Rating action

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

Rating rationale

The A- issuer rating on Brage Finans (Brage) reflects the following assessments:

• Business model assessment: Focused (High). Brage is a Norwegian finance company offering primarily equipment leasing for business clients and car loans for individuals. Brage serves as the finance company for its owners, primarily well-established and solid savings banks located in Western and Southern Norway. The owners account for about a third of the company’s sales, with the remainder stemming from Brage’s own direct channels, third-party agents, equipment sellers and car dealers. With five of eight board members coming from the banks, the owners steer the strategic direction of the company.
   
• Operating environment assessment: Very supportive (Low). Norway’s operating environment remains very supportive for financial services activities. Norway is a relatively small open economy with one of the world’s highest per capita income levels and low unemployment. A very robust government fiscal position provides ample capacity to support the economy when needed. The regulatory environment is well-established and rigorous, and the central bank has a strong record of providing funding support to banks in times of stress.
   
• Initial mapping of bbb: The initial mapping results from the combination of our business model and operating environment assessments.
   
• Long term sustainability assessment (ESG factor): Advanced. Brage continues to make ongoing enhancements to its relatively up-to-date technology systems to further increase efficiency and support business growth. The company also demonstrates a proactive approach to managing sustainability-related considerations, with attention being given to both risks and opportunities. Sustainability is integrated into the business strategy and credit risk processes.
   
• Earnings and risk exposure assessment: Neutral. The company aims to generate a good financial return for its owners. Through the considered expansion of distribution channels as well as market share gains, Brage’s returns have steadily increased. In 2023, Brage reported a return on equity above 11% (excluding commissions paid to its owners), with performance supported by solid growth, strong cost efficiency and contained credit costs.
  
  While benefitting from higher margins, the nature of Brage’s business activities entails greater asset risk than traditional banking focused on mortgage lending. In leasing, counterparties are often small businesses in cyclical industries such as construction and transport. At the same time, Brage has grown the car financing business, increasing the number of personal customers. Asset quality remains sound, underpinned by a diversified and mainly asset-backed credit portfolio and consistent risk management. Reflective of a slowing Norwegian economy, the Stage 3 ratio increased to 3.2% as of end-2023, from 2.2% as of end-2022. Brage has no direct exposure to residual value risk.
   
• Financial viability management assessment: Comfortable. Brage’s owners consistently provide capital and funding to sustain its growth and development. 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 prudential metrics above relatively stringent requirements with support from its owners as needed. In Q4 2023, the company received NOK 200m in capital from its owners. Solvency levels remain high, including a CET1 capital ratio of 17.5% and a leverage ratio of 14.2% as of end-2023.
  
  Brage relies on wholesale funding and is a frequent issuer in the domestic debt market as it is not authorized to collect deposits. To manage liquidity and funding risks, the company maintains a high quality liquidity buffer and ensures that operating cash flows are more than sufficient to cover future debt maturities. Reflecting the aim to optimise its liquidity position, the LCR stood at 122% as of end-2023. While lower than peers, Scope acknowledges the availability of support from Brage’s owners to ensure a sound liquidity position. With the elevated cost of market funding, management continues to consider different funding options, including expanding the investor base and issuing in longer duration.

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 Brage’s operating performance and prudential metrics will remain sound in a more uncertain economic environment.

What could move the rating up:

• Sustainable growth underpinned by increased business and geographic diversification

What could move the rating down:

• A change in the supportive nature of the relationship between Brage and its owners which negatively impacts its business franchise and/or liquidity and funding profile
   
• A material deterioration in asset quality or earnings, potentially stemming from a weaker macroeconomic environment

Overview of rating construct

Operating environment: Very supportive (Low)

Business model: Focused (High)

Initial mapping: 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

Stand-alone assessment: a-

External support: Not applicable

Issuer rating: A-

Rationale for debt rating

Senior unsecured debt is rated at the level of the issuer rating.

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, (Financial Institutions Rating Methodology, 6 February 2024), 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/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings and/or Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or 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 28 January 2020. The Credit Ratings/Outlooks were last updated on 20 February 2023.

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
© 2024 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis 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.