Oil Shock Is Putting Norway Bank Books at Risk, FSA Warns

Banks in Norway should prepare for a potential economic shock brought on by lower oil prices, according to the country’s financial regulator.

“Even if the prognosis for the Norwegian economy is for a soft landing, banks should also keep in mind the fact that there could be a harder hit to the economy,” Emil Steffensen, director of banking and insurance supervision at the Financial Supervisory Authority, said.

The regulator earlier in the week questioned bank assumptions on impairments. The FSA, based in Oslo, said there’s reason to fear that the proportion of bad loans might be higher than levels reported by the financial industry as western Europe’s biggest oil exporter gets dragged down by a plunge in crude prices. Brent traded as low as $32 a barrel this week, compared with a 2014 high of more than $115. The krone has fallen more than 30 percent against the dollar over the same period.

“Banks have to take into account the possibility of a broader impact to the macro-economy when they do the collective impairments and when they do the individual impairments,” Steffensen said in a phone interview on Wednesday.

“There is uncertainty related to the international economy, oil prices and the effects on the mainland economy ensuing from the lower demand from the petroleum sector,” he said. “We point to the importance of the possibility of a broader impact to the economy and ask the banks to be aware of that when they do their impairments.”

DNB ASA, Norway’s biggest bank, said last month that even though the oil market “has fallen off the cliff,” its direct exposure is “manageable” and a weaker currency will support the economy, limiting indirect effects. The Oslo-based lender expects that impairments through 2018 will be about 19 basis points of the total exposure at default, a level that it described as normalized.

The low oil price doesn’t affect DNB directly, Chief Executive Officer Rune Bjerke said in an interview. The bank is working with those clients that have been hardest hit by the market development, he said. Shares in the bank had lost 4.2 percent and were trading at their lowest in a year as of 10:22 a.m. in Oslo.

Total group impairments for Norwegian banks in terms of gross lending to customers were 25 basis points for the first three quarters of 2015, about the same level as in all of 2014, the FSA estimates.

Norway’s banks probably have adequate loss-absorbing buffers to deal with the economic scenarios that may play out, after raising capital to meet tougher requirements, according to the FSA. But Steffensen says they should continue to retain profits and not raise dividends.

Stress tests by the FSA and the International Monetary Fund “show that banks can cope with a fairly adverse scenario,” Steffensen said. But “in general we tell the banks to retain significant parts of their profits.”

Before it's here, it's on the Bloomberg Terminal.