Feeling Norway 3rd Quarterly Report 2014

Statement of the board of directors

Cover pool and outstanding covered bonds:

Key Figures Overview

Q3 2014 Q2 2014 Q1 2014 Q4 2013 Q3 2013
Weighted Average Current LTV (%) 51.2% 51.6 % 52.2 % 51.7 % 50.0 %
Weighted Average Original LTV (%) 57.4% 57.2 % 57.3 % 57.0 % 57.9 %
Average Loan Balance (NOK) 1,193,893 1,200,321 1,213,532 1,206,278 1,187,811
Number of Mortgages in Pool 133 393 132,344 138,664 138,359 136,613
Percentage of non first-lien mortgages in the pool 0.0% 0.0 % 0.0 % 0.0 % 0.0 %
Overcollateralisation 113.3 % 113.4 % 112.5 % 110.9 % 111.0 %

Key events during the third quarter

The third quarter, which is characteristic for the year as a whole, has been relative quiet without any larger benchmark issuances from Boligkreditt. The Company has issued approximately NOK 1.5 bn in the Norwegian market in the third quarter, but no foreign currency funding has taken place. This development takes place because the Company's parent banks have had a moderate growth in their loan volumes outstanding, a stronger increase in deposit inflows than typically over the last several years and advantageous conditions in the market for senior unsecured bank debt issuance. The development of the residential mortgage stock was also flat over the third quarter.

SpareBank 1 Boligkreditt remains well capitalized, with a total capital coverage ratio of 14.75% against a requirement of 13.5%.  Core equity is 11.9% against a requirement of 10%. Boligkreditt has now, as of 30.09.2014, introduced a new capital coverage calculation in accordance with the CRD IV rules, and these numbers reflect that.

In the market for the Company's covered bonds the credit spread has been reduced as a result of actions of the European Central Bank, which include a purchase programme for covered bonds. Boligkreditt's issued covered bonds are not directly affected by the programme which is targeted for issuances from banks within the Eurozone, but the effect in the secondary market for the Company's bonds has been material (lower spreads) and in line with issuers of covered bonds from within the Eurozone.

Capital base SpareBank 1 Boligkreditt June 30, 2014:

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 198 billion vs. NOK 206 billion at the end of 2013. The Company had during the first nine months net interest income of NOK 256 million compared to 192 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 24.7 million including amortisation and depreciation compared to 22.3 million for the same period last year. No additional amounts have been charged as loan provisions (write offs) during the first nine months 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 168 million compared to 188 million for the same period in 2013 (the net result for the first three quarters of 2014 is lower than for the same period last year due to recorded losses on financial instruments which are unrealized value adjustments of derivatives and these are reversed over time in addition to some losses due to early repurchase issued debt).

Lending to customers amounted to NOK 160 billion as of 30.09.2014, which is NOK 10 bn below the level one year ago. This development is in accordance with expectations and is due to that some of the Company's parent banks bought back some mortgages during the second quarter of 2014. The Company's liquid assets amount to NOK 11.6 bn as of 30.09.2014. 

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 44.8 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 records cash, bonds and treasury bills at September 30, 2014 for a total of NOK 23.7 billion, whereby NOK 11.9 bn thereof is collateral received from counterparties in swap transactions and is not available as general liquidity. The bonds are essentially Nordic covered bonds 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 30.09.2014 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 are relative stable and increased by 3.6% from September 2013 to September 2014, which is in line with wage growth for 2014. 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. 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. Lower credit spreads in the secondary market for covered bonds may improve the margin further in the time to come.

Macroeconomic development:
According to preliminary seasonally-adjusted volume figures, Mainland Norway’s gross domestic product (GDP) was up 1.2 per cent from the quarter before and this was a strong growth which is not expected to continue in the following quarters. Household final consumption expenditures rose 0.8 per cent in the 2nd quarter this year, after increasing 0.9% in the previous quarter. The previous fast pace of growth in the oil based investments was reduced after the third quarter of 2013, and has been declining for two quarters. In the 2nd quarter 2014 the investment level was at the same level as in the first quarter.

Economic outlook:
Reduced demand from the oil sector and a continued weak international development is dampening the growth in the Norwegian economy in the short to mid-term. Somewhat higher growth in demand from mainland Norway is insufficient to prevent mainland GDP growth from increasing at a slightly slower pace in 2015 compared to the current year, and from unemployment to inch up slightly. Statistics Norway is forecasting a markedly improved growth in 2016 as of the 4th of September 2014.

Forecast (%) 2014 2015 2016 2017
GDP growth mainland 2.2 2.1 3 2.8
Unemployment rate 3.4 3.7 3.6 3.5
CPI growth 2.1 1.7 1.7 1.9
Annual wages 3.5 3.5 3.5 3.6

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 September 30, 2014. No events have occurred after September 30, 2014 which are expected to have a material impact on the accounts for the nine months ending September 30, 2014.

Stavanger September 30, 2014 / October 23, 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 nine 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 30.09.14.

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 September 30, 2014 / October 23, 2014

The Board of Directors of Sparebank 1 Boligkreditt AS