During 2015 we issued two EUR denominated benchmark transactions for a total of EUR 2.5 billion and approximately NOK 17 billion of covered bonds in the Norwegian market, denominated in NOK.
The EUR bonds had maturities of 7 years (issuance in August) and 3 years (November) and met with very good demand at mid-swaps+ 8 bps for the 7 year and mid-swaps + 10 bps for the 3-year. Credit spreads continued to move out during the second half of the year along with the general market; the non-CBPP3 eligibility of Norwegian covered bonds continue to ensure more attractive spreads for our bonds compared to covered bonds from the Eurozone. Our EUR issuances are Liquidity Cover Ratio (LCR) category 1 eligible. The Norwegian parliament approved a new financial series legislation in 2016, which includes the covered bond legal framework. The relevant change in the latter is the inclusion of a minimum overcollateralization level of 2 per cent, something we expect will become effective during the first half of 2016.
Mortgages in the cover pool increased by NOK 8.1 billion (5.0 per cent) over the year and we expect a similar increase in 2016. Spabol has since the start in 2007 been and continues to be the strategic and preferred vehicle for covered bonds issuance on behalf of the SpareBank 1 Alliance banks. One Alliance bank, SpareBank 1 SR-Bank, chose to set up its own wholly owned covered bond issuer in 2015. Neither we, nor any other banks in the SpareBank 1 Alliance expect that any further individual covered bond issuers will be formed within the Alliance. When SpareBank 1 SR-Bank has chosen to supplement its covered bond funding with its own issuer in addition to Spabol, the only significance of this is that our cover pool is likely to grow more moderately than if this had not been the case. Lending growth for the banks in the Alliance was on average just above 5 per cent in 2015, which was retail (mortgage) growth with lending to corporates more or less flat.
Norwegian bank regulators tightened lending regulation in 2015. Previous guidelines became regulatory requirements and include a maximum 85 per cent loan to value, an amortization requirement for all mortgages with loan to value above 70 per cent and an interest increase (5 per cent increase in the mortgage rate) as a stress test. Banks are allowed to have an exception limit under these regulations of a share of mortgages they originate of up to 10 per cent. The exception is intended for when a creditworthy customer does not meet all the criteria for granting a mortgage loan.
The domestic private investor market continues to develop well. 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 kroner so as for these bonds to be LCR eligible in the highest category in Norway. A range of maturities in fixed and floating bonds are available for taps.
Chart 1: Outstanding Norwegian covered bonds and government bonds
Source: SSB, FNO
We expect further EUR covered bond issuance in 2016, with perhaps two benchmark bonds and will in addition consider other currencies for covered bond issuance.
Chart 2: Outstanding SpareBank 1 Boligkreditt covered bonds as of year-end, by currency:
Oustandings in EUR and USD on a book value basis as depicted above have increased relatively to NOK over 2014 and 2015 due to the krone depreciation. All foreign currency issuance is hedged fully with swaps.
2015 saw an increase in the real estate market national residential index of 5.1%.
The Norwegian economy grew at a slower pace, 1 per cent growth for mainland GDP, which is the weakest growth year since 2009. Due to the slowdown in the economy, wage increases in the economy moderated to a lower level than in the recent past (around 2.8 per cent nominally, which is approximately equal to inflation in 2015). It is however likely that the continuous downward trend in mortgage interest rates (bank competition and lower monetary policy rates in Norway) and high demand for housing in central areas of the largest cities which drive the price increase. Most analysts expect a lower growth rate for the national real estate index in 2016 than in 2015, though growth. The bifurcation of the market is expected to continue with price drops in the southwest oil dependent regional economies and above average growth in the Oslo market. SpareBank 1 Boligkreditt has a very well diversified portfolio with currently only 11 per cent (downward trend) of the loan book in southwest (Rogaland region) where houseprices were down a little over 3 per cent in 2015.
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%
Norwegian capital requirements have continued to move up for banks and covered bond issuer for some time and the overall capitalization requirement for significant financial institutions (SIFIs) is 17 per cent of risk weighted assets as of July 1, 2016 (see chart below).
This includes a countercyclical buffer of 1,5% and this now represents a tool for the authorities to free up further lending capacity for banks should credit growth turn negative or be too low to sustain economic expansion (Norway is going through re-adjustment phase due to lower oil prices). SpareBank Boligkreditt's capital coverage at year-end 2014 was 16.1%, which is influenced some by our valuation adjustment of basis swaps (approximately by 0.5%). Basis swap spreads as well as related costs have continued to move out and this causes an accounting gain and an increase in equity for 2016 (as detailed in the financial accounts and notes thereto). SpareBank 1 banks, including Boligkreditt are not determined to be SIFI banks, though some have stated as their goal to hold the same amount of capital as if they were. The weighted average capitalization of the four largest SpareBank 1 banks was 17.6 per cent as of year-end 2015.
Chart 5: Capital requirements for banks and credit institutions (covered bond issuers) in Norway
Chart 6: Capital in the four largest SpareBank 1 banks (weighted average)
Our cover pool metrics continue to exhibit a robust profile with an average weighted LTV in the cover pool of 52.1%.
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 7: 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 or flexible loans (both down from 75% before 1Q 2014, which remains the legal criteria). Loans over 75% means some migration since transfer of the loan to the cover pool, though the parts of these loans representing higher than 75% LTV are not counted as cover assets.
Chart 8: SpareBank 1 Boligkreditt cover pool: loans in arrears history
We expect to issue EUR covered bonds in both half of the year, markets permitting. We would also like to return to the USD market at some point. Boligkreditt’s early refinance policy means that we keep a portfolio of liquid assets and with upcoming redemptions in 2016 and 2017 this determines our international issuance volume, along with the growth in the cover pool on the one hand as well as the uptake in the domestic NOK covered bond market on the other.
It is clear that the Norwegian economy is undergoing a transitional phase due to lower oil prices in which two factors have material importance; (1) a floating krone exchange rate which ensures that companies exporting and other producers of goods and servicing competing with imports become more competitive and (2) a well-funded public sector which has accumulated a large sovereign wealth fund from oil revenue over the previous two decades. Oil prices on the other hand may rebound, as is expected by analysts in the second half of 2016, where several see global supply and demand being balanced contrary to the situation in 2015 and than at the beginning of 2016. Break even cost for Norwegian oil production has been significantly reduced and renewed investments in the sector, which is the current headwind for economic expansion, will likely start growing at significantly lower levels than were required in the beginning of 2014.
We see no impact on the cover pool from the weaker macroeconomic climate. The mortgage pool have a low weighted average current loan to value, unemployment remains low and there is ample structural support (fiscal, monetary policy as well strong unemployment support) in Norway and the Spabol pool is geographically very well diversified. Capitalization levels at Norwegian banks are very robust.
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