Boligkreditt

Issuances in 2018

With regards to future GBP issuance, the Company will look at the potential to convert to Sterling Overnight Interbank Average Rate (SONIA) as the basis for any FRNs issued in GBP (while extendable maturities for fixed rate covered bonds also require a floating rate reference in the terms for any extension period). This will require an update to the Issuing Programme at the next juncture addressing SONIA.

The first EUR issuance of the year, in January 2018, was SpaBol’s inaugural green bond.  This bond was issued with reference to the energy efficient housing units which have been financed.  A definition was developed for these with the help of technical consultants, and this became the Norwegian baseline for green residential covered bonds with the Climate Bond initiative (CBI).  Other Norwegian issuers followed by using the same baseline later in the year, which uses the most recent building codes to determine the green standard.  The building codes in Norway have undergone significant and increasing requirments with regards to insulation, materials and energy use.  At the time of issuance in January 2018, approximately 8 per cent of the Norwegian building stock had been constructed according to the recent building codes, while the CBI rule for green mortgages is the top 15 per cent in a market.  At a future point, when the housing unit under the current definition approaches the 15 per cent limit, the definition will be amended (it may be amended for other criteria earlier).

The green bond was well received with an order book peaking at nearly EUR 2 bn and remaining at between EUR 1.7 and 1.8 billion at re-offer.  Nearly ¼ of allocated investors were specialist, dedicated green investors.

The green mortgage loan volume has continued to grow through 2018 and a second green bond is therefore possible.  SpaBol would apply for any subsequent green bonds to also be certified by the CBI, as was the case with the inaugural green bond in January 2018.

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 however, SpareBank 1 SR-Bank, has chosen to issue own label covered bonds and therefore SR-Bank’s relative share of mortgages of the SpaBol cover pool has reduced over the last few years. SR-Bank’s share of the SpaBol pool was at year-end 2018 less than 5 per cent or approximately NOK 8.9 billion out of a total of 184 billion. The bank may further reduce its mortgages in the SpaBol cover pool at those point in time when outstanding bonds mature.  There are no consequences of this development, other than a more slowly growing cover pool.  Mortgages in the cover pool grew by 3.4 per cent over 2018.  We do not expect that any further stand-alone covered bond issuers will emerge from within the Alliance.

Domestic and foreign currency issuance

SpareBank 1 Boligkreditt AS has for many years relied on an Issuer rating from Moody’s which is derived from the majority stakeholders, but the rating has not been published. The Issuer rating is the starting point for the Aaa covered bond rating from the agency.  The Company has now requested from Moody’s to have the Issuer rating made public.  This should take place during the first quarter of 2019.

Domestic and foreign currency issuance

The domestic NOK market for covered bonds have developed strongly over the years since inception in 2007, and is in magnitude approximately equal to all government securities outstanding.  The total volume of Norwegian covered bonds issued in currencies is however larger, at 56 per cent of total covered bond volume, including NOK.  For SpareBank 1 Boligkreditt the situation is similar to the national picture, though somewhat more weighted towards foreign currency and EUR.  The overall covered bonds outstanding is approximately 41 % of Norwegian mainland GDP.

Chart 1: Outstanding Norwegian covered bonds and government bonds

Source: SSB, FNO (2018 as of Q3)

Chart 2: 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 rules were reviewed in June 2018 and were not changed.  The next review is due at year-end 2019.  Mortgage market regulations in place are:

• 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

This is below the consumer price inflation of 3.5 per cent for the year (consumer prices were impacted by higher energy and a weak currency).  In 2018 the Norwegian central bank raised its policy rate for the first time since 2007 and by 0.25 per cent.  There is an expectation of further interest rate increases. This as well as the overall high price level drove the development in the real estate index in 2018.  Building activity has also abated some in 2018 (lower level of building starts compared to 2017).

