Boligkreditt 1st Quarterly Report 2019
Statement of the board of directors
SpareBank 1 Boligkreditt’s purpose
SpareBank 1 Boligkreditt AS (‘Boligkreditt’, ‘SpaBol’, or ‘The Company’) 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 owner banks (banks in the SpareBank 1 Alliance) by buying residential mortgage loans with a loan-to-value (“LTV”) of up to 75 and financing these primarily through the issuance of covered bonds1.
The Company, which is based in Stavanger, is owned by banks which are 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”, “TSA”). The Company pays out nearly the full interest margin earned to the banks. This margin is accounted for as commissions due to owner banks and is included in the interest expense line of the Company’s financial statements with additional detail in the notes.
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 April 10, 2019 and is available on the Company’s home page: https://spabol.sparebank1.no.
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.
1 The limit for instalment mortgages are 75 per cent, while mortgages which have no scheduled repayment structure are limited to 60 per cent (these are a smaller portion of the mortgage portfolio). All mortgages above 60 per cent must be amortizing by at least 2.5 per cent per year according to current mortgage market regulations.
Cover pool and outstanding covered bonds 2
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 the end of the first quarter 2019:
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 with proceeds held as liquid assets (please see the investor reports for details on the composition of liquid assets). Derivatives are used solely to hedge currency and interest rate risk. The table below describes the mortgages in the cover pool:
2 The source is the balance sheet figures as of 31 March 2019 and the cover pool asset liability test for overcollateralization (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 bonds that they hedge. This is reflected in the chart and figures above.
Key figures cover pool 3
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 with proceeds held as liquid assets (please see the investor reports for details on the composition of liquid assets). Derivatives are used solely to hedge currency and interest rate risk. The table below describes the mortgages in the cover pool:
| Q4 2018 | Q3 2018 | Q2 2018 | Q1 2018 | Q4 2017 | |
|---|---|---|---|---|---|
| Weighted Average Current LTV (%) | 52.7 % | 51.7 % | 51.3 % | 52.4 % | 52.4 % |
| Weighted Average Original LTV (%) | 59.6 % | 59.8 % | 59.8 % | 59.9 % | 59.8 % |
| Average Loan Balance (NOK) | 1,422,929 | 1,414,203 | 1,414,916 | 1,400,686 | 1,386,865 |
| Number of Mortgages in Pool | 129,209 | 129,791 | 129,057 | 129,173 | 127,927 |
| Percentage of non first-lien mortgages | 0.0 % | 0.0 % | 0.0 % | 0.0 % | 0.0 % |
| Overcollateralization | 6.5 % | 6.5 % | 6.7 % | 6.7 % | 6.4 % |
3 Key figures for 31.3.19 were not fully available at the time of writing, but there are no material changes in these figures over the last quarter
Key developments in Q1 2019
SpaBol issued a EUR 1,25 billion, 10 year covered bond in late January and repaid the same amount in a maturing EUR benchmark transaction in February.
The residential mortgage lending volume at SpaBol has increased by approximately 2.2 per cent during the first quarter, as measured against the balance of loans as of December 31, 2018. The current mortgage balance is 188.2 billion kroner (equivalent to approximately EUR 20 billion).
There has been a personnel change in the Board of Directors, effective May 1, 2019. The new CFO of SpareBank 1 Nord-Norge is an incoming director, replacing Rolf-Eigil Bygdnes who is retiring from the same role in the northern Alliance bank.
The Board of Directors views Boligkreditt as well capitalized with a capital coverage ratio of 16.6 per cent. The capital requirement is 15.5 per cent (Pillar 1), in addition to the Pillar 2 requirement of 0.8 per cent common equity. Total Tier 1 capital is 14.7 per cent and common equity capital 13.2 per cent, the latter against a requirement for common equity capital (incl. Pillar 2) of 12.8 per cent. It is the Company’s policy to maintain capital ratios slightly above the regulatory requirements. Additional common equity is injected by the owner banks when required, usually in connection with increases in transferred mortgage volume, while Additional Tier 1 and Tier 2 capital is issued in the Norwegian domestic market when a need arises.
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 2019. Numbers in brackets refer to the corresponding period last year for comparison.
The total balance sheet at 31.03.19 amounted to 224 (242) billion kroner. The balance sheet decreased primarily due to reduction of the liquidity portfolio. The Company had in the first quarter 2019 net interest income of 102 (84) million kroner, which also includes the deduction of commissions (almost the entire net interest margin on mortgages) paid to the owner banks. The cost of operations for the first quarter 2019 was 8.2 (8.3) million kroner including depreciation and amortization. IFRS 9 expected losses increased by 2.2 million to 14.8 million. No actual loan losses have occurred since the Company commenced operations in 2007. This produces an operating result of 107 (35) million kroner before tax. The improvement comes mainly as the required liquid assets are less in volume and performed well during the quarter.
