Helgeland Sparebank

FINANCIAL INSTITUTIONS
CREDIT OPINION
13 June 2016
Helgeland Sparebank
Semi-annual Update
Update
Summary Rating Rationale
RATINGS
Helgeland Sparebank
Domicile
Norway
Long Term Rating
A3
Type
LT Bank Deposits - Fgn
Curr
Outlook
Stable
We assign A3 long-term deposit and issuer ratings to Helgeland Sparebank, which
incorporate two notches of rating uplift from the bank’s baa2 baseline credit assessment
(BCA) based on our Advanced Loss Given Failure (LGF) analysis. LGF takes into account
the risks faced by the different debt and deposit classes across the liability structure should
the bank enter resolution. The bank's ratings do not benefit from government support
uplift based on our assessment of a low probability of support. We also assign a Prime-2
short-term deposit rating and an A2(cr)/Prime-1(cr) Counterparty Risk Assessment (CRA
Assessment) to the bank.
Alexios Philippides
357-2569-3031
AVP–Analyst
[email protected]
Helgeland Sparebank's standalone BCA of baa2 reflects the bank's Very Strong- operating
environment, low problem loan levels (equivalent to 0.6% of gross loans as at end-March
2016), consistently modest loan loss provision expenses and adequate capital levels with
a tangible common equity to risk weighted assets ratio of 14% in Q1 2016. These credit
strengths are balanced against the bank's limited geographical reach, with over 80% of
loans extended within its home Helgeland district, high single-name concentrations and
concentration in the cyclical real-estate and construction sectors (17% of gross loans at endMarch 2016), material market funding reliance and limited pricing power resulting from its
relatively small size.
Maria Asensio
44-20-7772-1078
Associate Analyst
[email protected]
Exhibit 1
Please see the ratings section at the end of this report
for more information.The ratings and outlook shown
reflect information as of the publication date.
Contacts
Oscar Heemskerk
44-20-7772-5532
Associate Managing
Director
[email protected]
Financial Profile Key Factors (as of 31 Dec 2015)
Sean Marion
44-20-7772-1056
Managing Director Financial Institutions
[email protected]
Source: Moody's Financial Metrics
FINANCIAL INSTITUTIONS
MOODY'S INVESTORS SERVICE
Credit Strengths and Challenges
»
Helgeland Sparebank's BCA is supported by its Very Strong- Macro Profile
»
Capitalisation is adequate
»
Consistently strong asset quality metrics, but elevated risks remain from sector and credit concentrations
»
Stable retail-banking-driven profitability, but intense competition will continue to weigh on margins
»
Material market funding reliance despite a sizeable deposit base
»
Large volume of deposits and junior debt, resulting in deposit and issuer ratings benefiting from a very low loss-given-failure rate
Rating Outlook
The stable outlook on the bank's long-term issuer and deposit ratings reflects Moody's view that the bank's financial metrics will remain
broadly resilient in the face of a modest slowdown in Norway's economic performance.
Factors that Could Lead to an Upgrade
»
Upward rating momentum could develop if Helgeland Sparebank demonstrates (1) a reduction in concentrations, particularly
in more volatile sectors; (2) enhanced access to European capital markets and improved liquidity; and (3) stronger earnings
generation without an increase in its risk profile.
Factors that Could Lead to a Downgrade
»
Future downward rating pressure would emerge if (1) Helgeland Sparebank's problem loan ratio increases significantly above
Moody's system-wide expectation of approximately 2%; (2) financing conditions become more difficult; (3) its risk profile
increases, for example as a result of increased exposure to more volatile sectors; and/or (4) the macroeconomic environment
deteriorates more than estimated, leading to adverse developments in the Norwegian real-estate market. In addition, a reduction
in uplift as a result of the rating agency's LGF analysis could lead to ratings moving down.
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating action information and rating history.
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13 June 2016
Helgeland Sparebank: Semi-annual Update
FINANCIAL INSTITUTIONS
MOODY'S INVESTORS SERVICE
Key Indicators
Exhibit 2
Helgeland Sparebank (Consolidated Financials) [1]
Total Assets (NOK billion)
Total Assets (EUR million)
Total Assets (USD million)
Tangible Common Equity (NOK billion)
Tangible Common Equity (EUR million)
Tangible Common Equity (USD million)
Problem Loans / Gross Loans (%)
Tangible Common Equity / Risk Weighted Assets (%)
Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%)
Net Interest Margin (%)
PPI / Average RWA (%)
Net Income / Tangible Assets (%)
Cost / Income Ratio (%)
Market Funds / Tangible Banking Assets (%)
Liquid Banking Assets / Tangible Banking Assets (%)
Gross loans / Due to customers (%)
3-162
12-152
12-142
12-133
12-123
Avg.
