COVID-19 effect on lending volumes
KfS's gross lending totalled NOK 4.7bn in the first half, down 9.7% from year-end 2019 and 12.7% from a year earlier. Volumes were negatively affected by low funding requirements among member banks due to COVID-19 induced deposit growth and liquidity facilities provided by the Norwegian central bank.
KfS's business model could get a boost due to higher credit spreads at smaller savings banks, which would make the company a more attractive funding vehicle. However, the business model is under pressure due to an increase in the country's systemic capital risk buffer by 1.5pp (from 31 Dec. 2022). Unlike Norway's savings banks, KfS has not been positively impacted by capital discounts offered to SME customers as part of Norway's aim to implement EU capital requirements. However, KfS has a buffer (in its articles of association) to the regulatory requirement of 1.5pp, and the company decided earlier this year to propose for the bondholders to remove this buffer from the articles of association. It also needs permission from the Norwegian FSA to do this.
Back in black
Bond values rebounded in the second quarter and for this reason net financials contributed NOK 1.18m in the period (NOK 0.04m in the first half). KfS's net interest margin was 0.16% in the second quarter, down from 0.18% in the first quarter but equal to the 2019 level. Lower short-term interest rates have negatively impacted margins. Operating costs were up by 14% year-on-year, mainly due to increased provisions for the national resolution fund. We expect that higher costs will only partly passed on to customers in the form of higher spreads. KfS reported net profit of NOK 1.1m in the second quarter and NOK 0.74m for the first half.
KfS is not a profit maximizing company but seeks to pay dividends to equity certificate holders in line with a fair yield on subordinated capital. The dividend for 2019 was, however, cancelled due to increased risk due to COVID-19.
Capital ratio
KfS's reported common equity Tier 1 (CET1) ratio was 17.1% at the end of the second quarter of 2020 compared with 17.4% at end-2019, while its capital ratio was 22.6% (22.8%). NCR places additional emphasis on KfS's total capital ratio since additional capital above the CET1 ratio consists of equity certificate holder capital, while CET1 capital consists only of the member reserve.
This commentary does not constitute 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