Our 'A-' issuer and issue ratings for Kredittforeningen for Sparebanker (KfS) are unchanged following its third quarter 2019 results.
Going green
KfS' lending is down by NOK 125m (2.5%) from Q2/19 and by NOK 355m (6.8%) year-to-date. NOK 1,025m in new loans were paid out year-to-date, up from NOK 900m the same period last year.
KfS' business model may come under increased pressure if the proposal of increasing the systemic risk buffer by 1.5% is implemented as proposed, since KfS, unlike the savings banks, will not be positively impacted by the SME discount. However, the bank has a self-imposed buffer (in the articles of association) to the regulatory requirement of 1.5%, which we believe could be offset against a higher buffer requirement, given consent from the bondholders.
In order to turn the negative trend in volumes, the KfS is now targeting the market for green bonds. The aim is to be an aggregator for small banks seeking a green profile but do not have the size and resources to do this themselves.
Stronger net interest margin, higher costs
Net interest margin is reported at 0.17% in the quarter, up from 0.14% the previous quarter, mainly due to higher short-term rates. Operating costs are up by 55% from the second quarter due to increased provisions to the national resolution fund (to NOK 0.81m from NOK 0.25m). These costs are now expected to be 50% of total costs in 2019. We expect that a higher cost level will only to some degree be transferred to customers in form of higher spreads. KfS is not a profit maximizing company but seek to pay dividends to Equity Certificate Holders (ECC) in line with a fair yield on subordinated capital.
Capital ratio
KfS' reported CET1 ratio was 17.1% per Q3/19 vs 16.9% as of end 2018 while its capital ratio was 22.0% (21.6%). Note that this does not include year-to-date profit. NCR places additional emphasis on KfS' total capital ratio since the additional capital above the CET1 consists of ECC capital, while CET1 capital consists only of member reserve.
This commentary does not reflect a rating action.
For more information, please contact:
Geir Kristiansen, Credit Rating Analyst, +47 907 845 93, geir.kristiansen@nordiccreditrating.com
Sean Cotten, Lead Analyst, +46 735 600 337, sean.cotten@nordiccreditrating.com