Sbanken ASA. Update to credit analysis. CREDIT OPINION 13 December Update. Summary

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1 CREDIT OPINION December 28 Sbanken ASA Update to credit analysis Update Summary RATINGS Sbanken ASA Sbanken ASA (Sbanken) A long-term deposit rating with stable outlook, and (P)A senior unsecured ratings incorporates one notch rating uplift, from the bank's baa Baseline Credit Assessment (BCA) based on our Advanced Loss Given Failure (LGF) analysis. The bank's LGF considers the risks faced by different debt and deposits classes across the liability structure should the bank enter into resolution. The bank's ratings do not benefit from government support uplift with regards to our assessment of a low probability of support. Sbanken's short-term deposit rating is Prime-2 and other short term rating is (P)Prime-2, its Counterparty Risk Ratings (CRR) are A/Prime- and its Counterparty Risk Assessment (CR Assessment) A(cr)/Prime-(cr). Domicile Norway Long Term CRR A Type LT Counterparty Risk Rating - Fgn Curr Outlook Not Assigned Long Term Debt (P)A Type Senior Unsecured MTN - Fgn Curr Outlook Not Assigned Long Term Deposit A Sbanken's baa BCA reflects the bank's strong asset quality, relatively strong recurring profitability, combined with our expectation that capitalisation will remain robust despite continued growth, as well as our expectation that bank will issue more debt in the coming years, which increases risks related to swings in investor sentiment. Type LT Bank Deposits - Fgn Curr Exhibit Outlook Stable Rating Scorecard - Key Financial Ratios Sbanken ASA(BCA: baa) 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. Median baa-rated banks 6% 25% 4% 2% Niclas Boheman AVP-Analyst niclas.boheman@moodys.com Jean-Francois Tremblay Associate Managing Director jean-francois.tremblay@moodys.com Sean Marion MD-Financial Institutions sean.marion@moodys.com % 5% 8% % 6% 4%,5% 2% 5%,7% 4,9% Liquidity Factors Contacts Solvency Factors 2% 2,5%,5% Funding Structure: Market Funds/ Tangible Banking Assets Liquid Resources: Liquid Banking Assets/Tangible Banking Assets % % Asset Risk: Problem Loans/ Gross Loans Capital: Tangible Common Equity/Risk-Weighted Assets Solvency Factors (LHS) Profitability: Net Income/ Tangible Assets Liquidity Factors (RHS) These represent our Banks methodology scorecard ratios, whereby asset risk and profitability reflect the weaker of either the three year average and the latest annual figure. Capital ratio is the latest reported figure. Funding structure and liquid resource ratios reflect the latest fiscal year-end figures. Source: Moody's Investor Service

2 Credit strengths» Profitability is strong relative to credit risks» Asset risk is low with loan book dominated by low risk mortgages» Strong capitalisation, but loan growth can lead to downward pressure» Sbanken's BCA is supported by its Very Strong (-) macro profile Credit challenges» Credit concentration towards the Norwegian housing market, although mitigated by low average loan-to-value» Market funding will feature more prominently in the funding profile Outlook Sbanken's long-term deposit ratings carry a stable outlook reflecting our forecasts that sbanken will perform predictably over the next 2 to 8 months, remaining well capitalised, with low asset risk and delivering strong earnings. Factors that could lead to an upgrade» Upward pressure on the bank's BCA could be triggered by a combination of () more limited loan growth: and (2) stronger profitability without a significant increase in risk appetite. Upward rating pressure could also develop because of a larger cushion of loss absorbing obligations protecting creditors and depositors in case of failure. Factors that could lead to a downgrade» The BCA would likely be subject to downward pressure if () problem loans increase significantly beyond mortgage lending peers; (2) profitability were to deteriorate; and/or () market funds were to become its main funding source. Downward rating pressure on the long-term deposit rating may also develop because of smaller volumes of loss absorbing obligations, protecting creditors and depositors in case of failure. 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 for the most updated credit rating action information and rating history. 2 December 28

