Our 'BBB+' long-term issuer and issue ratings on Sörmlands Sparbank are unchanged following the publication of its results for the second half of 2021. The outlook is positive.
Strong risk-adjusted earnings
Sörmlands Sparbank ended 2021 by more than doubling its pre-provision income (PPI) compared with year-end 2020. Most of this increase was due to dividends from Swedbank, but core PPI (excluding dividends and other income) also rose by 29%. Net loans increased by 15.7% at year-end 2021, while the risk exposure amount (REA) declined slightly. This resulted in risk-adjusted income rising significantly, to 2.4% from 1.0% year on year. Core PPI/REA rose more modestly, to 1.2% from 0.95%, in line with our expectations for 2021.
Continued net reversals of loan loss provisions
The bank continued to make net reversals of loan loss provisions in the second half of the year, ending 2021 with net loan loss recoveries of SEK 53m, which is 39bps of net loans. Like most Swedish savings banks, Sörmlands Sparbank made extensive pandemic-related provisions at the beginning of 2020, which have been gradually reversed. During 2021, the bank also continued its work on resolving major legacy exposures which led to further loss reversals.
The common equity Tier 1 (CET1) ratio rose sharply in the second half of the year, driven by both an increase in CET1 capital and the decrease in REA. This decrease was due to regulatory changes, which lowered the risk weights for commercial real-estate exposures with low leverage.
Change in ownership structure expected in 2022
Sörmlands Sparbank took the decision in 2021 to convert the bank into a limited liability company, changing from the ownership foundation structure that many Swedish savings banks have traditionally had. The change in ownership structure is expected to be finalised during 2022, pending regulatory approval and will not affect our view of the bank.
Figure 1. Sörmlands Sparbank key credit metrics, 2017–2021
(%) |
2017 |
2018 |
2019 |
2020 |
2021 |
Net interest margin |
1.4 |
1.4 |
1.5 |
1.6 |
1.4 |
Loan losses/net loans |
0.05 |
0.12 |
-0.06 |
-0.31 |
-0.39 |
Pre-provision income/REA |
2.2 |
1.2 |
1.7 |
1.0 |
2.4 |
Return on ordinary equity |
5.9 |
3.0 |
5.0 |
3.8 |
7.9 |
Loan growth |
5.5 |
9.8 |
-1.2 |
11.1 |
15.7 |
CET1 ratio |
20.4 |
21.6 |
22.1 |
21.9 |
25.1 |
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This commentary does not constitute a rating action.
Contacts:
Sean Cotten, chief rating officer, +46735600337, sean.cotten@nordiccreditrating.com
Ylva Forsberg, analyst, +46768806742, ylva.forsberg@nordiccreditrating.com