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Norway's DNB sees loan losses fall, keeps lid on dividends

A woman walks past DNB bank's local office in Riga November 20, 2013. REUTERS/Ints Kalnins

By Balazs Koranyi

OSLO (Reuters) - DNB , Norway's biggest bank, will have to keep a lid on dividends for the next three years to help build up capital even though loan losses are shrinking faster than expected and profitability is solid.

State-controlled DNB will keep its dividend ratio at around 25 percent of profits through 2016, a year longer than it predicted earlier, but plans to return to a 50 percent payout ratio as soon as possible.

"Our long-term dividend policy is intact," Chief Executive Rune Bjerke told an investor meeting on Thursday. "We are aiming for at least 25 percent payout in the years to come; it might be more, under extreme conditions, it could be less," Bjerke said.

DNB's dividend constraints relate partly to Norway's tough line on how much capital the country's banks should hold to protect them from financial shocks.

On loan losses, Bjerke said these would be below DNB's 3 billion to 4 billion crown ($490-654 million) guidance for this year, then fall in 2014, both significantly below market expectations.

Much of the improvement will come from lower losses on lending to the troubled shipping sector and DNB said it was on track to cut shipping to 6 percent of its loan portfolio.

The bank also said it is aiming for a return on equity target of more than 12 percent, slightly above current levels.

On Norway's overheated housing market, Bjerke said it was heading for price falls but not an outright crash. The International Monetary Fund has said the country's housing market is 40 percent overvalued.

"You can never exclude a sharper decrease but the fundamentals don't support such a development," he said. "We do not believe in a sharp decline in prices."

"It might well be so that housing prices will continue to stay flat or decline by an additional 1 or 2 percent, maybe 5 percent," Bjerke said,

Norway's banks have come through the financial crisis relatively unscathed but policymakers, keen to avoid a repeat of a banking collapse in the early 1990s, have been strict on the sector. As a result, the banks have some of the toughest capital requirements in Europe. They also have to hold more capital during boom periods, known as a countercyclical buffers.

DNB plans to build up capital organically without resorting to the equity market. It expects to have to raise its common Tier 1 capital adequacy ratio - a measure of financial health - to between 13.5 and 14 percent of risk-adjusted assets by 2016 from the current 11 percent.

DNB's shares rose 1.1 percent as the dividend outlook was already priced in, while other forecasts surprised on the upside, traders said.

DNB shares have looked cheap relative to its regional competitors, overshadowed by Norway's tough capital regime, the housing market and problems with the shipping portfolio.

The stock trades around 9.6 times expected 2014 earnings, below an 11.2 ratio for its Nordic peers. But the shares are up 50 percent over the past year, outpacing a 20 percent rise in the European banking index. <.SX7P>

Analysts said the stock has plenty of room to rise further as funding costs are low and the bank was likely to increase mortgage rates further, boosting its margins.

(Reporting by Balazs Koranyi; Editing by Greg Mahlich and Jane Merriman)