Boligkreditt 2nd Quarterly Report 2017

Statement of the board of directors


Cover pool and outstanding covered bonds


The cover pool consists of residential mortgages and liquid, highly rated assets (substitute assets). 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 (up to 12 months) with proceeds held as liquid assets (please see the investor reports for details on the composition of liquid assets). Covered bonds are shown inclusive of the market value of the derivatives deployed to hedge currencies and interest rates.

Key figures cover pool

  Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016
Weighted Average Current LTV (%) 49.2 % 49.7 % 51.1 % 49.9 % 49.9 %
Weighted Average Original LTV (%) 59.8 % 59.6 % 59.4 % 59.0 % 58.7 %
Average Loan Balance (NOK) 1,349,074 1,340,039 1,322,732 1,306,717 1,286,759
Number of Mortgages in Pool 128,475 130,920 131,743 132,397 133,840
Percentage of non first-lien mortgages 0.0 % 0.0 % 0.0 % 0.0 % 0.0 %
Overcollateralization 108.7 % 111.2 % 108.8 % 108.6 % 109.0 %

Key developments in the first half 2017

SpareBank 1 Boligkreditt issued two new EUR benchmark covered bonds; in January and June 2017 with a maturity of 5 and 7 years, respectively.

Both transactions were well received and both achieved a new issue spread over mid swaps of zero bps. One EUR and one USD benchmark were repaid during the first half.  The Company also issued 3.2 billion Norwegian kroner worth of covered bonds during the first six months, as well as a smaller amount of EUR private placements.

The residential lending volume has decreased according to expectations with a small amount (approx.2 billion kroner) over the second quarter of the year. This reduction is a net number of additions and subtractions in the cover pool. The expectation is for the volume of mortgages to increase by three to four per cent for the full year 2017 (over 2016), but this remains dependent on owner banks’ funding plans and growth through the year.

In the market for the Company’s bonds the credit spreads have generally contracted with the market during the first half.

Boligkreditt is well capitalized with a capital coverage ratio of 16.19 per cent measured against a total capital requirement of 15.0 per cent, in addition to a moderate capital requirement for Pillar 2 requirements.  Total Tier 1 capital is 14.02 and core equity capital 12.55 per cent.

SpareBank 1 Boligkreditt has a negative result for the first half 2017, which was also the case for the full year 2016. This is entirely due to the change in basis swap valuation adjustments, an accounting requirement, which does not impact cash flows and earnings and reverse to zero over time. The pre-tax result is a positive 52 million kroner excluding the effect from revaluing basis swaps.

As of 31.12.2016 the Company reclassified its hybrid bonds from debt to equity on the balance sheet, in accordance with IFRS rules. Capital ratios are not affected by this movement of lines on the balance sheet. Interest expense on the hybrid bonds however are from 2017 charged to equity and not accounted for in the pre-tax result as interest expense.

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 included 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 per cent 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.  A comprehensive agreement is signed which each of the banks in the SpareBank 1 Alliance which are selling mortgages to the Company regarding the purchasing process and the obligations which the banks owe the Company and its mortgage customers (“Transfer and Servicing Agreement”, “TSA”).  The Company’s operating model is to pay out to the owner banks who sell mortgages to the Company the margin earned during the course of the year (commissions to the parent banks).  These commissions are deducted in the financial accounts to calculate net income.

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 June 10, 2016 and is available on the Company's home page:  

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 annual 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 year.  Numbers in brackets refer to the previous year for comparison.

The total balance sheet at the end of the of the second quarter 2017 amounts to 254 (263) billion kroner. The reduction is largely due to a decline in the value of derivatives used for hedging issued bonds and declines in associated collateral levels held. The Company had in the first half of 2017 net interest income of 214 (220) million kroner, which includes deducting commissions paid to the parent banks. The cost of operations for the first half was 17.3 (15.6) million kroner including depreciation and amortization (an additional 5 per cent tax is levied on Norwegian banks’ pay roll from January 2017).  No additional amounts have been charged as loan provisions (write offs) in 2017 beyond the approximately 8 million kroner which has been reserved from previous years. No actual loan losses have occurred since the Company commenced operations. This produces an operating result of negative 260 million kroner (positive 126) before tax. The operating result includes a pre-tax loss due to basis swap valuation adjustments of approximately 336 million kroner. Basis swap valuation adjustments are temporary effects reversed over time until maturity of the swaps.

