The European banks’ profit season opened with a whimper. On Tuesday, Norway’s largest bank DNB reported a profit of NOK 10 billion ($ 1 billion) in the second quarter before tax, which was pre-tax at 16% of market expectations. However, remove volatile trading revenues, and the pace is almost gone. What investors had hoped for was a window into the way economies are dealing with an early rise in interest rates like Norway. But perhaps it is still too early to say.
Norges Bank joined the Bank of England last month by raising rates to 1.25% – a level recently seen before the epidemic. While the European Central Bank is heading for its first rate hike in more than a decade, policymakers are looking for signs of pressure from borrowers elsewhere.
In DNB these remain restrained for the time being. Higher rates help. The bank earned an increase of NOK 1.5 billion ($ 147 million) in net interest income from the first increase of 25 basis points last year. The small yields brought it down to NOK 1.2 billion for the 25-point increase in March, thinks Johan Aqlum in UBS. He predicts that the increases for the last 50 basis point increase will be relatively weaker as higher rates are passed to borrowers.
Loan and deposit levels also remained stable. The savings banned during the epidemic are still intact. Provisions for bad loans are still falling apart, with net reversals of NIS 209 million in the second quarter. These are driven by better prospects in the energy sector.
However, the decline in bank stock prices reflects a lack of belief that this good situation can continue, even if the region has some of the lowest credit losses in Europe. The cost of risk in the Nordic banks has risen to just 30 basis points of loans on average during 2020. This is less than half the European average but double what they are now. Loss-absorbing capacity this year will cover that amount sevenfold if it comes back, UBS thinks.
DNB should be able to absorb losses at the 2020 level almost four times. If a similar credit event did occur, it is unlikely that the restrictions on distributions that accompanied it the previous time will recur.
Stay up to date with a letter from Lex centers around the world every Wednesday, and a review of the best interpretation of the week every Friday. Sign up Here
DNB: Nordic bank feels the warmth of rate rises Source link DNB: Nordic bank feels the warmth of rate rises