latest-news-headlines Market Intelligence /marketintelligence/en/news-insights/latest-news-headlines/large-nordic-banks-can-take-even-more-oil-losses-but-one-lender-is-vulnerable-60443970 content esgSubNav
Log in to other products


Looking for more?

Contact Us
In This List

Large Nordic banks 'can take even more' oil losses, but one lender is vulnerable


Banking Essentials Newsletter - April Edition


Tracking Credit Risk of a Major U.S. Retailer


Banking Essentials Newsletter: March Edition - Part 2


A Bank Takes Its Project Finance Assessments to a New Level

Large Nordic banks 'can take even more' oil losses, but one lender is vulnerable

Large Nordic banks have booked significant provisions for their oil-related exposures amid the coronavirus pandemic but another oil price drop could pose further challenges for lenders due to the "inherent risk" in the sector, according to experts.

While Norway's DNB ASA has the largest exposure to oil among big Nordic banks, Danske Bank A/S is the most vulnerable to another wave of credit losses, according to DBRS Morningstar.

Meanwhile, one risk expert warns that a short-term "rush" to avoid losses could come at a larger expense in the future as the pandemic diverts attention away from the transition to green energy and regulatory risks faced by the oil sector in the longer term.

Offshore overcapacity

Despite Nordic banks' efforts to restructure debts and reduce their exposure to oil-related sectors since the 2015-16 oil price crisis, it is clear that "there was inherent risk left," said Anders Porsborg-Smith, a partner at Boston Consulting Group in Norway.

DNB recorded impairments of €737 million in the first half of 2020, of which a large proportion was related to oil, despite significantly reducing its exposure to the sector since the last crisis to 4.84% from its peak at 8.55% in 2015.

SNL Image

SNL Image

Oil-related losses have weighed on other Nordic lenders amid the pandemic, including Danske, Nordea Bank Abp Skandinaviska Enskilda Banken AB and Swedbank AB (publ), relative to the size of their portfolios.

Offshore companies that provide services to oil firms have caused the largest problems. The market has faced an overcapacity of supply vessels and rigs since the last oil price crisis cut demand for such assets, and many companies have not recovered sufficiently to deal with another hit, Jan Ole Huseby, DNB's head of ocean industries, told S&P Global Market Intelligence.

The shipping and offshore sector is an important part of Norway's heritage, leaving the country's largest bank most exposed to such sectors among Nordic peers.

SNL Image

SNL Image

Svenska Handelsbanken AB (publ), with minimal exposure to oil, is the only of the region's six largest lenders whose loan losses have seemingly been unaffected by the pandemic so far.

Frontloading risk

On the positive side, banks are likely to have already taken the majority of their pandemic-driven oil-related impairments, Porsborg-Smith said. This is based on an expectation of a "V-shaped type recovery" in which the Brent oil price stays above $40.

Yet there is still "a lot of uncertainty linked to that estimate," he said. Further lockdowns could hurt demand for oil again, which would leave the sector in a "much more severe situation."

DBRS Morningstar is also "not expecting any additional pressure coming from this side," said Vitaline Yeterian, senior vice president for the agency's global financial institutions group. Due to IFRS 9, a new accounting standard that requires banks to take a forward-looking view when making provisions, Nordic lenders have been "frontloading" losses, she said in an interview.

She agreed that another oil price drop below $40 would mean more losses for Nordic lenders, but emphasized that they "can still take even more [losses]."

"For the oil sector, [another oil price plunge] would be really bad news. But for banks, they are still in a strong position," Yeterian said.

SNL Image

Danske Bank, for which 98.2% of its loan losses in the second quarter related to oil, is the most vulnerable of its Nordic peers to another potential wave of credit losses, Yeterian said.

Denmark's largest lender is in a "fragile position," she said, as it still faces significant compliance expenses following a large money-laundering scandal, along with the risk of a financial penalty from U.S. and Danish authorities. The negative interest rate environment in the lender's home market has also taken a toll on its income in recent years.

SNL Image

Limited toolbox

Banks are having to take on new strategies toward their oil portfolios amid the pandemic. In a crisis, lenders can "ride out the storm" by holding on to problematic assets; sell risky debt on the secondary market; restructure the debt; liquidate at default; or convert debt into equity in order to invest or engage in merger discussions, according to a framework developed by Boston Consulting Group during the 2015-16 oil crisis.

But the toolbox is now "significantly more limited" compared to five years ago, Porsborg-Smith said.

"There's not a lot of cash and flexibility left in the system," he said. Companies have "already done the consolidation and the easy cost-outs" in the previous crisis, he said.

SNL Image

The pandemic, combined with a general energy transition risk, also means there is little appetite for oil-related assets on the secondary market compared with previously, he said.

With fewer available options, banks are increasingly looking at new restructuring models, such as taking ownership of assets. This tool, which lenders largely avoided in the last crisis, is now "a more realistic option," Porsborg-Smith said.

Although taking ownership of financially distressed companies is "obviously something that we would like to avoid," Huseby said DNB is prepared to do so "if needed." He could not comment on specific clients.

In one example, Norwegian ship operator Solstad Offshore ASA announced in May a restructuring plan under which more than $1 billion of debt would be converted into equity. The largest creditors are DNB, Nordea and the Dutch bank NIBC Holding NV, Norwegian business newspaper Finansavisen reported at the time.

Regulatory risks

Meanwhile, a short-term focus on saving the oil industry could leave some companies vulnerable to longer-term regulatory risks, including changing governments or inevitable regulatory moves toward a low-carbon economy, warned Franca Wolf, a research analyst at risk consultancy Verisk Maplecroft. This could come with more losses for banks down the road.

Norway's temporary oil tax relief, for example, which was agreed in June 2020 to help oil and gas companies execute planned investments, could prompt a "rush" for companies to make investment decisions "that shouldn't have been made with the outlook of the oil prices over the next few years," she said.