(17 July 2015 – Norway) Norwegian banks are well positioned to weather the headwinds posed by a moderate slowdown in economic growth amid lower oil prices, according to Moody's Investors Service in a report published on 13 July.
The rating agency notes that Norway's banking system outlook for the next 12-18 months is stable.
At the end of May 2015, Moody's revised downwards its economic growth projections for Norway to capture the lower oil prices and structural difficulties in the oil sector.
The rating agency forecasts economic growth of 1.0 percent in 2015, before increasing to 1.6 percent in 2016.
As a result of the softening operating environment in Norway, credit growth will likely decrease to 4 percent- 5 percent in 2015, compared with 6 percent in 2014, said Moody's, although it expects the impact on Norwegian banks to be modest.
“While Norwegian banks' asset quality will likely weaken, the change will be from a very strong starting point, said Moody’s analyst and report author Effie Tsotsani.
“We expect non-performing loans to increase only modestly, to over 2% of gross loans in 2016 from 1.4 percent in 2014, primarily related to oil-related and associated industries.”
“In addition, any impact on earnings would mark a normalization from current high levels, while capital ratios will likely increase in line with bolstered regulatory requirements”, Tsotsani said.
Moody's notes that downside risks to Norway's banking system stem from credit concentrations, high household indebtedness, which are likely to persist in 2015-16, and the rapid house price appreciation since 2008.
However, it expects that associated pressure on banks' performances will remain tempered by Norway's comprehensive social safety net, countercyclical spending supported by the returns on the sizeable sovereign wealth fund, which accounts for 223 percent of GDP, and accommodative monetary policy.
In spite of its expectation of cooling house prices, Moody's views household lending, which accounts for more than half the system's loan book, as resilient.
The rating agency expects Norway's households to continue to service their debts as interest rates remain low and unemployment benefits remain generous.
Moody's report, entitled Norway: Banking System Outlook, available on its website.