Nordic Credit Rating (NCR) said today that it had revised its outlook on SpareBank 1 Østfold Akershus (SB1 Østfold Akershus) to stable from negative. At the same time NCR affirmed its 'A' long-term issuer rating and 'N-1+' short-term issuer rating on the bank.
Economic uncertainty reduced
NCR said today that it had revised its outlook on the Norwegian banking sector to stable from negative, while affirming its 'a-' assessment of the industry. In our last review of the sector earlier this year, we revised our assessment score down by one notch to its current level (see NCR sees increased risk for Norwegian banks, published 3 Apr. 2020), mainly to reflect the initial impact of COVID-19 on the sector. Any further downward revision of our assessment of the sector due to the pandemic is currently unlikely.
Norwegian banks, including SB1 Østfold Akershus, outperformed our earlier expectations in the first half of 2020. An initial fall in income due to capital market tightening was partly reversed in the second quarter, while net interest margins have fallen due to lower policy rates. In the first quarter of 2020, SB1 Østfold Akershus booked losses (under International Financial Reporting Standards 9) based on economic projections, increasing buffers against future actual losses, while losses in the second quarter were small and related to a specific exposure. Property prices remain relatively stable in south-eastern Norway and property lending remains the bank's primary form of exposure.
Mortgage loans account for close to three-quarters of SB1 Østfold Akershus's loan book and the bank has no direct or indirect exposure to the oil industry. SB1 Østfold Akershus is mainly funded by deposits and its deposit to loan ratio has improved during 2020. The bank has no bond maturities due in the remainder of 2020.
Stable outlook
The stable outlook reflects our expectations of a flatter U-shaped recovery rather than the sharp V- or, in the worst case, W-shaped rebound that we anticipated previously. There are remaining risk factors, including external problems affecting supply chains, long-term shutdowns or low production levels (under which furloughs could become layoffs), increasing corporate default, and the longer-term impact of changing market dynamics on commercial property prices. However, we believe that the bank's strong capitalisation and earnings make it resilient to a possible new economic downturn.
Potential positive rating drivers
- An upgrade is unlikely at this time given the current state of the regional economy and uncertain timeline for returning to normal operating conditions.
Potential negative rating drivers
- Long-term economic recession in the region, affecting economic activity and employment.
- Lower asset quality metrics and credit losses impacting capitalisation.
- Margin pressure due to lower spreads and higher level of non-performing loans.
If you have any questions, please contact:
Geir Kristiansen, credit rating analyst, +4790784593, geir.kristiansen@nordiccreditrating.com
Sean Cotten, chief rating officer, +46735600337, sean.cotten@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.