Today Nordic Credit Rating (NCR) affirmed its 'A-' long-term issuer rating and 'N-1+' short-term issuer rating on Kredittforeningen for Sparebanker (KfS). The outlook on the ratings is stable.
Macroeconomic uncertainty is very high
NCR has lowered its assessment of the Norwegian banking sector to 'a-' from 'a' due to the economic effects of the COVID-19 pandemic. We have also cut the savings bank sector and regional subscore by one notch to 'bbb'. In addition, NCR views the outlook for the domestic operating environment as negative given the abrupt reduction in economic activity and the uncertain prospects and timeline for an economic recovery. We note that many companies have elected to furlough employees using a government-supported programme which reduces costs for employers and maintains up to 80% of employees' wages. However, there was a significant rise in unemployment during the last weeks of March and we believe there will be long-term challenges for many sectors given varying degrees of economic shut down for Norway's neighbours and global trading partners and lower oil prices. Initially, the government's efforts to support the severe macroeconomic disruption could be effective, however, we believe that maintaining stability, especially in terms of bank earnings and credit losses, will become increasingly difficult the longer economic activity remains subdued.
KfS funds only investment-grade savings banks, resulting in concentrated but high-quality credit exposure, and the company has never had non-performing loans. KfS is funded by senior loans with approximately the same maturity as its individual loans and has minimal refinancing and interest rate risk. We believe that KfS has ample procedures to handle default by any of its borrowers.
The company was established in 2004 to help small savings banks with funding in a difficult environment, and the current crisis could help to revitalize its business model. The 1.5pp cut in the regulatory countercyclical buffer announced 13 Mar. 2020 makeS it less likely that the membership fee that KfS charges its member banks will have to be increased. It also increases the possibility that we could consider increasing the capital subfactor score. The cancellation of KfS' proposed dividend for 2019 (NOK 1.25m) haS no impact on the capital subsector score.
Outlook stable
The outlook is stable, despite the more challenging operating environment, due to KfS's modest risk profile and expectations that the company's business model will take on improved relevance.
Our full analysis of KfS, published 19 Feb. 2020, is available at:
https://nordiccreditrating.com/issuer/kredittforeningen-sparebanker
Potential positive rating drivers
- Stronger market position through, for example, success for the company's green bond initiative or a more challenging market for small savings banks.
- Increased profitability, thereby improving resilience.
Potential negative rating drivers
- Lower credit quality of borrowers due to the COVID-19 pandemic or other macroeconomic stress.
- Continuing fall in business volumes or increased concentration on lower credit quality.
- Total capital ratio below 18%.
If you have any questions, please contact:
Geir Kristiansen, credit rating 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.