Norwegian Financial Markets Risk Outlook The Sparebank 1 Capital Markets Day 2007 Trondheim, June 13 - 14 Emil Stef

1. Norwegian Financial Markets Risk OutlookThe Sparebank 1 Capital Markets Day 2007Trondheim, June 13 - 14Emil SteffensenKredittilsynet (The FSA of Norway)

2. Agenda Financial market structure in Norway Briefly on the Norwegian economy Credit growth and asset markets Banks� results Credit risk Banks� resilience Summing up

3. Some trends in financial markets Strong growth of the financial sector in most countries the last 10-15 years. Financial stability and well-functioning financial markets of increasing importance for the real economy. Internationalisation and increased competition in most areas of the financial market Consolidation and increased importance of large cross-border financial institutions Changing and more complex distribution of risk Financial innovation and increased flexibility for households and corporates in their savings and investment decisions Difficult to distinguish between structural and cyclical drivers for financial sector developments No crises or serious financial interruptions to the international financial system. A more resilient financial system, or has it not been significantly tested?

4. Norwegian Financial Markets High importance of financial conglomerates and alliances. Less concentrated banking market than in other Nordic countries Foreign ownership of importance, especially in banking, non-life insurance and of financing companies In banking more than 30% 3 of the 5 largest banks foreign owned For financing companies more than 60% In non-life insurance 40% Market shares of branches increasing (Fokus and Vesta) Bank-dominated financial system Banks account for appr. 70% of domestic credit growth Domestically oriented Mortgages (56%) and commercial real estate loans (appr. 14%) account for more than 2/3 of total loans Securities markets of increasing importance New issues of equity on Oslo Stock Exchange in 2006 equals total new issues in other Nordic countries together Private equity and venture capital of little importance today

5. Structure in the Norwegian financial market (end 2006)**

6. Number of banks 1987 - 2006

7. Concentration in the credit market(5 largest credit institutions)

8. Foreign-owned branches and subsidiaries (market shares)

9. Market Capitalization and New Issues, Equities

10. Market Capitalization and New Issues, Bonds

11. Growth in GDP and employment

12. Inflation and unemployment

13. Short term interest rates

14. Long term interest rates

15. Residential property prices

16. Commercial real estate (Office premises in Oslo)

17. Stock markets

18. Credit growth

19. Credit growth households and non-financial enterprises

21. Balance sheet � Norwegian banks

22. Deposits from and loans to customers

23. Long term funding

24. Growth in bank lending

25. Credit growth � Norwegian banks and foreign-owned branches

26. Credit and asset markets Cyclical upturn in the Norwegian economy since second half of 2003, stimulated by low real and nominal interest rates, oil investements and investments in the Mainland economy. Strong growth in employment, capacity contraints in several sectors, low employment, increasing wage pressures and increasing interest rates. Vigorous credit growth and strong growth in asset markets (residential real estate, equity markets and last year, commercial real estate) make the financial system more vulnerable to macroeconomic shocks and other unforeseen events Credit growth to the household sector closely linked to low interest rates, the upturn in housing markets and the economy in general. Increased competition and financial innovation have contributed to households increased gearing. The persistent and high loan growth imposes high demands on credit approval processes and the quality of banks� risk management

27. Banks� profit and loan losses

28. Profit and loss accounts Q1 2007

29. Non-performing loans (banks)

30. Net interest revenues and interest margins

31. Bank�s net interest revenues, decomposed

32. Mortgage rates and NIBOR

33. Spread* in banks� mortgage-rates

34. Pre-tax profit in per cent of assets - decomposed

35. Banks� results Profitability of Norwegian banks are very good, partly as a result of no loan losses, a favourable cost trend and strong growth. Return on equity close to 17 per cent in 2006; somewhat lower in Q1 2007. Intense competition and falling interest margins continue to put pressure on banks� net interest revenues. Strong lending growth limits the fall in net interest revenues ( in NOK). A reduced loan growth and a more normal level of loan losses must be met by further cost reductions or an increase in other income if reduced profitability is to be avoided. Non-performing loans decreasing. Long-term funding upheld and loan-to-deposits ratios not falling despite the vigorous loan growth, mainly due to deposit growth from corporates. Banks remain well capitalised.

