Fitch Affirms 3 Norwegian Savings Banks; Outlook Stable

Rogaland Sparebank

28/09/2018 17:28

(The following statement was released by the rating agency)


Fitch Ratings-London-September 28: Fitch Ratings has affirmed the Long-Term 
Issuer Default Rating (IDR) of three Norwegian banks, with Stable Outlooks. 

The affected banks are Sparebank 1 Nord-Norge (SNN), Sparebank 1 SR-Bank (SR) 
and SpareBank 1 SMN (SMN). 

A full list of rating actions is at the end of this rating action commentary.

  

KEY RATING DRIVERS 

IDRS, VRS AND SENIOR DEBT

The affirmations of the ratings of SNN, SMN and SR (collectively Sparebanken) 
are based on their stable and low risk business models, healthy profitability, 
resilient asset quality and sound capital ratios. The ratings also factor in 
risk arising from potentially volatile oil and property prices, moderate 
franchises with geographically concentrated lending and from liquidity 
management in the context of the banks' wholesale funding reliance.

SNN's ratings are one notch higher than those of Sparebanken peers, reflecting 
better asset-quality metrics, in particular limited offshore exposures, and a 
more retail-oriented business model.

Fitch expects the Sparebanken's asset quality to remain strong, despite 
continued issues in oil-related portfolios for some banks, driven by their 
conservative underwriting standards and a stable operating environment. The 
banks have successfully reduced concentration risks relating to large exposures 
and Fitch expects them to continue to maintain their low-risk business models 
focussed on retail and SME customers. Impaired loans (defined as Stage 3 
exposures under IFRS9) for the Sparebanken represented between 0.5% and 1.7% of 
gross loans at end-June 2018.

The sharp fall in oil prices seen in 2014-2015, and subsequent economic slowdown 
in Norway, led to a marked deterioration in oil-related portfolios. SR and SMN 
were particularly affected due to their exposure to the offshore service vessel 
(OSV) segment. Although Norway is now going through a recovery, with expected 
GDP growth of 2.6% in 2018, the OSV segment remains characterised by oversupply, 
ageing fleets and high fixed costs, which continue to put pressure on the banks' 
asset portfolios. SMN's oil-related lending is almost entirely in OSVs, whereas 
for SR it is around 60%, and we expect loan impairment charges (LICs) to largely 
be contained to this sub-segment. SR's lending book is concentrated in 
south-west Norway, the primary base for the oil industry, making the bank 
sensitive to more widespread contagion from potential oil price volatility and 
reduced activity. 

A significant property price correction is a key sensitivity for the banks. 
Fitch does not expect such a scenario to lead to significant deterioration of 
the quality of the banks' retail lending, although reduced consumption would 
likely negatively affect their SME portfolios. SNN is less exposed to this risk, 
due to lower house prices in north Norway than elsewhere in the country and a 
large public-sector presence in that region.

The Sparebanken have healthy pre-impairment profitability and the regional 
franchises support stable revenue generation. Net interest income, with healthy 
margins, is the main source of revenue, but the banks are also looking to 
strengthen fee income from ancillary products such as insurance, wealth 
management and real-estate brokerage. Cost-efficiency is acceptable, with 
cost-to-income ratios between 44% and 52% in 1H18.

LICs for the Sparebanken have averaged below 20% of pre-impairment profitability 
in recent years. Fitch expects that for SR and SMN, the material part of their 
problem portfolio restructuring has been completed, and therefore LICs should be 
lower in 2018 than in 2017, and remain low in 2019. 

Fitch has positively reassessed its view of SR's capitalisation, and is of the 
opinion that the Sparebanken's capital adequacy ratios compare well with those 
of international peers. Their Fitch Core Capital (FCC) ratios were between 15.5% 
and 16.4% at end-June 2018, despite Norwegian risk-weight floors. Leverage is 
low in a European context, with tangible equity/ tangible assets ratios of 
between 8.8% and 11.1%. 

Like most Nordic banks, the Sparebanken rely on wholesale funding to varying 
degrees. The Sparebanken have maintained access to domestic and international 
funding markets, particularly for covered bonds through SpareBank 1 Boligkreditt 
(S1B), a joint covered bonds funding vehicle for member banks of the Alliance 
group. SR has recently set up its own covered bond vehicle and this is now the 
main source of covered bond funding for the bank. We expect the banks to retain 
large liquidity portfolios to mitigate refinancing risk. 

The 'F2' Short-Term IDRs of SR and SMN, map to the lower of the two options for 
the 'A-' Long-Term IDRs. Fitch believes the banks have sound funding and 
liquidity, but their liquidity is not notably better than their rating levels 
would suggest.

