SpareBank 1 Boligkreditt’s (‘Boligkreditt’, ‘SpaBol’, or ‘The Company’) 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 recorded on the balance sheet:
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 with proceeds held as liquid assets (please see the investor reports for details on the composition of liquid assets). The chart below describes the mortgages in the cover pool in more detail.
1 The source is the balance sheet figures as of 30 June 2018 and the cover pool asset liability test for overcollateralization (see notes to the financial statements). The cover pool report is not yet available at the time of writing for the third quarter, but there has been no material change from the 2nd quarter.
|Q2 2018||Q1 2018||Q4 2017||Q3 2017||Q2 2017|
|Weighted Average Current LTV (%)||51.3 %||52.4 %||52.4 %||51.0 %||49.2 %|
|Weighted Average Original LTV (%)||59.8 %||59.9 %||59.8 %||59.9 %||59.8 %|
|Average Loan Balance (NOK)||1,414,916||1,400,686||1,386,865||1,374,953||1,349,074|
|Number of Mortgages in Pool||129,057||129,173||127,927||127,895||128,475|
|Percentage of non first-lien mortgages||0.0 %||0.0 %||0.0 %||0.0 %||0.0 %|
|Overcollateralization||6.7 %||6.7 %||6.4 %||7.7 %||8.7 %|
2 The source is the balance sheet figures as of 30 June 2018 and the cover pool asset liability test for overcollateralization (see notes to the financial statements). The cover pool report is not yet available at the time of writing for the third quarter, but there has been no material change from the 2nd quarter.
No issuance took place during the third quarter in any currencies, but so far in the fourth quarter both fixed and floating covered bond issuances in NOK has been placed, as well as 400 million kroner of subordinated debt (refinancing of existing subordinated debt).
The residential mortgage lending volume at SpaBol has increased moderately as expected by approximately 3.4 % during the year to September 30, as measured against the balance of loans as of December 31, 2017. The mortgage balance is 184 billion kroner (equivalent to 19.5 billion Euro).
Boligkreditt is well capitalized with a capital coverage ratio of 16.9 % (Pillar 1) measured against a total capital requirement of 15.5 %, while the add-on required Pillar 2 requirement is set at 0.8 % common capital. Total Tier 1 capital is 14.8 and common equity capital 13.3 %, the latter against a requirement for common equity capital (incl. Pillar 2) of 12.8 %. It is the Company’s policy to maintain a capital ratio slightly above the regulatory requirement. Additional common equity is injected by the owner banks when required, while Additional Tier 1 and Tier 2 capital is issued in the Norwegian domestic market.
SpareBank 1 Boligkreditt AS is a credit institution licensed by the Norwegian Financial Supervisory 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 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. A comprehensive agreement is signed with 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 pays out nearly the full margin earned to the owner banks which sell mortgages to the Company to obtain funding. This margin is accounted for as commissions due to owner banks and is included in the interest expense line of the Company’s financial statements with additional detail in the notes.
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, 2018 and is available on the Company’s home page: 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 to evaluate the credit quality of the issuances under the GMTCN Programme. The covered bonds rating is Aaa from Moody’s.
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 as of the end of the third quarter 2018. Numbers in brackets refer to the previous year same period for comparison.
The total balance sheet at 30.09.18 amounts to 246 (244) billion kroner. The Company had in the first three quarters of 2018 net interest income of 256 (318) million kroner, which also includes the deduction of commissions paid to the owner banks. The cost of operations for the first half was 23.6 (24.6) million kroner including depreciation and amortization. IFRS 9 expected losses increased by 0.3 million to 12 million. No actual loan losses have occurred since the Company commenced operations in 2007. This produces an operating result of 52,3 (-259) million kroner before tax. The result was negative last year due to the basis swap valuation adjustments in 2017 (a non-cash accounting measure reflecting the changing market rate for entering into currency basis swaps). The basis swap valuation effect is from 2018 accounted for in other comprehensive income only.
Mortgage loans for residential properties amounted to 184 (176) billion kroner as of 30.09.18. The Company’s own liquid assets as of 30.09.18 were approximately 33 (28) billion kroner. Liquid assets are cash and highly rated, highly liquid bonds which are held as a function of refinancing early the Company’s upcoming bond maturities up to six months ahead in time, or to comply with the Net Stable Funding Ratio as proposed, whichever is higher.
