Feeling Norway Annual Report 2013

Statement of the board of directors

Overview 2013

During 2013 SpareBank 1 Boligkreditt AS has had good access to covered bond finance and the prices for the Company's bonds have been stable. The Company maintains a large and diversified investor base and executed three benchmark transactions in the international markets, in Euro and US Dollars, during the year.  In the domestic Norwegian market the Company has also been active, issuing several bonds during the year.

The totals for the year show customer loan growth of NOK 14.6 billion to NOK 174.8 billion.

Nature and development of the company's business

SpareBank 1 Boligkreditt AS is a credit institution licensed by the Norwegian Financial Services Authority (Finanstilsynet) and is operated according to the legislation for covered bond issuers in Norway which is enshrined in the law regarding financial enterprises (“Finansieringsvirksomhetsloven”) chapter 2, section IV and the detailed regulations thereof.

The purpose of the Company is to provide funding for the owners by buying residential mortgage loans with a loan-to-value (“LTV”) of up to 75% and financing these primarily through the issuance of covered bonds. The Company which is based in Stavanger, is owned by banks which are members of the SpareBank 1 Alliance.  A comprehensive agreement is signed which each of the banks in the SpareBank 1 Alliance which are selling mortgages to the Company regarding the purchasing process and the obligations which the banks owe the Company and its mortgage customers (“Transfer and Servicing Agreement”, “TSA”).  The ownership shares of the banks in the Company are determined by the relative shares of mortgages loans in the cover pool from each bank.  Inherent to the process of purchasing mortgage loans is a capital injection from each selling bank in accordance with its volume of mortgages sold.

Boligkreditt’s owners receive a commission from the Company which is accounted for as a deduction in interest revenues in Boligkreditt’s income statement.  The commission is determined as the difference between interest received on that part of the mortgage portfolio purchased from a specific bank and the funding cost of Boligkreditt, less a deduction for operating costs. 

The ownership banks in the SpareBank 1 Alliance have further agreed to support Boligkreditt’s capital in the case of an adverse credit event and an impact on the level of capital. Potential losses on individual mortgages can first be offset against one annual calendar years' worth of commission due to the bank from which the mortgages originated which caused the loss.  The Alliance banks have furthermore committed themselves to support a minimum core Tier 1 capital ratio in Boligkreditt of 9%.  The commitment is initially calculated pro rata based on each bank’s shareholding in the Company, but in the second instance it is a joint and several commitment which is limited upwards to twice each bank’s initial commitment.

SpareBank 1 Boligkreditt has acquired residential mortgage loans and issued covered bonds since 2007 and a loss on a mortgage has never occurred. Customers with payments in arrears are very limited and the mortgage portfolio subsequently is of a high quality.  To the extent that the Company has made a provision for losses then these are based on general assumptions and an evaluation of risks and losses if defaults should occur.

The Company’s issuances of covered bonds take place under the EUR 25,000,000,000 Global Medium Term Covered Note Programme (GMTCN Programme).  One or more credit ratings from international rating agencies are important in order to be able to issue covered bonds. The Company have procured the services of Moody’s Ratings Service and Fitch Ratings to evaluate the credit quality of the issuances under the GMTCN Programme.  The bond ratings are Aaa from Moody’s and AAA from Fitch.

The Board of Directors affirms that the conditions for presenting the 2011 accounts under the assumption of a going concern are fulfilled.

Employees and the working environment

SpareBank 1 Boligkreditt had eight employees as of 31.12.2013. The Company employs six males and two females. SpareBank 1 Boligkreditt AS has a Transfer and Servicing Agreement with each shareholder bank which is handling the customer contact and servicing the mortgage portfolio on behalf of the Company. In addition, the Company purchases a significant amount of its support functions from SpareBank 1 SR-Bank ASA, e.g. accounting, HR and IT functions as well as finance related back-office functions.

The working environment is characterised as good and there is no pollution of the physical environment. There has been 0.23% employee absence recorded in 2013 due to sickness. No workplace accidents which might have resulted in property and/or damage to any persons have occurred or been reported during the year.

The Board consists of five persons of which three are male and two are female. SpareBank 1 Boligkreditt AS strives to achieve an even distribution between the genders in recruiting for the staff and the Board.

At the establishment of SpareBank 1 Næringskreditt AS which represents a similar type of business activity to that of SpareBank 1 Boligkreditt AS, it was decided that the two companies will have identical staffing. Of the eight full time employees which in 2013 have been employed in SpareBank 1 Boligkreditt AS, 2.7 full time equivalents have been allocated to SpareBank 1 Næringskreditt AS. The Boards of the two companies have joint meetings, where the members associated with one of the companies take the role of observers when matters of the other Company are discussed.

Annual accounts

The annual accounts have been prepared in accordance with the International Reporting Standards (IFRS) as adopted by the EU and published by the International Reporting Standards Board (IASB).

