SPAREBANKEN VEST BOLIGKREDITT

Transcription

1 SPAREBANKEN VEST BOLIGKREDITT ANNUAL REPORT 2017

2 Annual report for 2017 Sparebanken Vest Boligkreditt s registered office is in Bergen, and it is a wholly owned subsidiary of Sparebanken Vest. The company is a finance company that issues covered bonds, and the assets mostly consist of home mortgage loans originally underwritten by Sparebanken Vest and meet the conditions set by the company for home loans to be included in the cover pool. At year-end 2017, the company s lending to customers totalled NOK 76.4 billion, an increase of NOK 17.7 billion or 30.2% during the year. The large increase is caused by the parent banks decision to transfer most eligible mortgages from the bank to its covered bond subsidiary. Liabilities in the form of covered bonds amounted to NOK 64.7 billion at year-end 2017, compared with NOK 56.6 billion at the turn of the previous year. The company has a bond programme with a framework of EUR 10 billion, which is used in connection with the issuing of all covered bonds, both in Norwegian kroner and foreign currencies. Market conditions The opportunities for raising funds by issuing covered bonds have been very good through The credit spreads for covered bond financing were relatively high in the first part of 2017 and started to decrease in the spring. The spreads remained favourable in autumn before increasing towards the end of the year. Covered bonds are a large asset class in the Norwegian market, and investors abroad have shown great interest in purchasing covered bonds issued by Norwegian undertakings. Covered bonds issued by Sparebanken Vest Boligkreditt have a stable AAA rating from Moody s Investor Service since the company started up in The rating must be considered highly robust since the covered bond rating has a leeway of five notches, which means that several negative events with a bearing on the rating would need to take place for the company to lose its AAA rating. A high, stable and robust rating is a good point of departure for ensuring good, stable access to financing. During 2017, Sparebanken Vest Boligkreditt issued new covered bonds with a nominal value of NOK 16.4 billion, 70% of which are denominated in NOK and 30% in other currencies, mostly EUR. The company redeemed bonds in the amount of NOK 8.2 billion in Corporate governance Sparebanken Vest Boligkreditt s principles and policy for corporate governance are based on the Norwegian Code of Practice for Corporate Governance adopted by the Norwegian Corporate Governance Board (NUES). The company complies with this framework and bases its activities on principles and a policy that are intended to ensure that its governance meets generally accepted perceptions and standards, and in compliance with laws and regulations. Moreover, the bank s corporate governance shall ensure good cooperation between its different stakeholders, 2

3 such as shareholders, lenders, customers, governing bodies, management and society as a whole. In the Board s view, Sparebanken Vest Boligkreditt s corporate governance is satisfactory and in compliance with the applicable principles and policy. The Board of Directors held nine meetings in The Board of Directors main focus has been on following up operations, strategy and risk and capital management, and on monitoring markets and framework conditions. The Board of Directors has drawn up an annual plan for its work, and it endeavours to ensure that board members have the requisite knowledge and expertise. Sparebanken Vest Boligkreditt being a wholly owned subsidiary of Sparebanken Vest is exempted from the requirement to have an separate audit committee. The company has independent external and internal auditors as well as an independent inspector appointed by the Norwegian FSA. Sparebanken Vest Boligkreditt carries out an annual review of the company s risk management and internal control. Any operational events that can lead to operational non-conformities and/or losses are registered as they occur and reported to the Board. The company s risk strategy is approved by the Board, and risk areas are identified and any material non-conformities found during control of the company s financial reporting are followed up through the company s system for risk management and internal control, and reported to the Board of Directors. Sparebanken Vest Boligkreditt has entered into an agreement with Sparebanken Vest that covers financial reporting, management, direct and indirect taxes and internal control relating to financial reporting. This includes current financial reporting, and a reporting template has been drawn up to ensure the completeness of the basis for reporting and consistent use of principles. In addition to reviewing the accounts and risk reporting, the company s management continuously reviews operating reports seen in relation to the company s budget, and briefs the Board of Directors at board meetings. The company s ethical guidelines include a duty to report matters that warrant criticism, including breaches of internal guidelines, laws and regulations, and a procedure for how such information is to be given. Large companies are required to prepare a statement about how they exercise corporate social responsibility, cf. the Accounting Act Section 3-3c. The parent bank Sparebanken Vest prepares such a statement for the Group that also covers subsidiaries. Reference is therefore made to our parent bank s annual report for further information. Sparebanken Vest Boligkreditt s business is subject to supervision by the Financial Supervisory Authority of Norway. The Board of Directors and the management endeavour to maintain a good dialogue with the Financial Supervisory Authority. Statement concerning the annual accounts Income statement Sparebanken Vest Boligkreditt s financial statements are reported in accordance with IFRS. The level of commissions to be paid to the parent bank for mortgages purchased have been revised in The company recorded an operating profit before writedowns and tax of NOK 206 million for the financial year 2017, compared with NOK 389 million in The profit after write-downs and provision for tax amounted to NOK 150 million in 2017, compared with NOK 284 million the year before. The company s interest and similar income amounted to NOK 1,671 million in 2017, compared with NOK 1,479 million in Net interest income and similar income increased in 2017, amounting to NOK 726 million in 2017, compared with NOK 554 million in Net other operating income in 2017 showed a loss of NOK 507 million, largely due to commissions paid to the parent bank for mortgages and the value of swaps in connection with hedge accounting of financial liabilities. In 2016, net other operating income showed a loss of NOK 98 million. In relation to average assets interest income and similar income amounted to 2.30% in 2017 compared with 2.27% the year before. Net interest and credit commission income in 2017 amounted to 0.96% of average assets compared with 0.81% the year before. Interest expenses and similar expenses amounted to NOK 944 million in 2017, corresponding to 1.34% of average assets, compared with 1.46% the year before. The company s recorded operating expenses amounted to NOK 14 million in 2017, compared with NOK 67 million in The expenses in 2017 is general administrative expenses and no longer consists of management fees paid to the parent bank because the parent bank in 2017 has been remunerated by 3

