3rd Quarterly Report 2024
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SpareBank 1 Boligkreditt AS (‘Boligkreditt’, ‘SpaBol’, or ‘The Company’) is a specialized covered bond issuer. It is regulated as a credit institution and licensed by the Norwegian Financial Supervisory Authority (Finanstilsynet) and is operating according to the legislation for covered bonds in Norway1.
The Company, which is based in Stavanger, Norway, is owned by the SpareBank 1 banks throughout Norway (the SpareBank 1 Alliance banks), and funds mortgage lending for these banks.
The sole purpose of the Company is to provide funding via covered bonds for the owner banks in the SpareBank 1 Alliance. To this purpose, the owner banks transfer qualifying mortgage loans (mortgages that follow from a specific rule set) with a loan-to-value (“LTV”) of up to 75 per cent 2.
The Company pays the net interest margin earned on mortgages to the banks, after deductions for its funding and operating costs. The Company is thus an integrated part of the financing operations of its owner banks, which transfers all equity capital alongside mortgages to Boligkreditt. All customer interaction regarding the residential mortgages transferred to SpaBol remain with the originating bank.
The Company’s issuances of covered bonds mainly take place under the EUR 35 billion Global Medium Term Covered Note Programme (GMTCN Programme). This Programme was last updated on March 26, 2024. The programme is available on the Company’s home page: https://spabol.sparebank1.no/programme-documents
Moody’s Ratings Service evaluate the credit quality of the issuances under the GMTCN Programme. The issued covered bonds are rated Aaa.
[1] The covered bond legislation in Norway was updated July 2022 and incorporates the Directive (EU) 2019/2162
[2] The limit for instalment mortgages is 75 per cent, while mortgages which have no scheduled repayment structure are limited to 60 per cent. There is a regulatory minimum amortization requirement
SpareBank 1 Boligkreditt’s 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 as of September 30, 2024. The balances are based on a nominal principle where bonds (covered bonds issued as well as bonds held within liquid assets) are presented at par. This means that derivatives hedging these instruments are effectively incorporated within the nominal values of the bonds in the illustration. A swap exactly converts each fixed coupon payment in any currency to a NOK 3-month floating rate basis over the tenor of a bond.
[3] The source is the cover pool asset liability test for overcollateralization as of March 31, 2024 (which is a note included in the financial statements).
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 prior to the maturity of outstanding bonds (minimum 180 days) with bond proceeds invested as liquid assets. Liquid assets are covered bonds with a triple-A rating, SSA or government bonds with a triple-A rating, or short-term cash deposits and repos (please see the cover pool statistical reports on spabol.no for details on the composition of liquid assets).
The table below provides an overview of the residential mortgages in the cover pool, as well as the overcollateralization.
| Q3 2024 | Q2 2024 | Q1 2024 | Q4 2023 | |
|---|---|---|---|---|
| Weighted Average Current LTV (%) | 52.4 % | 53.5 % | 54.8 % | 53.3 % |
| Weighted Average Original LTV (%) | 60.4 % | 60.4 % | 60.5 % | 59.9 % |
| Average Loan Balance (NOK) | 1,855,925 | 1,842,214 | 1,836,819 | 1,811,759 |
| Number of Mortgages in Pool | 152,615 | 152,401 | 152,327 | 152,420 |
| Pct. of non first-lien mortgages | 0.0 % | 0.0 % | 0.0 % | 0.0 % |
| Overcollateralization | 5.7 % | 5.8 % | 5.8 % | 5.3 % |
The Company issued two EUR 1 bn transactions, in May and in August. Alongside NOK issuance of covered bonds, total issuance volume was then approx. NOK 35 bn through the third quarter of 2024, comparable to NOK 37 bn for the same time period in 2023.
The equity capital was increased in February 2024 from the SpareBank 1 owner banks, in the regular course of business due to the growth of Boligkreditt. AT1 and T2 issuances have been made in the domestic market in 2024.
The Norwegian market is still waiting for a new definition of the top 15 per cent energy efficient houses by the Norwegian government’s agency responsible. The new definition will enable green bond issuers, such as SpaBol, to calibrate and then plan further green bond issuances. The new green bond framework for SpaBol was published in January 2024, and is available on the Company’s home page, Spabol.no.
