Nordic Credit Rating (NCR) said today that it had revised its outlook on Sparbanken Västra Mälardalen (Sparbanken VM) to stable from negative. At the same time NCR affirmed its 'BBB+' long-term issuer rating and 'N-1+' short-term issuer rating on the bank.
Economic uncertainty reduced
NCR today revised its outlook on the wider Swedish banking sector to stable from negative, while affirming its 'bbb+' assessment of the industry. Earlier this year, we revised our assessment score for Swedish financial institutions down by one notch to its current level (see NCR sees increased risks in the Swedish banking sector, published 3 Apr. 2020), mainly to reflect the initial impact of COVID-19. We maintain our view that the bank's local operating environment is strained given the importance of manufacturing and industrial jobs to the local economy.
Sparbanken VM has thus far continued its steady improvement of core pre-provision earnings (net interest income and net fee and commission income net of expenses) with year-to-date levels 9% higher than a year earlier. We note that the bank's business volumes were up 1.9% year on year at end-June, supported by increases in loans (3.0%) and deposits (9.2%) despite market turbulence and the negative impact of measures to slow the spread of COVID-19. As expected, credit losses have increased to 27 bps of net loans, but volumes of Stage 3 net non-performing loans (as defined by International Financial Reporting Standards) have remained low at 26 bps of net loans.
Stable outlook
The stable outlook reflects our expectations of a flatter U-shaped recovery rather than the sharp V- or W-shaped rebound that we anticipated previously. In addition, property prices have remained resilient after an initial downturn in March and April of this year, supporting a large majority of Sparbanken VM's collateral. We expect the bank to maintain a very strong balance sheet and prudent underwriting, while retaining its access to and relationship with Swedbank AB.
Potential positive rating drivers
- Reduced downside risk in local economy.
- Improved core earnings performance.
- Reduced reliance on income from shareholdings and fixed income investments.
Potential negative rating drivers
- Long-term economic recession in the bank's operating region, affecting economic activity and employment.
- Lower asset quality metrics and credit losses impacting capitalisation.
- Swedbank-related issues impacting the bank's capitalisation or cooperation with Swedbank.
If you have any questions, please contact:
Sean Cotten, chief rating officer, +46735600337, sean.cotten@nordiccreditrating.com
Geir Kristiansen, credit rating 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.