4 commissions. Cooperation with Sparebanken Vest is formalised in various agreements that ensure that the company has the required expertise in operational areas, while at the same time facilitating cost-efficient operation. The commissions paid to the parent bank are based on normal commercial principles. They amounted to NOK 351 million in 2017, compared with NOK 60.7 million in fees for Group write-downs and losses on loans accounted for NOK 6 million in 2017, the same figure recorded in The tax expense for 2017 is calculated to be NOK 49 million, corresponding to 25% of the pre-tax profit. The net profit after tax for 2017 was NOK 150 million, corresponding to a return on equity (excluding hybrid capital) of 3.6% after tax. The Board notes that the company s profit for 2017 compared with previous years is highly affected by the recent change in commission regime for mortgages, and regulation of the value of basis swaps. In accordance with Section 3-3a of the Accounting Act, the Board of Directors confirms that the accounts have been prepared on the basis of the going concern assumption. Balance sheet and capital adequacy Sparebanken Vest Boligkreditt s total assets at the end of the 2017 financial year amounted to NOK 84.9 billion, which is NOK 17.4 billion higher than at yearend 2016, when total assets amounted to NOK 67.5 billion lending to customers increased by NOK 17.7 billion, or 30.2%, and amounted to NOK 76.4 billion at year-end The corresponding figure at the end of 2016 was 58.6 billion. The average assets amounted to approx. NOK 72.6 billion in 2017, up 11.5% on the year before. The company s outstanding securities debt measured in NOK increased by net NOK 8.2 billion in 2017 and amounted to NOK 64.7 billion at year-end, compared with NOK 56.6 billion at the end of The increase is partly due to the Norwegian krone has become weaker during the year, so that outstanding currency debt measured in NOK is higher. Borrowings in foreign currency are currency-hedged. The company s debt to financial institutions amounted to NOK 14.6 billion at year-end 2017, compared with NOK 5.9 billion at year-end These liability items are related to loans the company has taken out with the parent bank, and to deposits made by the company s counterparties in connection with the furnishing of security for swap contracts. Sparebanken Vest Boligkreditt has permission from the Financial Supervisory Authority of Norway to use the IRB method to calculate the company s capital. This permission does not mean that Sparebanken Vest Boligkreditt can operate with a lower capital adequacy ratio than based on the standard method because the authorities have decided to continue with the Basel I floor. The risk weight on housing loans is still 40 per cent, and the IRB approval still leads to higher weighting than would have been the case if the company did not use the IRB method, since the weighting based on the standard method is 35 per cent. In the Board s view, using the IRB method improves the company s risk and capital management. Based on the transitional arrangement for companies with IRB approval, the capital adequacy ratio in Sparebanken Vest Boligkreditt was 16.3% at year-end 2017, while the Core Tier 1 capital adequacy ratio was 12.9%. The corresponding figured at year-end 2016 was 16.8% and 12.5%. Capital adequacy comprises Core Tier 1 capital, core capital in the form of hybrid capital and supplementary capital, such as subordinated loans taken out for a specific period. All the capital has been infused by the parent bank, and the share capital was increased by NOK 1 billion during Based on IRB, the capital adequacy ratio would have been 29.7% at year-end The leverage ratio was 5.3% at year end 2017 and year end The net cash flow in 2017 was minus NOK 1.2 billion. Risk Laws and regulations that apply to covered bond companies require a low risk level. The Board of Directors places great emphasis on identifying, measuring and reporting different types of risk. The company has adopted guidelines and parameters for the management and control of different risk areas in order to ensure that the company enjoys the market s trust. In the Board s opinion, the company s overall risk exposure is low. Credit risk Credit risk is defined as the risk that a borrower or counterparty will be unable to meet its obligations to Sparebanken Vest Boligkreditt. The company s credit approval framework contains requirements stipulating which loans may be included in the company s loan portfolio. There were no significant changes in the company s credit risk profile in the financial year. Sparebanken Vest Boligkreditt s assets largely consist of home mortgage loans where the outstanding balance 4

