Nordic Credit Rating said today that it had affirmed its 'A-' long-term issuer rating on Sweden-based savings bank Sparbanken Skaraborg AB (publ). The outlook is stable. The 'N2' short-term issuer rating and the 'A-' senior unsecured issue rating were also affirmed.
Rating rationale
The affirmation reflects continued performance largely in line with our expectations. Sparbanken Skaraborg has benefited from still-high interest rates, despite recent declines. Together with modest loan growth, these have boosted capitalisation from already high levels. In February 2024, the bank issued a first senior unsecured bond since 2020. While we expect the bank to have limited need for market funding, we view the issue as a positive diversification of financing.
In the third quarter of 2024, Sparbanken Skaraborg reported a sharp increase in net Stage 3 loans, which returned to levels of 1.5-2% of total net lending last seen in 2018-2020. The bank has relatively high exposure to agriculture, a sector that generally provides strong collateral but faces periods of weak cash flows. While we expect modest, if any, realised losses from the bank's elevated Stage 3 loans, we have revised our assessment of loss performance to reflect a risk that such loans could remain at current levels.
The long-term issuer rating reflects Sparbanken Skaraborg's moderate risk appetite, solid market position, 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 mortgage loans.
Stable outlook
The stable outlook reflects our expectation that Sparbanken Skaraborg's strong capitalisation and improved earnings are sufficient to offset the possibility of higher loan losses following sharp increases in Stage 3 lending in 2024. The outlook also reflects our base-case expectation that the proportion of Stage 3 lending will decline from 2025, and that current levels of Stage 3 lending will not lead to significant realised losses. It further reflects our expectation that the regional economy where the bank operates will remain relatively weak for most of 2025. We expect the bank to improve its already strong capital ratios due to modest credit growth and prudent dividend payments to its owner, and to maintain its relationship with Swedbank.
A higher rating is unlikely at this time as earnings and capitalisation are already strong.
We could lower the rating to reflect continued elevated Stage 3 loans (1.5-2% of total net loans over a protracted period), a deteriorating operating environment leading to reduced regional growth, asset quality and collateral values, or a decline in the common equity Tier 1 capital ratio to below 22%.
| 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- |
Contacts:
Ylva Forsberg, analyst, +46768806742, ylva.forsberg@nordiccreditrating.com
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 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.