Feeling Norway 2nd Quarterly Report 2014

Statement of the board of directors

Cover pool and outstanding covered bonds:

Key Figures Overview

Q2 2014 Q1 2014 Q4 2013 Q3 2013
Weighted Average Current LTV (%) 51.6 % 52.2 % 51.7 % 50.0 %
Weighted Average Original LTV (%) 57.2 % 57.3 % 57.0 % 57.9 %
Average Loan Balance (NOK) 1,200,321 1,213,532 1,206,278 1,187,811
Number of Mortgages in Pool 132,344 138,664 138,359 136,613
Percentage of non first-lien mortgages in the pool 0.0 % 0.0 % 0.0 % 0.0 %
Overcollateralisation 113.4 % 112.5 % 110.9 % 111.0 %

Key Events During the Second Quarter

For the first six months of 2014 lending to customers (mortgage loans) has been reduced by just over NOK 15 bn to NOK 159 bn gross from NOK 175 bn at the beginning of the current year. The primary reason for this is the expiration of the Norwegian Government Swap Facility in June 2014 which was called into life in late 2008 in order to provide funding for banks against deposits of covered bonds with the Norwegian Central Bank amidst challenging international funding conditions at the time. With the termination of the Swap Facility, Boligkreditt's parent banks have taken advantage of existing market conditions and are financing a slightly larger share of residential mortgages on their own balance sheet rather than through Boligkreditt.  Additionally, the parent banks' overall lending growth has slowed somewhat to 4 to 5% on average.

Covered bonds outstanding has consequently been reduced to NOK 151 bn (including the value of hedging instruments) as of June 30, 2014 from NOK 165 bn at the end of 2013 (combined for cover pool 1 and 2[1]).

SpareBank 1 Boligkreditt AS (the "Company") continued to increase its capital base in the second quarter of 2014 by issuing a NOK 350 mill perpetual subordinated bond which is classified as additional Tier 1 capital. The issuance comes as a step in the process of increasing capital in accordance with new capital requirements including additional buffer capital. The capital base as of June 30, 2014 in Boligkreditt is now just above NOK 10 bn, and consist of the following relative components[2]:

[1] With the termination of the Norwegian Government Swap Facility, cover pool 2 is also terminated

[2] NOK 10 bn is prior to deductions for modelled expected losses and immaterial assets (see note 18 in the accounts).  

Capital base SpareBank 1 Boligkreditt June 30, 2014:

The total capital coverage is now 14.28% against a current requirement of 13.5% (including buffer requirements), with the Tier 1 and core Tier 1 capital coverage 12.17% and 11.67%, respectively.

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.  An agreement is signed with each parent bank regarding the purchase and transfer of residential 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: https://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. 

Accounts for the Period

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 200 billion vs. NOK 206 billion at the end of 2013. The Company had during the first six months net interest income of NOK 162 million compared to 121 million for the first six months 2013, including commissions earned by the ownership banks and accrued as an expense to SpareBank 1 Boligkreditt. The cost of operations for the first six months was NOK 15 million including amortisation and depreciation compared to 15 million for the same period last year. No additional amounts have been charged as loan provisions (write offs) during the first half of 2014, 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 half year's’ pre-tax result was NOK 89 million compared to 96 million for the same period in 2013 (the change is mostly attributable to the value of hedging derivatives).

Lending to customers amounted to NOK 159 billion as of 30.06.2014, which is NOK 7.5 bn below the level one year ago. This development is in accordance with expectations. The cash and cash equivalents at 30.06.2014 amounted to NOK 13 billion.

During the 2nd quarter SpareBank 1 Boligkreditt issued a NOK 350 million additional Tier 1 capital instrument, bringing the core capital ratio at the end of the second quarter to 12.17% (14.28% total capital coverage). 

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 bonds outstanding (excluding private placements) of EUR 9.85 bn, USD 4.75 bn, NOK 42.9 bn and SEK 0.2 billion. All borrowing and investments with a fixed coupon and all borrowing and investments denominated in foreign currency 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).  The Company receives collateral under the derivatives contracts from its counterparties subject to certain thresholds.

SpareBank 1 Boligkreditt AS owns bonds and treasury bills at June 30, 2014 for a total of NOK 2 billion and deposits in banks totalling NOK 11 billion. 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 30.06.2014 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 in a scenario where no interest payments would be 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 operational breakdowns. Reputational, legal, ethical and competency risks are also elements of operational risk. This risk is considered to be moderate.

The Company is focused on identifying, measure and manage and follow up on central areas of risk which contributes to that Boligkreditt achieves its strategic goals.  Please reference the annual report 2013 for more information on this.

Future Prospects of the Company

SpareBank 1 Boligkreditt's future prospects are good.  Residential real estate prices, which were slightly down for 2013, increased by 5.9% in the first six months of 2014 and are thus 1.1% above the level from one year ago. Unemployment remains low at a stable level. Lending growth for residential purposes in the SpareBank 1 banks is positive, but has reduced from previous years. We have experienced in the second quarter a decrease in the volume of mortgage loans as described above, as some parent banks have used their good liquidity position to repatriate residential mortgages.  For the remainder of 2014 we expect a relative flat growth rate for our mortgage volume.  The parent banks and Boligkreditt have reduced customer interest rates slightly with effect in the 2nd quarter 2014 and in Boligkreditt's portfolio the margin has consequently decreased, but remains at a high level.

Macroeconomic development
According to preliminary seasonally-adjusted volume figures, Mainland Norway’s gross domestic product (GDP) was up 0.5 per cent from the 4th quarter last year to the 1st quarter this year. This is still below trend growth.  Household final consumption expenditures rose 0.8 per cent in the 1st quarter this year, up from 0.4 per cent growth in the 4th quarter last year. The gross fixed capital formation (GFCF) in mainland Norway was down 1.9 per cent in the 1st quarter. Investments in both manufacturing and services decreased, while an increase was seen in electricity supply. Investments in residential dwellings continued to fall, and dropped 3.6 per cent in the 1st quarter. GFCF in petroleum-related activities increased 2.4 per cent from the 4th to the 1st quarter, after a record high growth of 17.1% in the year 2013.

Economic outlook:
Over the last 18 months, the Norwegian economy has experienced a moderate economic downturn, and the relatively modest GDP growth is expected to continue well into 2015. Unemployment has been fairly stable so far this year, but is expected to increase somewhat going forward.  

The petroleum sector is not expected to continue to give strong growth impulses to the Norwegian economy, instead it is envisaged that demand will level out and fall slightly. Slightly higher growth in demand from the mainland and a gradual increase in global growth will, however, contribute more to the activity level.

Forecast (%) 2014 2015 2016 2017
GDP growth mainland 2 2 3 3
Unemployment rate 4 4 4 4
CPI growth 2 2 2 2
Annual wages 4 4 4 4

The Board of Directors affirms that the financial accounts present a correct and complete picture of the Company’s operations and financial position as of June 30, 2014. No events have occurred after June 30, 2014 which are expected to have a material impact on the accounts for the first six months of 2014.

Stavanger June 30, 2014 / August 07, 2014

The Board of Directors of 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 six months of 2014 for SpareBank 1 Boligkreditt AS.  The 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 30.06.14.

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 June 30, 2014 / August 07, 2014

The Board of Directors of SpareBank 1 Boligkreditt AS