Boligkreditt 1st Quarterly Report 2018

Statement of the board of directors

Cover pool and outstanding covered bonds 1

Boligkreditt’s cover pool consists of residential mortgages and liquid, highly rated assets (substitute assets) as well as derivatives hedging liabilities in a foreign currency and/or at fixed rates.  The chart below illustrates the balances recorded on the balance sheet as of March 31, 2018:

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 early (up to 12 months) with proceeds held as liquid assets (please see the investor reports for details on the composition of liquid assets).

1 The source for the chart is the balance sheet figures as of 31 March 2018

Key figures cover pool 2

Q4 2017 Q3 2017 Q2 2017 Q1 2017 Q4 2016
Weighted Average Current LTV (%) 52.4 % 51.0 % 49.2 % 49.7 % 51.1 %
Weighted Average Original LTV (%) 59.8 % 59.9 % 59.8 % 59.6 % 59.4 %
Average Loan Balance (NOK) 1,386,865 1,374,953 1,349,074 1,340,039 1,322,732
Number of Mortgages in Pool 127,927 127,895 128,475 130,920 131,743
Percentage of non first-lien mortgages 0,0 % 0.0 % 0.0 % 0.0 % 0.0 %
Overcollateralization 106,4 % 107.7 % 108.7 % 111.2 % 108.8 %

2 The Q1 2018 cover pool statistics report detail was not ready at the time of writing (no material change from Q4 2017 has taken place)

Key developments in Q1 2018

SpareBank 1 Boligkreditt (SpaBol) issued its inaugural green covered bond, backed by mortgages which finance energy efficient properties in the cover pool (for details, please see the annual report 2017 or the Green bond page on the Issuer’s website). The bond, with a 7 year maturity was priced at MS-6 bps and was well received in the market, especially amongst the green investor community.

SpaBol tapped the Norwegian market for total covered bond issuance of 3.25 billion kroner during the 1st quarter.

A follow-on fixed GBP covered bond took place at the beginning of the second quarter 2018, a £ 250 million, 5.75 year fixed rate transaction.  

The residential mortgage lending volume at SpaBol has increased moderately as expected by approximately 2 per cent during the first quarter 2018, as measured against the balance of loans as of December 31, 2017.

Boligkreditt is well capitalized with a capital coverage ratio of 16.61 per cent (Pillar 1) measured against a total capital requirement of 15.5 per cent, while the add-on required Pillar 2 requirement is set at 0.8 per cent core capital.  Total Tier 1 capital is 14.51 and core equity capital 12.96 per cent, the latter against a requirement for core capital (incl. Pillar 2) of 12.8 per cent. It is the Company’s policy to maintain a capital ratio at or slightly above the regulatory requirement. Additional core capital is injected by the owner banks when required, while additional CET 1 and Tier 2 capital is issued in the Norwegian domestic market.

SpareBank 1 Boligkreditt has a result of 26 million kroner after tax for the first quarter 2018.  With the introduction of IFRS 9 from January 1, 2018 basis swap valuation adjustments are now reported in comprehensive income only and will no longer distort the normal results.

The composition of the Board of Directors has been slightly altered at the beginning of this year, in that two persons have joined the Board (previously on the Board of SpareBank 1 Næringskreditt), and one person has left.  The Board of Boligkreditt is now identical to the Board of SpareBank 1 Næringskreditt, the Alliance’s other covered bond issuer based on commercial mortgages, with the exception that Næringskreditt has one more member. These changes are rooted in amended laws and regulations for Boards of financial companies.

Nature and development of the Company’s business

SpareBank 1 Boligkreditt AS is a credit institution licensed by the Norwegian Financial Supervisory Authority (Finanstilsynet) and is operated according to the legislation for covered bond issuers in Norway which is included in the law regarding financial enterprises (“Finansforetaksloven”) chapter 11, section II 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 per cent 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 of the banks in the SpareBank 1 Alliance which are selling mortgages to the Company regarding the purchasing process and the obligations which the banks owe the Company and its mortgage customers (“Transfer and Servicing Agreement”, “TSA”).  The Company’s operating model is to pay out to the parent banks who sell mortgages to the Company the margin earned during the course of the year (commissions to the parent banks).  These commissions are, similar to interest expense, deducted in the financial accounts to calculate net income. 

The Company’s issuances of covered bonds mainly take place under the EUR 25,000,000,000 Global Medium Term Covered Note Programme (GMTCN Programme).  This Programme was updated on June 6, 2017 and is available on the Company's home page:

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 to evaluate the credit quality of the issuances under the GMTCN Programme.  The covered bonds rating is Aaa from Moody’s.

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 as of the end of the first quarter 2018.  Numbers in brackets refer to the previous year same period for comparison.

The total balance sheet at quarter-end 2018 amounts to 253 (249) billion kroner. The Company had in the first quarter of 2018 net interest income of 84 (90) million kroner, which also include the commissions paid to the parent banks (nearly the whole net interest margin on mortgage loans). The cost of operations for the quarter was 8.3 (8.5) million kroner including depreciation and amortization. IFRS 9 expected losses were estimated in total to be 11 million kroner at the beginning of the year and there was a minor adjustment to this estimate during the fourth quarter. No actual loan losses have occurred since the Company commenced operations in 2007. This produces an operating result of 26 million kroner before tax (negative 169 due to the basis swap adjustments in 2017).

