Announcements

    Drinks

      WEDNESDAY, 30/08/2023 - Scope Ratings GmbH
      Download PDF

      Norwegian banks: material CRE exposure manageable despite pressures

      Norwegian bank asset quality is underpinned by a resilient and wealthy economy and a high proportion of residential mortgages with low default rates. Commercial real estate accounts for almost half of corporate lending but this should be manageable.

      “Given the pressures on the CRE sector, loan-loss provisions are likely to increase. Some banks have started to see some risk migration and are cautious, although credit deterioration is likely to be manageable,” said Pauline Lambert, executive director in Scope’s financial institutions team. “Norwegian banks’ solid earnings and strong capital positions provide them with the capacity to absorb higher credit costs. The material exposure to commercial real estate remains a concern and investors would value more disclosure on these exposures. Positively, Norwegian authorities actively use macroprudential measures to manage risks.”

      As many Norwegian banks focus on personal customers and mortgages, the exposure to CRE accounts for 15% of total lending despite accounting for nearly half of total corporate lending. In aggregate, CRE exposures amount to about 9% of total lending for the Eika Alliance and 14% for the SpareBank 1 Alliance. For DNB, the largest domestic bank, CRE accounts for less than 10% of total gross loans and financial commitments and less than 20% of gross loans and financial commitments to corporate customers.

      So far, the increase in remote working has not significantly affected demand for office space in Norway. A limited supply of new office buildings, high employment rates and strong economic activity have supported rent increases and softened declines in sales prices. Rent inflation has also been high as most office leases are CPI-linked, although this is expected to moderate in line with projected slower growth for the Norwegian economy.

      Following a generally upward trend since 2010, commercial property prices are expected to decline to pre-pandemic levels at end-2024, rising moderately thereafter, driven by moderating rents and higher yield requirements.

      Bank financing remains the primary source of funding for Norwegian CRE companies; market financing accounts for 15%-20%. Banks have limited exposure to CRE companies with the weakest financial strength and elevated refinancing risks. Loans to companies with elevated refinancing risks account for just 10% of banks’ total CRE exposures and only a third of that is to companies with the weakest financials.

      The Norwegian FSA’s recent thematic inspection and stress test of office financing by seven banks (DNB, SpareBank 1 SR-Bank, SpareBank 1 Nord-Norge, SpareBank 1 Ostlandet, Sparebanken Vest, BN Bank and Handelsbanken) found that while banks were generally managing their CRE exposures in line with expectations, there were material differences in the robustness of their office financing portfolios. Under the stress scenario, 35% of borrowers on average had negative cash flow. The proportion varied between banks and ranged from 21% to 57%.

      “We believe investors would view more favourably those banks that follow the supervisor’s guidelines for managing CRE-related exposures and which provide good disclosure,” Lambert said. “Useful disclosures include the mix of properties financed, vacancy rates, the maturity profile of leases, loan-to-values, and information on the dynamics of local CRE markets, especially given the localised nature of many banks’ exposures. An overview of a bank’s’ risk appetite and approach to managing CRE exposures could also offer investors reassurance.”

      Download the full report here.

      Issuer rating reports are available to ScopeOne subscribers:

      DNB Bank

      Issuer rating reports are available on www.scoperatings.com

      Aurskog Sparebank

      BN Bank

      Landkreditt Bank

      Pareto Bank

      Sandnes Sparebank

      SpareBank 1 Nordmore

      Totens Sparebank

      Make sure you stay up to date with Scope’s ratings and research by signing up to our newsletters across credit, ESG and funds. Click here to register.

      Related news

      Show all
      Polish covered bond issuance expected to surge in next two years

      24/7/2024 Research

      Polish covered bond issuance expected to surge in next two years

      Scope assigns a first-time public issuer rating of B- to Pasha Bank Georgia. Outlook is Stable

      18/7/2024 Rating announcement

      Scope assigns a first-time public issuer rating of B- to ...

      Covered Bond Quarterly: Steady sailing over the summer with few clouds on the horizon

      18/7/2024 Research

      Covered Bond Quarterly: Steady sailing over the summer with ...

      New property value definitions in CRR3 to have notable impact on some mortgage covered bonds

      15/7/2024 Research

      New property value definitions in CRR3 to have notable impact ...

      Updated rating report on Crédit Foncier de France

      15/7/2024 Monitoring note

      Updated rating report on Crédit Foncier de France

      French bank quarterly: Heated political climate a business drawback

      12/7/2024 Research

      French bank quarterly: Heated political climate a business ...