Financial institutions' results in 2003:
Norwegian banks posted a pre-tax result of NOK 12.4 billion in 2003 compared with NOK 8.3 billion in 2002 and NOK 13.9 billion in 2001. The result for 2003 measured 0.80 per cent of average total assets (ATA), an improvement of 0.22 percentage points on 2002. Return on equity rose from 6.0 per cent in 2002 to just under 10 per cent in 2003. When reviewing these results, it should be borne in mind that the market's hurdle rate diminishes with lower interest rates.
Lower loan losses and higher revenues associated with the securities market recovery brought improved performances compared with 2002. Overall loan losses in 2003 were 10 per cent lower than in 2002 thanks to an improved trend in losses and defaults in the second half-year. The interest rate fall in 2003 squeezed banks' interest spreads and diminished their net interest revenues in terms of total assets to a historically low level. Ten banks incurred accounting deficits in 2003. Core (tier 1) capital adequacy was 9.7 per cent at end-2003, almost unchanged from 12 months previously.
Results for the three largest banks combined were NOK 1.1 billion up on the 2002 figure. The result for 2003 measured 0.7 per cent of ATA. Despite a substantial reduction in net interest revenues as a ratio of ATA, an increase in other revenues and lower costs led to an improved pre-loss result. Loan losses were somewhat lower in 2003 than the previous year. There were wide differences in loan losses and results between the largest banks. Other savings banks reported a twofold increase in their pre-tax result compared with the previous year. Lower loan losses and higher capital gains on securities were an important contributor to the advance in 2003. The substantial improvement on 2002 is also related to the deficit incurred in 2002 by the SpareBank 1 Group which substantially reduced the owner banks' profit performance that year. Although net interest revenues declined as a ratio of ATA, they were higher than those of the other two categories of banks. Pre-tax results for other commercial banks improved by NOK 460 million from 2002, but remained weak. These banks show lower net interest revenues and higher expenses as a ratio of total assets than the largest banks and other savings banks. Their loan losses were substantially lower than in 2002, but still higher than the loan losses reported by the savings banks and the largest banks.
The banking sector as a whole reported year-on-year lending growth of 7.0 per cent at end-2003. Lending by midsized and smaller savings banks showed the strongest growth, while other commercial banks reduced their aggregate loan volume in 2003. The banking sector’s portfolio of defaulted loans fell by 5 per cent from end-2002 to end-2003, measuring 1.7 per cent of banks’ gross lending. The fall in defaults was most pronounced in the last quarter of 2003. Customer deposits rose by a mere 2.9 per cent last year. The sluggish deposit growth combined with continued rapid growth in lending increases banks' need for alternative funding sources. Issuance of hybrid equity, supply of capital and balance sheet reductions contributed to improved core capital ratios among other savings banks and other commercial banks, while core capital adequacy for the three largest banks weakened. The three largest banks reported an overall core capital ratio of 8.2 per cent at year-end. Core capital adequacy in other commercial banks measured 10.9 per cent compared with 12.3 per cent for other savings banks.
Mortgage companies recorded a result of NOK 1.5 billion on ordinary operations in 2003, corresponding to 0.51 per cent of ATA. Mortgage companies' result as a ratio of total assets showed negligible change from 2002. Continued low loan losses and higher revenues on securities compensated for a slight decline in net interest revenues. Gross loans to customers rose by 15 per cent year-on-year. Mortgage companies as a whole reported a core capital ratio of 9.7 per cent at end-2003 compared with 10.4 per cent 12 months earlier.
Finance companies (18 in number) reported a profit of NOK 1.3 billion on ordinary operations, corresponding to 1.86 per cent of ATA. Net interest revenues rose substantially due to lower funding costs. Loan losses rose in 2003, measuring 0.92 per cent of ATA. Gross loans to customers rose by 12.1 per cent. All 18 finance companies combined reported a core capital ratio of 9.3 per cent at end-2003, approximately unchanged from the previous year.
Life insurance companies' results reflect developments in the securities markets. The recovery witnessed in securities markets led to improved results in 2003 compared with 2002. A low proportion of equities at the start of the year limited the impact of the vigorous stock market recovery on life companies’ results and buffer capital. The companies’ adjusted return on capital was 8.9 per cent in 2003 compared with 1.9 per cent in 2002. For life companies as a whole, fluctuation reserves rose by NOK 6.7 billion, bringing the adjusted result to NOK 17.7 billion or 4.1 per cent of ATA. This compares with a negative adjusted result of NOK 3.5 billion in 2002. The result before allocations to policyholders and tax came to NOK 10.9 billion in 2003 compared with a negative NOK 2.4 billion in 2002.
Life insurance companies' buffer capital came to NOK 25.3 billion at end-2003, corresponding to 5.5 per cent of total assets. Life companies’ risk-bearing capacity strengthened in 2003, but remains weak. Their equities portfolio in relation to total assets rose by 4.6 percentage points in 2003 to reach 12.0 per cent at year-end, while their holding of money market instruments and bonds held as current assets fell by 8.3 percentage points to 29.3 per cent. Bonds "held to security" rose substantially as a proportion of total assets in 2002, and continued to rise in 2003. At end-2003 these bonds accounted for 36.2 per cent of total assets compared with 30.1 per cent 12 months earlier.
Pension funds (a sample comprising the 12 largest private and 7 largest municipal pension funds) reported substantially improved results in 2003 compared with 2002. The pension funds posted an overall adjusted return on capital of 13.2 per cent in 2003, compared with a negative 3.3 per cent in 2002. The private pension funds recorded a far higher adjusted return on capital than did the municipal pension funds. The private pension funds’ equities component measured 18.5 per cent at the start of 2003 compared with just under 10 per cent in the case of the municipal pension funds. Pension funds' buffer capital improved on the back of the stock market recovery: by end-2003 their buffer capital accounted for 16.8 per cent of total assets, an increase of 6.5 percentage points over end-2002.
Non-life insurance companies in the sample (42 in number) posted an overall result of NOK 5.6 billion compared with a negative NOK 1.3 billion in 2002. The improvement is due both to a sharp increase in financial revenues and an improved technical account. The companies' combined ratio (claims ratio + expense ratio) showed a clear improvement on 2002, mainly thanks to continued vigorous growth in premium revenues. Higher financial revenues also improved the result of ordinary operations for the three dominant non-life groups: their pre-tax result of ordinary operations came to NOK 3.4 billion in 2003 compared with a negative NOK 1.2 billion in 2002. The non-life groups' technical result was slightly positive in 2003. Their combined ratio improved thanks to higher premium revenues.
The three dominant non-life insurance groups' equities portfolio measured 6.4 per cent of total assets at the start of 2003, an increase of 2.6 percentage points compared with end-2002. Money market instruments and bonds held as current assets measured 48.6 per cent of total assets, an increase of 4.5 percentage points compared with end-2002. Bonds "held to maturity" accounted for 4.5 per cent of total assets, a fall of 6.7 percentage points for the year. All three non-life groups satisfied the minimum requirements for technical provisions and capital adequacy at the end of 2003.
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
Enclosures:
Overview of financial institutions’ results in 2003 (xls)
