Nordic Credit Rating (NCR) said today that it had revised its outlook on Sparbanken Rekarne AB (Sparbanken Rekarne) to stable from negative. At the same time NCR affirmed its 'A-' long-term issuer rating and 'N-1+' short-term issuer rating on the bank.
Economic uncertainty reduced
NCR today revised its outlook on the wider Swedish banking sector to stable from negative, while affirming its 'bbb+' assessment of the industry. Earlier this year, we revised our assessment score for Swedish financial institutions down by one notch to its current level (see NCR sees increased risks in the Swedish banking sector, published 3 Apr. 2020), mainly to reflect the initial impact of COVID-19. We maintain our view that the bank's local operating environment is strained given the importance of manufacturing and industrial jobs to the local economy.
Sparbanken Rekarne continued a slow reduction in its on-balance-sheet loans during the second quarter, lowering lending by 1.6% (about SEK 200m), while increasing loans transferred to Swedbank AB by 1.8% (about SEK 130m). Total business volumes are also slightly higher than at end-2019 given a rebound in valuations of customer assets managed by Swedbank and an increased volume of new deposits, which reduces the need for capital market financing. Credit losses remain low at 6bps of total lending and net non-performing loans (Stage 3 loans as defined by International Financial Reporting Standards 9) have been stable at 10bps of net loans, exceeding expectations given the impact of COVID-19 on the Swedish economy.
Sparbanken Rekarne's capital ratios have improved, with the common equity Tier 1 ratio at 16.4% (compared with 15.6% at end-2019) and the total capital ratio at 18.5% (17.6%). The bank has cancelled its 2019 dividend to support its capital position.
Stable outlook
The stable outlook reflects our expectations of a flatter U-shaped recovery rather than the sharp V- or W-shaped rebound that we anticipated previously. In addition, property prices have remained resilient after an initial downturn in March and April of this year, supporting a large majority of Sparbanken Rekarne's collateral. We expect the bank to continue its relationship with Swedbank and that Swedbank's creditworthiness will remain strong. We include a notch of ownership support in the rating but expect that improvements in the standalone credit assessment would reduce the upside from ownership.
Potential positive rating drivers
- A rating upgrade is unlikely at this time given the bank's current capitalisation and ownership.
Potential negative rating drivers
- Reduced ownership by Swedbank or a decline in Swedbank's creditworthiness.
- Long-term economic recession in the Northern Södermanland region, affecting economic activity and employment.
- Materially lower capitalisation and/or asset quality.
If you have any questions, please contact:
Sean Cotten, chief rating officer, +46735600337, sean.cotten@nordiccreditrating.com
Geir Kristiansen, credit rating analyst, +4790784593, geir.kristiansen@nordiccreditrating.com
The methodology documents used for this rating are NCR's Financial Institutions Rating Methodology published on 14 Aug. 2018 and NCR's Rating Principles published on 16 Sep. 2019. For the full regulatory disclaimer please see the rating report.