Moody’s moves Norway banking system to stable on sound outlook

Moody’s changed its outlook on Norway’s banking system from negative to stable yesterday (Wednesday) as a result of improved and above euro-area growth forecasts, but also noted that Norwegian banks’ high reliance on wholesale funding could expose them to market volatility.

Moody’s expects Norway’s real GDP to grow 3.5% in 2012 and 3% in 2013, above forecasts for the euro-area of between -1.0% and 0.0% in 2012, and between -0.5% and 0.5% in 2013.

“The sound economic conditions and outlook for Norway are key drivers for moving our outlook to stable,” said the rating agency.

“Our forecast for Norway primarily reflects our expectations that the economy will benefit from high investments in the oil sector and continued growth in private consumption, supported by income growth and low unemployment,” it added.

Another driver of the stable outlook, said Moody’s, is the sound quality of bank assets, in the context of low interest rates and high employment. Moody’s said that problem loans stood at 1.7% of gross loans in September and were not expected to grow.

Also contributing to the stable outlook assessment is that Norwegian banks’ capacity to generate profits is “resilient”. Thanks to limited credit costs, Norwegian banks have been less affected by the crisis than their European peers, said Moody’s.

Norwegian banks’ capital levels are also seen as adequate to absorb moderate unexpected losses, it added.

However, the rating agency noted that Norwegian banks are highly reliant on wholesale markets for most of their funding, with 60% of funding coming from capital markets as at end-September.

The reliance on wholesale funding could expose Norwegian banks to a deterioration in investor sentiment and market fluctuations, said Moody’s.

The rating agency also said that Norway is exposed to the slow economic growth of the euro-zone, as Europe accounts for 70% of the country’s exports.