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 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 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 concludes 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 for approximately 137 billion kroner in EUR, 10 billion kroner in USD, 8.0 billion kroner in GBP and 0.2 billion kroner in Swedish kroner, at exchange rates at the end of September. 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 deposits, bills and bonds at quarter-end for a total of NOK 46.4 (45.8) billion kroner, whereof 13.4 (17.8) billion kroner is collateral received from counterparties in derivatives transactions, and are thus reserved for the return of such collateral. The bonds held are mainly 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 or S&P. Deposits are placed in banks with a minimum rating of at least A/A2.
The Company had as of 30.09.2018 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 or to comply with the NSFR requirement as proposed, whichever is higher. 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 breakdowns or malfunction. 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 21 to 25 in the 2017 annual accounts provides further information.
The Norwegian mainland economy expanded by 2.0 per cent over 2017 and the forecast for 2018 is recently upgraded to 2.3 (from 2.1) % (Statistics Norway). The project for the following years were similarly increased. This is largely due to an expected increased level of investments in the petroleum sector. The recovery from the previous 2015-16 oil price related slow-down is broad based. The Norwegian central bank has now raised its policy rate by 0.25 bps as expected. The banking industry has also generally raised their customer rates by the same amount. Further increases in interest rates are expected by both the central bank and the market. Risks to the demand driven growth scenario are to be found in these increasing interest rates, especially as household debt, which is mostly variable rate mortgage debt, stands at a historic high level. Households may become on balance more cautious in their consumption due to higher mortgage servicing costs. A long awaited potential strengthening of the krone (due to a higher oil price), could impact companies’ competitiveness in what is an open economy dependent and influenced by open markets and terms of trade. The government budget for 2019, presented in October, was largely neutral in terms of its fiscal impulse.
3Macroeconomic projections have been sourced from Statistics Norway as of September 4, 2018.
Summarized the forecast for the next few years are as follows for a few key indicators:
|Mainland GDP growth||1.1||2.0||2.3||2.4||2.4|
|Annual wage growth||1.7||2.3||2.8||3.3||3.6|
|Current account surplus to GDP||4.0||5.7||8.7||9.1||9.0|
Source: Statistics Norway (SSB) June 5, 2018
Inflation has been revised up in 2018 due to energy prices (electricity) and the current account surplus is significantly revised upwards compared to March 2018 due to the oil price outlook.
The Company has a portfolio of residential mortgage lending with an average loan to value (LTV) of approximately 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.
Residential real estate prices in Norway, and especially in the capital of Oslo, have seen strong growth over 2015-16 and a correction in 2017. The main reasons for the 2017 correction (decline of 4.1 per cent nationally) may have been the tightening mortgage market regulations as well as significant building starts, especially in Oslo where prices increased the most over 2015-16 when demand was high. In the first nine months of 2018 the Norwegian real estate price index has appreciated by 5 %, but prices declined in the month of September.
SpareBank 1 Boligkreditt’s portfolio is well diversified throughout the major city regions in all of Norway. In addition, mortgage loans in the cover pool are very granular (average size of 1.4 million kroner). The banks in the SpareBank 1 Alliance must keep reserves of eligible (i.e. cover pool qualified) mortgages in order to provide replacement assets should this become necessary in the future (if residential price declines increase LTVs above the eligibility limit for mortgages in the pool). The minimum reserves for each bank is calculated as that mortgage volume which is needed to cover the necessary replacement volume in the cover pool which would be needed should residential real estate prices decline of up to 30 per cent.
Due to the restrictions for loans to become part of the cover pool (bank lending practices, mortgage regulations and cover pool qualification requirements), high degree of diversification of the mortgages in the pool and the continued strength of the Norwegian economy, 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.
* * *
The Board of Directors affirm 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 third quarter 2018. The financial accounts including notes are produced under the assumption of a going concern.
There have been no incidents of a material nature after quarter-end which are expected to impact the accounts for the first three quarters of 2018.
Stavanger, 24 October 2018
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 three quarters 2018 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 30.09.18.
The board of directors and the chief executive officer declare to the best of their knowledge that the quarterly 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, 24 October 2018
The Board of Directors of SpareBank 1 Boligkreditt AS