Boligkreditt 3rd 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

  Q3 2015 Q2 2015 Q1 2015 Q4 2014 Q3 2014
Weighted Average Current LTV (%) 50.3 % 49.2 % 50.5 % 51.1 % 51.2 %
Weighted Average Original LTV (%) 58.3 % 58.2 % 57.3 % 57.3 % 57.4 %
Average Loan Balance (NOK) 1,221,414 1,201,505 1,199,658 1,194,160 1,193,893
Number of Mortgages in Pool 135,688 133,422 136,032 134,454 133,393
Percentage of non first-lien mortgages 0.0 % 0.0 % 0.0 % 0.0 % 0.0 %
Overcollateralization 111.2 % 111.5 % 111.3 % 111.9 % 113.3 %

Key developments in the period

Boligkreditt issued a new Euro benchmark bond early in the month of September.

The bond was 1 billion in size and was issued at a price of 8 basis points above the mid-swaps curve for a seven year maturity.  The bond was positively received with good uptake in the market. The money was raised to cover upcoming refinancing needs and moderate growth in the portfolio of residential mortgages.

In the Norwegian covered bond market Boligkreditt issued during the third quarter by increasing outstanding fixed and variable rate bonds maturing in 2020 and 2021 by slightly more than 1.5 billion kroner during the quarter.

Boligkreditt also issued additional Tier 1 capital with a 300 million kroner note in the month of September in order to increase capital according to the requirement for total capital which is 14.5 per cent from July 1, 2015. Total capital coverage is 14.76 per cent as of September 30, 2015, capital coverage is 12.54 per cent and core capital coverage 11.38 per cent. 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 250 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 311 million compared to 256 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 23.0 million including amortisation and depreciation compared to 24.7 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 504 million compared to 169 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 380 million kroner during the first nine months of 2015 (please see note 3 and the annual report for 2014 for further details). 

Lending to customers amounted to NOK 166 billion as of 30.09.2015, which is NOK 7.4 billion above the level one year ago. This development is in accordance with expectations. The Company's liquid assets as of September 30, 2015 amounted to NOK 45.4 billion kroner, whereof approximately 35.8 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 9.85 billion, USD 4.75 billion, NOK 47.5 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 the end of the period for a total of NOK 45.4 billion, whereby NOK 35.8 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 30.09.2015 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, measuring and managing 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 50 per cent and no loans are in default.

Residential real estate prices have increased during the first nine 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 (4.3 per cent in July 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 0.2 per cent during the second quarter of 2015 measured against the preceding quarter, while for the year 2014 as a whole, growth was 2.2 per cent. Consumption expenditures in private households as well as public consumption contribute positively in the second quarter, while investments and the value of exports decreases due to relatively low oil prices. Exports of traditional goods are nevertheless increasing (by 3.2 per cent in the second quarter) and is an indication of that competitiveness has improved with a weaker Norwegian krone.

Economic outlook:
The Norwegian economy has now over the past year been in an oil-related cyclical downturn which is expected to be replaced by a modest recovery in the second half of 2016. Unemployment is expected to reach its maximum in 2016 at 4.6 per cent on average. The reduced demand from the oil industry contributes to the weaker development the Norwegian economy is now experiencing, but is countered by a weaker currency and an expansive fiscal policy. The low price of oil means that few potential new developments are profitable, while investments in fields already in existence may mitigate this. Compared with 2014 it seems like the oil-related investments could decrease by 12 per cent in 2015, and that this reduction is reduced gradually in the years ahead to 5.5 per cent in 2018. This would mean a reduction of close to 33 per cent from the highest point of investment spending in 2013 to 2018 and a price of oil of $60 in 2018 is included in this projection.

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

Projections (%) 2015 2016 2017 2018
GDP growth mainland 1.3 1.8 2.9 2.5
Unemployment rate 4.4 4.6 4.2 4.1
CPI growth 2.1 2.9 2 1.8
Annual wages 2.8 2.9 2.8 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 September 30, 2015.

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

Stavanger, September 30, 2015 / October 23, 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 nine 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 September 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 September 30, 2015 / October 23, 2015
The Board of Directors in SpareBank 1 Boligkreditt AS