Chart 3: Residential real estate price index for Norway:

Chart 4: National house price index adjusted for inflation and after-tax household income (Jan. 2000

Adjusted for income and inflation, Norwegian house prices look more balanced (especially as adjusted for the after-tax growth in household income)

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Capital requirements

This includes a countercyclical buffer of now 2 per cent, which is scheduled to increase to 2.5 per cent on December 31, 2019. It was proposed during 2018 that the large regional SpareBank 1 banks should become SIFI banks during 2018.  The countercyclical buffer also 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.

The expectation for 2019 is for a change in the application of the Basel I floor for Norwegian banks, reducing the effective overall risk weight for the balance sheet and thereby increasing capital ratios. Banks expect a mitigating factor to be introduced (higher requirements).  SpareBank Boligkreditt's total capital coverage at year-end 2018 was 16.8 per cent, which meets the total requirements for the Company which is 15.5 per cent in Pillar I and an additional 0.8 per cent in Pillar II (no SIFI buffer applies for covered bond issuers). Boligkreditt calls on its owner banks for capital contributions as and when needed, and especially in connection with larger transfers of mortgages.

Chart 5: 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.  During the 4th quarter 2018, the residential real estate index declined by 2.2 per cent and this reflected to increase of the cover pool LTV from September’s 51.7 to December’s 52.7 per cent.

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 a scenario where house prices drop by 30 per cent quickly, the mortgage assets are sufficient to cover the preferred obligations within the 75 per cent legal limit for LTVs. The owner banks are required to maintain loan reserves, which are pre-qualified for the cover pool. 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.

Under the IFRS 9 rules for mortgage loans expected losses the Company has shown that approximately 12,5 million of expected losses would be booked as a consequence of the macroeconomic scenarios developed and the definitions and requirements of the new accounting rule.  The amount is small seen against the balance of mortgage loans, including fully drawn revolving loans on which it is based of 196 billion kroner.  No losses have been realized in the Company since inception in 2005.

Chart 7: SpareBank 1 Boligkreditt cover pool: loans in arrears history

Liquid assets in the cover pool
Liquid assets are also included in the cover pool along with residential mortgages-  These are cash deposits, government or government guaranteed bonds (Nordic and German) and covered bonds from Nordic issuers.  The minimum level of liquid assets has been re-defined during 2018 and is now compliant with the larger of 6 months of coverage for upcoming redemptions (as proposed in the EU harmonization Directive for covered bonds) and the NSFR rule as proposed, where mortgages are weighted 85 per cent when determining the amount of required long term funding.  The actual level of liquid assets may also be higher than the minimum, depending mainly on the timing of new bond issuances.  Liquid assets cannot be additional mortgages as this would not be prudent as mortgages are less effortlessly liquidated when funds are needed (for repayments), under certain circumstances.  A complete list of liquid assets is presented in every quarterly cover pool reporting.  Due to past issuance patterns, redemptions in any one year will typically include two benchmark bonds in EUR and so the liquid assets buffer is sizable.  At year-end 2018 it was 20 billion kroner compared to 34 billion at the end of 2017 (including the effect of the new definition of the minimum size of liquid assets).

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Outlook 2019

The EUR 1.25 final size was slightly more than the usual size of EUR 1 bn.  For the remainder of the year, SpaBol is likely, following the pattern of previous years, to return once more in 2019 to the EUR benchmark covered bond market.  Other currencies are also considered for issuance in 2019, in addition to regular NOK issuance activities.

Real estate prices increased moderately in 2018 and are likely to remain relatively stable in 2019 as well.  Real wage growth is probably on a path to be more modest than in the years leading up to the decline in oil prices in 2014-15 and the expectation of higher mortgages rates are factors which are likely to contribute to this development.  Mortgages across the Norwegian banking sector continue to be a low risk asset class with benign levels of non-performing loan levels.

The SpaBol cover pool continues to be geographically well diversified across the country, and the weighted average current LTV in the cover pool is low.  Banks remain subject to reserve assets requirements for the cover pool, calculated by looking at hypothetical steep declines in valuations in the housing market.   Mortgages must qualify on both legal and customer credit quality criteria in order to be eligible or qualified for the cover pool.  Credit risk is therefore extremely low and liquidity risks mitigated very well through liquidity reserves and a liquidity facility with the owner banks.

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Contact information

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