27.5
2913.9
3320.5
2.1
224.2
255.5
0.6
14.0
6.0
1.9
4.3
1.7
28.9
28.7
14.5
157.9
27.1
2821.8
3065.3
2.1
213.3
231.7
0.4
14.0
4.3
1.8
2.1
0.8
47.2
29.0
15.0
156.3
25.9
2849.8
3448.5
1.9
213.2
258.0
0.6
13.9
6.3
1.8
2.2
0.9
46.1
29.6
17.5
151.8
25.9
3103.3
4276.2
1.8
219.5
302.5
0.8
13.5
8.7
1.8
2.1
0.7
45.3
33.3
18.3
159.4
24.6
3352.0
4419.2
1.7
230.1
303.3
0.6
12.6
7.2
1.5
1.6
0.5
52.2
38.5
16.9
177.0
2.84
-3.44
-6.94
5.84
-0.64
-4.24
0.65
14.06
6.55
1.75
2.96
0.95
43.95
31.85
16.45
160.55
[1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel III - fully-loaded or transitional phase-in; IFRS [3] Basel II; IFRS [4] Compound Annual Growth Rate based
on IFRS reporting periods [5] IFRS reporting periods have been used for average calculation [6] Basel III - fully-loaded or transitional phase-in & IFRS reporting periods have been used for
average calculation
Source: Moody's Financial Metrics
Detailed Rating Considerations
HELGELAND SPAREBANK'S BCA IS SUPPORTED BY ITS VERY STRONG- MACRO PROFILE
As a purely domestic bank, we align Helgeland Sparebank's Macro Profile with that of Norway at 'Very Strong-'. Banks in Norway (Aaa
stable) benefit from operating in an affluent and developed country. Norway has very high economic, institutional and government
financial strength, as well as low susceptibility to event risk. The main risks to the system stem from a high level of household
indebtedness and domestic banks' reliance on market funding. However, these risks are offset by the strength of households' ability to
service debt, banks' adequate capitalisation and the banking system's relatively small size compared with GDP.
CAPITALISATION IS ADEQUATE
We view the bank as being adequately capitalised in light of its risk profile. Its capitalisation is in line with its rated Norwegian peer
group, with a tangible common equity (TCE) at 14% of risk-weighted assets as at end-March 2016, an increase from 2012 levels
(12.6%). The bank's board has established a 2015-19 capital plan that aims to increase its capital ratio in line with new capital
requirements. It also targets a common equity tier 1 (CET1) ratio of 14% and a total capital ratio of 17.5%. Accordingly, the bank
reported a CET1 ratio of 14.9% and a total capital ratio of 18.2% as of March 2016, well above the current regulatory minima.
Our assigned Capital score reflects this strength, as well as the bank's 8% TCE/tangible banking assets ratio, which is well within
international standards.
CONSISTENTLY STRONG ASSET QUALITY METRICS, BUT ELEVATED RISKS REMAIN FROM SECTOR AND CREDIT CONCENTRATIONS
Helgeland Sparebank's problem loan ratio (IFRS impaired loans as a percentage of total loans) has remained low, reaching 0.6% at
end-March 2015 (end-2015: 0.4%; see Exhibit 3) and broadly in-line with most of its Norwegian peers. Furthermore, the bank has
demonstrated a consistent credit loss performance with loan-loss provision expenses as a percentage of gross loans averaging a
relatively low 0.2% in the past five years. The bank's asset quality performance reflects its retail focus, with mortgages accounting for
almost 70% of the bank's loan book (including loans transferred to its covered bond funding vehicle). This asset class has historically
proven resilient. However, we note that the sustained increase in domestic house prices combined with the high level of household
indebtedness may pose long-term risks.
