1st Quarterly Report 2023
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SpareBank 1 Boligkreditt AS (‘Boligkreditt’, ‘SpaBol’, or ‘The Company’) is a specialized covered bond issuer. It is regulated as a credit institution and licensed by the Norwegian Financial Supervisory Authority (Finanstilsynet) and is operating according to the legislation for covered bonds in Norway1.
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 per cent and financing these through the issuance of covered bonds 2. The Company is an integrated part of the operations of its owner banks. When these banks transfer a portion of their residential mortgages to Boligkreditt for funding purposes, all customer relationship activities and aspects herein remain with the originating bank. The mortgages that may be transferred to the Company follow from a specific rule set.
The Company, which is based in Stavanger, Norway, is owned by banks throughout Norway and which are all members of the SpareBank 1 Alliance. The Company pays the net interest margin earned on mortgages to its owner banks, with deductions for its funding and operating costs. This margin is accounted for as commissions to the owner banks, which are contractually committed to maintain the Company’s equity capitalization at or above regulatory requirements.
The Company’s issuances of covered bonds mainly take place under the EUR 35 billion Global Medium Term Covered Note Programme (GMTCN Programme). This Programme was last updated on April 26, 2022 and is again at the end of April 2023 being updated. The programme is available on the Company’s home page: https://spabol.sparebank1.no.
Moody’s Ratings Service evaluate the credit quality of the issuances under the GMTCN Programme. The issued covered bonds are rated Aaa.
[1] The covered bond legislation in Norway is from July 2022 incorporates the Directive (EU) 2019/2162
[2] The limit for instalment mortgages is 75 per cent, while mortgages which have no scheduled repayment structure are limited to 60 per cent. There is a regulatory minimum amortization requirement of 2.5 per cent annually for new mortgages with a LTV at 60 per cent or above.
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 March 31, 2023. The balances are based on a nominal principle where bonds (covered bonds issued as well as bonds held within liquid assets) are presented at par. This means that derivatives hedging these instruments, tailored at the time of issuance to exactly transform a bond’s fixed annual coupon to a NOK 3-month floating rate basis over the whole tenor of a bond, are effectively incorporated within the nominal values of the bonds in the illustration.
[3] The source is the cover pool asset liability test for overcollateralization as of March 31, 2023 (note to the financial statements).
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 on spabol.no for details on the composition of liquid assets).
The table below provides an overview of the residential mortgages in the cover pool, as well as the overcollateralization.
| Q1 2023 | Q4 2022 | Q3 2022 | Q2 2022 | Q1 2022 | |
|---|---|---|---|---|---|
| Weighted Average Current LTV (%) | 51.9 % | 49.2 % | 48.3 % | 48.3 % | 50.0 % |
| Weighted Average Original LTV (%) | 60.1 % | 60.1 % | 60.2 % | 60.2 % | 60.1 % |
| Average Loan Balance (NOK) | 1,741,462 | 1,702,210 | 1,680,036 | 1,646,872 | 1,624,097 |
| Number of Mortgages in Pool | 151,075 | 148,328 | 145,739 | 144,086 | 141,872 |
| Pct. of non first-lien mortgages | 0.0 % | 0.0 % | 0.0 % | 0.0 % | 0.0 % |
| Overcollateralization | 5.3 % | 5.3 % | 5.3 % | 5.4 % | 5.6 % |
The domestic NOK covered bond market was receptive in 2023 and SpaBol has issued a total of NOK 13.65 billion, of which one series, or 9% of the total, was in fixed rate, and the remainder in FRN format. As a consequence, no EUR funding has taken place during the first quarter.
The Norwegian authorities presented the Near Zero Emissions Buildings Standard (NZEB) in early 2023. This definition is a requirement in the Energy Performance Buildings Directive 2010/31/EU and is a baseline for the green buildings definition under the EU Taxonomy, for buildings constructed after 2020. SpaBol is preparing an update to its green bond framework to incorporate the new definition.
A new Board member, Allan Troelsen, has replaced Knut Oscar Fleten. Mr. Troelsen is the CEO in SpareBank 1 Nordmøre. A presentation of the whole Boligkreditt board of directors can be see here: https://spabol.sparebank1.no/about
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 Q1 2023. Numbers in brackets refer to the corresponding period last year for comparison.
