SpareBank 1 Boligkreditt (SpaBol or the Company) is a Norwegian specialized issuer of covered bonds. 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. SpaBol issues covered bonds based solely on Norwegian residential mortgage collateral1.
The uniqueness of SpaBol is that it is owned by the group of savings banks working closely together and organized under the SpareBank 1 Alliance and common brand. The Alliance consist of a group of banks, 14 at the beginning of 2022. These operate in different regions with a high degree of operational integration. The banks are together Norway’s second largest financial institution by lending, and SpaBol therefore an issuer of covered bonds of size and regularity.
The SpareBank 1 banks’ market share in Norwegian residential mortgages is shown in the chart below. The source for the data is the real estate valuation firm Eiendomsverdi, which plays an important role in the automatic valuation of residential structures for all lenders in Norway. The data is based on the number of residential mortgages, rather than each loan’s size. The data shows an increasing SpareBank 1 market share over time, and a strong increase in 2021. The latter is also influenced by additional constituent banks joining the SpareBank 1 Alliance in 2021, which is now the country’s largest lending group in the Norwegian residential mortgage market.
1Liquidity is also part of cover assets
Following on from the year of the pandemic outbreak, there were no longer any extraordinary measures in place from the Norwegian central bank in 2021 to accommodate access to funding for the country’s banks. A facility for obtaining 12 months central bank funding against collateral (covered bonds) expired towards year-end 2020. Market funding has been regular from the third quarter of 2020 onwards. Norway has 5.5 million inhabitants, but is nevertheless in 6th place regarding overall EUR covered bond benchmark bonds outstanding at year-end 2021, as the chart below shows:
Source: Unicredit research
The regular market funding of Norwegian banks play a crucial role in this, as does the high homeownership rate and thus higher mortgage volumes in Norway. Of the approximately EUR 51 bn of EUR covered benchmark bonds outstanding at year-end, SpaBol had placed approximately 29 per cent.
SpaBol bond issuances in EUR were 2.0 bn in 2021: a 1.0 bn EUR, 10-year covered bond in May 2021 and a 7-year in late October. No further green covered bond issuances followed in 2021, which should likely make for further such issuances in 2022 (green collateral takes time to build)
Domestically the covered bond bid was strong and spreads competitive, so SpaBol used the domestic market to a high degree during 2021. NOK 26.8 billion of covered bonds were placed (approximately equivalent to 2 ½ EUR 1 bn bonds), making SpaBol the largest issuer domestically. The issuance was spread evenly throughout the year. The domestic market is characterized by tapping existing series, with new series starting according to demand and are built to the LCR Level 1 size.
Chart 3: Residential real estate price index housing starts (in units):
All foreign currency issuance is fully hedged to NOK, and there is a policy in place to use only external swap counterparties with a minimum credit rating, as well as collateral requirements. This is cover pool positive for investors as it represents a sound and full mitigation of both market and counterparty risk. It also explains the presence of collateral assets (liquidity) and swaps on the Issuer’s balance sheet.
Green bonds were issued first in 2018 and again in 2020, and further green issuance will follow.
The EU green taxonomy as it relates to residential mortgages determines that EPC A labelled mortgages are green, or that alternatively the best 15 per cent of a residential market in terms of energy efficiency qualifies as green. For houses constructed from 2021, the Near Zero Energy (NZEB) building standard should apply, and green residential units must be 10 per cent better than required by that standard. SpaBol has been issuing green covered bonds under the top 15 per cent of energy efficiency approach since 2018 and will continue to deploy such mortgage collateral as the green part of the pool. The NZEB is not established yet in Norway and there are uncertainties with how 10 per cent better performance on energy efficiency can be calculated. SpaBol’s green bonds are verified and issued according to the Climate Bond Initiative’s criteria and assessment.
The tightening of the mortgage market regulatory framework, which took effect from January 2017, was seen as a key driver for the housing market approximate flat real price appreciation during the years 2017 - 2019. The regulatory conditions continue to apply and are regularly evaluated by the government, the next assessment is due in the autumn of 2022.
The mortgage lending rules for a bank are:
For a cover pool for covered bonds, the restriction of LTV is 75 per cent at the time of transfer. The Norwegian parliament is expected to legislate by July 8, 2022 to harmonize the covered bond legislation and regulations to the European regulations for covered bonds (the EU Covered Bonds Directive and changes in Article 129 of the CRR), and this is likely to mean that the LTV for a mortgage in a cover pool may increase to 80 percent, as is contained within the new EU regulatory context.
