Fitch Affirms Norwegian Sparebanken

Rogaland Sparebank

19/11/2014 14:23

(The following statement was released by the rating agency)

LONDON, November 19 (Fitch) Fitch Ratings has affirmed SpareBank 1 Nord-Norge's 
(SNN) Long-term Issuer Default Rating (IDR) at 'A', SpareBank 1 SMN's (SMN), 
SpareBank 1 SR-Bank's (SR) and Sparebanken Vest's (SV) Long-term IDRs at 'A-', 
and Sandnes Sparebank's (Sandnes) Long-term IDR at 'BBB'. The Outlooks on all 
Long-term IDRs are Stable. A full list of rating actions is at the end of this 
rating action commentary. 

The rating actions were part of Fitch's periodic review of Norwegian savings 
banks. We will shortly issue a peer report on the major Sparebanken 1 Alliance 
banks (SNN, SMN and SR).

KEY RATING DRIVERS - IDRS, VRs AND SENIOR DEBT

The affirmations of SNN's, SMN's, SR's and SV's (collectively Sparebanken) 
ratings are based on their strong regional franchises, healthy profitability, 
sound asset quality and strong capitalisation. They also incorporate wholesale 
funding reliance, sharp rises in property prices in recent years, and 
concentrated loan books by geography and sector. SNN's ratings are one notch 
higher than those of its Sparebanken peers, reflecting stronger capital ratios 
and a more retail-orientated business model, particularly for its funding 
structure. 

Sandnes' rating reflects its healthy profitability, sound asset quality, solid 
capitalisation, as well as its entrenched regional presence in south-west 
Norway, although its smaller franchise relative to its Norwegian peers, greater 
geographical concentration and limited absolute size of capital are rating 
constraints. The ratings also factor in the bank's wholesale funding reliance. 

Underlying profitability for the Sparebanken and Sandnes is strong, underpinning 
internal capital generation. The banks' regional franchises support stable 
revenue generation, and operational efficiency is acceptable. Fitch expects 
continued low loan impairment charges in 2015. The banks benefited from 
repricing of corporate deposits in 9M14, and Fitch expects this to continue into 
2015. Lending margins for retail mortgage loans are beginning to come under 
pressure, but should remain satisfactory. 

The Sparebanken's asset quality is strong, driven by a benign operating 
environment and strong underwriting standards. Fitch's expectation is that 
banks' management will continue to implement low risk business models that focus 
on retail customers and small and medium sized (SME) businesses, and that 
concentration risks relating to larger corporates will reduce. A downturn in the 
housing market is a key sensitivity for the banks, and while Fitch does not 
expect such a scenario to lead to a significant deterioration of the quality of 
the banks' retail portfolios, reduced consumption would most likely negatively 
impact their SME portfolios. SNN is less exposed to this risk, given the 
relatively low house prices in northern Norway compared with other parts of the 
country, and the large public sector presence. SNN is somewhat more sensitive to 
larger corporate impairments due to its relatively small equity size compared 
with its Sparebanken peers. SR has relatively high sector concentration risk, 
given its exposure to the oil sector in south-west Norway.

Sandnes' unreserved non-performing loans represented a low 0.6% of gross loans 
at end September 2014. However, impaired exposures, essentially relating to 
legacy commercial real estate (CRE) loans, represented a more significant 2% (of 
which 1.5 percentage points are performing) of gross loans at end-September 
2014. Although of reasonable credit quality, and management's significant 
efforts into reducing concentration in this segment since its peak in 2008, 
Fitch considers the bank's CRE portfolio a key risk, which could put pressure on 
the bank's ratings. The bank's efforts in shortening maturities and reducing 
high loan-to-value CRE lending should continue to support the bank's solid asset 
quality.

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. 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. SNN's 
funding profile is stronger than its Sparebanken peers, driven by a greater 
retail deposit base. 

The Sparebanken's capital adequacy ratios 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%-12% at end-September 2014. SNN's 
risk-weighted capitalisation, as well as its leverage, is somewhat stronger than 
its Sparebanken peers. 

Sandnes uses the standardised approach to calculate its capital requirements for 
both retail and corporate exposures, which leads to higher risk weights than 
peers and slightly lower reported capital ratios. However, leverage is low in a 
European context and compares well with its Norwegian peers, with a tangible 
equity to tangible assets ratio of 7% at end-September 2014. Nonetheless, the 
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 a 
rating action is not expected. It factors in Fitch's expectation that house 
prices are likely to stabilise or moderately fall in the near term, and that 
banks will continue to strengthen capital ratios and maintain healthy liquidity 
buffers 

An upgrade is unlikely given the already high ratings in the context of their 
company profiles and geographical concentration. The structural reliance on 
wholesale funding is also a somewhat limiting factor. 

The Sparebanken's ratings could be downgraded if credit growth surpassed 
internal capital generation, materially weakening capitalisation. The ratings 
are also sensitive to a significant house price correction, should the banks be 
unable to absorb losses via earnings. The correction would probably lead to a 
drop in private consumption, affecting corporate lending quality, which Fitch 
expects to be the key driver for losses. In addition, this scenario would likely 
also be followed by difficulties in obtaining competitively priced funding in 
the wholesale funding markets which is a further ratings sensitivity.

RATING SENSITIVITIES - SANDNES'S VR, IDRS AND SENIOR DEBT

The Stable Outlook reflects Fitch's expectation of the operating environment in 
Norway remaining sound, supporting Sandnes' asset quality and working out of 
impaired exposures, and maintained access to market funding. 

