Rating action

Scope Ratings UK Limited (Scope) has today affirmed the ratings of Landkreditt Bank AS with a Stable Outlook:

• Issuer rating of A-
   
• Senior unsecured debt rating of A-
   
• Senior unsecured debt (subordinated) rating of BBB+. This category includes debt statutorily issued as non-preferred senior.

Scope has also affirmed the A- issuer rating on Landkreditt Boligkreditt with a Stable Outlook.

Rating rationale

Landkreditt Bank’s A- issuer rating reflects 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, accounting for 95% of total assets. Management has pursued a growth strategy in the agricultural sector as well as with personal customers to achieve greater scale and to diversify the business, aiming for a roughly equal balance between the two customer segments. In recent years, efforts have also been made to develop insurance, asset management and real estate brokerage activities, enabling the group to offer a broad range of financial services.

From origins as a digital bank, the group continues to make technology investments to support business growth and increase efficiency. Given its long-standing ties to the agricultural sector, Landkreditt aims to encourage the sustainability efforts of Norwegian farmers as they target a reduction in CO2 emissions of five million tons by 2030. In addition, the bank continues to work on incorporating ESG considerations into its credit process and developing capabilities to meet evolving sustainability-related disclosure requirements.

Reflecting its cooperative business model and low risk culture, Landkreditt generates relatively stable but somewhat lower returns than domestic peers. Earnings, nevertheless, are more than sufficient to absorb credit costs. Most lending is secured by residential property or agricultural property and land. Further, farmers continue to receive material government support. Asset quality has remained sound throughout the pandemic and during the current period of elevated rates, with the Stage 3 ratio standing at 1% as of year-end 2022.

Landkreditt maintains reassuring solvency metrics and is well positioned against current and future expected requirements. As of year-end 2022, the group’s CET1 capital ratio was 23.4%, well above the current requirement of 14.2%. By year-end, requirements are expected to rise by 2% due to announced increases in the systemic risk buffer and the countercyclical capital buffer. Importantly, cooperative members understand the need to ensure the group’s solidity.

Like with other Norwegian banks, Landkreditt relies to some extent on market funding, although deposits remain the primary funding source, with management targeting a deposit-to-loan ratio of at least 70%. The bank maintains comfortable liquidity buffers and regular access to the domestic debt market.

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 expects it would likely benefit from full support from its parent in case of need. Scope rates the covered bonds issued by Landkreditt Boligkreditt at AAA.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s view that the group’s business and operating performance will continue to be resilient in a more challenging macroeconomic environment.

What could move the rating up:

• Further diversification of the business while controlling risks and maintaining satisfactory returns

What could move the rating down:

• Deterioration in earnings which impedes the group’s business development and resilience
   
• 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

Stand-alone assessment: a-

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 methodologies used for these Credit Ratings and Outlooks, (Financial Institutions Rating Methodology, 7 February 2023), 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 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 Ratings and Outlook and the principal grounds on which the Credit Ratings and Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlook 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 Outlook are EU-endorsed.
Lead analyst: Pauline Lambert, Executive Director.
Person responsible for approval of the Credit Ratings: Nicolas Hardy, Deputy Head Financial Institutions
The Credit Ratings/Outlook were first released by Scope Ratings on 4 April 2018. The Credit Ratings/Outlook were last updated on 15 March 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
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