Boligkreditt Annual Report 2020
Statement of the board of directors
SpareBank 1 Boligkreditt’s purpose
SpareBank 1 Boligkreditt AS (‘Boligkreditt’, ‘SpaBol’, or ‘The Company’) is a credit institution licensed by the Norwegian Financial Supervisory Authority (Finanstilsynet) and is operated according to the legislation for covered bond issuers in Norway which is included in the Financial Institutions Act (“Finansforetaksloven”) chapter 11, section II and the detailed regulations thereof.
The purpose of the Company is solely to provide funding for its owner banks by buying qualifying residential mortgage loans from them with a loan-to-value (“LTV”) of up to 75 per cent and financing these through the issuance of covered bonds 1.
The Company, which is based in Stavanger, Norway, is owned by banks which are all members of the SpareBank 1 Alliance. A comprehensive agreement with each of these banks regulates the mortgage purchasing process and the obligations which the banks owe the Company and its mortgage customers (“Transfer and Servicing Agreement”). The Company pays out the interest margin earned to its owner banks, with deductions for estimated operating and financial expenses. This margin is accounted for as commissions to owner banks.
The Company’s issuances of covered bonds mainly take place under the EUR 35,000,000,000 Global Medium Term Covered Note Programme (GMTCN Programme). This Programme was updated on April 20, 2020 and is available on the Company's home page: https://spabol.sparebank1.no.
Moody’s Ratings Service evaluate the credit quality of the issuances under the GMTCN Programme. The covered bonds are rated Aaa.
1 The limit for instalment mortgages is 75 per cent, while mortgages which have no scheduled repayment structure are limited to 60 per cent. There is a regulatory minimum amortization requirement of 2.5 per cent annually for new mortgages with a LTV at 60 per cent or above.
Cover pool and outstanding covered bonds2
SpareBank 1 Boligkreditt’s cover pool consists of residential mortgages and liquid, highly rated assets as well as derivatives hedging liabilities in a foreign currency and/or at fixed rates. The chart below illustrates the balances as of the end of the fourth quarter 2020:
The amount of liquid assets varies over time and the variation is solely a result of the Issuer’s liquidity risk management (and regulatory requirements), whereby upcoming redemptions are refinanced prior to the maturity of outstanding bonds (minimum 180 days) with bond proceeds invested as liquid assets. Liquid assets are covered bonds with a triple-A rating, SSA or government bonds with a triple-A rating or short term cash deposits and repos (please see the cover pool statistical reports for details on the composition of liquid assets).
Derivatives are used solely to hedge currency and interest rate risk. They are tailored to exactly match the cash flows related to the bonds they hedge, for the full duration of the bond. Swap counterparties are subject to certain rating criteria and are in all cases banks other than the Company’s owner banks
The table below provide an overview of the residential mortgages in the cover pool, as well as the overcollateralization.
2 The source is the balance sheet figures as of 31 December 2020 and the cover pool asset liability test for overcollateralization (see notes to the financial statements). Norwegian covered bond issuers are required by law to group derivatives as part of cover pool assets, and not together with the issued covered bonds that they hedge (liability side). This is reflected in the chart.
Residential mortgages key figures
| Q4 2020 | Q3 2020 | Q2 2020 | Q1 2020 | Q4 2019 | |
|---|---|---|---|---|---|
| Weighted Average Current LTV (%) | 51.4 % | 51.8 % | 52.6 % | 53.2 % | 53.6 % |
| Weighted Average Original LTV (%) | 59.7 % | 59.3 % | 59.4 % | 59.3 % | 59.7 % |
| Average Loan Balance (NOK) | 1,507,205 | 1,488,367 | 1,470,921 | 1,456,844 | 1,443,119 |
| Number of Mortgages in Pool | 138,298 | 138,275 | 137,427 | 136,884 | 132,358 |
| Pct. of non first-lien mortgages | 0,0 % | 0,0 % | 0,0 % | 0,0 % | 0,0 % |
| Overcollateralization | 4.4 % | 4.3 % | 7.2 % | 4.2 % | 4.1 % |
Key developments in 2020
During the year, the disruptions caused by the pandemic caused also covered spreads to widen significantly in the early spring.
Domestic kroner level spreads were nevertheless attractive and SpaBol issued a larger than normal amount of approximately NOK 17.6 billion in the market over the year, in addition to a smaller amount via the central bank facility for banks established as a part of the pandemic economic response in March. Outside of NOK, the Company issued a SEK 8.5 bn and a EUR 1 bn covered bond. Both the SEK and the EUR benchmarks were green covered bonds.
