Liquidity

The main target in all companies is to generate a sufficient level of profit, but an aspect smaller firms tend to underestimate is the value of liquidity. Without liquidity, a company cannot pay its obligations, make investments, or pay their employees. Therefore, it is important to analyze short-term and long-short-term liquidity risk, whereas the short-short-term uncovers a company’s ability to satisfy all short-term obligations when due. The long-term liquidity risk, often referred to as solvency risk, addresses the company’s long-term financial health and ability to pay all future (Petersen &

Plenborg, 2012) and will be discussed more in the next part.

As the nature of the industry suggests, the assets of a bank consist mainly of customer loans, which is not very liquid, and is not easily salable to pay off creditors right away. The banks are also very dependent on customer deposits, especially in times with economic instability when the sale of the lending portfolio can be more difficult. As discussed in the Porter analysis, customer deposits are considered an uncertain asset as they easily can be withdrawn at any point. Anyhow, customer deposits are considered secure financial assets, even in financial instable times, mainly due to the Saving Banks’ Guarantee Fund and Commercial Banks Guarantee Fund (Bankenes sikringsfond, 2017). These two funds function as deposit insurance to depositors in case the banks loses the money, and provides customers an extra security which strengthens the liquidity of the asset. On the other hand, factors such as interest rates incentivizes customers to keep their money in the bank.

To assess a banks liquidity, it is common to measure the bank’s total loans compared to its total deposits by customers, meaning their debt to the customers. If the ratio is high, the bank may struggle to pay of their debt in case of a severe customer attrition and deposit withdrawal. The ratio is calculated by:

𝐿𝑖𝑞𝑢𝑖𝑑𝑖𝑡𝑦  𝑟𝑎𝑡𝑖𝑜 =𝐶𝑢𝑠𝑡𝑜𝑚𝑒𝑟  𝑑𝑒𝑝𝑜𝑠𝑖𝑡𝑠 𝑁𝑒𝑡  𝑙𝑜𝑎𝑛𝑠

Roar Hoff argues that the normal level would be somewhere within the interval of 70-110 % for Norwegian banks (Dahl, Hansen, Hoff, & Kinserdal, 1997). One of the reasons we assess these figures relative to each other is that if the funds are not provided by customers, the banks need to find other financial sources, which increases the exposure of market risk. As previously discussed, customers might get affected by financial instabilities, and the banks should try to hedge against the risk of losing deposits, by attaining a sufficient deposit to loan ratio, ensuring the financial sources with a long-term perspective. To further investigate, we have calculated the deposit as a percentage of the lending for the three banks (DnB - Annual reports 98-02, 2003) (Gjensidige NOR - Annual reports 98-02, 2003) (Nordea - Annual reports 98-02, 2003):

Table 8 - Deposit-to-loan ratio

Deposit-to-loan ratio

Banks 1998 1999 2000 2001 2002

DnB 74,3 % 75,3 % 69,4 % 69,6 % 69,9 %

GNO 58,4 % 56,4 % 56,0 % 56,3 % 58,6 %

Nordea 59,0 % 58,8 % 58,8 % 56,6 % 58,1 %

Most of the calculated numbers score below the “normal” level, whereas DnB has the highest ratio in all the years. GNO and Nordea operate with similar ratio, and can show stable figures between 56 - 59 %, which is below what Hoff suggests. Given the fact that the recommended level is between 70-110 %, this indicates that all banks should focus on improving their liquidity to make their operations more robust. However, to assess the ratio thoroughly, it will be natural to also look more at the growth of deposits and loans.

Growth in customer deposits

The industry mean for growth in deposits are between 5 - 9% for commercial banks, and 9 - 14%

for saving banks after adjusting for extreme outliers from merger etc. (Finans Norge - Annual accounts 98-02, 1998-2002). GNO and DnB both went through acquisitions and mergers in the

estimation period, which is clearly indicated with the extensive growth between 1998 and 2002. This would obviously not be sustainable, and got adjusted the following years.

As the figure above underlines, the customer deposit in the historical period were relative volatile for the banks, which was also the case for the rest of the market in both commercial and savings banks (Finans Norge - Annual accounts 98-02, 1998-2002).

Growth in net customer loans

As mentioned in the strategic section, Norway were experiencing an increased gross household debt in the period, the credit risk of the banks rose simultaneously. Norway also experienced a steep incline in housing prices, incentivizing the population to increase their mortgage. Sharp lending growth, combined with a slower growth in deposits led to an increased liquidity risk for banks around the year of 2002, where the money and capital markets largely covered the funding gap (Kredittilsynet - Risk outlook 02, 2003).

Figure 13 - Growth in credit to households and enterprises 0,00%

10,00%

20,00%

30,00%

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50,00%

60,00%

70,00%

1999 2000 2001 2002

Growth in customer deposit

DnB Gjensidige

Figure  12  -­‐  Growth  in  customer  deposit

Table 9 - Net customer loan as a percentage of assets

Net customer loans of assets

1998 1999 2000 2001 2002

DnB 75 % 72 % 73 % 77 % 72 %

GNO 78 % 74 % 72 % 71 % 70 %

Both GNO and DnB kept a stable share of their total assets as net loan to customers during the estimation period (Finans Norge - Annual accounts 98-02, 1998-2002), even though the gross loans increased. We assume that the banks desire to keep this level at the same level from one year to the next, as the primary source of income lies in interest margins.

Figure 14 - Growth in customer loans

DnB as a commercial bank have historically had more industry customers, whereas GNO has previously been considered a savings bank which primarily lends gives loans to private customers.

The high growth in 1999 are likely to be due to consolidation, GNO has kept a somewhat more stable growth in customer loans, and as discussed in the strategic section, we can assume this is largely due to the relations GNO has obtain with its customers while being a local savings bank.

Summary liquidity analysis

Based on the analysis of the liquidity in the banks, we assess the banks liquidity as medium, but remain confident that both banks will be able to pay their short-term obligations by due in the years to come. This also seems aligned with consensus in the market, represented by the national Financial Stability report (Norges Bank - Financial Stability 02, 2002), where they state that there was a slight increase in the banks’ liquidity risk, however it was still relatively low.

-­‐5,00%

0,00%

5,00%

10,00%

15,00%

20,00%

25,00%

30,00%

1999 2000 2001 2002

Historical

Growth in customer loans

DnB GNO