Nordic Credit Rating has lowered its long-term issuer rating on Sweden-based Norion Bank AB (publ) to 'BB+' from 'BBB-'. The outlook is stable. The short-term issuer rating has been lowered to 'N4' from 'N3', the senior unsecured issue rating to 'BB+' from 'BBB-', and the Tier 2 issue rating to 'BB-' from 'BB'. The bank currently has no outstanding Additional Tier 1 instruments, but we would expect to rate such instruments 'B'.
Rating rationale
The rating action reflects our increasing concerns about Norion Bank's management of conflicts of interest, as well as its high volumes of non-performing corporate loans. In view of this combination of risk factors we have lowered the issuer and issue ratings by one notch until we see clear signs of sustainable balance sheet improvement, greater transparency, and stronger internal limits to manage conflicts of interest. Our view of Norion Bank's risk governance has evolved following a series of events over the past 12 months involving associated companies linked to the bank's two largest owners, Swedish property managers Fastighets AB Balder and Erik Selin Fastigheter AB, each of which are chaired by Erik Selin, as is the bank since 2020. We see a risk that the broad and complex ownership profile of associated holdings related to the two owners could increase opportunities for related-party lending, as well as risk of indirect influence, as the bank expands its real estate loan book.
While Norion Bank maintains a public policy on management of conflicts of interest and transacts related-party deals on market terms, we have concerns when the level of such transactions could rise more rapidly than other types of lending. In addition, we believe that reputational risk linked to related-party exposures is heightened by Mr Selin's significant direct and indirect ownership, which could negatively affect investor perceptions. Our concerns are exacerbated by a lack of transparency around related-party exposures given that the bank discloses the volumes of such transactions only in its annual reports. As of end-2023, the volume of related-party lending was SEK 2bn, equal to 4.5% of net loans. This compares with volumes averaging closer to SEK 700m in 2020-2022 (about 2% of net lending) and only SEK 177m in 2019 (0.6%).
We have incorporated a notch of peer adjustment into the long-term-issuer rating to add additional weight to these risk factors.
In March, we revised the outlook to negative to reflect a deterioration in asset quality metrics and increased downside risk associated with a high proportion of Norion Bank's non-performing loans. We have now revised our assessment of the bank's loss performance due to the high proportion of corporate net Stage 3 non-performing loans, which rose to 10.9% as of 30 Sep. 2024 (13.4% gross) from 3.5% at end-2023 (5.7%). Although we believe that falling interest rates and increasing transaction volumes could support the overall real estate market, we note that real estate companies with high leverage and illiquid collateral face continued problems.
The long-term issuer rating continues to reflect Norion Bank's strong earnings, even though year-to-date pre-provision earnings are tracking somewhat below our expectations for full-year 2024 due to lower net interest margins and non-accrual of interest income from Stage 3 non-performing loans. However, the bank's common equity Tier 1 ratio (16.1% as of 30 Sep. 2024) and return on equity (15.5% in the year to date) have already exceeded our projections for full-year 2024 (15.1% and 11.2%, respectively) due to lower loan-loss provisions (2.2%) than we previously projected (3.5% in our forecast). We believe that the bank has been making efforts to improve its regulatory funding and liquidity metrics since the regulator revised its stance on deposits from distribution platforms.
Stable outlook
The stable outlook reflects our base-case view that, while we expect an increase in loan-loss provisions, Norion Bank will maintain its capital ratios and reduce the proportion of Stage 3 real estate lending, supported by its strong earnings. The outlook also reflects our expectation that the bank will limit further increases in related-party exposures and focus on expanding its core business outside the sphere of its ownership group.
We could raise the rating to reflect a material reduction in downside risk associated with Stage 3 lending if the bank maintains its capital ratios and improves both transparency and management of conflicts of interest and related-party exposures. We could lower the rating to reflect a reduction in the Tier 1 ratio below 15%, a lasting increase in loan-loss provisions above 4% of net lending, or a material expansion of related-party exposures in relation to common equity Tier 1.
Related publications
(i) NCR comments: Norion Bank acquires Swedish credit card portfolio from DNB, 10 Dec. 2024.
(ii) Norion Bank AB outlook revised to negative; 'BBB-' long-term issuer rating affirmed, 20 Mar. 2024.
(iii) Falling interest rates yet to impact Nordic niche banks, 21 Nov. 2024.
(iv) Swedish niche lenders face regulatory changes in funding metrics, 21 Oct. 2024.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BB+ | BBB- |
| Outlook: | Stable | Negative |
| Short-term issuer credit rating: | N4 | N3 |
| Senior unsecured issue rating: | BB+ | BBB- |
| Tier 2 issue rating: | BB- | BB |
| Additional Tier 1 issue rating: | B | B+ |
Contacts:
Sean Cotten, chief rating officer, +46735600337, sean.cotten@nordiccreditrating.com
Ylva Forsberg, analyst, +46768806742, ylva.forsberg@nordiccreditrating.com
Elisabeth Adebäck, analyst, +46700442775, elisabeth.adeback@nordiccreditrating.com
The methodology documents used for this rating are NCR's Financial Institutions Rating Methodology published on 14 Feb. 2024, NCR's Rating Principles published on 14 Feb. 2024 and NCR's Group and Government Support Rating Methodology published on 14 Feb. 2024. For the full regulatory disclaimer please see the rating report.