Banks' results still solid, but persistent high growth in loans to households is not sustainable over time
"The short-term outlook for financial stability is regarded as satisfactory and is approximately unchanged since the previous Financial Stability report," said Deputy Governor Jarle Bergo in connection with the presentation of Financial Stability 1/05 on Tuesday, 31 May. In the long term, high and rising household debt is a source of uncertainty.
The basis for financial stability since the previous report has been favourable in Norway. Household income and corporate revenues have both increased and interest rates have been low. Banks achieved solid results in 2004 and in the first quarter of this year, mainly as a result of low losses. Earnings before losses declined somewhat from 2003 to 2004.
Household debt is high and is still growing rapidly, mainly driven by the rise in house prices. The share of household debt secured on dwellings increased from 65 per cent in 1996 to 75 per cent in 2004. The share of household debt at a fixed rate of interest fell in 2004 to 14 per cent at the end of the year. Thus, few households have hedged against an unexpectedly high interest rate. As a result of low interest rates and favourable prospects for growth in the Norwegian economy, the risk of increased losses on loans to households is assessed as unchanged and relatively low in the short term. As a result of unusually low interest rates, the interest burden is currently relatively low, but will increase substantially as the interest rate gradually reaches a normal level.
Profitability in listed companies improved markedly from 2003 to 2004 as a result of high oil prices, higher demand, moderate wage growth and lower interest rates. Oil companies recorded the most pronounced improvement. Mainland fixed investment increased substantially in 2004. In spite of this, new loans raised by enterprises have only shown a moderate increase. With high profitability, credit risk associated with loans to enterprises is assessed as unchanged and relatively low.
This time, the report also includes separate analyses related to various themes, including the following: what influences the number of bankruptcies, risk associated with banks' loans to various industries and risk premiums in the Norwegian equity market.
For further information, please contact Kristin Gulbrandsen, Executive Director (tel. +47 22 31 60 92) or Arild Lund, Director (tel. + 47 22 31 61 44).
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