Our 'A-' issuer and issue ratings on Kredittforeningen for Sparebanker (KfS) are unchanged following the publication of its second-quarter 2022 results.
Green financing remains key growth area
KfS's lending fell in the second quarter to NOK 3.8bn, a year-on-year decline of 12%. In recent years, the company has experienced limited demand for market financing from member banks. Lately, this has been compounded by low bond market activity following the Russian invasion of Ukraine. However, KfS is seeing continued interest in 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.
Losses on net financials weigh on quarterly results
KfS's net interest margin (NIM) was 0.13% in the first half compared with 0.11% 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 were 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, high semi-fixed costs, and NOK 0.51m in losses on net financials resulted in a cost/income ratio of 110% in the second quarter, or 85% excluding the losses on net financials.
Capital ratios continue to rise
KfS's reported common equity Tier 1 (CET1) ratio was 19.6% at the end of the second quarter compared with 17.5% at end-2021, while the capital ratio was 25.9% (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. We note that KfS has a process in place to adapt its capital structure to satisfy the requirements of the EU's CRR2 prudential regulatory package. As part of this process, the company has decided to apply to the Norwegian financial supervisory authority for permission to write down its entire equity certificate capital of NOK 50m, while issuing hybrid Tier 1 securities of the same amount. Assuming that the capital restructuring takes place as planned in the third quarter, KfS's core capital will increase by NOK 50 million and its additional capital will decrease by an equivalent sum.
Figure 1. KfS key credit metrics, 2018-H1 2022
(%) | 2018 | 2019 | 2020 | 2021 | H1 2022 |
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 | -0.11 |
Return on ordinary equity | 1.2 | 0.7 | 0.1 | -0.6 | -0.4 |
Loan growth | 0.8 | -7.4 | -16.6 | 3.1 | -8.5 |
Capital ratio | 21.5 | 22.8 | 24.5 | 23.2 | 25.9 |
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