Fitch Ratings: Oil Shock Will Weaken Norwegian Savings Banks' Asset Quality

Sparebank 1 Nord-Norge

12/03/2020 16:18

(The following statement was released by the rating agency)


Fitch Ratings-Stockholm/London-March 12: Norwegian savings banks' asset quality 
and profitability are likely to weaken if oil prices remain low or volatile but 
rating downgrades are unlikely, Fitch Ratings says. Norwegian banks have reduced 
their exposure to the oil and offshore sector materially in recent years and 
strengthened their capital and earnings buffers. Oil prices fell sharply this 
week, close to levels last seen in 2015, on fears of a price war among leading 
producers and weak global demand.

Norway's banking sector experienced asset-quality deterioration after the 2015 
oil price fall. Norwegian savings banks and DNB Bank reported loan impairment 
charges (LICs) of NOK4.2 billion in 2015 and NOK9.6 billion in 2016, equivalent 
to 8.8% and 19.4%, respectively, of the sector's pre-impairment operating 
profit. DNB, Norway's largest bank, accounted for most of the loan losses, but 
some of the larger savings banks also experienced significant loan losses. Many 
of the losses were linked to the offshore industry, but savings banks' exposure 
to the sector has since reduced significantly.

About 90% of the sector's LICs in 2016 came from DNB and Norway's five largest 
savings banks, SpareBank 1 SR-Bank (SR-Bank), SpareBank 1 SMN (SMN), Sparebank 1 
Nord-Norge (SNN), Sparebanken 1 Ostlandet and Sparebanken Vest. Their impaired 
loans/gross loans ratios at end-2016 were up to 111bp higher than at end-2014, 
with DNB's ratio rising to 2.2% from 1.6%. These banks account for about half of 
the bank lending in Norway and are all exposed to the offshore industry, 
depending on the region in which they operate. Their average offshore exposure 
fell to 3.4% of total exposure at end-2019, down from 6% at end-2014 before the 
previous crisis erupted.

These banks have also strengthened their capitalisation, reducing their 
vulnerability to asset shocks. Their average net Stage 3 loans/common equity 
Tier 1 capital ratio was about 4% at end-2019, indicating resilient asset 
quality, although DNB's ratio was higher at 8.3%. Given the banks' reduced 
offshore exposure, we estimate that loan losses in a repeat of the previous oil 
price shock would be about NOK6.6 billion over one year, significantly lower 
than in 2016. This assumes LICs per exposure similar to those in 2016. On an 
individual basis, we estimate LICs would represent about 3% of common equity 
Tier 1 capital for DNB and about 2% for the five large savings banks.

This scenario would be unlikely to affect the ratings of the three Fitch-rated 
banks, SR-Bank (A-/Stable), SMN (A-/Stable) and SNN (A/Stable), particularly as 
most of their offshore exposure is already classified as Stage 3 and covered by 
loan-loss allowances. SNN, with its core market of northern Norway, is less 
exposed to the offshore industry than its peers. This led to lower loan losses 
during the last oil crisis and largely underpins SNN's better asset-quality 
metrics and higher rating.

Low oil prices could also weaken the broader Norwegian economy, leading to 
higher unemployment and lower economic growth, which could affect banks' 
non-oil-related exposures. The economy will be affected by the coronavirus but 
the nature and magnitude of the impact is still highly uncertain.

We expect that banks' retail portfolios will be resilient due to conservative 
underwriting standards and Norway's supportive social security system, which 
should help most retail borrowers to service their debt even if temporarily 
unemployed. SME portfolios could be more affected if low oil prices indirectly 
lead to lower domestic consumption, although this did not happen significantly 
in the last oil crisis. Finally, if the Norwegian central bank lowers interest 
rates as a result of the weaker economy, this would have a negative impact on 
the profitability of Norwegian banks by lowering deposit margins, thereby 
reversing the positive effect from rate rises since autumn 2018.

Contact: 

Francis Dallaire

Director, Financial Institutions - Banks

+46 8 551 094 44

Fitch Ratings Espana S.A.U. Nordic Region Filial

Kungsgatan 8

111 43 Stockholm

Erik Rankeskog

Analyst

+46 8 5510 9445

David Prowse

Senior Director, Fitch Wire

+44 20 3530 1250

Media Relations: Louisa Williams, London, Tel: +44 20 3530 2452, Email: 
louisa.williams@thefitchgroup.com.

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