Credit Opinion:
SpareBank 1 Gruppen AS
Global Credit Research - 12 Mar 2012Oslo, Norway
Ratings
Category Moody's Rating
Rating Outlook RUR
LT Issuer Rating Baa1
Contacts
Analyst Phone
David Masters/London 44.20.7772.5454 Janne Thomsen/London
Simon Harris/London Laura Perez Martinez/London
Key Indicators
SpareBank 1 Gruppen AS[1][2]
2010 [3]2009 2008 2007 2006
Total assets (NOK Mil.) 40,690 36,447 56,401 54,271 49,166
Reported Sh. equity (NOK Mil.) 4,809 4,163 5,054 5,287 4,177
Net Income (NOK Mil.) 832 735 (858) 1,219 1,019
Gross Premiums Written (NOK Mil.) 8,214 7,557 7,527 8,698 7,072
Adjusted Financial Leverage 18.7% 22.6% 23.9% 20.7% 25.8%
Earnings cover (1 year) 17.0x 15.3x -7.4x 14.5x 10.4x
[1] Information based on IFRS accounts [2] 2008 and prior include Bank 1 Oslo [3] Pro-forma figures excluding Bank Oslo
Opinion
SUMMARY RATING RATIONALE
The long term issuer rating of Baa1 for SpareBank 1 Gruppen AS ("the group") reflects the holding company's good franchise, but also the recent volatility in its financial fundamentals, with 2011 pre-tax profits of MNOK 389 (2010: MNOK 985) significantly impacted by capital market volatility and property/casualty weather related claims. The rating incorporates the creditworthiness of the owner banks (specifically, SpareBank 1 SR-Bank (C-/A1/P-1), SpareBank 1 SMN (C-/A1/P-1), SpareBank 1 Nord-Norge (C/A1/P-1) and Sparebanken Hedmark (C-/A1/P-1), which collectively own approximately 70% of the group, all of which were placed on review for possible downgrade on 09 March 2012). These banks are expected to support the group, which is viewed as strategically important to its owners in terms of the manufacturing of insurance products, synergies, and branding.
Furthermore, there is tangible recent evidence of parental support from the owner banks/the group into the life company, in the form of an equity injection in Q4 2008 totalling NOK 300m and a further capital injection into the life company in 2009 of NOK 413m, although some of this has since been repaid (e.g. a loan totalling NOK 200m within the life company).
SpareBank 1 Gruppen is a holding company whose main owners are 15 Norwegian savings banks, together with the Norwegian Confederation of Trade Unions (LO). The group was established in 1996 in response to stronger competition in the Norwegian financial market. Until end-December 2009, the group has consisted of five wholly owned product companies in life insurance, non-life insurance, asset management, banking, factoring and debt collection. Since 1st January 2010, Bank 1 Oslo has been separated from SpareBank 1 Gruppen and is now directly owned by the SpareBank 1-banks and the Norwegian Confederation of Trade Unions. SpareBank 1 Gruppen is also an owner in the brokerage firm SpareBank 1 Markets (97.2%).
deeper product offering, increased marketing and good cross-selling, as well as new banks joining the alliance. On a reported basis, SpareBank 1 Alliance is the second-largest financial institution in Norway and has a market share of around 20% in retail lending, c.15% in corporate lending, around 10% in equity funds, approximately 10% in non-life insurance and around 3% in life insurance.
Credit Profile of Significant Subsidiaries
SpareBank 1 Skadeforsikring
Moody's considers the property & casualty (P&C) business to be a significant market player in the Norwegian market, where it has a number 4 position with a reported market share at Q3 2011 of 11.2%. After a period of improving profitability in recent years, albeit driven largely by investment income in 2009 and the relatively good product risk, being focused primarily on personal motor and property risks, 2010 witnessed an increase in the overall combined ratio to 97.7%, driven in part by the severe 2010 winter, and 2011 witnessed a further deterioration to 103.4%. The 2011 deterioration was driven, inter alia, by a combination of elevated flood related claims in Q2 2011, together with storm and other large claims. Moody's also notes that there remains some degree of reserving volatility within the portfolio, particularly on the longer tailed commercial lines business and the P&C business remains heavily dependent on a single distribution channel, namely the owner banks, although Unison Skadeforsikring will improve the diversification within the P&C business over the long term.
