Boligkreditt 3rd 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 foreign currency bonds issued and fixed to floating interest rates.

Key figures cover pool

  Q3 2017 Q2 2017 Q1 2017 Q4 2016 Q3 2016
Weighted Average Current LTV (%) 51.0 % 49.2 % 49.7 % 51.1 % 49.9 %
Weighted Average Original LTV (%) 59.9 % 59.8 % 59.6 % 59.4 % 59.0 %
Average Loan Balance (NOK) 1,374,953 1,349,074 1,340,039 1,322,732 1,306,717
Number of Mortgages in Pool 127,895 128,475 130,920 131,743 132,397
Percentage of non first-lien mortgages 0.0 % 0.0 % 0.0 % 0.0 % 0.0 %
Overcollateralization 107.7 % 108.7 % 111.2 % 108.8 % 108.6 %

Key developments in the first nine months of 2017

During the third quarter no new debt was issued as the EUR 1 billon benchmark settled on June 26 was sufficient for requirements during the quarter. The summer period is also typically associated with less issuance volume. The Norwegian covered bond market is developing well. During the third quarter and market adopted to the European issuance standard with larger amounts from two issuers placed during one day in a syndicated format.

The residential lending volume has increased by NOK 2 billion (1.4 per cent.) over the third quarter of the year. This increase is a net number of additions and subtractions in the cover pool. The expectation is for the volume of mortgages to increase by approximately NOK 3 billion during the fourth quarter 2017. As usual the expectation is based on the SpareBank 1 banks’ funding plans and mortgage growth. 

In the market for the Company’s bonds the credit spreads have generally contracted moderately with the market during year to September.  The EUR denominated bonds issued in 2017, a 5-year in January and a 7-year benchmark in June both carried spreads of zero bps over mid-swaps.

Boligkreditt is well capitalized with a capital coverage ratio of 16.39 per cent measured against a total capital requirement of 15.0 per cent, in addition to 0.8 per cent capital requirement for Pillar 2 requirements.  Total Tier 1 capital is 14.22 and core equity capital 12.77 per cent.

SpareBank 1 Boligkreditt has a negative result for the nine months to the end of September, which was also the case for the full year 2016. This is 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 142 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.

In October 2017 SpareBank 1 Boligkreditt decided to end the requested covered bond rating from the agency Fitch Ratings for commercial reasons.  The rating from Fitch is currently AAA and has remained at this level since the first covered bond issuance in 2007.  The covered bonds maintain their rating by Moody’s Investor Service (rated Aaa).  

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 (“Finansforetaksloven”) chapter 11, section II and the detailed regulations thereof. The law was amended and effective from January 1, 2016.

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 6, 2017 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 to evaluate the credit quality of the issuances under the GMTCN Programme. The bond ratings are Aaa from Moody’s.

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 third quarter 2017 amounts to 233 (250) 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 as well as repayments. The Company had in the three quarters to September 2017 net interest income of 318 (322) million kroner, which includes a deduction for commissions paid to the parent banks who originate the mortgage loans. The cost of operations for the period was 24.6 (25.2) 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 184 (positive 38) million kroner before tax. The operating result includes a pre-tax loss due to basis swap valuation adjustments of approximately 326 million kroner. Basis swap valuation adjustments are temporary effects reversed over time until maturity of the swaps.  

Lending to customers amounted to 176.1 (173) billion kroner as of 30.09.17. The Company’s own liquid assets as of December 31, 2016 were 28 (34) 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 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 129 billion kroner in EUR, 18 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 46 (59) billion kroner, whereof 18 (25) 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 30.09.2017 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 in Norway, an especially in the capital of Oslo, changed direction over the last six months. This means that a correction is taking place where real estate prices increased the most over the previous years, and especially in Oslo. On a 12 months basis the Norwegian real estate index is up 1.5 per cent in September 2017, while it is up 0.9 per cent in Oslo.  Over only the previous six months however, the data show a reduction of 3.8 (nationally, including Oslo) and contraction of 7.8 per cent (for Oslo only).  The correction seems to be effected by tighter regulations for banks on the mortgage market, which specifically addressed the previous strong price appreciation in the capital. SpareBank 1 Boligkreditt’s portfolio is well diversified throughout the major city regions in all of Norway, which do develop with a lesser degree of correlation from time to time.

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 mainland economy contracted by 0.2 per cent in the second quarter (from the 2nd quarter last year), but experienced a strong growth of 3.1 per cent in the first quarter. Taken together, the quarters represent a good performance in the mainland economy driven by business investments, exports and consumption increases, both private and public sector.  The unemployment rate is now 4.2 per cent (July 2017), down from 4.6 at the last data point in April. The labour market is therefore clearly improving. It is to some extent important that the oil price has stabilized at level above USD 50/barrel. The Norwegian energy sector has over the previous 2 years reduced costs significantly and new investment projects in the sector are viable to a higher degree at the current oil price. Jobs are created in many sectors across industries in Norway, which have benefitted from the relatively weak Norwegian currency (and low interest rates).  However, the unemployment rate improvement is partially also explained by a reduced labour force participation rate, which is now 69.9 per cent of the population, down from just above 71 per cent at the end of 2014 and through 2015.

Economic outlook:
The economic outlook is summarized in the table below. Third quarter national account data is published by SSB in Norway on November 17. The latest data at the time of writing is therefore the second quarter 2017.  House construction and total demand from the public sector have contributed to the recovery in Norway in 2017 (real growth in 2016 was 1.0 per cent), alongside a weak exchange rate which has mattered for the general competitiveness in Norwegian industry. The household consumption growth has also increased (and consumer confidence expanding). After a record setting decline in average real household disposable income in 2016 (negative 1.6 per cent), an increase of 2.2 is expected in 2017 and higher growth in the following years.  Looking ahead it is the export sector and investment in mainland industries (for example electric power, i.e. wind investments and electric transmission upgrades) which will likely be drivers of economic growth. House prices are now correcting and the construction sector will thus no longer contribute, but probably be a drag on growth in 2018.  At the same time the fiscal stimulus from the government looks set to be neutral in 2018 and is likely to reverse in later years as there is a general political consensus that the contribution from the fund to the government budget should decline (2.9 per cent of the fund is proposed used in 2018).

1 Macroeconomic projections have been sourced from Statistics Norway as of Sept 5, 2017.

Projections (%) 2017 2018 2019 2020
GDP growth mainland 2.2 2.1 3.0 2.8
Unemployment rate 3.4 3.7 3.6 3.5
CPI growth 2.1 1.7 1.7 1.9
Annual wages increase 3.5 3.5 3.5 3.5
Current account surplus to GDP 5.2 4.2 4.6 5.1

Source: Statistics Norway (SSB) Sept 5, 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 third 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 September, 2017.

Stavanger, September 30, 2017 / October 24, 2017

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 third 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 30.09.17.

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, September 30, 2017 / October 24, 2017
The Board of Directors of SpareBank 1 Boligkreditt AS