Nordic Credit Rating (NCR) said today that it had affirmed its 'A-' long-term issuer rating on Norway-based Orkla Sparebank. The outlook is stable. At the same time, the 'N2' short-term issuer rating was affirmed, as was the 'A-' issue rating on the bank's senior unsecured debt, the 'BBB+' issue rating on its Tier 2 instruments, and the 'BBB-' issue rating on its additional Tier 1 instruments.
Rating rationale
The long-term issuer rating reflects Orkla Sparebank's strong capital position and liquidity, and low risk appetite. The bank has a cooperation agreement with the Eika alliance, which we view as positive, as it provides product diversity, shared development costs and the opportunity to finance residential retail mortgages through mortgage company Eika Boligkreditt AS. We expect Orkla Sparebank's core earnings to withstand an imminent reduction in interest rates beginning in 2025 thanks to improved cost efficiency and an increase in corporate lending. We also expect core earnings to support capital generation despite projected loan losses. We also believe that the risk for a sharp increase in loan losses is less than 12 months ago due to low unemployment and our expectations of lower interest rates from 2025.
The rating is constrained by the bank's concentrated exposure to real estate and agriculture in the region south-west of Trondheim in central Norway. It is also constrained by strong competition and low market share in Trondheim, the bank's fastest growing market.
Stable outlook
The stable outlook reflects our view that a weak economic climate and projected credit losses will be offset by improvements in capital and stable earnings metrics. We expect the bank's already strong capital ratios to be further boosted by modest on-balance sheet loan growth and the positive impact of implementing the EU's Capital Requirements Regulations III.
We could raise the rating to reflect improved economic conditions and asset quality metrics relative to those of its peers and improved capital and earnings (Tier 1 capital sustainably above 25%).
We could lower the rating to reflect a material deterioration in the local operating environment that negatively affects asset quality, a lasting reduction in the Tier 1 capital ratio to below 20%, and risk-adjusted earnings metrics below 2% of risk exposure amount.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | A- | A- |
| Outlook: | Stable | Stable |
| Short-term issuer credit rating: | N2 | N2 |
| Senior unsecured issue rating: | A- | A- |
| Tier 2 issue rating: | BBB+ | BBB+ |
| Additional Tier 1 issue rating: | BBB- | BBB- |
Contacts:
Geir Kristiansen, analyst, +4790784593, geir.kristiansen@nordiccreditrating.com
Christian Yssen, analyst, +4740019900, christian.yssen@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.