SpareBank 1 Boligkreditt. Covered Bond Issuer Investor Presentation May 2016
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1 SpareBank 1 Boligkreditt Covered Bond Issuer Investor Presentation May 2016
2 Disclaimer By attending the meeting where this presentation is made, you agree to be bound by the following conditions: This document may be distributed only: (a) (i) outside the United States in compliance with Rule 903 or 904 of Regulation S under the U.S. Securities Act of 1933, as amended (the Securities Act ), or (ii) to a person who is a Qualified Institution Buyer ( QIB ) within the meaning of, and in compliance with, Rule 144A of the Securities Act; and (b) in accordance with all applicable U.S. State securities laws. This document does not constitute an offering circular in whole or in part and you must read the actual offering circular related to the notes before making an investment decision. The offering circular for the issuance is available from the arranger. You should consult the offering circular for more complete information. This document is presented solely for information purposes and does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or related financial instruments and should not be treated as giving investment advice. It has no regard to the specific investment objectives, financial situation or particular needs of any recipient By electing to view this presentation, you represent, warrant and agree that you will not attempt to reproduce, re-transmit or otherwise divulge the contents of this presentation by any means without the prior consent of SpareBank 1 Boligkreditt AS (the SpareBank ). The recipient of this presentation should not base any behaviour in relation to qualifying investments or relevant products which would amount to market abuse on the information in this presentation until after the information has been made generally available, nor should the recipient use the information in this presentation in any way which would constitute market abuse. Any notes issued by SpareBank will not be registered under the Securities Act of 1933 (the Securities Act ), as amended, under applicable state securities laws, or under the law of any other jurisdiction. Notes will only be offered (i) in offshore transactions to non-u.s. persons in reliance upon Regulation S under the Securities Act; and (ii) to qualified institutional buyers in reliance upon rule 144A under the Securities Act. Any offering of notes to be made in the United States will be made by means of an offering circular that may be obtained from the dealers. Such offering circular will contain, or incorporate by reference, detailed information about SpareBank 1 Boligkreditt AS, its business and financial results. Under no circumstances shall the information presented herein constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the notes in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction. Any such offer would be made only after a prospective participant had completed its own independent investigation of the notes and related transactions and the collateral pool, and received all information it required to make its own investment decision, including, where applicable, a review of any prospectus, prospectus supplement, offering circular or memorandum describing such security or instrument. That information would supersede this material and contain information not contained herein and to which prospective participants are referred. We have no obligation to tell you when information herein is stale or may change, nor are we obligated to provide updated information on the notes. SpareBank is not responsible for the lawfulness of the acquisition of any notes by a prospective purchaser with regard to any law, regulation or policy applicable to it. A prospective investor may not rely on SpareBank when making determinations in relation to these matters. By accepting this document you acknowledge that (a) SpareBank is not in the business of providing (and you are not relying on SpareBank for) legal, tax or accounting risks associated with notes in this document, (c) you should receive (and rely on) separate and qualified legal, tax and accounting advice, and (d) you should appraise senior management in your organisation as to such legal, tax and accounting advice (and risks associated with the notes) and this disclaimer to these matters. 2
3 Disclaimer continued This presentation includes statements that are, or may be deemed to be, forward-looking statements. