Feeling Norway 1st Quarterly Report 2014

Statement of the board of directors

SpareBank 1 Boligkreditt AS – Statement of the Board of Directors

Key events during the first quarter of 2014

During the first quarter of 2014, SpareBank 1 Boligkreditt AS (the "Company") increased its capital by NOK 1 900 million in total, whereby NOK 300 million kroner was in the form of core Tier 1 equity (common equity) and NOK 1 600 million took the form of Tier 2 additional capital, a time limited subordinated loan. This increase was effected in order to meet the requirements for increased capital buffers which were introduced from July 1, 2013.  Beyond this capital increase the Company has placed smaller amounts in the debt capital market, mainly in order to refinance maturing senior unsecured debt.

For the quarter as a whole the total lending volume has changed only very moderately.

The Company has implemented new loan-to-value limitations during the first quarter of 2014 and mortgage loans which are acquired from SpareBank 1 banks may now have LTVs of up to 70% for amortizing loans and 60% for flexible loans. The new limitations represent a stricter lending standard compared to the current law pertaining to the Company's business, where the maximal LTV for residential mortgages is 75%.

Nature and development of the Company's business

SpareBank 1 Boligkreditt AS is a credit institution licensed by the Norwegian Financial Services Authority (Finanstilsynet) and is operated according to the legislation for covered bond issuers in Norway which is enshrined in the law regarding financial enterprises (“Finansieringsvirksomhetsloven”) chapter 2, section IV and the detailed regulations thereof.

The purpose of the Company is to provide funding for the owners by buying residential mortgage loans with a loan-to-value (“LTV”) of up to 75% and financing these primarily through the issuance of covered bonds. The Company which is based in Stavanger, is owned by banks which are members of the SpareBank 1 Alliance.  A comprehensive agreement is signed with each parent bank regarding the purchase and transfer of commercial mortgages and the services which the parent banks owe to the Company and the Company's customers in this regard ("Transfer and Servicing Agreement").

The Company’s issuances of covered bonds take place under the EUR 25,000,000,000 Global Medium Term Covered Note Programme (GMTCN Programme).  This Programme was updated on April 15, 2014 and is available on the homepage: spabol.sparebank1.no.

One or more credit ratings from international rating agencies are important in order to be able to issue covered bonds. The Company have procured the services of Moody’s Ratings Service and Fitch Ratings to evaluate the credit quality of the issuances under the GMTCN Programme.  The bond ratings are Aaa from Moody’s and AAA from Fitch.

Quarterly Accounts

The quarterly 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 at the end of the first quarter 2014.

The total balance sheet amounts to NOK 203 billion vs. NOK 206 billion at the end of the previous year. The Company had during the quarter net interest income of NOK 91 million, including commissions earned by the ownership banks and accrued as an expense to SpareBank 1 Boligkreditt. The cost of operations was NOK 9 million including amortisation and depreciation. No additional amounts have been charged as loan provisions (write offs) during the quarter, in addition to the NOK 8 million in cumulative group loan loss provisions as of 31.12.13. No actual loan losses have occurred. In total the quarter’s pre-tax result was NOK 54 million.

Lending to customers amounted to NOK 175 billion as of 31.03.2014, which corresponds to the level at year-end 2013. This development is in accordance with expectations. The cash and cash equivalents at 31.03.2014 amounted to NOK 12 billion.

During the quarter the shareholders’ equity increased by NOK 300 million through an ordinary share issuance. Total core Tier 1 equity amounted to NOK 8 111 million. In addition the Company has added 1 600 million Tier 2 additional capital through a maturing subordinated loan.  Total capital for Boligkreditt was NOK 9 550 million. The core Tier 1 equity capital ratio for the Company was 10.51% at quarter-end according to the current rules for determining core capital, while the total capital ratio was 12.37%.  The capital coverage was 12.5% from April 2, 2014 as a result of planned re-acquisition of residential mortgages from a parent bank.

