The outbreak of the coronavirus pandemic has led to weaker results for Norwegian banks and life insurers thus far in 2020. The results were particularly weak in the first quarter and improved in subsequent quarters. The underlying profitability of non-life insurers has improved, reflecting pronounced premium growth and lower growth in claims payments.
Higher loan losses have a negative effect on banks' profits
Banks’ total pre-tax profits for the first three quarters came to 0.9 per cent (annualised) of average total assets, compared with 1.4 per cent in the corresponding period of 2019. Return on equity was down almost 4 percentage points, to 9.2 per cent. Higher loan losses were the main reason for the decrease in profits compared with the previous year. For the banks overall, losses increased from 0.2 per cent to 0.6 per cent of average lending (annualised) for the first three quarters of the year. Losses were particularly high in the first quarter and decreased in the following two quarters. While most of the banks recorded a rise in losses compared with the previous year, loan losses were particularly high for banks with a large exposure to oil-related industries and for consumer loan banks. Operating profits before loan losses were also lower than a year earlier. Narrower deposit spreads in the second quarter as a result of the sharp reduction in interest rates were the main factor behind the decline in net interest income.
Growth in consumer loans is slowing, while the level of non-performance is high and increasing
The growth in consumer loans to Norwegian customers continued to decline in the third quarter. At end-September, the volume of consumer loans in the institutions included in Finanstilsynet’s survey was 16 per cent lower than a year earlier. Adjusted for the sale of portfolios, there was a year-on-year decrease of 13 per cent. The volume of non-performing consumer loans has increased markedly in recent years. At end-September, the level of non-performing loans, including loans to foreign customers, was 13.8 per cent after rising by 0.4 percentage points during the third quarter. The level of non-performance for Norwegian banks with consumer loans as their main business was 20.0 per cent, as against 19.6 per cent at end-June. In comparison, the level for all Norwegian banks combined was 1.1 per cent of lending.
Weaker performance for life insurers
The coronavirus pandemic has also resulted in lower profitability for life insurers. Life insurers recorded an adjusted return, which includes unrealised changes in value, of 2.5 per cent (annualised) in the first three quarters of 2020, compared with 7.7 per cent in the corresponding period of 2019. There was a significant stock market decline in the first quarter of the year, and although the markets have largely recovered, the fall in share prices remains the main reason behind the lower investment income and weaker profits for life insurers overall.
Slightly stronger underlying profits for non-life insurers
Adjusted for non-recurring income in 2019 from the sale of Gjensidige Bank, non-life insurers reported slightly higher profits in the first three quarters of 2020 than in the corresponding period of 2019. The improvement is primarily due to significant premium growth, while a mild winter in large parts of the country and a decline in insured activities dampened the growth in claims payments. The sale of Gjensidige Bank in 2019 and the decline in stock markets in the first quarter of the year led to a significant weakening of the financial result compared with 2019, and non-life insurers' pre-tax profits represented 16.6 per cent of premium income for own account in the first three quarters of 2020, down from 24.7 per cent in the corresponding period last year.