Rating action

Scope Ratings UK Limited (Scope) has today affirmed Lankdreditt Bank AS’s Issuer Rating of A- and its senior unsecured debt rating of BBB+. The A- Issuer Rating of Landkreditt Boligkreditt AS, a wholly owned covered bond issuing entity of the bank, was also affirmed. All ratings have a Stable Outlook.

Rating rationale

The ratings of Landkreditt Bank are based on the credit fundamentals of the cooperative group, Landkreditt SA, a leading provider of financial services to Norway’s agricultural sector. The bank is the main operating company of the group. In recent years, management has pursued a growth strategy in the agricultural segment as well as with retail customers to achieve greater scale and to diversify the business. While the aim is for a roughly equal balance between the two customer segments, management currently sees more opportunities with its historic customer base of farmers.

Under Scope’s bank rating methodology, the “long-term sustainability” (ESG factor) 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 Landkreditt Bank. While a digital bank since its founding, management continues to make investments to further digitalise customer interactions and automate processes. At the same time, the bank is working on how it can best support the sustainability efforts of farmers.

The bank maintains a low risk profile, with over 99% of lending secured by residential property or agricultural property and land. Asset quality was little impacted by the Covid-19 pandemic although management made additional loss provisions to cover potential long-term consequences. As of year-end 2020, the reported non-performing loan ratio was 0.4%.

The bank’s ownership structure further reinforces a fairly low risk business, with cooperative members understanding the need to ensure the solidity of the group. As of year-end 2020, the group’s CET1 capital ratio stood at 20.5%, well above the current requirement of 13.8%. Like with other Norwegian banks, the bank relies on market funding. However, Landkreditt maintains comfortable liquidity buffers and successfully accesses the domestic unsecured and secured debt markets regularly.

The A- Issuer Rating of Landkreditt Boligkreditt, a wholly owned subsidiary, is aligned with that of Landkreditt Bank. Through the issuance of covered bonds, Landkreditt Boligkreditt provides secured funding for its parent. Scope rates the covered bonds issued by Lankdreditt Boligkreditt at AAA.

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.

A potential positive rating-change driver includes growing the business while keeping risks under control and sustainably increasing returns. Potential negative rating-change drivers include (a) greater than expected credit losses which materially impair profitability and (b) business expansion which increases the group’s risk profile.

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.

Editorial Note: The rating action was initially released under the header and layout of Scope Ratings GmbH. On 23 March 2021, the header and the layout were corrected to show Scope Ratings UK Limited as the issuing credit rating agency.

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

Methodology
The methodology used for these Credit Rating(s) and/or Outlook(s), (Bank Rating Methodology, 26 January 2021) is available on https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions - Credit Ratings, Ancillary and Other 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 Credit Rating performance report at https://www.scoperatings.com/#!governance-and-policies/regulatory-UK. A comprehensive clarification of Scope Ratings’ definitions of default and Credit 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 factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Rating if the Credit Rating were to change within the next 12 to 18 months.

Solicitation, key sources, and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Rating(s): 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 the Credit Rating(s) 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(s) and/or Outlook(s) and the principal grounds on which the Credit Rating(s) and/or Outlook(s) are based. Following that review, the Credit Rating(s) were not amended before being issued.

Regulatory disclosures
These Credit Rating(s) and/or Outlook(s) are issued by Scope Ratings UK Limited at 111 Buckingham Palace Road, London, United Kingdom, SW1W 0SR, Tel +44020-7340-6347. The Credit Rating(s) and/or Outlook(s) is/are EU-endorsed.
Lead analyst: Pauline Lambert, Executive Director.
Person responsible for approval of the Credit Rating(s): Dierk Brandenburg, Managing Director.
The Credit Rating(s)/Outlook(s) were first released by Scope Ratings on 4 April 2018.

Potential conflicts
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
© 2021 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions 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. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.