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Figur 11 Aksjemarkeder

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					The Financial Market of Norway - Stability and Challenges
Bjørn Skogstad Aamo
Director General

Sparebanken Møre’s Banking Seminar Ålesund, 3 June, 2004

Main Points
● Banks’ results in 2003 and Q1 2004 ● Credit risk ● Home mortgage loans and loan-to-value ratio ● Households’ sensitivity to interest rate increases ● Business sector ● Results in non-life insurance ● Challenges for life insurance companies

Banks’ loan losses and profit
4 3
Percent of ATA

2 1 0 -1 -2 -3 1991 1993 1995 1997 1999 2001 Pre-tax profit Loan losses 2003

Banks’ net interest income and interest spreads
6,0 5,0 4,0
Per cent

3,0 2,0 1,0 0,0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Net interest income (as % of average total assets) Interest margin

Banks’ loan defaults
(per cent of gross loans)
10 9 8 7 6 5 4 3 2 1 0 1990

1992

1994

1996

1998

2000

2002

Three largest

Other comm. banks

Other savings banks

Banks’ results 1st quarter 2004
All Norwegian banks Interest income Interest expenses Net interest income Other operating income
of which net gain on FX and financial instruments

Q1-2004 Q1-2003 NOK million % of ATA * NOK million % of ATA 16 411 4,08 25 586 6,96 8 919 2,22 17 916 4,87 7 493 1,86 7 670 2,09 3 533 0,88 2 530 0,69
934 0,23 531 0,14

Operating expenses Operating profit before provisions and losses Losses on loans and guarantees Net gains on financial fixed assets Pre-tax operating profit Taxes Profit for the period Return on equity (ann.) Core capital ratio Growth in gross lending to customers Growth in deposits from customers
* ATA = Average Total Assets

7 198 3 828 507 1 311 4 632 1 220 3 412 13,0 % 9,3 % 7,3 % 3,7 %

1,79 0,95 0,13 0,33 1,15 0,30 0,85

6 256 3 944 1 774 (22) 2 148 532 1 616 6,5 % 9,5 % 6,6 % 7,2 %

1,70 1,07 0,48 -0,01 0,58 0,14 0,44

Growth in credit to households and nonfinancial enterprises
17,5 15,0 12,5 10,0

Households, 11,4 percent

Per cent

7,5 5,0 2,5 0,0 -2,5
96 97 98 99 00

Non-financial enterprises, -1,1 per cent
01 02 03 04

Source: EcoWin

Source: Norges Bank

Households’ debt and interest burden as percent of disposable income
160 150 140
Per cent

12
Q4-2003 148 per cent

11 10 9 8 7
Per cent

130 120 110 100

Q4-2003 6,2 per cent

6 5 4

7

9

1

3

5

7

9

1 ar .0 m m

ar .8

ar .8

ar .9

ar .9

ar .9

ar .9

ar .9

m

m

m

m

m

m

Burden of debt (left axis)
Sources: Norges Bank and Statistics Norway. The figures for 2003 are estimated by Norges Bank.

Interest burden (right axis)

m

ar .0

3

Households’ interest rate sensitivity
2001
Interest burden Number (thousands) Percentage of total debt

2005
Number (thousands) Percentage of total debt

2005
Interest rate at 2001 level
Number (thousands) Percentage of total debt

0.1–19.9%

1 304 188 85

59 24 16

1 421 108 41

74 16 9

1 132 257 182

43 27 29

20–30 %

Over 30 %

Sources: Statistics Norway and Kredittilsynet

Kredittilsynet’s home mortgage survey 2004: Loan-to-value ratios
50 % 40 % 30 % 20 % 10 % 0% below 60% 60-80% 2001 2002 2003 80-100% 2004 above 100%

Kredittilsynet’s home mortgage survey 2004: Loan-to-value ratios
50 % 40 % 30 % 20 % 10 % 0% Below 60% 60-80% Purchase/Self build 80-100% Other Above 100%

Mainland enterprises’ debt and interest burden
750 700 650 600
Per cent
Q4 - 2003 611 per cent

75 70 65 60
Per cent

55 50 45
Q4 - 2003 41 per cent

550 500 450 400 350 1987 1989 1991 1993 1995 1997 1999 2001 2003

40 35 30 25

Burden of debt (left axis)

Interest burden (right axis)

Sources: Norges Bank and Statistics Norway

Kredittilsynet’s survey on exposure to selected industries
Industry Loan commitments
NOK billion Annual growth per cent

