Capital/Financing Update • Oct 18, 2022
Capital/Financing Update
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London, October 18, 2022 -- Moody's Investors Service ("Moody's") has today upgraded SpareBank 1 Sorost-Norge's long-term deposit and issuer ratings to A1 from A2. Furthermore, the rating agency has affirmed the Baseline Credit Assessment (BCA) at baa1. The outlook on the long-term deposit and issuer ratings was changed to stable from positive.
The stable outlook on the long-term deposit and issuer ratings and the affirmation of the BCA reflect SpareBank 1 Sorost-Norge's stable fundamentals, in particular sound capitalization and good asset quality, reflective of the bank's retail focus and the agency's expectation that this performance will be sustained in the next 12-18 months.
The upgrades of the deposit and issuer ratings reflect (1) the bank's baa1 Adjusted BCA and (2) the incorporation of future issuances of senior non-preferred (SNP) debt up to end 2023, when the bank needs to fully meet its minimum requirement for own funds and eligible liabilities (MREL), will have to issue to comply with the subordination requirements of the MREL regulation, in Moody's forward-looking Advanced Loss Given Failure (LGF) analysis.
The full set of the affected ratings can be found at the end of this press release.
The affirmation of SpareBank 1 Sorost-Norge's baa1 BCA reflects the bank's strong solvency position with a stable level of asset quality over the past years, despite significant M&A activity, as evident by a stable problem loan to gross loans ratio of 0.4% at end June 2022 (including loans transferred to covered bond companies). This is reflective of the bank's focus to the residential sector with residential mortgages accounting for 78% of gross loans at end June 2022. The bank's BCA is also supported by its very strong capitalisation with a tangible common equity to risk weighted assets of 20.26% at end June 2022 and a leverage ratio of 8.5% which compares favourably to similarly rated peers. These strengths are balanced against the bank's sector and geographical concentration and its reliance on confidence sensitive market funding.
The upgrade of the long-term deposit and issuer ratings to A1 results from Moody's forward-looking Advanced LGF analysis of SpareBank 1 Sorost-Norge's liability structures, which indicates that depositors and senior unsecured creditors are likely to face extremely low losses given failure resulting in three notches of uplift to the ratings from the BCA. This reflects our expectation that SpareBank 1 Sorost-Norge will be required to issue large volumes of instruments, prior to the end of 2023, that are subordinated to depositors and senior creditors in order to comply with their minimum requirements for own funds and eligible liabilities (MREL).
The analysis takes into account the current MREL requirement as well as the Norwegian Financial Supervisory Authority's (FSA)'s new approach to calculating MREL subordination requirements under, following the expected implementation of the amended Bank Recovery and Resolution Directive (BRRD2) into Norwegian law; as well as the bank's need to hold buffers above the minimum requirements.
The affirmation of the Counterparty Risk Assessment and Counterparty Risk Ratings at A1(cr)/P-1(cr) and A1/P-1 respectively, reflect three notches of uplift as indicated by Loss Given Failure (LGF) analysis due to large volumes of loss absorbing liabilities protecting counterparties in case of failure. Three notches above the Adjusted BCA, is the maximum uplift possible in the LGF analysis.
OUTLOOK
The stable outlook on the long-term deposit and issuer ratings reflects the agency's expectation that the bank will continue its resilient performance over the next 12-18 months, following the integration of SpareBank 1 Modum (not rated).
The ratings could be upgraded if the bank (1) demonstrates its ability to successfully integrate SpareBank 1 Modum into the group without compromising its financial performance and/or crystalizing operational risk, (2) delivers sustained robust earnings at a level of its higher-rates peers without compromising its risk profile, (3) demonstrates continued good access to market funding combined by strong liquidity.
Downward ratings pressure could emerge if (1) the bank's problem loan ratio was to deteriorate materially in light of higher inflation ; (2) financing conditions were to become more difficult; (3) its risk profile was to increase, for example as a result of increasing exposure to more volatile sectors, or due to increase in operational risk and/or (4) macroeconomic environment were to deteriorate leading to adverse developments in the Norwegian real-estate market.
Downward rating pressure on the long-term deposit and issuer ratings may also develop because of lower issuance of senior non-preferred securities leading to a reduction in the rating uplift through our LGF analysis.
..Issuer: SpareBank 1 Sorost-Norge
Outlook Action:
....Outlook, Changed To Stable From Positive
The principal methodology used in these ratings was Banks Methodology published in July 2021 and available at https://ratings.moodys.com/api/rmc-documents/71997 . Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found onhttps://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from
existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC\_1288235.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.
Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.
Effie Tsotsani Vice President - Senior Analyst Financial Institutions Group Moody's Investors Service Ltd. One Canada Square Canary Wharf London, E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454
Simon Ainsworth Associate Managing Director Financial Institutions Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454
Releasing Office: Moody's Investors Service Ltd. One Canada Square Canary Wharf London, E14 5FA United Kingdom
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