Nordic Credit Rating said today that it had revised the outlook on its 'A-' long-term issuer rating on Norway-based Jæren Sparebank to positive from stable. At the same time, the long-term issuer rating was affirmed, as were the 'N2' short-term issuer rating, the 'A-' senior unsecured issue rating, the 'BBB+' Tier 2 issue rating, and the 'BBB-' additional Tier 1 issue rating.
Rating rationale
The outlook revision reflects an improvement in our view of Jæren Sparebank's risk governance, credit risk, and competitive position, as well as the possibility that the bank could improve its regulatory capital position following implementation of the EU's Capital Requirements Regulations III (CRR3) next year. We anticipate an initial 2.5pp increase in the bank's Tier 1 capital ratio on implementation of the new requirements. In addition, we see a possibility that the bank will take a long-term approach to future growth and maintain somewhat higher capital buffers. The bank's strong capitalisation is supported by its long-term ownership by two foundations. The foundations maintain their own liquidity positions, with a view to supporting the bank or participating in future capital injections, if necessary.
The outlook revision also reflects a strengthening of Jæren Sparebank's risk and compliance functions and long track record of conservative underwriting. The bank is a member of the Eika banking alliance and its key credit risk metrics compare favourably with those of other alliance members. As a result, we expect loan losses to remain modest despite the current economic slowdown in Norway. We expect the bank to report net reversals in 2024 and project average losses of 7bps in 2025 and 2026. We also expect the bank to maintain strong earnings metrics and cost efficiency advantages even as Norwegian policy interest rates decline. We note that the bank has continued to increase its market share, which strengthens our view of its competitive position, despite notable consolidation among larger domestic savings banks with a presence in the Jæren region in Rogaland county.
The rating is constrained by Jæren Sparebank's concentrated exposure to real estate and agricultural collateral. Rogaland's key role in Norway's oil and gas production makes the region's economy more volatile than the national average, but has also created strong economic conditions with low unemployment.
Positive outlook
The positive outlook reflects the possibility that we could raise the long-term rating if Jæren Sparebank maintains its strong asset quality and sustains recent improvements in earnings metrics as interest rates decline. A higher rating would depend on the bank's growth plans and commitment to higher capital buffers following implementation of CRR3. While the bank is already well capitalised, we expect its capital ratios to improve further with implementation of the new requirements. We believe the bank's low risk appetite, strong liquidity position, improved earnings, and stable cost position will enable resilience to the currently weak conditions in the wider economy.
We could raise the rating to reflect a commitment to maintaining material regulatory capital buffers and a Tier 1 ratio sustainably above 21%. We could also raise the rating to reflect pre-provision earnings sustainably above 2.5% of risk exposure amount (REA) together with stable asset quality metrics.
We could revise the outlook to stable to reflect a significant downturn in the operating environment that negatively impacts asset quality, a lasting reduction in the Tier 1 ratio to below 20%, or risk-adjusted earnings metrics below 2% of REA.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | A- | A- |
| Outlook: | Positive | Stable |
| Short-term issuer credit rating: | N2 | N2 |
| Senior unsecured issue rating: | A- | A- |
| Tier 2 issue rating: | BBB+ | BBB+ |
| Additional Tier 1 issue rating: | BBB- | BBB- |
Contacts:
Geir Kristiansen, analyst, +4790784593, geir.kristiansen@nordiccreditrating.com
Sean Cotten, chief rating officer, +46735600337, sean.cotten@nordiccreditrating.com
Elisabeth Adebäck, analyst, +46700442775, elisabeth.adeback@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.