Report on The Financial Market in Norway 2003: Risk Outlook presented:
Since 1994 Kredittilsynet has analysed and assessed potential stability problems in the Norwegian financial market in the light of developments in the Norwegian and international economy. Individual institutions’ profitability and financial strength also need to be assessed against the background of the general state of the financial market. To this end Kredittilsynet publishes a yearly report giving its view of the state of the financial market and of the various categories of institutions. The first report was published in 2003.*
In its report entitled The Financial Market in Norway 2003: Risk Outlook, Kredittilsynet gives an overall assessment of risks facing financial institutions. Accounting data for 2003 are analysed in light of economic developments and the risk facing banks and insurance companies in various areas.
“Banks’ results improved in 2003, and the prospects for Norwegian banks in 2004 are bright,” said Bjørn Skogstad Aamo, Director General of Kredittilsynet, when the report was presented. “Continued strong growth in household sector indebtedness may compel many households to devote a substantially higher portion of their incomes to servicing debt when interest rates increase. This could create problems for the banks in the somewhat longer-term. A high loan-to-value ratio on home mortgage loans may augment banks’ problems should a large proportion of households incur excessive debt and be forced to retrench,” said Mr Skogstad Aamo. For life insurance companies, the current low interest rates are impeding efforts to generate sound long-term returns.
Banks' results for 2003 turned out better than in 2002. Interest spreads have come under increasing pressure, and net interest revenues fell further in 2003. In time slower deposit growth could increase liquidity risk.
Banks' credit risk diminished in 2003. Prospects for the Norwegian business sector have improved, although some sectors remain vulnerable, and exceptionally low interest rates have made it substantially easier for borrowers to service debt. However, the rapid growth in the Norwegian household sector’s indebtedness may increase the risk attached to bank lending in the somewhat longer-term.
Should the rapid growth in household credit continue in 2004 and 2005, and interest rates at the turn of the year 2005/2006 return to the 2001 level, almost 440,000 households will face interest expenses in excess of 20 per cent of their incomes. More than 180,000 households will face an interest burden in excess of 30 per cent. This is shown by calculations of the sensitivity of households to interest rate changes undertaken by Statistics Norway on behalf of Kredittilsynet. While a sudden return of interest rates to the 2001 level is not the most likely scenario, a gradual return to this level in 2005/2006 cannot be ruled out.
Spillover effects into real estate markets and parts of the corporate sector are possible should many households be compelled to retrench. Mortgage debt is growing very rapidly, and prices in the residential market are once again rising strongly. Kredittilsynet's latest survey of home mortgage loans shows that the proportion with a loan-to-value ratio in excess of 80 per cent is appreciably higher than the figure reported in March 2003. Home mortgages with a high loan-to-value ratio account for more than 40 per cent of reported loans compared with slightly over 30 per cent in the spring of 2003. In the case of home mortgages for house purchase or new housebuilding, more than 60 per cent have a loan-to-value ratio in excess of 80 per cent.
Norwegian insurance companies have shown weak results in recent years. Both non-life insurance companies and life insurance companies report improved performances in 2003. Non-life insurers benefited from a sharp increase in financial revenues and improved technical accounts. Life insurers’ ability to bolster their results and buffer capital on the back of the vigorous stock market recovery was limited by a low proportion of equities in their asset portfolios. Given the current low interest rates along with a combination of minimum guaranteed returns on policies and profit sharing schemes, life insurers are finding it difficult to build up buffer capital and generate sound long-term returns.
* The Financial Market in Norway 2002: Risk Outlook
Contact persons:
Bjørn Skogstad Aamo, Director General, Kredittilsynet, tel. +47 22 93 99 29
Emil Steffensen, Head of Unit, tel. +47 22 93 98 70
