Annual report 2021
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SpareBank 1 Boligkreditt AS (‘Boligkreditt’, ‘SpaBol’, or ‘The Company’) is a specialized covered bond issuer. It is regulated as a credit institution and licensed by the Norwegian Financial Supervisory Authority (Finanstilsynet) and is operated according to the legislation for covered bonds in Norway1.
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 percent and financing these through the issuance of covered bonds 2.
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, which are obligated to maintain the Company’s equity capitalization above regulatory requirements.
The Company’s issuances of covered bonds mainly take place under the EUR 35 billion Global Medium Term Covered Note Programme (GMTCN Programme). This Programme was updated on April 20, 2021 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 covered bond legislation is included in the Financial Institutions Act (“Finansforetaksloven”) chapter 11, section II and the detailed regulations thereof.
[2] 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.
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 December 31, 2021:
[3] The source is the cover pool asset liability test for overcollateralization as of Dec. 31, 2021 (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.
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. Counterparties post collateral to Boligkreditt for its swap exposures, and this is included as a liability and an asset, amongst liquid assets, on the balance sheet.
The table below provides an overview of the residential mortgages in the cover pool, as well as the overcollateralization.
| Key Figures | Q4 2021 | Q3 2021 | Q2 2021 | Q1 2021 | Q4 2020 |
|---|---|---|---|---|---|
| Weighted Average Current LTV (%) | 51.0 % | 48.3 % | 49.2 % | 51.2 % | 51.4 % |
| Weighted Average Original LTV (%) | 59.9 % | 59.9 % | 59.9 % | 59.8 % | 59.7 % |
| Average Loan Balance (NOK) | 1,593,078 | 1,564,121 | 1,539,309 | 1,521,007 | 1,507,205 |
| Number of Mortgages in Pool | 139,495 | 138,755 | 137,453 | 138,595 | 138,298 |
| Pct. of non first-lien mortgages | 0.0 % | 0.0 % | 0.0 % | 0.0 % | 0.0 % |
| Overcollateralization | 5.7 % | 6.0 % | 5.7 % | 4.5 % | 4.4 % |
[4] Overcollateralization in the table is calculated inclusive of LCR amounts within the cover pool.
A record amount of NOK 26.8 billion was issued in 2021, with a larger amount in the 4th quarter, taking advantage of cost-effective and receptive markets in domestic denominated covered bonds. There was no pandemic related extraordinary central bank financial support in Norway during the year, apart from a low policy interest rate, leading to normal market issuance volumes. SpaBol also issued EUR 2 bn in two transactions, in May and late October. This pattern in the EUR market is normal, though the relatively high volume of NOK issuance replaced issuance in other currencies during the year.
The residential mortgage lending volume which SpaBol finances grew by 6.8 percent during 2021. The financed mortgage volume stands at NOK 223 billion at the end of the year. This follows 9.3 percent growth of financed mortgage volume during 2020, when the growth was larger due to the pandemic’s initial impact on capital markets and lower market interest rates and higher mortgage demand.
The Norwegian government is implementing the EU’s harmonization directive for covered bonds, as well as changes to Article 129 in CRR (Capital Requirement Regulation). This is expected to take place by the deadline in July 2022, and will probably cause that the required regulatory overcollateralization in the cover pool increases to 5 percent from 2 percent. These and other changes in the covered bond legal framework, due to the EU harmonization, are not expected to represent any difficulty for the Company.
The SpareBank 1 Alliance expanded with one bank – SpareBank 1 Helgeland - joining and rebranding to The Alliance in 2021. There was also Alliance growth through consolidation with SpareBank 1 Nordvest merging with Surnadal Sparebank in 2021 (from outside the Alliance), and rebranding to SpareBank 1 Nordmøre. Finally, internal SpareBank 1 consolidation created another larger shareholder in SpareBank Boligkreditt when three existing SpareBank 1 banks merged and SpareBank 1 Sørøst Norge was formed.
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 2021. Numbers in brackets refer to the corresponding period last year for comparison.
The total balance sheet at 31.12.21 amounted to 258 (271) billion kroner. While the financed volume of mortgages continued to increase (NOK 223 billion vs. 209 billion on December 31 the prior year), the balance sheet decreased primarily due to a reduced value of financial derivatives (swaps) and also associated collateral received from counterparties, due to a stronger NOK exchange rate against EUR, and repayment of maturing debt and expiration of related older swaps.
