Improved profitability for Norwegian financial institutions in the first half of 2021
Published: 2 September 2021
Both banks and insurers showed a stronger performance in the first half of 2021 than in the corresponding period a year earlier. For the banks, this was mainly due to a significant reduction in loan losses, while the rise in profits for insurers primarily reflected a rise in investment income. Non-life insurers also recorded an increase in profits from insurance business.
Lower loan losses contributed to a rise in banks’ profits
Norwegian banks' total pre-tax profits in the first half of 2021 were 35 per cent higher than in the corresponding period of 2020, representing 1.2 per cent of average total assets (ATA). The increase in profits gave a 2 percentage point rise in return on equity, to 10.8 per cent. Markedly lower loan losses were the main factor behind the improvement in profits. Total loan losses came to 0.1 per cent of lending (annualised), compared with 0.7 per cent in the corresponding period of 2020. A reduction in operating income, mainly as a result of lower net interest income, resulted in a slight increase in the total cost/income ratio, to 45 per cent. Banks' lending growth to personal customers has increased steadily over the past year. Twelve-month growth at end-June 2021 was 5.8 per cent. Growth in lending to corporate customers is still somewhat lower than before the outbreak of the pandemic in 2020 at 4.9 per cent.
Continued decline in the volume of consumer loans
At end-June 2021, the volume of consumer loans to Norwegian customers in the institutions included in Finanstilsynet’s survey was 12.5 per cent lower than a year earlier. Adjusted for the banks' sale of portfolios of non-performing consumer loans, the reduction was 9 per cent. The share of non-performing consumer loans was still very high at end-June, representing just under 15 per cent of lending, but was slightly down from the preceding quarter. For banks with consumer lending as their main business, just under 23 per cent of the loans were non-performing. By comparison, the level of non-performing loans for Norwegian banks combined is 0.9 per cent of total lending.
Life insurers' total profits increased from 0.1 per cent of ATA in the first half of 2020 to 0.6 per cent in the first half of 2021, mainly due to a rise in investment income. The adjusted return, which includes unrealised changes in value, was 7.5 per cent in the first half of 2021, up from 0.3 per cent in the first half of 2020. The return on the investment portfolio was 15.7 per cent in the first half of 2021.
Pension funds also recorded an increase in investment income and profits in the first half of 2021 compared with the same period of 2020. The adjusted return on the collective portfolio was 9.9 per cent, up from 0 per cent in the first half of 2020. The higher return mainly reflects an increase in the value of equities.
Non-life insurers also generated higher profits in the first half of 2021 than in the corresponding period of 2020. The rise in profits is mainly due to a significant improvement in the financial result, with the greater part of earnings coming from the realisation of gains on equities. Lower activity levels as a result of Covid-19 containment measures helped to increase profits from insurance business. Pre-tax profits represented 27.2 per cent of premium income for own account in the first half of 2021, compared with 11.8 per cent in the first half of 2020.