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The Norwegian economy, similar to other countries, struggled with the consequences of the Covid-19 pandemic throughout 2020. The introduction of several measures dampened the negative impact on the economy. Nevertheless, GDP-growth reached its lowest level since WWII in 2020 (-3.1% for the Mainland-Norway) and unemployment has increased (registered unemployment at 5% year-end 2020).
The economic measures to support the economy and financial system included a reduction of the key policy rate from 1.5% to 0%, reduced level of the countercyclical capital buffer for banks to 1%, introduction of a loan guarantee scheme and a compensation scheme for relevant businesses.
The Norwegian banking sector is characterised by a few very large commercial banks, some regional based and several small savings banks. At the end of 2020 there were 134 banks operating in Norway, 118 were Norwegian and 16 branches of foreign banks. The market share of the subsidiaries and branches of foreign banks were 24% and 38% in the retail and domestic corporate market, respectively.
At year-end 2020, the aggregate assets of the banking sector (including foreign entities) amounted to around €669 billion. The Norwegian banks’ return on equity were naturally affected by the pandemic but ended at 9%, down approximately 3 percentage points from 2019. The reduction in profit was particularly due to higher losses on lending. According to the Norwegian FSA the losses amounted to 0.5% of average lending volume, which is the highest level since the financial crisis.
The capital adequacy in Norwegian banks increased by 0.9 percentage points to 18.9% in 2020. More capital must be seen in relation to the discussion on banks’ dividend policy and a higher level of retained profits. The leverage ratio was on average 8.1%.
As more and more people are using banking services online, the number of physical branches has decreased significantly over several years. Mobile payment solutions have been well received by Norwegian households and are becoming increasingly popular. More digital banking has given the banking sector large productivity gains and hence lower costs. In 2020, the cost/income ratio in Norwegian banks were on average 44.6%.
The most important sources of funding are deposits and covered bonds. Large banks have a considerably larger share of market-based, international funding than smaller banks, which base their operations largely on depository funding. Bank deposits are guaranteed by the Norwegian deposit guarantee scheme and have thus proven to be a stable source of funding, also during the financial crisis. The guarantee provided by the Banks’ Guarantee Fund covers up to NOK 2 million (approx. €200,000) per depositor per bank but may be changed in the future to the equivalent of €100,000 to be aligned with the EU. The deposit-to-loan ratio (deposits as a share of gross loans to customers) for Norwegian parent banks was 98% at year-end 2020. The high level is due to the transfer of mortgages to separate credit institutions (with the purpose of issuing covered bonds). By including these loans, the deposit-to-loan ratio was 59%. Deposits from customers increased by 10.2% in 2020.
Given the VAT exemption for financial services a financial tax was implemented in Norway in 2017. The tax comprises of two elements. The first is a payroll tax of 5% and the second a maintained tax rate at 25 %, i.e. an extra tax of 3 percentage points relative to other corporates (22% tax rate in 2020).
The Norwegian financial sector strongly supports the ESG-agenda and are involved in/has launched several initiatives in this area. The Roadmap for Green Competitiveness in the Norwegian Financial Sector, developed by Finance Norway, is an example of a key initiative setting the vision of a profitable and sustainable Norwegian financial sector in 2030. The roadmap includes seven general recommendations for the industry in addition to several specific recommendations for banks, insurers and investors.
Norwegian banks also strongly support the progress in the stability and governance of the European financial sector, as well as the increasing harmonisation of regulation and supervision throughout Europe, to ensure a level-playing field and improve the functioning of the market economy. Norway is not a direct member of the EU but participates in EU’s internal market under the European Economic Area Agreement (EEA). According to this agreement Norway is obliged to implement all EU directives and regulations that relate to financial institutions and markets, such as the CRR/CRD, MiFID, Prospectus Directive, Solvency II etc. This ensures Norwegian financial institutions the same rights and obligations as institutions established within the EU.
Contributor: Michael H. Cook email@example.com