The total balance sheet as at March 31, 2023 amounted to 302 (267) billion kroner. The main reason behind this increase is the growth in the financed volume of mortgages of NOK 264 billion vs. NOK 231 billion a year earlier. The pre-tax result of 210 (negative 21) million is driven by the following[4]:
The Company had in the first quarter net interest income of NOK 424 (500) million, which includes both mortgage interest and interest income from liquid assets. The decrease, despite a higher volume of mortgages on the balance sheet, is mainly due to a reduced mortgage net lending margin. This happens because the 3-month NIBOR rate, which is the funding basis for covered bonds, has increased faster and by more than the variable mortgage rate. Effective from 2023, mortgage rate increases must by law be delayed by 8 weeks after announcement before becoming effective. All of the Company’s mortgages are at a variable rate, and Boligkreditt has the right to set and change the variable rate on its mortgage loans. However, for the interest rate decisions, Boligkreditt in practice defers to the SpareBank 1 banks which originated the loan. Banks set and change their variable mortgage rates in competition with other banks and are often guided by changes in the central bank policy rate when doing so. Commission expense to SpareBank 1 banks, which are the payments of most of the lending net interest margin to the Issuer’s loan originating owner banks, show a corresponding decrease.
The net gain from liquid assets (highly rated and liquid bonds) was 80 (negative 94) million in the first quarter, largely due to unrealized valuation gains in the Company’s issued bonds including swaps. The value of the Company’s net hedged liability side, which is the 3 month NIBOR pay side, changes in market value according to changes in the 3 month NIBOR rate curve since the last rate fixing of the various positions and the balance sheet date. Market credit spread changes impact the Company’s valuation of its liquidity portfolio (consisting of covered bonds, SSA and government bonds), which contributed moderately overall to the 80 million gain in the first quarter. The Company’s holding of liquid assets is rules driven, covering a minimum of 180 days of bond redemptions at any point in time.
The cost of operations for the first quarter 2023 was NOK 13 (10) million. The majority of operating costs are for expenses related to the Company’s bond issuances, IT operations as well as personnel related expense. Costs of operations were higher in the recent quarter after a pension related one-off expense.
IFRS 9 loan loss provisions decreased by NOK 2.3 million (increased by 1.4) to NOK 29.5 million. No actual loan losses have occurred.
[4] The quarterly results exclude interest paid on the Company’s AT1 bonds of NOK 900 million in total. This interest is accounted for as an equity distribution.
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% 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[5].
Market risk is defined as the risk of losses due to changes in market rates, ie. interest rates, exchange rates and the prices of financial instruments. SpareBank 1 Boligkreditt issues a materially larger share of covered bonds in currencies other than its operational currency NOK. However, all borrowing and investments in a foreign currency, as well as such with a fixed rate, have been hedged by financial currency- and/or interest rate swap agreements. Some natural hedging may occur with EUR assets matching EUR liabilities. The collective cash flow therefore matches borrowing in Norwegian kroner with floating rate conditions (NIBOR 3 months). The Company receives cash collateral from its counterparties in derivative agreements.
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. These bonds are held on a 3-month basis either as FRNs or as swapped fixed rate bonds. 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 2023 only moderate interest rate risk, and small 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 liquidity reserve with a minimum size equal to or more than all debt maturities within the next 6 months. 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 2022 annual accounts provide further information.
[5] The EU harmonized covered bond regulations, implemented in Norway, allow for LTV of up to 80 per cent. For mortgages in the cover pool. The Company has chosen to continue with a 75 per cent LTV maximum.
There is an expectation of lower, but not negative, GDP growth in 2023 and 2024. Private consumption is seen as vulnerable after interest rate increases and higher inflation, including higher energy prices. Household real income growth was negative in 2022 and is expected to be zero in 2023, although the uncertainty around this is high. Business investment’s main driving is the oil and gas sector, but also renewable energy. Unemployment is expected a little higher in 2023 on average compared to 2022.
Norway’s current account surplus to GDP as an energy exporter is particularly high, at over 30 per cent in 2022 and a projected 17 per cent in 2023. Oil and gas investments are expected to increase significantly from 2023 onwards, due to the increased demand from Europe. However, uncertainties remain with regards to future energy prices.
