Rating action

Scope Ratings UK Limited (Scope) has assigned to Skagerrak Sparebank a first-time issuer rating of A- and a first-time preferred senior unsecured debt rating of A-, both with a Stable Outlook.

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

Download the issuer report.

Key rating drivers

Business model assessment: Focused (High). With NOK 26bn in total assets, Skagerrak Sparebank is a well-established savings bank operating primarily in Vestfold and Telemark counties in southeastern Norway. The bank pursues a personal and local relationship banking approach to customers as its main differentiating factor. The merger with Larvikbanken – Din Sparebank and Andebu Sparebank, completed on 1 February 2024, has added scale to the bank’s activities.

In addition, the wholly owned digital banking brand NORDirekte has a national reach and adds to business diversification. As a member of the Eika Alliance and a distributor for the Eika product companies, Skagerrak Sparebank can meet the broad financial needs of its clients and benefits from important economies of scale, particularly in digital investments. Lending activity is focused on retail customers, with residential mortgages accounting for more than 75% of credit exposure.

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 bank’s operating environment and business model.

Long-term sustainability assessment (ESG factor): Developing. Skagerrak Sparebank’s sustainability strategy addresses both risks and opportunities. The bank is developing its capabilities to assess ESG risks in its loan portfolio and is preparing for CSRD requirements. Consistent with its savings bank business model, the bank maintains close ties with local communities. A key part of the bank’s strategy is the use of sponsorships and donations to strengthen its profile as a local bank.

Along with the other member banks of the Eika Alliance, Skagerrak has made material investments to enhance its digital platforms. In May, the technical integration between the three banks was successfully completed, removing a potential source of operational risk.

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

Earnings capacity and risk exposures assessment: Supportive (+1 notch). Skagerrak Sparebank’s earnings capacity and asset quality metrics are in line with Norwegian savings bank peers, with pre-provision income providing a strong first line of defence against potential losses.

Credit quality is sound, underpinned by the large share of secured lending, primarily residential mortgages. As of June 2024, the Stage 3 ratio stood at 1.4%. Like the Norwegian banking sector, the bank has a material concentration in commercial real estate (CRE) within its corporate loan portfolio. However, this segment also includes low risk exposures to housing associations. CRE represented 13% of total loans as of June 2024.

While the bank’s increased size presents new opportunities with SMEs, management does not intend to prioritise growth at the expense of asset quality. Year-to-date operating performance has been impacted by significant merger integration costs. Going forward, the bank targets a return on equity of 9% and a cost-income ratio of around 40%, which Scope considers to be realistic.

Financial viability management assessment: Comfortable (+1 notch). Skagerrak Sparebank is well capitalised with a CET1 ratio of 19.6% and a leverage ratio of 8.7% on a proportionally consolidated basis, as of June 2024. The lowest buffer to SREP requirements was 240 bps. Given the composition of its credit portfolio, the bank expects to see a significant increase in its CET1 ratio following the implementation of CRR 3 in Norway.

The bank has a stable funding profile, with deposits and covered bonds representing 54% and 28%, respectively, of total funding as of June 2024. Deposits are highly granular as more than 75% are from retail customers. Covered bond funding is accessed through the covered bond issuing vehicle of the Eika Alliance.

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 ratings are balanced.

The upside scenario for the ratings and Outlooks is:

1. Significant business and geographic diversification that strengthens the business model without compromising the bank’s risk profile and returns.

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

1. A material deterioration in asset quality and/or earnings.
    
2. Less conservative capital management and/or a weakening in the stability of the funding profile, leading to a lower assessment of financial viability management.

Debt ratings

Preferred senior unsecured debt: A-. 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+. 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

Skagerrak Sparebank

Issuer rating: A-/Stable, new rating assigned

Preferred senior unsecured debt rating: A-/Stable, new rating assigned

Non-preferred senior unsecured debt rating: BBB+/Stable, new rating assigned

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: Marco Troiano, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 15 November 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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