Our 'A-' issuer and issue ratings on Kredittforeningen for Sparebanker (KfS) are unchanged following the publication of its first-quarter 2022 results.
Green financing seen as key growth area
KfS's lending fell in the first quarter to NOK 4.1bn, a year-on-year decline of 8%. In recent years, the company has experienced limited demand for market financing from member banks. Lately, this has been compounded by low activity levels in the bond market following the Russian invasion of Ukraine. However, KfS is seeing continued interest for its green lending products from member banks, which are generally too small to tap the green bond market by themselves. We believe that this will prove an important growth area for the company.
Rising interest rates likely to drive future earnings
KfS's net interest margin (NIM) was 0.13% in the first quarter compared with 0.08% in the corresponding period of 2021. Low short-term interest rates have negatively impacted NIM in recent years, but spreads on new loans are somewhat higher. More than one-third of operating expenses are related to provisions to the national resolution fund, which is based on unsecured funding with a two-year lag. The combined effect of low NIM and high semi-fixed costs resulted in a cost/income ratio of 132% in the first quarter.
Capital ratios rising
KfS's reported common equity Tier 1 (CET1) ratio was 17.7% at the end of the first quarter compared with 17.5% at end-2021, while the capital ratio was 23.5% (23.2%). 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.
Figure 1. Kredittforeningen for Sparebanker key credit metrics, 2018-2022Q1
(%) |
2018 |
2019 |
2020 |
2021 |
2022Q1 |
Net interest margin |
0.14 |
0.15 |
0.14 |
0.11 |
0.13 |
Loan losses/net loans |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
Pre-provision income/REA |
0.4 |
0.2 |
0.0 |
-0.18 |
-0.17 |
Return on ordinary equity |
1.2 |
0.7 |
0.1 |
-0.6 |
-0.6 |
Loan growth |
0.8 |
-7.4 |
-16.6 |
3.1 |
-7.9 |
Capital ratio |
21.5 |
22.8 |
24.5 |
23.2 |
23.5 |
Based on company data. All metrics adjusted in line with NCR methodology. REA–risk exposure amount.
This commentary does not constitute a rating action.
Contacts:
Geir Kristiansen, analyst, +4790784593, geir.kristiansen@nordiccreditrating.com
Sean Cotten, chief rating officer, +46735600337, sean.cotten@nordiccreditrating.com