5 on the loan does not exceed 75% of an appropriate value assessment of the mortgaged property. Gross loans in default for more than 90 days amounted to 0.08% of total lending at the turn of the year. The Board regards the quality of the lending portfolio as very good, an assessment that is reinforced by the company s low losses. A fall in house prices would reduce the net value of the company s cover pool, and regular evaluations are carried out to calculate the effect of any negative trends in house prices. The Board is comfortable with the outcome of the stress tests that have been carried out. The credit risk involved in other investments is also deemed to be low, since the company s investments are in interest-bearing securities with a good rating issued by other Norwegian covered bond companies. Market risk Market risk is defined as the risk of financial loss as the result of changes in observable market variables such as interest and exchange rates and the price of financial instruments. Sparebanken Vest Boligkreditt has a low market risk, and parameters have been adopted that define maximum exposure to fluctuations in the interest and exchange rate markets. Around 75% of the company s home mortgages are at a variable interest rate that can be adjusted with six weeks notice to the customers. Home mortgages at fixed interest rates are hedged by interest rate swap agreements with the parent bank. Insofar as the company borrows at a fixed rate, and/or the bonds are issued in foreign currency, the interest rate and currency risk is eliminated by entering into swap agreements concurrently with the bonds being issued, for the full term to maturity of the loans. Such swap agreements are entered into with high-quality counterparties based on documentation that is favourable for the company. These agreements are approved by the rating agency the company uses, and they contribute to the company s good covered bond rating. Changes in the value of the swaps are recognised as they arise, but the effect on profit will be zero over the duration of borrowings. Accounting effects will thereby be reversed over time. The company s investments in interest-bearing securities are at a floating rate of interest. The market risk is therefore low. The Board of Directors considers the interest and currency risk, as well as the overall market risk, to be moderate. Liquidity risk Liquidity risk is the risk that the company will not be able either to refinance its commitments upon maturity or to finance an increase in assets on market terms. With effect from 31 December 2016, Norwegian covered bond companies must meet the new liquidity requirements introduced for European banks and finance companies (LCR) by 80%. The liquidity coverage ration must be met by 100% from 31 December 2017, and at this point of time the company fulfilled requirements by 592%. Sparebanken Vest Boligkreditt also has an agreement with the parent bank whereby the bank will provide liquidity support in order to ensure that all the covered bonds can be repaid on the ordinary maturity date. Moreover, covered bonds issued by Sparebanken Vest Boligkreditt are based on loan agreements whereby the company has a unilateral right to extend the term to maturity of the bonds by up to 12 months. This right will only be used if the company were to experience refinancing problems on the ordinary maturity date, and if the parent bank were unable to provide liquidity support. Sparebanken Vest Boligkreditt plans for large maturities in the Norwegian market by buying back its own bonds and ensuring that it has access to liquidity in good time before the covered bonds fall due. The Board of Directors considers the liquidity risk to be moderate. Operational risk Operational risk is the risk of losses as the result of errors and irregularities in the management of transactions, inadequate internal control or irregularities in the systems used by the company. Operational risk is identified through assessments and management confirmations that are part of the company s internal control. The company has entered into a management agreement with Sparebanken Vest that includes management, bank production and IT operations, as well as financial and risk management. Under the agreement, the bank must compensate the company for any expenses incurred as the result of any defects in the deliveries and services the bank provides. The operational risk is assessed on an ongoing basis. Management considers the company s IT systems 5

6 as central to operations, accounting and reporting of completed transactions, as well as obtaining the basis for important estimates and calculations. The company uses PricewaterhouseCoopers as its internal auditor, and any non-conformities are reported to the Board. The Board of Directors considers the company s operational risk to be moderate, including the risk relating to the financial reporting process. Employees and the working environment Sparebanken Vest Boligkreditt has no employees. The managing director and the company s COO are formally employed by the parent bank and hired to carry out work for Sparebanken Vest Boligkreditt. Other resources required to operate the company are provided by the relevant departments in Sparebanken Vest based on agreements between the company and the parent bank. No serious work accidents or incidents occurred or was reported during the year. The working environment in and around the company is deemed to be good, and the company does not pollute the natural environment. The Board of Directors was reduced from five to three members on the ordinary general assembly in One of the three board members is a woman, and two of the board members hold executive positions in Sparebanken Vest. There have not been appointed new individuals to Board in Changed framework conditions The countercyclical buffer was increased by further 0,5% from 31 December 2017 onwards, and Sparebanken Vest Boligkreditt is required to have a capital adequacy ratio of at least 15.5%, of which Core Tier I capital must amount to at least 12.0% of the calculation basis excluding Pilar 2 supplements. The risk weight on mortgages for IRF-approved financial institutions is still 40 pct. The company meets all the capital requirements at year-end 2017, and it will make the necessary adaptations as regards capital and operations to ensure that the capital requirements will be met in the future. The LCR requirement means that, from 31 December 2017, Norwegian credit companies must have a liquidity reserve that constitutes at least 100% of the company s liquidity outflows in the next 30 days. Economic development and outlook The global economic upturn is continuing and is now more synchronised than before. Growth is picking up in the EU and in emerging economies. This is helping to reduce unemployment and push up wages and inflation. It will also further increase demand for goods and services. A natural consequence of the persistent, synchronised upturn is that the national banks increase their key interest rates. This process has already started in the USA, and the Federal Reserve increased its rate to 1.5% in December last year. Four further hikes may take place in the USA before the end of the year. In the Eurozone, the key interest rate is still negative, but, in the course of 2018, the European Central Bank will signal whether we can expect to see an increase already in spring Economic growth has also picked up here in Norway. This has been driven by higher oil prices, a weak krone and more optimistic households. In our estimate for 2018, we expect to see economic growth of just over 2% (mainland GDP) in That is slightly higher than our estimate for However, we believe that the factors expected to contribute to the economic growth in 2018 may be subject to change. We expect to see fairly moderate public demand in the coming years, and less expansive spending of oil revenues. We believe that the growth in private consumption will be the same as last year at around 2.2%. Wage growth will be slightly higher, however, at around 2.5%. House prices will continue to fall for a few more months. Our preliminary best estimate is until Easter. We see signs of the fall in house prices in Oslo levelling off. In Bergen, we see that the number of new completed house-building projects will peak in April, and then level off and fall. The NOK exchange rate and the oil prices, which had closely followed each other since the fall in oil prices in 2013, went their separate ways in autumn The price of oil has risen by around 25% since then, while the NOK exchange rate has fallen by around 7%. A lot of the uncertainty concerning the value of the krone has been due to the risk of a sharp fall in house prices. We expect the euro to cost slightly less over the course of spring. We expect a EUR/NOK exchange rate of 9.45 in six months time. The krone is expected to climb during autumn, but one euro is still expected to cost NOK 9 at the end of the year. We expect Norges Bank to defer an interest rate increase until spring Western Norway is expected to drive growth in the Norwegian economy in The Western Norway Index 4/2017 shows that growth is picking up in Rogaland. The enterprises in the county are reporting an increase in demand, employment, profitability and 6