Lending to customers amounted to 174 (173) billion kroner as of 30.06.17. The Company’s own liquid assets as of December 31, 2016 were 32 (26) billion kroner.  Liquid assets are cash and highly rated, highly liquid bonds which are held as a function of upcoming bond maturities up to 12 months ahead in time.

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. Because the Company buys residential mortgages within 75% of the value of the objects on which the mortgages are secured, the Board of Directors conclude that the credit risk is lower than for 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 issued bonds in foreign currency, in addition to Norwegian kroner denominated debt. Amounts were approximately 132 billion kroner in EUR, 19 billion kroner in USD and 0.3 billion kroner in Swedish kroner, at exchange rates at quarter-end. 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.

SpareBank 1 Boligkreditt AS owns cash, bonds and short term notes at year-end for a total of 55 (58) billion kroner, whereof 23 (32) billion kroner is collateral received from counterparties in derivatives transactions and are not available for the Company as liquid assets. The bonds held are Norwegian and 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 and/or S&P, as well as some Norwegian and German sovereign debt.  Deposits are placed in banks with a minimum rating of at least A/A2.

The Company had as of 30.06.2017 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.  The Company’s liquidity position 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 breakdowns. Reputational, legal, ethical and competency risks are also elements of operational risk. The risk is assessed 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 annual report 2016 provides further information. 

Future prospects of the Company

The Company has a portfolio of residential mortgage lending with an average loan to value of approximately 50 per cent and no loans are in default.

Residential real estate prices have increased overall in Norway over the year 2016 and into 2017 and stand at a high level. There are now signs that a correction is under way where real estate prices increased the most over the previous 12 to 18 months (especially in Oslo).  SpareBank 1 Boligkreditt’s portfolio is well diversified throughout the major city regions in all of Norway.

Due to the special characteristics and restrictions for loans to become part of the cover pool, the high degree of diversification of the pool and the continued strength of the Norwegian economy, as well as prudent lending practices (and mortgage lending regulations) in place, the prospects for the Company are continuing to be good and stable. The Board 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.

Macroeconomic development 1:
The Norwegian economy expanded in the first quarter 2017 by 3.1 per cent, a very solid performance in the mainland economy driven by business investments, exports and consumption increases, both private and public sector.  The unemployment rate is now 4.6 per cent (April 2017), down from the peak of 4.9 per cent in this cycle, but an increase from 4.2 per cent at the beginning of this year, indicating that the labour market is still affected by the changing economic situation.  However, while jobs are created in many sectors, the relatively low unemployment rate (following the oil sector changes) is partially also explained by a reduced labour force, which is now 70.1 per cent of the population, down from 71 per cent in April 2014.

Economic outlook:
The economic outlook is summarized in the table below. Second quarter national account data is published by SSB in Norway on August 24. The latest data at the time of writing is therefore the first quarter 2017. The 3.1 growth rate for the first quarter may be the start of a cyclical economic upswing as the decline in the aggregated demand from the petroleum sector comes to an end (the decline in oil sector investments was now only 3.4 per cent y-o-y in the first quarter over the same period the previous year).  House construction and demand from the public sector have contributed to the strong growth. The household consumption growth has also increased some over the last two quarters (and consumer confidence expanding). Looking ahead it is the export sector (the weak NOK and reduced cost levels lead to a better competitive position) and investment in mainland industries (electric power, i.e. wind investments and electric transmission upgrades) which will likely be the drivers of economic growth. House prices are showing first signs of correcting downwards in the spring of 2017 (following strong growth and investments in 2016-2017) and it is expected that this will be a drag on economic growth in 2018 and possibly beyond.  After a record setting decline in average real wages in 2016, a small increase is expected in 2017 and higher growth the following years. This will contribute to growth in household consumption.

1 Macroeconomic projections have been sourced from Statistics Norway as of June 8, 2017.

Projections (%) 2017 2018 2019 2020
GDP growth mainland 1.9 2.2 2.4 2.2
Unemployment rate 4.3 4.2 4.1 4
CPI growth 2.1 2 2.1 2.3
Annual wages increase 2.3 3.1 3.4 4

Source: Statistics Norway (SSB) June 6, 2017

The Board of Directors affirms that the financial accounts present a correct and complete picture of the Company’s operations and financial position for the second quarter of 2017. 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 quarterly accounts as of 30 June, 2017.

Stavanger, June 30, 2017 / August 7, 2017
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 second quarter 2017 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 30.06.17.

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, 2017 / August 7, 2017
The Board of Directors of Sparebank 1 Boligkreditt AS