Today Nordic Credit Rating (NCR) affirmed its 'BBB-' long-term issuer rating on Resurs Bank AB (publ) (Resurs) and revised its outlook on the rating to negative from stable. NCR also affirmed its 'N-1+' short-term rating on the bank.
Disruption to the operating environment
NCR has lowered its assessment of the Swedish banking sector to 'bbb+' from 'a-' and the Norwegian to 'a-' from 'a' due to the economic effects of the Covid-19 pandemic. In addition, NCR views the outlook for the operating environment in both sectors as negative given the abrupt reduction in economic activity and the uncertain prospects and timeline of an economic recovery. We note that many companies have elected to furlough employees, however, there has also been a significant rise in unemployment and bankruptcy filings in Resurs's Nordic markets and we believe there will be long-term challenges given varying degrees of economic shut down across Europe. Initially, the Nordic governments' efforts to alleviate the severe macroeconomic disruption could be effective, however, we believe that maintaining stability will become increasingly difficult the longer economic activity remains subdued.
The economic effect of the pandemic is likely to lead to increased non-performing loans (NPLs) and loan losses, even if social and economic conditions start to normalise, as we expect, in the second half of 2020. The eventual depth of the crisis will depend on the severity of the pandemic and the duration of closures and travel restrictions. NCR views consumer lending as having more volatile risk drivers than our national assessments would indicate. In our view, consumer loans are more sensitive to shifts in the economy than a typical retail loan portfolio, which includes a high share of mortgage loans. Furthermore, we have previously noted increased political risks for consumer lenders and are concerned that niche banks might not receive the same level of support in the current crisis as universal and mortgage banks. Accordingly, we have lowered the score for Resurs's operating environment to 'bb' from 'bbb'.
In addition, we have adjusted our assessment of capital and loss performance. First, the bank's owner, Resurs Holding, issued SEK 300m in additional Tier 1 capital in December 2019, of which SEK 200m was credited as equity to Resurs. In addition, the board of directors has postponed a decision on a proposed SEK 420m dividend for 2019, adding material capital flexibility. These moves have prompted us to notch up the scoring of Resurs's capital to 'bbb' from 'bb+'. While we believe that our reduced scoring of the operating environment to a large degree takes into account the increased risk related to the Covid-19 pandemic, we have cut the scoring of loan losses by one notch to 'bb' due an expected increase in NPLs.
Negative outlook
Our negative outlook on Resurs reflects the risk of increased levels of NPLs and higher loan losses as a result of the Covid-19 pandemic. We expect that social and economic conditions will start to normalise in the second half of 2020 but see a risk of a protracted recession. The outlook could be revised to stable if the government's efforts to avert severe macroeconomic disruption are effective and there are clear signs of an economic recovery.
Our updated full analysis of Resurs Bank is available at:
https://nordiccreditrating.com/issuer/resurs-bank-ab-publ
If you have any questions, please contact:
Geir Kristiansen, credit rating analyst, +4790784593, geir.kristiansen@nordiccreditrating.com
Sean Cotten, chief rating officer, +46735600337, sean.cotten@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.