The Board views the accounts as presented to be a true representation of SpareBank 1 Boligkreditt’s operations and financial position at the end of the year. The total balance sheet amounts to NOK 206.2 billion vs. NOK 186.7 billion at the end of the previous year. The Company had in 2013 net interest income of NOK 295.2 million, including NOK 2,299.0 million earned by the ownership banks and accrued as a cost (commissions) to SpareBank 1 Boligkreditt. The cost of operations was NOK 31.4 million including depreciation. No additional amounts have been charged as loan provisions (write offs) in 2013, but the NOK 7.7 million in cumulative loan loss provisions as of 31.12.12 have been maintained. No actual loan losses have occurred. In total the year’s result before tax was NOK 300.6 million.

Lending to customers amounted to NOK 174.8 billion at year-end 2013 vs. NOK 160.2 billion at year-end 2012. This business growth of just over 9% is according to expectations. The cash and cash equivalents at 31.12.2013 amounted to NOK 11,882.5 million, whereof 10,611 million are collateral received according to the derivatives agreements which hedge the Company's fixed rate and foreign currency bond issuances. Net cash flow for the year was NOK 5,836 million.

During the year the shareholders’ equity increased by NOK 420.0 million through ordinary share issuances. Total equity amounted to NOK 8,289.0 million. The core capital ratio for the Company was 10.09% at year-end according to the current rules for determining core capital.

From July 1, 2013 a regulatory requirement of additional capital became effective which in practice means a total capital requirement of 12.5% of risk weighted assets.  The Company's balance sheet consists mainly of residential mortgages with low loan to value ratios. Throughout the year there has been a discussion with regards to how the factors which contribute to the calculation of risk weighted assets, should be calculated, and if and how a floor of 80% compared to earlier requirements (Basel I) should be calculated. This has created uncertainty with regards to how the size of the risk weighted assets should be calculated and thus what the capital requirements are.  The Company therefore decided to postpone the increase of total capital to 12.5% until a final ruling was available, and informed the Norwegian Financial Authority (Finanstilsynet) of this decision. Finanstilsynet stated in a letter on February 4th, 2014 a proposal which in practice means that the current method for calculating the floor is maintained.  Based on this proposal the Company has called up and received NOK 300 million in additional equity on February 26, 2014 in order for the core capital to be a minimum 10.5%.  Furthermore the Company made an announcement to the stock exchange on February 12, 2014 about its intention to issue subordinated debt (Tier 2 capital) debt of NOK 1.6 billion to its shareholders, an amount which will be paid in on March 7, 2014.  The Company will thereupon have a total capital ratio of 12.5%.

The Company has as its policy to pay out available profits as dividends, and to cover additional capital needs by calling in additional capital. The Company has a very high degree of control over its balance sheet and the capital coverage at the time a dividend is paid is expected to meet the regulatory requirements, which is the Company's target for capital coverage. The Board proposes that out of net income after tax of NOK 222.9 million, NOK 222.6 million is distributed to shareholders (NOK 4.2 per share), and that in addition the previous year's fund for unrealised gains of NOK 97.1 million is also paid out as a dividend (NOK 1.9 per share based on the shares receiving a distribution in 2012).


Risk aspects

General considerations

SpareBank 1 Boligkreditt as an issuer of covered bonds is subject to strict rules regarding its exposure to credit, market, and liquidity risks. This fact and the aim of the maintenance of the AAA/Aaa rating means that the Company is subject to low levels of risk and places strong emphasis on risk control.

The Company strives to identify, measure, control and manage central sources of risk in such a way that its goals are achieved. SpareBank 1 Boligkreditt has during 2012 worked to develop further risk reporting. In 2009 the Norwegian Financial Authority gave its approval for SpareBank 1 Boligkreditt AS to use the rules according to the IRB approach. Because of the transition rules to Basel II and IRB, the Company is obligated to hold at least 80% of the capital it would have had to hold according to the old Basel I rules. The standard approach of Basel II (as opposed to IRB) would have meant that the amount of capital to be held would have been 70% compared to the Basel I rules. The regulatory authorities have postponed the full implementation of Basel II awaiting likely adjustment to the rules based on initiatives from the Basel committee. If the full effect of the rules according to the IRB method had been in effect, SpareBank 1 Boligkreditt would have had a capital ratio of 33.22% as of 31.12.2013.

Credit risk

Credit risk is defined as the risk that losses can occur as a consequence of that customers and others do not have the ability or willingness to meet their obligations to SpareBank 1 Boligkreditt.

The Company buys residential mortgages within 75% of the value of the objects on which the mortgages are secured. The mortgages are granted to customers with a high degree of ability to service their debts. The credit policy of the Company aims to keep the portfolio of loans within well defined and low levels of risk. The risk classification system is used to manage the portfolio of mortgage assets according to the overall strategy.

