During 2014 we issued no EUR or USD denominated benchmark transactions but a little more than 7 billion of covered bonds in the Norwegian market, denominated in NOK.
Total volumes nevertheless declined (of both mortgages and covered bonds) because some of our parent banks decided to repurchase mortgage loans which we had used to obtain covered bond funding with the central bank in 2009. This Norwegian government swap facility, which was arranged and administered by the central bank, ended during 2014 and all the bonds needed to be redeemed. We repurchased our bonds early and transferred most of the associated mortgages back to certain of our parent banks.
Credit spreads on our issuances have declined through 2014 mostly due to factors which affect the whole covered bond market such as the monetary policies in the Eurozone but also the negative net supplies of covered bonds in Euros. While Norwegian covered bonds were not eligible to be acquired by the European Central Bank asset purchase programme (CBPP3), the actions of the ECB still impacted the spreads of our bonds in a tighter direction. Norwegian covered bonds in EUR are Liquidity Cover Ratio (LCR) eligible for the highest category as this was agreed by banking regulators during the year. While we fulfil all the requirements for LCR eligibility a question arose with regards to the issue of a mandatory overcollateralization (OC) of 2 per cent. SpareBank 1 Boligkreditt has a minimum committed OC included in its GMTCN programme and we believe this is sufficient to satisfy the demand for mandatory OC. In the meantime the Norwegian Parliament will be overhauling the banking act (Finansieringsvirksomhetsloven) on a few points, and it is expected that a minimum OC will be enshrined in the legislation during the first half of 2015.
The domestic private investor market continues to develop well and was able to assume essentially all of the maturities from the swap facility. The NOK market for covered bonds in Norway is approximately the same size as the market for Norwegian government bonds in NOK. We follow a policy of tapping our outstanding issues and will target a normal size for our NOK bonds of above NOK 4 billion so as for these bonds to be LCR eligible in the highest category in Norway.
Chart 1: Outstanding Norwegian covered bonds and government bonds
We expect renewed benchmark issues in other currencies than Norwegian kroner for 2015.
Our policy of refinancing outstanding issues ahead of time will see us needing to refinance both a USD 1 billion and a EUR 1.25 billion in outstanding bonds during 2015. Additionally we forecast a modest growth in mortgages in our portfolio over 2015 of a little below 6 per cent, though this number is uncertain. It is ultimately our parent banks who decide on their funding mix and how much should come through covered bonds. Our parent banks have excellent access to a Norwegian deposit base and to the market for senior unsecured bank debt in NOK (and some also in EUR). The larger banks in the SpareBank 1 Alliance are in the process of establishing solely owned covered bond vehicles for reasons of obtaining maximum flexibility in the face of tighter regulations relating to largest exposures between banks, also between SpareBank 1 units. This may lead to some covered bond issuance in NOK from SpareBank 1 banks directly during 2015. We expect this direct issuance to be small and for SpareBank 1 Boligkreditt to remain the main vehicle for the SpareBank 1 banks' covered bond funding.
Chart 2: Outstanding SpareBank 1 Boligkreditt covered bonds as of year-end, by currency:
Oustandings in EUR and USD have increased relatively to NOK over 2014, but this is matched by a similar increase in our derivatives as more closely described in the Statement of the Board of Directors.
2014 saw an increase in the real estate market national residential index of 8.1%, but this should be seen in context with 2013 when prices declined 0.5% on average.
With real household disposable income growing 3.25% on average over the two previous years, and inflation averaging 2.1%, the two year average nominal house price increase is below the two year annual increase in household sector income.
Chart 3: Twelve month growth rate of the residential real estate price index for Norway
Chart 4: National house price index adjusted for after-tax household income
In 2014 we increased our capital coverage ratio, along with our parent banks according to new regulation (CRD IV) and a Norwegian additional component. The requirements for capital are rendered below, including a 1 per cent countercyclical buffer which is expected to come into effect from July 1, 2015. SpareBank Boligkreditt's capital coverage at year-end 2014 was 14.1%
Chart 5: Capital requirements for banks and credit institutions (covered bond issuers) in Norway
Our cover pool metrics continue to exhibit a robust profile with an average weighted LTV in the cover pool of 51.1%.
The real estate values are updated for the entire cover pool each quarter based on an automated valuation model (AVM) from the Norwegian company Eiendomsverdi, used by most Norwegian banks. The model is independently tested and validated and has certain parameters built into its valuation settings which allow for a cautious treatment of potential upside valuation outcomes for individual houses.
Chart 6: SpareBank 1 Boligkreditt cover pool: number of loans by LTV interval
SpareBank 1 Boligkreditt continues to have no arrears beyond 90 days in the cover pool and has never experienced a credit event with regards to any of the mortgage loans in the pool. We stress test the portfolio regularly for potential sharp house price declines, which provides comfort with regards to the robustness of the pool, even in the face of 20 to 40% house price declines. Because we would like to maintain strong LTV cushions also in a severe house price decline environment we decided to set new self-selected limitations for the maximum LTV eligibility criteria; the new limits for the pool are thus 70% for repayment mortgages and 60% for interest only mortgages (both down from 75% before, which remains the legal criteria).
Chart 7: SpareBank 1 Boligkreditt cover pool: loans in arrears history
We expect to take advantage of strong markets in covered bonds in 2015 and return to the EUR benchmark market and may also consider the USD market given that circumstances align, especially making the USD market competitive with the EUR market via the currency swap (basis swap) market.
We will also be present in the NOK market regularly throughout the year. We expect that despite some heightened uncertainty with regards to Norway's economic outlook that this will not have a material impact on two key elements important to us: unemployment and house prices, partly due to the responses of monetary policy and the large potential for fiscal policy manoeuvrability which the Norwegian government retains.
SpareBank 1 Boligkreditt
Bjergsted Terrasse 1
Chief Executive Officer
Phone: +47 5150 9411
Phone: +47 5150 9367
Head of Finance and Risk
Phone: +47 5150 9412