"If this effect were to come on top of increased loan losses it could have a dramatic impact on the country's banking sector", said Geir Kristiansen, Credit Rating Analyst at NCR. "A number of banks will be at risk of breaching their capital requirements."
Norwegian banks reacted quickly and cut their mortgage rates by 40 bps after the most recent 25-bp cut in the policy rate, and we believe that their customers have received about 80% of the wider 1.5-pp cut in the policy rate since the beginning of the year. Norges Bank seems to expect that competition will force banks to gradually pass the remaining impact of lower rates to customers over the next couple of years.
We assume that deposit rates will not fall below 10bps on average. This is based on the experience of Sweden, where banks avoided cutting deposit rates below zero even in a sub-zero interest rate environment. Based on Norges Bank's projection, the three-month market rate will stabilise at 30bps, resulting in a deposit margin at 20bps. This means the average deposit spread will fall by 152bps from a peak in the fourth quarter of 2019, compared to only a 13bps increase in lending spreads. We illustrate in an example that this could lead to a 24% reduction in NII, which could also bring the net interest margin down by 45bps to 1.42% and lower return on equity by 20-30% for the highly capitalised Norwegian savings banks.
Analyst contact details:
Geir Kristiansen, credit rating analyst, +47 90784593, geir.kristiansen@nordiccreditrating.com
Sean Cotten, +46 735 600 337, sean.cotten@nordiccreditrating.com