Nordic Credit Rating (NCR) has affirmed its 'BBB+' long-term issuer rating on Norway-based Pareto Bank ASA. The outlook is negative. The 'N2' short-term issuer rating, 'BBB+' senior unsecured issue ratings, 'BBB' Tier 2 issue rating, and 'BB+' Additional Tier 1 issue rating have also been affirmed.
Rating rationale
The outlook revision is driven by the deterioration in asset quality and higher loan losses in Pareto Bank ASA’s core residential development portfolio. The bank maintains strong pre-provision earnings and robust capital and liquidity, which we believe continue to support the current rating level. Elevated interest rates, higher newbuild costs, and an overhang of rental apartments for sale have delayed pre-sale milestones and dampened demand for newbuilds. This has created liquidity stress for contractors and increased Pareto Bank's Stage 3 nonperforming loans. We expect loan losses to remain high in the near term, at about 3.7% of net loans at end-2026, before moderating as rates ease and the market gradually rebalances.
This deterioration is balanced by structural strengths in profitability and capital. Pareto Bank’s niche strategy supports higher lending margins, underpinning risk-adjusted earnings (pre-provision income to risk exposure amount) above 4% and a strong cost-to-income ratio of around 20% through our forecast horizon. As of 30 Jun. 2026, the bank reported a CET1 ratio of 19.7%, comfortably above its 15.8% target, including a 1pp management buffer. We have improved our view of the bank's capital, but expect capital ratios to decline modestly as growth resumes.
Liquidity and funding metrics remain a credit strength. Funding is diversified between customer deposits and wholesale debt. Deposits have been actively reduced to 56% of net lending, reflecting an intentional reduction in excess liquidity amid muted loan demand, and senior unsecured bonds now represent 36% of net loans.
We view the bank’s risk profile and operating environment as increasingly constrained by its concentration on project financing, particularly in real estate development, where Pareto Bank's credit risk is structurally higher than for universal banks. We have also revised our view of the bank's credit risk and expected loss performance to reflect that Stage 3 loans have increased significantly, mirroring sector-wide pressures. We expect loan losses to gradually normalise, decreasing to about 0.8% in 2028 as interest rates decline and demand recovers.
Negative outlook
The outlook is negative, reflecting rising loan losses and elevated Stage 3 loans. Higher interest rates, increased newbuild prices and an overhang of rental apartments for sale have led to oversupply, extending the time required to meet pre-sale requirements and reducing demand for newbuilds. This has resulted in liquidity challenges for residential development contractors, a key market segment for Pareto Bank. While we believe there is a risk that improved credit quality may be delayed until interest rates decline and oversupply decreases, we acknowledge that Pareto Bank has loss-absorbing capacity due to strong pre-provision earnings and capitalisation.
We could revise the rating to stable if credit quality improves and lower loans are reduced at least in line with our forecast, if we observe significant improvement in size and diversification, or if the bank commits to maintaining a Tier 1 capital ratio above 22%.
We could lower the rating if credit quality remains weak and loan losses stay elevated for an extended period, if the Tier 1 ratio remains below 18% for a sustained period or if liquidity buffers weaken and refinancing risk increases.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BBB+ | BBB+ |
| Outlook: | Negative | Stable |
| Short-term issuer credit rating: | N2 | N2 |
| Senior unsecured issue rating: | BBB+ | BBB+ |
| Tier 2 issue rating: | BBB | BBB |
| Additional Tier 1 issue rating: | BB+ | BB+ |
Contacts:
Geir Kristiansen, analyst, +4790784593, geir.kristiansen@nordiccreditrating.com
Ylva Forsberg, analyst, +46768806742, ylva.forsberg@nordiccreditrating.com
Sean Cotten, lead senior analyst, +46735600337, sean.cotten@nordiccreditrating.com
The methodology documents used for this rating are NCR's Financial Institutions Rating Methodology published on 12 May 2025, 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.