Fitch Ratings has affirmed SpareBank 1 Nord-Norge's (SNN) Long-Term Issuer Default Ratings (IDRs) at 'A' with a Stable Outlook.

Fitch has also affirmed SNN's Viability Rating (VR) at 'a'. A full list of rating actions is below.

Key Rating Drivers

Low-Risk Regional Bank: The ratings of SNN reflect its stable and low-risk business model, strong profitability, resilient asset quality, robust capital adequacy and well-managed wholesale funding reliance. The ratings also factor in SNN's regional and overall moderate franchise in Norway, which leads to a geographically concentrated loan portfolio.

Regional Market Leader: SNN is the market leader in northern Norway, with a well-established regional franchise and a strong relationship with the local community. The bank's membership of the SpareBank 1 Alliance provides greater product breadth, economies of scale and access to cheap covered bond funding. The SpareBank 1 Alliance is the second-largest lender in Norway, with about a 20% market share in lending.

Conservative Risk Profile: SNN has a strong risk-management culture, with a conservative attitude to credit risk underpinned by prudent domestic regulations. SNN's credit risk mainly resides in its loan book (about 75% of assets at end-September 2023), which is mainly secured with prudent loan-to-value ratios. SNN's investment guidelines are conservative and its debt portfolio comprises highly rated and liquid bonds. The bank's credit expansion has been restrained and is balanced between retail and corporate loans.

Robust Asset Quality: SNN's low levels of impaired assets and limited credit losses over multiple economic cycles, its conservative underwriting standards and a loan book dominated by resilient residential mortgage loans offset its regional concentration risk. SNN's asset quality metrics compare well with Nordic and international peers', due to historically limited high-risk lending to oil-related industries.

Nonetheless, we believe SNN's regional concentration makes the bank more vulnerable to credit losses than its large diversified Swedish peers. We expect asset quality to remain resilient and SNN's impaired loans (Stage 3) ratio to remain low at about 1% at end-2024.

Strong Profitability: SNN's profitability benefits from its close relationship with the local community, a wider net interest margin following several policy rate hikes and diversified fee and commission income, which is largely sourced from non-banking activities. Cost efficiency is very strong by international standards, despite the bank's small size, and is underpinned by strong automation and digitalisation. Loan impairments have not had a meaningful impact on profitability since the pandemic.

Fitch expects SNN's operating profit to remain strong at about 4.3% of risk-weighted assets (RWAs) in 2024, primarily reflecting significant growth in net interest income due to a higher interest rate environment, coupled with only moderate impact from cost inflation and loan impairment charges (LICs).

Robust Capital Adequacy: SNN's high risk-weighted capital and leverage ratios are underpinned by its low risk profile, stable asset quality and healthy internal capital generation. We also factor in the moderate size of the bank's capital base compared with highly rated Nordic peers'. At end-September 2023, SNN's common equity Tier 1 (CET1) ratio of 17.6% was above its recently revised minimum of 15.8%.

Low Refinancing Risk: SNN's solid funding profile benefits from a stable deposit base and prudently managed refinancing risk. Like most Nordic banks, SNN relies on wholesale funding, in particular covered bonds issued through SpareBank 1 Boligkreditt (S1B), a joint covered-bond funding vehicle for member banks of the SpareBank 1 Alliance. The bank maintains strong coverage of short-term liabilities with good-quality, unencumbered liquid assets.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

SNN's ratings have sufficient headroom to absorb significant deterioration in the bank's financial profile. We could downgrade SNN's ratings if a severe economic stress reduces its operating profit close to or below 1.5% of RWAs and the impaired loans ratio rises above 3%, both on a sustained basis.

SNN's structural reliance on wholesale funding means an unmitigated weakening of access to the capital markets would also be negative for its ratings.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

An upgrade is unlikely in medium term unless SNN has a significant nationwide strengthening of its franchise while maintaining a low risk profile and strong financial metrics.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

Short-Term IDR

SNN's Short-Term IDR of 'F1' is the lower of the two options mapping to a Long-Term IDR of 'A', driven by SNN's funding and liquidity score of 'a-'.

Deposits and Senior Debt

SNN's long-term senior preferred debt and deposit ratings are one notch above the bank's Long-Term IDR. This reflects the protection that we expect will accrue to deposits and senior preferred debt from the bank's junior resolution debt and equity buffers. We expect SNN's resolution debt buffer to remain comfortably above 10% of resolution-relevant RWAs in the long term. At end-September 2023, we estimate this buffer equaled 13% of SNN's resolution-relevant RWAs, adjusted for S1B and SpareBank 1 Naeringskreditt, which are excluded from SNN's resolution strategy.

For the same reason, SNN's long-term senior non-preferred debt rating is equalised with the Long-Term IDR, reflecting Fitch's view that the default risk of the notes is equivalent to that of the IDR and their average recovery prospects.

SNN's short-term senior preferred debt and deposit ratings are mapped to their respective long-term ratings and reflect our assessment of the bank's funding and liquidity at 'a-'.

No Government Support: SNN's Government Support Rating (GSR) of 'No Support' reflects Fitch's view that senior creditors cannot rely on receiving full extraordinary support from the sovereign if the bank becomes non-viable, given Norway's adoption of the EU's Bank Recovery and Resolution Directive. This legislation provides a framework for resolving banks that requires senior creditors to participate in losses, if necessary, ahead of a bank receiving sovereign support.

Fitch believes that being a member of the Sparebank 1 Alliance may result in SNN being supported by other Alliance members, but this is not an obligation, and is therefore not factored into the ratings.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

The Short-Term IDR is sensitive to changes in SNN's Long-Term IDR and liquidity score.

The senior preferred and senior non-preferred debt ratings and the deposit ratings are sensitive to changes in the bank's IDRs. They are also sensitive to SNN maintaining a buffer of senior non-preferred and more junior debt of at least 10% of resolution-relevant RWAs, or could be downgraded otherwise.

An upgrade of the GSR would be contingent on a positive change in Norway's propensity to support domestic banks. While not impossible, this is highly unlikely in Fitch's view.

VR ADJUSTMENTS

The business profile score of 'a-' is above the 'bbb' implied score due to the following adjustment reason: business model (positive).

The asset quality score of 'a' is below the 'aa' implied score due to the following adjustment reason: concentrations (negative).

The capitalisation & leverage score of 'a' is below the 'aa' implied score due to the following adjustment reason: size of capital base (negative).

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on SNN, either due to their nature or the way in which they are being managed by the bank. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation of the materiality and relevance of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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