The Company had in 2021 net interest income of 2,344 (2,139) million kroner. The increase is due to a higher volume of financed mortgages and a higher margin compared to the same period last year when variable mortgage interest rates reduced quickly due to the pandemic. Commission expenses, which are amounts paid to Boligkreditt’s owner banks, were 2,098 (1,770) million. These amounts represent most of the margin between mortgage interest rates and the Company’s funding costs.
The cost of operations for 2021 was 39 (41) million kroner. The majority of operating costs are for expenses related to the Company’s bond issuances, IT operations as well as personnel related expenses.
IFRS 9 expected loan losses decreased by 15 (increased by 18) million to 15 (30) million. No actual loan losses have occurred. This produces an operating result of 131.5 (168.4) million kroner before tax. The operating result includes scheduled payments to Additional Tier 1 bondholders, which are classified as distribution to equity capital.
The result after tax is NOK 98.6 million and 25.1 million, after tax, was distributed to additional Tier 1 bondholders. The remainder, 73.4 million is proposed to be paid out to common shareholders, which is 0.94 NOK per share. A small residual amount is added to other equity.
The Company’s own liquid assets were approximately 24 (24) billion kroner as of the end of the fourth quarter. The volume of Boligkreditt’s liquid assets is rules driven. Liquid assets are cash and highly rated, highly liquid bonds being held as a function of refinancing early the Company’s upcoming bond maturities at least six months ahead of expected maturities. The volume of liquid assets is, at a minimum, managed to meet the 180-day minimum liquidity rule in the EU covered bond harmonization direct
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 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 fourth quarter SpareBank 1 Boligkreditt had issued bonds for approximately 137 billion kroner in EUR, 9 billion kroner in GBP and 8.6 billion kroner in Swedish kroner, based on exchange rates on December 31, 2021. 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, 2021 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 2021 annual accounts provide further information.
SpareBank 1 Boligkreditt had seven direct employees as of 31.12.2021, of which six are male and one female. The Company 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 and further operational activities.
The Company has moved into new offices in early 2020, which are energy efficient with a BREEAM-NOR certification of very good. The EPC label is B, while energy use is 85 kWh/m2 and running Co2 emissions are 12.9 kg Co2/m2. About half of the employees walk and cycle to work. The company provides no car parking spaces. Working from home has been smooth and efficient during the pandemic. There has been zero percent employee absence recorded in 2021 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.
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 at year-end 2021.
SpareBank 1 Boligkreditt’s principles for corporate governance are based on the Norwegian accounting law and regulations and the Norwegian practice for corporate governance. 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 has insurance in place for professional responsibility for the board of director and its employees, as well as insurance coverage regarding cyber related claims (hacking, ransom etc.) and for losses due to criminal acts towards the company. All insurance policies are held jointly within the SpareBank 1 Alliance.
The Company publishes its Corporate Governance policies in a document available on the Company’s website www.spabol.no.
The Company’s shareholders are solely banks in the SpareBank 1 Alliance (or banks owned by these banks) which have sold and transferred mortgages to the Company. The shareholder’s agreement includes a clause that the Shareholders must maintain a minimum equity capitalization of Boligkreditt consistent with minimum regulatory requirements. In case of a rights issue, the shareholders are obliged to subscribe shares according to its current share of the shareholdings. 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 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 owner 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:
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 owner 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 percent 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.
With the outbreak of the pandemic, Norway saw a recession in 2020, like most other countries, with GDP contracting 2.3 percent (recently revised up from -2.5 percent). The GDP recovery in 2021 (recently upgraded to 4.1 percent from 3.6 percent), is led by a return of private consumption, and also government expenditure, while investments are now not expected to contribute more materially until 2022. High European energy prices, in particular for natural gas, have brought back a high current account surplus, as projected for 2021 and 2022 (and lately revised upwards).
