SPAREBANK 1 SMN
Fitch Ratings has affirmed
Fitch has also affirmed SMN's Viability Rating (VR) at 'a'. A full list of rating actions is below.
Key Rating Drivers
SMN's Short-Term IDR of 'F1' is the lower of two options mapping to a Long-Term IDR of 'A'. This reflects our assessment of the bank's funding and liquidity at 'a-', compared with the minimum level of 'aa-' for a Short-Term IDR of 'F1+'.
Strong Franchise in
Conservative Risk Profile: SMN has a strong risk-management culture, with a conservative attitude to credit risk, underpinned by prudent domestic regulations. SMN's credit risk mainly resides in its loan book (about 70% of assets at
Resilient Asset Quality: SMN's low levels of impaired assets and limited credit losses over economic cycles, conservative underwriting and a loan book dominated by resilient residential mortgage loans offset the bank's regional concentration risk. SMN's asset-quality metrics compare well with Nordic and international peers', but they are weaker than highly rated Swedish banks'.
We expect asset quality to remain strong and to be only modestly affected by the economic downturn, rising interest rates and inflation. Fitch expects the bank's impaired loans (Stage 3) ratio to remain low at 1.7% at end-2023.
Strong Profitability: SMN's stable revenue benefits from its close relationships with the local community, healthy margins, low funding cost and diversified fee and commission income, which to a large extent is sourced from non-banking activities. Cost efficiency is superior compared with international standards, despite the bank's small size, and is underpinned by strong automation and digitalisation.
SMN's profitability is also supported by low loan impairment charges (LICs). In 2023 we expect the bank's net interest income to improve further. However, the operating profit return will weaken to 2.6% of risk-weighted assets (RWAs; 2022: about 3%) due to higher LICs and expenses and subdued contribution from associated companies.
Robust Capital Adequacy: SMN's high risk-weighted capital and leverage ratios are underpinned by its low risk profile, stable asset quality and healthy internal capital generation. We also consider the only moderate size of the bank's capital base compared with highly rated Nordic peers'. At
Low Refinancing Risk: SMN's solid funding profile benefits from a stable deposit base and prudently managed refinancing risk. Like most Nordic banks, SMN relies on wholesale funding, in particular covered bonds issued through SpareBank 1 Boligkreditt (S1B), a joint covered-bond funding vehicle for member banks of the SpareBank 1 Alliance. The bank maintains strong coverage of short-term liabilities with good-quality, unencumbered liquid assets.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
SMN's ratings have sufficient headroom to absorb significant deterioration in the bank's financial profile. We could downgrade SMN's ratings if a severe economic stress durably reduces its return on RWAs close to or below 1.5% and the impaired loans ratio rises above 3% on a sustained basis.
SMN's structural reliance on wholesale funding means an unmitigated weakening of access to capital markets would also be negative for its ratings.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade is unlikely in the medium term unless SMN sees significant nationwide strengthening of its franchise while maintaining a low-risk profile and strong financial metrics.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
SMN's long-term senior preferred debt and deposit ratings are one notch above the bank's Long-Term IDR. This reflects the protection that could accrue to preferred creditors from the bank's more junior resolution debt and equity buffers. We expect SMN's resolution debt buffer to remain comfortably above 10% of resolution-relevant RWAs, adjusted for S1B, which is excluded from SMN's resolution strategy. At
SMN's short-term senior preferred debt and deposit ratings are mapped to their respective long-term ratings and also reflect our assessment of the bank's funding and liquidity at 'a-'.
SMN's Government Support Rating (GSR) of 'No Support' reflects Fitch's view that senior creditors cannot rely on receiving full extraordinary support from the sovereign if the bank becomes non-viable, given
Fitch believes that being a member of the Sparebank 1 Alliance may result in SMN being supported by other Alliance members, but this is not an obligation, and is therefore not factored into the ratings.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
The senior preferred debt ratings and the deposit ratings are sensitive to changes in the bank's IDRs. They are also sensitive to SMN maintaining a buffer of subordinated and senior non-preferred debt of at least 10% of resolution-relevant RWAs, or could be downgraded otherwise.
An upgrade of the GSR would be contingent on a positive change in
VR ADJUSTMENTS
The business profile score of 'a-' is above the 'bbb' implied score due to the following adjustment reason: business model (positive).
The capitalisation & leverage score of 'a' is below the 'aa' implied score due to the following adjustment reason: size of capital base (negative).
The funding & liquidity score of 'a-' is above the 'bbb' implied score due to the following adjustment reasons: non-deposit funding (positive), liquidity coverage (positive).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on SMN, either due to their nature or the way in which they are being managed by the bank. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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