Lower profitability in financial institutions in 2020
Published: 24 February 2021
Document number: 1/2021
The Covid-19 pandemic led to weaker results for Norwegian banks and life insurers in 2020 compared with 2019. Powerful government measures helped to mitigate the negative economic consequences of the Covid-19 crisis. Nevertheless, banks' loan losses were at the highest level since the financial crisis, and life insurers and pension funds recorded lower profits. On the other hand, the underlying profitability of non-life insurers improved, reflecting pronounced premium growth and lower growth in claims payments.
Higher loan losses and lower net interest income gave a reduction in banks' earnings
Norwegian banks’ total pre-tax profits came to 0.9 per cent of average total assets (ATA) in 2020, compared with 1.3 per cent in 2019. A significant increase in loan losses was the main reason for the deterioration in profits. Overall, banks’ loan losses represented 0.5 per cent of lending volume, which is the highest level since the financial crisis. Loan losses were particularly high in banks with large exposures to the petroleum sector, as well as in consumer loan banks. For most banks, losses were particularly high shortly after the onset of the pandemic and moderate in the second half of the year. The decline in interest rates had a negative impact on banks' net interest income. This effect was most pronounced in the second quarter of 2020 due to narrower deposit spreads, while the level of income stabilised later in the year. The banks' total return on equity was 9.0 per cent, down close to 3 percentage points from the previous year.
Marked reduction in consumer loan volume, but continued growth in non-performing loans
At year-end 2020, the volume of consumer loans to Norwegian customers in the institutions included in Finanstilsynet’s survey was 17 per cent lower than a year earlier. Adjusted for the banks' sale of portfolios of non-performing consumer loans, the reduction was 14 per cent. The level of non-performance for consumer loans has risen sharply over several years. This trend continued in 2020, but the pace of growth slowed slightly towards the end of the year. 20.5 per cent of the loans granted by Norwegian consumer loan banks were non-performing at the end of 2020, which is an increase of 5 percentage points in one year. In comparison, the non-performing loans of all Norwegian banks combined represented 1.0 per cent of lending at end-December 2020.
Weaker performance for insurers and pension funds
The Covid-19 pandemic also had a negative impact on life insurers’ profitability. In the collective portfolio, the adjusted return, which includes unrealised changes in value, was 4.3 per cent in 2020, down from 7.5 per cent in 2019. The return on the investment portfolio was 8.2 per cent in 2020. The insurance result was 0.3 per cent of ATA, while the insurers' profit after tax came to 0.4 per cent of ATA in 2020.
Pension funds recorded an adjusted return on the collective portfolio of 7.8 per cent in 2020, down from 10.3 per cent in 2019. The decrease is primarily due to weaker returns on equities. For private and municipal pension funds, the adjusted return was 8.7 per cent and 6.6 per cent respectively in 2020.
Non-life insurers reported higher profits in 2020 than in 2019 when adjusting for Gjensidige’s sale of Gjensidige Bank in 2019. The increase in profits 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.