7 investments. Enterprises that have a more moderate proportion of turnover from oil and gas-related activities are driving the positive development in the county. This may indicate that the enterprises that have adapted and diversified are now seeing the results of this restructuring process. We expect industries exposed to competition to contribute the most to increased growth in A broad upturn in the global economy and among our trading partners, combined with a weaker krone, mean that we expect to see an increase in corporate investments. We expect oil investments to increase by around 5%. Industrial production will follow the development in oil investments. Mainland exports will also make a positive contribution as a result of the growth outside Norway and the weak krone. Allocations The profit after write-downs and tax amounted to NOK million for It is proposed that the profit be allocated as follows: Transferred to the hybrid capital owners NOK 21.5 million Transferred to other equity NOK million The Board of Directors proposes distributing a dividend of NOK 129 million to Sparebanken Vest. The size of the dividend is deemed to be justifiable since the Board assumes that the parent bank will also in future increase the company s capital base if this should be necessary. The proposed dividend has not been recognised in the accounts because it does not qualify as a provision pursuant to IFRS. Bergen, 31 December 2017/31 January 2018 The Board of Directors of Sparebanken Vest Boligkreditt AS Frank Johannesen, Chairman of the Board Åsmund Bjørndal Heen Inga Lise Moldestad Egil Mokleiv, Managing Director 7

8 Income Statement (NOK MILLION) Notes Interest income and similar income Interest expenses and similar expenses Net interest and credit commission income Commission income and income from banking services 0 0 Commission expenses and expenses relating to banking services Net gain/(loss) on financial instruments Other operating income 0 1 Net other operating income Net operating income General administration expenses Other operating expenses Total operating expenses Profit before write-downs and tax Write-downs and loan losses Pre-tax profit Tax Profit/loss for the financial year Profit per share 36,1 86,1 Statement of comprehensive income Profit for the period Other items in the statement of comprehensive income 0 0 Total profit for the period

9 Balance sheet (NOK MILLION) Notes 31/ /12-16 Assets Loans to and receivables from credit institutions Net lending to customers 5,6,7,8, Certificates and bonds Deferred tax assets Financial derivatives 12, Total assets Liabilities and equity Debt to credit institutions 13,14, Securitised debt 15, Financial derivatives Tax payable Subordinated loan capital Other liabilities 41 9 Total liabilities Shareowners equity Total paid-in equity Reserve for unrealised gains 1 1 Other equity Hybrid capital Total equity Total liabilities and equity Bergen, 31 December 2017/31 January 2018 The Board of Directors of Sparebanken Vest Boligkreditt AS Frank Johannesen, Chairman of the Board Åsmund Bjørndal Heen Inga Lise Moldestad Egil Mokleiv, Managing Director 9

10 Statement of cash flows Cash flows from operations Interest, commission and customer fees received Interest, commission and customer fees paid Interest received on other investments Interest paid on other borrowings Payments to other suppliers for goods and services Payments to employees, pens. schemes, empl. nat. Ins. contr., tax withholdings etc Payment of taxes Net cash flow from operations Cash flows from investment activities Payments made/received on loans to customers Paym. made/received on purch./sales of other securities not held for trading purposes Net cash flow from investment activities Cash flows from financing activities Payments made/received relating to debt to credit institutions Payments made/received relating to subordinated loan capital Payments received on issuing bond debt Payments made relating to redemption of bond debt Payments received on issuing of new shares Payments of dividends/ group contributions Net cash flow from financing activities Net cash flow for the period Net change in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period

11 Changes in equity Shareowner equity Other equity Reserve for unrealised gains Hybrid capital Equity at 31 December Profit/loss for the period Issuance of share capital 04 May Issuance of hybrid capital 15 June Interest paid on hybrid capital Tax on interest on hybrid capital, directly against equity 6 6 Distributed dividend Equity at 31 December Profit/loss for the period Issuance of share capital 25 June Issuance of share capital 04 October Distributed dividend Interest paid on hybrid capital Tax on interest on hybrid capital, directly against equity 7 7 Equity at 31 December Total Shareowner equity as of 31 December 2017 is NOK 4,250 million and is divided between 4,250,000 shares with a nominal value of NOK 1,000. All the shares are owned by Sparebanken Vest. The proposed dividend for 2017 is NOK 129 million. 11