SpareBank 1 Livsforsikring
Following significant losses in 2008 and capital injections into the life business during both 2008 and 2009, Moody's notes the recent improvements in both profitability and capitalisation within the life business, particularly with regard to the improvement in the administration result in 2011 to NOK -66m (2010: NOK -187m) and an overall pre-tax profit of NOK 414m (2010: NOK 350m). . Whilst policyholder buffer capital remains higher (2011: 10.8% of technical provisions) and ? remains significantly above the 5.8% reported at YE 2008, Moody's considers the life business to remain significantly exposed to investment market volatility, and the 2011 figure compares unfavourably with the 14.6% reported as at YE 2010. As with the P&C business, the life business remains heavily exposed to the Norwegian economy, lacking the geographic diversification of larger continental life insurers.
Credit Strengths
- Strong brand, which is among the most recognised financial brands in Norway
- Diversified operations, including the owner banks
- Relatively low risk profile of non-life insurance business
- Expected high support from the owner banks reflecting its important role in the wider SpareBank 1 Alliance
Credit Challenges
- Improving profitability and growing business in the mature market
- High competition in both the insurance and banking markets
- Volatility of investment results, particularly with the life insurance business, which necessitated capital injections during the crisis
- Dependence on the distribution channels of the alliance
- Lower coherence in the alliance as there is no joint and several liability guarantee
- Potential departure of any member bank, although this at the moment is not considered likely
Recent Events
In November 2010 SpareBank 1 Skadeforsikring acquired Skandia Lifeline Norge's entire health insurance business from Skandia Insurance Company Ltd. Operations from the former Skandia Lifeline have been integrated into SpareBank 1 Skadeforsikring
In January 2010, the group announced the demerger of Bank 1 Oslo. With accounting effect from 1st January 2010, Bank 1 Oslo has been lifted out from SpareBank 1 Gruppen and is now directly owned by the SpareBank 1 banks and the Norwegian Confederation of Trade Unions (LO).
In July 2010, SpareBank 1 Skadeforsikring acquired 100% of the share capital of Unison Forsikring for NOK 56.4m, a small non-life insurer which focuses on the corporate P&C market.
The long-term issuer rating (Baa1) and the short-term issuer rating (P-2) were both placed on review for possible downgrade on 09 March 2012. This rating action reflects the review for possible downgrade of SpareBank 1 Gruppen's owner banks (see relevant press release for further details).
What Could Change the Rating - Up
Not considered likely in the short term due to the ratings being on review for possible downgrade. However, in the longer term, positive rating action could arise in the event of:
- An upgrade in one of more of the owners' ratings
- If the commitment from the owner banks were to be perceived as higher, and/or
- If a sustained improvement in the financial performance of the group were to occur.
What Could Change the Rating - Down
- A downgrade in one of more of the owners' ratings
- The commitment from the owner banks were to be perceived as lower, and/or
- A deterioration in the financial performance of the group.
Recent Results
At YE 2011, the group posted a pre-tax profit of NOK 389m (2010: NOK 985m). SpareBank Livsforsikring reported buffer capital of 10.8% (YE 2010: 14.6%), whilst SpareBank Skadeforsikring reported a pre-tax profit of NOK 188m (2010: NOK 641m) following elevated Q2 flood claims and other weather related claims 2011.
Capital Structure and Liquidity
The majority of the group's borrowings are made by SpareBank 1 Gruppen AS. The group's refinancing risk is limited as the outstanding term of the debt is relatively long with a mixture of perpetual instruments and post 2015 maturities, although we note that there is some refinancing need in 2012. The liquidation ranking is varied with material amounts of senior, subordinate and junior subordinate in issue.
Financial leverage was moderate at 19% at year-end 2010 excluding Bank Oslo's debt. In addition, Moody's assigns equity credit to the supplementary provision (2010: NOK 379m) and security provisions 2010: NOK 767m), with, in particular the supplementary reserves recovering in 2010 thanks to the relative improvement in financial markets, at least as at YE 2010, although the securities adjustment reserve declined materially in 2011. Furthermore, policyholder reserves continue to be lower than pre-crisis levels.
Earnings cover is estimated to be strong at 17x in 2010 in line with the healthy profitability of the company and the relatively modest levels of financial leverage. Nevertheless, Moody's notes the substantial volatility of the group's operating performance could pressurise earnings cover in future quarters, as demonstrated in 2008, which resulted in a negative interest coverage figure.
Holding company cash flows have been pressurised in recent years, driven in part by meaningful dividends to the owner banks, although there have also been capital injections (as mentioned above) from the owner banks to support the life business during times of stress.
Overall, we view SpareBank1 Gruppen's access to capital markets as being satisfactory but not comparable with larger European peers.
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