Fitch Ratings has affirmed SpareBank 1 SR-Bank ASA's (SR-Bank) Long-Term Issuer Default Ratings (IDRs) at 'A' with a Stable Outlook.

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

Key Rating Drivers

Low Risk Regional Bank: The ratings of SR-Bank 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 SR-Bank's regional and overall moderate franchise in Norway, which leads to a geographically concentrated loan portfolio.

SR-Bank's Short-Term IDR of 'F1' is the lower of two options mapping to a Long-Term IDR of 'A'. This reflects our assessment of the bank's funding and liquidity at 'a-', compared with the minimum level of 'aa-' for a Short-Term IDR of 'F1+'.

Regional Market Leader: SR-Bank is Norway's fifth-largest bank with about a 4% market share. It is also the market leader in southern and western Norway with a well-established regional franchise and a strong relationship with the local community. SR-Bank is the largest bank in the SpareBank 1 Alliance, the second-largest financial group in Norway, with about a 20% national market share in lending. This membership provides greater product breadth, income diversification and economies of scale.

Conservative Risk Profile: SR-Bank has a strong risk management culture, with a conservative attitude to credit risk, underpinned by prudent domestic regulations.SR-Bank's credit risk mainly resides in its loan book (about 75% of assets at end-September 2022). Lending is mainly secured with prudent loan-to-value ratios. SR-Bank's investment guidelines are conservative and its debt portfolio comprises highly rated and liquid bonds. The bank's credit expansion has been restrained and balanced between retail and corporate segments.

Resilient Asset Quality: SR-Bank's low levels of impaired assets and limited credit losses over economic cycles, conservative underwriting standards and a loan book dominated by resilient residential mortgage loans offset its regional concentration risk. SR Bank's asset-quality metrics compare well with Nordic and international peers', but they are weaker than highly rated Swedish banks'.

We expect asset quality to remain strong and to be only modestly hit by the economic downturn, rising interest rates and inflation. Fitch expects the bank's impaired loans (Stage 3) ratio to remain low at 1.5% at end-2023.

Strong Profitability: SR-Bank's stable revenue benefits from its close relationships with the local community, healthy margins, low funding costs and diversified fee and commission income, which to a large extent is sourced from non-banking activities. Cost efficiency is superior compared with international standards, despite the bank's small size and is underpinned by strong automation and digitalisation.

SR-Bank's profitability is also supported by low loan impairment charges (LICs). In 2023 we expect the bank's net interest income to improve further. However, the operating profit return will weaken to 2.4% of risk-weighted assets (RWAs; 2022: about 3%) due to higher LICs and expenses and subdued contribution from associated companies.

Robust Capital Adequacy: SR-Bank's high risk-weighted and leverage ratios are underpinned by its low risk profile, stable asset quality and healthy internal capital generation. We also consider the moderate size of the bank's capital base compared with highly rated Nordic peers'. At end-September 2022, SR-Bank's common equity Tier 1 (CET1) ratio of 17.8% was above its internal long-term target of 16.85%.

Low Refinancing Risk: SR-Bank's solid funding profile benefits from a stable deposit base and prudently managed refinancing risk. Like most Nordic banks, SR-Bank relies on wholesale funding, in particular covered bonds issued through its wholly-owned subsidiary. 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:

SR-Bank's ratings have sufficient headroom to absorb significant deterioration in the bank's financial profile. We could downgrade SR-Bank's ratings if a severe economic stress durably reduces its return on RWAs close to or below 1.5% and the impaired loans ratio rises sustainably above 3%.

SR-Bank'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 SR-Bank sees significant nationwide strengthening of its franchise while maintaining a low risk profile and strong financial metrics.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

SR-bank's long-term senior preferred debt and deposit ratings are one notch above the bank's Long-Term IDR. This reflects the protection that could accrue to senior creditors from the bank's more junior bank resolution debt and equity buffers. We expect SR-Bank's resolution debt buffer to remain comfortably above 10% of resolution-relevant RWAs, adjusted for consolidated RWAs of SR-Boligkreditt AS (the mortgage bank subsidiary), which is excluded from SR-Bank's resolution strategy. At end-September 2022, we estimate that this buffer equaled 9% of resolution-relevant RWAs and we expect it to increase above 10% by end-2023.

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

SR-Bank's subordinated debt is rated two notches below its VR to reflect the poor recovery prospects of this type of debt.

SR-Bank'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, instead of or ahead of a bank receiving sovereign support.

Fitch views SR Bank's membership of the SpareBank 1 Alliance may result in support 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 senior preferred debt ratings and the deposit ratings are sensitive to changes in the bank's IDRs. They are also sensitive to SR-Bank maintaining a buffer of subordinated and senior non-preferred debt of at least 10% of resolution-relevant RWAs, or could be downgraded otherwise.

The subordinated debt rating is sensitive to changes in SR-Bank's VR.

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

The funding & liquidity score of 'a-' is above the 'bbb' implied score due to the following adjustment reasons: non-deposit funding (positive), liquidity coverage (positive).

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

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 SR-Bank, either due to their nature or the way in which they are being managed by the bank. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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