The residential mortgage lending volume at SpaBol has increased by 9.3 per cent during the year, as measured against the balance of loans as of December 31, 2019. The current mortgage balance is 209 billion kroner (equivalent to approximately EUR 20 billion at the FX rate year-end 2020). The growth was stronger than unusual, underpinned also by growth in the mortgage market.
The Board of Directors views Boligkreditt as well capitalized with a capital coverage ratio of 23.9 per cent against a total requirement, including all buffers and the planned increase in the systemic buffer effective year-end 2020, of 16 per cent (Pillar 1) plus 0.9 per cent (Pillar 2). The countercyclical buffer capital requirement was lowered to 1 per cent in March 2020, and remains at that level at year-end.
Total equity Tier 1 capital is 21.3 per cent against a total requirement, including buffers, of 14.9 per cent. Common equity capital was 19.7 per cent against a requirement, including all buffers, of 13.4 per cent. It is the Company’s policy to maintain capital ratios slightly above the regulatory requirements. When required, additional common equity is paid in by the owner banks in the regular course of business, usually in connection with increases in transferred mortgage volume. Additional Tier 1 and Tier 2 capital is raised in the Norwegian domestic capital market.
Moody’s requirement for overcollateralization remains 2.5 per cent. Boligkreditt’s cover pool overcollateralization at December 31, 2020 was 4.4 per cent 3. The Norwegian government is working in 2021 on implementing the EU’s harmonization directive in covered bonds, as well as changes to Article 129 in CRR. This is expected to mean that the required regulatory overcollateralization will increase to 5 per cent from 2 per cent.
A consent solicitation to convert the outstanding SpaBol £500 million LIBOR covered bond to SONIA was launched in December 2020 and unanimously approved by eligible investors. The bond spread was amended from LIBOR + 27 bps to SONIA + 31.2 bps, which will be effective from February 15, 2021.
3 This is calculated according to the Norwegian regulation with derivatives as a part of the cover pool. Mathematically a different (higher) percentage emerges when netting derivatives with the issued debt they hedge, such as is usually done by Moody’s.
Annual accounts
The 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 as of the end of 2020. Numbers in brackets refer to the corresponding period last year for comparison.
The total balance sheet at 31.12.20 amounted to 271 (246) billion kroner. The balance sheet increased primarily due to an increase in mortgage loans and there was also a smaller increase in the value of derivatives hedging issued debt. The Company had in 2020 net interest income of 2,139 (1,876) million kroner. Commissions paid to the owner banks were 1,769 (1,444) million and represent most of the margin between mortgage interest rates and the Company’s funding costs. The cost of operations for 2020 was 40.5 (36.1) million kroner including depreciation and amortization. IFRS 9 expected loan losses increased by 18 (decreased by 0.8) million to 30 (12) million. No realized loan losses have occurred. This produces an operating result of 168.4 (225.2) million kroner before tax. The operating result includes scheduled payments to AT1 bondholders, which are classified as distribution to equity capital.
Mortgage loans for residential properties amounted to 209 (191) billion kroner as of the end of 2020. The Company’s own liquid assets were approximately 24 (25) billion kroner.
Liquid assets are cash and highly rated, highly liquid bonds are held as a function of refinancing early the Company’s upcoming bond maturities at least six months ahead of expected maturities. Liquid assets are managed to meet the 180 day minimum liquidity rule in the EU covered bond harmonization directive and the Net Stable Financing Rule (NSFR) rule.
Risk aspects
SpareBank 1 Boligkreditt, as a licensed and regulated covered bond issuer, is subject to strict rules regarding its exposure to credit, market, and liquidity risks. This fact, and the aim of the maintenance of the Moody’s 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 not having 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 concludes that the credit risk is lower than for Norwegian 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 149 billion kroner in EUR, 8.8 billion kroner in GBP and 9.2 billion kroner in Swedish kroner, based on exchange rates at December 31, 2020. However, 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 borrowing in Norwegian kroner with floating rate conditions (NIBOR 3 months). The Company receives collateral from its counterparties in derivative agreements according to certain criteria.
The bonds held in the Company’s liquidity portfolio are mainly Nordic covered bonds and German supra sovereign and agencies (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 A/A2. Cash is also placed in reverse repos with approved counterparty banks, with AAA rated securities as collateral.
The Company had as of December 31, 2020 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 finance the purchase of loans at normal terms and conditions. Liquidity risk is managed based upon a liquidity strategy approved by the Board of Directors. According to the strategy, SpareBank 1 Boligkreditt AS shall maintain a material liquidity reserve with a minimum size equal to or more than all debt maturities within the next 6 months, or to comply with the NSFR requirement as proposed, whichever is higher. The Board of Directors views SpareBank 1 Boligkreditt AS’s liquidity situation as 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 or malfunction. Reputational, legal, ethical and competency risks are also elements of operational risk. The risk is assessed by the Board of Directors to be moderate.
