Our 'A-' issuer and issue ratings for Kredittforeningen for Sparebanker (KfS) are unchanged following its first quarter 2020 results.
Proposing removal of capital buffer
KfS' lending is down by NOK 104m (1.7%) from year-end 2019 and by NOK 354m (7.1%) year-on-year. Loans amounting to NOK 380m matured in the quarter, which is consistent with previous quarters.
KfS' business model may get a boost due to higher credit spreads for smaller savings banks, which makes KfS a more attractive funding vehicle. However, the business model is also under pressure due to the 1.5% increase in the systemic risk capital buffer (from 31 Dec. 2022). Unlike the savings banks, KfS' capital ratios are not positively impacted by the SME discount, and the entire buffer increase requires capital. However, the bank has an additional self-imposed buffer (in the articles of association) to the regulatory requirement of 1.5%, and the company has decided to propose for the bond holders and Norwegian FSA to remove this buffer from the articles of association. This is in line with our expectations.
Net financial income affected by COVID-19
Net interest margin is reported at 0.18% in the quarter, up from 0.16% in 2019. Lower short-term interest rates will impact margins negatively going forward. Operating costs are up by 38% year-on-year, mainly due to increased provisions to the national resolution fund. We expect that a higher cost level will only to some degree be transferred to customers in the form of higher spreads. The company reported a net loss of NOK 0.36m due NOK 1.25m negative contribution from net financial income due to the increased credit spreads in the bond portfolio after the onset of the COVID-19 pandemic.
KfS is not a profit maximizing company but seeks to pay dividends to equity certificate holders (ECC) in line with a fair yield on subordinated capital. The dividend for 2019 was, however, cancelled due to the increased risk due to the COVID-19 pandemic.
Capital ratio
KfS' reported CET1 ratio was 18.2% per first quarter 2020 vs 17.4% as of end-2019 while its capital ratio was 23.3% (22.2%). NCR places additional emphasis on KfS' total capital ratio since the additional capital above the CET1 includes loss-absorbing ECC capital, while regulatory CET1 capital consists only of the member reserve.
This commentary does not reflect a rating action.
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