Nordic Credit Rating (NCR) said today that it had revised the outlook on its 'A-' long-term issuer rating on Sweden-based savings bank Varbergs Sparbank AB (publ) to positive from stable. At the same time, the long-term rating and the 'N2' short-term issuer rating were affirmed. The 'A-' senior unsecured issue rating was also affirmed.
Rating rationale
The outlook revision reflects a significant improvement in earnings and capital over the past year. While we consider Varbergs Sparbank to be well equipped to manage higher credit losses, lower credit growth, and increased competition for customer deposits, we remain cautious about the downside risks for the wider economy and their likely impact on the bank's performance. Consequently, we would want to see reduced uncertainty about the national and local economy and the direction of interest rates, before raising the rating. A higher rating would also be contingent on a continued strong financial performance, outstanding capital ratios, and a conservative risk appetite.
We have lowered our assessment of credit risk to reflect pressure on the commercial and residential real estate sectors due to persistent inflation and sharp interest rate increases over the past 18 months. We have raised our assessment of earnings due to an improvement in key ratios over the past year and reflected this in our forecast through 2025. While we expect net interest margins to peak later this year, we project earnings will remain strong given high interest rates and interest margins.
Positive outlook
The positive outlook reflects our view that Varbergs Sparbank is well equipped to handle a regional economic downturn, with solid underwriting and a strong improvement in earnings and capital. However, uncertainty about the local economy, as well as credit risk to commercial and residential real estate in the region, implies continued downside risk that is currently reflected in the rating. We would likely raise the rating to reflect continued elevated earnings and capital levels.
We could raise the rating to reflect core cost to income below 50% and core risk-adjusted earnings above 2.5% over a protracted period. We could also raise the rating to reflect reduced economic uncertainty, improved asset quality and interest rate predictability, and an improved outlook for commercial and residential real estate exposures.
We could revise the outlook to stable to reflect a decline in core earnings, with core cost-to-income around 60% and risk-adjusted earnings around 2%. We could also revise the outlook to stable to reflect a significant downturn in the operating environment, that negatively impacts asset quality, loan growth, and funding access, or material changes in the bank's cooperation arrangements with Swedbank AB.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | A- | A- |
| Outlook: | Positive | 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
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.