Nordic Credit Rating (NCR) said today that it had affirmed its 'BBB' long-term issuer rating on Sweden-based consumer lender Nordax Bank AB (publ) (Nordax). The outlook is stable. We also affirmed the 'N-1+' short-term issuer rating, as well as the 'BBB' senior unsecured issue ratings and 'BB+' issue ratings on the bank's Tier 2 debt instruments.
Rating rationale
The affirmation reflects the successful completion of Nordax's acquisition of 100% of the shares in Bank Norwegian ASA. Nordax has announced its plans to settle the voluntary cash offer by 4 Nov. 2021 at the latest, with the compulsory acquisition phase following shortly thereafter. Given the time frame, we expect Nordax will own all of the shares by mid-November and that Bank Norwegian will then become a direct Nordax subsidiary.
We understand that at the projected point of acquisition, private equity company Nordic Capital will hold an aggregate stake of about 80% in Nordax Holding AB (publ), Nordax's ultimate parent. Nordax Holding AB is the parent company of Nordax's immediate parent, Nordax Group AB (publ). Sampo Oyj of Finland will hold the remainder as a minority owner.
The affirmation takes into consideration Nordax Holding AB's plans to issue between SEK 820m and SEK 875m in additional Tier 1 capital instruments and between SEK 460m and SEK 750m in Tier 2 instruments, which will form part of the consolidated capitalisation of the Nordax Group. Given successful issuance of the proposed additional Tier 1 capital and our projections of a common equity Tier 1 (CET1) ratio of over 15% by end 2021, we maintain our current assessment of Nordax's capital position, even though the bank estimates it will have only a small margin of 1.5-2pp over current regulatory capital requirements. Uncertainty remains over Nordax's future regulatory capital requirements; the Swedish regulator could impose higher requirements in view of the combined entity's larger balance sheet and the bank might need to manage reciprocity requests from the Norwegian regulator in respect of Bank Norwegian.
Our view of the combined entity's capital position is forward looking and takes into consideration the exceptional risk-adjusted capital generation potential of the combined loan books. We anticipate that Nordax will maintain its strong growth ambitions and aim to pay dividends on 2022 profits, giving flexibility to our capital forecast while adding over 1pp to its capital ratios annually in both 2022 and 2023 as regulatory countercyclical buffers are reinstated.
We view the acquisition as positive for Nordax's credit profile, but reflect the combination of positive and negative impacts in our affirmation of the ratings. We believe the transaction will improve Nordax's competitive position and will lead to increased pre-provision earnings from already high levels. Once completed, the acquisition will result in the largest and most diverse niche bank in the Nordic market in terms of geographic and product footprint. We also expect Nordax's margins and earnings to increase, largely due to the higher risk profile of the acquired loan book. In addition, as a combined banking group, Nordax will have a more diverse funding profile and materially improved liquidity reserves, though the initial legal structure limits some cross-entity funding synergies.
In our view, these improvements will be slightly offset by the higher credit risk appetite and increased losses that we expect in Bank Norwegian's loan book. We anticipate credit losses to be materially higher for the combined entity than in our pre-acquisition expectations for Nordax Bank. We also believe that higher earnings and a materially worse loss performance are likely because of the lower levels of collateral and weaker underwriting in Bank Norwegian's loan book, negatively affecting our credit risk assessment. In addition, we expect the transaction to lead to restructuring costs initially and possible future costs for legal restructuring. For this reason, we adjust our view of other risks due to the increased possibility of complications associated with an acquisition of this magnitude.
The affirmation takes into account our view of the risks related to the combined geographic footprint of the new entity, considering the upward revisions we made in September to our national assessments of the main Nordic banking markets (see Nordic banking assessments raised on reduced COVID threat, published 9 Sep. 2021). In addition, we continue to view the consumer lending industry as subject to more stringent regulatory scrutiny than the wider banking market and consider those risks in our assessment of the operating environment.
Stable outlook
The stable outlook reflects our view that the acquisition of Bank Norwegian comes as the Nordic region continues to make progress towards a full economic recovery despite the lingering effects of COVID-19. It also reflects our view that the benefits of the acquisition in terms of scale and risk-adjusted earnings will initially offset the higher risk profile of the acquired loan book, and that the resulting added value will increase gradually as additional synergies are achieved.
We could raise the long-term issuer rating due if the synergies and benefits of diversification are supported by a CET1 ratio above 18%, increasing the buffer above regulatory requirements, and stable asset quality. We could also raise the rating to reflect greater benefits of scale and a more diverse funding profile than we currently expect, or an improvement in the operating environment for consumer lenders. We could lower the rating to reflect a decline in the CET1 ratio below 14% driven by a greater risk appetite in terms of growth and/or lower capital buffers, or regulatory changes affecting interest rates and recovery prospects for consumer loans.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BBB | BBB |
| Outlook: | Stable | Stable |
| Short-term issuer credit rating: | N-1+ | N-1+ |
| Senior unsecured issue rating: | BBB | BBB |
| Tier 2 issue rating: | BB+ | BB+ |
Contacts:
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.