Norwegians most bearish in Nordic CFO survey

Norwegian chief financial officers proved more bearish than their peers in their responses to a variety of questions posed by Moody’s in a survey of 39 Nordic CFOs, with an increase in banking regulation highlighted as a key factor potentially constraining their institutions.

The rating agency conducted the inaugural survey of CFOs of Nordic banks it rates, which make up 80%-90% of the region’s total lending, to gather expectations for the domestic markets in 2014. The CFOs were surveyed at the end of 2013 and Moody’s released the results last week.

Macroeconomic developments were the most oft-cited by CFOs as the greatest constraint on the performance of their institutions, being picked by 48% of respondents. However, the response from Norwegian CFOs contrasted with respondents from other Nordic countries, with the former expressing concerns over domestic macroeconomic trends as opposed to pressures from the international market.

Norwegian CFOs also proved more concerned than their peers about an increase in banking regulation threatening the performance of their banks, with 80% of respondents citing this as a factor. In the overall results increased banking regulation was the second most-cited factor threatening the CFO’s banks.

Norway again provided contrasting results compared to its Nordic neighbours with regard to business confidence: whilst Sweden expected an improvement in business confidence, and Denmark and Finland expected levels to at least remain at 2013 levels or improve, Norway was more divided, with 50% saying levels would remain the same, 25% expecting an improvement and 25% a deterioration.

“In our view, this mixed forecast reflects the differences in macroeconomic outlooks,” said Moody’s.

More than half of those polled said that authorities would assist the banking system in the case of deterioration in the operating environment. Over a third felt that the authorities would adopt a policy of non-intervention, with less than 5% of the opinion that the authorities would protect retail depositors only.

The majority of respondents said that liquidity buffers would be preserved or increase, with the rating agency noting that this expectation reflects an upcoming tightening of regulatory liquidity requirements. Introduction of the new Capital Requirements Directive (CRD IV) poses challenges to financial institutions in the Nordics region, and to the composition of their liquidity portfolios, according to Moody’s.

“Given the low supply of government bonds, Nordic banks rely heavily on covered bond investments for the liquidity portfolios,” said the rating agency. “Therefore, regulatory treatment will have a significant effect on the level of reported liquidity buffers across the Nordics.”

It noted a European Banking Authority report published in December that recommended covered bonds not enjoy the same treatment under CRD IV as government bonds. The European Commission will by the end of June decide whether covered bonds are eligible as Level 1 or Level 2 assets under the EU implementation of Basel III.

Demand for credit is also expected to remain at the same level or rise, as opposed to deteriorate, according to the survey results. For 2014, 70% of respondents from Sweden, Denmark and Finland expect credit demand from corporates to rise, with the remaining 30% expecting demand to be flat to 2013, but in Norway only 25% of respondents expected an increase, while a third expected a decline in demand for credit.

“In 2013, Norwegian banks and mortgage companies recorded virtually zero growth in lending to non-financial corporations,” said Moody’s. “This could be partially attributable to low credit demand from non-financial corporations.”

Nordic household debt has been growing faster than incomes, according to the rating agency, with the household debt-to-income ratio in Norway as of the third quarter of 2013 at 210%, almost 50% higher than in the same quarter a decade earlier.

“We note that household indebtedness in Nordic countries is already very high and is above that of most other European peers,” said Moody’s.