Norway’s banking sector: Facts & Figures
Updated September 2018 – For earlier editions of Facts & Figures click here
Economic activity in the Norwegian economy picked up in 2017, after 2016 ended as the weakest year in terms of growth since the financial crisis. The improved outlook has continued in 2018 and reflects a more positive outlook after the downturn in the petroleum sector, which faced challenges after the oil-price drop in 2014. Unemployment has decreased to currently 3.7% according to the Labour Force Survey. Growth has been stimulated by the continuance of expansionary monetary and fiscal policy but as the economy continues to improve, the Central Bank of Norway has communicated that the key policy rate probably will increase from the current record low level of 0.5% in the second half of 2018.
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 2017 the Norwegian banking sector consisted of 122 banks. In addition, there were twelve branches and subsidiaries of foreign banks operating in Norway. The market share of the branches of foreign banks was 19% and 38% in the retail and domestic corporate market, respectively.
At year end 2017, the aggregate assets of the banking sector (including foreign entities) amounted to around €631 billion, corresponding to 190% of Norway’s total GDP. However, given the large presence of foreign banks, total assets relative to the size of the economy is noticeably lower when regarding Norwegian banks only. The financial intermediation sector contributes approximately 6% of GDP and employs around 2% (50,000 people) of the total labour force.
The Norwegian banks’ return on equity was on average 11.3% in 2017, while losses were 0.14% of gross lending. Losses decreased considerably compared to the previous year when some of the large banks experienced losses on oil-related exposures. Norwegian banks have strengthened their financial positions in recent years by retaining a larger share of their profits and by issuing new equity. The overall common equity tier 1 ratio for Norwegian banking groups was 16.3% by the end of 2017. The leverage ratio was on average 7.8%.
There were 943 branches by the end of 2017, and the average number of inhabitants per bank branch was about 5,600. As more and more people are using banking services online, the number of 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 2017, the cost-income ratio in Norwegian banks was on average 47.5%. The ratio increased somewhat in 2017, due to changes in the pension system and the introduction of a new tax on financial services.
When it comes to funding, the most important sources 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 (approximately €210,000) per depositor per bank. This 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 2017. The high level is due to the transfer of mortgages to separate credit institutions (with the purpose of issuing covered bonds). If these loans were included, the deposit-to-loan ratio would be 59%.
Domestic credit growth has in recent years been fluctuating around 5-6%. Household credit growth has in the same period been 6-7%. In recent months, credit demand from non-financial companies has increased significantly, reflecting the more positive outlook in the economy. This has led to an increase in the aggregate credit growth although growth among households has, to some extent, decreased lately.
Norwegian banks 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 to improve the functioning of the market economy. Norway is not a member of the EU but participates in the EU’s internal market under the European Economic Area Agreement. 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 IV, 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