirements.

In order to reduce risk concentrations, limits have also been established for exposure to individual segments.

Commitments showing a negative development are identified and followed up separately. The risk classification systems referred to above are used for decision support, risk monitoring and reporting.

Counterparty risk for derivatives

Derivatives are traded in portfolios where balance sheet products are also traded. The market risk of the derivatives is handled, reviewed and controlled as an integral part of market risk in these portfolios. Derivatives are traded with a number of different counterparties, and most of these are also engaged in other types of business. The credit risk that arises in connection with derivative trading is included in the DNB Group's overall credit risk. For a number of counterparties, netting agreements or bilateral guarantee agreements have been entered into, thus reducing credit risk. The authorities' capital adequacy requirements take such agreements into account by reducing the capital requirement.

CSA agreements (Credit Support Annex) have been entered into with most of the major banks. This implies that the market value of all derivatives entered into between DNB and the counterparty is settled either daily or weekly, whereby counterparty risk is largely offset. If the collateral is impaired (i.e. weaker rating) the minimum amount for the exchange of money will be reduced.

At year-end, the Group considered whether there were objective evidence that the financial assets had decreased in value. See note 10 Write-downs on loans and guarantees and note 37 Commercial paper and bonds, held to maturity. At year-end 2011, the Group’s exposure to the so-called PIIGS countries (Portugal, Ireland, Italy, Greece and Spain) totalled approximately NOK 21 billion, the majority of which referred to DNB Markets’ international bond portfolio (NOK 17.4 billion). The Group had no exposure to Greece.

The financial effects of collateral and other risk-mitigating measures are believed to reduce the Group’s credit risk to a satisfactory level. In addition, the level of write-downs upon default is reduced. See also note 5, in which the Group’s credit risk is quantified in terms of risk-adjusted capital requirements. Risk-adjusted capital for credit increased by NOK 4.6 billion during 2011 due to rising volumes and was estimated at NOK 50.1 billion at end-December.

Note 6 Credit risk (continued)

Write-down ratio DNB Group

Amounts in NOK million 31 Dec. 2011 31 Dec. 2010

Non-performing commitments (gross) 16 793 17 313

Impaired commitments (gross) 12 296 10 369

Gross non-performing and impaired commitments 29 089 27 682

Individual write-downs 9 624 9 273

Collective write-downs 2 119 1 872

Write-downs in per cent of gross non-performing and impaired commitments 40.4 40.3

Collateral for non-performing and impaired commitments 18 209 17 793

Write-downs and collateral in per cent of gross non-performing and impaired commitments 103.0 104.5

Past due loans not subject to write-downs

The table below shows overdue amounts on loans and overdrafts on credits/deposits broken down on number of days after the due date that are not due to delays in payment transfers. Past due loans and overdrafts on credits/deposits are subject to continual monitoring. Commitments where a probable deterioration of customer solvency is identified are reviewed for impairment. Such reviews are also carried out for the commit-ments included in the table in cases where no deterioration of customer solvency has been identified. Past due loans subject to impairment are not included in the table.

DNB Group

Amounts in NOK million 31 Dec. 2011 31 Dec. 2010

No. of days past due/overdrawn

1 - 29 208 1 238

30 - 59 263 466

60 - 89 95 103

> 90 213 261

Past due loans not subject to write-downs 779 2 068

Repossessed properties and other assets - recorded value

Repossessed assets are assets acquired by units within the Group as part of the management of non-performing and impaired commitments. At the time of acquisition, such assets are valued at their estimated realisable value. Any deviation from the carrying value of non-performing and impaired commitments at the time of acquisition is classified as write-downs on loans. Repossessed assets are recorded in the balance sheet according to the type of asset. When acquiring shares or mutual fund holdings, the assets are evaluated according to the principles described in the Accounting principles. Upon final sale, the difference relative to carrying value is recognised in the income statement according to the type of asset. Property additions in 2010 mainly included the acquisition of the companies FB 40 ApS and København Ejendomme from DNB Baltics and Poland’s operations in Denmark and repossessed investment properties in Latvia and Lithuania. Other asset additions in 2010 mainly in-cluded machinery, equipment and vehicles taken over from DNB Baltics and Poland’s operations in Estonia. Property additions in 2011 mainly included the acquisition of the companies Royston/Propinvest. Disposals in 2011 mainly relates to the residential market in Latvia.

DNB Group

Amounts in NOK million 2011 2010

Repossessed properties and other repossessed assets as at 1 January 2 822 224

Property additions 2 559 2 626

Other asset additions 0 119

Property disposals 196 22

Other asset disposals 0 125

Repossessed properties and other repossessed assets as at 31 December 5 185 2 822

Companies/parts of companies acquired in 2011 Royston/Propinvest

On 16 June 2011, DnB NOR Bank ASA took over all the shares in Royston Norway from Propinvest Ltd. as part of the restructuring of the bank's commitment with the company. In addition, a company in Sweden and another in Finland were acquired. The acquired companies own a total of 62 commercial properties, of which 55 are located in Norway, four in Sweden and three in Finland. The fair value of the properties was estimated at approximately NOK 1.8 billion on the acquisition date. The property values are included in the above table.

