Nordic Credit Rating (NCR) said today that it had affirmed its 'BBB+' long-term issuer rating on Sweden-based Sörmlands Sparbank. The outlook has been revised to positive from stable to reflect projected improvement in earnings metrics which could support a higher rating if achieved while maintaining strong capital and asset quality. At the same time NCR affirmed the 'N-1+' short-term rating and the 'BBB+' senior unsecured issue rating.
Rationale
Our long-term issuer rating on the bank reflects the bank's very strong capital position, low risk appetite, and relationship-based funding profile. We view the bank's cooperation arrangement with Swedbank AB as positive, as it provides material diversification of product offerings, shared IT costs and the opportunity to finance retail mortgages. In addition, Sörmlands Sparbank benefits from dividend revenues through its holdings of Swedbank shares, which have resumed in 2021.
The rating is constrained by the bank's relatively weak core earnings metrics, which remain weaker than those of similar Nordic savings banks. The rating also reflects the relative volatility of the bank's local market, which has historically demonstrated volatility associated with being a key region for Sweden's manufacturing industry. Despite the uncertain economic environment, our projections for losses and non-performing loans are only slightly above historic levels after the resolution of a small number of legacy credit losses have been resolved in the past year.
Positive outlook
Our positive outlook on Sörmlands Sparbank reflects our expectation that the bank will continue to improve its core earnings metrics, while maintaining strong capital ratios as it grows its loan book. It also takes account of the bank's maintenance of its relationship with Swedbank and its low risk appetite, with normalised credit losses as the local economy improves. We could raise our rating if the bank is able to demonstrate sustainable improvements in core earnings metrics, with core pre-provision income to risk exposure above 1.5%. A positive rating action would also reflect continued improvement in the economic conditions in Sweden and in the bank's local market and asset quality metrics in line with the bank's peer group. We could return the outlook to stable if core earnings metrics fall below our estimates, if growth plans lead to a sustained reduction in the common equity capital ratio to below 21% or if there is a material deterioration in asset quality metrics.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BBB+ | BBB+ |
| Outlook: | Positive | Stable |
| Short-term issuer credit rating: | N-1+ | N-1+ |
| Senior unsecured issue rating: | BBB+ | BBB+ |
Contacts:
Sean Cotten, chief rating officer, +46735600337, sean.cotten@nordiccreditrating.com
Geir Kristiansen, analyst, +4790784593, geir.kristiansen@nordiccreditrating.com
The methodology documents used for this rating are NCR's Financial Institutions Rating Methodology published on 14 Aug. 2018 and NCR's Rating Principles published on 16 Sep. 2019. For the full regulatory disclaimer please see the rating report.