Mortgage loans for residential properties amounted to 181 (176) billion kroner as of 31.03.18.  The Company’s own liquid assets as of 31.03.18 were approximately 36 (26) billion kroner.  Liquid assets are cash and highly rated, highly liquid bonds which are held as a function of upcoming bond maturities up to 12 months ahead in time.

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 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 that customers and others do not have 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 conclude that the credit risk is lower than for 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 132 billion kroner in EUR, 17 billion kroner in USD, 5.5 billion in GBP and 0.3 billion kroner in Swedish kroner, at exchange rates at year-end. 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 borrowings in Norwegian kroner with floating rate conditions (NIBOR 3 months).  The Company receives collateral from its counterparties in derivative agreements according to certain criteria.

SpareBank 1 Boligkreditt AS owns deposits, bills and bonds at quarter-end for a total of NOK 55.6 (48.5) billion kroner, whereof 15.7 (22) billion kroner is collateral received from counterparties in derivatives transactions, and are thus reserved for the return of such collateral. The bonds held are mainly Nordic covered bonds and German supra sovereign and agencies (German 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 at least A/A2.

The Company had as of 31.03.2018 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 maintain a material liquidity reserve with a minimum size of covering all maturities within 6 months, and 50 per cent of all maturities between 6 and 12 months.  Additionally 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. SpareBank 1 Boligkreditt AS’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 assessed to be moderate.

The Company spends much time identifying, measuring, managing and following up central areas of risk in such a way that this contributes to meeting the strategic goals. The notes 21 to 25 in the 2017 annual accounts provides further information.

Future prospects of the Company

The Company has a portfolio of residential mortgage lending with an average loan to value (LTV) of approximately 50 per cent and no loans are in default. The maximum allowable level for a mortgage in a cover pool is 75 per cent LTV, with amounts above that level not being eligible as a cover pool asset.

Residential real estate prices in Norway, and especially in the capital of Oslo, have seen strong growth over 2015-16 and a correction in 2017. In the first three months of 2018 real estate prices have again appreciated slightly, each month. The main reasons for the 2017 correction (decline of 4.1 per cent nationally) may have been the tightening mortgage market regulations as well as significant building starts, especially in Oslo where prices increased the most over 2015-16 when demand was high.

SpareBank 1 Boligkreditt’s portfolio is well diversified throughout the major city regions in all of Norway, which do develop with a lesser degree of correlation from time to time. For example, the Oslo market was up over 20 per cent in 2016 compared to the national index which was up 12.5 per cent (including Oslo). In addition, mortgage loans in the cover pool are very granular (average size of 1.3 million kroner) and banks in the SpareBank 1 Alliance must keep reserves of eligible (cover pool qualified) mortgages in order to continue to add more mortgages to the cover pool and thus obtain covered bond funding. The reserves must be calibrated to cover a quick decline of 30 per cent in national real estate prices (all regions).

Due to the restrictions for loans to become part of the cover pool (bank lending practices, mortgage regulations and cover pool qualification requirements), high degree of diversification of the mortgages in the pool and the continued strength of the Norwegian economy, the prospects for the Company are continuing to be good and stable. The Board also base this conclusion on the low LTVs of the mortgages, no defaults or arrears, a strong history and institutional framework in Norway for loan performance, as well as the low unemployment environment.

Macroeconomic development 3:
The Norwegian mainland economy expanded by 1.8 per cent over 2017 and the forecast for 2018 is 2.4 per cent (Statistics Norway).  The recovery from the previous 2015-16 oil price related slow-down is relatively strong and broad. With the inflation estimated to meet the central bank’s target of 2 per cent in 2018, the central bank policy rate is expected to increase in 2018 from a record low of 0.5 per cent, where it has been since March of 2016.  A main driver for growth is increasing oil and gas related investments after oil prices have recovered significantly from the low in 2015-2016, and the industrial sector in Norway has restructured and taken out costs. Other industries contributing to growth is renewable (hydro and wind), pharma, aquaculture (fisheries).  Risks to the growth scenario are to be found in increasing interest rates and a potential krone strengthening, which could impact companies’ competitiveness in what is an open economy dependent and influenced by open markets and trade and terms of trade.  Likewise, an international trade conflict could impact Norway as well.

3 Macroeconomic projections have been sourced from Statistics Norway as of March 8, 2018.

Summarized the forecast for the next few years are as follows for a few key indicators:

Projections (%) 2016 2017 2018 2019 2020
Mainland GDP growth 1.0 1.8 2.4 2.3 2.3
Unemployment rate 4.7 4.2 3.9 3.7 3.7
CPI growth 3.6 1.8 2.0 1.6 1.8
Annual wage growth 1.7 2.3 2.9 3.5 3.7
Current account surplus to GDP 3.8 5.1 6.6 6.3 7.2

Source: Statistics Norway (SSB) March 8, 2018

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 as of the first quarter 2018. 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 for the first quarter 2018.

Stavanger, 25. April 2018

The Board of Directors of SpareBank 1 Boligkreditt AS



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 2018 for SpareBank 1 Boligkreditt AS.  The quarterly 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 31.03.18.

The board of directors and the chief executive officer declare to the best of their knowledge that the quarterly 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, 25. April 2018
The Board of Directors of SpareBank 1 Boligkreditt AS