3 Key indicators Exhibit 2 Sbanken ASA (Consolidated Financials) [] 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 (%) ,624, ,55, ,84 8, ,82 7, CAGR/Avg. 62 6,8 8, [] All figures and ratios are adjusted using Moody's standard adjustments. [2] Basel III - fully-loaded or transitional phase-in; IFRS. [] May include rounding differences due to scale of reported amounts. [4] Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime. [5] Simple average of periods presented for the latest accounting regime. [6] Simple average of Basel III periods presented. Source: Moody's Financial Metrics Profile Sbanken ASA is a digital and branchless Norwegian bank. The bank provides mortgages, payment and card services, savings and investment products, and short term loans to mainly retail customers in Norway (Aaa stable). As of end-september 28, the bank reported total consolidated assets of NOK9 billion ( 9.6 billion). The bank was established in 2 as Skandiabanken, and was the first online-only bank in Norway. Sbanken is listed on Oslo Stock Exchange (ticker: SBANK), and its largest share holder is the Swedish private equity firm Altor Equity Partners AB, which holds a 25% stake of the bank via Altor Fond IV, as of February 28. Detailed credit considerations Business Diversification Similarly to other Nordic mortgage banks, we apply a negative notch for lack of business diversification for Sbanken. Monoline business models may demonstrate high stability over a number of years, but are vulnerable to an eventual problem in the bank s chosen field of business as it has no other income streams to fall back upon. Hence, we consider a bank with monoline activities to be weaker than one with diverse businesses, even where both have similar observed earnings volatility. That said, Sbanken is launching new retail savings and insurance products and launching a new business concept targeted primarily toward lower sized SME customers. Over time, these additional revenue sources can contribute to increased diversification. Sbanken's BCA is supported by its Very Strong (-) Macro Profile Sbanken's operations are domestically oriented and its Macro Profile is thus aligned with that of Norway, at Very Strong (-) (see Norway Macro Profile: Very Strong -, published 5 December 27). Norway s Macro Profile reflect its solid economic, institutional and government fundamentals, but restrained by households' high indebtedness, which renders them sensitive to changes in interest rates. The Norwegian banking market is also highly dependent on market funding and particularly foreign-currency based funding. Norway has a diversified and growing economy, which demonstrated resilience to the weakening of the oil sector in The oil industry started to recover in 27 and the outlook is now improving. December 28

4 Asset quality is strong reflecting the dominance of low risk mortgages in the portfolio Sbanken's asset quality is strong, reflected by a problem loans ratio consistently below 5 basis points of gross loans. At the end of September 28, problem loans constituted 45 basis points of gross loans (48 basis points at the end of December 27). This reflects the secured nature of the bank s lending book and is comparable with other Nordic banks which focus on mortgage lending, and considerably lower than Nordic corporate lenders. The bank has a portfolio of non-mortgage lending, consisting of auto lending, custody account credit and unsecured consumer finance, representing 6% of the loan book, or 88% of tangible common equity (TCE) at the end of September 28. In contrast to the mortgage portfolio, the problem loans ratio in other lending was higher at 4.% at end-december 27. Our a assigned asset risk score balances the strong quality of the bank s mortgage portfolio and its rapid expansion. At the end of September 28, 94% of the loan book consisted of mortgages, which had a low average loan-to-value (LTV) of 5.5%. This indicates that the bank is not aggressively pursuing buyers of new homes, but rather attracting customers who have existing loans with other banks. However, its rapid credit growth reflects a downside risk, as the portfolio expanded by 7% from 22 to 27 (see exhibit ). The twelve month growth as of September 28 of 9.4% was higher than the expected average market growth of 6% for 28 (see Banking System Outlook - Norway, published 28 August 28), and has slowed down compared to the past two years. The volume of loans to customers at the end of September 28 had increased with around 9.2% compared to the end of December 27. Exhibit Sbanken's Norwegian loan book development since 22 The significant loan growth is a potential risk to Sbanken's asset quality Net lending (LHS) Yearly growth in lending % (RHS) 7% % 7 NOK Billion 5% 6 5 4% 4 % 2% 2 9,4% % % Sep-8 Sources: Moody's Investor Service, company reports While we consider mortgage lending in Norway as a relatively low-risk product, property prices have been volatile. However recent data show that house prices in both oil-related regions have started recovering while urban areas such as Oslo are stabilising following sharp price appreciations and corrections due to tighter underwriting standards. According to Eiendomsverdi, property prices in Stavanger, the Norwegian oil-centre, decreased by.2% in October 28, although the prices have annual increased by 2%. In Oslo property prices increased by.% in October 28 while the 2 month change was an increase of 5.%. Given the low interest rate environment as well as the diversification of the bank s lending book across different regions, we forecast problem loans to remain around 5 basis points during the next 2-8 months. Solid capitalisation and internal capital generation supports continued growth Sbanken reported a Common Equity Tier (CET) ratio of 4.5% at the end of September 28, a marginal decline compared with the 4.7% reported at the end of September 27 (CET ratio's including 7% retained earnings). The CET ratio, calculated under standardised approach for credit risk, compares well with the bank s targeted ratio of 4% and the regulatory minimum requirement of.2% (see exhibit 4). The bank reported a leverage ratio of 6.% in the end of September 28, unchanged from end of 27, which is above the 5% regulatory requirement. We expect Sbanken's capital position to remain strong over the forecast period, but expected high loan growth leads us to forecast a minor decline in its capitalisation. 4 December 28

