Rating action

Scope Ratings UK Limited (Scope) has affirmed Pareto Bank ASA’s issuer rating of BBB and preferred senior unsecured debt rating of BBB, both with a Stable Outlook.

The full list of rating actions and rated entities is at the end of this rating action release.

Key rating drivers

Business model assessment: Focused (Low). 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 credit exposure. The bank successfully targets medium-sized 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. The bank has been cautiously expanding into Sweden, which now accounts for 9% of credit exposure.

The bank has a strong track record of consistent organic volume and revenue growth. However, given the focus on project financing and the relatively short-term nature of credit exposures (typically 1-3 years), business volumes are more sensitive to the economic and investment cycle.

Operating environment assessment: Very Supportive (Low). The operating environment in Norway is very conducive for the development of banking activities due to the economy’s resilience to shocks, high wealth levels, low unemployment and strong public finances. The regulatory environment remains reassuring, with banks being closely regulated and supervised. Meanwhile, elevated interest rates continue to weigh on economic activity, with the building construction industry being particularly impacted.

Scope arrives at an initial mapping of bbb- based on a combined assessment of the issuer’s operating environment and business model.

Long-term sustainability assessment (ESG factor): Developing. Pareto Bank is committed to managing ESG-related risks and opportunities, with the progress made being in line with peers. The bank continues to invest in technology to improve efficiency and processes, contributing to a low cost base that supports overall financial performance. Following the adoption of a sustainability policy in 2021, the bank has been assessing and monitoring ESG risks associated with its financing activities. In 2023, 88% of customers with loans above NOK 50m were assigned an ESG score (representing 90% of total loans).

The long-term sustainability assessment leads to an adjusted rating anchor of bbb-.

Earnings capacity and risk exposures assessment: Supportive (+1 notch). The bank generates robust returns, underpinned by a strategic priority to achieve a level of profitability that provides a strong capacity to absorb credit costs and build capital for growth. At the same time, the bank maintains prudent underwriting criteria and demonstrates sound risk management. Since 2014, the bank has consistently achieved a return on equity of at least 13%. Management’s long-term return on equity ambition is 15%.

Given the more challenging operating conditions for its customers, the bank has seen an increase in loan impairments. As of Q2 2024, the Stage 3 ratio stood at 4.1%, up from 3.5% as of YE 2023, driven primarily by residential property financing exposures. The bank continues to work closely with its customers to facilitate the completion of projects and the repayment of loans. Scope takes comfort from the secured nature of the bank’s lending and the low Stage 2 ratio, which was 3.3% as of Q2 2024. With strong levels of pre-provision income, the bank remains well positioned against potentially higher impairments.

Financial viability management assessment: Adequate. Through earnings retention and controlled lending growth, Pareto Bank takes a proactive approach to ensuring appropriate buffers to relatively high capital requirements. Management is committed to maintaining a buffer above the Norwegian FSA’s expectation for the bank to have a CET1 ratio of at least 16.7%, which includes a Pillar 2 guidance of at least 1%. The bank’s solvency position remains sound, with the CET1 ratio at 17.9% and the leverage ratio at 17.1% as of Q2 2024. The pending implementation of CRR 3 in Norway from 1 January 2025 is expected to have a net positive effect on the bank’s CET1 ratio.

Given its commercial banking 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 continues to attract deposits from retail customers. Accordingly, the bank aims to maintain a high level of excess liquidity, with the LCR at 399% and the NSFR at 143% as of Q2 2024.

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

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s view that the risks to the current rating are balanced.

The upside scenario for the ratings and Outlooks is:

1. Continued profitable growth, with increased business and geographic diversification.

The downside scenarios for the ratings and Outlooks are (individually or collectively):

1. A weakening in asset quality that materially impacts profitability.
    
2. A deterioration in the stability of the funding profile.

Debt ratings

Preferred senior unsecured debt: BBB/Stable. The rating is aligned with the issuer rating and applies to senior unsecured debt ranking above other classes of senior unsecured debt.

Non-preferred senior unsecured debt: BBB-/Stable. The rating is one notch lower than the issuer rating, reflecting statutory subordination.

Environmental, social and governance (ESG) factors

Please refer to the ‘long-term sustainability assessment’ under the ‘key rating drivers’ section above for the ESG analysis.

All rating actions and rated entities

Pareto Bank ASA

Issuer rating: BBB/Stable, affirmed.

Preferred senior unsecured debt rating: BBB/Stable, affirmed.

Non-preferred senior unsecured debt rating: BBB-/Stable, affirmed.

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, 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 Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings and Outlooks 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. The Credit Ratings/Outlooks were last updated on 29 September 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, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

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.