Nordic Credit Rating (NCR) said today that it had affirmed its 'A-' long-term issuer rating on Sweden-based Sparbanken Rekarne AB (publ) (Sparbanken Rekarne). The outlook is stable. At the same time NCR affirmed the 'N-1+' short-term rating, the 'A-' issue ratings on Sparbanken Rekarne's senior unsecured bonds and the 'BBB+' issue ratings on the bank’s Tier 2 bonds.
Rationale
Sparbanken Rekarne's issuer rating reflects the bank's very strong loss history, modest risk appetite and relationship-based funding profile. We view the bank's 50% ownership by Swedbank AB as positive. In addition, we view the bank’s cooperation with Swedbank as important, as it provides 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 local economy, which has historically experienced volatility as a result of being a key region for Sweden's manufacturing industry, and by its regional retail-banking customers, SMEs and real-estate collateral. In addition, the owners' return requirements have contributed to a slimmer capital structure than that of its Nordic savings bank peers. Although capital and earnings metrics have improved, we consider them somewhat weaker than those of peers when adjusted for Sparbanken Rekarne's higher leverage.
Our assessment of Sparbanken Rekarne's operating environment has improved, due to a lower risk of COVID-19-related loan losses as the economic recovery continues. We also take a more positive view of the bank's capital and loss performance, given sustainable improvements. These improvements have increased our standalone credit assessment of the bank to 'a-' and we have consequently removed the notch for ownership support that we had previously included in the bank's issuer rating due to Swedbank's 50% ownership. In our view, the bank's 'A-' issuer rating, which now excludes ownership support, adequately reflects the credit profile of the bank, though we still view Swedbank's ownership as positive for Sparbanken Rekarne and it reduces the risk of a downgrade of the issuer rating.
Stable outlook
The stable outlook on Sparbanken Rekarne reflects our expectation that the bank will maintain strong capital buffers as it grows its loan book. It also reflects projections of population and economic growth in the region and the bank's modest risk appetite. In addition, the outlook takes account of the bank's maintenance of its relationship with Swedbank and our forecast of continued low credit losses. We could raise the rating if the bank shows sustainable improvements in core earnings metrics, with core pre-provision income to risk exposure amount sustainably above 3%, along with improved cost efficiency and a common equity Tier 1 capital ratio in excess of 25%. We could lower the rating in the event of a sustained reduction in the common equity Tier 1 capital ratio to below 18%, combined with reduced ownership by Swedbank, a material deterioration in asset quality metrics or a long-term economic recession in the northern Södermanland region, affecting economic activity and employment.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | A- | A- |
| Outlook: | Stable | Stable |
| Short-term issuer credit rating: | N-1+ | N-1+ |
| Senior unsecured issue rating: | A- | A- |
| Tier 2 issue rating: | BBB+ | BBB+ |
Contacts:
Sean Cotten, chief rating officer, +46735600337, sean.cotten@nordiccreditrating.com
Geir Kristiansen, 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.