Nordic Credit Rating said today that it had affirmed its 'A-' long-term issuer rating on Kredittforeningen for Sparebanker (KfS). The outlook is stable. The 'N-1+' short-term rating was also affirmed. At the same time NCR affirmed the 'A-' senior unsecured issue rating.
Rationale
The long-term rating reflects KfS's strong capitalisation and low risk appetite. The company is a non-profit credit institution serving Norwegian savings banks. It has a concentrated loan portfolio, but funds only investment-grade savings banks. KfS has never experienced loan losses. Our assessment of the operating environment has improved due to recovering economic conditions as the COVID-19 pandemic subsides. The company is funded by senior loans with approximately the same maturity as its individual loans. It has no obligation to refinance these loans, and consequently refinancing and pricing risk are minimal.
Negatively, prospective changes in regulation represent a risk factor for KfS' business model. For example, the EU's bank capital and liquidity package (CRR II/CRD V) will likely have negative implications for the company's attractiveness as a funding source for its member banks. We have reduced our assessment of the company's earnings, which have been negatively affected by low interest rates and reduced business volumes. However, green bond issues in 2021 represented a successful start to an initiative which could revitalise the business model and we expect higher interest rates to bolster future earnings.
Stable outlook
The stable outlook reflects the resilience of the Norwegian savings bank sector and KfS' modest risk profile. We believe that possible challenges for the company's business model due to regulatory changes will not result in higher default risk given its high asset quality and low refinancing and liquidity risk. The business model would, in our opinion, simplify an orderly run-off, if necessary, without significant deterioration of credit quality or increased liquidity risk. We could raise the rating to reflect a stronger market position through, for example, success for the green bond initiative, or a common equity Tier 1 ratio sustainably above 22%. We could lower the rating to reflect lower credit quality of debtors either due to idiosyncratic or macroeconomic stress, a renewed fall in business volumes or increased concentration on lower credit quality, or a total capital ratio below 18%.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | A- | A- |
| Outlook: | Stable | Stable |
| Short-term issuer credit rating: | N-1+ | N-1+ |
| Senior unsecured issue rating: | A- | A- |
Contacts:
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 Aug. 2018 and NCR's Rating Principles published on 16 Sep. 2019. For the full regulatory disclaimer please see the rating report.