Housing investment (construction) has over some years delivered negative GDP contributions and is expected negative also in 2023 on higher interest rates. The variable mortgage interest rate, which most mortgage holders pay, is expected around 5 per cent later in 2023. The housing market price index appreciated by 5.8 per cent in the first quarter of 2023, but stands at -0,2% on a last twelve month basis at the end of March 2023. A low single digit contraction is expected for 2023, but within a broader range of possible outcomes. The price index for used property may respond to population growth and very low levels of new constructions. Mortgage lending regulations where relaxed somewhat from January 2023. An interest stress test currently requires banks to add 3 per centage points to the offered rate to test the mortgage loan applicant’s repayment ability (reduced from 5 per cent). This would enable borrowing which would have been rejected at the previous higher stress level.
Summarized for a few macroeconomic indicators, the recent data and forecast for the next period are as follows:
| Recent data and forecast (per cent) | 2020 | 2021 | 2022 | 2023 | 2024 |
|---|---|---|---|---|---|
| Mainland GDP growth | -2.8 | 4.2 | 3.8 | 1.3 | 1.6 |
| Private consumption growth | -6.2 | 4.4 | 6.8 | 1.2 | 1.5 |
| Investments growth | -4.1 | -0.8 | 4.4 | 1.8 | 1.9 |
| Unemployment rate | 4.7 | 4.4 | 3.2 | 3.6 | 3.8 |
| CPI growth | 1.3 | 3.5 | 5.8 | 5.0 | 2.3 |
| Annual wage growth | 3.1 | 3.5 | 4.4 | 5.0 | 4.5 |
| Current account surplus to GDP | 1.1 | 13.6 | 30.4 | 16.6 | 16.8 |
Source: Statistics Norway (SSB) March 19, 2023
[6] Macroeconomic projections have been sourced from Statistics Norway as of March 19, 2023.
The Company has a portfolio of residential mortgage loans with an average loan to value (LTV) around 50 per cent, and no loans are in default.
SpareBank 1 Boligkreditt’s residential mortgage portfolio is well diversified, albeit weighted towards the eastern, central, and northern regions in Norway. Mortgage loans in the cover pool are very granular (average size of 1.7 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 broad and general 30 per cent decline in real estate prices leaves each member bank with sufficient qualifying reserves for replenishing the cover pool.
The Board of Directors views Boligkreditt as well capitalized with a capital coverage ratio of 20.3 per cent against a total requirement, including all buffers, of 17.3 per cent (Pillar 1) plus 0.9 per cent (Pillar 2) for a total of 18.2 per cent. Total equity Tier 1 capital is 18.2 per cent against a requirement, including buffers, of 16.2 per cent (incl- Pillar 2).
It is the Company’s policy to maintain capital ratios slightly above the regulatory requirements (a management buffer). 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, despite the changed macroeconomic forecasts towards lower growth and more uncertainty ahead. This is based on several elements: a strict qualifying process for loans to become part of the cover pool (bank lending practices, mortgage lending regulations and cover pool qualification requirements), a high degree of diversification and granularity of the mortgages in the pool, as well as the robustness of the Norwegian economy, 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 mortgage 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 2023. The financial accounts including notes are produced under the assumption of a going concern.
Stavanger, May 3, 2023
The Board of Directors of SpareBank 1 Boligkreditt AS
/s/ Bengt Olsen
Chair
/s/ Geir-Egil Bolstad
/s/ Trond Søraas
/s/ Steinar Enge
/s/ Heidi C. Aas Larsen
/s/ Merete N Kristiansen
/s/ Allan Troelsen
The Board and the chief executive officer have today reviewed and approved the financial accounts as of March 31, 2023 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 March 31, 2023.
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, May 3, 2023
/s/ Bengt Olsen
Chair
/s/ Geir-Egil Bolstad
/s/ Trond Søraas
/s/ Heidi C. Aas Larsen
/s/ Merete N Kristiansen
/s/ Allan Troelsen
/s/ Steinar Enge
/s/ Arve Austestad
Managing Director
SpareBank 1 Boligkreditt is a labelled covered bond issuer. Details of the label and information on SpareBank 1 outstanding covered bonds are available on the European Covered Bond Council (ECBC) covered bond label webpage:
www.coveredbondlabel.com