Amount drawn
NOK billion

High risk as per cent of amount drawn
30.09.02 30.09.03

Shipping Shipbuilding Offshore Oil/gas extraction

105.0 6.8 16.5 20.6

1.7 -46.5 19.4 -34.6

79.9 4.1 9.4 8.8

5.3 14.5 12.4 3.2

8.7 13.4 4.9 4.3

Fish farming and hatcheries
Property management

17.7
136.3

17.9
7.4

15.8
120.0

38.6
6.2

44.5
7.9

Increased credit risk in the medium term
● The Norwegian banking sector emerges from the recession without major problems ● Low interest rates reduce banks’ credit risk in 2004. ● Outlook for the Norwegian business sector improved, but some industries still vulnerable ● Persistent strong growth in households’ borrowing will substantially increase interest burden when interest rates start increasing ● With interest rates at 2001 level in 2005/2006, a sensitivity analysis shows that almost 450 000 households will have interest expenses of more than 20 % of income, and near 200 000 households more than 30 %

Credit risk for banks (2)
● Renewed strong growth in residential property markets and very strong growth in home mortgage loans ● High and increasing loan-to-value ratios on banks’ new home mortgage loans
● Loan-to-value ratios in excess of 80 % for 40 % of new loans, compared to 30 % in March 2003 ● More than 60% of loans, where the purpose is purchase of new houses, have a loan-to-value ratio above 80%

● Spillover effects to real estate markets and parts of the business sector may reinforce the banks’ problems if a large number of households must reduce their consumption ● Financial stability considerations call for a gradual increase in interest rates

o w n

a c c o u n t

Non-life insurance companies’results
(three largest groups)

in c o m e p r e m iu m

fo r

30 20 10 0 -1 0 -2 0 2000 2001 2002 2003

P e r

c e n t o f

R e s u lt o f t e c h n ic a l a c c o u n t , e x c . a llo c a t e d in v e s t m e n t r e t u r n N e t in c o m e o n f in a n c ia l a s s e t s , in c l. o t h e r r e v e n u e s / e x p e n s e s R e s u lt o f o r d in a r y o p e r a t io n s

Improvement in non-life insurance
● Substantial increase in financial revenues in 2003 and 1st quarter 2004 ● Improved technical accounts ● Technical accounts reflect strong premium growth in 2003. No further increase in premiums appears to be needed ahead

Life insurance companies’ results
12
Per cent of average total assets

10 8 6 4 2 0 -2 -4 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Value-adjusted Accounting results

Life insurance companies’ buffer capital

Per cent of total assets

12 % 10 % 8% 6% 4% 2% 0% 4Q 1Q 1999 2000 2Q 3Q 2000 2000 4Q 1Q 2000 2001 2Q 3Q 2001 2001 4Q 2001 1Q 2Q 2002 2002 3Q 4Q 2002 2002 1Q 2Q 2003 2003 3Q 4Q 2003 2003

Fluctuation Reserves

Additional statutory allocations

Core capital (excess amount)

Per cent of total assets

40 35 30 25 20 15 10 5 0

31.12.1999
Shares etc. (Current)

Life insurance companies’ asset composititon

31.12.2000
Bonds (Current) Money market instruments Bonds to maturity

31.12.2001 31.12.2002 31.12.2003
Real estate Loans Other

Life insurance companies’ equity holdings in the EEA area
60

Per cent of total assets

50 40 30 20 10

Belgium

Luxembourg

0

Denmark

Germany

Finland

Italy*

Portugal

Greece*

Iceland

Ireland*

Norway

Spain*

France*

* Estimate as of 31.12.2002

31.12.1999

Netherlands*

31.12.2002

Source: National supervisory authorities

Sweden

Austria

Total

UK

Challenges in life insurance
● Profit improvement in 2003 and 1st quarter 2004. The low equity component has reduced the impact of equity market recovery on profits and buffer capital ● Continued growth in bonds held to maturity ● Low interest rates, and the combination of guaranteed annual minimum interest rate and profit allocation rules, imply a major challenge in terms of assuring a satisfactory long-term return on managed assets ● Priority should be given to building up of buffer capital ● The authorities should consider changes in the regulatory framework for long-term pension insurance

Summary
● Profit improvement for banks, but declining net interest revenues ● Reduced credit risk in the short term, but a build-up of credit risk in the medium term ● Lower liquidity risk in 2003, but low deposit growth may increase liquidity risk in the medium term ● Financial strength still satisfactory for the banking sector as a whole ● Markedly improved results in non-life insurance ● Continuing substantial challenges for life insurance companies
Norwegian financial industry’s situation satisfactory in the short term. Problems might occur in the medium to longer term.


				
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