Nordic Credit Rating (NCR) said today that it had affirmed its 'BBB+' long-term issuer rating on Sweden-based Sparbanken Västra Mälardalen (Sparbanken VM). The outlook is stable. At the same time NCR affirmed the 'N3' short-term rating. At the same time NCR affirmed the 'BBB+' senior unsecured issue rating.
Rating rationale
The affirmation reflects the bank's performance, which remains consistent with our expectations. Increases in net interest income due to policy rate hikes have improved earnings, strengthened capital ratios and act as a buffer against a higher share of stage 2 and non-performing loans.
The long-term issuer rating on Sparbanken Västra Mälardalen (Sparbanken VM) reflects the bank's strong capital position, low risk appetite and relationship-based deposit profile. Sparbanken VM 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 manufacturing centre. The rating is also constrained by Sparbanken VM's regional retail banking and SME customers, and by the high real-estate exposure. We project that credit losses and non-performing loans will increase over the next two years, given the uncertain economic environment.
We have raised our assessment of Sparbanken VM's other risks to reflect continued work on lowering risk in the bank's investment portfolio. We have also raised our assessment of earnings to take account of improved risk-adjusted income and cost efficiency metrics, driven by higher interest rates. However, we have lowered our assessment of Sparbanken VM's loss performance to reflect worsening asset quality metrics in our forecast, based on increased risk in individual exposures and sensitivity in the weak regional economy.
Stable outlook
The stable outlook reflects our expectation that Sparbanken VM will maintain strong capital buffers in a harsher economic climate. It also reflects projections of below-average population and economic growth in the bank's core markets and its 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 an improvement in local economic conditions and growth prospects in the bank's market, or to reflect an earnings increase over a sustained period, with core risk-adjusted earnings ratio stabilising above 3%, with improved asset quality metrics.
We could 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. We could also lower the rating if asset quality metrics deteriorate materially or if the common equity capital ratio falls below 18% on a sustained basis.
| 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+ |
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. NCR_-_Sparbanken_Vastra_Malardalen_-_Full_Rating_Report_19_Dec._2023.pdf (522.56 KB) NCR - Sparbanken_Vastra_Malardalen - Rating Action Report 19 Dec. 2023.pdf (150.83 KB) Sparbanken Västra Mälardalen BBB + Stable Financial N3 Off On Off