Nordic Credit Rating (NCR) said today that it had revised the outlook on its 'BBB+' long-term issuer rating on Sweden-based Sörmlands Sparbank AB (publ) to positive from stable. At the same time the long-term rating, the 'N3' short-term issuer rating and the 'BBB+' senior unsecured issue rating were affirmed.
Rating rationale
The outlook revision reflects significant improvements in Sörmlands Sparbank's capital and earnings in recent years. The bank is well equipped to manage higher loan losses, lower credit growth, and increased competition for customer deposits. We remain cautious about the downside economic risk in the bank's area of operation and the potential impact on its performance. Moreover, we are likely to remain cautious until we see greater clarity about the national and local economy and the direction of interest rates. A higher rating would be contingent on the bank maintaining its current earnings performance and outstanding capital ratios, while improving its asset quality metrics.
We have lowered our assessment of the operating environment given the historical volatility of the bank's area of operation and pressure on the regional commercial and residential real estate sectors due to persistent inflation and sharp interest rate increases over the past 18 months. Conversely, we have raised our assessment of earnings due to improvements in key ratios and the cost base, which have reduced core cost income towards 50% in 2023 from 87% in 2019. While we expect net interest margins to peak later this year, the bank has a high proportion of fixed-interest mortgages set to reprice over the next two years and we expect earnings to remain strong through 2025.
Positive outlook
The positive outlook reflects our view that Sörmlands Sparbank's stronger capital and earnings provide solid buffers for managing an economic downturn in its core markets. Uncertainty about the local economy, as well as credit risk associated with regional commercial and residential real estate are already reflected in the rating. We would likely raise the rating to reflect a further elevation of earnings and capital levels and a reduced likelihood of a material downturn. In our base-case assessment, we expect continued strong capital ratios, supported by dividends from Swedbank AB.
We could raise the rating to reflect reduced economic uncertainty in the bank's region of operation and improvements in asset quality. We could also raise the rating if the bank maintains core pre-provision income above 2.5% of risk exposure amount (REA) and a common equity Tier 1 (CET1) capital ratio sustainably above 25%.
We could revise the outlook to stable to reflect a more significant downturn in the operating environment than we currently expect, that negatively impacts asset quality, loan growth, and/or funding access. We could also revise the outlook to stable to reflect a persistent decline in core earnings and capital, with core earnings falling below 2.5% of REA or a CET1 ratio below 25%.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BBB+ | BBB+ |
| Outlook: | Positive | Stable |
| 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.