Nordic Credit Rating (NCR) said today that it had affirmed its 'A-' long-term issuer rating on Sweden-based Sparbanken Rekarne AB (publ). The outlook is stable. At the same time NCR affirmed the 'N2' short-term rating. At the same time NCR affirmed its 'A-' issue ratings on Sparbanken Rekarne's senior unsecured bonds and affirmed its 'BBB+' issue ratings to its tier 2 bonds.
Rating rationale
The affirmation reflects continued performance in line with our expectations. Improvements in net interest income due to the rise in policy rates have translated into stronger earnings, boosting capital ratios and providing a buffer against a higher share of stage 2 and non-performing loans.
The long-term issuer rating on Sparbanken Rekarne reflects the bank's history of strong asset quality metrics, modest risk appetite and its relationship-based funding profile. We view the bank's 50% ownership by Swedbank AB as positive. Cooperation with Swedbank enables material diversification of product offerings, shared IT costs and the opportunity to finance retail and commercial mortgages.The rating is constrained by the bank's concentrated exposure to the Södermanland region, which has historically experienced volatility as a key manufacturing region. We project increased credit losses over the next two years as the global and Swedish economies slow, and see increasing risk associated with the bank's high levels of real-estate lending.
We have raised our assessment of Sparbanken Rekarne's capital to reflect the improvement in capital ratios and reduced uncertainty over the impact of changing to the standardised capital model approach, which will first be reflected in the first interim report in 2024. We have also lifted our assessment of risk governance, to reflect the relative strength in internal risk monitoring and reporting compared with similar-sized peers. In addition, we have raised our assessment of earnings, reflecting improved risk-adjusted earnings and cost efficiency metrics, largely driven by the increase in interest rates. However, we have lowered our assessment of loss performance, reflecting our view that Sparbanken Rekarne is likely to see a higher increase in loan losses than similar-sized peers due to the relatively weak local economy.
Stable outlook
The stable outlook reflects our expectation that Sparbanken Rekarne will maintain its strong capital buffers and benefit from improvements in earnings due to higher interest rates. It also reflects projections of population and economic growth in the region, as well as the bank's modest risk appetite, despite our expectations of higher credit losses as the economy slows. The outlook also takes account of the bank's continuing relationship with Swedbank and the potential for capital support from the larger bank, should the need arise.
An upgrade is unlikely at this time, given the uncertain economic environment. We could lower the rating to reflect a sustained reduction in the common equity Tier 1 capital ratio to below 18%, combined with reduced ownership by Swedbank. We could also lower the rating to reflect a more significant downturn in the operating environment than we expect, negatively impacting asset quality, loan growth, and/or funding access, or to reflect a material deterioration in asset quality metrics.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | A- | A- |
| Outlook: | Stable | Stable |
| Short-term issuer credit rating: | N2 | N2 |
| Senior unsecured issue rating: | A- | A- |
| Tier 2 issue rating: | BBB+ | BBB+ |
Contacts:
Ylva Forsberg, analyst, +46768806742, ylva.forsberg@nordiccreditrating.com
Sean Cotten, chief rating officer, +46735600337, sean.cotten@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 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.