Our 'A-' issuer and issue ratings on Kredittforeningen for Sparebanker (KfS) are unchanged following the publication of its first quarter 2021 results.
Green financing initiative launched successfully
KfS's lending increased by 10.8% quarter-on-quarter to NOK 4.5bn, but was down 5.9% year-on-year. In recent years, the company has experienced limited demand for market financing from its member banks. In the first quarter, KfS launched a green lending product for its member banks, which are generally too small to tap the green bond market by themselves. The company successfully issued two green bonds totalling NOK 626m in an initiative which could provide a basis for new growth and revitalise its business model.
Low interest rates pressure net interest margin
KfS's net interest margin was 0.08% in the first quarter against 0.18% in the corresponding period of 2020. Low short-term interest rates have negatively impacted the company's net interest margin in recent years, but spreads on new loans are somewhat higher and should gradually impact the margin positively. More than one-third of the company's operating expenses are related to provisions placed with the national resolution fund, which is based on unsecured funding with a two-year lag. The combined effect of low net interest margins and high semi-fixed costs resulted in a cost/income ratio of 174% in the first quarter.
Capital ratios continue to rise
KfS's reported common equity Tier 1 (CET1) ratio was 18.1% at the end of the first quarter compared with 18.6% at end-2020, while its total capital ratio was 23.5% (24.5%). 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 company's member reserve. KfS' CET1 requirement will increase by 1.5pp to 12.8% from end-2022, due to an increase in the regulatory systemic risk buffer.
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