Rating action

Scope Ratings UK Limited (Scope) has today affirmed the ratings of Pareto Bank ASA with an issuer rating of BBB, senior unsecured debt rating of BBB and senior unsecured (subordinated) debt rating of BBB-. All credit ratings have a Stable Outlook.

Rating rationale

The BBB issuer rating reflects the following credit considerations:

Pareto Bank is a commercial bank specialising primarily in real estate, corporate and ship financing for Norwegian customers. Real estate and corporate financing account for over 90% of exposure. 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. Activities are concentrated in Eastern Norway, including the Oslo region and other large cities in the country. In recent years, the bank has cautiously expanded into Sweden and that exposure now represents 8% of the total.

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. The regulatory environment remains reassuring, with a relatively stringent and proactive bank supervisor. Meanwhile, higher interest rates have led to a reduction in economic activity, with lower housing and business investment expected in the near term.

The ’developing’ long-term sustainability assessment reflects the view that Pareto Bank is managing associated risks and opportunities, with the progress made so far being in line with peers (ESG factor). The bank invests in technology to improve efficiency and processes, contributing to a low cost base which supports the overall financial performance. However, as a commercial bank, maintaining leading digital customer solutions is less of a strategic focus. Following the adoption of a sustainability policy in 2021, the bank has made good progress in assessing ESG risks associated with its lending activities. As of end-2022, 88% of customers with loans above NOK 50m have been assigned an ESG score (nearly two-thirds of total loans). The average ESG score of 6.2 is considered to be low risk by the bank.

Pareto Bank generates robust returns, underpinned by a strategic priority to achieve a level of profitability which provides a strong capacity to absorb credit costs and to build capital for growth. Management recently raised its long-term return on equity ambition to 15%, from 14%. Drivers for reaching the target include lending growth, higher margins and low credit losses. Since 2014, the bank has achieved returns of at least 14%, with the exception of 2020 when the reported return was 13%.

The bank maintains sound asset quality metrics, reflecting prudent underwriting criteria. While the cost of risk is subject to higher variability than peers due to the less granular and more cyclical nature of its credit exposures, the bank has a history of low credit losses. As of Q2 2023, the Stage 3 loan ratio stood at 1.7%.

Through earnings retention and controlled lending growth, the bank takes a proactive approach to ensuring appropriate buffers to relatively high capital requirements. In August, the bank raised NOK 350m in capital through a private placement, adding approximately 1.6% to the CET1 capital ratio reported in June 2023. Management is committed to maintaining a buffer above the Norwegian FSA’s expectation for the bank to have a CET1 capital ratio of at least 16.7%, which includes a Pillar 2 guidance of at least 1%.

Given its business focus and funding profile, Scope considers the bank to be more sensitive to investor sentiment compared to peers who rely primarily on retail deposits and covered bonds. Potentially less stable corporate deposits account for a material proportion of the funding base although the bank has successfully grown retail deposits. Accordingly, the bank aims to maintain a high level of excess liquidity. As of Q2 2023, the LCR was 344% and the NSFR was 160%. The elevated LCR level may decline as the bank pursues attractive lending opportunities.

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, with pressures on the real estate sector.

What could move the rating up

• Continued profitable growth, with increased business and geographic diversification

What 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 construct

• 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, 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 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 21 October 2022.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
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