Rating action

Following the announcement of SpareBank 1 Nordvest's plans to merge with Surnadal Sparebank, Scope Ratings has affirmed the bank's Issuer Rating of A- with a Stable Outlook. The senior unsecured debt rating of BBB + has also been affirmed with a Stable Outlook.

Rating rational

On 20 October 2020, the boards of SpareBank 1 Nordvest and Surnadal Sparebank entered into a merger agreement. Due diligence has been performed and the mechanics of the transaction have been agreed. The merger will be facilitated through the issuance of new equity capital certificates. Subject to approval from the Norwegian FSA and the outcomes of the banks' respective general meetings to be held on 24 November 2020, the merger is planned for completion in May 2021.

The operations of Surnadal Sparebank will be transferred to SpareBank 1 Nordvest, creating a new bank to be named SpareBank 1 Nordmore. Like SpareBank 1 Nordvest, area Sparebank's business model is that of a local savings bank focused on retail customers and mortgage lending. Consequently, Scope does not expect SpareBank 1 Nordvest's sound asset quality and solvency metrics to materially change. As of 30 June 2020, the bank's CET1 capital and leverage ratios were 16.5% and 8.8%, respectively (proportional consolidation basis). Meanwhile, problem loans accounted for 0.5% of gross loans. Following the merger, the bank's market area will expand across More og Romsdal and into Trondheim, with its presence in the region being strengthened.

Key rating drivers

• Well-established savings bank in north-west Norway supported by management's in-depth knowledge of the local market.

• Resilient profitability underpinned by good cost efficiency and sound asset quality.

• As with other Norwegian banks, there is a reliance on market funding.

• Solid solvency metrics guided by relatively stringent regulatory demands.

Rating change drivers

Potential negative rating-change drivers include: (a) a deterioration in the operating environment which materially impacts profitability, (b) a loss of the advantages and economies of scale that the bank enjoys from being part of the SpareBank 1 Alliance, and (c) Poor execution of the planned merger with Surnadal¹ Sparebank. Meanwhile sustainable and profitable growth underpinned by greater diversification of the loan portfolio would be viewed favorably.

1 The name of the entity was amended on 29 October 2020. In the original publication the name of the entity was Oraclad Sparebank.

Stress testing & cash flow analysis
No stress testing was performed. No cash flow analysis was performed.

Methodology
The methodology used for this rating(s) and/or rating outlook (s), Bank Rating Methodology 4 May 2020, is available on https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/ rating scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA.Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope's definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how Environmental,
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources, and quality of information
The rated entity and/or its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, and scope internal sources.
Scope considers the quality of information available to scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope's ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH, Lennéstrasse 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Pauline Lambert, Executive Director.
Person responsible for approval of the rating: Dierk Brandenburg, Managing Director.
The ratings / outlooks were first released by Scope on 9 December 2019.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

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