SUPPORT RATING AND SUPPORT RATING FLOOR 

The Support Ratings (SRs) of '5' and Support Rating Floors (SRFs) of 'No Floor' 
reflect Fitch's view that senior creditors of the Sparebanken cannot rely on 
receiving full extraordinary support from the sovereign in the event of them 
becoming non-viable. The EU's Bank Recovery and Resolution Directive (BRRD) 
provides a framework for resolving banks that is likely to require senior 
creditors participating in losses, if necessary, instead of or ahead of a bank 
receiving sovereign support, and it is Fitch's expectation that this legislation 
will be transposed into Norwegian law in the short term. 

For the Sparebanken, there is also a possibility of institutional support from 
Alliance members. However, Fitch understands from management that no obligation 
to support member banks arises from membership of the Alliance and therefore 
does not factor this into the ratings. 

 

SUBORDINATED DEBT 

SMN's and SR's subordinated debt instruments are rated one notch below the 
banks' respective VRs for loss severity, reflecting our expectation of 
below-average recovery prospects relative to senior unsecured creditors. No 
notching is applied for incremental non-performance risk because write-down of 
the notes will only occur once the point of non-viability is reached and there 
is no coupon flexibility before non-viability.

RATING SENSITIVITIES

IDRS, VRS AND SENIOR DEBT

The Sparebanken's ratings are primarily sensitive to deteriorating asset 
quality, particularly if there is another oil price shock leading to high 
unemployment and deterioration in CRE exposure, and if the banks are unable to 
absorb losses through earnings. They are also sensitive to a severe house price 
correction, which would likely lead to lower consumption impacting on SME 
portfolios. Either scenario would likely be followed by difficulties in 
obtaining competitively priced funding.

The Stable Outlooks on the Sparebanken's ratings reflect Fitch's expectation 
that the operating environment in Norway will remain strong, with LICs contained 
largely to the OSV segment. We expect the banks to further reduce their 
single-name concentration, and that they will continue to strengthen capital 
ratios and maintain healthy liquidity buffers. 

For SMN and SR, positive rating pressure could in the medium term result from 
sustained asset-quality improvements, most likely through the successful 
restructuring of the OSV portfolios. For SNN, an upgrade is unlikely due to its 
already high ratings in the context of its company profile and geographical and 
lending concentration. The Sparebanken's structural reliance on wholesale 
funding means unmitigated weakening of access to capital markets would also be 
negative for their ratings. 

SUPPORT RATING AND SUPPORT RATING FLOOR 

An upgrade of the Sparebanken's SRs or upward revision of their SRFs would be 
contingent on a positive change in Norway's propensity to support its banks. 
This is highly unlikely, in Fitch's view. 

SUBORDINATED DEBT 

The ratings of the subordinated debt issued by SMN and SR are primarily 
sensitive to a change in the VRs from which they are notched. The securities' 
ratings are also sensitive to changes in Fitch's assessment of loss severity or 
non-performance risk relative to that captured in the banks' VRs, although these 
are unlikely. 

The rating actions are as follows: 

SpareBank 1 SR-Bank

Long-Term IDR affirmed at 'A-'; Outlook Stable

Short-Term IDR affirmed at 'F2'

Viability Rating affirmed at 'a-'

Support Rating affirmed at '5'

Support Rating Floor affirmed at 'No Floor'

Senior unsecured debt affirmed at 'A-'/'F2'

Subordinated debt affirmed at 'BBB+'

SpareBank 1 SMN

Long-Term IDR affirmed at 'A-'; Outlook Stable

Short-Term IDR affirmed at 'F2'

Viability Rating affirmed at 'a-'

Support Rating affirmed at '5'

Support Rating Floor affirmed at 'No Floor'

Senior unsecured debt affirmed at 'A-'/'F2'

Subordinated debt affirmed at 'BBB+'

SpareBank 1 Nord-Norge

Long-Term IDR affirmed at 'A'; Outlook Stable

Short-Term IDR affirmed at 'F1'

Viability Rating affirmed at 'a'

Support Rating affirmed at '5'

Support Rating Floor affirmed at 'No Floor'

Senior unsecured debt affirmed at 'A'/'F1'

Contact: 

Primary Analyst 

Bjorn Norrman

Senior Director

+44 20 3530 1330

Fitch Ratings Limited

30 North Colonnade

London E14 5GN

Secondary Analyst

Gurminder Bawa

Director

+44 20 3530 1787

Committee Chairperson 

Claudia Nelson

Senior Director

+44 20 3530 1191

Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: 
peter.fitzpatrick@fitchratings.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Bank Rating Criteria (pub. 22 Jun 2018)

https://www.fitchratings.com/site/re/10034713

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Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10046560

Solicitation Status 

https://www.fitchratings.com/site/pr/10046560#solicitation

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https://www.fitchratings.com/regulatory

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