Favourable outlook, but high debt growth increases vulnerability of households

Norges Bank considers the overall outlook for the financial system in Norway to be satisfactory, despite an increase in the vulnerability of Norwegian household sector. The household debt-to-income ratio has never been higher. A rising number of households are opting for interest-only loans and almost all their loans are floating-rate loans. Many new borrowers have a high loan to collateral value ratio. At the same time, interest rates are rising.

The overall financial position of the household sector is nevertheless solid. So far, there are no signs of an increase in debt-servicing problems. Unemployment is very low. Corporate profits are solid. Growth in lending to enterprises has increased sharply over the past two years, but their debt-servicing capacity remains solid. Norwegian banks’ profits are solid, partly owing to unusually low loan losses. Interest margins have declined. The financial strength of banks remains solid.

Even if the main picture is positive, it is important to be aware of certain developments:

The strong growth in loans is not likely to continue over time. If pressures on interest margins persist, banks will have to increase income from other sources than net interest income or reduce costs to maintain profitability.
Under the new capital adequacy rules, the level of capital at financial institutions will to a greater extent reflect the risk exposure of their activities. The transition to the new capital adequacy rules entails some degree of risk that banks will reduce capital to the extent that the buffers for meeting unforeseen events become smaller than desirable.
In the commercial property market, prices are expected to rise rapidly in the period ahead. Commercial property prices have historically varied widely and in pace with business cycle fluctuations.
There are several downside risks to the favourable prospects for global growth. There is considerable uncertainty surrounding developments in the US housing market ahead. There are still considerable imbalances in payment flows between the major economies.
To the extent that today’s low risk premia do not reflect underlying risk, there is a risk of corrections in securities markets.

The Report includes analyses of various themes such as: low share of fixed-rate loans, low household saving and factors behind banks’ problem loans.

For further information, please contact: Birger Vikøren, Director, tel. + 47 22 31 61 42, or Snorre Evjen, Assistant Director, tel. + 47 22 31 65 70.