Niche banks are taking increasing market shares in the Norwegian and Swedish credit markets and generally showing strong profitability. Nordic Credit Rating (NCR) sees challenges ahead, however, due to declining growth prospects, higher funding costs and, most likely, higher credit losses. NCR has compared a selection of seven Norwegian and seven Swedish niche banks and found that banks focused on consumer lending were more impacted by higher loan losses in 2018 but remain more profitable than other niche banks. We also found that Norway's higher capital requirements seem strongly linked to higher risk profiles and therefore return on equity (RoE) compared to Swedish peers. From a rating perspective, strong capitalisation can often, but not always, offset a higher credit risk profile.
"We believe that the Norwegian FSA has succeeded in imposing higher capital requirements on banks with higher risk profiles. The bank's risk profile does not seem to affect Swedish banks' Pillar 2 capital requirements to the same degree", says credit analyst Geir Kristiansen at NCR.
Lending growth among the Norwegian banks in our study was as high as 16.8% in 2018 and the maximum for the Swedish banks as high as 15.4%. Loan growth was closely matched by deposit growth at 15.0% and 20.6%, respectively. Essentially, these high-margin banks have been able to attract deposits by offering guaranteed deposits at rates above those offered by universal banks and savings banks, and by tapping into new Nordic markets and Germany. The addition of risk profile into deposit guarantee contributions in Norway could reduce profitability, but is unlikely to affect banks' business models.
If you have any questions, please contact:
Geir Kristiansen, Analyst, +47 90 78 45 93, geir.kristiansen@nordiccreditrating.com
Sean Cotten, Lead analyst, +46 732 32 43 78, sean.cotten@nordiccreditrating.com