With the lowering of the policy rate to zero and corresponding decreases in the mortgage interest rates, house prices increased in 2020 and in 2021. The central bank started increasing its policy rate again in September 2021, and the rate now stands at 0.5 per cent after two increases. This change comes as the economy is growing strongly, there is again full or near-full employment (after unemployment rose at the outbreak of the pandemic) as well as inflationary pressures.
As a result of the run up in house prices as well as these interest rate increases, with expectations of further such increases, 2021 was a year of two halves in the Norwegian housing market. Overall, the national price index increased by 5.2 per cent, but the second half of 2021 represented a correction the previous 18 months. The charts below illustrate the latest development.
The chart below shows the result of dividing the house price index by an index of after-tax household income, as calculated by Statistics Norway (SSB) (including an estimate for 2020 and 2021 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. The high level came during the run up in prices post pandemic outbreak and has since corrected. Overall, the increase in the national index is driven by the residential market in the capital Oslo, but it’s likely that also new standards of the building code for construction of new residences play a role (revisions with higher energy efficiency standard in 2007, 2010 and 2017).
Source: SSB, Eiendomsverdi
Norwegian bank capital requirements have been adjusted through the pandemic and are increasing in 2022. The countercyclical buffer requirement was reduced to 1 per cent from 2.5 per cent after the pandemic outbreak in March 2020. At the end of 2020 however, the systemic buffer in Pilar 1 increased to 4.5 from 3 per cent. The countercyclical buffer becomes effective at the 1.5 per cent level at June 30, 2022.
SpaBol operates with a considerable buffer in its capital requirement, as illustrated above. Some of the excess capitalization illustrated represents Pillar 2 requirements (0.9 per cent of risk weighted assets) and a management buffer. Capital is important and provides flexibility also when calculating maximum exposure limits against swap counterparties, which are extensively used and part of every non-NOK covered bond issuance.
Boligkreditt calls on its owner banks for capital contributions as and when needed, and in connection with larger transfers of mortgages from the banks (mortgage loan growth). Capital ownership levels are reset minimum annually to reflect the relative shares of mortgages transferred by each one of the SpareBank 1 Alliance banks. 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 dividends.
There is a shareholder’s agreement in place between Boligkreditt and its SpareBank 1 owner banks, whereby the banks are required to maintain Boligkreditt’s equity capitalization at the regulatory requirement as a minimum. Specialized 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.
The cover pool metrics continue to exhibit a robust pool profile with an average weighted loan to value (LTV) in the cover pool of approximately 50 per cent as of December 31, 2021. LTV has been largely stable for the cover pool through the years.
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 2021.
Mortgage loans in the pool at over 75 per cent LTV (illustrated by the three columns to the right in Chart 6) means that some negative price migration has taken place since the transfer of such mortgages to the cover pool. The parts of these loans representing higher than 75 per cent LTV can not be counted as cover assets. 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. Each bank must have a certain minimum amount of mortgage reserves that are qualified and can be added to the cover pool if necessary.
According to the IFRS 9 rules for mortgage loans, expected cumulative modelled losses in the SpaBol mortgage pool at year-end 2021 are approximately 15 million kroner. This is a decrease from a year ago, and is small as a share of the mortgage volume financed (0.7 bps).
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 is 180 days coverage for upcoming redemptions (corresponding to the EU covered bond harmonized regulation). 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.
The mortgage volume that Boligkreditt funds is expected to increase in 2022. In addition to upcoming maturities, financed at least six months ahead of time, robust planned growth in transferred mortgages determines the funding frequency and volume. We issued a EUR 1.25 billion bond on January 13, 2022, and further issuance in EUR, and also in other currencies are expected during the year.
The SpaBol cover pool is very granular and geographically well diversified across the country, with originating banks distributed throughout the country. Credit quality of mortgages will remain strong, with very low expected modelled mortgage loan losses in the cover pool, but also very low levels of arrears and mortgage losses for the residential mortgages remaining on the SpareBank 1 banks’ balance sheets. Both post-pandemic robust economic growth and full or near-full employment support this.