Boligkreditt

SpareBank 1 Boligkreditt

The Company was set up in 2005 and issued an inaugural EUR denominated covered bond, once the covered bond legislation was passed by parliament in 2007. The uniqueness of SpaBol is that it is owned by the savings banks working closely together in the SpareBank 1 Alliance. The Alliance is Norway’s second largest financial institution by lending, and SpaBol therefore an issuer of covered bonds of size and regularity. The Norwegian market share in residential mortgages of the SpareBank 1 Alliance banks is rendered in the chart below, and has according to the real estate valuation firm Eiendomsverdi increased slighty over the years.

Chart 1: Relative market share SpareBank 1 Alliance banks in the aggregate

Source: Eiendomsverdi

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Issuances in 2020

 

As part of the Norwegian central bank’s measures to ensure the smooth functioning of domestic financial markets, a 12-month facility was set up whereby banks could deposit collateral, including covered bonds, in order to obtain central bank funding. With the uncertainty that the pandemic represented in the spring, the central bank facility was important for sentiment. SpaBol arranged a short designated covered bond for its owner banks, which they could use with Norges Bank, but less than 1/3 of this series was actually utilized. This modest use was also reflected in the overall banking landscape.

However, the regular domestic covered bond market was in good shape. Pandemic induced spreads were slightly higher than in March, but on April 7, 2020 SpaBol issued a new NOK five-year FRN at NOK 1 bn, which was in subsequent April days increased by nearly NOK 5 billion. In early June, an inaugural SEK 7.5 bn benchmark green covered bond was issued, later increased to SEK 8.5 bn. With this issuance, the funding plan for the first half of the year was covered and the EUR return would wait until the 3rd quarter.

The September EUR 1 bn green covered bond was welcomed by investors, who placed orders for nearly EUR 2.6 bn. Banks took 54%, Asset Managers around 31% while a few insurers and mostly official institutions ended up with 15%. Norway not being part of the Eurozone, the ECB does not participate in SpaBol bonds as part of its APP, yet individual central banks placing their reserves has always been a relevant part of the investor community for SpaBol. Across countries, there was good diversification.

During the 4th quarter, another NOK 5.1 bn was placed in the domestic covered bond market. NOK issued bonds find a natural buyer base across the Scandinavian countries. Also, in the fourth quarter, holders of the £500 million, November 2022 SpaBol covered bond were approached with a solicitation to replace LIBOR with the new SONIA reference rate. In January 2021, investors approved this during the first bondholders meeting.

Outstanding bonds for SpareBank 1 Boligkreditt shows the importance of the EUR market, which will continue to have a key role

Chart 2: Relative share of outstanding SpareBank 1 Boligkreditt covered bonds, by currency:

All foreign currency issuance is fully hedged to NOK, and there is a policy in place to use only external counterparties with a minimum credit rating, as well as collateral requirements. This is cover pool positive for investors as it represent a sound and full mitigation of both market and counterparty risk. The USD covered bond segment has been phased out since SpaBol placed more than USD 6 bn between the years of 2010 and 2013. This is partly related to special Volcker rule topics in the U.S. but also partly to the non-development of a domestic U.S. covered bond market.

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Green bonds

Demand seems to be strong for a green covered bond, though that should ideally be calibrated or adjusted against the general market sentiment at the time of issuance. There might be, similarly, an estimate of a slight pricing advantage to the Issuer for a green bond, but not more than one or perhaps two basis points in the covered bond market in 2020.

The EU commission has proposed details for its green Taxonomy in late 2020, according to which an EPC label of A must be in place for acquired real estate in order for a related financing to fit an EU green bond programme. For buildings built from 2021 and onwards, the EU requirement for green is the NZEB definition, which is to be developed in each country, but with a 20 per cent better degree of energy efficiency than such regulation. The EU green proposals for building construction and acquisition are strict, and, if adapted, may lead to that SpaBol and other Norwegian issuers may be unable to comply with them for many years. The EU would like there to be renovation of existing properties, which, if a 30 per cent energy efficiency improvement is achieved, can be added to the EU green labelled stock of an Issuer. There may be more possibilities for issuers like SpaBol to work alongside this renovation axis, though questions and considerations remain.

SpareBank 1 Boligkreditt’s green bonds have been issued under a green bond framework, which is essentially unchanged since late 2017 (first issuance was January 2018). The framework’s definition of green means that residential dwellings must be among the best 15 per cent of energy efficient houses in the country. This Climate Bond Initiative definition has been established for Norway, and other issuers have followed SpaBol’s lead on this topic. Issuers are offering impact calculations of this methodology, which show energy and related Co2 savings. These calculations demonstrate a significant reduction compared to the average housing stock in the country. However, they do not go beyond the requirement that the country’s building code places upon construction of a new residences. However, as the number of new houses (which have better degree of energy efficiency) increase, the best 15 per cent limit remains constant. That means that buildings built some years ago, which initially was also considered green, will drop out of the green universe. In this way the green definition is dynamic and moves with the market requirements, which are tightening.

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Regulations in the Norwegian mortgage market

The mortgage lending rules for a bank 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 exempted (8 pct in Oslo)

For a cover pool for covered bonds, the restriction of LTV is 75 per cent at the time of transfer. Norwegian authorities are in the process of making effective the harmonized European regulations for covered bonds (the EU Covered Bonds Directive and changes in Article 129 of the CRR), and this may mean that the LTV for a mortgage in covered pool may increase to 80 percent, as is contained within the new EU regulatory context.

