Boligkreditt

Issuances in 2016

The EUR bonds had maturities of 7 years (issuance in March) and 10 years (August) and met with very good demand at mid-swaps+ 23 bps for the 7 year and mid-swaps + 4 bps for the 3-year.  As is evident from these two issuances, credit spreads continued to move in through the 3rd quarter of the year; however 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 bonds met with good demand and were oversubscribed. Our EUR issuances are Liquidity Cover Ratio (LCR) category 1 eligible.  The issued EUR volume for 2016 is also what we expect to issue for 2017, although timing of issuances may alter the volume within any one calendar year.  We have not been issuing in other currencies than NOK and EUR for a while (last USD issuance in 2013), but other currency markets are monitored for covered bond opportunities.   

Mortgages in the cover pool increased by NOK 5.1 billion (3.0 per cent) over the year and we expect a similar increase in 2017.  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.  SpareBank 1 SR-Bank has chosen to supplement its covered bond funding with its own issuer in addition to Spabol, and therefore SR-Bank’s relative share of mortgages of the Spabol cover pool has reduced (reduction of 2.8 per cent of its relative share during 2016).  We do not expect that any further covered bond issuers will emerge within the Alliance with any meaningful level of active issuance.  Lending growth for the largest banks in the Alliance was (weighted average) just below 6 per cent in 2016, with lending in the corporate segment slower than for residential purposes.

Chart 1: Outstanding Norwegian covered bonds and government bonds

Source: SSB, FNO

Spabol

Chart 2: Relative share of outstanding SpareBank 1 Boligkreditt covered bonds as of year-end, by currency:

All foreign currency issuance is fully hedged using swaps.

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Regulations mortgage market

The new regulation is a further tuning of previous regulation and is a response to the low mortgage rate environment in Norway. House prices have increased over some time, partially due to the increased affordability which lower rates imply. These are the current rules now in effect, summarized:  

• Loan to value: maximum 85 per cent for all mortgages and maximum 60 per cent for loans without instalments (revolving credit line mortgage loans); for a property located in Oslo, which is not a borrower’s primary residence, the maximum is 60 per cent.
• Repayment: minimum 2.5 per cent per annum for loan to value mortgages at or above 60 per cent LTV
• Income limitation: total debt maximum is 5x a borrower’s before-tax income
• Stress test: applications must pass an affordability test of a 5 per cent increase in the prevailing (offered) mortgage rate
• Flexibility: 10 per cent of each lender’s mortgage lending contracts per quarter may be in breach with one or more of the limitations (8 per cent in Oslo), and must be reported

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The Norwegian residential real estate market

Despite the weak GDP growth nationally, most regions away from the oil clusters have a positive development.  House prices are driven by demand in central areas, in particular Oslo, and the affordability of lower rates. The overall increase in the house price index is driven by Oslo, which outpaces by far the rest of the country and also has a high degree of weight in the composite index, which is weighted by transaction volume in each region. This is also the reason for a particularly targeted regulatory rules for Oslo (see above). Additionally, 5 times gross income as a cap for mortgage debt is a new restriction, albeit generous for the country at large. In Oslo however, this cap is likely to be more effective than elsewhere due to the currently elevated prices there and the development in the capital through 2016.  SpareBank 1 Boligkreditt has a very well diversified portfolio with less than 10 per cent of all lending in Oslo. 

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

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Capital requirements

This includes a countercyclical buffer of 1.5 per cent, which was revised to 2 per cent from December 31, 2017.  The countercyclical buffer represents a tool for the authorities to increase lending capacity for banks should credit growth turn negative or be too low to sustain economic expansion.  SpareBank Boligkreditt's total capital coverage at year-end 2016 was 16.5%.  SpareBank 1 banks are not defined by the regulator as SIFI banks, though several banks have stated the objective to meet the same capital requirements.  The weighted average capitalization of the four largest SpareBank 1 banks was 18.8 per cent as of year-end 2016.   Pillar 2 capital requirements for banks were published during the year and the largest SpareBank 1 banks have Pillar 2 requirements in the range from 1.7 to 2.1 per cent.  

Chart 5: Pillar 1 capital requirements for banks and credit institutions (covered bond issuers) in Norway

Capital requirements SIFI banks from 1 July 2016: 17% risk weighted total capital

Chart 6: Capital in the four largest SpareBank 1 banks (weighted average)

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Cover pool

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.  Mortgage loan reserves are not primarily maintained within the cover pool, but are cover pool qualified loans kept on balance sheet in the parent banks until such time as they need to or should be transferred.  Mortgage loans in the pool at over 75% LTV means some migration has taken place since transfer of the loan to the cover pool, though the parts of these loans representing higher than 75% LTV may not be counted as cover assets.

Chart 8: SpareBank 1 Boligkreditt cover pool: loans in arrears history

Liquid assets in the cover pool
Liquid assets are included in the cover pool and are cash, government or government guaranteed bonds and covered bonds from Nordic issuers.  The minimum level of liquid assets are defined as covering 50 per cent of upcoming bond redemptions 12 months ahead of the maturity date and covering 100 per cent when there is six months or less until maturity.  The actual level of liquid assets may also be higher than the minimum, depending on timing of new bond issuances.  Liquid assets cannot be additional mortgages as this would not be prudent because mortgages are less effortlessly liquidated when funds are needed (for repayments), under certain circumstances.  Liquid assets are detailed line in the quarterly cover pool reporting.  Due to past issuance patterns, redemptions in any one year will typically include two benchmark bonds in USD or EUR and so the liquid assets buffer is sizable.  At year-end 2016 it was 26 billion Norwegian kroner compared to 22 billion at the end of 2015. 

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Outlook 2017

Norway has managed the economic challenges of the reduction in oil prices well, despite that the oil and gas industry has been and remains a dominant industry.  Monetary and fiscal policies as well as benefits from a floating (weaker) NOK are all contributing factors in this development.  The housing market, which has experienced a sharp price increase in 2016 that very clearly was driven by developments in the capital of Norway, Oslo, should be set for a moderation course.  The reasons for this are that in additional to already increased house prices, mortgage interest rates have increased some in late 2016 into 2017, regulations have been tightened and importantly building (supply) of new residential dwellings have increased. At year-end 2016 housing starts are at a trailing 12 months average of 3,000 per month, the highest seen in more than ten years.   

The mortgage pool have a low weighted average current loan to value, unemployment remains low in Norway and there is ample structural support (fiscal, monetary policy as well strong unemployment support).  The Spabol pool is geographically very well diversified across the country, much less exposed to an area of rapid growth (like Oslo) or one of recent (moderate) declines, such as in Stavanger.  The outlook for continued stability and a robust cover pool is therefore good. 

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Contact information

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