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05 Aug 2004
MOODY'S REPORTS: NORWEGIAN BANKS' STABLE OUTLOOK REFLECTS STRONG FINANCIAL FUNDAMENTALS, BUT ALSO INTENSE COMPETITION
London, 05 August 2004 -- The stable rating outlook for the Norwegian banking system is based on
the banks' strong domestic franchises, sound financial fundamentals
and overall low risk profile, says Moody's Investors Service in
a new Banking System Outlook on Norway. The outlook also incorporates
intense competition and a decline in interest rates.
Although the Norwegian banks' asset quality indicators deteriorated
in 2002-2003, their credit risk profile is sound, says
Moody's. The deterioration was related to a few specific
events, and ratios had already improved at year-end 2003
and in 2004. The rating agency also points out that although Norwegian
banks post a higher proportion of problem loans compared with banks in
the rest of the Nordic region, they compare well with other rated
banks in Europe.
During 2003-2004, the majority of Moody's rating actions
for Norwegian banks were positive. More recently, DnB NOR
Bank's rating outlook was changed back to stable from negative,
as the merger between the former Den norske Bank and Union Bank of Norway
has gone smoothly. "Although the merger created Norway's
largest financial institution by far, local and regional banks (including
savings banks) remain strong players," says Anne Caris,
a Moody's AVP/analyst and author of the new report. "While
the latter are preparing for when DnB NOR will enjoy a significant pricing
power and become a fierce competitor, we expect them to continue
to benefit from their strong local brand name and high customer loyalty,"
the analyst adds. Foreign banks (mainly Nordic) also retain a strong
presence in Norway, and the government maintains significant control
despite recent legal reforms, notes Moody's.
"The 1990s crisis continues to be at the forefront of management's
mind, and risk management practices are prudent," says
Ms. Caris. Lending has been largely to households for mortgages,
and corporate loan portfolios are well-diversified overall,
although some discrepancy exists, for example at some savings banks.
Further, loan losses are low, while the capacity of banks
to absorb them has improved. "That said, Moody's
will continue to monitor closely the comparatively higher exposure of
Norwegian banks to inherently riskier industries -- mainly shipping
and fish farming, given the characteristics of the national economy,"
says the analyst. According to Moody's, although direct
market risks have also been kept low, Norwegian banks are indirectly
exposed to capital markets via their insurance activities, although
to a modest extent.
Moody's notes that Norwegian banks have also managed in recent years
to find new funding alternatives at a relatively competitive price,
although for some this translated into higher liquidity risk. This
is mainly the case for savings banks, which have been funding themselves
short-term to take advantage of the low interest rates.
Moody's, nonetheless acknowledges their strict liquidity management
as well as the recent lengthening of their funding strategy.
Finally, intense competition remains among the key challenges as
banks follow a similar strategy to grow in retail lending as well as in
wealth management, where high structural growth opportunities have
been identified, says Moody's. Savings disintermediation
is still at an early stage in Norway. In addition, the rating
agency also points out that the drastic decline in interest rates has
been extremely harmful, given its magnitude, the banks'
balance sheet structure and the higher proportion of net interest income
in total. Thus, despite the higher volatility of fee income
from savings-related products, the capacity of banks to diversify
their income is essential for their future profitability. It is
especially important as many players do not see much extra "fat"
to cut after recent efficiency programmes, although they have not
reached the lean cost bases of some other Nordic banks and continue to
face high pressures (mainly in staff and IT/technology), Moody's
* * * * *
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Samuel S. Theodore
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