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The Norwegian residential real estate market

Consumer inflation was 3.2 and 1.8 for 2018 and 2019, respectively. This means that in real terms housing was approximately flat for two years, as measured on a national scale (there are regional differences). With the onset of the pandemic, the central bank policy rate was lowered to zero per cent for the first time in history, and variable mortgage rates followed suit, nearly halving, to average around 1.8 per cent. This probably had an effect on real estate, and prices nationally rose 8.7 per cent in 2020 (lead by the capital city, Oslo)

Chart 3: Residential real estate price index for Norway

Chart 3: Residential real estate price index housing starts (in units):

The chart below show the result of taking the Norwegian houseprice index and divide it by the index of after-tax household income, as calculated by Statistics Norway (SSB) (including an estimate for 2019 and 2020 pertaining to income). This view of real house prices illustrate that residential real estate became materially less expensive in Norway during and after the financial crisis (2008 and 2009) as house prices fell, but incomes continued to grow. However, real house prices are 12 to 13 per cent higher in 2020 than they were in 2007. The increase could show the effect of lower interest rates in the latter years compared to the beginning of the period, but perhaps also the increasing standards of the building code for construction of new residences.

Chart 4: National house price index adjusted for after-tax household income (Index, Jan. 2007=100)

Source: SSB, Eiendomsverdi

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Capital requirements

The countercyclical buffer requirement was reduced to 1 per cent from a previous level of 2.5 per cent after the pandemic hit in March. This reduction was part of the government’s package to counter the negative economic effects of the virus. On the other hand, The Finance Ministry decided in 2019 that systemic buffer was going to increase to 4.5 per cent, from 3 per cent, at the end of 2020. This means overall that the Pillar 1 requirements at the end of 2020 are unchanged compared to a year previously. At the same time, the Norwegian Finance Ministry indicated a desire to adjust the countercyclical buffer during 2021, and possible back to its pre-pandemic level, meaning an increase in overall capitalization requirements in 2021. icularly with regards to the starting point for the covered bond rating, which is derived from the owner banks’ issuer ratings. Covered bond issuers in Norway are not subject to MREL requirements and have to meet a Leverage Ratio of 3 per cent, rather than 5 per cent for banks in general.

Chart 5: Capital requirements and SpaBol actual capitalization level (Pillar and 2)

Boligkreditt calls on its owner banks for capital contributions as and when needed, and especially in connection with larger transfers of mortgages from the banks (mortgage loan growth). During the year, Boligkreditt pays out commissions to its owner banks, which is most of its net interest margin. Surpluses at the end of a year are paid out as regular dividends.

There is also formal Shareholders agreement in place between Boligkreditt and its owner banks, whereby the banks are required to maintain Boligkreditt’s equity capitalization at the regulatory requirement as a minimum. This agreement is not deployed in operating practice, as capital is added by the banks regularly, but it is of formal importance, particularly with regards to the credit rating link (i.e. starting point for the covered bond rating) between Boligkreditt and its owner banks. Covered bond issuers in Norway are not subject to MREL requirements and have to meet a Leverage Ratio of 3 per cent, rather than 5 per cent for banks in general.

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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. The chart below shows the mortgage loans in the cover pool by LTV interval at year-end 2019.

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 realized credit loss 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. Mortgage loans in the pool at over 75 per cent 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 per cent LTV may not be counted as cover assets.

According to the IFRS 9 rules for mortgage loans, expected cumulative losses in the SpaBol mortgage pool at year-end 2020 are approximately 30 million kroner. This is an increase from a year ago, but remains a small portion (1.4 bps) of the portfolio.

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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. Repos and reverse repos are also tools deployed for liquidity. The minimum level of liquid assets (a SpaBol board approved rule in place) is minimum 180 days of coverage for upcoming redemptions (which are the expected maturities for soft bullet bonds). The actual level of liquid assets may also be higher than the minimum, depending mainly on the timing of new bond issuances. A complete list of liquid assets is presented in every quarterly cover pool reporting on the SpaBol website (www.spabol.no). There are requirements for the rating of bonds held in the portfolio (Aaa/AAA), issuer requirements, and concentrations limits in internal policies, and more broadly in the Norwegian covered bond law. Internal policies also dictate that near term outflows are covered by cash, deposits or zero risk weighted assets only.

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Outlook 2021

The mortgage volume that Boligkreditt funds is expected to increase 2021. In addition to upcoming maturities, financed at least six months ahead of time, growth in transferred mortgages determine the funding volume. Boligkreditt will return to the benchmark EUR market in 2021 with likely two benchmarks. With the LIBOR to SONIA conversion for the existing November 2022 maturity in pound sterling approved by investors, this market may become relevant in 2021 as could the SEK market continue to be.

The growth in mortgage volume seen in 2020 provides the expectation for growth in 2021, though probably at a lesser rate. The pandemic interest rate cuts probably impacted the residential real estate market in 2020, which grew. With more robust Norwegian economic growth, as is projected in 2021, interest will eventually increase, probably calming house price increases compared to the 2020 development.

The SpaBol cover pool is geographically well diversified across the country, with originating banks distributed throughout the country. Credit quality of mortgages, which is strong with low expected and realised losses in the banks, will continue to be high. Both robust economic growth post the pandemic and a low and expected lower unemployment rate support this.

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Contact information

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