Nordic Credit Rating (NCR) applies a score of 'a' for the Norwegian banking market and expects the domestic operating environment for Norwegian banks to remain somewhat benign over the next 2-3 years. Despite higher capital requirements, Norwegian banks have outperformed their European peers in terms of earnings and efficiency and have managed a downturn in the oil and offshore segment with strong loss performance in recent years. Weakening international growth prospects constitute a risk factor, counterbalanced by robust government finances and a weak currency. The banking market score is a component of NCR's issuer ratings on financial institutions. Depending on the nature of a rated entity's exposure and geographic profile, the score can affect up to 20% of an overall issuer credit rating.
"NCR considers the Norwegian banking market to be somewhat stronger than the other Nordic markets, which are scored 'a-'," says Geir Kristiansen, credit analyst at Nordic Credit Rating. "Norwegian banks are better capitalized than Nordic peers and Norway has a well-balanced housing market and low unemployment."
Norwegian banks have developed significant equity buffers, particularly since 2011, when stricter capital requirements were introduced. However, this has not been obvious looking at reported capital ratios due to Norwegian high-risk weight floors. From year-end 2019, Norway will implement EU capital requirement regulations not already incorporated into domestic legislation. These regulations – CRR and CRD IV – allow a 23.8% capital discount for banks' SME customers and stipulate removal of the transitional Basel I floor for Norwegian banks using the advanced internal ratings-based (A-IRB) approach for calculating risk exposure amounts (REA). The Norwegian Ministry of Finance has increased the systemic risk buffer by 1.5pp to 4.5% from capital buffers to compensate for the resulting lower REAs for the country's banks. However, the implementation of the increase has been postponed to 31 Dec. 2020 for A-IRB banks and to 31 Dec. 2022 for banks using the foundation IRB based (F-IRB) approach or the standardised approach. The Ministry says that this will give Finanstilsynet time to amend the Pillar 2 requirements for the banks which will not benefit from the removal of the Basel I floor, which we interpret as an indication that standardised banks will not be required to increase their capital by the entire 1.5pp. We examined the effect of the earlier proposed changes in legislation in the article Proposed changes in Norway's capital regulations likely to punish small banks, 1 Oct. 2019, and the outcome seems to be that the banks not using the A-IRB approach will be better off due to later implementation and probably lower Pillar 2 requirements. Note that the new regulations also will be implemented for foreign banks operating in Norway, which means a more level playing field for Norwegian banks.
Norway – scoring of national indicators
| Subfactor | Score | Rationale |
|---|---|---|
| Sovereign strength | aa | Major credit rating agency average: AAA, minimum: AAA. |
| Output growth | a | Lower support from oil investments and weaker international cycle generate lower economic growth, but still close to 2%. |
| Credit growth | bbb | Credit growth is more than twice GDP growth, but is slowing due to regulations, higher interest rates and high debt levels. |
| Housing prices | a | Housing prices have stabilised due to higher interest rates, regulations and increased supply. |
| Unemployment | aa | Unemployment is expected to remain low. |
| Available stable funding | a | Available stable funding in the form of stable deposits and domestic covered bonds exceeds monetary financial institution private-sector loans in most likely market conditions. |
| International cycle | bb | Global growth prospects are weakening, though supported by significant monetary stimulus. An international trade war and the UK's intended departure from the EU could affect economic growth. Asset prices are at or near peak levels but are expected to remain high. |
Analyst contact details:
Geir Kristiansen, +47 90 78 45 93, geir.kristiansen@nordiccreditrating.com
Sean Cotten, +46 732 324 378, sean.cotten@nordiccreditrating.com