12 Notes Note 1 Accounting principles GENERAL INFORMATION Sparebanken Vest Boligkreditt AS is a wholly owned subsidiary of Sparebanken Vest. The company was established by the bank to issue covered bonds. Sparebanken Vest Boligkreditt offers loans secured by mortgage within 75 per cent of the residential property s value. The company was formed on 21 May Its head office is in Bergen. The address of the head office is Jonsvollgaten 2, NO-5011 Bergen. Unless otherwise specified, all amounts in the accounts and notes to the accounts are stated in NOK million. Norwegian kroner is the company s functional and presentation currency. BASIS FOR THE PREPARATION OF THE ANNUAL ACCOUNTS The company accounts of Sparebanken Vest Boligkreditt AS have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and published by the International Accounting Standards Board (IASB). They are mandatory from 31 December Amortised cost is used for the valuation of financial assets and liabilities, with the exception of financial instruments at fair value through profit or loss and financial instruments designated for hedge accounting. Amortised cost is defined as the amount the instrument is initially measured at in the accounts (cost price) minus repayments of principal, with an addition or deduction for accumulated amortisation of all differences between cost price and the nominal amount, minus all write-downs. Fair value is defined as the price that would be received for selling an asset or paid for transferring a liability between independent market participants on the measurement date. For financial instruments subject to hedge accounting, the hedging instruments are recognised at fair value and the hedged items at fair value for the hedged risks. When preparing annual accounts and using IFRS, the management has used estimates and made assumptions that have affected assets, liabilities, income, expenses and information relating to contingent liabilities. Future events may result in changes to these assumptions. Estimates and the underlying assumptions are continuously assessed. The effect of these changes will be recognised in the accounts when new estimates can be determined with sufficient certainty. Dividend, group contributions and other distributions relating to the result for the financial year are recognised at the time the distribution is adopted. The accounts have been prepared on the basis of the going concern assumption. CHANGES IN ACCOUNTING PRINCIPLES No amendments have been made to accounting standards in 2017 that have a material bearing on Sparebanken Vest Boligkreditt AS s accounts. SEGMENT INFORMATION The company s activities are managed as a single segment. The vast majority of the loan portfolio is related to the retail market. RECOGNITION OF INTEREST AND FEES Interest income is taken to income using the effective interest rate method. This entails recognition of nominal interest income and amortisation of establishment fees after the deduction of direct establishment costs, as they arise. REMUNERATION OF EMPLOYEES Sparebanken Vest Boligkreditt AS had no employees in The company purchases services from the parent company, and transactions between the company and the parent bank are conducted in accordance with generally accepted business terms and principles. FINANCIAL ASSETS AND LIABILITIES Financial assets and liabilities are valued and classified in accordance with IAS 39, and presented in accordance with IFRS 7. Note 2 specifies the volume for each main group of financial instruments classified in the different measurement categories. Recognition and derecognition Financial assets and liabilities are recognised in the balance sheet when the company becomes a party to the instrument s contractual terms. Financial assets and financial liabilities are derecognised when the advantage or liability that follows from the contractual terms is met, cancelled or terminates. Financial instruments at fair value through profit or loss Financial instruments classified for recognition at fair value through profit or loss are recognised at fair value excluding transaction costs. Fair value is also used in subsequent valuations. Financial instruments are classified in this category if one of the following criteria is met: The classification eliminates or significantly reduces accrual accounting differences for gains and losses on hedging instruments and hedged items in connection with financial hedging. The financial instruments are part of a portfolio that is managed and valued on the basis of fair value in accordance with a documented risk management or investment strategy. Financial assets that upon initial recognition were classified for recognition at fair value through profit or loss include certificates and bonds and fixed-interest loans. Upon initial recognition, fixed-interest loans are recognised in accordance with the fair value option pursuant to IAS 39. The reason for this is to avoid inconsistent accounting in relation to derivatives intended to counteract the interest rate risk. Gains and losses that are due to changes in fair value are recognised in the income statement as a change in value. Financial instruments valued at amortised cost Loans and receivables at floating interest rates are valued at amortised cost. Loans and receivables are defined as non-derivative financial assets with fixed or determinable payments that are not traded in an active market. Loans are initially valued at fair value with the addition of direct transaction costs. In periods after the initial measurement, loans are valued at amortised cost based on the effective interest rate method. If there is objective evidence of a decline in the value of individual loans or groups of loans, the loans are written down. The amount of the write-down is calculated as the difference between the balance sheet value and the current value of future expected cash flows, based on the expected life of the loan. Write-downs are recognised in the period the objective evidence 12

