Fitch Affirms Norwegian Sparebanken

Rogaland Sparebank

06/12/2013 15:19

(The following statement was released by the rating agency)

LONDON, December 06 (Fitch) Fitch Ratings has affirmed SpareBank 1 SMN's (SMN), 
SpareBank 1 SR-Bank's (SR) and Sparebanken Vest's (SV) Long-term Issuer Default 
Ratings (IDR) at 'A-', Short-term IDRs at 'F2' and Viability Ratings (VRs) at 
'a-'. The Outlooks on the Long-term IDRs are Stable. 

Fitch has also affirmed SpareBank 1 Nord-Norge's (SNN) Long-term IDR at 'A', 
Short-term IDR at 'F1' and VR at 'a'; and Sandnes Sparebank's (Sandnes) 
Long-term IDR at 'BBB', Short-term IDR at 'F3' and VR at 'bbb'. The Outlook on 
SNN's and Sandnes' Long-term IDRs is Stable. A full list of rating actions is at 
the end of this rating action commentary.

KEY RATING DRIVERS- IDRS, VRS AND SENIOR DEBT

The affirmation of SNN's, SMN's, SR's, SV's (collectively Sparebanken) and 
Sandnes' ratings, reflects Fitch's view that the banks' sound asset quality will 
remain robust even in case of a house price correction.

The Sparebanken's ratings are based on individually strong regional franchises, 
sound asset quality, and healthy profitability underpinning internal capital 
generation. The ratings also take into account the banks' reliance on wholesale 
funding, sharp rises in property prices over recent years, potentially creating 
overheating of the market, and relatively concentrated loan books by geography 
and by industry sector.

Sandnes' ratings are based on its sound performance, which provides a buffer 
against increasing loan impairment charges (LICs), an established but regionally 
concentrated franchise, and acceptable asset quality. The latter is affected by 
a relatively large portfolio of impaired but still performing loans. The ratings 
also factor in the bank's small volume of equity compared with similarly rated 
peers.

Improved profitability through margin enhancements has been successful in 2013, 
and Fitch expects the high capital requirements introduced in Norway will 
continue to support the industry's efforts to reprice the loan book. LICs took 
up a modest 5% to 15% of pre-impairment operating profits in 9M13, and Fitch 
expects they will remain manageable for the Sparebanken and Sandnes in 2014.

The Sparebanken's sound asset quality underpins the ratings and is supported by 
a benign Norwegian operating environment. Fitch expects the banks will maintain 
strict underwriting practices and further build buffers to withstand a 
correction in house prices. Nevertheless, a sharp fall in the property market 
represents a downside risk for the banks. Fitch does not expect such a scenario 
to lead to significant deterioration of the quality of the banks' retail 
portfolios, although the banks' corporate exposures would be more sensitive to a 
correction and possible subsequent economic downturn including a drop in private 
consumption.

Sandnes' non-performing loans represented a low 0.7% of gross loans at 
end-September 2013. However, it has a relatively significant legacy portfolio in 
its SME business, where non-performing plus impaired (but still performing) 
loans represented a more material 3.2% at end-September 2013. As the bank is 
working out these exposures, changing the business towards less risky business 
sectors, Fitch expects the stock of impaired loans to continue to reduce.

Similar to most Nordic peers the Sparebanken and Sandnes rely on wholesale 
funding to varying degrees. The Sparebanken have maintained access to domestic 
and international funding markets, in particular for covered bonds through 
SpareBank 1 Boligkreditt (S1B; a joint funding vehicle of Alliance member banks) 
and Sparebanken Vest Boligkreditt (unrated). However, they would be affected by 
a prolonged dislocation of the debt capital markets, and Fitch believes that the 
banks will retain significant liquidity portfolios to mitigate this risk. 

The Sparebanken's capital adequacy ratios, excluding Basel II transitional 
floors, compare well with those of international peers, but lag those of their 
larger Nordic peers partly due to higher risk weights. Leverage is low in a 
European context, with tangible common equity/tangible assets generally between 
6%-10% at end-September 2013. 