Housing investment has delivered negative GDP contributions from 2018 through 2020 but is seen to be turning clearly positive in 2021 and 2022. The reason for that can be found in the housing market, where there has been a high level of transactions and relatively low levels of inventory. Furthermore prices are 5.2 percent higher over 2021, after 8.7 percent growth in 2020. However, the level of new construction is now relatively high compared to the population change, which has reduced, and may imply that investment growth will be less ahead. Market mortgages rates have lately increased from record low levels, following two increases in the central bank’s monetary policy rate in 2021. This will probably keep the residential real estate price development moderate. The trend during the second half of 2021 has been lower prices for residential property.
Unemployment in 2021 is a little elevated because the figures represent average levels for the year, while the forecast for 2022 was recently reduced to 3.7 percent (annual averaged) from 4.4 percent. The labour market is strong, though new Omicron related corona restrictions in December 2021 did move the unemployment rate marginally higher, but this is expected to revert with easing of restrictions. Mortgage market risks are not expected to materialise from the labour market situation going into 2022.
Summarised 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 | 2.0 | -2.3 | 4.1 | 4.1 |
| Private consumption growth | 1.6 | 1.1 | -6.6 | 4.2 | 8.5 |
| Mainland investments growth | 1.5 | 6.3 | -3.6 | 0.8 | 4.6 |
| Unemployment rate | 3.8 | 3.7 | 4.6 | 4.6 | 3.7 |
| CPI growth | 2.7 | 2.2 | 1.3 | 3.4 | 2.6 |
| Annual wage growth | 2.8 | 3.5 | 3.1 | 3.3 | 3.3 |
| Current account surplus to GDP | 8.0 | 2.9 | 2.0 | 12.3 | 13.5 |
[5] Macroeconomic projections have been sourced from Statistics Norway as of December 3, 2021.
The Company has a portfolio of residential mortgage loans with an average loan to value (LTV) around 50 percent, and no loans are in default. The maximum allowable level for a mortgage in a cover pool is 75 percent LTV, with amounts above that level not being eligible as a cover pool asset.
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-industry 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 percent decline in real estate prices leaves each member bank with sufficient qualifying reserves for replenishing the cover pool.
The Board of Directors views Boligkreditt as well capitalised with a capital coverage ratio of 23.7 percentagainst a total requirement, including all buffers, of 16.0 percent(Pillar 1) plus 0.9 percent(Pillar 2). The countercyclical buffer capital requirement was lowered from 2.5 to 1 percentin March 2020, but will increase to 1.5 percentas of June 30, 2022.
Total equity Tier 1 capital is 21.2 percentagainst a requirement, including buffers, of 14.9 percent. Common equity capital was 19.6 percent against a requirement, including all buffers, of 13.4 percent. It is the Company’s policy to maintain capital ratios slightly above the regulatory requirements (a management buffer). 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
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 practises, mortgage regulations and cover pool qualification requirements), a high degree of diversification of the mortgages in the pool, as well as the robustness of the Norwegian economy, both during the pandemic and the future outlook, including the strong financial resources available to the Norwegian state to support the economy at large. 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 mortgage loan performance.
* * *
The Board of Directors affirms its conviction that the financial accounts present a correct and complete picture of the Company’s operations and financial position at the end of 2021. The financial accounts including notes are produced under the assumption of a going concern.
There have been no incidents of a material nature after year-end which are expected to impact the accounts as of December 31, 2021.
Stavanger, February 11, 2022
The Board of Directors of SpareBank 1 Boligkreditt AS
/s/
/s/ Bengt Olsen
Chair
/s/ Geir-Egil Bolstad
/s/ Heidi C. Aas Larsen
/s/ Merete N Kristiansen
/s/ Knut Oscar Fleten
The Board and the chief executive officer have today reviewed and approved the financial accounts as of December 31, 2021 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 December 31, 2021.
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 Compan
Stavanger, February 11, 2022
The Board of Directors of SpareBank 1 Boligkreditt AS
/s/
/s/ Bengt Olsen
Chair
/s/ Geir-Egil Bolstad
/s/ Heidi C. Aas Larsen
/s/ Merete N Kristiansen
/s/ Knut Oscar Fleten
/s/ Arve Austestad
Managing Director
SpareBank 1 Boligkreditt is a labelled covered bond issuer. Details of the label and information on SpareBank 1 outstanding covered bonds are available on the European Covered Bond Council (ECBC) covered bond label webpage:
www.coveredbondlabel.com