Relacom AB

As part of the restructuring of the Realcom Group, the creditors took over all shares in Realcom AB in April 2011. Debt totalling SEK 2.3 billion was thereafter converted to equity capital. The banking group’s ownership interest in the company was 30.76 per cent at year-end 2011. The balance sheet value of the investment was NOK 32 million. See note 37 Investments in associated companies for more information. The investment is not included in the above table.

Note 6 Credit risk (continued)

Companies/parts of companies acquired in 2010 København Ejendomme Holding Aps (København Ejendomme)

On 21 October 2010, Bovista, RC Real Estate, Nykredit, Bank DnB NORD and DnB NOR Bank ASA entered into an agreement to settle an ongoing legal dispute. The agreement implied that DnB NOR Bank ASA purchased the property portfolio from the company in liquidation, Bovista, at fair value and paid an additional compensation to settle the dispute. The total amount paid was DKK 2 023 million. The properties were taken over on 1 December 2010. The property portfolio consists of 1 083 flats in prime location, mainly in central parts of Copenhagen.

The repossessed properties are included in the above table.

FB 40 ApS

In 2010, Bank DnB NORD in Copenhagen took over all shares in FB 40 ApS. The company owns a commercial property in the centre of Copenhagen. The property is included in the above table.

Amports Inc.

The auto transport company receives and prepares cars prior to and following overseas shipping. In the fourth quarter of 2010, the company's three large creditors agreed to recapitalise the company. The company's debt was converted to share capital in November 2010. After the conversion, DnB NOR Bank ASA acquired a 28.97 per cent ownership interest in the company. The balance sheet value of the investment was NOK 122 million at year-end 2011. See note 37 Investments in associated companies for more information. The investment is not included in the above table.

Faktor Eiendom ASA

During the second quarter of 2010, Faktor Eiendom ASA completed a private placement totalling NOK 250 million, and the bank converted NOK 249 million from debt to equity. After the conversion, DnB NOR Bank ASA acquired a 30.8 per cent ownership interest in the company, which was later reduced to 30.6 per cent. The company went into liquidation in 2011. See note 37 Investments in associated companies for more information. The investment is not included in the above table.

Companies/parts of companies acquired in 2009 Nordisk Tekstil Holding Group

On 26 August 2009, DnB NOR Bank ASA took over the shares in Nordisk Tekstil Holding AS as part of the restructuring of the bank's commitment with the company. Nordisk Tekstil Holding AS owns 100 per cent of Kid Interiør AS and Kid Logistikk AS and 50 per cent of Kid Skeidar AS. Kid Interiør has a dominant position in the Norwegian home textile market. The Nordisk Tekstil Holding Group was taken over at the price of NOK 1. The Nordisk Tekstil Holding Group is classified under operations held for sale in the accounts and is not included in the above table.

Effects of changes in credit margins

The financial turmoil has caused a general rise in credit margins, which affects a number of items in the DNB Group's balance sheet. The turmoil continued in 2011 due to the debt situation in Greece and a number of other European countries, especially in the fourth quarter.

The DNB Group’s fixed-rate loans in Norwegian kroner and parts of the portfolio of margin loans in Norwegian kroner are carried at fair value through profit or loss. Unrealised losses resulting from rising margin requirements came to NOK 115 million at year-end 2011, compared with unrealised losses of NOK 7 million at end-December 2010. The unrealised losses will be reversed over the remaining term to maturity, provided that there are no changes in the credit status of the loans.

As part of ongoing liquidity management, DNB Markets invested in an international covered bonds portfolio in 2011. Higher margin requirements resulted in unrealised losses of NOK 487 million in this portfolio at year-end 2011. The unrealised losses will be reversed over the remaining term to maturity, provided that there are no changes in the credit status of the bonds.

The DNB Group has a 40 per cent ownership interest in Eksportfinans, and the company is recognised in the group accounts according to the equity method. Large parts of Eksportfinans’ liabilities are carried at fair value through profit or loss. Moody’s and Standard and Poor’s downgrades of Eksportfinans’ credit rating in the fourth quarter of 2011 resulted in sizeable unrealised gains on the company’s long-term funding. The effect of such unrealised gains on DNB’s holding, after tax, represented NOK 11.8 billion. After reviewing the fair value of the company, DNB wrote down the value by an amount corresponding to unrealised gains on Eksportfinans’ own debt in the fourth quarter. The write-down has been reported on the line ”Profit from companies accounted for by the equity method” along with DNB’s share of profits from the company. Following the write-down, unrealised gains after tax attributable to the DNB Group were NOK 327 million at year-end 2011, compared with NOK 360 million at end-December 2010. Unrealised gains on the company's liabilities will be reversed over the remaining term to maturity.

The DNB Group’s long-term borrowings in Norwegian kroner are carried at fair value through profit or loss. Due to the financial market tur-moil and the downgrading of Eksportfinans, investors’ margin requirements increased through 2011, especially in the fourth quarter. At end-December 2011, there were unrealised gains of NOK 536 million on long-term borrowings. At year-end 2010, there were unrealised losses of NOK 19 million in the portfolio. Unrealised gains and losses on the Group’s liabilities will be reversed over the remaining term to maturity.