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms anticipates, believes, estimates, expects, aims, continues, intends, may, plans, considers, projects, should or will, or in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts. They appear in a number of places and include, but are not limited to, statements regarding SpareBank s intentions, beliefs or current expectations concerning, amongst other things, results of operations, financial positions, prospects, growth, strategies and expectations of the banking industry and Norwegian mortgage market. By their nature, forward-looking statements involve risk and uncertainty, because they relate to future events and circumstances. Forward-looking statements are not guarantees of future performance, and the actual results, performance, achievements or industry results of SpareBank s and its group s operations, results of operations, financial position and the development of the markets and the industry in which they operate or are likely to operate ant their respective operations may differ materially from those described in, or suggested by, the forward-looking statements contained in this presentation. In addition, even if the operations, results of operations, financial position and the development of the markets and the industry in which SpareBank and its group operates are consistent with the forward-looking statements contained in this document, those results or developments may not be indicative of results of developments in subsequent periods. A number of factors could cause results and developments to differ materially from those expressed or implied by the forward-looking statements including, without limitation, general economic and business conditions, industry trends, competition, process in the residential mortgage industry, changes in regulation, currency fluctuations. Forward-looking statements may, and often do, differ materially from actual results. Any forward-looking statements in this document reflect SpareBank s and its group s current view with respect to future events and are subject to risks relating to future events and other risks, uncertainties and assumption relating to SpareBank s financial position, prospects, operations, results of operations, growth, strategy and expectations of the residential mortgage industry. Any forward-looking statement speaks only as of the date on which it is made. New factors will emerge in the future, and it is not possible for SpareBank to predict which factors they will be. In addition, SpareBank cannot assess the impact of each factor on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those described in any forward-looking statements. Although the statements of fact in this presentation have been obtained from, and are based upon, sources that SpareBank believes to be reliable, no representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein. The information contained in this document has not been independently verified. All opinions and estimates included in this presentation constitute SpareBank s judgement, as of the date of this presentation and are subject to change without notice and SpareBank is not under any obligation to update or keep current the information contained herein. None of SpareBank 1 Boligkreditt AS or any of its respective affiliates, advisors or representatives shall have any liability whatsoever (in negligence or otherwise) for any loss whatsoever arising from any use of this document or its contents, or otherwise arising in connection with this presentation. This presentation is confidential and is the property of SpareBank. 3
4 Table of contents Norwegian Economic Overview SpareBank 1 Alliance SpareBank 1 Boligkreditt Housing and Mortgage Markets Regulatory Developments Appendix 4
5 Norwegian Economic Overview Strong Fundamentals 5 Source:
6 Re-orientation in the Norwegian economy Oil and gas exports represents approximately 15% of total Norwegian GDP in 2015 Because the oil industry now demands less resources from the economy at large, new ideas have a better basis for success The economic change which Norway is going through will take time, but the country is financially extremely well placed to stimulate activity and new jobs in other sectors Competencies, expertise and talent from the oil industry can be relayed into other sectors, current focus on: Biotechnology, medicine Renewable energy (wind, water) Information technology, industry 4.0 Ocean technology / food production 6 Source: The Economist
7 Norwegian economy oil price Oil prices have returned to a previous long-term level Norwegian investments are declining in , causing headwinds for Norwegian GDP; though the investment project cycle is long and prices above $50 per barrel will again make selected new projects viable The oil market has become less driven by OPEC and more by global supply (and demand). The current supply change is down, giving a boost to oil prices 7 Sources: Bloomberg, US CPI, Statistics Norway (SSB), IEA
8 Norwegian economy growth drivers 8 Sources: Bloomberg, US CPI
9 Norwegian economy - exports The depreciation of the NOK increases Norwegian competitiveness abroad (and reduces import) Traditional goods and services exports have recently performed well 9
10 Norwegian economy public demand has a large wallet Oil revenue flows into the fund A limited amount is channelled into government outlays (spending rule in effect) But: the fund can be used as countercyclical buffer The fund can not invest in Norway/Norwegian assets Oil revenue does not fund the Norwegian government budget; income tax, VAT, business tax and indirect taxation do 10 Source: Statistics Norway, NBIM, OECD Economic Outlook
11 Norwegian economy - unemployment Softness in the labour market is a regional issue in 3 «oil» counties Improvement detectable in flexibility in the labour market? Traditionally a low unemployment rate in Norway 11 Sources: NAV, Statistics Norway, Norges Bank, April 2016
