Nordic Credit Rating (NCR) expects that Norwegian banks will on average report a strong fourth quarter in 2019, driven by higher lending and deposit margins and strong performance in the financial markets. Solid foundations for Norwegian banks also lead us to believe that loan losses will remain moderate in the short term.
"Given the assumption that short-term interest rates will level out, which currently seems to be the case, we expect that the lending spread will continue to increase in the first quarter of 2020, driving both total spread and net interest margin further upwards," says Geir Kristiansen, credit analyst at NCR.
We expect that the total interest spread will have increased by 7 bps from the previous quarter and by 31 bps from the fourth quarter of 2018, to 2.91%. The expected quarter-on-quarter increase will likely have been driven equally by higher lending and deposit spreads. More than half of the effect of an increase in lending rates, announced in September 2019, will likely come in the fourth quarter. However, the banks have not announced a general increase in deposit rates and the spread increase from the previous year is likely to be entirely driven by a 36 bps increase in deposit spreads. Note that the Norwegian Interbank Offered Rate (NIBOR) is up by 60 bps year-on-year, which is not (yet) matched by an increase of about 50 bps in lending rates.
Changes in 2020 will obviously depend on competition for loan and deposit customers. We believe that competition is likely to ease due to reduced competitive advantages for Nordic banks and continuing uncertainty about capital requirements for standard banks; increased non-systemic buffers might or might not lead to lower Pillar 2 requirements (see Proposed changes in Norway's capital regulations likely to punish small banks, 1 Oct. 2019). Uncertainty about the effect of new minimum requirements for own funds and eligible liabilities on funding costs could also make banks less aggressive in terms of pricing.
Analyst contact details:
Geir Kristiansen, +47 90 78 45 93, geir.kristiansen@nordiccreditrating.com
Sean Cotten, +46 732 324 378, sean.cotten@nordiccreditrating.com