SpareBank 1 Boligkreditt AS utilises the SpareBank 1 Alliance’s IT support systems in buying mortgages. Credit risk is monitored by measuring the development of the portfolio’s credit quality, the details of loans in arrears and over the limit overdrafts.

During 2013 the total portfolio of mortgages to customers increased from NOK 160.2 billion to NOK 174.8 billion. The portfolio consists exclusively of mortgages secured with a first lien.

on residential property. The average size of a mortgage is approximately NOK 1.2 million. The average loan to value is approximately 51% at year-end 2013.  No mortgages were above 90 days in arrears as of year-end. The portfolio of mortgages is distributed throughout Norway, with the main concentrations in the regions of Rogaland (22%), Sør-Trøndelag (9%) and Akershus (9%) and Oslo (9%).

SpareBank 1 Boligkreditt AS annually tests the portfolio of mortgages for the effects of a material decline in the value of the residential collateral and an increase in the probability of default.  The results of this stress test is a very modest impact on the Company’s equity, though some replacement assets will be required to maintain the legal asset liability test for cover pools as some mortgages will be above the 75% loan to value limit and are therefore partially excluded from the asset side. We expect that the ownership banks are able to commit sufficient replacement mortgages or other substitute liquid assets if this should become necessary.

The Board is of the opinion that SpareBank 1 Boligkreditt AS’s portfolio represents a lower degree of credit risk than that found in ordinary banking and credit institutions.

Market risks

Market risk is defined as the risk of losses due to changes in market rates, i.e. interest rates, exchange rates and the prices of financial instruments.

The Company is subject to strict rules regarding market risk in the national legislation covering issuers of covered bonds. The Board of SpareBank 1 Boligkreditt AS has decided on moderate and specific limits for market risk. Market risk arises mainly as a consequence of covered bonds issued or investments made in fixed income in NOK or other currencies. The limits formulated by the Board means that all bond issuances or investments which incur market risk are hedged by the use of derivatives, or natural hedges were investments are made in the same currency as the issued bonds to ensure that the currency and interest rate risk are limited. The policy set by the Board allows for the use of derivatives only for hedging purposes.

At the end of the year SpareBank 1 Boligkreditt AS had issued bonds for approximately NOK 89.8 billion (in EUR), NOK 28.6 billion (in USD), NOK 73.3 billion in NOK and 0.2 billion (in SEK) .The foreign currency bonds and NOK bonds with a fixed coupon are hedged by financial swaps or natural hedges, effectively converting all of this debt to a NOK floating rate (3 months NI BOR).

SpareBank 1 Boligkreditt AS owns bonds and treasury bills at year-end for a total of NOK 6.7 billion and deposits in banks total NOK 1.3 billion. The bonds are mainly Nordic covered bonds with a triple-A rating from Fitch, Moody's or S&P.  Deposits  are placed in banks with a minimum rating of at least A/A2.

The Company had as of 31.12.2013 only moderate interest rate risk and immaterial amounts of currency risk.

Liquidity risk

Liquidity risk is defined as the risk that the Company is not able to meet its obligations at maturity or to be able to finance the purchase of loans at normal terms and conditions.

Liquidity risk is managed based upon a liquidity strategy approved by the Board. According to the strategy, SpareBank 1 Boligkreditt AS shall survive for a minimum of twelve months, also under stressed market conditions, without accessing external financing. In addition the Company shall at any point in time be able to meet its interest payments, including derivatives, which come due in the next three months under a scenario where no interest payments are received from the loan portfolio. At the start of 2014 SpareBank 1 Boligkreditt AS’s liquidity situation is characterised as good.

SpareBank 1 Boligkreditt AS’s owners have committed themselves to buying covered bonds issued by the Company in a situation where it may not be possible to issue these bonds in the open market. This entails no adverse liquidity effects for the SpareBank 1 banks as they are able to deposit/repo such covered bonds with the Norwegian Central Bank.  The Company may, under the agreement with its ownership banks, sell covered bonds to them in an amount which matches the next upcoming 12 months of covered bond maturities at Boligkreditt, less the amount of liquidity held at the Company.  An individual ownership bank’s commitment is limited to its shareholding percentage in the Company, but pro rata up to twice this initial commitment in the case where other banks did not or were not able to carry their own share. Each bank may also deduct already purchased amounts of bonds from the size of its commitment at any time.

Operational risk

Operational risk is defined as risk of loss due to error or neglect in transaction execution, weakness in the internal control or information technology systems breakdowns. Reputational, legal, ethical and competency risks are also elements of operational risk. The risk is considered to be moderate.