13 arises, and are classified as a loss expense. Interest income from loans is recognised under net interest also in cases where a write-down has been carried out. Interest income on written-down loans is recognised using the original effective interest rate and on the basis of the written-down loan. Changes in a loan s interest rate that reflect changes in the market interest rate do not affect the value of the loan. Financial liabilities at floating interest rates are recognised in the balance sheet at amortised cost. The liability is initially valued at fair value with the addition of direct transaction costs. In periods after the initial measurement, the loan is valued at amortised cost based on the effective interest rate method. Financial instruments designated for hedge accounting The company uses hedge accounting to ensure an accounting treatment that reflects how interest rate risk and currency risk are managed for long-term borrowings. This leads to a comparison in the income statement of gains and losses on bonds issued at fixed interest rates and/or foreign currency (hedged item) with gains and losses on pertaining interest rate and currency swaps (hedging instrument). This is recognised as fair value hedging. Formal earmarking and documentation of the hedging relationship takes place when the hedging relationship is established. There is a clear, direct and documented connection between fluctuations in the value of the hedged item that are due to the hedged risk and fluctuations in the value of the financial derivatives. The hedging is documented with reference to the company s risk management strategy, clear identification of the hedged item and the hedging instrument, a clear description of the hedged risk and a description of why the hedging is expected to be effective. The hedging instruments are valued at fair value and entered under Net gain/ (loss) on financial instruments in the income statement. CURRENCY The company s presentation currency is Norwegian kroner. Currency items are hedged by matching them with corresponding items on the other side of the balance sheet, or by using derivatives. Income and expenses in foreign currency are translated into NOK at the rates on the transaction date. TAX Deferred tax and deferred tax assets are recognised in the balance sheet in accordance with IAS 12 Deferred Tax. The tax expense in the income statement includes both the tax payable for the period and the change in deferred tax. The deferred tax/deferred tax asset is calculated at a rate of 23% of net temporary differences between accounting and tax values at the end of the financial year. Tax-increasing and tax-reducing temporary differences that are reversed or can be reversed in the same period are offset and entered net. The deferred tax asset is capitalised on the basis of expectations of taxable income through earnings in future years. Tax payable in the balance sheet is the tax payable on the profit for the year. COMMITMENTS / PROVISIONS A provision has been made for contingent liabilities in accordance with IAS 37. For a provision to be made, a contingent liability must exist as a result of previous events, and it must be highly likely that the liability will have to be met. The provision has been calculated as the present value of future payments required to meet the liability. The proposed dividend had not been formally decided on the balance sheet date and does not meet the criteria for being defined as a liability under IAS 37. POST BALANCE SHEET EVENTS Events that occur after the balance sheet date are disclosed in accordance with IAS 10. The information concerns events that are not recognised in the company accounts, but whose nature makes them material to assessing the business. CASH FLOW STATEMENT The cash flow statement is broken down into cash flows from operations, investment activities and financing activities. Cash flows from operations are defined as current interest, fees and commission related to lending and borrowing, interest relating to liquidity, unpaid operating expenses and direct and indirect taxes paid. Investment activities are defined as cash flows from changes in the nominal lending volume, cash flows from securities transactions and investments in operating assets. Cash flows relating to the raising and repayment of subordinated loans and bond debt and equity are defined as financing activities. UPCOMING AMENDMENTS TO STANDARDS AND INTERPRETATIONS IFRS 9 Financial Instruments IFRS 9, which replaces today s IAS 39, is implemented from 1 January This will affect Sparebanken Vest Boligkreditt AS s accounts for future periods. The following notes concern the implementation of IFRS 9: Note 27 contains a general explanation and description. Note 28 describes Sparebanken Vest Boligkreditt s impairment model for financial assets that are debt instruments and that are not classified at fair value through profit or loss. Note 29 specifies the transition effects of implementation. IFRS 15 Revenues from Contracts with Customers The standard introduces a new model for the recognition of revenue from customer contracts. IFRS 15 replaces IAS 11 and IAS 18. The standard is expected to have a limited effect on the company and it will enter into force for the financial year starting 1 January IFRS 16 Leases The standard proposes to remove the distinction between operational and financial leasing because both types of agreements transfer the right to use a specific object from the lessor to the lessee for a specific period. For the lessor, the provisions of IAS 18 are largely retained. The standard has been approved by the EU and is expected to take effect for the financial year starting 1 January The standard is assumed to have a limited effect on the company. ACCOUNTING ESTIMATES AND DISCRETIONARY ASSESSMENTS When preparing the annual accounts in accordance with IFRS, the company s management has used estimates and assumptions that affect the amounts recognised for assets, liabilities, equity and profit/loss. The estimates used are based on discretionary assessments and assumptions that were deemed to be realistic on the balance sheet date. New information and future events may lead to significant changes in estimates, with pertaining changes in recognised amounts. Changes in accounting estimates are recognised in the period when the changes occur. If the changes also apply to future periods, the 13

14 effect is distributed over the current and future periods. The company s most important estimates and assumptions are discussed below. Losses on loans and guarantees If there is objective evidence of one or more events having occurred since the initial recognition of the asset that are expected to entail a risk of reduced debt-servicing ability, an individual loss assessment is carried out for the commitment. Objective events could be default of payment, illiquidity or other material financial problems on the part of the debtor. The company s loss assessments will be the result of a process that involves the parent bank s business areas and important credit environments. The amount of the write-down is determined based on an assessment of the difference between the balance sheet value (loan principal + accrued interest on the valuation date) and the present value of future cash flows discounted on the basis of the effective interest rate over the useful life of the loan. Write-downs are classified as a loss expense in the income statement. Fair value of financial instruments Sparebanken Vest Boligkreditt AS uses basis swaps as hedging instruments to convert payment commitments in foreign currencies into Norwegian kroner. The price of entering into basis swaps varies, which means that the hedging is not a perfect hedge. This affects the fair value of the derivative. In addition, CSA agreements have been entered into on the furnishing of security that clearly favour the bond owners. This has a price, because the counterparties face potentially large commitments if, for example, they are downgraded. This price is called a credit charge and may also vary over time. There is uncertainty associated with the calculation of fair value for such financial instruments. Fixed-interest loans Pursuant to IFRS, the valuation shall be based on an assessment of what an external investor would have assumed when investing in corresponding loans. A well-functioning market does not exist for the buying and selling of fixed-interest loans between market players. The value of the fixed-interest loans is estimated by discounting the cash flows using a risk-adjusted discount factor that takes market players preferences into account. The discount factor is calculated on the basis of an observable swap interest rate with the addition of a margin requirement. When estimating the margin requirement, the bank looks at observable market interest rates for corresponding loans. The swap interest rate element of the discount factor fluctuates continuously, while the observable market interest rates for corresponding loans does not change as frequently. The market players margin requirement is thereby not directly observable, and it is estimated on the basis of the difference between the observable market interest rates and the swap interest rate over a given period. Since the margin requirement is not directly observable, there is uncertainty attached to the calculation of the fair value of fixed-interest loans. Transition effects of implementation of IFRS 9 The application of IFRS 9 Financial Instruments requires a number of assumptions and estimates. Note 29 shows the transition effects of implementation, and Notes 27 and 28 provide descriptions of the standard and the impairment model. 14

