Norwegian banks well placed to deal with Covid-19 and falling oil prices

Recent recommendations from the Norwegian FSA with respect to the distribution of profits should further bolster banks’ capital positions. “We expect banks to remain prudent,” Lambert said. Originally proposed dividend distributions and share buybacks had totaled more than NOK 20bn (roughly EUR 1.7bn).

Loan loss coverage varies by bank, but many banks’ pre-provision income has averaged between 1.5% and 2.0% of loans over the past three years. To that one can add the substantial capacity of the banks to absorb losses with excess capital, providing a further 2%-7% against loan losses before affecting minimum solvency requirements. The financial position of Norwegian banks compares well to European peers, both in terms of pre-provision profitability as well as excess capital.

If strict infection control measures remain in place for many months, the liquidity strains of borrowers could become more serious credit issues. “We remain relatively sanguine with exposures to retail clients as mortgages have a strong track record in various economic and financial crises,” Lambert said. Most small and medium-sized savings banks in Norway are focused on personal clients, with residential mortgages often comprising 70% of loan portfolios. For the banks rated by Scope, there is also limited exposure to more vulnerable business sectors such as retailing and hospitality (restaurants and hotels).

For the Norwegian banking system as a whole, lending to commercial real estate accounts for the largest share of exposures to the corporate sector – about 45%, according to data from Norges Bank. “This is a sector we continue to monitor in light of relatively high commercial property prices in the country and the more volatile nature of earnings. Commercial real estate firms will be eligible to access loans under the state-guaranteed SME lending scheme, which should be supportive,” said Lambert.

The economic impact of Covid-19 in Norway may be exacerbated by the recent decline in oil prices. But having reduced their cost bases, oil companies are considered to be in a better position to handle lower oil prices while banks like DNB have reduced their exposures to the sector.

The full report can be downloaded here.