Our 'A-' issuer and issue ratings for Sparbanken Rekarne (SpR) are unchanged following the publication of its fourth-quarter results.
On balance sheet growth supports revenues
SpR continues to grow its on-balance-sheet loan book. SpR's net loans grew 14.2% in 2019 (2.5% considering a reduction of SEK 1.1bn in loans transferred to Swedbank Mortgage). During the fourth quarter, SpR's lending growth was 3.5%, 0.4% including a reduction in transferred loans. The bank's report includes a comment that reduced margins from Swedbank Mortgage to 10bps for loans to corporates has been a key contributor to SpR's desire to grow its own loan book. Growth in the loan book has been primarily in residential mortgages and loans backed by commercial real estate, but we note that the bank has increased volumes in all reported segments Y-on-Y.
The shift has resulted in higher net interest income and lower fee and commission incomes from Swedbank. In addition, lower commissions due to a change in the commission model from Folksam affected 2019 revenues. In total, core NII and fee revenues increased 2.2% during 2019. Total Y-on-Y revenues increased 4.5%, including one-off gains on the sale of subsidiaries.
Higher IT and consulting costs led to an 8.2% increase in expenses during the year. In addition, SpR wrote down intangible assets associated with its acquisition of its Strängnäs branch and internally developed software, totally SEK 10m. Excluding the write down, the bank's SEK 146m pre-provision earnings were 0.9% below 2018 and total net profits of SEK 112m (SEK 114m in 2018) were 1.9% below 2018. The bank's 11.7% return on average equity during 2019 was somewhat higher than NCR expectations (11.3%).
Capital ratios decline, Asset quality remains high
The bank's capital ratios continued to decline during the fourth quarter. SpR reported a CET1 ratio of 15.0% and a total capital ratio of 17.0% as of December 2019, including 70% of annual net profit (16.3% and 18.7% at end 2018). The CET1 ratio is somewhat below NCR's expectations (15.2%) and we note that the bank is considering alternatives to strengthen its capital base in order to support a higher volume of on-balance sheet lending.
Credit losses remained low during the quarter at 3bps of total lending in Q4/19 and 2019 as a whole. Net non-performing (IFRS 9 stage 3) loans remain very low at 12bps (14bps in Q3/19).
This commentary does not reflect a rating action.
Analyst contact details:
Sean Cotten, +46 735 600 337, sean.cotten@nordiccreditrating.com
Geir Kristiansen, +47 907 845 93, geir.kristiansen@nordiccreditrating.com
research Issuer comment Financial Sparbanken Mälardalen AB (publ) Financial