Risk Outlook – June 2024

Growth in the Norwegian economy has slowed, but activity levels remain relatively high and unemployment low. In the coming period, moderate growth, declining inflation and a slight rise in unemployment are expected. The interest rate level has risen, and the policy rate is expected to remain at the current level for some time. 

“High household debt and elevated residential and commercial property prices are still the key vulnerabilities in the Norwegian financial system,” says Finanstilsynet’s Director General, Per Mathis Kongsrud.

An escalation of geopolitical tensions could lead to disruptions in international trade, have a sudden impact on commodity prices, increase inflation and interest rates and cause turbulence in global financial markets.

“Experience shows that crises may occur abruptly, spread quickly and be amplified through the financial system. The banks must have sufficient equity to be able to bear risk and provide loans, even during economic downturns,” says Kongsrud.

Households

Norwegian households have a high level of debt relative to income, both in a historical perspective and compared with other OECD countries. Lower credit growth and higher nominal income growth have contributed to a certain reduction in households’ debt burden over the past two years, which may indicate that this financial vulnerability is not building up further. 

Households' financial resilience varies significantly. So far, there are few signs of serious debt servicing problems for the household sector overall. Low unemployment and financial buffers have contributed to dampening the effects of high inflation and rising interest rates. Households’ demand may decline, and their debt servicing capacity may be impaired if economic developments prove to be weaker or interest rates higher than expected. 

House prices

House prices have risen so far in 2024 after flattening out in 2023 and are at a historically high level measured as a share of household income. Debt levels and house prices may show increased growth if inflation and interest rates decline in the years ahead. Low housebuilding activity, high employment, rising household income and population growth in urban areas may push up house prices. Higher collateral values may contribute to further debt growth and increased vulnerabilities in the household sector.

Commercial real estate

Higher interest rates have led to a fall in the value of commercial properties and reduced earnings in commercial real estate (CRE) companies. A number of CRE companies have high debt, and a substantial share of their debt matures and must be refinanced in the coming years. The share of debt in companies with weak interest servicing capacity has risen. The yield on commercial real estate is still low compared with the interest rate on risk-free investments. If risk premiums normalise and interest rates remain high, the share of high-risk debt may increase further and elevate banks’ credit risk. 

Norwegian banks

Relatively high activity and low unemployment have helped ensure low loan losses in Norwegian banks. Combined with an increase in net interest income, this has led to very high profits in this industry. Banks' net interest income must be expected to decline somewhat again, and loan losses may increase. 

In recent years, the share of Norwegian banks' loans with a significant increase in credit risk has risen, particularly in small banks. Total non-performing loans have been stable over the past year, but there has been an increase in the share of loans on which payments are up to 31 days past due.

Stress test of Norwegian banks

Finanstilsynet's annual stress test of Norwegian banks shows that the banks on average are financially sound, but that their capital adequacy levels may deteriorate during a severe downturn. In the stress scenario, the intensification of geopolitical conflicts leads to higher inflation and interest rates both in Norway and internationally, a decline in GDP, higher unemployment and a fall in residential and commercial property prices. Banks' loan losses rise, particularly on corporate loans, but also on loans to personal customers. Losses are high but significantly lower than the banks' losses during the banking crisis in the early 1990s.

“Financial crises can generate significant economic costs. Banks' ability to bear risk and provide new loans to creditworthy customers during downturns requires that they have sufficient equity. Over the past couple of years, the improvement in banks' solvency position has subsided. Norwegian banks should meet regulatory requirements by an ample margin,” says Kongsrud.

Norwegian life insurers and pension funds

Norwegian life insurers and pension funds have strong profit and solvency levels. The higher interest rate level has also improved life insurers’ solvency position. Finanstilsynet expects the pension institutions’ capital planning to factor in the risk in the real estate market. For non-life insurers, the increased scope and severity of weather and natural disasters, in addition to higher claims for own account under reinsurance contracts, have led to weaker earnings and heightened risk.