The Company spends much time identifying, measuring, managing and following up on central areas of risk in such a way that this contributes to meeting its strategic goals. The notes 24 through 28 in the 2020 annual accounts provides further information.
Employees and the working environment
SpareBank 1 Boligkreditt had seven employees as of 31.12.2020. The Company employs five 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 SMN, e.g. accounting, HR and finance related back-office functions. Boligkreditt is served by a central SpareBank 1 Alliance unit for IT specific needs.
The working environment is characterised as good, and there is no pollution of the physical environment. There has been zero per cent employee absence recorded in 2020 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 six persons of which four 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 end of 2020, a new Board member joined, Heidi Aas Larsen, who replaces Inger Eriksen. Ms. Larsen was in previous years also a Board member.
SpareBank 1 Naeringskreditt AS, which is smaller and finances commercial property lending, but also is a covered bond issuer, has identical staffing to Boligkreditt. Of the seven full time employees employed at year-end in both SpareBank 1 Boligkreditt and Naeringskreditt AS, 1.4 full time equivalents have been allocated to SpareBank 1 Naeringskreditt AS. The Boards of the two companies have almost an identical composition.
Corporate governance
SpareBank 1 Boligkreditt’s principles for corporate governance are 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. Through its financial accounting, Boligkreditt seeks to deliver relevant and timely information for its owner banks, 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 www.spabol.no. With regards to the Company having a single purpose and that the shares are not freely tradeable, nor listed on an exchange, it is the Board’s opinion that any deviations to the policies are immaterial.
Shareholders
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, stipulates that the Company’s shares will be re-allocated 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 current share of the shareholdings. The shareholder’s agreement includes a clause that the Shareholders must maintain a minimum equity capitalization of Boligkreditt consistent with minimum regulatory requirements. The Company is not party to agreements which come into force, are amended, or are terminated as a result of a takeover bid.
SpareBank 1 SR-Bank has been a shareholder since the Company’s inception, but has reduced its interest over several years and has now fully exited as a shareholder at the end of 2020. Helgeland Sparebank is expected to join the SpareBank 1 Alliance as a shareholder in 2021. An existing Alliance bank, SpareBank 1 Nordvest, is expected to finalize its merger with another bank, Surnadal Sparebank in 2021.
Social responsibility
SpareBank 1 Boligkreditt is a specialized issuer of covered bonds, set up according to Norwegian law requirements for issuers of covered bonds.
Despite the relatively large size of its balance sheet, Boligkreditt has strict limitations on its activities and has only seven full time employees. The nature of the business consists solely of buying residential mortgage loans from its shareholder banks in the SpareBank 1 Alliance, and to finance these by issuing covered bonds. Every other activity, such as entering into derivatives agreements, receiving collateral related to those and maintaining and investing own liquid assets, follow from this single business purpose.
The banks in the SpareBank 1 Alliance operate as universal banks in the Norwegian market with an array of activities, including lending to businesses and households. These banks in total have around 6,000 employees and are together Norway’s second largest financial group. Boligkreditt’s parent banks set lending policies, service and handle all mortgage customer activity (including the customers whose mortgage loans have qualified for and been sold to the Company). Because of this, the ESG policy of the Company is aligned with its parent banks within the relevant areas for the Company. The SpareBank 1 banks present their ESG reports and further material on their websites and/or annual reports. The ESG reports, including GHG emissions reporting, of the main Boligkreditt shareholder banks can be found here:
- For SpareBank 1 Ostlandet; https://www.sparebank1.no/en/ostlandet/about-us/sustainability/sustainability-in-everything-we-do.html#par_title
- For SpareBank 1 SMN: https://www.sparebank1.no/en/smn/about-us/sustainability.html
- For SpareBank 1 Nord-Norge: https://www.sparebank1.no/en/nord-norge/about-us/about-us/sustainability.html
SpareBank 1 Boligkreditt supports, encourages and to some extent coordinates increased ESG disclosures and initiatives within SpareBank 1. Through the issuing of green covered bonds, where proceeds are earmarked for mortgages financing energy efficient housing, the ESG policies of the mortgage originating banks come into focus. The Company adopts the same set of ESG values and goals as the parent banks (see in particular the document “ESG policy in SpareBank 1 Boligkreditt” under the Green Bonds section of the spabol.no website).
