Oil-related exposures have been causing problems for Nordic banks since the coronavirus crisis broke out, but second-quarter financial results indicate that the region's lenders have otherwise avoided the worst impact of the pandemic. Analysts also point to Nordic banks as the best placed to resume a normalized dividend policy.

The coronavirus crisis has prompted five of the six largest Nordic financial institutions — Nordea Bank Abp, Danske Bank A/S, DNB ASA, Skandinaviska Enskilda Banken AB and Swedbank AB (publ) — to increase their loan loss provisions significantly in the first half from the same period in 2019.

Only Svenska Handelsbanken AB (publ), the largest Swedish bank by assets, appears to have been unaffected by the crisis so far, showing a year-over-year decline in provisions for the period.

Oil-related exposures have been the great culprit of the year, with offshore, a segment affected by lower collateral valuations and oil price volatility, particularly driving loan loss provisions among Nordic banks.

The sector — particularly the offshore supply vessel segment — has faced pressure for a while, and banks have been working to restructure their exposure, Olivia Perney Guillot, a managing director at Fitch Ratings, told S&P Global Market Intelligence. But such restructuring is getting increasingly difficult in times of crisis, she added.

"And now that we get into difficult times, it's more difficult to see how, even by restructuring, banks will be able to get that sort of client either paying or repaying the full loan," Guillot said.

The proportion of provisions relating to oil was significant despite the sector not taking up a considerable part of Nordic banks' lending portfolios, Elisabeth Rudman, head of DBRS Morningstar's European financial institutions group, said in an interview.

Danske Bank, for example, has a just 1.88% exposure to shipping, oil and gas, and just 0.8% directly related to oil. Yet oil-related provisions represented about 98.2% of the Danish bank's total loan loss provisions in the second quarter, according to DBRS Morningstar calculations.

Rudman said banks usually only split their loan loss provisions into specific sectors when those sectors become "an area of concern," adding that even small portfolios can cause "outsized losses for banks."

Handelsbanken an outlier

Handelsbanken is the Nordic region's outlier, seeing limited impact from the coronavirus crisis on its loan loss provisions in the first half.

Presenting Handelsbanken's second-quarter earnings, CFO Carl Cederschiöld said the bank has a "low correlation between macro statistics and defaults." The Sweden-based lender's stronger credit quality has enabled it to "distinguish" itself in crises, he said. This was also apparent during the financial crash of 2008-2009, when the bank recorded lower losses than its Nordic peers.

Handelsbanken also has low exposure to oil, gas and the offshore sector, at just 0.2% of its loan book.

Analysts have continuously pointed to the Swedish lender's business model as one that makes the bank particularly strong during turbulent times. Guillot, for one, highlighted the advantages of Handelsbanken's decentralized model, where branch managers are responsible for its own profit and loss and credit default risk, which has created a culture of knowing customers well and having limited tolerance for risk.

"For Handelsbanken, banking has only ever been about risk management and nothing else," said investment bank Berenberg in a July 16 analyst note. "It is one of the few banks that still manages for risk; hence, it materially outperforms during crises."

Outperforming Europe

In spite of significant oil-related provisions, Nordic banks are generally outperforming European peers when it comes to battling the impact of the coronavirus crisis. The average cost of risk for the six largest Nordic banks was 54 basis points in the first quarter, falling to 40 basis points in the second quarter, according to S&P Global Market Intelligence data.

In comparison, the average cost of risk for European banks in the first quarter was 86 basis points, according to DBRS Morningstar calculations, and the rating agency expects this average to rise further in the second quarter, in contrast to the Nordics. So far, European banks that have reported their second-quarter results have generally increased their provisioning levels significantly, said Rudman.

This difference can be explained, to some extent, by a relatively better macroeconomic outlook for countries in the Nordic region, which include Sweden, Norway, Denmark and Finland.

Presenting second-quarter earnings, DNB CEO Kjerstin Braathen said a pickup in activity and economic development in Norway is "encouraging" and provides "a sound outlook" for the bank's business. DNB, as a result, reported a lower-than-expected impact from the pandemic on its activity levels, causing its share price to rise close to 10% on the day it released its second-quarter earnings.

In its July update on global macroeconomic scenarios, DBRS Morningstar improved the scenarios expected for the Nordic countries, as opposed to a downward revision for growth in European countries such as Italy, Spain, France and the U.K.

The agency pointed to Norwegian unemployment, in particular, as having "recovered sharply" over the previous two months, while the increase in unemployment in the other Nordic countries had been "relatively limited." One key difference is that Nordic economies are less dependent on tourism than other European countries, Rudman said.

Nordic banks applied different macroeconomic scenarios in their calculation of loan losses under the IFRS9 accounting standard in the first quarter, and those scenarios have become "more consistent" in the second quarter, as there has been a growing "consensus" around the economic impact of COVID-19, Rudman said.

Back to normal dividends?

The largest Nordic banks have also seen a limited effect of loan losses on its capital levels, Fitch Ratings noted in a July 30 report. Nordic banks' high capital buffers combined with a relatively better macroeconomic outlook have led analysts to suggest that Nordic banks are among those lenders in Europe that are best placed to reinstate dividends if allowed to do so by regulators.

It comes after the ECB earlier this year requested lenders refrain from paying dividends until the full effects of the coronavirus crisis are known, leading Nordic lenders to suspend dividend payments for 2019.

In a July 28 note, equity analysts at UBS ranked European banks on their ability to resume a normalized dividend policy, based on their capital levels and capacity to withstand credit stresses. It placed Nordea at the top, with Handelsbanken, DNB and SEB also landing in the top five.