UPDATE 2 Apr. 2020: For comparability, adjusted figures for Marginalen Bank have been added to the figures to reflect SEK 3.5bn in purchased non-performing debt portfolios reported as stage 3 loans.
Given coordinated efforts of the central banks and regulators, NCR believes that the COVID-19 crisis will be more about credit risk than the lack of liquidity observed during the financial crisis. See Coordinated relief package supports bank creditworthiness, 16 Mar. 2020. The significant increase in unemployment due to COVID-19 will most certainly lead to higher levels of non-performing loans (NPLs), despite available benefits for the unemployed. This will probably lead to capital constraints for banks, despite reduced counter-cyclical buffers, and lower lending capacity.
"There are significant differences in loan loss provisioning between niche banks and banks with a high risk appetite are at risk of falling below capital thresholds as NPLs increase", said Geir Kristiansen, Credit Analyst at Nordic Credit Rating. "Particularly banks with high levels of net problem loans to equity and low capital surplus."
IFRS 9 accounting regulations, implemented in 2018, require banks to make earlier recognition of loan losses on impaired loans. The change in principles was a response to underreported loan loss provisions during the financial crisis. However, it is clear that a significant increase in loan losses will have a pro-cyclical effect on credit. If the crisis is prolonged and NPLs increase, we believe that it could be necessary for regulators to postpone or reconsider the prudential NPL backstop regulation in EU's reform of capital requirements, which is set to go into effect from 1 Jan. 2022.
Analyst contact details:
Geir Kristiansen, +47 907 845 93, geir.kristiansen@nordiccreditrating.com
Sean Cotten, +46 732 324 378, sean.cotten@nordiccreditrating.com