Boligkreditt Annual Report 2014

Statement of the board of directors

Cover pool and outstanding covered bonds 1

1 The cover pool consists of residential mortgages and liquid, highly rated assets (substitute assets). Covered bonds are shown inclusive of the market value of the derivatives deployed to hedge currencies and interest rates.

Key figures

  Q4 2014 Q3 2014 Q2 2014 Q1 2014 Q4 2013 Q3 2013 Q2 2013
Weighted Average Current LTV (%) 51,1 % 51,2 % 51,6 % 52,2 % 51,7 % 50,0 % 49,8 %
Weighted Average Original LTV (%) 57,3 % 57,4 % 57,2 % 57,3 % 57,0 % 57,9 % 57,8 %
Average Loan Balance (NOK) 1 194 160 1 193 893 1 200 321 1 213 532 1 206 278 1 187 811 1 176 445
Number of Mortgages in Pool 134 454 133 393 132 344 138 664 138 359 136 613 135 227
Pct. of non first-lien mortgages 0,0 % 0,0 % 0,0 % 0,0 % 0,0 % 0,0 % 0,0 %
Overcollateralization 111,9 % 113,3 % 113,4 % 112,5 % 110,9 % 111,0 % 110,4 %

Key developments in the fourth quarter and in 2014

Boligkreditt issued covered bonds in NOK of 2.25 billion kroner in the 4th quarter and 7.19 billion for the year as a whole.

No issuances have taken place in EUR or USD. Including the issuances in NOK, covered bonds outstanding have been reduced by 11 billion kroner in 2014 due to that Norges Bank's swap facility was terminated and some residential mortgages were as a consequence repurchased from some of the Company's parent banks. With the exception of this reduction associated with the swap facility the volume of lending has increased moderately for the year. This is because of a moderate growth in lending for the Company's parent banks, an increase in the deposits of these banks and attractive conditions in the market for senior unsecured bonds (an advantageous credit spread compared to previous years). For 2015 there are reasons to expect a continued moderate growth in the residential lending volume.

Sparebank 1 Boligkreditt is well capitalised, with a capital coverage ratio of 14.1% measured against a requirement of 13.5%. Core equity is 11.3% measured against a requirement of 10%. These figures reflect that SpareBank 1 Boligkreditt has introduced a new capital coverage calculation according to CRD IV. 

In the market for the Company's bonds, credit spreads have generally increased a little from the end of the third quarter to the end of the year, but remain at a historical low level.

The Norwegian krone was put under pressure during the fourth quarter, presumably because of the significant decline in the oil price. This results in that SpareBank 1 Boligkreditt receives more collateral from its swap counterparties according to the ISDA/CSA agreements which the Company has established. This increases the balance sheet of the Company significantly as of 31 December 2014 because the derivatives as an asset are valued at fair value while the amount of liquid assets due to the collateral placements with the company also increase. The following charts illustrate this and show the relative shares for the largest balance sheet items as of September 30 and 31 December, 2014:

The share of mortgages are reduced optically from a little over 80 per cent to just over 70 per cent as of December 31, 2014, but as shown above there are minor changes in the volumes of residential mortgages as measured in kroner. The change is due in its entirely to the fact that the derivatives have increased in value, and more collateral is posted to the Company.  On the balance sheet's liability side a corresponding entry is increased for the market value of issued debt (in EUR and USD), while a liability is recorded for the collateral received of approximately 27.1 billion kroner (see note 33 in the annual accounts).  Boligkreditt holds separate accounts for assets which is held as collateral and for its own liquid assets which is a part of the Company's liquidity management.

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 included 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 per cent and financing these primarily through the issuance of covered bonds[1]. 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 Company’s issuances of covered bonds mainly take place under the EUR 25,000,000,000 Global Medium Term Covered Note Programme (GMTCN Programme). This Programme was updated on April 15, 2015 and is available at the Company's home page:

One or more credit ratings from international rating agencies are important in order to be able to issue covered bonds.2 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.

2 The issuer's own criteria for which loans will qualify for the cover pool include a maximum LTV requirement of 70 per cent for new residential mortgages from the end of the first quarter 2014.

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 228 billion kroner vs. 206 billion kroner at the end of the previous year (see above for an explanation for the increase in total assets). The Company had in 2014 net interest income of NOK 355 million kroner, including commissions paid to its parent banks, compared to 295 million kroner for the same period last year. The cost of operations was NOK 33.3 million including depreciation compared to 31.4 million kroner for the same period last year. No additional amounts have been charged as loan provisions (write offs) in 2014 beyond the approximately 8 million kroner which has been reserved from previous years. No actual loan losses have occurred since the Company commenced operations. This produces an operating result of 284 million kroner before tax, compared to 201 million kroner last year. The operating result includes a loss on financial instruments of 39.5 million kroner which include both realized and unrealized changes in value for derivatives, debt and certain financial assets (bonds). Unrealized effects include the result of the fair value of derivatives and effect from basis swap effects which are reversed over time.

Lending to customers amounted to NOK 161 billion kroner at year-end 2014 which is approximately 14 billion less than one year ago. This development is due to that some loans where repurchased by the Company's parent banks in the 2nd quarter of 2014. The Company's own liquid assets as of December 31, 2014 were 9.5 billion kroner.

Risk aspects

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.

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. Because the Company buys residential mortgages within 75% of the value of the objects on which the mortgages are secured, the Board of Directors conclude that the credit risk is lower than for banks in general.

