Boligkreditt 2nd Quarterly Report 2015

Statement of the board of directors


Cover pool and outstanding covered bonds 1

1 The cover pool consists of residential mortgages and liquid, highly rated assets (substitute assets). Covered bonds are shown inclusive of the market value of the derivatives deployed to hedge currencies and interest rates. 

Key figures

  Q2 2015 Q1 2015 Q4 2014 Q3 2014 Q2 2014
Weighted Average Current LTV (%) 49.2 % 50.5 % 51.1 % 51.2 % 51.6 %
Weighted Average Original LTV (%) 58.2 % 57.3 % 57.3 % 57.4 % 57.2 %
Average Loan Balance (NOK) 1,201,505 1,199,658 1,194,160 1,193,893 1,200,321
Number of Mortgages in Pool 133,422 136,032 134,454 133,393 132,344
Percentage of non first-lien mortgages 0.0 % 0.0 % 0.0 % 0.0 % 0.0 %
Overcollateralization 111.5 % 111.3 % 111.9 % 113.3 % 113.4 %

Key developments in the period

The Company issued debt only in NOK during the period.

The reduction in cover pool and covered bonds outstanding in the chart above, reflect the reduction in residential mortgages and liquid assets which financed the repayment of a EUR 1 billion covered bond maturity in June 2015.

Due to reduction in lending volume, total capital coverage increased slightly to 14.33 per cent as of June 30, 2015. The capital requirement inclusive of additional capital/buffer capital is 13.5% as of June 30, 2015 and increased to 14.5 per cent as of July 1, 2015. The Company's capital coverage target is to be above the minimum legal requirement.  

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 Norwegian Parliament has passed a new law regarding financial companies ('lov om finansforetak') which takes effect from January 1, 2016.  We expect that the Norwegian Treasury Department will set a minimum overcollateralization level of 2 per cent for covered bond pools in the law’s associated regulations.  The law does not have any material impact on the operations of SpareBank 1 Boligkreditt.

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 2. 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).  The Programme was updated on April 23, 2015 and is available on the homepage:

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.

2 New self-selected criteria for which loans qualify for the cover pool from the first quarter 2014 sets the limit at 70% LTV.

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 second quarter 2015.

The total balance sheet amounts to NOK 218 billion vs. NOK 228 billion at the end of the previous calendar year. The Company had during the first quarter net interest income of NOK 199 million compared to 162 million for the period last year, 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 15.3 million including amortisation and depreciation compared to 15.3 million for the same period last year. No additional amounts have been charged as loan provisions (write offs) during the first quarter of 2015, in addition to the NOK 8 million in cumulative group loan loss provisions as of 31.12.14. No actual loan losses have occurred. In total the ’ pre-tax result was NOK 391 million compared to 87 million for the same period last year. The higher pre-tax result is mostly due to an increase in the book valuation of the Company's basis swaps, which increased with 318 million kroner during the first six months of 2015 (please see note 12 for further details).

Lending to customers amounted to NOK 161 billion as of 30.06.2015, which is NOK 1,5 billion above the level one year ago. This development is in accordance with expectations. The Company's liquid assets as of June 30, 2015 amounted to NOK 29.4 billion kroner, whereof approximately 24.4 billion kroner are funds received as collateral under ISDA agreements and the remainder is available to the Company as liquid assets. 

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 per cent LTV, is the reason for why the Board of Directors assess the credit risk to be lower compared to other banks in general 3.

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 8.85 billion, USD 4.75 billion, NOK 56.8 billion 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 records cash, bonds and treasury bills at March 31, 2015 for a total of NOK 29.4 billion, whereby NOK 24.4 billion thereof is collateral received from counterparties in swap transactions and is not available as general liquidity. The bonds are Nordic covered bonds, Norwegian government debt and German SSA paper 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 30.06.2015 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 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 2014 for more information on this.

3 Eligibility criteria for the sale of mortgage loans to Boligkreditt include a maximum 70% LTV from the end of the first quarter 2014.

Future prospects of the Company

The Company has a portfolio of residential mortgage lending with an average loan to value of approximately 51 per cent and no loans are in default.

Residential real estate prices have increased during the first six months of 2015 and stand at a high level. This should be seen in the context of declining interest rates in Norway, also for residential mortgages, together with an increasing demand for property, especially in central areas. Even if the unemployment rate is at a low level in Norway (4.2 per cent in April 2015) this has been increasing moderately recently. Despite the higher uncertainty in the Norwegian economy, the prospects for the Company are good at a stable level.

Macroeconomic development 4:
Norwegian mainland GDP increased by 0.5 per cent during the first quarter of 2015 measured against the preceding quarter, while for the year 2014 as a whole, growth was 2.2 per cent.  Household consumption growth together with moderate growth in public consumption impact the growth positively during the first quarter 2015, while investments and the value of exports overall are declining against the backdrop of relatively low oil prices. Export of traditional goods however are increasing (by 0.8 per cent in the first quarter 2015) and this indicates improved competiveness after the depreciation of the Norwegian krone.

Economic outlook:
A clear fall in oil investments has been a strong contributor to the slowing activity growth in the Norwegian economy since last summer. Demand from the mainland, excluding general government, has also consistently seen a weak development, and export growth has been modest. From early 2016, however, expectations are of increased momentum in exports, slightly higher growth in household demand and somewhat higher growth in business investments on the mainland. This, together with strong growth in public demand (expansive fiscal policy), will have a clear positive impact on economic growth despite the fact that investment in the petroleum industry is expected to continue falling somewhat throughout 2016. The growth in mainland Norway’s GDP is expected to pick up further in 2017, reaching 3.2 per cent.

4 Macroeconomic prospects and projections have been sourced from Statistics Norway as of per June 4, 2015.

Projections (%) 2015 2016 2017 2018
GDP growth mainland 1.2 2.4 3.2 3.2
Unemployment rate 4.2 4.3 4 3.8
CPI growth 2 2.1 1.6 1.4
Annual wages 2.8 3 3 3.3

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, 2015.

No events have occurred after June 30, 2015 which are expected to have a material impact on the accounts for the period ending June 30, 2015.

Stavanger, June 30, 2015 / August 7, 2015
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 six months of 2015 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 June 30, 2015.

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, 2015 / August 7, 2015
The Board of Directors in SpareBank 1 Næringskreditt AS