36. Some downside risks Norway is a small, open economy, and weaker international growth affects the Norwegian financial sector through several channels: Mainland economy exports, prices of oil and other raw materials and securities and foreing exchange markets Uncertainties in the macroeconomic environment Increased oil prices, escecially following a supply shock Imbalances in international trade- and capital balances Risk of corrections from the high levels of credit and housing prices seen in several countries Further negative effects on US economy of sub-prime loans Reduced liquidity or increased risk premiums in international financial markets Downside risks in the Norwegian economy has increased Risk of overheating of the economy Increasing pockets of vulnerabilities in the household sector, and risk of imbalances and corrections in residential property and credit markets The level of house prices cannot be fully explained by fundamentals

37. Households� net financial assets (% of disp. income)

38. Households� savings rate and net financial investments (% of disp.income)

39. Households� debt and interest burden (% of disp. income)

40. Households� interest burden

42. Average debt of home owners and non- home owners, by age

43. Loan-to-value ratios � mortgages

44. Loan-to-value ratios - house purchase/housebuilding

45. Loan-to-value ratios by age of borrowers �  house purchase/housebuilding

46. Fixed-interest rate loans � households

47. Loan periods by loan-to-value ratios

48. Interest-only loans

49. Equity release loans

50. Unsecured consumer loans

51. Loans backed by financial instruments (3rd. Quarter 2006)

52. Purpose of loans secured on dwellings

53. Equity ratios and pre-tax return on equity (selected companies listed on OSE1. Quarterly figures -2000 Q1- 07 Q1)

54. Enterprises� debt and interest burden

55. Likelihood of default, Norwegian enterprises

56. House prices, 12-month growth

57. Global housing markets

58. Banks� credit risk Default rates on corporate loans historically higher than on loans to households, especially mortgages. High profitability and high equity ratios in Norwegian companies. Despite increased interest rates and strong credit growth, debt servicing ability remains sound. Banks� exposures to households are predominantly in the form of mortages. Unsecured consumer loans are of lesser importance for financial stability, but are important for consumer protection. Banks� lending backed by securites, such as lending for structured products, is of limited importance for financial stability. Household debt has for a long time been significantly higher than income growth. Households� debt burden is at historically high levels, and is still increasing strongly. Interest burdens have been low due to the steep fall in interest rates from December 2002.

59. Banks� credit risk Despite low savings ratios and negative financial investements in 2006 and Q1 2007, the financial position of the household sector is sound. There are, however, important pockets of vulnerability in the household sector, and a number of households are vulnerable to increased interest rates, among these young households recently entering the housing market. Increased loan-to-value ratios on mortgages, a very low and decreasing level of fixed-interest loans, lenghtening of downpayment periods, increasing use of loans with initial interest-only terms, as well as a significant increase of equity-release loans add to the vulnerability of households. Possible imbalances and corrections in housing and credit markets will reduce banks� profitability through lower growth, defaults on mortgages and spill-over effects to corporates affected by reduced growth in consumption. The propensity to consume for those households that have to consolidate their financial positition may be higher than average. Norwegian banks and the Norwegian economy are significantly stronger than around 1990, and the risk of any banking crisis in the near future, is small.

60. Basel II The aim of new, international capital adequacy rules (Basel II) is to strenghten the stability of the financial system, i.a. through More risk sensitive capital requirements Incentives and requirements to improve risk management Requirements on assessment of overall capital and supervisory review Stronger market disipline through disclosure Basel II leads to reduced minimum capital requirement, especially for banks using internal ratings based approaches (IRB). Substantial residential mortgages and lending to SMEs entails a larger reduction in minimum requirements in Norwegian banks than banks in many other countries. 5 banks use the IRB-approach in 2007, 3 banks use the standarised approach, while the rest uses the transitional arrangement and follows the Basel I rules in 2007. Directive-based transitional rules (�floors�) limit the reduction in minimum capital requirements for IRB-banks in 2007-09. Banks� capitalisation and their buffers to the minimum levels depend i.a. on supervisors�, rating agencies� and other market participants� evaluation of banks� assessment of their overall capital needs. During 2008 there will be more practical experiences on ICAAP and pillar-2

61. Tier-1 capital ratios and credit growth �small and medium sized banks

62. Tier-1 capital distribution(all banks, end 2006)

63. Tier-1 capital ratios

64. Summing up High profitability in Norwegian banks in 2006 and prospects for 2007 are good Strong growth, no loan losses, favourable cost trends and falling levels of non-performing loans Increased attention on risk management, especially in larger banks Prospects for the Norwegian economy and employment are good. Challenges for banks Intense competition and falling interest margins continue to put pressure on net interest revenues. With lower growth banks have to reduce costs further or increase other income to keep up profitability The strong lending growth imposes demands on banks� risk management and credit approval processes. High and increasing levels of debt and housing prices, increasing loan-to-value ratios, predominantly loans with floating rates and reduced downpayment on loans increase vulnerabilities in parts of the household sector, and are leading to higher credit risk on banks� exposures both to households and corporates. Banks have to ensure sufficient capital, i.a. to make sufficient allowance for downturn periods and possibly more difficult access to capital, and be able to handle more volatile results and capital requirements following Basel II and IFRS.