Banks coped with recession by increasing prices of loans

Thus far credit losses have remained at manageable level

Ilkka Hallavo

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The banks operating in Finland have successfully managed to expunge the horror scenario of a recurrence of the banking crisis of the 1990s.
      The interim results released by the banks for the first part of the year have contained many positive surprises.
      Of the largest banks, Nordea’s stock price has more than doubled from the low recorded in March. OP-Pohjola’s listed subsidiary Pohjola Bank’s stock price development has been almost equally impressive.
     
There are two primary reasons for the banks’ handsome results in these difficult times: firstly, the banks have managed to increase the prices or interest margins on the loans granted by them. Secondly, they have managed to pull through with smaller credit losses than had been feared.
      “It seems it was a surprise even for the banks themselves that in Sweden, Norway, and to some extent even in Finland the level of credit losses remained below expectations”, says Matti Ahokas, Head of Research at Handelsbanken Capital Markets.
     
The banks have nevertheless issued a warning that there may still be an increase to the credit losses in the offing.
      Most of the credit loss writedowns recorded so far have merely been provisions for the coming losses. The provisions have to be entered into the result according to detailed rules, but some guesswork is still involved when it comes to predicting losses.
      Usually credit losses reach their peak towards the end of a recession period.
      The interest margins the banks have managed to retain by increasing the price of the loans they have granted.
      As late as last year the total interest on a housing loan was still in the region of the reference rate of interest plus 0.3%-points on top of that.
      Today, banks add an entire percentage point and sometimes even more on top of the reference rate.
      In business loans, the ramping up of margins has been even sharper than this.
      The banks have justified the moves by saying that their own acquisition of funding has become more expensive. This problem, however, is now going away as confidence in the banks in the financial market has improved.
     
Still, banks do not promise to lower their margins, for they now want proper restitution for the risk they take in case of a client’s possible insolvency.
      The risk pricing principle, which is the current hot topic, may lead to a situation where weaker businesses end up paying more for their loans than well-established firms.
      Also in the housing loan sector the assessment of risks will be emphasised.
      “If the granted loan covers 30-40 per cent of the value of the property, this is very different from a loan that covers 70 per cent”, reasons Sampo Bank CEO Ilkka Hallavo.
     
In the first six months of the year, OP-Pohjola was the clear winner of all the large banks in Finland. Its result for January-June was almost identical compared with a year earlier.
      Sampo Bank, which released its result on Tuesday, did otherwise well, but its credit losses encumbered it to a certain extent.
      On the group level Nordea’s result was excellent. In Finland, though, the lowering of the interest level clearly weighed heavily on the bank's performance.
      Nordea’s Finnish clients keep noticeably more money on their checking accounts that pay practically no interest than do the bank’s clients in other countries. Because of the low interest rates there is currently little profit to be made in lending out this "free money".
     
Also Nordea’s raising of the loan margins in Finland has taken place much slower than elsewhere.
      For example in Denmark banks have the right to increase the business loan margins on a 14-day notice. In Finland this is possible only in very exceptional cases.


Previously in HS International Edition:
  Vanhanen: Finnish banks in good shape (13.10.2008)
  Finnish banks say they have no need for EUR 50 billion in state guarantees (21.10.2008)
  Decline in use of cash makes banks seek income from card fees (3.8.2009)

See also:
  Nordea could raise interest margins of existing home loans (18.9.2008)

Links:
  Nordea
  OP-Pohjola Group
  Sampo Bank

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