Nordic Credit Rating said today that it had assigned a 'BBB+' long-term issuer rating to Norway-based Flekkefjord Sparebank. The outlook is stable. An 'N3' short-term rating was also assigned, together with a 'BBB+' senior unsecured issue rating, a 'BBB' Tier 2 issue rating and a 'BB+' Additional Tier 1 issue rating.
Rating rationale
The long-term issuer rating reflects Flekkefjord Sparebank's strong earnings and capital position, and moderate risk appetite. We take a positive view of the bank's membership in the Lokalbanksamarbeidet banking cooperative, which enables product diversity, shared development costs and the opportunity to finance residential retail mortgage loans through jointly owned covered-bond company Verd Boligkreditt AS. The bank has a strong market position in its traditional core markets and faces less competition from similarly sized savings banks than its domestic peers. We expect Flekkefjord Sparebank to maintain strong earnings and improve its cost efficiency over our forecast period through 2026. We also expect the bank's credit losses and its proportion of non-performing loans to remain slightly elevated, given the continued effects of recent cost inflation and high interest rates.
The rating is constrained by geographic concentration in the relatively rural local economy of south-west Norway and a high proportion of real-estate collateral in the bank's core markets. It is also constrained by the bank's strong growth prospects.
Stable outlook
The stable outlook reflects our view that Flekkefjord Sparebank's strong earnings will compensate for slightly elevated credit provisions over the next few years. We forecast that the bank's cost efficiency will improve to levels better than those of its peers and expect it to maintain robust capital ratios despite strong loan growth, after recent issues of equity capital certificates and hybrid instruments. In addition, we expect the bank's capital ratios to be positively impacted by the prospective implementation of the EU's Capital Requirements Regulations III.
We could raise the rating to reflect commitment to reduced loan growth, thereby improving risk appetite, a consolidated Tier 1 ratio above 22% for a protracted period, or improved asset quality metrics (net Stage 3 loans as a share of net loans below 1% for a protracted period).
We could lower the rating to reflect growth significantly outpacing capital generation, resulting in a Tier 1 ratio below 18% over a protracted period, a material deterioration in the local operating environment that negatively affects asset quality and profitability, or increased competition leading to lower profitability and a weaker market position.
| Rating list | Rating |
|---|---|
| Long-term issuer credit rating: | BBB+ |
| Outlook: | Stable |
| Short-term issuer credit rating: | N3 |
| Senior unsecured issue rating: | BBB+ |
| Tier 2 issue rating: | BBB |
| Additional Tier 1 issue rating: | BB+ |
Contacts:
Christian Yssen, analyst, +4740019900, christian.yssen@nordiccreditrating.com
Geir Kristiansen, analyst, +4790784593, geir.kristiansen@nordiccreditrating.com
Sean Cotten, chief rating officer, +46735600337, sean.cotten@nordiccreditrating.com
The methodology documents used for this rating are NCR's Financial Institutions Rating Methodology published on 14 Feb. 2024, NCR's Rating Principles published on 14 Feb. 2024 and NCR's Group and Government Support Rating Methodology published on 14 Feb. 2024. For the full regulatory disclaimer please see the rating report.