Risk Aspects

SpareBank 1 Boligkreditt as an issuer of covered bonds is subject to strict rules regarding its exposure to credit, market, and liquidity risks. This fact and the aim of the maintenance of the AAA/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 do not have the ability or willingness to meet their obligations to SpareBank 1 Boligkreditt. The portfolio which consists of mortgages up to 75% LTV is the reason for why the Board of Directors assess the credit risk to be lower compared to other 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 quarter SpareBank 1 Boligkreditt AS had issued bonds for approximately NOK 89 billion (in EUR), approximately NOK 28 billion (in USD), approximately NOK 64 billion and 0.2 billion (in SEK) . The foreign currency bonds and NOK bonds with a fixed coupon are hedged by financial currency/and or interest rate swaps or through natural hedges, in order to convert the effective cash flow on this this debt to a NOK floating rate (3 months NIBOR).

SpareBank 1 Boligkreditt AS owns bonds and treasury bills at year-end for a total of NOK 5.9 billion and deposits in banks totalling NOK 10.6 billion, most of which is collateral received in derivative transactions. The bonds are mainly Nordic covered bonds with a triple-A rating from Fitch, Moody's or S&P.  Deposits  are placed in banks with a minimum rating of at least A/A2.  Consequently, the Company had as of 31.03.2014 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 be able to finance the purchase of loans at normal terms and conditions.

Liquidity risk is managed based upon a liquidity strategy approved by the Board. According to the strategy, SpareBank 1 Boligkreditt AS shall survive for a minimum of twelve months, also under stressed market conditions, without accessing external financing. In addition the Company shall at any point in time be able to meet its interest payments, including derivatives, which come due in the next three months under a scenario where no interest payments are received from the loan portfolio. The Company's liquidity situation is 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. Reputational, legal, ethical and competency risks are also elements of operational risk. The risk is considered to be moderate.

The Company is focused on identifying, measure and manage and follow up on central areas of risk in such a way that ensures that Boligkreditt achieves its strategic goals.  Please reference the annual report for more information on this.

Future Prospects of the Company

SpareBank 1 Boligkreditt's future prospects have not materially changed from the assessment presented in connection with the annual accounts for 2013. Because of the relative low difference in the cost of funding between the parent banks and the Company it may be that parent banks buy back mortgage loans in the future, which may result in a low or negative growth in the Company's balance sheet at times, but which otherwise is not expected to affect the Company's future prospects.

Macroeconomic development 1
According to preliminary seasonally-adjusted volume figures, Mainland Norway’s gross domestic product (GDP) was up 0.6 per cent from the 3rd to the 4th quarter last year and remains somewhat below trend.  Mainland GDP rose 2.0 per cent in 2013, down from 3.4 per cent in the previous year. A decrease in value added in petroleum activities and ocean transport resulted in an annual growth in total GDP of 0.6 per cent – weaker than GDP for mainland Norway.

Final consumption expenditures in both households and general government showed a slower growth in 2013 compared to the previous year. Gross fixed capital formation (GFCF) continued to increase strongly, in particular within oil-related activities by 18 per cent. Mainland GFCF had a more moderate annual growth rate of 4.7 per cent. Total exports of goods and services were reduced, while imports increased from 2012 to 2013.

Preliminary calculations show that Norway’s disposable income in real terms went down 0.8 per cent from 2012 to 2013. The reduction was due to lower production in the oil and natural gas extraction industry and a negative contribution from the terms-of-trade with the rest of the world, mainly a result from a lower oil price.  Improving terms-of-trade with the rest of the world has contributed positively to real income through several years.

Economic outlook 1:
The moderate growth in activity experienced last year is expected to continue for another few years. Loss of powerful growth impulses from petroleum investments will be replaced by a moderate increase in growth in other demand. Unemployment is expected to rise slightly, to almost 4 per cent in 2015.

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The Board of Directors affirms that the financial accounts present a correct and complete picture of the Company’s operations and financial position for the first quarter of 2014.

According to a previously existing plan some parent banks have repurchased a smaller part of their mortgage portfolio and as a consequence the total capital coverage was 12.50% from April 2, 2014. 

Stavanger March 31, 2014 / April 30, 2014


 SpareBank 1 Boligkreditt AS

- Statement of the members of the board and the chief executive officer

The Board and the chief executive officer have today reviewed and approved the financial accounts for the first quarter of 2014 for SpareBank 1 Boligkreditt AS.  The annual accounts have been prepared in accordance with the International 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 31.03.14.

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, 30. april 2014
Members of the board, SpareBank 1 Boligkreditt AS


Macroeconomic prospects and forecasts have been sourced from Statistics Norway.