Nordic Credit Rating (NCR) said today that it had affirmed its 'A-' long-term issuer rating on Norway-based Kredittforeningen for Sparebanker (KfS). The outlook is stable. At the same time NCR affirmed the 'A-' senior unsecured issue rating. The 'N2' short-term issuer rating was also affirmed.
Rating rationale
The long-term issuer rating reflects KfS' strong capitalisation and low risk appetite. KfS is a non-profit credit institution serving Norwegian savings banks. The company has a concentrated loan portfolio, but funds only investment grade savings banks. KfS has never experienced loan losses. The company is funded by senior bonds with approximately the same maturity as the individual loans it makes. It has no obligation to refinance these loans, and refinancing and pricing risk are consequently minimal.
The low interest rate environment has put pressure on KfS' margins in recent years and has also led to lower demand for funding from member banks. However, we now expect higher interest rates to be positive for the company. Since 2021, KfS has helped small savings banks to access green funding, an initiative with the potential to revitalise the company's business model. Adaptation to the finalised EU banking package is a current challenge for KfS. The European Banking Authority (EBA) considers that membership contributions in the form of pure core capital instruments, as practised at KfS, do not meet the requirements. Moreover, the maximum loan limit has been reduced and KfS' capital requirement has increased by 1.5% (the SME discount is not applicable). We believe that KfS will most likely be able to adapt to the new regulations, given that the member banks see the benefit of its services.
Stable outlook
The stable outlook reflects the resilience of the Norwegian savings bank sector and KfS' modest risk profile. We do not believe that possible challenges for the company's business model will 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 portfolio run-off, if necessary, without significant deterioration in the company's credit quality or increased liquidity risk.
We could raise the rating if there is an improvement in two or more drivers, such as stronger market position, stronger capitalisation and/or higher earnings. We could lower the rating if the credit quality of debtors declined, either due to idiosyncratic or macro-economic stress; if there were a renewed fall in business volumes or increased concentration on lower credit quality; or if the total capital ratio fell below 18%.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | A- | A- |
| Outlook: | Stable | Stable |
| Short-term issuer credit rating: | N2 | N2 |
| Senior unsecured issue rating: | A- | A- |
Contacts:
Geir Kristiansen, analyst, +4790784593, geir.kristiansen@nordiccreditrating.com
Ylva Forsberg, analyst, +46768806742, ylva.forsberg@nordiccreditrating.com
The methodology documents used for this rating are NCR's Financial Institutions Rating Methodology published on 18 Feb. 2022, NCR's Rating Principles published on 24 May 2022 and NCR's Group and Government Support Rating Methodology published on 18 Feb. 2022. For the full regulatory disclaimer please see the rating report.