Nordic Credit Rating said today that it had raised its long-term issuer rating on Sweden-based savings bank Varbergs Sparbank AB to 'A' from 'A-'. The outlook is stable. At the same time, the senior unsecured issue rating was raised to 'A' from 'A-' and the 'N2' short-term issuer rating was affirmed.
Rating rationale
The rating action reflects our view that Varbergs Sparbank has demonstrated prudent loan-book management and risk governance through a period of uncertainty and turbulence in the national and regional operating environment. We expect that the bank's asset quality metrics will remain strong, in part due to prudent past provisioning that is now serving as a cushion against the risk of additional losses. We also expect that the bank will be able at least partly to maintain recent improvements in its earnings metrics due to high interest rates even as interest rates fall. While we consider that risk in the Swedish property management sector has abated somewhat, we continue to view it as elevated.
We have raised our assessments of Varbergs Sparbank's loss performance and risk governance, reflecting our expectations of strong asset quality metrics over our forecast period through 2026, as well as the bank's proactive risk management.
The rating continues to reflect Varbergs Sparbank's exceptionally strong capitalisation, high proportion of secured lending, and history of strong asset quality. A cooperation agreement with Swedbank AB provides material diversification of the product offering, shared IT costs, and the opportunity to finance retail mortgages via Swedbank Hypotek AB.
The rating is constrained by Varbergs Sparbank's regional and sectoral concentration. While the bank's core market, Varberg municipality, has a diverse business sector, the bank faces geographic concentration risk, combined with sectoral concentration due to significant exposures to the property segment, both private and corporate.
Stable outlook
The stable outlook reflects our view that Varbergs Sparbank will maintain a prudent risk appetite despite our expectation that it will utilise its excess capital to grow. We expect that the bank will be able to protect some of a recent increase in risk-adjusted earnings if interest rates fall, as we expect. We believe that the bank's prudent provisioning will protect against any significant losses despite a risk of increasing non-performing loans in the construction sector. We further believe that the regional economy will continue to perform in line with, or better than, the domestic average and that Sweden does not face a major recession.
An upgrade is unlikely at this time, given the bank's regional and sectoral concentration.
We could lower the rating to reflect a decline in core earnings (core cost-to-income around 60% and risk-adjusted earnings around 2%). We could also lower the rating to reflect a material deterioration in the regional operating environment or increased risk appetite, or material changes in the bank's cooperation with Swedbank.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | A | A- |
| Outlook: | Stable | Positive |
| 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
Geir Kristiansen, analyst, +4790784593, geir.kristiansen@nordiccreditrating.com
The methodology documents used for this rating are NCR's Financial Institutions Rating Methodology published on 14 Feb. 2024, NCR's Rating Principles published on 14 Feb. 2024 and NCR's Group and Government Support Rating Methodology published on 14 Feb. 2024. For the full regulatory disclaimer please see the rating report.