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Economic developments and financial markets in Norway Finn Hvistendahl, London, 20 May 2008 The Norwegian economy • • • • • • • • • • Strong and broadly based growth in GDP Low unemployment and tight labour market Increasing inflation Large current account and government surpluses Substantial gains in terms of trade High credit growth to households and enterprises Declining growth rates of housing prices High level of commercial property prices Considerable growth of stock prices the last five years Monetary policy tightened since 2005 Lower growth is expected for 2008 and 2009 Growth in GDP 7 6 5 Per Cent 4 3 2 1 0 -1 -2 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 GDP GDP Mainland Norway Source: Statistics Norway Forecast GDP Forecast GDP Mainland Norway Unemployment and inflation 11 10 9 8 7 Unemployment rate Percent 6 5 4 3 2 1 CPI 0 CPI-ATE -1 -2 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 Source: Reuters EcoWin Source: Reuters EcoWin Government surplus 20,0 % Per cent of GDP 15,0 % 10,0 % 5,0 % 0,0 % -5,0 % -10,0 % 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Overall surplus Source: National Budget Oil adjusted surplus Terms of trade 180 160 140 120 100 80 60 40 20 0 1996 1997 1998 1999 2000 Total Source: National Budget 2001 2002 2003 Traditional merchandise 2004 2005 2006 Credit growth Households and non-financial enterprises 25 20 Non-financial enterprises Per cent 15 10 5 Households 0 -5 -10 8889 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 Source: EcoWin Source: Statistics Norway Housing prices Price level 25 25000 20000 15 Per cent NOK pr.sq.meter 30000 12-month growth 15000 10000 5 5000 0 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Nominal prices Real prices (2007 Nok) Sources: NEF, EFF, FINN.no and Econ Pöyry -5 02 03 04 05 06 07 08 Price of office premises in Oslo 40000 Prices (NOK) per sq. m. 35000 30000 25000 20000 15000 10000 5000 0 1979 1983 1987 Nominal prices Sources: OPAK and Kredittilsynet 1991 1995 1999 Real prices (1998 prices) 2003 2007 Stock markets 500 450 Norway Index (1 January 2003 = 100) 400 350 300 250 Euro area 200 150 USA 100 50 03 04 05 06 07 08 Source: Reuters EcoWin Source: Reuters EcoWin Key policy rate in Norway 11 10 9 8 Per cent 7 6 5 4 3 2 1 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 Kilde: Reuters EcoWin Source: Reuters EcoWin Norwegian Financial Markets • • • • • Financial conglomerates and alliances with high market shares Less concentrated banking market than in other Nordic countries Foreign ownership of importance in banking and non-life insurance Banks account for approximately 70% of domestic credit growth Securities markets of increasing importance. Recent years larger volumes issued on Oslo Stock Exchange than on other Nordic stock exchanges • High profitability in banking for several years • No loan losses and low levels of non-performing loans • High lending growth, especially to the corporate sector • High and stable tier-1 capital ratios Structure of the Norwegian financial market (end 2007) Per cent of total assets Banks Finance Mortgag e Life insuranc e Non life insuranc e DnB NOR (incl. Nordlandsbanken) 37 25 15 31 0 Nordea Bank Norway 14 8 4 6 0 Sparebank1 Group* 12 6 3 3 6 Storebrand 1 0 0 26 1 Terra-Group* 5 1 2 0 1 69 40 23 66 8 Other companies **31 60 77 34 92 Total 100 100 100 100 100 - of which foreign branches in Norway 17 20 1 1 31 - of which foreign subsidiaries 17 46 8 6 2 Total financial groups *For Sparebank1 Group and Terra-Group, market shares include the owner banks. **Savings banks accounted for 10 per cent, and commercial banks (incl. branches of foreign banks) for 21 per cent of other banks. % of total assets Norwegian-owned banks’ assets 90 % 80 % 70 % 60 % 50 % 40 % 30 % 20 % 10 % 0% NOK Net lending to customers Net lending to cred.instit. Cash + deposits Other assets Foreign currency Securities As of 31.12.2007 Banks’ loan losses and pre-tax profits 4 3 Per cent of ATA 2 1 0 -1 -2 -3 1990 1993 1996 Pre-tax profit 1999 2002 Loan losses 2005 Q1-08 Effect of the international turmoil • Norwegian banks had no exposure to US subprime mortgages, • • • • structured credit products or off-balance investment vehicles Most noticeable effect of the international turmoil for the Norwegian banks has been less accessible and more expensive international funding for the larger banks Issuance of covered bonds has been important in banks’ liquidity management. New regulation came into force on 1 June 2007. Norwegian banks have a high level of long-term funding and depositto-loan ratios. Generous deposit guarantee scheme. More demanding liquidity management and pressure on long-term funding limits since summer 2007. Liquidity situation for Norwegian banks remained satisfactory during the market turbulence in 2007 and beginning of 2008 Lending growth by banks and mortgage companies 32 28 Per cent 24 20 16 12 8 4 0 2003 2004 2005 2006 2007 Branches of foreign banks and mortgage companies Foreign-owned subsidiaries and mortgage companies Norwegian-owned banks and mortgage companies Banks’ non-performing loans 10 % % of lending 8% 6% 4% 2% 0% 1990 1995 Corporate cust. 2000 Households 2005 2007 Capital adequacy in banks* 16 14 % of RWA 12 10 8 6 4 2 0 31.12.91 31.12.93 31.12.95 31.12.97 31.12.99 31.12.01 31.12.03 31.12.05 31.12.07 Tier 1 Tier 1 (Basel I) Tier 1+2 Tier 1+2 (Basel I) * Figures for 31.12.07 combine Basel I and Basel II-banks, with additional capital ratios shown with Risk Weighted Assets calculated under Basel I-rules Bill NOK Norwegian-owned banks’ funding 1 800 1 600 1 400 1 200 1 000 800 600 400 200 NOK Deposits from customers Short term papers Equity Foreign currency Net lending from credit institutions Bonds As of 31.12.2007 Funding – Norwegian banks 110 100 90 80 70 60 50 Q4 2001 Q4 2002 Q4 2003 Q4 2004 Q4 2005 Q4 2006 Deposit to loan ratio Q1 2007 Q2 2007 Q3 2007 Q4 2007 Long term funding Long term funding: Funding with maturity in excess of 1 year as a share of illiquid assets 7 large Norwegian-owned banks Q1 2008 Main points • Banks results remained good in 2007. Return on equity 16 per cent. • Limited effect of international financial turbulence on Norwegian banks in 2007. • Q1 2008 results lowered by capital losses on foreign bond holdings and equities. Interest margins increasing, partly due to repricing of risk. •The Norwegian economy is strong. Increasing risk in the housing markets and increasing vulnerability in parts of the household sector. High profitability in the corporate sector, but strong investment growth may lead to overcapacity in a downturn. • Strong lending growth, increased uncertainty in the economy and in housing markets, as well as continued liquidity problems internationally, require sound and prudent risk management and capital planning. • Prospects for financial stability in Norway in 2008 remain satisfactory.