Our 'BBB+' issuer and issue ratings for Sparbanken Västra Mälardalen's (SBVM) are unchanged following the publication of its 2018 results. The fourth quarter proved difficult for the bank with an increase in credit losses and a material reduction in the valuation of financial assets. However, the bank improved its core earnings and maintains a CET1 ratio of 22.3% which is a key strength for the rating.
Credit losses and nonperforming loans
SBVM reported credit losses of SEK 10m during the quarter, primarily arising from an increase in loss reserves for construction loans. For 2018, SBVM reported 12m in credit losses (18bps of net loans). SBVM also experienced an increase in nonperforming loans (IFRS stage 3) to 84bps (63bps as of 30 Sep. 2018) of gross loans. The reported losses and loss reserves are consistent with the existing rating.
Valuation of financial assets
The increase in market volatility during December 2018 was reflected in a material reduction in unrealised gains and fair value adjustments in the bank's liquidity and investment securities as well as interest rate swaps used to hedge fixed rate loans. Net financial losses were SEK 24m during the fourth quarter and SEK 18m for 2018 (of which only SEK 441t are realised). The changes in valuation are almost entirely unrealised and could reverse given reduced volatility thus far in 2019.
Earnings and capital
Reversing SEK 3.3 million in untaxed reserves improved the bottom line, but SBVM still reported an SEK 1.8m net loss for the fourth quarter. Despite these setbacks, SBVM improved core earnings by improving net interest income (6% year on year) and net fee and commission income (6%) as well as reducing total costs (-5%). In addition, SBVM maintained a strong CET 1 ratio at 22.3% while growing on-balance-sheet loans by 4% and loans transferred to Swedbank Hypotek by 9% during the year.
This commentary does not reflect a rating action.
research Issuer comment Nordic Credit Rating - Sparbanken Västra Mälardalen 2018 results Jan 29 2019.pdf (86.31 KB) Financial Sparbanken Västra Mälardalen Financial