5 Exhibit 4 Sbanken's capitalisation is solid and above regulatory requirements CET capital ratio Leverage ratio CET capital ratio requirement Leverage ratio requirement 6,% 4,5% 4,%,2% 2,%,% 8,% 6,% 6,% 5,% 4,% 2,%,% Sep-8 Sources: Moody's Investor Service, company reports The increase in leverage ratio is due in part to increased capital but also to new calculation guidelines from the Norwegian Financial Supervisory Authority (FSA), whereby the conversion factor on some off-balance sheet commitments was lowered. The reported offbalance sheet commitments increased marginally to 7.2% of total leverage exposures at the end of September 28 from 5.5% at the end of December 27. Given the headroom above minimum regulatory requirements and good internal capital generation with a targeted maximum dividend payout ratio of %, we do not expect that the current growth strategy will be constrained by capital although capitalisation would decline slightly. Our assigned a Capital Score incorporates Sbanken s expected growth plans and the impact this will have on capitalisation. Profitability is solid relative to credit risks but margins increasingly under pressure Although Sbanken focuses on low-risk mortgage lending, profitability is sound with a net income to tangible assets ratio of around.8% in first nine months (.7% in the first nine months of 27), which compares well with its peer average at around.5% (see exhibit 5). Sbanken reported a net interest margin of.5% for the first nine months ending in September 28, a decrease from the.6% reported for the same period in 27. The deterioration is mainly due to an increase in the three month NIBOR (Norwegian Interbank Offered Rate) in November, in combination with delay of the repricing of the bank's products. Exhibit 5 Net income to Tangible Assets for Sbanken and peers ,%,9%,8%,7%,6%,5%,4%,%,2%,%,% Sbanken ASA KLP Banken ASA OBOS-Banken AS SBAB Bank AB Skandiabanken AB Sparebanken Vest Note: 28 is based on latest available data Sources: Moody's Investor Service, company reports The bank s profitability is supported by solid efficiency, reflected by a Moody's adjusted cost-to-income ratio of 9.7% in the first nine months of 28, an improvement from 4.2% in the same period in 27 and better than most Norwegian peers. As Sbanken is a pure online bank, supporting its cost efficiency, it does not need to support cost intensive branches. 5 December 28

