Boligkreditt 3rd Quarterly Report 2016

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

  Q3 2016 Q2 2016 Q1 2016 Q4 2015
Weighted Average Current LTV (%) 49.9 % 49.9 % 51.4 % 52.1 %
Weighted Average Original LTV (%) 59.0 % 58.7 % 58.7 % 58.7 %
Average Loan Balance (NOK) 1,306,717 1,286,759 1,272,036 1,251,680
Number of Mortgages in Pool 132,397 133,840 135,432 134,895
Percentage of non first-lien mortgages 0.0 % 0.0 % 0.0 % 0.0 %
Overcollateralization 108.6 % 109.0 % 108.6 % 110.4 %

Key developments in the period

SpareBank 1 Boligkreditt issued a new 10 year, Eur 1 billion (NOK 9,32 billion) benchmark covered bond in the euro market during the 3rd quarter of 2016. In NOK no issuance activity took place during the third quarter, but activity has picked up again in October.

The Norwegian krone has appreciated to around 9 NOK/EUR and 8,2 NOK/USD at the end of the third quarter, which means a reduction in the balance sheet value of swaps hedging currency risk on issued covered bonds and a corresponding further reduction in the level of collateral which Boligkreditt holds from swap counterparties.

Total capital coverage is 16.4 per cent as of September 30, 2016, Tier 1 capital coverage is 14.3 per cent and core capital coverage 12.8 per cent. The Company's capital coverage target is to be above the minimum legal requirement. Legal requirement for total capital coverage is 15 per cent from July 1, 2016.  The capitalization ratios are currently positively impacted by the accounting for basis swaps which will reverse over time.

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 undertakings ("Finansforetaksloven") chapter 11, section II and the detailed regulations thereof. 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 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.  An agreement is signed with each owner bank regarding the purchase and transfer of residential mortgages and the services which the owner 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 last updated on June 10, 2016 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.

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 third quarter 2016 (corresponding previous year period in brackets).

The total balance sheet amounts to NOK 260 (241) billion. Lending to customers amounted to NOK 173 (166) billion as of 30.09.2016.  Loan growth is in accordance with expectations. The Company's liquid assets as of September 30, 2016 amounted to NOK 59 (45) billion, whereof approximately NOK 26 billion are funds received as collateral under ISDA agreements and the remainder is available to the Company as liquid assets.

The Company had during the first nine months net interest income of NOK 322 (311) million, 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 25.2 (23.0) million including amortisation and depreciation. No additional amounts have been charged as loan provisions (write offs) during the first three quarters of 2016, in addition to the NOK 8 million in cumulative group loan loss provisions as of 31.12.15. No actual loan losses have occurred. The pre-tax result was NOK 38 (503) million. The difference in pre-tax result compared to the same period last year is mostly due to valuation changes of basis swaps, which reduced by NOK 150 million during the third quarter and by a net NOK  97 million during the first three quarters of 2016 (please see note 3 and the annual report for 2015 for further details).

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.

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, universal and deposit taking banks.

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 covered bonds outstanding of NOK 185 billion at original (hedged) exchange rates, of which NOK bonds were approximately 55 billion and the remainder mainly in EUR and USD.  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 59 billion, whereby NOK 26 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 30.09.2016 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 considered to be 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.  Reference is made to the annual report 2015 for more information on this. 

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 by 10 per cent in September 2016 from September 2015, and stand at a high level. However, the house price development in the region dominated by the oil industry is weaker than the national average (down 5.3 per cent). That house prices nationally increase should be seen in the context of declining interest rates in Norway, also for residential mortgages, together with high demand for property, especially in central areas. Even if the unemployment rate is at a relatively low level in Norway (5.0 per cent as of September 2016 according to the unemployment survey, though below 3 per cent on a registered basis) it has generally been on an upward trajectory since late 2014.  Despite the current higher uncertainty in the Norwegian economy, the prospects for the Company are considered to be good and stable. The Board base this conclusion on a geographically well diversified loan portfolio without arrears, low LTVs, 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 second quarter 2016 by 2 per cent compared to the same period in 2015 (but following a contraction on a year-over-year basis in the firstquarter). Both private sector investment as well as private (household) consumption shows good growth and is probably indicative of a recovery from a period of weaker development following the downward shift in oil prices.  The combination of a depreciated krone, low interest rates and fiscal expansive policies have probably effectively counter balanced the negative demand impulses from the petroleum sector.

Economic outlook:
The economic outlook is summarized in the table below. The outlook for the full year economic growth is on balance kept at an unchanged 0.9 per cent expansion in real terms for the mainland Norwegian economy compared to the previous forecast. Due in part to a halt in rate reductions from the Norwegian central bank at both the June and September monetary policy meetings (policy rate at + 0.5 per cent) the krone has appreciated against the Euro and the US Dollar in the third quarter and may shift competitiveness away from the Norwegian exporting sector. On the other hand, the oil price has stabilized above 50 USD and investments in the petroleum sector will reduce as a headwind for economic growth while conditions remain favourable in most Norwegian regions.  Inflation in Norway as expressed by the CPI is significantly higher, and was 4 per cent in August. This is a temporary effect as the NOK has been weak leading to higher prices for imports; inflation is expected back to a normal level from 2017.  The labour market is expected to tighten from last readings at 5 per cent (September 2016) both for the current year and the years ahead. The actual registered unemployment rate already shows this trend, dropping to 2.8 per cent in September 2016.

1 Macroeconomic projections have been sourced from Statistics Norway as of September 13, 2016. 

Projections (%) 2016 2017 2018 2019
GDP growth mainland 0.9 2.1 2.2 2.2
Unemployment rate 4.7 4.5 4.3 4.3
CPI growth 3.4 2 2.1 2
Annual wages increase 2.3 2.7 3.1 3.4

Source: Statistics Norway (SSB) September 13, 2016

The Board of Directors affirms that they consider the financial accounts to present a correct and complete picture of the Company’s operations and financial position as of September 30, 2016. 

No events have occurred after September 30, 2016 which are expected to have a material impact on the accounts for the period ending September 30, 2016.

Stavanger, September 30, 2016 / October 25, 2016
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 nine months of 2016 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, 2016.

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, 2016 / October 25, 2016
The Board of Directors of Sparebank 1 Boligkreditt AS