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

Source: Statistics Norway

-2

-1

0

1

2

3

4

5

6

7

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Per

Cen

t

GDP GDP Mainland Norway Forecast GDP Forecast GDP Mainland Norway

Unemployment and inflation

Source: Reuters EcoWin

Source: Reuters EcoWin

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Pe

rce

nt

-2

-1

0

1

2

3

4

5

6

7

8

9

10

11

Unemployment rate

CPICPI-ATE

Government surplus

Source: National Budget

-10,0 %

-5,0 %

0,0 %

5,0 %

10,0 %

15,0 %

20,0 %

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Per

cen

t o

f G

DP

Overall surplus Oil adjusted surplus

Terms of trade

Source: National Budget

0

20

40

60

80

100

120

140

160

180

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Total Traditional merchandise

Source: EcoWin

8889 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Pe

r ce

nt

-10

-5

0

5

10

15

20

25

Households

Non-financial enterprises

Credit growth Households and non-financial enterprises

Source: Statistics Norway

0

5000

10000

15000

20000

25000

30000

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

NO

K p

r.sq

.met

er

Nominal prices Real prices (2007 Nok)

-5

5

15

25

02 03 04 05 06 07 08

Per c

ent

Sources: NEF, EFF, FINN.no and Econ Pöyry

Housing prices

Price level 12-month growth

0

5000

10000

15000

20000

25000

30000

35000

40000

1979 1983 1987 1991 1995 1999 2003 2007

Pri

ces

(NO

K)

pe

r sq

. m.

Nominal prices Real prices (1998 prices)

Price of office premises in Oslo

Sources: OPAK and Kredittilsynet

Stock markets

Source: Reuters EcoWin

Source: Reuters EcoWin

03 04 05 06 07 08

Ind

ex (1

Jan

ua

ry 20

03

= 1

00

)

50

100

150

200

250

300

350

400

450

500

Norway

USA

Euro area

Key policy rate in Norway

Source: Reuters EcoWin

Kilde: Reuters EcoWin

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Per cent

1

2

3

4

5

6

7

8

9

10

11

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

Total financial groups 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

*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.

Norwegian-owned banks’ assets

As of 31.12.2007

0 %10 %20 %30 %40 %50 %60 %70 %80 %90 %

NOK Foreign currency

% o

f to

tal a

sset

s

Net lending to customers Net lending to cred.instit. Securities

Cash + deposits Other assets

Banks’ loan losses and pre-tax profits

-3

-2

-1

0

1

2

3

4

1990 1993 1996 1999 2002 2005 Q1-08

Per

cen

t of

AT

A

Pre-tax profit Loan losses

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 deposit-to-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

0

4

8

12

16

20

24

28

32

2003 2004 2005 2006 2007

Per

cen

t

Branches of foreign banks and mortgage companiesForeign-owned subsidiaries and mortgage companiesNorwegian-owned banks and mortgage companies

Banks’ non-performing loans

0 %

2 %

4 %

6 %

8 %

10 %

1990 1995 2000 2005

% o

f le

ndin

g

Corporate cust. Households

2007

Capital adequacy in banks*

* 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

0

2

4

6

8

10

12

14

16

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

% o

f RW

A

Tier 1 Tier 1+2Tier 1 (Basel I) Tier 1+2 (Basel I)

Norwegian-owned banks’ funding

-200

400600800

1 0001 2001 400

1 6001 800

NOK Foreign currency

Bil

l NO

K

Deposits from customers Net lending from credit institutionsShort term papers BondsEquity

As of 31.12.2007

Funding – Norwegian banks

50

60

70

80

90

100

110

Q42001

Q42002

Q42003

Q42004

Q42005

Q42006

Q12007

Q22007

Q32007

Q42007

Q12008

Deposit to loan ratio 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

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.