12 Norwegian economy - employment Where do people work? and what is produced? 12 Sources: Statistics Norway
13 Norwegian economy - hydroelectric power Norway: 95% mountains, highlands, lakes existing hydroelectric facilities Large potential for upgrades and extensions Nearly all power production in Norway comes from hydro-power Norway can cover a material portion of Europe s renewable energy storage ( green battery ) requirement when renewable energy makes up a large portion of the continent s energy mix Source: Statnett Directly linked power cables under construction between Norway England and Norway - Germany
14 Sm3 mill Norwegian economy natural gas But it s not 20% of GDP from oil alone natural gas is more than half the Norwegian fossil fuel production Norwegian oil and gas production: EU imports of Natural Gas: Gas Condensate NGL Oil Natural Gas: Regional, not global, commodity (due to transport issues) price correlation with oil positive, but below 0.5 cleanest fossile fuel, part of future energy mix Demanded by households, industry and power generators (less correlation with the business cycle than oil) 14 Sources: Eurostat, Norwegian Petroleum Directorate
15 SpareBank 1 Alliance Strong alliance of closely cooperating savings banks 2 nd largest Norwegian financial group 15
16 SpareBank 1 Alliance Founded 1996 with the goal of achieving Economies of Scale Key banks in the Alliance trace their history back to the early 19th century Operates exclusively in Norway with a large local presence Norway s most extensive branch network with approx. 350 branches SpareBank 1 Hedmark SNN SMN Sr. Unsec. Ratings Fitch Moody s SpareBank 1 SMN A- / F2 A1 / P-1 SpareBank 1 SR A- / F2 A1 / P-1 SpareBank 1 SNN A / F1 A1 / P-1 SpareBank 1 Hedmark n/a A2 / P-1 16
17 SpareBank 1 Alliance structure overview SpareBank 1 SR SpareBank 1 SMN SpareBank 1 SNN SpareBank 1 Hedmark / Oslo 11 smaller SpareBank 1 Banks All banking and ancillary products customers The banks issue senior unsecured, subordinated and capital instruments individually Equity and credit investors Services, dividends, commissions, covered bond funding Mortgages, capital, commitments, human resources etc. Joint Product Platforms Banking Cooperation Covered Bonds Joint funding Property/Casualty Insurance Brand building / Marketing SpareBank 1 Boligkreditt Life Insurance Mutual Funds IT Systems Risk Management Processes (Residential mortgages) SpareBank 1 Næringskreditt Covered bond investors Cards and Payments (score cards and models) (Commercial mortgages) Factoring and Collection Centres of Excellence Markets Unit Procurement Real Estate Brokerage Business Development, e.g. mobile solutions, online solutions 17
18 SpareBank 1 Alliance Lending composition Total lending across all banks approximately NOK 675 bn Mortgages approximately NOK 475 bn Share of mortgages bought by Boligkreditt: ca. 36% 18 Source: SpareBank 1 banks reporting
19 SpareBank 1 Alliance - market position 2nd largest banking group in the market More than 20% national market share in residential mortgages Regional market share leader with 30-50% shares Total Assets SpareBank 1 is a Norwegian-only, retailed focused institution 19 Source: Banks annual reports, SpareBank 1
20 Capital Requirements 20 Additional capital requirements may arise from the Pillar 2process of Norway s regulatory and supervisory authorities
21 SpareBank 1 key aggregated figures 21 Source: Financial reporting for SpareBank 1 SR, SMN, SNN and Hedmark, own averaging and aggregation * SR, SMN, and SNN only
22 SpareBank 1 key aggregated figures 22 Source: Financial reporting for SpareBank 1 SR, SMN, SNN and Hedmark, own averaging and aggregation
23 Savings banks Losses (net write downs) in Norwegian saving banks over time 23 Source: SpareBank 1 Markets
24 SpareBank 1 Boligkreditt Aaa / AAA rated covered bonds backed by a very high quality cover pool Structure and support Covered bonds outstanding and funding 24
25 Norwegian covered bonds Norway s covered bond legislation Specialist banking principle, ring fencing of assets In effect since 2007, to be updated in 2016 to include mandatory legal overcollateralization of 2% in cover pools Standard principles in the legalisation; LTV cap, risk limits, valuation assessment and tests, independent examiner, asset segregation, transparency through specialized issuers Norwegian covered bonds are category 1 for LCR purposes in Europe Norwegian covered bonds comply with the definition of covered bonds in EU Regulation 575 (2013) Article 129 Exposures in the form of covered bonds SpareBank 1 Boligkreditt covered bonds 2 nd largest Norwegian covered bond issuer SpareBank 1 Boligkreditt (Spabol) is a labelled covered bond issuer ( each issuance is LCR categorized (according to its size) on the CB label website Spabol covered bonds are rated Aaa / AAA by Moody s and Fitch Typical issuance is EUR 1 bn in the Euro market 11 benchmark covered bonds outstanding in EUR for a total issuance volume of bn (4 USD covered benchmarks outstanding) 25
