Fitch: Norway Saving Banks' Good Results Shrug Off Oil Pressure
Weak oil prices heighten economic uncertainty in Norway. The fallout has been limited so far but a protracted period of low prices could have a major negative effect on Norway's mainland, non-oil, economy.
The Sparebanken are not immune: direct oil and gas lending make up 4%-6% of their gross loans, and loans to offshore service vessels - where prices have slumped - represent between 1% and 5%. Lending to these companies is likely to suffer additional impairments in 2016 as oil companies strive to reduce costs, and service vessels' contracts come up for renewal. The early stages of the value chain - such as oil production and exploration - are likely to be the first hit by a decline in oil investments, but the Sparebanken's exposure to these segments are low.
The common equity Tier 1 (CET1) ratios of the four rated Sparebanken were all above 13% at end-2015, in line with similarly 'A'/'A-' rated European peers. We expect the banks to keep dividend payouts low to reach their CET1 targets of 14%-14.5% by 2016-2017.
Norwegian banks are subject to rigorous regulatory stress tests. The central bank's adverse scenarios for 2016 and 2017 assume annual economic contraction of around 2.5% and oil prices hovering at USD30/barrel, with recovery to over USD40/barrel only in 2019. Banking sector CET1 ratios hold up at above 10% in these scenarios, which we think demonstrates reasonably strong capacity to absorb unexpected losses.
The four rated Sparebanken reported return on equity ratios above 10% in 2015, which we view positively due to their solid Tier 1 leverage ratios (6% to 7% at end-2015). Operating expenses declined for most of them, primarily due to lower staff costs and greater efficiency focus.
Loan impairment charges (LICs) rose for some banks in 2H15, mostly due to oil-related collective reserving, these were easily absorbed. We expect LICs to increase in 2016, reflecting oil and gas sector fallout and a spillover effect on the housing market, particularly in southwest Norway, and local service companies, but believe this too will be manageable for the banks.
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