15 Note 2 Classification and valuation of financial instruments 31 Dec Recognised at fair value Financial instr. subject to hedge accounting Recognised at amortised cost Total Assets Loans to and receivables from credit institutions Net lending Certificates and bonds Financial derivatives Total Liabilities Debt to credit institutions Securitised debt Financial derivatives Subordinated loan capital Total Dec Assets Loans to and receivables from credit institutions Net lending Certificates and bonds Financial derivatives Total Liabilities Debt to credit institutions Securitised debt Financial derivatives Subordinated loan capital Total Sparebanken Vest Boligkreditt AS has no financial instruments classified as held for trading purposes, held to maturity, or available for sale. 15

16 Note 3 Fair value of financial instruments recognised at amortized cost 31/ /12-16 Balance sheet value Fair value Balance sheet value Fair value Assets Loans to and receivables from credit institutions Loans to customers Total Liabilities Debt to credit institutions Securitised debt, amortised cost Securitised debt, classified as hedge accounting Subordinated loan capital Total Loans and receivables to credit institutions are recognised at amortised cost. These are loans with floating interest rates and fair value is approx. amortised cost. The same applies to loans to customers and liabilities to credit institutions. Note 4 Valuation hierarchy for financial instruments at fair value Level 1 Financial instruments traded in active markets are classified as level 1. A market is deemed to be active if the market prices are easily and regularly available from a stock exchange, broker, industry group, pricing service or regulatory authority, and these prices represent actual and regularly occurring market transactions at arm s length. The market price used for financial assets is the applicable purchase price, while the applicable sales price is used for financial commitments. Level 2 The fair value of financial instruments that are not traded in an active market is determined by using valuation methods. These valuation methods maximise the use of observable data where available and, as far as possible, are not based on the use of own estimates. If all the material data required to determine the fair value of an instrument are observable data, the instrument is included in level 2. Level 3 If one or more data items are not based on observable market information, the instrument is included in level Amounts in thousands Level 1 Level 2 Level 3 Total Financial assets Bonds and certificates at fair value through profit Loans to customers Financial derivatives designated for hedge accounting Total financial assets Liabilities Financial derivatives Total Loans to customers Financial instruments valued at level 3 as of 1 Jan Additions/acquisitions Sales/redemption/repayment -994 The year's value adjustment 90 Financial instruments valued at level 3 as of 31 Dec An increase in the discount rate of 10 basis points for loans valued at fair value will lead to a reduction in value of NOK 28 million. 16

17 Note 4 Valuation hierarchy for financial instruments at fair value (cont.) Amounts in thousands Level 1 Level 2 Level 3 Total Financial assets Bonds and certificates at fair value through profit Loans to customers Financial derivatives 2 2 Financial derivatives designated for hedge accounting Total financial assets Liabilities Financial derivatives Financial derivatives designated for hedge accounting Total Loans to customers Financial instruments valued at level 3 as of 1 Jan Additions/acquisitions 69 Sales -39 The year's value adjustment -42 Financial instruments valued at level 3 as of 31 Dec An increase in the discount rate of 10 basis points for loans valued at fair value will lead to a reduction in value of NOK 12 million. 17

18 Note 5 Risk classification of the credit portfolio Credit risk Credit risk is the risk of losses if Sparebanken Vest Boligkreditt s customers are unable to meet their commitments to the company relating to loans, credit facilities, guarantees etc. Credit risk relating to derivative transactions is quantified using conversion factors that depend on the contract type and term to maturity. Risk classification of loans and guarantees The measurement of credit risk is based on the following main components: i) probability of default (PD), ii), expected exposure at default (EAD) and iii) loss given default (LGD). i) Probability of default (PD) is defined as the probability of a customer defaulting on a loan within the next 12 months. A default can be default of payment in excess of 90 days or other concrete circumstances ( unlikely to pay, cf. Basel II), that affect the customer s ability to service the debt. The probability of default is calculated using statistical models (scorecards) based on logistic regression. Eleven risk classes from A to K are used in order to group the credit portfolio by debt-servicing ability. default. EAD is estimated as the expected utilisation of credit plus the expected utilisation of unutilised drawing rights. iii) Loss given default (LGD) indicates the loss ratio on a commitment in default expressed as a percentage of EAD. For the retail market (PM) this is calulated based on internal models. Collateral type, value, and the probability of recovery are key parameters in the calulation of the loss ratio. In addition to calculating the expected loss ratio, adjustments are made for downturns by calculating the downturn LGD. This is used for capital adequacy purposes. Risk class K comprises commitments in default. The scorecard models combine internal and external data to predict statistical relationships. The results are interpreted and form the basis for logical key figures, and they have a central place in the management of credit risk. A risk classification of all commitments is carried out every month in which data from internal and external sources are retrieved automatically. ii) Expected exposure at default (EAD) is an estimated amount that shows the total exposure in relation to the customer in the event of Risk classes based on probability of default Risk class From and incl. Up to A 0.00% 0.10% B 0.10% 0.25% C 0.25% 0.50% D 0.50% 0.90% E 0.90% 1.50% F 1.50% 2.75% G 2.75% 5.00% H 5.00% 10.00% I 10.00% 25.00% J 25.00% 99.99% K % % Loans broken down by risk class Commitment 31/ /12-16 A-D E-H I-J K Total 1) ) The definition of a customer s commitment in connection with the calculation of risk classification will deviate somewhat in a few areas from the definition of credit exposure pursuant to IFRS. The total amount in this note will therefore not be fully reconcilable with commitments as defined in Note 7. 18