26 Structure and cover pool Loan transfer SpareBank 1 SR- Bank SpareBank 1 SMN SpareBank 1 SNN SpareBank 1 Hedmark/Oslo 11 smaller SpareBank 1 banks 16.7% 19.0% 14.5% 19.7% 30.1% Mortgage Eligibility Criteria Filter (see next page) Mortgage Loan Mortgage Loan Mortgage Loan Ownership shares in Covered Bond Issuer (Boligkreditt) as of True sale of mortgage loans Joint and several provisions for Min. Equity Liquidity SpareBank 1 Boligkreditt Specialist Bank (Covered Bond Issuer) Individual bank requirement for additional cover pool eligible assets/mortgages 26
27 Eligibility criteria for cover pool mortgages Assets Customer Credit Quality Criteria Collateral Types of Property Type of Products Retail Residential mortgages only Employed (99% of mortgage book) or self-employed Mortgage loans solely originated by the SpareBank 1 Alliance banks and certain other banks owned by the Alliance banks Uniform underwriting criteria and credit assessment model in the SpareBank 1 Alliance banks Risk category A-F (SpareBank 1 credit scoring model best PD classes) No past due or over the limit customer notifications in the last 12 months < 70% LTV limit or 60% for any revolving balance mortgage (legal criteria cover pool: 75%) Recent valuation date Valuation from independent 3 rd party, documented First priority / first lien only Located in Norway only Detached houses, terraced houses or apartments Repayment Mortgages with fixed or floating interest rates (serial and annuity loans) Revolving (flexible) loans with floating interest rates Excluded Categories LTV > 75% SB1 rating < F Loans below NOK 200,000 or above NOK 12 mill Loan applicant / co- applicant or guarantors who have not met previous loan obligations, resulted in loss for the bank or are insolvent Speculative investments in housing, eg. mortgages to individuals owning more than 3 properties (buy-to-let) Holiday / leisure Properties (as of 1H 2013) 27
28 Boligkreditt relative balance sheet Cash and equivalents (2.6%) Liquid, highly rated Bonds (10.1%)* 91.5% Aaa/AAA covered bonds Residential mortgages 87.3% Senior unsecured (2.1%) Addt l T1 and T2 capital (1.2%) Core Equity (5.0%) 15.8% equity on RWA 28 Source: SpareBank 1 Boligkreditt financial reporting (excluding derivatives and associated collateral posted by swap counterparties) * Portfolio of government, SSA and Nordic Covered Bonds
29 Cover pool credit quality Arrears history, % of total lending volume Norway High home ownership and strong credit culture Low unemployment Regulatory mortgage underwriting standards limiting LTV and requiring interest rate stress tests SpareBank 1 Boligkreditt Weighted average current LTV history Strict credit policy No realized losses No foreclosed mortgages No arrears over 90 days Source: SpareBank 1 Boligkreditt cover pool report, as of Mar. 31, 2016
30 Cover pool characteristics Assets / Status 100% first lien mortgages on Norwegian private residential properties / 100% performing loans. Loans and rate 135,432 loans at a weighted average interest rate of 2.7% Average Loan Balance NOK 1,272,036 (approximately 132,000 / $150,000) Weighted Average Original LTV Weighted Average Current LTV Weighted Average Seasoning Mortgages 58.7 % 51.4 % 38 months (3 years and 2 months) Weighted Average Remaining Term Mortgages 258 months (21 years and 6 months) Cover Pool NOK (ca. 21 bn).: Residential Mortgages: 88%, Liquid Assets: 12.7% Current O/C 8.6% (stressed O/C post 15% house price decline: 6.8%) Source: SpareBank 1 Boligkreditt cover pool report, as of Mar. 31, 2016
31 Cover pool loan-to-value distribution Current LTV buckets (Numbers of loans in % of pool) Current LTV buckets (Loan volume in % of pool) The collateral (residential properties) is revalued every quarter based on an automated valuation model by Eiendomsverdi, based on the most comprehensive set of real estate transactions in Norway Loans which rise above the legal 75% LTV limit as a result of the revaluation stay in the cover pool, but the share of the loan above 75% is disregarded for asset liability testing (matching) SpareBank 1 Boligkreditt has self selected stricter criteria of 70% LTV for repayment mortgages and 60% LTV for flexible mortgage loans (since Q1 2014) Source: SpareBank 1 Boligkreditt cover pool report, as of Mar. 31, 2016
32 Cover pool regional diversification Mortgage Lending by Region (by Loan Amount) The loan portfolio is well diversified across Norway and in line with the SpareBank 1 Alliance s distribution channels 5.9% Nordland (5%) 5.7% Troms (3%) 2.5% Finnmark (1%) 6.0% Nord-Trøndelag (3%) 6.2% Møre og Romsdal (5%) 0.2% Sogn og Fjordande (2%) 1.8% Hordaland (10%) 11.6% Rogaland (9%) 1.2% Vest-Agder (4%) 3.3% Oppland (4%) 6.1% Buskerud (4.5%) 4.6% Telemark (3%) 0.3% Aust-Agder (2%) 9.7% Sør-Trøndelag (6%) 11.1% Hedmark (4%) 7.6% Akershus (11%) 8.4% Oslo (12%) 3.6% Østfold (6%) 4.3% Vestfold (5%) Distribution of number of loans by county for SpareBank 1 Boligkreditt. Population in parenthesis 32 Source: SpareBank 1 Boligkreditt cover pool report, as of Dec 31, 2015
33 Cover pool mortgage type and granularity Mortgage loans by type of property Number of mortgage loans in each size range Detached owner-occupied prime residential homes represent the majority of the portfolio SB1B has no buy-to-let property in the cover pool No multi-family / housing cooperatives loans in the cover pool No subprime mortgages Average loan size approximately 1.2 mill (Euro 132,000) Few large loans (5% of total number above NOK 3 mill.) NOK volume of mortgage loans in each size range 33 Source: SpareBank 1 Boligkreditt cover pool report, as of Mar. 31, 2016
