Nordic Credit Rating said today that it had raised its long-term issuer rating on Sweden-based savings bank Sörmlands Sparbank to 'A-' from 'BBB+'. The outlook is stable. At the same time, we raised the short-term issuer rating to 'N2' from 'N3'. The senior unsecured issue rating was raised to 'A-' from 'BBB+'.
Rating rationale
The rating action reflects our view that Sörmlands Sparbank's steady gains in its earnings and asset quality have strengthened the bank's overall creditworthiness. We view more positively the bank's loss performance given its continued progress with legacy loan resolution and our projections for declining net non-performing loans and modest credit losses in our forecast period through 2026. We expect that the bank will maintain some of its recent progress in its earnings metrics, even as interest rates fall, given its focus on tighter cost efficiency. These improvements have occurred while the bank strengthened its capital position. We have raised our assessment of the bank's capital given that we expect further improvement in its common equity Tier 1 (CET1) capital ratio to above 30%.
The rating continues to reflect Sörmlands Sparbank's exceptional capital position, moderate 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 the bank's recent improvements in core earnings, cost efficiency and projected dividend revenues from holdings of Swedbank shares to continue to complement capital generation.
The rating is constrained by the relative volatility of the bank's local market in the county of Södermanland due to its historical role as a key manufacturing region. We anticipate that credit risk will remain elevated but expect losses to remain modest over the next two years as the bank steadily reduces non-performing loans and recovers loss provisions associated with legacy credit losses.
Stable outlook
The outlook is stable, reflecting our view that Sörmlands Sparbank's capital and improved earnings provide solid buffers for managing an economic downturn in its core markets. Downside credit risks associated with commercial and residential real estate in the region remain given the weak economy. We consider these risks to be manageable in light of the bank's solid capital position. Although we project increasing capital ratios, we believe that the bank may use its excess capital resources to support increased growth by reducing its share of transferred loans or expanding its lending.
An upgrade is unlikely at this time, given the bank's regional and sectoral concentration.
We could lower the rating to reflect a material deterioration in the regional operating environment, leading to weaker asset quality, core pre-provision earnings sustainably below 1.5% of the risk exposure amount or a sustained reduction in the CET1 ratio to below 25%.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | A- | BBB+ |
| Outlook: | Stable | Positive |
| Short-term issuer credit rating: | N2 | N3 |
| Senior unsecured issue rating: | A- | BBB+ |
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.