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Bank Norwegian - Political risk to decrease in Norway, despite the NFSA seemingly having trouble to admit victory
Conclusion
Based on new data we estimate that the growth in the Norwegian unsecured consumer credit market was 0.8% in Q1 19 (q/q), which annualized is 3.2% and well below the 5.6% (annualized) growth in total household credit.

Thus, the macroprudential tightening towards the consumer credit sector in Norway has been successful and should materially lower the risk of further action from the Government. This is good news for Bank Norwegian (Buy).

The remaining “regulatory” risks are now the implementation of the debt register (expected somewhere between June and late 2019) and the Government’s review of the debt collection law (review expected by 1st of January 2020):

The debt register could affect demand and, more severally, reveal large cross holdings of consumer credits (e.g. people having loans in several banks and, thereby, have a higher debt burden than individual banks assumed). This would affect the probability of default (PD) on the back-book (risk on new volumes should theoretically be easier to control).

A change in the debt collection law could increase loss-given-default (LGD), as e.g. it could become less attractive to purchase defaulted debt.

For more information on our view on Bank Norwegian’s credit quality please check our reports on the name (in short: we believe risk is under control).

Interestingly, we note that the Norwegian Supervisory Authority (NFSA) focused extensively on the “still very high” unsecured consumer credit growth and this resulted in very negative coverage (for the sector) in the news media. What the NFSA neglected to mention is that the market growth has been below general household credit growth now for two consecutive quarter (as a result of the macroprudential tightening), but we suspect it fit their agenda better to focus on year-on-year growth and the potential (emphasis on ‘potential’) risk to financial stability.

Nonetheless, it is just a matter of time before the year-on-year growth rates of consumer credits will be lower than that of the general household credit growth (in our opinion) and then the political risk overhang in Norway should subside for the sector. For the niche banks that have strong enough market positions to survive the already tougher operating environment, lower political risk should lower the risk premium (resulting in higher multiples).

The facts
Yesterday, the Norwegian Financial Supervisory Authority (NFSA) released the market statistic for the Norwegian unsecured consumer credit market, which showed a 7.4% growth rate year-deon-year in Q1 19. However, the market statistic is based on a sample approach and the NFSA had changed their sample from the Q4 18 report, which complicated the extraction of q/q growth rates somewhat. In the table below, we show our calculation of the Q1 19 quarterly growth rate. The only assumption is that the new addition(s) (unknown name) in the Q1 19 report has grown roughly in line with the market, since Q1 18.

Adjusted unsecured consumer credit growth rates (Norway):
Unsecured consumer credit Q4 17 Q1 18 Q2 18 Q3 18 Q4 18 Q1 19

Volume from old reports (NOKbn) 102.1 105.6 108.4 111.3 112.6
Volume from report yesterday (NOKbn) 108.6 116.6
Difference 2.9
Reported y/y growth 13.2 % 11.4 % 11.2 % 10.5 % 10.0 % 7.4 %
Implied q/q growth (on old numbers) 3.4 % 2.6 % 2.7 % 1.1 % ?
Imputed sample adjustment (NOKbn) 113.5
Q1 18 NOK 105.6bn * (1+7.4%)
Adjusted volume (NOKbn) 102.1 105.6 108.4 111.3 112.6 113.5
Growth q/q 3.4 % 2.6 % 2.7 % 1.1 % 0.8 %
Unsecured credit growth (ann.) 13.7 % 10.5 % 10.7 % 4.5 % 3.2 %
Household credit growth (y/y) 6.0 % 5.9 % 5.8 % 5.5 % 5.6 %

Sources: NFSA, SSB, Danske Bank Equity Research estimates