Amid an improved economic outlook in Nordic countries, the region's largest banks are well placed in 2021 to reverse some of the pandemic-related loan loss provisions made in 2020, according to analysts, although some lenders may consider a more prudent approach.
First-quarter results showed promising loan loss developments at the six largest banks in Sweden, Norway, Denmark and Finland, with cost of risk dropping below 2019 levels at most of them, while DNB ASA and Svenska Handelsbanken AB (publ) even recorded small net reversals.
More Nordic lenders are likely to follow with net reversals 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, their loan loss buffers are currently larger than those losses are likely to be, he said.
Nordic economies have proved to be more resilient than other European countries, as they are less reliant on sectors affected by physical distancing and mobility restrictions, while strong public finances enabled the adoption of substantial support measures to mitigate the impact of the pandemic, according to a recent DBRS Morningstar analysis.
More than a year into the pandemic, there are now "many reasons to be optimistic" as the vaccine rollout is progressing, societies are gradually opening up, and the "outlook for economic growth is positive," Nordea Bank Abp CEO Frank Vang-Jensen said April 29.
Recovery in oil, shipping
If the health and economic crisis continues to improve, "it is not unlikely" that large Nordic banks will record net loan loss reversals for the full year of 2021, said Geir Kristiansen, analyst at Nordic Credit Rating.
Nordic banks were among those in Europe to record the sharpest increases in provisions in 2020 compared with 2019, the only exception being Handelsbanken, which posted a drop in loan losses.
DNB ASA, which in 2020 took the largest impairment charges relative to the size of its loan book, is set to make the most reversals of its regional peers, according to Kristiansen. A recovery in the oil and shipping markets is in particular benefiting Norway's biggest bank, which has a large exposure to those segments, he said.
Of the 9.92 billion Norwegian kroner loan loss provisions DNB made in 2020, 6.85 billion kroner were for oil-related sectors, according to the bank.
The Norwegian lender already started writing back some of those provisions the first quarter, recording net loan loss reversals of 110 million kroner, which it said were mainly driven by improvements in the shipping segment and the ability of the bank to restructure its exposure with two oil and gas customers.
DNB's stage 2 loans in the first quarter made up 7.5% of its total lending, approximately 2 percentage points higher than pre-crisis levels, which Cotten said can be seen as "more precautionary than related to nonperforming loans," and indicates that DNB still has "some room" for more "macro-based reversals." Most of its peers recorded stage 2 loans at similar or lower levels than before the pandemic.
Stage 2 provisions cover for exposures that have had a significant increase in credit risk but do not have objective evidence of impairment. This makes it generally easier for banks to release allowances as compared to those in stage 3, where there must be a durable improvement in credit quality or a loan sale or repayment for a bank to justify a release, said Michal Bryks, director for financial institutions at Fitch Ratings.
Even within offshore, which remains DNB's most problematic exposure, the bank's high provisioning level for this segment "makes it more likely than not that it will, in the end, be able to reverse some of the loan losses there as well," said Kristiansen, although it may take some time before that will happen.
Prudent management
Bryks provided a more cautious estimate for 2021, and expects that Nordic banks' provisions will be lower than in 2020 but still above average pre-pandemic levels.
Most of the Nordic banks sit on "sizable management overlays," Bryks said, referring to expert-based reserves put in place by banks to cover for potential losses not captured by their models. What will happen to those buffers depends on management decisions, making it harder to predict when they may be released, Bryks said, adding that banks may choose to only do so in 2022.
So far Nordic lenders have largely kept these overlays unchanged, indicating that their managerial teams take a "conservative" stance and are not tempted to start releasing them quickly based on improvements in the economic outlook, Bryks said.
Nordea, for one, retained what it labeled a "substantial management buffer" of €650 million in the first quarter, deeming it "to be a prudent approach as the full impact of the COVID-19 pandemic on our customers remains uncertain," according to the CEO, even if the bank's realized loan losses had been low.
Danske Bank A/S CEO Carsten Egeriis similarly said it "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 1.9 billion Danish kroner from 2 billion kroner, but maintained its loan loss guidance of up to 3.5 billion kroner for the full year, despite seeing first-quarter charges at only 443 million kroner.
Based on the source of 2020 loan losses, Bryks considers Handelsbanken the best candidate to further release impairments this year. The Swedish lender recorded a small net credit loss reversal in the first quarter, of 8 million kronor. Bryks pointed to the fact that about 70% of the bank's provisions last year were expert-based, meaning they "do not stem from the underlying asset quality deterioration."
Of the largest banks in the Nordic region, Handelsbanken had the biggest management overlay as a percentage of full-year 2020 provisions, followed by Nordea, according to UBS analysts.
Handelsbanken is often seen as a safe haven during crises, but some analysts have nevertheless questioned whether its exceptionally low credit losses are sustainable. Bryks admitted it may seem "very strange" that Handelsbanken's provisions have only fallen since the pandemic broke out, but said the development "makes sense" given the bank's robust asset quality and strong collateralization.
As of May 26, US$1 was equivalent to 8.34 Norwegian kroner, 6.09 Danish kroner and 8.31 Swedish kronor.