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13 June 2016
Helgeland Sparebank: Semi-annual Update
MOODY'S INVESTORS SERVICE
FINANCIAL INSTITUTIONS
Exhibit 3
The bank's asset quality metrics have been consistently strong
Source: Moody's Banking Financial Metrics
We note that a large portion of problem loans relate to the real-estate and construction sectors. The bank's substantial involvement
in these cyclical industries (at 17% of gross loans in March 2016), poses a risk to its future asset quality. In addition, the bank's loan
book exhibits high geographic and single-borrower concentration. Around 84% of the bank's lending exposures were in the district of
Helgeland as of March 2016. While such concentrations are typical for small local savings banks, they could accelerate the extent and
pace of any deterioration in asset quality. Our assigned Asset Risk score also reflects our view that although the bank is vulnerable to
less favourable national economic conditions owing to low oil prices as well as falling investment levels, Helgeland Sparebank is not
directly exposed to the oil sector and the level of unemployment in Helgeland is currently lower than the national level (2.5% vis-à-vis
3.3% by end of Q1 2016).
STABLE RETAIL-BANKING-DRIVEN PROFITABILITY BUT INTENSE COMPETITION WILL CONTINUE TO PRESSURE MARGINS
Helgeland Sparebank derived around two-thirds of its 2015 pre-tax income from retail operations (excluding not attributed
operations), which we view positively in terms of earnings stability. The bank’s primary source of earnings is net interest income, which
has accounted for over 80% of its net revenue in the past few years. Net interest income improved in 2015, primarily as a result of loan
growth by 8%. In 2015 the bank's net interest margin remained at the same level as the previous year, at 1.8%, following interest rate
reductions in both mortgages and deposits. Net income to tangible assets stood at 0.8% for 2015, in line with the bank's three-year
average but slightly lower than 2014 (at 0.9%). Loan loss provisions represented 0.15% of average loans at end December, lower than
0.23% at end 2014, while the cost-to-income ratio was 47%
We expect the bank's profitability to be somewhat under pressure in 2016 on the back of a weakening operating environment, margin
pressure as spreads are widening and competition remains strong, especially in the retail market, which is reflected in the bank's
Profitability score.
MATERIAL MARKET FUNDING RELIANCE DESPITE A SIZEABLE DEPOSIT BASE
Although Helgeland Sparebank's funding profile benefits from a sizeable deposit base, largely from retail customers that constituted
around 60% of funding at year-end 2015, it is also materially reliant on market funding – mostly senior debt and covered bond funding.
We note that covered bond funding has grown significantly since 2009, when Helgeland Boligkreditt AS (the bank's wholly owned
covered bond company) was established.
Based on our methodology, we reflect the stability of covered bonds relative to unsecured market funding through an adjustment to
our market funds to tangible assets ratio and our adjusted ratio for the bank is 29% as of year-end 2015. However, we do not expect
that, size-wise, Helgeland Sparebank will have the capacity to make large benchmark issuances, ultimately restricting its potential
investor base and increasing refinancing risk. As such we reverse this adjustment for the bank (similar to other small Norwegian banks)
by assigning a Funding score based on the bank's unadjusted market funds to tangible assets ratio (of around 35%). The bank's Funding
score reflects that funding risk remains a fundamental weakness for its credit profile.
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Helgeland Sparebank: Semi-annual Update
MOODY'S INVESTORS SERVICE
FINANCIAL INSTITUTIONS
At end-March 2016, liquid assets accounted for around NOK4 billion, or 15% of total assets and comprised cash, due from banks and
securities. As of year-end 2015, around 90% of securities in the portfolio were rated single-A or higher. However, we note that these
holdings mostly consist of Norwegian securities, which leads to some concentration risk.
Notching Considerations
LOSS GIVEN FAILURE
We expect that Norway will transpose the EU Bank Resolution and Recovery Directive (BRRD) into local legislation and as such we
consider the country an Operational Resolution Regime. In accordance with our methodology we therefore apply our Advanced LGF
analysis, considering the risks faced by different debt and deposit classes across the liability structure should the bank enter resolution.
In our LGF analysis we assume residual tangible common equity of 3%, losses post-failure of 8% of tangible banking assets, a 25% runoff in “junior” wholesale deposits, and a 5% run-off in preferred deposits. We assign a 25% probability to deposits being preferred to
senior unsecured debt. These are in line with our standard assumptions.
Under these assumptions, Helgeland Sparebank's deposits and senior unsecured debt are likely to face very low loss-given-failure, due
to the volume of the deposits and senior debt themselves and the amount of debt subordinated to them. This results in a Preliminary
Rating Assessment (PRA) of two notches above the BCA for both the deposit and issuer ratings of the bank.
