Nordic Credit Rating (NCR) said today that it had affirmed its 'BBB+' long-term issuer rating on Sweden-based Sörmlands Sparbank AB (publ). The outlook is stable. The 'N3' short-term issuer rating and the 'BBB+' senior unsecured issue rating were also affirmed.
Rating rationale
The long-term rating reflects Sörmlands Sparbank's strong capital position, low risk appetite, and relationship-based funding profile. The bank has a cooperation arrangement with Swedbank AB which we view as positive, as it provides material diversity of product offerings, shared IT costs, and the opportunity to finance retail mortgages. We expect higher interest rates to support the bank's core earnings profile which is complemented by dividend revenues from holdings of Swedbank shares.
The rating is constrained by the relative volatility of the bank's local market due to its historical role as a key manufacturing region. We anticipate that credit losses will increase over the next two years reflecting the bank's relatively high levels of non-performing loans associated with legacy credit losses.
In our base-case assessment, we expect the bank to make material improvements in its earnings, despite projections of higher credit losses. However, downside risk has increased due to uncertainty about the wider Swedish economy and the bank's local region of operation. We have also seen an increase in credit risk associated with the bank's property exposures.
Stable outlook
The stable outlook reflects our expectation that Sörmlands Sparbank's core earnings metrics will improve over the next two years, offsetting the likelihood of considerable economic uncertainty over the same period. We base our view on our assessment of the bank's region of operation and exposure to the local property market. In our base-case assessment, we expect continued strong capital ratios, supported by Swedbank dividends, even as the bank expands its loan book by financing a larger proportion of mortgage loans on its own balance sheet. The outlook also reflects the bank's continuing relationship with Swedbank and its low risk appetite, despite our expectations that credit losses will rise through 2024.
We could raise the rating to reflect reduced economic uncertainty in the bank's region of operation and the local property market, core pre-provision income sustainably above 2.5% of the risk exposure amount and modest credit losses, or a common equity capital ratio sustainably above 25%.
We could lower the rating to reflect a material deterioration in the local operating environment that negatively affects the bank's asset quality, a sustained reduction in the common equity capital ratio to below 18%, or core risk-adjusted earnings metrics sustainably below 1.0% of the risk exposure amount.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BBB+ | BBB+ |
| Outlook: | Stable | Positive |
| Short-term issuer credit rating: | N3 | N3 |
| Senior unsecured issue rating: | BBB+ | BBB+ |
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.