Nordic Credit Rating said today that it had affirmed its 'BBB' long-term issuer rating on Norway-based mortgage company Eiendomskreditt AS. The outlook is stable. The 'N3' short-term rating was also affirmed, as were the 'AAA' issue ratings on the company's covered bonds, the 'BBB' issue ratings on its senior unsecured bonds, the 'BB+' issue ratings on its Tier 2 bonds, and the 'BB-' issue ratings on its Additional Tier 1 bonds.
Rating rationale
The affirmation reflects continued performance in line with our expectations. Eiendomskreditt had a stable performance in 2023, largely due to prudent underwriting, despite ongoing uncertainty in the Norwegian commercial real estate market.
The long-term issuer rating reflects the operating environment for Norwegian commercial real estate, as well as Eiendomskreditt's robust capitalisation and earnings and low historical and projected credit losses. It also reflects weaknesses due to Eiendomskreditt's concentrated loan portfolio, modest market position, and limited funding profile.
We have revised our assessment of Eiendomskreditt's earnings to 'a+' from 'a' to reflect exceptional cost efficiency, and our belief that improvements in the company's income will prove less volatile than for many other financial institutions.
The issue rating on Eiendomskreditt's covered bonds is ultimately based on the 'BBB' issuer rating and reflects the company's role as a commercial real estate lender and partner for small and mid-sized Norwegian banks. The covered bond ratings are supported by an 'a+' qualitative assessment and our analysis of the potential for up to four notches of support from the cover pool, which indicates 'AAA'-level support for bondholders in the unlikely event that the pool were to become a standalone entity.
Stable outlook
The stable outlook on the issuer rating reflects our view that Eiendomskreditt's selective underwriting and moderate loan-to-value profile will prevent a material decline in credit quality. We expect loan to value to rise in the next 12 months and that non-performing loans and credit losses will increase due to rising yields and liquidity strains in the commercial real estate market. We also believe that Eiendomskreditt's continued access to capital market financing will allow it to continue to support its partner banks' demand for commercial real estate financing.
We could raise the rating to reflect improved capital and earnings (common equity Tier 1 capital ratio sustainably above 22%), pre-provision income sustainably above 3.0% of risk exposure amount, or a larger and more diverse loan book.
We could lower the rating to reflect a material deterioration in the operating environment that negatively affects the company's asset quality, a lasting reduction in the common equity Tier 1 capital ratio to below 15%, or risk-adjusted pre-provision income persistently below 1.5% of risk exposure amount.
Given the stable outlook on the issuer rating, we also expect the covered bond rating to remain stable.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BBB | BBB |
| Outlook: | Stable | Stable |
| Short-term issuer credit rating: | N3 | N3 |
| Covered bond issue rating: | AAA | AAA |
| Senior unsecured issue rating: | BBB | BBB |
| Tier 2 issue rating: | BB+ | BB+ |
| Additional Tier 1 issue rating: | BB- | BB- |
Contacts:
Ylva Forsberg, analyst, +46768806742, ylva.forsberg@nordiccreditrating.com
Christian Yssen, analyst, +4740019900, christian.yssen@nordiccreditrating.com
Geir Kristiansen, analyst, +4790784593, geir.kristiansen@nordiccreditrating.com
The methodology documents used for this rating are NCR's Covered Bond Rating Methodology published on 14 Feb. 2024, NCR's Group and Government Support Rating Methodology published on 14 Feb. 2024, NCR's Financial Institutions Rating Methodology published on 14 Feb. 2024 and NCR's Rating Principles published on 14 Feb. 2024. For the full regulatory disclaimer please see the rating report.