Weaker profitability in financial institutions in the first half of 2020
Published: 4 September 2020
Document number: 13/2020
The profitability of Norwegian financial institutions declined in the first half of 2020 as a result of the coronavirus crisis. A contraction in economic activity and financial market turbulence led to higher losses for the banks and weaker financial performance for insurers and pension funds. Nevertheless, there was a somewhat more positive trend in the second quarter than in the first quarter.
Increased losses and lower net interest income for the banks
In consequence of the coronavirus pandemic, the profitability of Norwegian banks was strongly impaired in the first half of the year. Total pre-tax profits came to 0.9 per cent (annualised) of average total assets, compared with 1.4 per cent in the first half of 2019. The decline in profits can mainly be explained by a significant increase in loan losses compared with the first half of last year. For the banks overall, (annualised) losses increased from 0.1 per cent to 0.7 per cent of average lending. Loan losses were particularly high in banks with large exposures to the petroleum sector, as well as in consumer loan banks. Most banks recorded lower loan losses in the second quarter than in the first quarter. Relative to total assets, the banks' net interest income was lower in the first half of the year than in the corresponding period last year. This was a reflection of a significant decline in the second quarter, mainly due to a sharp reduction in deposit spreads. The banks' total return on equity was 8.8 per cent in the first half of the year, down close to 5 percentage points from the first half of 2019. Six banks reported a net loss after the first half of the year, compared with 17 banks for the January through March period.
Reduction in total consumer loans in Norway, but sharp increase in the level of default
The growth in consumer loans to Norwegian customers has slowed substantially over the past couple of years. At end-June 2020, the volume of consumer loans to Norwegian customers in the institutions included in Finanstilsynet’s survey was 14 per cent lower than a year earlier. Adjusted for the banks' sale of portfolios of non-performing consumer loans, the reduction was 10.6 per cent. For Norwegian consumer loan banks, the default rate was 19.6 per cent at end-June, an increase of close to 4 percentage points since the turn of the year. In comparison, the default rate for all Norwegian banks combined was 1.0 per cent of lending at end-June this year.
Weaker performance for insurers and pension funds
The significant market turmoil in connection with the coronavirus crisis affected the financial performance of insurers and pension funds in the first half of 2020. After a sharp decline in the first quarter, the stock market had recovered somewhat at end-June. Falling share prices and realised losses on derivatives were the main factors behind the decline in investment income and weaker returns in the first half of the year. Life insurers recorded an adjusted return, which includes unrealised changes in value, of 0.3 per cent (annualised), compared with 8.5 per cent in the corresponding period of 2019. Pension funds’ adjusted return was 0.0 per cent (annualised), compared with 11.3 per cent in the first half of 2019. Four of twelve life insurers reported a net loss for the first six months of the year, down from six in the first quarter. 19 of the 49 pension funds recorded a net loss, compared with 39 after the first quarter.
Non-life insurers achieved pre-tax profits of 11.8 per cent of premium income for own account in the first half of 2020, a reduction from 31.0 per cent in the first half of 2019. There was a significant reduction in financial revenues, while insurance-related operations showed improvement compared with the first half of 2019, partly as a result of a mild winter in large parts of the country and a reduction in insured activities due to the coronavirus crisis. 14 of 40 non-life insurers recorded a net loss in the first half of the year, while only one non-life insurer reported net profits after the first quarter.