Several of the owner banks offer ‘environmental mortgages’, where a discounted rate is offered to consumers planning to build energy efficient houses or for substantial energy efficiency upgrades. These loans will also, included in a broader set based on the top 15 per cent of energy efficient housing, qualify for green bond issuance at SpareBank 1 Boligkreditt.
In the area of mortgage finance the originating banks are obligated by Norwegian mortgage market regulation to analyse the sustainability of mortgage debt that borrowers are seeking. They are also obligated to not approve and provide advice to customers who are seeking debt levels which may be or become unsustainable.
Macroeconomic development and outlook 4
With the outbreak of the pandemic, Norway will record a recession in 2020, like most other countries.
The downturn in GDP is estimated to be 3 per cent, which is nearly one per cent better than anticipated mid-year. Looking ahead, it is private consumption that will provide a boost to growth once the pandemic ends, while aggregate investment will return to growth, but is expected to be somewhat slower. Investment within the oil and gas sector is seen as continuing to shrink into 2022.
Housing investment has delivered negative contributions to growth during 2018 through 2020, which is seen to turn positive in 2021. The housing market, with a high activity level in 2020 (the number of transactions taking place) is likely influenced by pandemic induced lower rates, and house prices increased nationally by 8.7 per cent in 2020. With the monetary policy interest rate outlook now slowly changing to an expectation of an increase (in late 2021 or during 2022), it is probably not likely that 2021 will produce the same growth in the residential market.
Both the unemployment rate and trade contributions to GDP in 2020, show the effects of the pandemic. Unemployment increased in the travel and services sectors, and is expected to remain somewhat elevated, even for 2021, on average.
Summarized for a few macroeconomic indicators, the recent data and forecast for the next few years are as follows:
| Recent data and forecast (per cent) | 2018 | 2019 | 2020 | 2021 | 2022 |
|---|---|---|---|---|---|
| Mainland GDP growth | 2.2 | 2.3 | -3.0 | 3.7 | 3.6 |
| Private consumption growth | 1.6 | 1.4 | -8.0 | 8.1 | 5.9 |
| Mainland investments growth | 1.5 | 4.0 | -5.6 | 1.3 | 2.4 |
| Unemployment rate | 3.8 | 3.7 | 4.8 | 4.5 | 3.9 |
| CPI growth | 2.7 | 2.2 | 1.3 | 2.5 | 2.4 |
| Annual wage growth | 2.8 | 3.5 | 2.4 | 2.1 | 3.6 |
| Current account surplus to GDP | 8.0 | 2.5 | 0.9 | 2.6 | 3.5 |
Source: Statistics Norway (SSB) Dec 11, 2020
4 Macroeconomic projections have been sourced from Statistics Norway as of December 11, 2020.
Future prospects of the Company
The Company has a portfolio of residential mortgage loans with an average loan to value (LTV) slightly above 50 per cent, and no loans are in default.
The maximum allowable level for a mortgage in a cover pool is 75 per cent LTV, with amounts above that level not being eligible as a cover pool asset. During the course of 2020, some mortgages within Boligkreditt’ s portfolio were granted a postponement of the loan principal repayment schedule for up to six months, but this had largely returned to normal by year-end (please see special topic article in this annual report).
SpareBank 1 Boligkreditt’s residential mortgage portfolio is well diversified, albeit weighted towards the eastern, central and northern regions in Norway (with little exposure in the southwest oil-dominated area of Norway). Mortgage loans in the cover pool are very granular (average size of 1.5 million kroner). The banks in the SpareBank 1 Alliance are required to keep reserves of eligible (i.e. cover pool pre-qualified) mortgages in order to provide replacement assets should this become necessary (i.e. if residential price declines increase LTVs above the eligibility limit for mortgages in the pool). Such reserves in the banks are tested regularly to verify that a 30 per cent decline in real estate prices leaves banks with sufficient qualifying reserves for replenishing the cover pool.
The Board of Directors views prospects for the Company to continue to be good and stable. This is based on several elements: a strict qualifying process for loans to become part of the cover pool (bank lending practices, mortgage regulations and cover pool qualification requirements), a high degree of diversification of the mortgages in the pool as well as the continued strength of the Norwegian economy despite the pandemic, including the strong financial resources available to the Norwegian state. The Board also bases this conclusion on the low average LTV of the mortgage portfolio, no defaults or loans in arrears and a strong history and institutional framework in Norway for loan performance.
SpareBank 1 Boligkreditt AS
The Board and the chief executive officer have today reviewed and approved the financial accounts for 2020 for SpareBank 1 Boligkreditt AS. The 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 31.12.2020.
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, February 9, 2021
The Board of Directors of SpareBank 1 Boligkreditt AS
