Today Nordic Credit Rating (NCR) affirmed its 'A-' long-term issuer rating on Sparbanken Rekarne (SpR) and revised its outlook on the rating to negative from stable. NCR also affirmed its 'N-1+' short-term rating on the bank.
Macroeconomic uncertainty is very high
NCR has lowered its assessment of the Swedish banking sector to 'bbb+' from 'a-' due to the economic effects of the COVID-19 pandemic. In addition, NCR views the outlook for the domestic operating environment as negative given the abrupt reduction in activity and the uncertain prospects and timeline of an economic recovery. We note that many companies have elected to furlough employees using a government-supported programme which reduces costs for employers and maintains at least 92.5% of employees' wages. However, there was a significant rise in unemployment and bankruptcy filings during the last weeks of March and we believe there will be long-term challenges for many sectors given varying degrees of economic shut down for Sweden's neighbours and global trading partners. Initially, the government's efforts to support the severe macroeconomic disruption could be effective, however, we believe that maintaining stability, especially in terms of bank earnings and credit losses, will become increasingly difficult the longer economic activity remains subdued.
We have also revised our assessment of SpR's operating region, which relies heavily on manufacturing and industrial jobs, down two notches to 'bb+' from 'bbb'. The disruption in the manufacturing industry in Sweden presents a unique challenge given the high share of big-ticket export goods, lack of predictability, and difficulties in restarting domestic production without European and global coordination throughout supply chains. So far, the hours of many industrial jobs have been reduced to 40-80%, with employees still receiving at least 92.5% of their income in many cases. However, uncertainty could reduce domestic consumption and negatively affect many of SpR's SME customers.
We have adjusted our loss performance assessment for SpR to 'a' from 'aa-'. While the bank has maintained exceptional asset quality historically, we believe it is likely that credit losses will increase with the magnitude of the losses depending on the impact of government support measures, the length and depth of the economic slowdown, and the interpretation of revised European guidance on IFRS9 accounting rules for non-performing loans. We note that the bank has cancelled its dividend for 2019, adding SEK 33.5m to its common equity Tier 1 (CET1) and improving its CET1 ratio to 15.6%, or 0.6pp higher than it originally reported and 40bps higher than our expectations as of end-2019. Our existing capital assessment already includes an expectation of an increase in capital during 2020 as the bank manages its internal capital buffer.
Negative outlook
The negative outlook reflects our view that SpR and its Swedish banking peers face an uncertain future on many fronts which could primarily affect our view of the bank's operating environment, earnings potential, and longer-term loss performance. In a severe economic downturn, loss reserves could even put pressure on the bank's capital position, collateral coverage, and other aspects of its operations. A material deterioration for 50% owner Swedbank AB could also affect our view of support in our rating on SpR. The outlook could be revised to stable if the government's efforts to support the economy are effective and there are clear signs of an economic recovery.
Our full analysis of Sparbanken Rekarne, published 10 Dec. 2019, is available at:
https://nordiccreditrating.com/issuer/sparbanken-rekarne
Potential positive rating drivers
- An upgrade is unlikely at this time given the current state of the regional economy and uncertain timeline for returning to normal operating conditions.
Potential negative rating drivers
- Long-term economic recession in the region, affecting economic activity and employment.
- Lower asset quality metrics and credit losses impacting capitalisation.
- Reduced ownership by Swedbank or a decline in Swedbank's creditworthiness.
If you have any questions, please contact:
Sean Cotten, chief rating officer, +46735600337, sean.cotten@nordiccreditrating.com
Geir Kristiansen, credit rating 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.