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. At the end of the year SpareBank 1 Boligkreditt AS had issued bonds for approximately NOK 100 billion kroner in euros, 25 billion kroner in United States dollars and 0.2 billion kroner in Swedish kroner. All borrowing and investments with a fixed rate and all borrowing and investments in a foreign currency have been hedged by financial currency- and/or interest rate swap agreements or through natural hedges. The collective cash flow therefore matches to high degree borrowings in Norwegian kroner with floating rate conditions (NIBOR 3 months). The Company receives collateral from its counterparties in derivative agreements according to certain criteria.

SpareBank 1 Boligkreditt AS owns bonds and treasury bills at year-end for a total of NOK 36.6 billion, whereof 27.1 billion is collateral received from counterparties in derivatives transactions and are no available for the Company as liquid assets. The bonds are mainly Nordic covered bonds and German supra sovereign and agencies (German agencies guaranteed by the German government) 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 31.12.2014 only moderate interest rate risk and immaterial amounts of currency 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 maintain a material liquidity reserve with a minimum size of covering all maturities within 6 months and 50 per cent of all matruirties between 6 and 12 months. Additionally 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. SpareBank 1 Boligkreditt AS’s liquidity situation is good.

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 assessed to be moderate.

Employees and the working environment

SpareBank 1 Boligkreditt had eight employees as of 31.12.2014. 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 0.8% 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.

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  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

SpareBank 1 Boligkreditt's future prospects stable and good. Residential real estate prices (the residential real estate index from Eiendom Norge) increased by 8.1% from December 3013 to December 2014, but this should be seen in connection with a decline in the index of 0.5% during 2013.

The average loan-to-value in the Company's portfolio is stable at 51 per cent and there are no losses and no loans with a delayed payment of more than 60 days (number of loans with a delayed payment between one and two months amounts to 0.02% of the portfolio). Unemployment is at a low level of 3.7% per cent in November 2014 according to Statistics Norway. Even if the unemployment rate has increased since May 2014 (3.2 per cent), the Company does not expect a large increase in this number in 2015. This is despite of that uncertainty for the Norwegian economy has increased markedly as a consequence of a decline in the oil price.  Lending growth for residential purposes in the SpareBank 1 banks is positive, but has reduced from previous years. For 2015 we expect a moderate growth in the amount of residential mortgages which the Company is financing. Both the interest rate earned on customer lending (from 4.06 per cent in December 2013 to 3.66 per cent in December 2014) and Boligkreditt's funding costs (from 2.42 per cent in December 2013 to 2.37 per cent in December 2014) have been reduced during 2014, which produced a reduced margin. The margin is still at a continued high level in a historical context. The market for the Company's bonds now reflects a lower credit spread than for the previously issued bonds. This results in that the Company at future refinancing and through new issues is expecting to reduce the average funding costs. The Company's funding costs is tracking the 3 months NIBOR, and because this has declined towards the end of the year this will also contribute further to reduced funding costs at coming interest rate reset dates during the first quarter in 2015.

Macroeconomic development:3
According to preliminary seasonally-adjusted volume figures, Mainland Norway’s gross domestic product (GDP) was up 0.4 per cent in the third quarter compared with the previous quarter.  This reflect the moderate growth rate which Norway has experienced over the last 18 months. Household total consumption expenditures declined 0.1 per cent in the 3rd quarter this year, after increasing 0.7% in the previous quarter.  The previous fast pace of growth in the oil based investments was halted a year ago and declined some in the 3rd quarter of 2014, while residential and public investment were weak and industrial investments at the same level as in the 2nd quarter.

3 Macroeconomic prospects and forecasts have been sourced from Statistics Norway.

Economic outlook:
Reduced demand from the oil sector and a continued weak international development is dampening the growth in the Norwegian economy for some time. A material depreciation in the exchange rate of the Norwegian krone should help the traditional (non-oil and gas related) export goods and services. Somewhat higher growth in demand from mainland Norway has not been sufficient to prevent that GDP for mainland Norway is expected to increase at a slower pace in 2015 compared with 2014, and that the unemployment rate probably will increase some for the time ahead. Statistics Norway is forecasting a markedly improved growth in 2016, but points to increased uncertainty for the Norwegian economy. The Norwegian central bank reduced its monetary policy rate to 1.25 per cent on the 11th of December 2014 and there is an expectation of a further reduction in March 2015.

Forecast (%) 2014 2015 2016 2017
Mainland GDP growth 2,6 1 2,2 2,7
Unemployment rate 3,5 3,9 4 3,7
CPI growth 2,1 2,6 2 1,7
Annual wages 3,3 3,1 3,3 3,3

The Board of Directors affirms that the financial accounts present a correct and complete picture of the Company’s operations and financial position for 2014. The financial accounts including notes thereto are produced under the assumption of a going concern. 203.9 million kroner of the annual net income will be distributed as a dividend to the shareholders. This corresponds to 3.70 kroner per share.

There have been no incidents of a material nature after year-end which are expected to impact the annual accounts for 2014.

The Board of Directors of SpareBank 1 Boligkreditt AS
Stavanger, 31. December 2014 / Oslo, 12. February 2015




 SpareBank 1 Boligkreditt AS

- 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 2014 for SpareBank 1 Boligkreditt AS. The annual accounts have been prepared in accordance with the International Financial 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 31.12.14.

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. 

Stavanger, 31. December 2014 / Oslo, 12. February 2015
Members of the board, SpareBank 1 Boligkreditt AS