2nd Quarterly Report 2022
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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, 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 owner banks, which are obligated 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 updated on April 26, 2022 and 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 covered bonds are rated Aaa.
[1] The covered bond legislation is included in the Financial Institutions Act (“Finansforetaksloven”) chapter 11, section II and the detailed regulations thereof.
[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 June 30, 2022:
[3] The source is the cover pool asset liability test for overcollateralization as of June 30, 2022 (part of the notes 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 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. Counterparties post collateral to Boligkreditt for its swap exposures.
The table below provide an overview of the residential mortgages in the cover pool, as well as the overcollateralization.
| Q2 2022 | Q1 2022 | Q4 2021 | Q3 2021 | Q2 2021 | |
|---|---|---|---|---|---|
| Weighted Average Current LTV (%) | 48.3 % | 50.0 % | 51.0 % | 48.3 % | 49.2 % |
| Weighted Average Original LTV (%) | 60.2 % | 60.1 % | 59.9 % | 59.9 % | 59.9 % |
| Average Loan Balance (NOK) | 1,646,872 | 1,624,097 | 1,593,078 | 1,564,121 | 1,539,309 |
| Number of Mortgages in Pool | 144,086 | 141,872 | 139,495 | 138,755 | 137,453 |
| Pct. of non first-lien mortgages | 0.0 % | 0.0 % | 0.0 % | 0.0 % | 0.0 % |
| Overcollateralization | 5.4 % | 5.6 % | 5.7 % | 6.0 % | 5.7 % |
NOK issuance of 15.7 billion took place during the first half of 2022, in addition to two EUR benchmark covered bond for a total of 2.25 bn, and an inaugural CHF 210 million covered bond. Credit spreads on covered bonds have generally widened over the period, along with the broader market, and are higher at the end of the 2nd quarter than at the time of issuance during the period.
The residential mortgage lending volume which SpaBol finances grew by 6.8 per cent during 1H 2022. The financed mortgage volume stands at NOK 238 billion at the end of the second quarter. This is a relatively strong growth, with the growth for the full year 2021 also at 6.8 per cent.
The Norwegian government has implemented the EU’s harmonization directive for covered bonds, as well as changes to Article 129 in CRR (Capital Requirement Regulation). These changes became effective in July 2022. SpaBol will issue European Covered Bonds (Premium) forthwith. Of note is an increase in the regulatory overcollateralization requirement for cover pools to 5 per cent from 2.5 per cent prior. The Issuer has a 5.4 per cent overcollateralization as of June 30, 2022
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 Q2 2022. Numbers in brackets refer to the corresponding period last year for comparison.
The total balance sheet at June 31, 2022 amounted to 279 (258) billion kroner. While the financed volume of mortgages continued to increase (NOK 238 billion vs. 212 billion the prior year), there was at the same time a reduction in the value of financial derivatives (hedging swaps), and also associated collateral received from counterparties mainly due to the repayment of maturing debt and expiration of related older swaps.
The Company had in the first half of 2022 net interest income of 967 (1158) million kroner, which includes both mortgage interest and interest on liquid assets. The decrease, despite a higher volume of mortgages, is due to a reduced net lending margin. This takes place when the 3 month NIBOR rate increases while the mortgage rates increases may not happen at an equal pace, but will in any case always be delayed by 6 weeks which is the period before a mortgage rate increase may become effective after announcement. All of the Company’s mortgages are at variable rates.
The cost of operations for the first half of 2022 was 19.1 (21.5) million kroner. The majority of operating costs are for expenses related to the Company’s bond issuances, IT operations as well as personnel related expense.
IFRS 9 expected loan losses increased by 1.1 million (decreased by 12.3) to 16.3 million. No actual loan losses have occurred. Credit spread widening on the Company’s bonds held in its liquidity portfolio produced unrealized valuation losses of size during the first half. This is the main reason for a negative operating result of 34.3 million (positive 59.6) million kroner before tax. The operating result includes no deduction for scheduled interest payments to Additional Tier 1 bondholders, which are classified as distribution to equity capital.
