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Rating action

Scope Ratings UK Limited (Scope) has assigned the following first-time credit ratings to Pareto Bank ASA: issuer rating of BBB, preferred senior unsecured debt rating of BBB and non-preferred senior unsecured debt rating of BBB-. All credit ratings have a Stable Outlook.

Rating rationale

The BBB issuer credit rating reflects the following considerations:

Pareto Bank is a commercial bank specialised primarily in real estate and corporate financing (90% of credit exposure combined) and to some extent ship financing for Norwegian customers. The bank successfully targets medium-sized Norwegian companies who are underserved by other market players, although its overall market position is limited. In addition, the bank offers ordinary banking services to retail and corporate customers such as deposits and payments. Operating revenues are derived mainly from interest income. Activities are concentrated in eastern Norway, including the Oslo region and other large cities in the country.

The bank has a strong track record of consistent organic volume and revenue growth. Nevertheless, with a focus on project financing and relatively short-dated credit exposures, the bank must continually seek new business opportunities.

The operating environment in Norway is very supportive of banking activities, thanks to the resilience of the country’s economy to shocks, high wealth and low unemployment levels, and strong public finances. While there is a relatively large number of banks, the banking sector performs well and exhibits conservative risk metrics. The regulatory environment is strong, with a relatively stringent and proactive bank supervisor.

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. The bank invests in technology to improve efficiency and processes and a low cost base supports overall financial performance. As a commercial bank, digital customer solutions are less of a differentiating factor or a primary strategic focus. Following the adoption of a sustainability policy last year, the bank has started integrating ESG risks into its credit process. The “developing” long-term sustainability assessment reflects the view that the bank is managing associated risks and opportunities, with the progress made so far being in line with peers.

Pareto Bank generates robust returns, underpinned by a commitment to achieving a level of profitability which provides strong capacity to absorb credit costs and to build capital for growth. Management’s long-term ambition is return on equity of 14%. The bank maintains sound asset quality metrics, reflecting its prudent underwriting criteria. The loan portfolio has grown materially in recent years, although Scope expects this trend to moderate and for the composition to remain broadly stable. While the bank’s cost of risk is subject to higher variability than peers due to the less granular and cyclical nature of its credit exposures, the bank has a history of low credit losses.

Through earnings retention and controlled lending growth, Pareto Bank maintains a solvency position in line with relatively high requirements. Management takes a proactive approach to ensuring appropriate buffers and considers future regulatory developments in its planning. Given its business activities and funding profile, Scope considers the bank to be more sensitive to investor sentiment. In particular, corporate deposits make up a material proportion of the funding base. This funding source is potentially less stable, compared to peers who rely primarily on retail deposits and covered bonds. Accordingly, the bank aims to maintain a high level of excess liquidity.

In line with Scope’s financial institutions rating methodology, the preferred senior unsecured debt rating is aligned with the issuer rating and the non-preferred senior unsecured debt rating is one notch below the issuer rating.

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that the bank’s operating performance will remain resilient in a less benign business cycle.

Factors which could move the rating up

• Continued profitable growth, with increased business and geographic diversification

Factors which could move the rating down

• A weakening in asset quality which materially impacts profitability
   
• A deterioration in the stability of the funding profile

Overview of rating components

• Operating environment: Very supportive
   
• Business model: Focused
   
• Initial mapping refinement: Low
   
• Initial mapping: bbb-/bbb
   
• Long-term sustainability (ESG-D): Developing
   
• Adjusted anchor: bbb-
   
• Earnings capacity and risk exposures: Supportive
   
• Financial viability management: Adequate
   
• Additional rating factors: Neutral factor
   
• External support: Not applicable
   
• Issuer rating: BBB

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 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 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, Executive Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 20 October 2022.

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
© 2022 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, Scope Innovation Lab 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.