34 Cover pool other characteristics Occupancy Status Borrower Status 10 largest borrowers Mortgage Payment Frequency Per cent of cover pool size Source: SpareBank 1 Boligkreditt cover pool report, as of Mar. 31, 2016
35 Cover pool other characteristics Remaining legal term of the mortgage portfolio (number of loans in pct of portfolio) The legal term is typically 25 years for a new mortgage Boligkreditt buys the loan from the originating SpareBank 1 bank typically some time after origination Seasoning of the mortgage portfolio (number of loans in pct of portfolio) 47% 33% The behavioral maturities are shorter than the legal terms: nearly 50% of the portfolio is less than 3 years of age (since origination) 31% of loans are above 5 years of age (since origination) 35 Source: SpareBank 1 Boligkreditt cover pool report, as of Mar. 31, 2016
36 Covered bond funding Covered Bonds the 2 nd most important source of funds for the SpareBank 1 Alliance (20-25%) after deposits and before senior bank bonds SpareBank 1 Boligkreditt covered bonds in NOK, EUR and USD NOK bonds are available for taps Issue Date Size (mill) Tenor (years) Maturity Spread at issue Issue date Size (mill) Maturity Interest Basis Spabol EUR Covered Bond Issues outstanding EUR MS+bps Spabol NOK covered bonds available for taps March , / Feb , / Sept , / Nov , / Feb , / August , / June , / Nov , / April ,350 Jun % fixed April ,900 Jun 2021 FRN April Jun 2022 FRN Sept ,020 Jul % fixed Oct ,650 Oct % fixed Aug , / Nov , / Mar , / Spabol 144A USD Covered Bond Issues outstanding USD MS+bps May , / April , / Nov , / April , /
37 Covered bond funding Relative share of funding currencies for Spabol covered bonds outstanding NOK EUR USD AUD A tap market Most cost efficient: no swap costs and SpareBank 1 is household brand Market cannot accommodate all larger issuers Long term funding Deep market Private placements Hedging costs considerations For diversification reasons a 144A programme was set up in benchmark bonds issued U.S. Gov sponsored mortgage finance acts as roadblock to U.S. covered bond legislation and larger market Hedging costs considerations Programme set up in February 2014 Add-on diversification Covered bonds relatively newly established in Australia (legal basis) No SpareBank 1 covered Bonds issued as of yet 37 Debt is shown at current fx rates, although currencies are fixed with swaps at issuance of the bonds
38 SpareBank 1 Boligkreditt maturity profile Bond maturities as of Mar. 31,
39 Housing and Mortgage Markets High home ownership rate Strict residential mortgage underwriting standards 39 Source:
40 Housing and mortgage markets Key characteristics Mortgage Market Total size approximately NOK 2,500 billion (USD 320bn, 280bn) Private banks (incl. savings banks) are the dominant suppliers of mortgages with over 90% market share Scheduled repayment mortgages: 83.4%, flexible: 16.6% Typical maturity: 25 years First priority security market with high doc. standard Household credit growth (12 months growth rate) Howe Ownership Social security Personal Liability Regulation Interest Payments Over 80% of households owner occupied (little buy to let) Between 50 and 60% are detached one-family houses Generous unemployment benefits Unemployment benefit represents ca 60% of final salary for at least 104 weeks Borrowers are personally liable for their debt Swift foreclosure regime upon non-payment Usually tight relationship borrower - bank Transparent information about borrowers Loan to value: 85% (75% legal limit for cover pool) Interest only (flexible) mortgages: max 70% LTV Required amortization for loans with LTV > 70% 5% mortgage interest rate increase as stress test Higher risk weighting for mortgages from 2015 (approx. 25%) 90-95% of mortgages are variable rate Interest rates can be reset at the lender s discretion, by giving the debtor 6 weeks notice Avg. variable interest rate for new mortgages 40 Tax Incentives Source: Statistics Norway 27% of interest paid is tax deductible (equal to the basic rate of tax) Low effective real estate tax (lower net worth tax on real estate than financial assets)
41 Housing and mortgage markets 12 months index change March 2010: max LTV of 90% for all mortgage loans Dec 2011: max LTV of 85% for all mortgages 70% for revolving mortgage loans 2013: Higher risk weights for mortgages higher capital requireme nts for banks July 2015: Existing LTV limits become legally binding, with exceptions Mandatory stress test (interest rate) and amortisation 41 Source: Eiendomsverdi, through March 2016
42 Housing and mortgage markets Adjusted price developments 42 Source: Eiendomsverdi through April 2016, own projections and indexation
43 Housing and mortgage markets Regional indexes (unadjusted) 43 Source: Eiendomsverdi
44 Housing and mortgage markets Population change and completed housing units 44 Source: Statistics Norway