SNN

SNN's VR is currently one notch higher than the other rated Sparebanken. This 
reflects its lower dependency on the wholesale markets as part of its funding 
structure, wider lending margins due to lower competition, and the presence of a 
strong and stable public sector in the region. SNN's asset quality also benefits 
from a higher proportion of retail lending than its Alliance partners. However, 
its smaller size has led to slightly higher loan concentration as a proportion 
of Fitch core capital as well as the proportion of impaired loans to gross 
loans. Credit growth in 2012 and 9M13 was relatively high, which could put 
pressure on reported capital ratios if it continues. 

SMN

SMN's ratings are driven by Fitch's expectation that the bank's asset quality 
will remain sound, backed by the diversified economy in mid-Norway. SMN raised 
additional capital in 3Q13, although Fitch expects the bank to improve capital 
ratios further via retained earnings. Capitalisation and leverage is slightly 
weaker than the other rated Alliance banks, although it compares well with 
similarly rated peers in an international context.

SR

SR's ratings reflect its strong position in the prosperous western Norway and 
Fitch's expectation that asset quality will remain sound. SR is the largest of 
the Sparebanken and maintains strong profitability, aided by tight cost control. 
Capitalisation is adequate, in Fitch's view, and improving year on year. 
Property prices in SR's region have increased more strongly than the national 
average, making the bank's asset quality more sensitive to a potential price 
correction. The bank is also more sensitive to the oil economy than other 
Sparebanken and more reliant on wholesale funding, which makes it more sensitive 
to a prolonged dislocation of international wholesale funding markets or a 
change in sentiment toward Norwegian issuers.

SV

SV's ratings are underpinned by its sound risk profile and capitalisation. 
Around three-quarters of SV's lending related to retail, mainly mortgage, 
lending, making the bank sensitive to a house price correction. SV left the 
Sparebank 1 Alliance in 2004 and set up jointly owned companies (offering 
leasing, insurance and brokerage) with other savings banks. These companies are 
now profitable and should continue to improve earnings. Wholesale funding 
dependence is significant although the bank has diversified its funding base 
through Sparebanken Vest Boligkreditt (its wholly-owned covered bond vehicle). 
The higher loan/deposit ratio at SV, compared with the rated Alliance banks, is 
driven by the consolidation of its covered bonds issuer, while the Alliance 
banks only have minority stakes in S1B.

SANDNES 

Sandnes' ratings reflect its established, but regionally concentrated retail and 
SME franchise in economically prosperous municipalities around Sandnes in 
south-west Norway. The ratings also factor in its reliance on wholesale funding, 
working-out of troubled legacy assets and small absolute size of capital. Fitch 
considers the bank's property management portfolio, which shows a significant 
proportion of exposures in high loan-to-value buckets, as a key risk, which 
could put pressure on the bank's ratings. Fitch's expectation is that management 
will continue its risk reducing strategy, which should lead to fewer borrower 
concentrations in more volatile sectors, and underwriting standards will remain 
conservative. Sandnes currently uses the standardised approach to calculate its 
capital requirements for both retail and corporate exposures, which leads to 
risk weights higher than peers and therefore slightly lower reported capital 
ratios. Leverage is relatively low in a European context, with a tangible equity 
to tangible assets ratio of 6.7% at end-September 2013, but higher than most 
Sparebanken. The bank's small absolute volume of capital makes it vulnerable to 
shocks.

RATING SENSITIVITIES - SPAREBANKEN'S VRS, IDRS AND SENIOR DEBT

The Stable Outlooks on the Sparebanken's ratings reflects Fitch's view that 
rating action is currently not expected. It factors in Fitch's expectation that 
house prices are likely to stabilise or moderately fall in the near term; while 
capital ratios and funding structures are strengthening and growth plans are 
limited, providing a stronger buffer against unexpected shocks. 

An upgrade is currently unlikely given the already high ratings, geographical 
concentration and structural reliance on wholesale funding. 

The Sparebanken's ratings coul