Boligkreditt 1st Quarterly Report 2021

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 Financial Institutions Act (“Finansforetaksloven”) chapter 11, section II and the detailed regulations thereof.

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 1.

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.

The Company’s issuances of covered bonds mainly take place under the EUR 35,000,000,000 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: Moody’s Ratings Service evaluates the credit quality of the issuances under the GMTCN Programme. The covered bonds are rated Aaa.

The limit for instalment mortgages is 75 percent, while mortgages which have no scheduled repayment structure are limited to 60 percent. There is a regulatory minimum amortization requirement of 2.5 percent annually for new mortgages with a LTV at 60 percent or above.

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 2021:

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.

The source is the cover pool asset liability test for overcollateralization as of March 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 table below provides an overview of the residential mortgages in the cover pool, as well as the overcollateralization.

Residential mortgages key figures 3


  Q4 2020 Q3 2020 Q2 2020 Q1 2020 Q4 2019
Weighted Average Current LTV (%) 51.4 % 51.8 % 52.6 % 53.2 % 53.6 %
Weighted Average Original LTV (%) 59.7 % 59.3 % 59.4 % 59.3 % 59.7 %
Average Loan Balance (NOK) 1,507,205 1,488,367 1,470,921 1,456,844 1,443,119
Number of Mortgages in Pool 138,298 138,275 137,427 136,884 132,358
Pct. of non first-lien mortgages 0,0 % 0,0 % 0,0 % 0,0 % 0,0 %
Overcollateralization 4.4 % 4.3 % 7.2 % 4.2 % 4.1 %

The latest cover pool data was not available at the time of writing. There are no material changes to the data during Q1 2021.

Key developments in the first quarter 2021

The covered bond markets have been receptive during the quarter, with less supply from many jurisdictions.

However, there is no extraordinary central bank financial support in Norway, which means covered bond market funding is sought by banks, as is usual. SpareBank 1 Boligkreditt has issued 11 billion kroner in floating rate covered bonds (including 3 billion kroner in the month of April), and another 1 billion kroner in fixed rate covered bonds during the first quarter 2021. No other funding markets were utilized during the period.

The residential mortgage lending volume which SpaBol finances continue to increase, but at a more moderate pace compared to last year. During the first quarter 2021, residential mortgages increased by NOK 2.4 billion kroner or 1.1%.

Moody’s requirement for overcollateralization remains 2.5 percent. Boligkreditt’s cover pool overcollateralization at March 31, 2020 was 4.5 percent 4. The Norwegian government is working in 2021 on implementing the EU’s harmonization directive in covered bonds, as well as changes to Article 129 in CRR (Capital Requirement Regulation). This is expected to mean that the required regulatory overcollateralization increases to 5 percent from 2 percent.

This is calculated according to the Norwegian regulation with derivatives hedging issued covered bonds included as a cover pool asset. Mathematically a different (higher) percentage emerges when netting derivatives with the issued debt they hedge, such as is calculated elsewhere (Moody’s).

Quarterly accounts

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 the first quarter 2021. Numbers in brackets refer to the corresponding period last year for comparison.

The total balance sheet at 31.03.21 amounted to 255 (282) billion kroner. The balance sheet decreased primarily due to a decrease in the value of financial derivatives (and associated collateral), which is due that older debt matured and the NOK has strengthened. The Company had in Q1 2021 net interest income of 573 (480) million kroner. Commissions paid to the owner banks were 500 (358) million and represent most of the margin between mortgage interest rates and the Company’s funding costs. The cost of operations for Q1 2021 was 10 (10) million kroner including depreciation and amortization. IFRS 9 expected loan losses decreased by 12 (increased by 9) million to 18 (21) million. No realized loan losses have occurred. This produces an operating result of 31.4 (-181.3) million kroner before tax, with the prior year’s negative number determined by unrealized bond losses during the pandemic outbreak. The operating result includes scheduled payments to Additional Tier 1 bondholders, which are classified as distribution to equity capital.

Mortgage loans for residential properties amounted to 211 (200) billion kroner as of the end of 2020. The Company’s own liquid assets were approximately 20 (20) billion kroner.

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. Liquid assets are managed to meet the 180 day minimum liquidity rule in the EU covered bond harmonization directive, and the Net Stable Financing Rule (NSFR) rule.

Risk aspects

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.

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 percent 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 first quarter SpareBank 1 Boligkreditt had issued bonds for approximately 129 billion kroner in EUR, 8.9 billion kroner in GBP and 8.6 billion kroner in Swedish kroner, based on exchange rates at March 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 March 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 2020 annual accounts provide further information.

Macroeconomic development and outlook 5

With the outbreak of the pandemic, Norway saw a recession in 2020, like most other countries.

The downturn in GDP, which was estimated to be more severe earlier in 2020, was reported at 2.5 percent. Looking ahead, it is private consumption that will provide a boost to growth once the pandemic ends, while aggregate investment will return to growth, but is expected to be slower to pick up, i.e. in 2022. Investment within the still important oil and gas sector is seen as continuing to shrink through 2022.

New housing investment has delivered negative contributions to growth during 2018 through 2020, which is seen to turn positive in 2021. The housing market, with a high activity level in 2020 (the number of transactions taking place) as well as relatively strong price appreciation, is likely influenced by the current low mortgage interest rates. Norway’s central bank issued a projection in March which included an interest rate increase expectation in the fourth quarter of 2021, which if it takes place, may cool down the housing market.

Both the unemployment rate and trade contributions to GDP in 2020 show the effects of the pandemic. Unemployment increased in the travel and services sectors, and is expected to remain, even through 2022, at above 4 percent, which is higher than before the pandemic.

Summarized 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 2.3 -2.5 3.3 3.6
Private consumption growth 1.6 1.4 -7.6 6.9 6.9
Mainland investments growth 1.5 4.0 -3.9 0.2 2.3
Unemployment rate 3.8 3.7 4.6 4.5 4.2
CPI growth 2.7 2.2 1.3 2.7 1.8
Annual wage growth 2.8 3.5 3.1 2.6 3.1
Current account surplus to GDP 8.0 2.8 1.9 8.7 10.2

Source: Statistics Norway (SSB) March 12, 2021

5 Macroeconomic projections have been sourced from Statistics Norway as of March 12, 2021.

Future prospects of the Company

The Company has a portfolio of residential mortgage loans with an average loan to value (LTV) slightly above 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. There is no material volume of mortgages in the Company’s portfolio that has been granted a covid-related repayment postponement.

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 banks with sufficient qualifying reserves for replenishing the cover pool.

The Board of Directors views Boligkreditt as well capitalized with a capital coverage ratio of 23.5 percent against 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 to 1 percent in March 2020, and remains at that reduced level as of March 31, 2021.

Total equity Tier 1 capital is 20.9 percent against a requirement, including buffers, of 14.9 percent. Common equity capital was 19.3 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. 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 practices, 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 during the pandemic and future outlook, including the strong financial resources available to the Norwegian state. 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 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 the first quarter 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 for the first quarter of 2021.

Stavanger, April 28, 2021
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 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 31.03.2021.

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 Company.

Stavanger, April 28, 2021
The Board of Directors of SpareBank 1 Boligkreditt AS