The Company’s own liquid assets were approximately 31 (24) billion kroner as of the end of the second quarter 2022. The volume of Boligkreditt’s liquid assets is rules driven. 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. The volume of liquid assets is, at a minimum, managed to meet the 180-day minimum liquidity rule in the EU covered bond harmonization directive.
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 that 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.
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. 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 June 30, 2022 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 2021 annual accounts provide further information.
The labour market is now on the tight side of normal and economic growth is strong after the pandemic. With high energy prices, the current account surplus to GDP is particularly high as Norway exports energy.
Inflation is higher in 2022, expected at 4.7 per cent for 2022, and underlying core inflation (excluding food and energy) has also increased to 3.6 per cent for the twelve month period ending June 2022. The headline inflation rate is dampened by mitigating refund payments to households from the state due to the extremely high electricity prices. The central bank, which has a 2 per cent inflation target, has increased its policy rate to 1.25 per cent in June, with further increases expected. Inflation triggers higher wage growth, but real wages are projected to developed negatively in 2022. Investment growth in 2022 is driven broadly by business and residential real estate, while oil and gas investments are expected to increase significantly from 2023 onwards, pertaining to Europe’s energy crisis.
Housing investment has delivered negative GDP contributions from 2018 through 2020, has been fairly flat in 2021, but is expected to be positive in 2022 and 2023. The housing market has been strong with price increases also into 2022 so far and a high level of transactions and relatively low levels of inventory for sale. Market mortgages rates are now however increasing and this could keep the residential real estate price development flat to moderate for the time ahead. Real estate prices have increased during the first half, and especially the first quarter of 2022, but the expectation is for this to abate through the year.
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) | 2019 | 2020 | 2021 | 2022 | 2023 |
|---|---|---|---|---|---|
| Mainland GDP growth | 2.0 | -2.3 | 4.2 | 3.6 | 2.5 |
| Private consumption growth | 1.1 | -6.6 | 4.9 | 7.5 | 3.1 |
| Investments growth | 9.5 | -5.6 | -0.9 | 3.8 | 5.7 |
| Unemployment rate | 3.7 | 4.7 | 4.4 | 3.0 | 3.2 |
| CPI growth | 2.2 | 1.3 | 3.5 | 4.7 | 2.6 |
| Annual wage growth | 3.5 | 3.1 | 3.5 | 4.0 | 4.1 |
| Current account surplus to GDP | 2.9 | 1.1 | 15.0 | 25.7 | 20.9 |
[4] Macroeconomic projections have been sourced from Statistics Norway as of June 10, 2022.
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. The maximum allowable level for a mortgage in a cover pool is 75 per cent LTV, with amounts above that level not being eligible as a cover pool asset.
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 1.6 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 per cent decline in market 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 22.9 per cent against a total requirement, including all buffers, of 16.5 per cent (Pillar 1) plus 0.9 per cent (Pillar 2). The countercyclical buffer capital requirement increased to 1.5 per cent as of June 30, 2022 and will further increase to 2.0 per cent as of December 31, 2022.
Total equity Tier 1 capital is 20.5 per cent against a requirement, including buffers, of 15.4 per cent. Common equity capital was 19.0 per cent against a requirement, including all buffers, of 13.9 per cent. 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. 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 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 second quarter 2022. 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 as of June 30, 2022.
Stavanger, August 10, 2022
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/ Knut Oscar Fleten
The Board and the chief executive officer have today reviewed and approved the financial accounts as of June 10, 2022 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 June 30, 2022.
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, August 10, 2022
The Board of Directors of SpareBank 1 Boligkreditt AS
/s/ Bengt Olsen
Chair
/s/ Geir-Egil Bolstad
/s/ Trond Søraas
/s/ Heidi C. Aas Larsen
/s/ Merete N Kristiansen
/s/ Knut Oscar Fleten
/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