Nordic Credit Rating (NCR) said today that it had affirmed its 'BBB' long-term issuer rating on Sweden-based NOBA Bank Group AB (publ) (NOBA). The outlook is stable. At the same time NCR affirmed the 'N3' short-term rating. The 'BBB' issue ratings on NOBA's senior unsecured bonds and its 'BB+' issue ratings on NOBA's tier 2 bonds were also affirmed.
Rating rationale
The long-term issuer rating reflects NOBA's improving risk-adjusted earnings, increasing economies of scale and diversity relative to its peers. It also reflects robust creditor rights across the Nordic region. We expect strong earnings and a lack of dividends to support Tier 1 capital levels above 15% even as the bank pursues significant growth. We view increased secured lending, in particular non-traditional mortgage lending in Sweden and Norway, as a positive contributor to greater diversity, improved asset quality metrics and a more diverse funding structure.
The rating is constrained by the higher-than-average risk appetite associated with consumer lending, and the relatively higher risk profile in the growth areas of credit cards and expansion into Germany and Spain. The consumer lending industry is subject to tough competition for loans and low customer loyalty within the bank's key markets, with a funding model driven by price-sensitive deposits. In addition, we believe that consumer lending is under intensified regulatory scrutiny in all Nordic countries, which could negatively affect the bank's business model and profitability over time.
We have revised our assessment of the bank's operating environment and loss performance downwards to reflect increasing risks for consumer lending and higher credit losses. We have also revised our view of capital to reflect lower capital ratios due to significant loan growth in our projections. Our view on funding and liquidity has weakened somewhat due to a higher share of on-demand, price-sensitive deposits. Positively, our view of the bank's competitive position and business diversity has improved due to increasing synergies and scale, as well as lower implementation risks associated with the merger with Bank Norwegian.
Stable outlook
The stable outlook reflects our expectations that increasing synergies from the merger with Bank Norwegian will support strong earnings and capital generation as the bank expands, primarily in credit card lending and mortgage products. These anticipated improvements are partly offset by the higher risk profile of the resulting loan book, increasing credit provisions and high expected loan growth. We project a material increase in loss provisions in 2023 and 2024 as borrowers continue to be affected by cost inflation and declining real wage growth. Nevertheless, the bank's increasing economies of scale improve resilience to an economic downturn, and the bank has a track record of adapting its growth strategy to improve capital buffers when necessary.
We could raise the ratings to reflect the Tier 1 ratio being sustainably above 20%. We could also raise the ratings in the event of increased stability in the operating environment for consumer lenders and improved asset quality metrics.
We could lower the ratings to reflect the Tier 1 ratio being sustainably below 15% or common equity Tier 1 ratio sustainably below 4% over regulatory requirements. We could also lower the rating if regulatory changes adversely affect consumer lending operations, or due to an increased credit risk appetite, reflected in loan losses to net loans sustainably over 4%.
Rating list | To | From |
---|---|---|
Long-term issuer credit rating: | BBB | BBB |
Outlook: | Stable | Stable |
Short-term issuer credit rating: | N3 | N3 |
Senior unsecured issue rating: | BBB | BBB |
Tier 2 issue rating: | BB+ | BB+ |
Contacts:
Sean Cotten, chief rating officer, +46735600337, sean.cotten@nordiccreditrating.com
Ylva Forsberg, analyst, +46768806742, ylva.forsberg@nordiccreditrating.com
The methodology documents used for this rating are NCR's Financial Institutions Rating Methodology published on 18 Feb. 2022, NCR's Rating Principles published on 24 May 2022 and NCR's Group and Government Support Rating Methodology published on 18 Feb. 2022. For the full regulatory disclaimer please see the rating report.