45 Housing and mortgage markets - affordability Share of net disposable income (after tax and cost of necessities) required to service a 85% LTV repayment mortgage over 25 years Average after-tax, after-necessities income for all households with children from 0 to 18 years of age Based on median house prices for Norway (excl. apartments) 45 Source: Statistics Norway, Eiendomsverdi
46 Housing and mortgage markets house price and income The chart shows family income vs. median houseprice Affordability for Norwegian Households is at a relatively stable and moderate level 46 Source: Statistics Norway, Eiendomsverdi
47 Housing and mortgage markets demand and supply: normal conditions 47 Source: Eiendomsverdi April 2016, Statistics Norway
48 Housing and mortgage markets demand and supply (cont.) normality in the national housing market, but with weakness in the south west oil region: Supply here is at an all-time high The house price index peaked in the Stavanger (oil region) area in April Source: Eiendomsverdi April 2016, Statistics Norway
49 Regulatory Developments Covered Bond legislation, bank capital and mortgage risk weights 49 Source:
50 Regulatory developments Mortgage risk weights New Risk weighting for residential mortgage lending is effectively increased to ca. 25% for banks in general (in Pillar 1, i.e. basis for equity capital coverage) However, banks subject to the Norwegian banking regulator s (Finanstilsynet) minimum risk assets floor, such as SpareBank 1 Boligkreditt, have effective risk weights of ca. 40% The RWA floor is defined as a minimum whole-balance sheet RWA which is not allow to be reduced below 80% of what RWA would have been under the previous Basel I rules 31. March Finanstilsynet proposed minimum leverage ratio of 6% for banks, 3% for residential covered bond issuers 50
51 Regulatory developments Equity in nordic banks Norwegian banks are subject to a risk-weight floor: RWA can not be lower than 80% of the RWA according to Basel I Because of these higher risk weights, reported capital ratios are generally lower for Norwegian banks Equity as a share of assets is on the other hand generally higher for Norwegian banks A key reason for this is lower risk weights for residential mortgages for non-norwegian banks 51
52 Appendix 52 Source:
53 Norwegian legal covered bond framework Specialist banking principle Only specialised institutions whose articles of association comply with prescribed mandatory requirements may issue covered bonds LTV limits Assets 75% for residential mortgages 60% for commercial mortgages The cover pool may consist of mortgaged real estate assets, public sector loans and substitute assets (max 20% of cover pool, 30% with NFSA approval) Matching Requirement Value of the cover pool shall at all times exceed the value of the covered bonds with a preferential claim on the pool. NPV principle applied to all assets and liabilities. Special Supervision Supervised by the Financial Supervisory Authority of Norway (NFSA) NFSA appoints an independent inspector who regularly (at least every three months) supervises the matching requirement of the cover pool and the cover pool registry the Inspector submits annual reports of observations and assessments to the NFSA Over Collateralisation Voluntary OC is part of the pool and is bankruptcy remote Liquidity Requirement Cash flow from the cover pool shall at all times suffice to cover payments on the covered bonds and payments to counterparties under related derivatives agreements. A liquidity reserve needs to be established which shall be included in the Cover Pool Currency risk The credit institution must establish reasonable and conservative limits. SB1B fully hedges currency risk 53 Interest rate risk Issuer Insolvency Interest rate risk must be analysed (rate curve shifts and twists). SB1B hedges interest rate risk on its bonds to 3 month NIBOR Bankruptcy Administrator tasked with preserving the value of the cover pool, maintain law & regulations, ensure timely payment to covered bond investors and derivatives counterparties Must inform covered bond investors about any material decisions If timely payments can no longer be ensured, a halt to payments is introduced. All covered bond investors have preferential pari passu claim, must be consulted on material points
54 SpareBank 1 SR-Bank: southwest Norway Fjords and Coastline Norway s oil hub: Stavanger SpareBank 1 SR-Bank Innovative growth region Approximately 24% of Norway s population live in the region, and it is also here that the population growth has been particularly strong. 54 SpareBank 1 SR-Bank (short SR-Bank) s home market are both in the Western and Southern (the Skagerak coastline) Norwegian regions. The bank, with home base in Stavanger and which is Norway s 2 nd largest Norwegian owned bank, maintains approximately 50 branches in its region. The dominating industry is oil and gas, but the region is also an important food producer and in Stavanger, finance and investments has also become a significant factor. The bank maintains the largest market share in the retail segment of all banks active in the region. Within the corporate segment, the largest exposures are to commercial real estate, service based businesses, pipelines and other transportation, agriculture and forestry, hydroelectric power, construction, minerals and mining.
