Annual report 2022

Management's statement

SpareBank 1 Boligkreditt

SpareBank 1 Boligkreditt (SpaBol, the Company or Issuer) 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, 13 at the beginning of 2022. These operate in different regions of Norway with a high degree of operational integration. The banks are together Norway’s second largest financial institution by lending, and SpaBol is 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 chart is based on the number of residential mortgages, rather than NOK volume and shows an increasing SpareBank 1 market share over time. The Alliance is now the country’s largest lending group in the Norwegian residential mortgage market. 

1Liquidity is also part of cover assets

Source: Eiendomsverdi


50 years ago there were 473 savings banks in Norway, and at the end of 2022 there were 91 according to the savings banks association.  That figure will be down to 90 in early 2023 with an announced merger between two SpareBank 1 banks to take place.  The SpareBank 1 Alliance member banks, which in 2007 numbered 23 banks, will be 12 later in the year as things stand in early 2023.  The line below charts this development, which also includes 4 banks which have joined and been merged into Alliance banks from outside, as well as one small bank which left (because it was merged with a savings bank outside the Alliance). SpareBank 1 Boligkreditt has been operating throughout this period in the chart, issuing a growing amount of covered bonds in several currencies from an Alliance consolidated cover pool.

The Alliance, which was founded in 1996, benefitted each member bank’s independence and regional anchoring.  The close cooperation provided the banks with increased competitiveness, profitability, and solidity, as each bank was able to harness economies of scale and competency advantages through the Alliance.  This work mainly took place through two jointly owned entities. The Alliance Group, which establish, consolidate, and run non-lending financial product companies, is one of the largest providers of such products in Norway. The Alliance Development Company coordinates and drive joint processes and project work, driving economies of scale for all member banks.  

After the financial crisis in 2007-2008, increasing regulatory requirements and the need for increased digitalization, are two well-known factors influencing bank consolidation in many countries, and also among smaller banks in Norway.  A bank’s size drives costs efficiency, also on the lending side.  That is the background for the consolidation trend within the Alliance charted above, as well as within the broader landscape of savings banks in Norway.

Covered Bonds outstanding

Covered bonds are an important funding instrument for Norwegian banks.  Norway has approximately 5.5 million inhabitants, but is nevertheless in 5th place regarding overall EUR covered bond benchmark bonds outstanding. The countries with the largest shares of outstanding EUR denominated covered bonds, with  mortgage collateral in the cover pool at year-end 2022 is shown in the following chart:

Source: The Covered Bond Report, January 2023

SpaBol EUR denominated bonds represent 28% of the total Norwegian outstanding volume in the chart, and the Issuer is the largest Norwegian EUR issuer.   SpaBol issued EUR 3.25 bn during 2022, over three public benchmark bonds which were placed in  January, May and August. 

Domestically the covered bond bid was strong and spreads competitive, so SpaBol used the domestic market to a high degree during 2022.   In addition to the EUR issuances, NOK 37 billion of covered bonds were placed during 2022 (approximately 3.7 bn EUR equivalent).  This issuance was spread evenly throughout the year.  The domestic market is characterized by tapping existing series, with new series starting according to demand, which are then built to above LCR Level 1 size.   

All foreign currency issuance is fully hedged to NOK, and swap counterparties are always external banks with a certain credit rating. Swaps are subject to collateral requirements in accordance with Moodys’ criteria for such covered bond swaps. 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 and swap valuation positions on the Issuer’s balance sheet.   

Green bonds

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 applies, and green residential units must be 10 per cent better than required by that benchmark.  The NZEB standard was just established by the Norwegian government at the end of January 2023, and SpaBol is working with its advisors to establish how green mortgages are now identified for building years from 2021.   It is likely that revised green criteria for residential mortgages will be updated in the Green Bond Framework later in 2023, and it is also likely that these will then be:

i.  Buildings built ≥2021 : NZEB-10% 
    a. Selection criteria: all EPC A labels ; some EPC B labels (with delivered energy ≤X kWh/m2) 
ii.    Buildings built <2021 : Buildings within the top 15% low carbon buildings in Norway 
    a. Selection criteria: Buildings complying with TEK10 & TEK17 building codes (built ≥2012)

Regulations in the Norwegian mortgage market

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 same regulatory conditions continued to apply throughout 2022, but were then changed to allowing for less interest rate stress.  Since market mortgage rates had already increased from low levels, the stress-test add on to the offered mortgage rate for a would-be borrower was reduced to 3 per centage points from 2023, from 5 percentage points previously.   

