Our 'BBB+' issuer and issue ratings on Sörmlands Sparbank are unchanged following the publication of the bank's results for the first half of 2021.
Restructuring awaiting regulatory approval
In April, Sörmlands Sparbank decided to reorganise itself as a limited liability company, with a savings bank foundation (sparbanksstiftelse) as owner, in line with the structure of many other Swedish savings banks. Pending regulatory approval, the bank will be renamed Sörmlands Sparbank AB (publ) and will be wholly owned by a newly created foundation, Sparbanksstiftelsen Sörmland. The restructuring is scheduled to take place in 2022 and will not affect our ratings on the bank.
Increased lending and dividends boost earnings despite lower interest margins
Sörmlands Sparbank's business volumes rose by 7% to SEK 49.4bn in the first half. This was driven by increases in both on-balance-sheet net lending and deposits. Mortgage loans transferred to Swedbank Hypotek AB decreased in the period as the bank maintained a higher level of customer loans on its own balance sheet.
Despite increased lending, net interest income decreased by 2% from year-end 2020. This negative effect on revenues was offset by an increase in net fee and commission income, and renewed dividend payments from Swedbank AB totalling nearly SEK 50m in the first half. As a result, the bank closed the first half with a 110% increase in pre-provision earnings from end-2020. Excluding the Swedbank dividends, the improvement was 12%.
The bank's core cost efficiency (including fee and interest income) continued to improve from an initially weak level, and was down to 71.9% from 77.7% in 2020 and 86.6% in 2019.
Decreasing capital ratios amid large loan loss reversals
Both common equity Tier 1 (CET1) capital and risk exposure amounts increased in the first half. The reported CET1 ratio was down slightly at 21.5% from 21.9% at end-2020, or 23.0% including first-half net profit.
Stage 3 non-performing loans halved to SEK 104m from SEK 209m at end-2020 due to the resolution of legacy non-performing exposures. As of 30 Jun. 2021, net Stage 3 loans stood at 48bps of all lending compared with 111bps at end-2020. Reserves were down accordingly, and the bank reversed SEK 29.6m in loan loss provisions during the period. In the 12 months to June, the bank made reversals of SEK 90m, primarily due to the resolution of legacy exposures.
Figure 1. Sörmlands Sparbank key credit metrics, 2017-June 2021
(%) |
2017 |
2018 |
2019 |
2020 |
2021 Q2 YTD |
Net interest margin |
1.4 |
1.4 |
1.5 |
1.6 |
1.4 |
Loan losses/net loans |
0.1 |
0.1 |
-0.1 |
-0.3 |
-0.2 |
Pre-provision income/REA |
2.2 |
1.2 |
1.7 |
1.0 |
2.3 |
Return on ordinary equity |
5.9 |
3.0 |
5.0 |
3.8 |
9.6 |
Loan growth |
5.5 |
9.8 |
-1.2 |
11.1 |
7.8* |
CET1 ratio |
20.4 |
21.6 |
22.1 |
21.9 |
21.5 |
REA–risk exposure amount. *12 months to June 2021. Based on company data. All metrics adjusted in line with NCR methodology.
This commentary does not constitute a rating action.
If you have any questions, please contact:
Sean Cotten, chief rating officer, +46735600337, sean.cotten@nordiccreditrating.com
Geir Kristiansen, credit rating analyst, +4790784593, geir.kristiansen@nordiccreditrating.com