55 SpareBank 1 SMN: middle Norway City of Trondheim Salmon farming SpareBank 1 SMN The Norwegian University of Science and Technology This region s consists of three counties (North and south Trøndelag and Møre and Romsdal) and the population is nearly 700,000 people or 13.8% of the Norwegian total. The town of Trondheim is an old Norwegian capital and has played a key role in Norwegian history. The renowned Norwegian University of Science and Technology is located here. SpareBank 1 SMN (or short SMN) is based in the town of Trondheim and over 50 branches are maintained throughout the region. SMN is the region s leading retail bank by market share. Within the corporate sector the most important activities of the bank is in commercial real estate, transportation and related services, maritime and offshore, seafarming, agriculture and forestry as well as other traditional manufacturing, construction and leisure industries. 55
56 SpareBank 1 SNN: northern Norway Tourism Abundant natural resources SpareBank 1 Nord-Norge City of Tromsø Northern Norway represents about 35% of the Norwegian mainland and approximately 9.4% of the population. Northern Norway is often described as the land of the midnight sun and the northern lights. It is by far the most dramatic Norwegian region from a nature perspective. Outside the Islands of Lofoten are the richest cod fishing grounds in Europe. Northern Norway and the Arctic holds the most promising aspects for the long-term future of Norway s oil and gas industry. SpareBank 1 Nord Norge (or short SNN) is headquartered in the city of Tromsø and has 75 branches throughout Northern Norway. Other than a significant retail banking presence, industries are fishing, oil and gas exploration and production moving north, mining and minerals, construction and tourism. The public sector is also a meaningful employer in this part of Norway. 56
57 SpareBank 1 Hedmark/Bank 1 Oslo: eastern Norway Oslo: administrative, cultural, financial capital Agriculture in Eastern Norway SpareBank 1 Hedmark / Oslo The Royal Palace, Oslo Eastern Norway is by far the most populous region of Norway with approximately 50% of the overall Norwegian population. It also contains Oslo, which is both a county and a municipality. Oslo is Norway's most populous city and Norway s administrative, cultural and financial capital. SpareBank 1 Hedmark is headquartered in Hamar, to the north of the capital, and it maintains 28 bank branches SpareBank 1 Oslo Akershus covers the capital and surroundings with 18 branches and is majority owned by SpareBank 1 Hedmark. 57
58 Mortgage origination process identical in all SpareBank 1 banks Customer and Product Information Rating and Classification Further Analysis Assessment of Collateral Decision, Pricing and Loan Contract Registration of Customer information Registration loan requirements, maturity etc Automatic lookups in internal and external credit databases SpareBank 1 credit scoring model Income verification and documentation Further analysis needed if credit scoring model rejects the application Affordability stress testing Valuation of collateral Calculation of Foreclosure values Assessment of ranks of claims Final decision Pricing based on internal pricing model Legally binding contract Cash flow and affordability are key criteria for evaluating a mortgage application Affordability is determined after taking account of a number of factors, including the applicant s net monthly income and expenses for the household (SIFO model) and analysis of total assets and debt The borrower s affordability is stressed by a 5% interest rate rise General lending policy guidelines: maximum 3x gross income and up to maximum 85% LTV Customer past behavior also weigh heavily in credit scoring model 58 58
59 What is a Norwegian savings bank? - a Savings Bank has 2 layers of equity capital: external and the bank s own Partial Balance Sheet: Order of priority at insolvency Subordinated Debt Equity Capital Certificates (ECC) ECC s / Bank s paid-in capital reserves 1. External Capital: 20-40% of votes Equalization Fund Savingsbank s Reserve Fund Gift Fund Cumulative profits not paid out as dividends. Belongs economically to the ECC holders and may be used for future dividends or converted to EC certificates by the bank 2. The Savings Bank s own capital, voted by bank customers publicly appointed officials for the region where the bank is domiciled (optional) and the bank s employees (up to 25%) A portion of the annual profit is given to specific community projects A key consequence of the specific savings banks law which defines the ownership structure above is the exclusion of the possibility of a hostile takeover as non-ecc shareholders always have a majority vote 59