Three new Supervisory Board of Directors members have joined the Board from the April 1st 2024, and these are replacing three outgoing Directors. The Board is presented on the Company’s home page: https://spabol.sparebank1.no/about. An amended law in Norway requires most Norwegian companies to have a 40% minimum participation by both genders on the supervisory Board. The law previously required this only by all widely held corporations listed on the stock exchange. SpaBol’s Board today meets the new legal requirements, which are effective from the end of 2024.
The accounts have been prepared in accordance with the International Reporting Standards (IFRS) as adopted by the EU.
Numbers in brackets refer to the corresponding period last year for comparison.
The total balance sheet as at September 30, 2024 amounted to 349 (305) billion kroner. The main reason behind this increase is the growth in the financed volume of mortgages of NOK 284 billion vs. NOK 276 billion a year earlier, as well as increases in the valuation of hedging derivatives (swaps) and associated collateral posting by counterparties. The pre-tax result for the quarter ended September 30, 2024 of 644 (433) million is driven by the following4:
[4] The result exclude interest paid on the Company’s AT1 bonds of NOK 900 million in total. This interest is accounted for as an equity distribution. The result also does not take into account the changes in basis swap spreads and valuation thereof for currency swaps, which only effect other comprehensive income and equity.
SpareBank 1 Boligkreditt, as a licensed and regulated covered bond issuer, 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 not having 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 Norwegian banks in general5.
Market risk is defined as the risk of losses due to changes in market rates, ie. interest rates, exchange rates and the prices of financial instruments. SpareBank 1 Boligkreditt issues a materially larger share of covered bonds in currencies other than its operational currency NOK. However, all borrowing and investments in a foreign currency, as well as such with a fixed rate, have been hedged by financial currency- and/or interest rate swap agreements. Some natural hedging may occur with EUR assets matching EUR liabilities. The collective cash flow therefore matches borrowing in Norwegian kroner with floating rate conditions (NIBOR 3 months). The Company receives cash collateral from its counterparties in derivative agreements.
The bonds held in the Company’s liquidity portfolio are mainly Nordic covered bonds and German supra sovereign and agencies (agencies guaranteed by the German government) with a triple-A rating from Fitch, Moody’s or S&P. These bonds are held on a 3-month basis either as FRNs or as swapped fixed rate bonds. Deposits are placed in banks with a minimum rating of A/A2. Cash is also placed in reverse repos with approved counterparty banks, with AAA rated securities as collateral.
The Company had as of September 30, 2024 only moderate interest rate risk, and small 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 finance the purchase of loans at normal terms and conditions. Liquidity risk is managed in alignment with the EU Covered Bond Directive. The Company maintains a minimum 180 days outflow target for its liquidity portfolio, which is a part of the cover pool assets.
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 by the Board of Directors to be moderate.
The Company spends much time identifying, measuring, managing, and following up on central areas of risk in such a way that this contributes to meeting its strategic goals. The notes 24 through 28 in the 2023 annual accounts provide further information.
[5] The EU harmonized covered bond regulations, implemented in Norway, allow for LTV of up to 80 per cent. For mortgages in the cover pool. The Company has chosen to continue with a 75 per cent LTV maximum.
GDP growth in 2023 and 2024 is lower than normal, but not negative, after significant interest rate increases. The monetary policy rate remains at 4.5 per cent since December 2023 and has impacted household consumption and investments.
Housing investments have been particularly weak over 2023 and 2024, but are now expected to increase in 2025. There is uncertainty regarding this, as inflation is not expected to return to around 2 per cent (the central bank’s target) in 2025 and rates may therefore remain elevated. The uncertainties regarding rates are partially coming from the value of NOK against EUR and USD, which could cause more inflation if a weaking trend continues. Oil and gas investments, which have been growing robustly over the past couple of years, have helped keep Norway’s GBP growing. The consumer is also in better shape than previously thought, with increased spending in 2024, probably related to robust wage settlements.
The variable mortgage interest rate, which most mortgage holders pay, is now between 5.5 and 6 per cent. While this reduces loan growth, and was expected to also reduce market pricing of residential property, the housing market price index has appreciated 4.1 per cent over the twelve months from through September 2024. General wage settlements at over five per cent in 2023 and 2024, population growth, and a reduced new construction volume, also influences the price index for existing homes.
