Financial Stability 2/2001
1 Summary
Growth forecasts for the global economy have been revised downwards after
the terrorist attacks in the US on 11 September. Future developments are shrouded
in considerable uncertainty. Some sectors of Norwegian industry are being affected
by the international downturn. However, the outlook for the Norwegian economy
in general is still good. Credit growth has been high the last year and the
debt burden is higher than half a year ago in both the household and enterprise
sectors. Although credit risk has increased, banks are well equipped to meet
a moderate increase in loan losses. On the whole, the outlook for financial
stability is satisfactory.
Credit growth remains high, but shows signs of slowing
A weaker international growth outlook and increased uncertainty surrounding
economic developments in Norway now appear to be curbing credit growth in Norway.
Twelve-month growth in domestic credit has slowed slightly since March this
year. Nevertheless, credit growth has been stronger than growth in mainland
GDP. Corporations in particular have reduced credit growth. In September, twelve-month
growth in household borrowing also showed signs of slowing.
Chart 1.1
Rising debt burden in the household sector
Rising house prices and increased housing wealth have contributed to increasing
household debt. Borrowing has risen at a faster rate than disposable income.
The debt and interest burden have increased. Households as a group are thus
more vulnerable to increased unemployment or higher interest rates.
On the whole, households have solid, positive net financial assets. The decline
in share prices through 2001 has reduced these assets somewhat. However, shares
account for a relatively small portion of net financial assets and are in addition
unequally distributed among households. In the main, a fairly small group of
households with high income and considerable wealth will be affected by the
decline in share prices. If we exclude insurance claims, which can seldom be
redeemed in the event of debt-servicing problems, net financial assets are negative.
On the whole, credit risk in connection with loans to the household sector is
still considered to be relatively low, but higher than half a year ago.
Chart 1.2 Chart
1.3
High debt burden and weaker earnings in the enterprise sector
Enterprise debt has increased more sharply than value added for a long time.
Debt growth slowed somewhat in the second and third quarters of 2001, in step
with declining mainland business investment. Debt growth slowed most in a number
of internationally-exposed sectors, while debt growth has remained high in a
number of service industries. Earnings in the enterprise sector as a whole declined
somewhat from 1999 to 2000, and figures so far this year indicate a further
decline. Thus, it appears that the debt burden will increase even more.
The distribution of debt changed through the 1990s. Enterprises with a high
probability of bankruptcy accounted for a steadily diminishing share of long-term
debt in the enterprise sector. Enterprises on the whole have also increased
equity ratios. Risk-weighted debt was virtually unchanged from 1999 to
2000.
Due to the strong growth in debt, enterprises are more vulnerable to a decline
in earnings. Estimates based on share prices and accounts data to September
2001 show that there has been a considerable increase in the probability of
bankruptcy for large unlisted companies in 2001. The decline in share prices
this year will also reduce the value of companies' share portfolios and limit
the possibility of raising new equity. On the whole, the risk associated with
bank lending to mainland enterprises is considered to be relatively high. Continued
high debt growth, prospects of weaker economic growth and a decline in earnings
have increased credit risk compared with half a year ago.
Chart 1.4 Chart
1.5
Banks' lending growth is slowing down
Growth in bank lending has slowed somewhat in relation to the high growth rates
in 2000 and the beginning of 2001. Nevertheless, banks' need to raise funds
from domestic and foreign money and capital markets has continued to grow since
customer deposits have not increased as much as lending. The three largest banks
have increased the share of short-term financing, with a shift towards foreign
money market financing. Developments at small and medium-sized banks have been
the opposite, with a reduction in the share of short-term financing and a shift
towards domestic money market financing. The buffer, which is in the form of
liquid assets, has also increased somewhat in the three largest banks and remained
virtually unchanged in the small and medium-sized banks. Liquidity risk is considered
to be more or less unchanged since the last Financial Stability report.
Chart 1.6
Banks' financial strength is still satisfactory
Despite high lending growth, the largest banks have maintained financial strength.
At small and medium-sized banks, lending growth has been higher and financial
strength has declined somewhat, but they still comply with capital adequacy
requirements by a solid margin. Lending growth in recent years has coincided
with a period of solid economic growth and modest loan losses. Intense competition
and low margins in the Norwegian market probably limit the possibilities of
substantially strengthening underlying earnings through growth in lending.
Sluggish developments in banks' earnings
Small and medium-sized banks' pre-loss operating profits declined in the first
three quarters of 2001 compared with the same period last year. Pre-loss profits
for the three largest banks remained virtually unchanged and loan losses were
still low. However, the volume of non-performing loans has increased so far
this year. After-loss profits declined for the three largest banks, and developments
at the small and medium-sized banks were even weaker, compared with the same
period last year.
Due to recent economic developments, it is reasonable to expect a rise in loan
losses. Therefore, banks may need to improve their underlying earnings.
Life insurance companies
Life insurance companies are far more exposed than banks when equity and bond
prices fall. Problems in insurance companies can spill over to banks and securities
markets both directly through current transactions and through a general loss
of confidence in the financial sector. A number of life insurance companies
in Norway are also part of financial conglomerates where bank activities dominate.
A decline in earnings in the life insurance companies will reduce their group
contribution or require new equity. The risk of considerable spillover effects
from the life insurance operations to the banking operations in financial conglomerates
is nevertheless regarded as limited.
Despite increased uncertainty, stability remains satisfactory
The debt burden in the household and enterprise sectors has increased since
the last Financial Stability report. The household debt burden is still
not as high as at the end of the 1980s, whereas the debt burden in the enterprise
sector is higher. It should be emphasised that enterprises are dependent on
continued high earnings in the years ahead to service debt. At the same time,
the economic outlook in Norway and abroad has deteriorated the last six months
and uncertainty has increased. Thus, banks' credit risk has grown and loan losses
are expected to increase in the future. However, loan losses are still low and
must rise substantially before stability in the banking sector is threatened.
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