60 Norwegian oil and gas reserves After 43 years of oil and gas production Norway s not yet half way through Contingent Reserves Existing Fields 6% Contingent Reserves New Fields 7% The chart represents the Norwegian Petroleum Directorate s assessment of the produced volumes and reserves under the Norwegian Continental Shelf on an oil equivalent basis Produced and Sold 44% Undiscovered Resources 21% Contingent reserves are reserves recoverable with some degree of additional investment required, these numbers are cautious / conservative Reserves 22% Contingent resources are cautious reserve assessments of not proven energy resources based on geological surveys and data analysis The pie chart represents a total of 85 billion barrels of oil equivalents 60 Source: Norwegian Petroleum Directorate year end 2013 Source: Norwegian Petroleum Directorate
61 Norway Key Characteristics Tromsø Trondheim Oslo Bergen Stavanger Kristiansand Geography: km 2 mainland area 4.6% agriculture and populated area 95.4% mountains, highlands, lakes Demographics: 5.2 million population 2.3 million households 5 year pop. CAGR: 1.2% Government and Affiliations Parliamentary Constitutional Monarchy Non-EU member (EEA member) Currency: Norwegian Kroner (NOK) World Economic Forum Global Competitive Index: rank 11 globally Transparency International: rank 5 globally UN s Global Human Development Index: rank 1 globally Household debt: Number of households with debt: 84% Average HH debt: NOK Average gross income per HH: NOK HH debt multiple of gross income: 1.61x 61 Source: Eurostat, Statistics Norway
62 Norwegian economy Economic Indicators (%) E GDP growth - mainland Household consumption growth Investment growth (mainland*) Investment growth offshore oil and gas Inflation rate (CPI) month NIBOR / mortgage rate 2.9 / / / / / / 2.4 Household savings ratio Unemployment rate HH sector real disp. income growth Current account surplus / GDP Gov. budget surplus / GDP Sovereign Wealth Fund / GDP Sources: Statistics Norway as of March 8, 2016, NBIM, Ministry of Finance * Business, housing and public sector
63 Household indebtedness Total Debt burden in per cent of household income (after tax) Norway: All HH debts included in the statistic, question of int l comparability High home ownership (mortgage debt rather than rent commitments) Generous benefits (pensions, healthcare, education, childcare, maternity, unemployment) Income growth over the last decades has far outpaced the cost of necessities in the time period shown Household savings rate is high: debt reduction possible Source: Norges Bank (Norwegian Central Bank) Monetary Policy Report 1/2016
64 Household sector net worth 64 Source: Source: Statistics Norway / Tax rolls. Pension reserves not included
65 Household debt to income multiples FSA limit on mortgage debt underwriting in banks: max. 85% LTV General long-standing limit of 3x gross household income in SpareBank 1 banks Higher debt multiple brackets are dominated by younger households 23% of households have student debts and this represents on average 15% of their total debt Source: Statistics Norway
66 SpareBank 1 Boligkreditt Arve Austestad Managing Director arve.austestad@sparebank1.no Fixed Line: Mobile: Henning Nilsen Director, COO & Risk Manager henning.nilsen@sparebank1.no Fixed Line: Mobile: Eivind Hegelstad Director, CFO and Investor Relations eivind.hegelstad@sparebank1.no Fixed Line: Mobile:
67 Highlights summary Highly rated Covered Bonds in a strong economy Rated AAA / Aaa by Fitch and Moody s Scarcity value due to a lack of Norwegian government AAA rated paper Norwegian economy is performing well Covered Bond asset class preferred vehicle of the Norwegian Central Bank for providing liquidity to banks Supported by the Norwegian Legal Framework for Covered Bonds Special supervision by the Norwegian FSA and dedicated independent inspector for monitoring purposes LTV criteria of 75% for residential mortgages (self selected 70% LTV limitation) Prudent risk with regards to liquidity, currency and interest rate High quality of cover pool 100% prime Norwegian residential mortgages Very low levels of arrears and no losses Common, strict underwriting criteria of the SpareBank 1 Alliance Banks and even stricter criteria for transfer of mortgages to the Covered Bond Company Savings banks with a long history in Norwegian mortgage lending Diversified ownership and support through multiple banks in the SpareBank 1 Alliance 2nd largest Norwegian financial group Market leader in local markets with a local market shares of approximately 40% 67
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