An upgrade is currently unlikely because the bank's small size makes it 
relatively sensitive to shocks, particularly in the context of its narrow 
geographical operating market and still some exposure to legacy CRE exposures.

Sandnes' ratings are sensitive to reduced activity in the region should it lead 
to a significant house price correction or increased losses in the corporate 
sector. A dislocation in debt capital markets making Sandnes unable to obtain 
competitively priced funding is a further sensitivity.

RATING DRIVERS - SUPPORT RATINGS AND SUPPORT RATING FLOORS

The Sparebanken's Support Ratings of '3' and Support Rating Floors of 'BB+' 
reflect Fitch's view that there is a moderate probability of support, if 
required from the Norwegian authorities, given their strong regional franchises.

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

Sandnes' Support Rating reflects Fitch's view of an only low extraordinary 
support probability from the Norwegian authorities, given the bank's very 
limited market shares in Norway, hence its Support Rating Floor is 'No Floor'.

RATING SENSITIVITIES - SUPPORT RATINGS AND SUPPORT RATING FLOORS 

The Support Ratings and Support Rating Floors are potentially sensitive to any 
change in Fitch's assumptions about the ability (as reflected in its ratings) or 
willingness of the Norwegian state to provide timely support to the bank, if 
required. They are also sensitive to a change in Fitch's assumptions around the 
availability of sovereign support for banks more generally.

In Fitch's view, there is a clear intention ultimately to reduce implicit state 
support for financial institutions in the EU, as demonstrated by a series of 
legislative, regulatory and policy initiatives. Norway is not an EU member 
country and has done little so far to update its bank resolution framework. 
Fitch's base case is that it will look to adopt a flexible approach to bank 
support/resolution decisions for its largest banks. All the Sparebanken banks 
have SRs of '3' and SRFs of 'BB+', and these are unlikely to be affected unless 
Norway adopts a much less flexible approach to resolution than Fitch currently 
anticipates. Sandnes' SRF of 'No Floor' is also unlikely to change. 

KEY RATING DRIVERS AND SENSITIVITIES - SMN'S, SR'S and SV'S SUBORDINATED DEBT 
AND OTHER HYBRID SECURITIES

Subordinated debt and other hybrid capital issued by the Sparebanken are all 
notched down from the banks' VRs. Therefore, their respective ratings have been 
affirmed and are sensitive to any change in the banks' VRs.

The ratings are in accordance with Fitch's criteria 'Assessing and Rating Bank 
Subordinated and Hybrid Securities' reflecting each instrument's respective 
non-performance and relative loss severity risk profiles, which vary 
considerably.

SNN's and SMN's subordinated debt instruments are notched down once from the 
banks' VRs to reflect the notes' higher expected loss severity relative to 
senior unsecured creditors.

SV's hybrid Tier 1 securities are rated four notches below the bank's VRs to 
reflect the higher loss severity risk of these securities relative to average 
recoveries (two notches from the VR) as well as high risk of non-performance (an 
additional two notches).

KEY RATING DRIVERS AND SENSITIVITIES - SUBSIDIARY AND AFFILIATED COMPANY

S1B's IDRs are aligned with those of the largest Alliance members, SR and SMN, 
and reflect its role as a covered bond funding vehicle for its shareholder 
banks. Given S1B's close integration in the Alliance, including operational 
support and servicing of the mortgage assets, no VR is assigned. S1B's ratings 
are sensitive to the same factors that might drive a change in the parent banks' 
ratings.

These rating actions have no impact on the ratings of the covered bonds issued 
by S1B and Sparebanken Vest Boligkreditt.

The rating actions are as follows: 

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 '3'

Support Rating Floor affirmed at 'BB+'

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

Subordinated debt affirmed at 'A-'

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 '3'

Support Rating Floor affirmed at 'BB+'

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

Subordinated debt affirmed at 'BBB+'

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 '3'

Support Rating Floor affirmed at 'BB+'

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

SpareBank 1 Boligkreditt:

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

Short-term IDR affirmed at 'F2'

Support Rating affirmed at '1'

Sparebanken Vest:

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

Short-term IDR affirmed at 'F2'

Viability Rating affirmed at 'a-'

Support Rating affirmed at '3'

Support Rating Floor affirmed at 'BB+'

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

Hybrid capital instruments affirmed at 'BB+'

Sandnes Sparebank:

Long-term IDR affirmed at 'BBB'; Outlook Stable

Short-term IDR affirmed at 'F3'

Viability Rating affirmed at 'bbb'

Support Rating affirmed at '5'

Support Rating affirmed at 'No Floor'

Contact: 

Primary Analyst

Jens Hallen

Senior Director

+44 20 3530 1326 

Fitch Ratings Limited

30 North Colonnade

London E14 5GN

Secondary Analyst (SNN, SMN, SR, S1B)

Bjorn Norrman

Director

+44 20 3530 1330

Secondary Analyst (SV, Sandnes)

Lawrence Power

Analyst

+44 20 3530 1567

Committee Chairperson 

Erwin Van Lumich

Managing Director

+34 93 323 8403

Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: 
elaine.bailey@fitchratings.com.

Additional information is available on www.fitchratings.com

Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 31 
January 2014, are available at www.fitchratings.com.

Applicable Criteria and Related Research: 

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Additional Disclosure 

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http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=927895

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