Corporate governance

SpareBank 1 Boligkreditt’s principles for corporate governance is based on the Norwegian accounting law and regulations and the Norwegian practice for corporate governance.  The Board of Directors has appointed an audit committee which evaluates the Accounts inclusive of the Notes to the Accounts. The Board of Directors reviews the financial reporting processes in order to contribute to a culture which maintains a focus on quality and accuracy of this work. Boligkreditt seeks to deliver through its financial accounting relevant and timely information which can be compared over time to constituents in the SpareBank 1 Alliance, regulatory authorities and participants in the capital markets.  The Board evaluates and approves Management’s proposed annual and quarterly financial accounts.

Boligkreditt maintains an administration which is suitable for the purposes, activities and extent of the business.  The Management routinely evaluates internal procedures and policies for risk and financial reporting including measuring the results and effectiveness of the procedures and policies.  Any breaches in the policy and procedures are reported continuously to the Board of Directors.  Management is also responsible for following up and implementing actions, recommendations and new rules from the regulatory authorities.

The Company publishes its Corporate Governance policies in a document available on the Company’s website www.spabol.sparebank1.no. With regards to that the Company has a single purpose and that the shares are not freely tradeable nor listed on an exchange it is the Company’s opinion that any deviations to the policies are immaterial.



According to the Articles of Association 2 “The shares can only be owned by banks under contract with the Company for managing the Company’s lending funds.” Entering into such agreements is decided by the Board or the General Meeting.

Neither the Company nor employees own shares in the company. A shareholders agreement which all shareholders and the Company are parties to, it is agreed that the Company’s shares will be reallocated at least annually and in relation to the mortgage volume transferred to the Company by each shareholder. The shareholders are obliged to vote for any possibly private placements to new banks that have transferred mortgages to the Company. In case of a rights issue, the shareholders are obliged to subscribe shares according to its share of the shareholdings.

The Company is not party to agreements which come into force, are amended or terminated as a result of a takeover bid.

Social responsibility

SpareBank 1 Boligkreditt is an issuer of covered bonds and has, despite the size of its balance sheet, a very limited activity.  The nature of the business consists of buying mortgage loans from its shareholder banks in the SpareBank 1 Alliance, and to finance this activity by issuing covered bonds.  The owner banks have meaningful roles as pillars of society in their regional areas, and we make a reference to the annual accounts of the banks for a closer description of the social responsibility of SpareBank 1.  The Company thus chooses not to maintain special guidelines and principles tied to social responsibility.  


Future prospects of the company

The Board of Directors has no reason to believe that the situation for SpareBank 1 Boligkreditt AS in 2014 will change materially from the circumstances which have prevailed in 2013, i.e. relatively low funding costs and Norway representing an attractive location for debt investors.

The development of the Company’s financial and operating condition is amongst other things dependent on the ability of the customers to service their mortgage debt and of the development in residential real estate prices.  The outlook for the Norwegian economy in 2014 continues to be strong, albeit with some slower growth and some increased uncertainty. In the residential real estate market participants expect a stable or moderately decreasing price trend and a continued relatively low interest rate level. Unemployment is expected to remain stable at today’s low level, which is low in a European context.  SpareBank 1 Boligkreditt AS has a high quality and low credit risk portfolio of residential mortgages.  The average weighted loan to value is approximately 51% and those mortgage customers whose loans are sold to SpareBank 1 Boligkreditt AS are those with a high ability to service their debts. 

The Company’s business is only to a little degree subject to competition because SpareBank 1 Boligkreditt AS is obtaining mortgage loans exclusively from its owners.

The Board of Directors expect a more moderate increase in the Company’s Balance Sheet in 2014 compared to previous years. This expectation reflects that growth will now primarily be driven by the underlying growth in lending for residential real estate in the Company’s ownership banks and not by increases in the share of mortgages in the banks’ portfolios transferred to SpareBank 1 Boligkreditt AS.

No material change of operating conditions except from the factors which have been discussed above is expected.

* * *

The Board of Directors affirms that the financial accounts present a correct and complete picture of the Company’s operations and financial position. There have been no incidents of a material nature after year-end 2013 which are expected to impact the annual accounts for 2014.

Hamar, 31. December 2013 / 4. March 2014





Statement of the members of the board and the chief executive officer

The Board and the chief executive officer have today reviewed and approved the financial accounts for 2013 for SpareBank 1 Boligkreditt AS.  The annual accounts have been prepared in accordance with the International Reporting Standards (IFRS), as adopted by the EU.

To the best knowledge of the board and the chief executive officer the accounts have been prepared in accordance with applicable accounting standards and give a true and fair view of the assets, liabilities, financial position and profit or loss of the company taken as a whole as of 31.12.13.

The board of directors and the chief executive officer declare to the best of their knowledge that the annual report gives a true and fair view of the development and performance of the business of the Company, as well as a description of the principal risks and uncertainties facing the Company.

Hamar, 4. March 2014

The Board of Directors of SpareBank 1 Boligkreditt AS