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).
    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 3 per cent increase in the offered mortgage rate.
  • Flexibility: 10 per cent of each lender’s mortgage lending contracts per quarter may be exempted (8 pct in Oslo)

The Norwegian parliament legislated, and regulations were in place in Norway, by the July 8, 2022 deadline, to harmonize the covered bond legislation and regulations to the EU Covered Bonds Directive and changes in Article 129 of the CRR, in order to issue European Covered Bonds (Premium).  The regulatory changes from an operational point of view were not material for SpaBol.  The highlights of som specific decisions within the new framework are now: 

  • •    The loan to value limit for residential mortgages to be transferred to the cover pool was increased to 80 per cent from 75 per cent, but SpaBol remains at the 75 per cent limit.
  • The over collateralization requirement increased to 5 per cent, a level which was already in place.
  • The 180 days minimum liquidity requirement for the cover pool is at SpaBol calibrated on the expected maturity of a covered bond (which are all soft-bullet according to objective triggers).  This means that actual liquidity is held onbalance sheet ahead of upcoming maturities2.

2 This will be different in the regulatorily permissible case when an issuer decides to calibrate it’s cover pool liquidity requirement on extended covered bond maturities, when there is no need for the issuer to hold actual liquidity in the normal course of business.

The Norwegian residential real estate market

Interest rates are increasing in Norway as well, due to inflationary pressures.  The central bank policy rate has increased from zero during the pandemic to 2.75 per cent as of February 2023, with some further increase expected.   

As a result of the run up in house prices during the pandemic years with low interest rates, this development was followed by a contraction in house prices in the second half of 2022.  The charts below illustrate the latest development, which includes a negative reading for the last twelve months from January 2022 through January 2023.  The month of January is usually a positive month, and January 2023 was no different, though seasonally adjusted a flat month.  The outlook is now uncertain, but with what seems like a majority of views tending towards a further price contraction of some percentage points for the year (with year over year CPI reading of 7 per cent from January 2022 through January 2023). 

Source: Eiendomsverdi

Source: Eiendomsverdi

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 2022 pertaining to income). This presentation of real house prices illustrates that residential real estate has become more expensive in Norway, by approximately 20 per cent, now compared to January 2010. In 2016, after a strong run up in the Oslo market (following interest rate contractions), national real indexed prices increased, and with a further increase during the corona pandemic, which has since corrected.  Overall, the increase in the national index is driven by the residential market in the capital Oslo, but it is 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

Capital requirements

The mortgage rate depicted as an index is the market average rate for mortgages, which at year-end 2022 is back up to the level last experienced in 2014. This is potentially what might be weighing on the real estate market, and might bring a further correction in 2023.  

The total requirement is 16.8 per cent as shown in the illustration with all buffers. In addition, the Issuer has a 0.9 per centage points Pillar 2 requirement, and operates with a management buffer above this.   Adding all together, the operational requirement is 18.1 per cent against a capital ratio of 22.7 per cent as of year-end 2022. 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). The SpareBank 1 owner banks are required to always maintain minimum regulatory capitalization requirements at Boligkreditt (part of the Shareholders Agreement). Ownership levels are reset 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.

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. 

Cover Pool

The cover pool consist of residential mortgage loans which had a maximum 75 per cent loan to value at the time of transfer to the pool, as well as liquid, highly rated assets covering the 180 day minimum requirement in the covered bond regulation. Mortgages continue to exhibit a robust profile with an average weighted loan to value of approximately 50 per cent as of December 31, 2022. 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 2022.

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 cannot 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.  The mortgage portfolio is regularly stress tested for potential sharp house price declines, which provides comfort with regard to the valuation reserves.  Each owner bank must have also maintain a minimum amount of mortgage reserves that are pool pre-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 2022 are approximately 32 million kroner.  This is an increase from a year ago, mostly due to a more negative macro outlook, but represents a small amount as a share of the mortgage volume financed (1.2 bps). 

Outlook 2023

The mortgage volume that Boligkreditt funds has increased strongly over the last few years, but this growth is expected to abate in 2023.  The reasons for this are both MREL issuing requirements in SpaBol’s owner banks, potentially more attractive senior preferred terms in the capital market, and lower growth of mortgage production.  The latter comes as a consequence of higher interest rates and a possible further correction in the housing market this year.  The combination has already slowed new construction and purchases, and it is therefore likely that the market for used residences also will slow down during the year.  Nevertheless, cover pool mortgage growth will be positive in 2023 as well, albeit at a lower level compared to during 2021 and 2022.  Covered bond issuance will continue at largely a normal annual pace, to finance both growth and bond redemptions.  Two new EUR benchmark covered bonds are highly probable (or minimum EUR 2 billion), alongside a volume of NOK covered bonds. The SpaBol cover pool is very granular and geographically well diversified across the country, and the selection of mortgages for the pool follows strict criteria agreed between all the Alliance banks.  Credit quality of mortgages will therefore likely remain strong.  GDP growth is unlikely to be negative in Norway for 2023, predominantly due to investments in the energy sector and trade surpluses relating to energy.  Because of higher interest rates combined with reduced growth, as well as an uptick in unemployment already registered at the beginning in 2023, we will continue to model a modest level of loan losses in the IFRS 9 model. These are unlikely to lead to any realised losses.