Our 'A-' issuer and issue ratings on Kredittforeningen for Sparebanker (KfS) are unchanged following the publication of its third-quarter 2021 results.
Weak demand for market finance drives lending down
KfS's lending was down 8% quarter on quarter at NOK 3.9bn, and 2% year on year. In recent years the company has experienced limited demand for market financing from member banks. Lending in the third quarter was lower than we had previously anticipated, largely due to increased deposits at member banks. In the first quarter, KfS launched a green lending product for its member banks, which generally are 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 expected to drive future earnings
KfS's net interest margin was 0.11% in the third quarter compared with 0.10% the corresponding period of 2020. Low short-term interest rates have negatively impacted the net interest margin in recent years, but spreads on new loans are somewhat higher. More than one-third of operating expenses are related to provisions placed with the national resolution fund, which is based on unsecured funding with a two-year lag. This contributed to a negative pretax profit in the third quarter. While KfS expects a negative net result for full-year 2021, it has issued positive guidance for 2022 due to higher expected market rates.
Capital ratios remain strong
KfS's reported common equity Tier 1 (CET1) ratio was 17.1% at the end of the third quarter compared with 18.6% at end-2020, while its capital ratio was 22.9% (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.
Figure 1. KfS key financial metrics, 2017-Q3 2021
(%) |
2017 |
2018 |
2019 |
2020 |
2021e |
Q3 2021 |
Net interest margin |
0.12 |
0.14 |
0.15 |
0.14 |
0.15 |
0.11 |
Loan losses/net loans |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
Pre-provision income/REA |
0.2 |
0.4 |
0.2 |
0.0 |
0.1 |
0.0 |
Return on ordinary equity |
0.8 |
1.2 |
0.7 |
0.1 |
0.3 |
-0.4 |
Loan growth |
-3.4 |
-4.1 |
0.8 |
-16.6 |
17.0 |
-1.9 |
Capital ratio |
22.7 |
21.5 |
22.8 |
24.5 |
23.8 |
22.9 |
REA–Risk exposure amount. e–Estimate. All metrics adjusted in line with NCR methodology. Based on NCR estimates and company data.
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