The outlook for Norway's banking system remains stable for a second consecutive year, Moody's Investors Service in a report Thursday. The stable outlook reflects broadly benign macroeconomic conditions that will support banks' performance and credit metrics over the 12-18 month outlook period, notwithstanding risks of asset-quality erosion, mainly due to a slight weakening in the retail housing market and sector-specific issues.
Ther rating agency expects that over the 12-18 month outlook period, the country’s operating environment will remain supportive for bank credit quality. Norway's real GDP expanded by 0.7% in Q3 2013, at a faster rate than in most European countries.
However, Moody's says that despite the economic growth, slight asset-quality deterioration is likely, driven by weaker performance in specific sectors such as commercial real estate and shipping, as well as a more general softening of the retail housing market.
In recent months, house prices have declined after several years of robust growth. Whilst it is too early to categorically state that this presages a sustained fall, Moody's believes that given the record-high housing prices and high household indebtedness, problem loans will increase slightly from their current, very low levels. Rising house prices have been supporting consumption in recent years and if a correction materialises, the rating agency would expect falling consumer spending to weaken the economy by reducing corporate earnings, prompting a consequent increase in the system's level of non-performing loans, albeit from a low base at present.
Moody's added that in an effort to build capital in response to more stringent regulatory demands, the banking sector increased margins in recent years, thereby increasing its resilience to higher loan losses.
Norwegian banks continue to use material amounts of market funding, and notably increased their use of non-domestic market funding sources, with recent market access by many banks remaining strong. However, these funding sources could become less reliable in the event of any market disruption or weakness in the local economy. Norwegian banks' greater usage of covered bonds in recent years does render them vulnerable to any potential changes in investor sentiment, but the stability of demand for covered bonds has historically been superior to other forms of wholesale funding.
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