Bank loan

Nordic bank loan loss reversals likely amid a promising outlook, but an uncertain timing

Amid an improving economic outlook in the Nordic countries, the region’s largest banks are well placed in 2021 to write off some of the pandemic loan loss provisions taken in 2020, analysts say, although some lenders may consider a more cautious approach.

The first quarter results showed a promising development in loan losses at the six largest banks in Sweden, Norway, Denmark and Finland, with cost of risk falling below 2019 levels in most of them. they, while DNB ASA and Svenska Handelsbanken AB (publ) even recorded a small clear reversal.

Other Nordic lenders are expected to follow with net reversals from the second quarter, according to Sean Cotten, rating director at Nordic Credit Rating. Although banks face “real losses” in 2021 from the COVID-19 pandemic, their loan loss reserves are currently larger than those losses likely will be, he said.

The Nordic economies have proven to be more resilient than other European countries, as they rely less on sectors affected by physical remoteness and mobility restrictions, while strong public finances have allowed for substantial support measures to mitigate the impact of the pandemic, according to a recent DBRS Morningstar analysis.

More than a year after the start of the pandemic, there are now “many reasons to be optimistic “as vaccine deployment progresses, companies gradually open up and” the outlook for economic growth is positive, “Nordea Bank Abp CEO Frank Vang said on April 29. Jensen.

Oil recovery, shipping

If the health and economic crisis continues to improve, “it is not unlikely” that the big Nordic banks will record net loan loss reversals for the whole of 2021, said Geir Kristiansen, analyst at Nordic Credit Rating.

Nordic banks were among those in Europe to record the largest increases in provisions in 2020 compared to 2019, the only exception being Handelsbanken, which recorded lower loan losses.

DNB ASA, which suffered the largest impairment charges in 2020 relative to the size of its loan portfolio, is expected to perform the most reversals of its regional peers, according to Kristiansen. A recovery in the oil and shipping markets in particular benefits Norway’s largest bank, which has high exposure to these segments, he said.

Of the NKr 9.92 billion in loan loss provisions that DNB made in 2020, NKr 6.85 billion was for oil-related sectors, according to the bank.

The Norwegian lender has already started to write back some of these provisions in the first quarter, recording net loan loss write-backs of NKr 110 million, which it said was mainly due to improvements in the shipping segment and the the bank’s ability to restructure its exposure with two and gas customers.

DNB’s Phase 2 loans in the first quarter accounted for 7.5% of its total loans, about 2 percentage points above pre-crisis levels, which Cotten says can be considered “more conservative. than related to NPLs ”, and indicates that DNB continues to have“ room ”for more“ macro-based reversals ”. Most of his peers recorded stage 2 loans at levels similar to or lower than before the pandemic.

Stage 2 provisions cover exposures that have experienced a significant increase in credit risk but have no objective evidence of impairment. This generally makes it easier for banks to release provisions compared to those in phase 3, where there must be a lasting improvement in credit quality or a loan sale or repayment for a bank to justify a release, a. declared Michal Bryks, Director of Financial Institutions at Fitch Ratings.

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Even within offshore, which remains DNB’s most problematic exposure, the bank’s high level of provisioning for this segment “makes it more likely than not that it will ultimately be able to to reverse some of the loan losses there as well, ”Kristiansen said. , although he can take some time before this happens.

Prudent management

Bryks has provided a more conservative estimate for 2021 and expects that the Nordic banks’ provisions will be lower than in 2020 but still above the average levels before the pandemic.

Most Nordic banks rely on “significant management overlays”, Bryks said, referring to the expert reserves put in place by banks to cover potential losses not taken into account by their models. What happens to these buffers depends on management decisions, which makes it harder to predict when they can be released, Bryks said, adding that banks might choose not to do so until 2022.

So far, Nordic lenders have largely kept these overlays unchanged, indicating that their management teams are taking a “conservative” stance and are not tempted to start releasing them quickly based on improving economic prospects, said Bryks.

Nordea, for its part, withheld what it called a “substantial management buffer” of 650 million euros in the first quarter, believing it to be “a cautious approach because the full impact of the COVID-19 pandemic on our customers remains uncertain “, according to the CEO, even if the loan losses realized by the bank had been low.

Danske Bank A / S CEO Carsten Egeriis also said he “remains cautious” given the uncertain macroeconomic environment. Denmark’s largest bank in terms of assets saw a slight decrease in its post-model adjustment cushion linked to the coronavirus in the first quarter, to DKK 1.9 billion from Kroner 2 billion, but maintained its forecast for loan losses of up to NKr 3.5 billion for the full year, despite charges of just NKr 443 million in the first quarter.

Based on the source of loan losses in 2020, Bryks considers Handelsbanken to be the best candidate for further write-downs this year. The Swedish lender recorded a small net reversal of credit losses in the first quarter of SEK 8 million. Bryks pointed out that around 70% of the bank’s provisions last year were expert-based, meaning that they “do not flow from the underlying deterioration in asset quality. “

Among the largest banks in the Nordic region, Handelsbanken had the highest management coverage as a percentage of provisions for the year 2020, followed by Nordea, according to UBS analysts.

Handelsbanken is often viewed as a safe haven in times of crisis, but some analysts have nonetheless questioned whether its unusually low credit losses are sustainable. Bryks admitted that it might seem “very strange” that Handelsbanken’s supplies have only dwindled since the start of the pandemic, but said the development “makes sense” given the quality of the robust assets of the bank and strong collateral.

As of May 26, $ 1 was equivalent to 8.34 Norwegian kroner, 6.09 Danish kroner and 8.31 Swedish kronor.