Nordic Credit Rating (NCR) said today that it had affirmed its 'BBB+' long-term issuer rating on Sweden-based Sparbanken Västra Mälardalen. The outlook is stable. The 'N3' short-term issuer rating and 'BBB+' senior unsecured issue rating were also affirmed.
Rating rationale
The long-term issuer rating reflects Sparbanken VM's strong capital position, low risk appetite, and relationship-based deposit profile. The bank has a cooperation arrangement with Swedbank AB which enables material diversification of product offerings, shared IT costs, and the opportunity to finance retail mortgages. We expect higher interest rates to support the bank's core earnings profile, which is complemented by dividend revenues from its holdings of Swedbank shares.
The rating is constrained by the bank's concentrated exposure to the Västra Mälardalen region, which has historically demonstrated volatility associated with its key role as a centre of manufacturing, and by its regional retail banking and SME customers and real-estate collateral. We project that credit losses and non-performing loans will increase over the next two years, given the uncertain economic environment.
In our base-case assessment, we expect the bank to make material improvements in its earnings, despite projections of higher credit losses. However, downside risk has increased due to uncertainty about the wider Swedish economy and the bank's local region of operation. We also expect an increase in credit risk due to the bank's high level of property exposure.
Stable outlook
The stable outlook reflects our expectation that Sparbanken VM will maintain strong capital buffers through a harsher economic climate. It also reflects projections of below-average population and economic growth in its core markets and the bank's modest risk appetite. The outlook also takes account of the bank's continuing relationship with Swedbank and expectations of increased credit losses in our forecast.
We could raise the rating to reflect sustainable improvements in core earnings metrics (pre-provision income to risk exposure above 2.5%) with maintained asset quality, or a material improvement in economic conditions and growth prospects in the bank's local market.
We could lower the rating to reflect a sustained reduction in the common equity capital ratio to below 18%, a material deterioration in asset quality metrics, or a long-term economic recession in the bank's operating region that negatively affects economic activity and employment.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BBB+ | BBB+ |
| Outlook: | Stable | Stable |
| Short-term issuer credit rating: | N3 | N3 |
| Senior unsecured issue rating: | BBB+ | BBB+ |
Contacts:
Sean Cotten, chief rating officer, +46735600337, sean.cotten@nordiccreditrating.com
Ylva Forsberg, analyst, +46768806742, ylva.forsberg@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.