Rating action

Scope Ratings UK Limited (“Scope Ratings”) has today affirmed SpareBank 1 Nordvest’s Issuer Rating of A- and its senior unsecured debt rating of BBB+, both with a Stable Outlook. The rating action follows the Norwegian FSA’s recent approval of the bank’s merger with Surnadal Sparebank.

Rating rationale

In October 2020, the boards of SpareBank 1 Nordvest and Surnadal Sparebank entered into a merger agreement. 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, Surnadal Sparebank’s business model is that of a local savings bank focused on retail customers and mortgage lending. The merger is being facilitated through the issuance of new equity capital certificates and is expected to be completed in May 2021.

The ratings of SpareBank 1 Nordvest continue to reflect its well-established market position in its local area in north-west Norway and a sound financial profile. In a year where the economy suffered from the pandemic and the policy rate was lowered to 0% from 1.5%, the bank’s performance was resilient. In 2020, the bank reported a return on equity of 6.5% while Stage 3 loans remained low at 1.3% of the loan book.

Key to the bank’s competitive position is its membership in the SpareBank 1 Alliance. Collectively, the alliance represents the second largest provider of financial products and services in Norway. In addition to enabling SpareBank 1 Nordvest to meet the broader financial needs of clients, the alliance is a source of expertise and provides important economies of scale, particularly in digital capabilities. As well, the covered bond issuing vehicles of the alliance are a critical source of funding.

The bank’s solvency metrics remain at solid levels. As of YE 2020, the CET1 capital ratio was 16.7% while the leverage ratio was 8.9% on a proportional consolidation basis.

Under Scope’s Bank Rating Methodology, the “long-term sustainability” assessment captures how relevant environmental, social and governance (ESG) factors as well as an issuer’s preparedness for digital transition (D), may impact creditworthiness and the ability to repay debt. As part of the first-time implementation of this methodology, Scope has assigned an assessment of “developing” to SpareBank 1 Nordvest. The bank’s digital capabilities are at an advanced level in line with domestic peers. Meanwhile, the bank is in the process of integrating sustainability in its credit risk process.

Outlook and rating-change drivers

The Stable Outlook reflects the ongoing resilience of the bank’s business and operating performance in a challenging operating environment. The upcoming merger with Surnadal Sparebank is expected to be supportive of the bank’s credit profile.

Potential positive rating change drivers include sustainable and profitable growth with greater diversification of the loan portfolio. Potential negative rating change drivers include a deterioration in the operating environment which impacts profitability and poor execution of the planned merger with Surnadal Sparebank.

Overview of rating construct

Operating environment: Very supportive

Business model: Focused

Initial mapping refinement: High

Initial mapping: bbb/bbb+

Long-term sustainability (ESG-D): Developing

Adjusted anchor: bbb

Earnings capacity and risk exposures: Supportive

Financial viability management: Comfortable

Additional rating factors: Neutral factor

External support: Not applicable

Issuer Rating: A-

One or more key drivers for the credit rating action are considered ESG factors.

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

Methodology
The methodology used for this credit rating(s) and/or rating outlook(s) (Bank Rating Methodology, 26 January 2021) 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-UK. A comprehensive clarification of Scope Ratings’ 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, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
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 Ratings internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the rated entity or instrument to be satisfactory. The information and data supporting these credit ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the credit rating action, the rated entity was given the opportunity to review the credit rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the credit rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings UK Limited at 111 Buckingham Palace Road, London, United Kingdom, SW1W 0SR, Tel +44020-7340-6347. The credit rating and/or outlook is EU endorsed.
Lead analyst: Pauline Lambert, Executive Director.
Person responsible for approval of the credit rating: Dierk Brandenburg, Managing Director.
The credit ratings/outlooks were first released by Scope Ratings on 9 December 2019. The credit ratings/outlooks were last updated on 29 October 2020.

Potential conflicts
Please see www.scoperatings.com under Governance & Policies/UK Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
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