6 Sbanken enjoys the most satisfied and loyal customers among Norwegian banks according to Norsk Kundebarometer (see exhibit 6). The bank s name change did not impose challenges related to brand recognition. In order to maintain momentum in its growth strategy, the bank has increased marketing efforts but could also have to increasingly compete on pricing, consequently creating negative pressure on its margins and profits. Exhibit 6 Customer Satisfaction and Loyalty for Norwegian Banks (Indexed: -) Sbanken has the highest customer satisfaction and loyalty among banks included in the survey 95 9 Customer Loyalty Sbanken Danske Bank 85 Handelsbanken Sparebank 8 Eika Alliansen DNB Bank 75 Nordea Customer Satisfaction Note: Based on survey responses and indexed on a scale from to, where indicates highest satisfaction/loyalty. Source: BI Norwegian Business School - Norsk Kundebarometer 28 We expect Sbanken, and Norwegian banks in general, to report stabilising profits going forward after profitability challenges in Our assigned Profitability Score of baa reflects Sbanken s sound profitability, but also our expectations on margin pressure stemming from low interest rates and competition. Sbanken's focus on deposits will stabilise market funding ratio Our assessment of Sbanken s funding structure and liquid resources incorporates the banks significant retail deposit base, adequate liquidity position and our expectations that market funding reliance will increase moderately, mainly through issuance of covered bonds and senior unsecured debt. Sbanken has successfully issued covered bonds as well as senior unsecured debt and subordinated bonds, resulting in outstanding covered bonds at NOK29.5 billion, NOK4.2 billion in unsecured debt and around NOK65 million in subordinated liabilities as of end-september 28. Sbanken benefits from a stable funding base, with deposits amounting to 66% of loans at the end of September 28 (69% at the end of September 27). We expect cost effective market funding, particularly through covered bonds, to feature more prominently in the funding mix over the next few years but efforts to gather additional deposits, for example from SME's, will stabilise the market funding ratio. Because the bank does not operate through a branch network and instead attracts deposits online, it could indicate lower deposit stickiness than a traditional branch based bank. However, the changing structure in the banking industry with a reduction in branches and more focus on online and mobile interaction reduces this differentiation. Furthermore, Sbanken benefits from a well established franchise, high customer satisfaction, and a large proportion of deposits falling under the deposit guarantee scheme (95% at endseptember 28). Because of these factors, we not expect materially higher deposit volatility at Sbanken compared to peers. Source of facts and figures cited in this report Unless noted otherwise, the bank specific figures originate from bank's reports and Moody's Banking Financial Metrics. All figures are based on our own chart of accounts and may be adjusted for analytical purposes. Please refer to the document Financial Statement Adjustments in the Analysis of Financial Institutions, published on 9 August December 28

7 Support and structural considerations Loss Given Failure Analysis Norway will shortly implement the EU's Bank Resolution and Recovery Directive (BRRD), which we consider to be an Operational Resolution Regime. For this analysis we assume that equity and losses stand at % and 8%, respectively, of tangible banking assets in a failure scenario. We also assume a 25% run-off of junior wholesale deposits and a 5% run-off in preferred deposits. Moreover, we assign a 25% probability to junior deposits being preferred to senior unsecured debt. These are in line with our standard assumptions. Given the bank's focus on retail deposits, we assume the bank's junior deposits to account for % of total deposits. We believe that Sbanken's deposits are likely to face low loss given failure, due to the loss absorption provided by subordinated debt and senior unsecured debt (should deposits be treated preferentially in a resolution). In addition, the bank has a large deposit base, meaning that any losses would be spread over a large base, thus translating into low losses for the individual depositor. Sbanken's longterm deposit and senior unsecured debt ratings consequently receive a one-notch uplift to A and (P)A respectively. Counterparty Risk (CR) 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 () consider only the risk of default rather than both the likelihood of default and the expected financial loss, and (2) apply to counterparty obligations and contractual commitments rather than debt or deposit instruments. The CR Assessment is opinion of the counterparty risk related to a bank's covered bonds, contractual performance obligations (servicing), derivatives (for example, swaps), letters of credit, guarantees and liquidity financing. Sbanken ASA's CR Assessment is positioned at A(cr)/Prime-(cr) Sbanken's CR Assessment is positioned three notches above the bank's adjusted BCA of baa, based on the buffer against default provided by subordinated instruments to the senior obligations represented by the CR Assessment and without attributing further government support. Counterparty Risk (CRR) Rating Counterparty Risk Ratings are opinions of the ability of entities to honour the uncollateralized portion of non-debt counterparty financial liabilities (CRR liabilities) and also reflect the expected financial losses in the event such liabilities are not honoured. CRR liabilities typically relate to transactions with unrelated parties. Examples of CRR liabilities include the uncollateralized portion of payables arising from derivatives transactions and the uncollateralized portion of liabilities under sale and repurchase agreements. CRRs are not applicable to funding commitments or other obligations associated with covered bonds, letters of credit, guarantees, servicer and trustee obligations, and other similar obligations that arise from a bank performing its essential operating functions Sbanken ASA's CRR is placed at A/Prime- The CRR is three notches above the adjusted BCA of baa and at the same level as the counterparty risk assessment, reflecting the buffer against default provided by more junior instruments to the CRR liabilities. Government support considerations Our ratings assigned to Sbanken do not contain uplift due to government support. This takes into account Sbanken's limited share of national lending, and the ability to replace its operations in resolution. About Moody's Bank Scorecard Our scorecard is designed to capture, express and explain in summary form our Rating Committee's judgement. When read in conjunction with our research, a fulsome presentation of our judgement 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. 7 December 28