Summarized for a few macroeconomic indicators, the recent data and forecast for the next period are as follows:
| Recent data and forecast (per cent) | 2021 | 2022 | 2023 | 2024 | 2025 |
|---|---|---|---|---|---|
| Mainland GDP growth | 4.5 | 3.7 | 0.7 | 0.7 | 2.1 |
| Private consumption growth | 5.1 | 6.2 | -0.8 | 1.1 | 2.1 |
| Investments growth | 0.7 | 5.2 | 0.0 | -2.4 | -0.1 |
| Unemployment rate | 4.4 | 3.2 | 3.6 | 4.1 | 4.1 |
| CPI growth | 3.5 | 5.8 | 5.5 | 3.4 | 3.3 |
| Annual wage growth | 3.5 | 4.3 | 5.2 | 5.3 | 4.6 |
| Current account surplus to GDP | 14.9 | 30.2 | 17.9 | 16.9 | 16.8 |
Source: Statistics Norway (SSB) September 13, 2024
The Company has a portfolio of residential mortgage loans with an average loan to value (LTV) around 50 per cent, and no loans are in default.
SpareBank 1 Boligkreditt’s residential mortgage portfolio is well diversified, albeit weighted towards the eastern, central, and northern regions in Norway. Mortgage loans in the cover pool are very granular (average size of NOK 1.8 million). The banks in the SpareBank 1 Alliance are required to keep reserves of eligible (i.e. cover pool pre-qualified) mortgages in order to provide replacement assets should this become necessary (i.e. if residential price declines increase LTVs above the eligibility limit for mortgages in the pool). Such reserves in the banks are tested regularly to verify that a broad and general 30 per cent decline in real estate prices leaves each member bank with sufficient qualifying reserves for replenishing the cover pool.
The Board of Directors views Boligkreditt as sufficiently capitalized with a capital coverage ratio of 18.67 per cent against a total requirement, including all regulatory buffers, of 18.1 per cent. Additional capital is paid in by the shareholder banks when needed. With the management buffer target an additional 0.8 per cent, the Company will call in additional capital during the fourth quarter of this year.
The Board of Directors views prospects for the Company to continue to be good and stable, despite the changed macroeconomic forecasts towards lower growth and more uncertainty ahead. This is based on several elements; a strict qualifying process for loans to become part of the cover pool (both mortgage lending regulations and further cover pool qualification requirements), a high degree of diversification in the mortgage portfolio and granularity of the mortgages, as well as low unemployment and household real income growth. The Board also bases this conclusion on the low average LTV of the mortgage portfolio, no defaults or loans in arrears, and a strong history and institutional framework in Norway for mortgage loan performance.
* * *
The Board of Directors affirms its conviction that the financial accounts present a correct and complete picture of the Company’s operations and financial position at the end of September 2024. The financial accounts including notes are produced under the assumption of a going concern.
Stavanger, November 5, 2024
The Board of Directors of SpareBank 1 Boligkreditt AS
/s/ Bengt Olsen
Chair
/s/ Geir-Egil Bolstad
/s/ Trond Søraas
/s/ Heidi C. Aas Larsen
/s/ Inger Eriksen
/s/ Bjørn Rune Rindal
/s/ Herborg Aanestad
The Board and the chief executive officer have today reviewed and approved the financial accounts as of September 30, 2024 for SpareBank 1 Boligkreditt AS. The accounts have been prepared in accordance with IFRS Accounting Standards, 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, 2024.
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, November 5, 2024
/s/ Bengt Olsen
Chair
/s/ Geir-Egil Bolstad
/s/ Trond Søraas
/s/ Heidi C. Aas Larsen
/s/ Inger Eriksen
/s/ Bjørn Rune Rindal
/s/ Herborg Aanestad
/s/ Arve Austestad
Managing Director
SpareBank 1 Boligkreditt is a labelled covered bond issuer. Details of the label and information on SpareBank 1 outstanding covered bonds are available on the European Covered Bond Council (ECBC) covered bond label webpage:
www.coveredbondlabel.com