Fitch Revises Sandnes' Outlook to Positive; Affirms 'BBB'

Rogaland Sparebank

01/10/2018 14:18

(The following statement was released by the rating agency)


Fitch Ratings-London-October 01: Fitch Ratings has revised Sandnes Sparebank's 
Outlook to Positive from Stable while affirming the bank's Long-Term Issuer 
Default Rating (IDR) on at 'BBB'. 

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

The Outlook revision reflects our expectation that the Viability Rating (VR) and 
the IDRs are likely to be upgraded within one or two years on the back of 
improving asset quality metrics. 

The rating actions were part of Fitch's periodic review of Norwegian savings 
banks. 

  

KEY RATING DRIVERS 

IDRS, VIABILITY RATING AND SENIOR DEBT

The ratings of Sandnes reflect its healthy pre-impairment profitability, 
improving asset quality, sound capital ratios, and an entrenched regional 
presence in south-west Norway. Its ratings are constrained by the bank's smaller 
franchise relative to domestic peers', and by still significant geographical and 
obligor loan concentration.

Sandnes' impaired loans accounted for 2.2% of gross loans at end-June 2018, 
materially down from a recent peak of 3.6% at end-2016, and we expect a 
continued reduction. A significant share of the impaired loans relate to legacy 
commercial real estate (CRE) loans, which in our assessment includes building 
and construction and property management lending. We expect management to 
continue the progress it has made in reducing concentration in this segment from 
its peak in 2008, although it remains a material risk. The bank's efforts to 
shorten maturities and reduce high loan-to-value CRE lending are positive for 
the ratings. Direct lending to the oil and gas sectors is minimal. 

Sandnes' lending books are 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 bank. Fitch 
does not expect such a scenario to lead to significant deterioration of the 
quality of the bank's retail lending, although reduced consumption would likely 
negatively affect the bank's SME portfolio. 

Sandnes has healthy pre-impairment profitability and the regional franchise 
supports stable revenue generation. Net interest income, with healthy margins, 
is the main source of revenue, but the bank is also looking to strengthen fee 
income from ancillary products such as insurance, wealth management and 
real-estate brokerage. Cost-efficiency is acceptable, with a cost-to-income 
ratio of 39.8% in 1H18.

Fitch expects that with the material part of Sandnes' problem portfolio 
restructuring completed, and loan impairment charges (LICs) should be lower in 
2018 than in 2017, and remain low in 2019. The loss experienced in 2015 
highlights the concentration risks it faces.

Fitch has positively reassessed its view of Sandnes' capitalisation, given 
improved capital ratios and a continued reduction in unreserved impaired loans. 
Sandnes demonstrates strong capital ratios, and its end-June 2018 Fitch Core 
Capital (FCC) ratio was 17.5%, despite the use of the standardised approach in 
calculating its capital requirements for both retail and corporate credit 
exposures. Leverage is in line with domestic peers'. Nonetheless, our assessment 
of capital is constrained by the small absolute size of the bank's equity, 
making the bank vulnerable to shocks.

Like most Nordic banks, Sandnes relies on wholesale funding to varying degrees. 
It has maintained access to domestic and international funding markets, 
particularly for covered bonds. We expect the bank to retain a large liquidity 
portfolio to mitigate refinancing risk. 

The 'F3' Short-Term IDR of Sandnes maps to the lower of the two options for the 
'BBB' Long-Term IDR. Fitch believes the bank has sound funding and liquidity, 
but its liquidity is not notably better than its rating level would suggest.

SUPPORT RATING AND SUPPORT RATING FLOOR 

The Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'No Floor' 
reflect Fitch's view that senior creditors of Sandnes cannot rely on receiving 
full extraordinary support from the sovereign in the event of it 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. The SR and SRF for Sandnes 
further reflect its small size and lack of systemic importance.

RATING SENSITIVITIES

IDRS, VR AND SENIOR DEBT

The Positive Outlook on Sandnes' ratings reflects the progress the bank is 
making in materially reducing its legacy CRE exposure and obligor concentration. 
We expect to upgrade Sandnes' ratings if this trend of improving asset quality 
metrics continues.  Conversely, Sandnes' ratings could come under pressure if 
reduced activity in the region should lead to a significant house price 
correction or larger losses in the corporate sector, particularly if this leads 
to issues in maintaining access to competitively priced funding. 

SUPPORT RATING AND SUPPORT RATING FLOOR 

An upgrade of the Sandnes' SR or upward revision of the bank's SRF would be 
contingent on a positive change in Norway's propensity to support its banks. 
This is highly unlikely, in Fitch's view. An upward revision of Sandnes' SRF 
would be also contingent on a positive change in Fitch's view of the systemic 
importance of the bank, which is also unlikely.

The rating actions are as follows: 

Sandnes Sparebank

Long-Term IDR affirmed at 'BBB'; Outlook revised to Positive from Stable

Short-Term IDR affirmed at 'F3'

Viability Rating affirmed at 'bbb'

Support Rating affirmed at '5'

Support Rating Floor affirmed at 'No Floor'

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/10046760

Solicitation Status 

https://www.fitchratings.com/site/pr/10046760#solicitation

Endorsement Policy 

https://www.fitchratings.com/regulatory

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