Large Nordic banks cut oil and gas-related exposures by nearly a third in 2020 and 2021 and say they will not change course even as Norway ramps up fossil fuel production.

The pandemic caused the region's lenders to accelerate efforts to reduce exposures to the oil, gas, offshore and shipping sectors as a sharp oil price drop and struggling economies threatened asset quality. An ongoing push to reduce energy transition risk means more cuts are likely for some.

In aggregate, DNB Bank ASA, Skandinaviska Enskilda Banken AB (publ), Nordea Bank Abp, Danske Bank A/S and Swedbank AB (publ) recorded a drop of 31% in their oil and gas-related exposures, measured as a proportion of total gross exposures, in 2020 and 2021, according to S&P Global Market Intelligence data. All five have committed to reaching net-zero emissions in their financing and investment activities by 2050.

The war in Ukraine has raised questions about the supply of oil and gas from Russia to Europe. Norwegian state-owned energy company Equinor said it will deliver more gas from fields off the coast of Norway through increased production permits to meet European demand. Norway's government plans to offer new licenses to expand oil and gas drilling in its waters.

Nordic banks, which have historically financed the region's oil firms and companies that service them, say the new geopolitical landscape will not interfere with their climate ambitions.

"The situation does not fundamentally change our strategic approach," said Espen Kvilekval, global head of oil and gas at DNB Bank ASA, Norway's largest lender by assets. From a credit risk perspective, the bank is "very comfortable" with its current oil and gas exposure levels and is now strategically focused on helping clients reduce their emissions intensity, Kvilekval said in an interview.

Oil-related exposures may rise in the short term due to increased client demand for commodity price hedging in the current price environment, but this is temporary, Kvilekval said. Other dynamics such as the timing of syndications may also have an impact on the figures, he said.

Reduced exposures

DNB, which due to its Norwegian base has historically had a larger oil, gas, offshore and shipping portfolio than its Nordic peers, has worked to cut these exposures since 2015. As a proportion of total exposures, oil and gas-related exposure fell to 6.6% from 8% during 2020 and 2021 — a roughly 17% drop.

Other banks cut their exposure even more over the same period. Sweden-based Swedbank AB (publ) recorded a 40% decrease, which a spokesperson said was achieved by restricting new lending, amortizing existing loans and by selling or writing off parts of some portfolios.

Russia's invasion of Ukraine has highlighted the continued reliance on fossil fuels for energy security and added "further urgency" to the transition to renewable energy, the spokesperson said. Swedbank will continue to decarbonize its balance sheet, the spokesperson said.

Denmark's largest bank, Danske Bank A/S, cut oil and gas-related exposures by 38%. The bank aims to reduce its exposure in upstream oil and gas production by 50% from the 2020 level by 2030, said the bank's head of sustainable finance, Samu Slotte.

"We have not discussed any revisions of the recently set climate targets," said Slotte, when asked about the impact of Europe's energy independence efforts on its strategy.

Sweden's Skandinaviska Enskilda Banken AB (publ), or SEB, put an exit strategy for the offshore segment in place in 2020 and announced in November 2021 a goal to reduce the fossil fuel credit exposure within its energy portfolio by between 45% and 60% by 2030, compared with a 2019 baseline. Those targets remain in place, a spokesperson said. The bank's oil and gas-related exposures dropped by 36% in 2020 and 2021.

Nordea Bank Abp said it believes supporting the "best-in-class lower-emitting Nordic oil and gas companies" can help them play an important role in Europe's efforts to achieve energy independence, although it did not wish to comment on how this may impact exposure levels.

The Finland-based bank did, however, reiterate a goal to reduce carbon emissions from its lending and investment portfolios by between 40% and 50% by 2030. Its oil and gas-related exposures fell 47% in 2020 and 2021, the largest reduction among the large Nordic banks.

Pandemic provided opportunity

Nordic banks' strategic decision to scale down this lending is "irreversible," said Michal Bryks, director for financial institutions at Fitch Ratings. A key reason for this, along with environmental, social and governance concerns, is the desire to avoid the associated cyclicality and higher credit losses, Bryks told Market Intelligence.

The region's lenders have sought to cut oil-related exposures since the 2015-2016 oil price crisis caused heavy credit losses. As the pandemic and a significant oil-price drop in 2020 amplified existing challenges within those portfolios, it allowed banks to raise credit loss allowances both for new exposures and for bad legacy debt, Bryks said. This lowered the residual risk and put the banks in a better position to sell exposures or write them off.

The average cost of risk spiked to 36.2 basis points in 2020 as the banks took material loan loss charges linked to oil-related segments.

In 2021, the work to restructure and bring down exposures in oil-related sectors was a key driver of improved asset quality, said Mario De Cicco, vice president for global financial institutions at DBRS Morningstar. Oil-related exposures in Stage 3 — meaning nonperforming — loans have been declining significantly, De Cicco said.

The banks' average cost of risk fell to 0.6 bps in 2021; contributing factors also included improved asset quality in other pandemic-hit sectors and a brighter economic outlook.

Large Nordic banks have been generally prudent in their provisioning strategies despite a rapid post-pandemic recovery in 2021, meaning they sit on sizeable reserves to cover oil-related credit losses should they materialize, Bryks said.

As Nordic banks shift their focus from credit risk to climate and transition risk, some will likely record further reductions in oil-related exposures in the coming years, according to Bryks. For others, such as Norway's DNB, the focus will be on reducing carbon emissions within the portfolio by supporting clients in their transition.

"We have an impact strategy rather than an exit strategy, and that's important," Jan Ole Huseby, DNB's head of ocean industries, said in an interview. "We are a transition bank."