8 Rating methodology and scorecard factors Exhibit 7 Sbanken ASA Macro Factors Weighted Macro Profile Very Strong - Factor Historic Ratio Initial Score Expected Trend Assigned Score Key driver # Solvency Asset Risk Problem Loans / Gross Loans.5% aa a Loan growth Capital TCE / RWA 4.9% aa a Expected trend Profitability Net Income / Tangible Assets.7% baa2 baa Expected trend Combined Solvency Score Liquidity Funding Structure Market Funds / Tangible Banking Assets 2.5% baa baa Liquid Resources Liquid Banking Assets / Tangible Banking Assets aa.5% baa baa baa2 Balance Sheet in-scope (NOK million) 2,925 49,9 44,97 4,99 4, ,728 9,94 December 28 Key driver #2 a2 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 Other liabilities Deposits Preferred deposits Junior Deposits Senior unsecured bank debt Dated subordinated bank debt Preference shares (bank) Equity Total Tangible Banking Assets 8 % Expected trend baa2 a - - Aaa a-baa2 baa baa % in-scope 6.2% 54.9% 49.4% 5.5% 4.6%.7%.5%.% % at-failure (NOK million) 6,42 46,45 42,69,745 4, ,728 9,94 % at-failure 4.% 5.% 46.9% 4.% 4.6%.7%.5%.% %

9 Debt class Counterparty Risk Rating Counterparty Risk Assessment Deposits Senior unsecured bank debt Instrument class De Jure waterfall De Facto waterfall Notching LGF Assigned Additional Preliminary LGF notching Rating Instrument Sub- Instrument SubDe Jure De Facto Notching Guidance notching Assessment volume + ordination volume + ordination vs. subordination subordination Adjusted BCA.%.%.%.% a.%.%.%.% a (cr).% 4.%.% 8.9% 2 a.% 4.% 8.9% 4.% a Loss Given Failure notching Counterparty Risk Rating Counterparty Risk Assessment Deposits Senior unsecured bank debt Additional Preliminary Rating Notching Assessment a a (cr) a a Government Support notching Local Currency Rating A A (cr) A -- Foreign Currency Rating A -A (P)A [] Where dashes are shown for a particular factor (or sub-factor), the score is based on non-public information. Source: Moody's Financial Metrics Ratings Exhibit 8 Category SBANKEN ASA Outlook Counterparty Risk Rating Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk Assessment Senior Unsecured MTN Other Short Term Moody's Rating Stable A/P- A/P-2 baa baa A(cr)/P-(cr) (P)A (P)P-2 Source: Moody's Investors Service Endnotes Eiendom Norges boligprisstatistikk October 28 9 December 28

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