Rating action

Scope Ratings UK Limited (Scope) has today affirmed Brage Finans AS’s Issuer Rating of A- and its senior unsecured debt rating of A-, both with Stable Outlook.

Rating rationale

The A- Issuer Rating reflects Brage Finans’ focused leasing and car financing business, solid credit fundamentals and strategic relationship with its owner banks.

Brage serves as the finance company for its owners, primarily well-established and solid savings banks located in western and southern Norway. Combined, the owner banks have more than 100 local offices, forming an essential part of the company’s distribution network. With four of seven members on the board coming from the banks, the owners steer the strategic direction of the company. In addition, the owner banks have consistently provided capital and funding to support Brage’s growth and development.

The nature of Brage’s business entails greater asset risk than traditional banking focused on mortgage lending. Leasing offers higher margins, but counterparties are often small businesses in cyclical sectors like construction and manufacturing. Nevertheless, performance in 2020 was resilient with the company reporting a return on equity of 9% when adjusting for commissions paid to the owner banks. Asset quality remained sound with Stage 3 exposures accounting for 1.6% of the credit portfolio as of year-end 2020.

Under Scope’s bank rating methodology, the “long-term sustainability” assessment (ESG factor) 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 “advanced” to Brage. The company integrates sustainability considerations into its business strategy and risk processes. Further, an independently assessed green bond framework has been established which enables the issuance of green bonds.

As a licensed finance company regulated and supervised by the Norwegian FSA, Brage is subject to most of the same requirements as banks, including in the areas of solvency and liquidity. Brage maintains reassuring prudential metrics in line with relatively stringent requirements. As it is not authorised to collect deposits, Brage relies on wholesale funding and is a frequent issuer in the domestic debt market.

Outlook and rating-change drivers

The Stable Outlook reflects the expectation that Brage’s operating performance and asset quality will remain sound in the face of potential challenges posed by the Covid-19 pandemic as well as rapid business growth.

A potential positive rating-change driver would be continued sustainable growth underpinned by increasing business and geographic diversification. Further diversification of funding sources would also be viewed positively. Potential negative rating-change drivers include (a) a change in the supportive nature of the relationship between Brage and its owner banks and (b) material deterioration in the regional economies where Brage’s activities are concentrated, impacting earnings and/or asset quality.

Overview of rating construct

Operating environment: Very supportive

Business model: Focused

Initial mapping refinement: High

Initial mapping: bbb/bbb+

Long-term sustainability (ESG-D): Advanced

Adjusted anchor: bbb+

Earnings capacity and risk exposures: Neutral

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 these Credit Ratings and/or Outlooks, 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 Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings UK Limited at 111 Buckingham Palace Road, London, United Kingdom, SW1W 0SR, Tel +44020-7340-6347. The Credit Ratings and/or Outlooks are EU-endorsed.
Lead analyst: Pauline Lambert, Executive Director.
Person responsible for approval of the Credit Ratings: Dierk Brandenburg, Managing Director.
The Credit Ratings/Outlooks were first released by Scope Ratings on 28 January 2020.

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.