Rating action

Scope Ratings UK Limited (Scope) has affirmed Brage Finans AS’ issuer rating and senior unsecured debt rating of A- and changed the Outlook to Positive.

The change in Outlook to Positive from Stable reflects Scope’s expectation that Brage Finans (Brage) is likely to benefit from stronger owner support going forward. The company’s two largest owners, Sparebanken Vest and Sparebanken Sor, have agreed to merge, which will create Norway’s largest savings bank with total assets of more than NOK 490bn (based on 30 June 2024 figures). Pending regulatory approval and completion of the merger, which is expected around July 2025, Brage will become a 77.6% owned subsidiary of the merged bank, which will be called Sparebanken Norge. Brage is expected to be strategic product company of the merged bank and the Frende Group.

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 (High). Brage is a Norwegian finance company that mainly offers equipment leasing to business customers and car loans to individuals. Brage serves as the finance company for its owners, mainly well-established and solid savings banks located in western and southern Norway. The owners account for approximately one third of the company’s sales. Supported by its own direct channels, third-party agents, equipment dealers and car dealers, Brage has a national presence. With half of the board members coming from the banks, the owners steer the strategic direction of the company.

Operating environment assessment: Very supportive (Low). The operating environment in Norway continues to be very supportive of 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 track record of providing funding support to banks in times of stress.

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): Advanced (+1 notch). Brage continues to make ongoing enhancements to its relatively up-to-date technology systems to further increase efficiency and drive 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.

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

Earnings capacity and risk exposures assessment: Neutral. The company aims to generate a good financial return for its owners. Brage’s returns have grown steadily over time, supported by market share gains, cost discipline, and controlled credit costs. For H1 2024, the company reported a return on equity of 7.6% (before commissions paid to owners), down from 11.2% in 2023. Results were heavily impacted by credit losses related to a single customer. Excluding these exceptional losses, performance remained solid.

Although Brage benefits from higher margins, the nature of its business involves 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 its car finance 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. Given the more challenging operating environment, the Stage 3 ratio was 3.2% as of Q2 2024, higher than historic levels of around 2%. Brage has no direct exposure to residual value risk.

Financial viability management assessment: Comfortable (+1 notch). 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. The last capital increase of NOK 250m was completed in Q2 2024. Solvency levels remain high, including a CET1 capital ratio of 17.7% and a leverage ratio of 15.2% as of Q2 2024.

Brage relies on wholesale funding and is a frequent issuer in the domestic debt market, as it is not authorised 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. In line with the objective of optimising its liquidity position, the LCR stood at 125% as of Q2 2024. While this is lower than banking peers, Scope acknowledges the willingness of the owners to ensure that Brage maintains a sound liquidity position. In March 2024, the owners subscribed to a new NOK 2bn senior unsecured certificate loan to support Brage’s financing needs.

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

Outlook and rating sensitivities

The Positive Outlook reflects Scope’s view that the risks to the current rating are tilted to the upside.

The upside scenario for the ratings is:

1. Brage becomes a majority-owned subsidiary as the planned merger between its two largest owners is completed.

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

1. Brage’s ownership structure does not change significantly as the planned merger between the two largest owners does not materialise.
    
2. 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.
    
3. A material deterioration in asset quality or earnings, potentially stemming from a weaker macroeconomic environment.

Debt ratings

Senior unsecured debt: A-. The rating is aligned with the issuer rating.

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

Brage Finans AS

Issuer rating: A-, affirmed and Outlook changed to Positive (from Stable)

Senior unsecured debt rating: A-, affirmed and Outlook changed to Positive (from Stable)

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: Marco Troiano, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 28 January 2020. The Credit Ratings/Outlooks were last updated on 8 February 2024.

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
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