Rating action

Scope Ratings UK Limited (Scope) has today affirmed the ratings of Totens Sparebank: issuer rating of A-, preferred senior unsecured debt rating of A-, and non-preferred senior unsecured debt rating of BBB+. In addition, the A- issuer rating of the bank’s covered bond funding entity, Totens Sparebank Boligkreditt, has been affirmed. All credit ratings have a Stable Outlook.

Rating rationale

The A- issuer rating on Totens Sparebank reflects the bank’s strong market position in its local area, solid earnings and sound prudential metrics. As a savings bank, Totens’ business is focused on personal customers and residential mortgage lending in its local area, the Mijos region in south-eastern Norway. The bank’s business is strengthened by its membership in the Eika Alliance, the fourth largest financial group in the country.

With solid earnings and a sound asset quality profile, the bank can comfortably absorb credit provisions out of ordinary pre-provision profit. For H1 2022, Totens Sparebank reported a return on equity of 11.2% and a cost income ratio below 40% while problem loans amounted to 0.3% of gross loans.

Supported by internal capital generation, the bank maintains comfortable buffers to current and future regulatory requirements. As of 30 June 2022, the CET1 capital ratio stood at 17.1% while the leverage ratio was 8.3%, compared to requirements of 13.1% and 5%, respectively. At year-end, the systemic risk buffer will increase to 4.5% from 3% while the countercyclical capital buffer will revert to 2.5% next year from the current level of 1.5%.

While customer deposits are the primary source of funding, the use of market funding is material. In addition to unsecured senior debt, the bank has access to covered bond funding from two sources, Eika Boligkreditt, the issuing entity of the Eika Alliance, and Totens Sparebank Boligkreditt (TSBB), its own vehicle. To mitigate risks related to the use of market funding, the bank maintains a high-quality liquidity portfolio.

Under Scope’s financial institutions 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. Operating in a highly digital market with demanding customer expectations, management understands the need for ongoing technology investments to remain competitive. Along with other banks in the Eika Alliance, the bank is in the process of upgrading its core banking system. Further, the bank has started integrating ESG risks into its underwriting process. The “developing” long-term sustainability assessment on Totens Sparebank reflects Scope’s view that the progress made so far is in line with peers.

TSBB is a wholly owned, specialised credit institution, with the dedicated role of providing secured covered bond funding for its parent, Totens Sparebank. TSBB is considered a fully integrated subsidiary and its issuer rating aligned with that of Totens Sparebank. The rating on covered bonds issued by TSBB is AAA.

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

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s view that Totens Sparebank’s operating performance will remain resilient in a less benign business cycle.

What could move the rating up:

• Sustained profitable growth with greater geographic diversification, and without an increase in the bank’s risk profile

What could move the rating down:

• A deterioration in operating conditions which materially impairs the bank’s earnings capabilities
   
• Loss of benefits and economies of scale from being a member of an alliance

Considering TSBB’s status as a fully integrated subsidiary, any change in the rating or outlook of Totens Sparebank would be reflected in its issuer rating. Scope could also lower the issuer rating if it no longer viewed TSBB as a fully integrated subsidiary.

Overview of rating components

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-

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 Outlooks, (Financial Institutions Rating Methodology, 28 January 2022), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/uk-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings 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 Ratings: 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 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 Ratings and Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlooks are issued by Scope Ratings UK Limited at 52 Grosvenor Gardens, London, United Kingdom, SW1W 0AU, Tel +44 20 7824 5180. The Credit Ratings and Outlooks are EU-endorsed.
Lead analyst: Pauline Lambert, Executive Director
Person responsible for approval of the Credit Ratings: Nicolas Hardy, Deputy Head Financial Institutions Ratings
The Totens Sparebank issuer Credit Rating/Outlook was first released by Scope Ratings on 30 October 2018. The Credit Rating/Outlook was last updated on 8 November 2021.
The Totens Sparebank preferred senior unsecured debt Credit Rating/Outlook was first released by Scope Ratings on 30 October 2018. The Credit Rating/Outlook was last updated on 8 November 2021.
The Totens Sparebank non-preferred senior unsecured debt Credit Rating/Outlook was first released by Scope Ratings on 28 September 2021. The Credit Rating/Outlook was last updated on 8 November 2021.
The Totens Sparebank Boligkreditt AS issuer Credit Rating/Outlook was first released by Scope Ratings on 30 October 2018. The Credit Rating/Outlook was last updated on 8 November 2021.

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
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