Recovery of losses on loans from northern banks is likely against the backdrop of good forecasts, but the timing has not been determined



As the economic outlook in the Nordic countries improves, analysts say the region’s largest banks in 2021 are well positioned to remove some of the 2020 pandemic loan loss provisions, although some lenders may consider a more cautious approach.

First quarter results showed promising dynamics of loan losses in the six largest banks in Sweden, Norway, Denmark and Finland, with the cost of risk in most of them falling below 2019 levels, while DNB ASA and Svenska Handelsbanken AB (publ) even recorded small net profit. reversals.

Other Scandinavian lenders are likely to see a net pullback from the second quarter, according to Sean Cotten, chief rating officer at Nordic Credit Rating. Although banks will face “actual losses” in 2021 related to the COVID-19 pandemic, he said, their loan loss reserves are currently larger than those losses are likely to be.

Nordic countries have proven to be more resilient than other European countries as they are less reliant on sectors affected by physical removal and mobility restrictions, while strong public finances have allowed significant support measures to be taken to mitigate the impact of the pandemic, according to a recent DBRS Morningstar analysis. …

More than a year has passed since the start of the pandemic, and now there is “There are many reasons for optimism, “as vaccine introduction progresses, societies are gradually opening up and“ the prospects for economic growth are positive, ”Frank Wang-Jensen, CEO of Nordea Bank Abp, said on April 29.

Oil production, shipping

According to Geir Christiansen, an analyst at Nordic Credit Rating, if health conditions and the economic crisis continue to improve, it is “likely” that large Scandinavian banks will record a recovery in net loan losses throughout 2021.

Scandinavian banks were among those in Europe to record the sharpest increase in provisions in 2020 compared to 2019, with the exception of Handelsbanken, which recorded a decrease in loan losses.

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According to Christiansen, DNB ASA, which suffered the largest impairment losses in 2020 compared to the size of its loan portfolio, intends to generate the most kickbacks from its regional peers. According to him, the recovery in the oil and shipping markets is especially beneficial for the largest bank in Norway, which has a great influence on these segments.

According to the bank, of the NOK 9.92 billion loan loss reserves created by DNB in ​​2020, NOK 6.85 billion was earmarked for oil-related sectors.

The Norwegian lender has already started writing off some of these reserves in the first quarter, recording a recovery in net loan losses of 110 million kronor, which he said was mainly driven by improvements in the transportation segment and the bank’s ability to restructure its positions with two oils. and gas consumers.

DNB’s Phase 2 loans in the first quarter accounted for 7.5% of total lending, which is about 2 percentage points higher than pre-crisis levels, which, according to Cotten, can be viewed as “more precautionary than for problem loans,” and indicates that DNB still has “little room” for “macro reversals”. Most peer companies registered Stage II loans at levels similar to or lower than before the pandemic.

Stage 2 provisions cover positions for which credit risk has been significantly increased, but which do not have objective evidence of impairment. This generally makes it easier for banks to issue quotas compared to those in stage 3, where there must be a sustained improvement in credit quality or a sale or repayment of a loan for the bank to justify the exemption, said Michal Bryks, Director of Financial Institutions at Fitch Ratings.

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Even in offshore areas that remain DNB’s most problematic exposure, the high level of reserves for this segment “makes it more likely than not that it will eventually be able to reverse some of its loan losses,” Christiansen said. although it may it will take some time before this happens.

Intelligent management

Bryks gave a more cautious estimate for 2021 and expects that the reserves of northern banks will be lower than in 2020, but still higher than the pre-pandemic average.

Most Scandinavian banks rely on “significant management overlaps” Bryks said, referring to the expert reserves created by banks to cover potential losses not reflected in their models. What happens to these buffers depends on management decisions. makes it difficult to predict when they might be released, Bryks said, adding that banks can only do this in 2022.

Scandinavian lenders have largely kept these overheads unchanged, Brykes said, indicating that their management teams are “conservative” and reluctant to release them quickly on the basis of an improved economic outlook.

Nordea, for example, retained what it described as a “substantial management buffer” of € 650 million in the first quarter as “a prudent approach as the full impact of the COVID-19 pandemic on our customers remains uncertain,” it said. CEO, even if the bank’s realized loan losses were low.

Danske Bank A / S CEO Carsten Egeris also said he “remains cautious” given the uncertain macroeconomic environment. Denmark’s largest bank by assets recorded a slight decrease in its coronavirus-related post-model adjustment buffer in the first quarter to DKK 1.9bn from CZK 2bn, but kept the forecast for losses on loans at the level of up to 3.5 billion kroons throughout the year, despite the fact that in the first quarter, expenses amounted to only 443 million kroons.

Based on the source of loan losses in 2020, Bryks considers Handelsbanken the best candidate to further reduce impairment losses this year. The Swedish lender recorded a slight recovery in net credit losses in the first quarter of 8 million kroons. Bryks pointed to the fact that about 70% of the bank’s reserves last year were expert, which means that they “do not hold back from deterioration in the quality of the underlying asset “.

According to UBS analysts, of the largest banks in Scandinavia, Handelsbanken had the largest share of managerial capital as a percentage of reserves for full year 2020, followed by Nordea.

Handelsbanken is often viewed as a haven during crises, but some analysts nonetheless doubt that its exceptionally low credit losses are sustainable. Brykes admitted that it might seem “very odd” that Handelsbanken’s reserves only fell after the pandemic broke out, but said this development “makes sense” given the bank’s high asset quality and strong collateral.

As of May 26, US $ 1 was the equivalent of NOK 8.34, DKK 6.09 and SEK 8.31.


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