Our 'BBB+' issuer and issue ratings on Sparbanken Västra Mälardalen (Sparbanken VM) are unchanged following the publication of its third-quarter results.
Core earnings improve and loss reserves decline due to improved economic expectations
Sparbanken VM reported continued improvement in core pre-provision income, which rose to SEK 79m in the first nine months, an 8.5% improvement from the corresponding period in 2019. Net interest income fell slightly from second-quarter levels, revealing somewhat lower margins, but was more than compensated by strong growth in fee and commission income and a reduction in expenses. Core cost-to-income levels fell to 51.5% in the year to date from 52.6% a year earlier.
Business volumes rose to SEK 26.1bn, or 5.4%, in the first nine months, with a large portion of the growth due to increased loans (up 4.9%) and deposits (up 10.6%), while off-balance-sheet growth in loans and investment assets transferred to Swedbank also improved. Despite the increase in deposits, Sparbanken VM issued a 2.5-year SEK 300m senior unsecured bond in September, replacing a maturing issue and extending its debt maturity profile.
Sparbanken VM reversed previous loan-loss reserves by SEK 5.0m in the third quarter, reducing year-to-date credit losses to 5.3m (7 bps of net loans). The reversal reflects improved economic expectations. Volumes of Stage 3 net non-performing loans (as defined by International Financial Reporting Standards) remained stable at 25 bps of net loans.
Dividend income remains well below 2019 levels given a decision by Swedbank AB to follow regulatory guidance to pay no dividends given the economic uncertainty associated with COVID-19. Swedbank has stated that it has the resources and would like to pay a dividend, but we think this is unlikely by year-end in view of the recent resurgence of coronavirus and tighter regulatory guidance.
Capital remains strong
Sparbanken VM's common equity Tier 1 ratio has fallen somewhat during the year so far as a result of growth in risk-weighted assets outpacing profits. At end-September, it stood at 21.6% (22.4% including 2020 net profit), compared with 24.0% at end-2019.
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research Issuer comment Financial Sparbanken Västra Mälardalen Financial