Mortgage loans for residential properties amounted to 188 (181) billion kroner as of the first quarter 2019. The Company’s own liquid assets were approximately 18 (36) billion kroner.
Liquid assets are cash and highly rated, highly liquid bonds which are held as a function of refinancing early the Company’s upcoming bond maturities up to six months ahead in time, or to comply with the Net Stable Funding Ratio, as proposed. Liquid assets have been reduced during 2018 due to the proposed 180 day liquidity rule in the EU covered bond harmonization directive and by the inclusion of a lower than 100 per cent weighting assigned to mortgages when calculating their required long-term financing need. The minimum liquidity portfolio is managed to whichever of these measures requires the greatest amount.
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 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 year SpareBank 1 Boligkreditt AS had issued bonds for approximately 127 billion kroner in EUR, 10.7 billion kroner in USD, 8.5 billion kroner in GBP and 0.3 billion kroner in Swedish kroner, at exchange rates at the end of March 2019. 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.
The bonds held in the Company’s liquidity portfolio 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. Cash is also placed in reverse repos with approved counterparty banks, with AAA rated securities as collateral.
The Company had as of 31.03.2019 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 of Directors. 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 or to comply with the NSFR requirement as proposed, whichever is higher. The Board of Directors view 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 central areas of risk in such a way that this contributes to meeting the strategic goals. The notes 23 to 27 in the 2018 annual accounts provides further information.
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<h2 class="pgbreak" id="macroeconomic-development-and-outlook">Macroeconomic development and outlook<sup>4</sup></h2>
The Norwegian mainland economy expanded by 2.2 per cent over 2018 and in 2019 a moderate increase is expected to 2.4 per cent. The economic cycle is in a moderate but broad growth phase, with increases across industries. The oil sector investments are expected to provide a clear growth contribution for the economy in 2019, then remain flat. Investments in housing, mainland industries and the public sector are expected to remain moderate, meaning total investments in mainland Norway, excluding offshore oil and gas extraction is expected at approximately 2 per cent. in 2019. The central bank’s policy rate was increased to 1 per cent in March and the forecast from Norges Bank expresses continued increases in the rate. International growth and rates movements casts some doubt on the central bank’s expectations. Despite some strengthening during the first quarter 2019, the Norwegian currency is relatively weak in a historic context, and this continues to be beneficial to a small and open economy.
The housing market displayed relative stability over 2018. Overall, the real estate price index increased slightly less than general consumer price inflation for the year. The micro-prudential regulations of the mortgage market, which were last tightened in January 2017 and renewed in June 2018, have had a desired effect, targeting a balancing of supply and demand. Real estate prices thus far in 2019 have increased moderately.
Summarized the forecast for the next few years are as follows for a few key macroeconomic indicators:
| Forecast (%) | 2017 | 2018 | 2019 | 2020 | 2021 |
|---|---|---|---|---|---|
| Mainland GDP growth | 2,0 | 2,0 | 2,7 | 2,4 | 2,3 |
| Unemployment rate | 4,2 | 3,9 | 3,8 | 3,7 | 3,7 |
| CPI growth | 1,8 | 2,7 | 1,8 | 2,3 | 1,7 |
| Annual wage growth | 2,3 | 2,8 | 3,2 | 3,3 | 3,5 |
| Current account surplus to GDP | 5,7 | 8,1 | 8,4 | 8,1 | 9,7 |
Source: Statistics Norway (SSB) March 5, 2019
Future prospects of the Company
The Company has a portfolio of residential mortgage lending with an average loan to value (LTV) slightly above 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.
SpareBank 1 Boligkreditt’s portfolio is well diversified throughout the major city regions in Norway. In addition, mortgage loans in the cover pool are very granular (average size of 1.4 million kroner). The banks in the SpareBank 1 Alliance must keep reserves of eligible (i.e. cover pool 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. Reserves in the banks are robust, making the covered bond funding function in SpareBank 1 resilient to downward shifts in real estate prices.
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 of Directors 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.
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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 the first quarter of 2019. The financial accounts including notes are produced under the assumption of a going concern.
There have been no incidents of a material nature after quarter-end which are expected to impact the accounts for the first quarter 2019.
Stavanger, 2. May 2019
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 2019 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 31.03.19.
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, 2. May 2019
The Board of Directors of SpareBank 1 Boligkreditt AS