GOVERNMENT SUPPORT
We do not incorporate any government support uplift on Helgeland Sparebank’s deposit and issuer ratings as a result of the expected
implementation of resolution legislation in Norway. Helgeland Sparebank is a local savings bank with a well-established market
position in Helgeland, a district in the county of Nordland. However, its national market share of deposits and loans is small; the bank is
the 12th largest savings bank in Norway. Therefore, we consider the likelihood of government support for its debt and deposits as being
low, resulting in no ratings uplift.
COUNTERPARTY RISK ASSESSMENT
CR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails and are distinct from debt and
deposit ratings in that they (1) consider only the risk of default rather than the likelihood of default and the expected financial loss
suffered in the event of default; and (2) apply to counterparty obligations and contractual commitments rather than debt or deposit
instruments. The CR assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performance
obligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities.
Helgeland Sparebank’s CR Assessment is positioned at A2(cr)/Prime-1, three notches above the bank's BCA of baa2, based on the
cushion against default provided to the senior obligations represented by the CR Assessment by subordinated instruments. The main
difference with our Advanced LGF approach used to determine instrument ratings is that the CR Assessment captures the probability of
default on certain senior obligations, rather than expected loss, therefore we focus purely on subordination and take no account of the
volume of the instrument class.
About Moody's Bank Scorecard
Our Scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment. When read in
conjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the output of our Scorecard
may materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strong
divergence). The Scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down to
reflect conditions specific to each rated entity.
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13 June 2016
Helgeland Sparebank: Semi-annual Update
FINANCIAL INSTITUTIONS
MOODY'S INVESTORS SERVICE
Rating Methodology and Scorecard Factors
Exhibit 4
Helgeland Sparebank
Macro Factors
Weighted Macro Profile
Very Strong -
100%
Financial Profile
Factor
Historic Ratio
Macro
Adjusted Score
Credit Trend
Assigned Score
Key driver #1
Key driver #2
Solvency
Asset Risk
Problem Loans / Gross Loans
0.6%
aa1
←→
baa1
Geographical
concentration
Sector
concentration
Capital
TCE / RWA
14.0%
aa3
←→
a1
Risk-weighted
capitalisation
Profitability
Net Income / Tangible Assets
1.0%
a2
↓↓
baa2
Expected trend
Combined Solvency Score
Liquidity
Funding Structure
Market Funds / Tangible Banking
Assets
Liquid Resources
Liquid Banking Assets / Tangible
Banking Assets
Combined Liquidity Score
Financial Profile
Business Diversification
Opacity and Complexity
Corporate Behavior
Total Qualitative Adjustments
Sovereign or Affiliate constraint:
Scorecard Calculated BCA range
Assigned BCA
Affiliate Support notching
Adjusted BCA
Instrument Class
Counterparty Risk Assessment
Deposits
aa3
a3
29.0%
baa2
←→
ba2
Market
funding quality
15.0%
baa3
←→
baa3
Stock of
liquid assets
baa2
Loss Given
Failure
notching
3
2
Additional notching
0
0
ba1
baa1
0
0
0
0
Aaa
a3-baa2
baa2
0
baa2
Preliminary
Rating
Assessment
a2 (cr)
a3
Government
Support notching
Local Currency
rating
0
0
A2 (cr)
A3
Foreign
Currency
rating
-A3
Source: Moody's Financial Metrics
Ratings
Exhibit 5
Category
HELGELAND SPAREBANK
Outlook
Bank Deposits
Baseline Credit Assessment
Adjusted Baseline Credit Assessment
Counterparty Risk Assessment
Issuer Rating
Moody's Rating
Stable
A3/P-2
baa2
baa2
A2(cr)/P-1(cr)
A3
Source: Moody's Investors Service
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13 June 2016
Helgeland Sparebank: Semi-annual Update
MOODY'S INVESTORS SERVICE
FINANCIAL INSTITUTIONS
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13 June 2016
Helgeland Sparebank: Semi-annual Update
FINANCIAL INSTITUTIONS
MOODY'S INVESTORS SERVICE
8
Analyst Contacts
CLIENT SERVICES
Alexios Philippides
357-2569-3031
AVP–Analyst
[email protected]
Americas
1-212-553-1653
Asia Pacific
852-3551-3077
13 June 2016
Japan
81-3-5408-4100
EMEA
44-20-7772-5454
Helgeland Sparebank: Semi-annual Update