Large Nordic banks have recorded significantly lower loan loss provisions than European peers during the pandemic, but there are risk factors that could end this track record this year, according to analysts.

The median cost of risk for the six largest Nordic banks — Nordea Bank Abp, Danske Bank A/S, DNB ASA, Svenska Handelsbanken AB (publ), Skandinaviska Enskilda Banken AB and Swedbank AB (publ) — was 37 basis points in the first nine months of 2020, according to S&P Global Market Intelligence data.

This is compared with a 75-basis-point median for large European banks outside of the Nordic region.

One explanation is that Nordic banks started off in a better shape, already recording loan losses below European peers before the pandemic, said Geir Kristiansen, analyst at Nordic Credit Rating.

In 2019, the six banks had a median cost of risk of 9 basis points, against 19 basis points for other large European lenders.

Another driver is the range of extensive government support packages, furlough schemes and well-functioning social security systems in Sweden, Denmark, Norway and Finland, which have enabled customers to continue servicing their debts during the crisis, Kristiansen said.

'Real' losses limited

But the Nordic banks' 2020 financial results may not tell the whole story of the pandemic's impact on their loan books.

"It remains to be seen if there is really underlying worsening of the asset quality. It hasn't been the case for now, but it might be a bit more of a delayed process," said Salla von Steinaecker, director and lead analyst for Nordic banks at S&P Global Ratings.

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Most of the large Nordic lenders' loan loss provisioning in 2020 was driven by macroeconomic modeling under IFRS 9, rather than actual asset quality deterioration, she said in an interview. Implemented in 2018, the IFRS 9 accounting standard requires banks to apply macroeconomic forecasts when estimating expected credit losses.

Even for vulnerable segments such as tourism and airlines, the downward rating migration has been limited so far, with "very few real losses," said Louise Lundberg, a Nordic bank analyst at Moody's.

Oil-related exposures, in particular offshore, were the only segments that drove significant increases in stage 3 nonperforming loan levels during 2020, particularly for DNB, which due to its Norwegian domicile has a relatively large exposure to these sectors. The bank had the highest cost of risk among its Nordic peers last year, although still below the median for other large European lenders.

"There's an expectation that there's sort of a pent-up loss somewhere, given the fact that there's been so much government support. At some point, the support tap will have to be turned down a little bit, and then things can probably come to the surface then," said Sean Cotten, Nordic Credit Rating's chief rating officer.

Nordic Credit Rating expects that Nordic banks will face higher loan losses in 2021 than in 2020, as will likely also be the case for European peers.

Then there would typically be a time lag of six months before actual defaults would appear in the banks' books, he said in an interview.

Risks ahead

Some exposures could make Nordic banks particularly vulnerable, especially if the coronavirus crisis is prolonged. Oil-related sectors, which continue to face pressure due to ongoing price volatility and lower collateral values, represent "the highest source of credit risk for the large Nordic banks," according to a Moody's note.

Companies, particularly within the offshore service industry, may find it increasingly difficult to get banks and bondholders to agree on restructurings in a prolonged low oil price environment, which could lead to more defaults, said Kristiansen.

Another potential risk is commercial real estate, to which Nordic banks have a high exposure compared to European peers and have in previous crises taken significant losses, said Kristiansen.

Already before the pandemic Sweden's financial regulator had warned of "elevated risks" in Swedish banks' lending for commercial real estate, which represents around 40% of their total exposure to corporates, and as a result raised capital requirements for Handelsbanken, SEB and Swedbank in January 2020.

So far the sector has performed well through the pandemic thanks to low interest rates and government support, but this could change if an extended crisis leads to bankruptcies and shutdowns within restaurants and hotels, which would likely spill over into the commercial real estate sector, Kristiansen said.

Finally he warned that high exposures to individual tourism companies could hide behind generally low total exposures to the sector. In the third quarter of 2019, DNB was hit by a 1.25 billion Norwegian kroner impairment loss, which was reportedly related to the collapse of tour operator Thomas Cook Group PLC.

More provisions?

The fact that macroeconomic modeling drove most of Nordic banks' loan loss provisions throughout 2020 makes it difficult to predict whether their current loan loss reserves are large enough to cover for a rise in future pandemic-related losses, Cotten said.

In Norway, the financial regulator warned in its December risk outlook for the Norwegian banking sector that "there is a risk that potential losses may be underestimated in banks' loss allowances," and urged lenders to factor in "the possibility of a significant rise in loan losses in the coming period."

Nordic Credit Rating's base scenario is that Nordic banks will have to make further pandemic-related provisions in 2021.

Lundberg, meanwhile, said there is "a good possibility" that the provisions already taken by large Nordic banks are "more than enough" to cover what she expects will be a "moderate increase" in problem loans in 2021. She said there could even be some loan loss reversals once the uncertainty has reduced.

Should loan losses increase above those expectations, however, Lundberg highlights Danske as the most vulnerable among its Nordic peers, due to its already relatively weaker profitability going into the crisis. The Danish bank's loan loss provisions in the first nine months of 2020 accounted for 60.4% of its pre-impairment operating profit, higher than other Nordic and European lenders.

Nevertheless, she said all the large Nordic banks generally continue to be "very robust," pointing to their healthy capital buffers.

As of Jan. 5, US$1 was equivalent to 8.50 Norwegian kroner.