19 Note 6 Loans broken down by receivable type, markets and geographical areas 31/ /12-16 Loans broken down by type of receivable Flexible loans Installment loans Gross loans to customers Individual write-downs, loans -8-5 Group write-downs, loans -9-6 Net loans to and receivables from customers Default of payment - individually assessed 31/ /12-16 Commitments in default Up to 30 days days days 4 7 More than 90 days Net commitments in default Loans broken down by geographical area 31/ Percentage Lendings Ind. write-down Hordaland Sogn og Fjordane Rogaland Other Total Norway Foreign Total geographical areas / Percentage Lendings Ind. write-down Hordaland Sogn og Fjordane Rogaland Other Total Norway Foreign Total geographical areas Note 7 Total commitments 2017 Gross loans Unused credit facilities Total commitments Retail customers, domestic Retail customers, foreign Sole proprietorships secured by mortgage on homes Total gross commitments Individual write-downs Group write-downs Total net commitments Retail customers, domestic Retail customers, abroad Sole proprietorships secured by mortgage on homes Total gross commitments Individual write-downs Group write-downs Total net commitments

20 Note 8 Secured debt Gross loans are secured by mortgages. The hedging objects consist of real property. The table below shows the percentage breakdown of commitments relating to different levels of secured debt. For example, the line 0-50% denotes that the commitments are lower than 50% of the value of the asset used as security. Loan to value % - 50% 27,1% 29,6% 50% - 75% 69,1% 65,5% 75% - 90% 2,6% 3,7% 90% - 100% 0,5% 0,4% >100% 0,7% 0,8% Total 100,00% 100,00% Note 9 Capitalised write-downs of commitments Capitalised write-downs of commitments 31/ /12-16 Individual write-downs Individual write-downs on loans 1 January 5 0 Reversal of write-downs as a result of confirmations in the period -1 0 Write-downs of loans not previously written down 4 5 Individual write-downs 8 5 Group write-downs Write-downs of groups of loans at 1 January (nominal values) 6 5 Change in group write-downs in the period 3 1 Write-downs on groups of loans 9 6 Total write-downs of commitments Losses on commitments Change in individual write-downs during period 3 5 Confirmed losses in the period with previous individual write-down 0 0 Confirmed losses in the period without previous individual write-down 1 1 Change in group write-downs in the period 3 1 Write-downs and losses on loans in the period

21 Note 10 Loans to and receivables from credit institutions 31/ /12-16 No agreed term to maturity or period of notice Net loans to and receivables from credit institutions Geographical areas Hordaland Total geographical areas Receivables from credit institutions are classified at amortised cost and are in their entirety receivables from the parent company Sparebanken Vest (see note 21). There is no agreed term to maturity or period of notice for the receivable. Note 11 Certificates and bonds Certificates and bonds are recognised at fair value (see note 2). Spread risk* Cost price Fair value at 31 Dec Svensk Stat DNB NOR Boligkreditt AS Finnvera PLC Swedbank hypotek Municipality finance Møre Boligkreditt AS Skandinaviska Enskilda Bustadkreditt Sogn og Fjordane Pluss Boligkreditt Gjensidige Bank Boligkreditt Nordic Investment Bank Nordea Eiendomskreditt AS Stockholm Kommune Total Spread risk* Cost price Fair value at 31 Dec Norsk Stat DNB NOR Boligkreditt AS Sparebank1 Boligkreditt Møre Boligkreditt AS Bustadkreditt Sogn og Fjordane Pluss Boligkreditt Gjensidige Bank Boligkreditt Statshypotek Stockholm Kommune Total * Sparebanken Vest Boligkreditt AS accept credit spread risk by investing in fixed-income securities. To manage this risk, the exposure measured by the methodology developed by the FSA. This estimate changes in the value of bonds, taking into account the rating and maturity. The limit is set as the maximum estimated value change by this method. Calculation is performed according to the method described in market risk strategy. 21

22 Note 12 Financial derivatives Financial derivatives in the accounts are agreements entered into with financial institutions to stipulate interest terms and exchange rates for specific periods. The derivatives are recognised at fair value (see note 2). The company mainly uses financial derivatives for hedge accounting of borrowings in foreign currency and/or fixed interest borrowings. The hedging instruments comprise interest rate and currency swaps. See the accounting principles and note 18- Market risk for a more detailed description. Nom. value 31/12-17 Positive market value Negative market value Interest rate swaps Total interest rate instruments Interest rate derivatives designated for hedge accounting Interest rate and currency derivatives designated for hedge accounting Total derivatives designated for hedge accounting Nom. value 31/12-16 Positive market value Negative market value Interest rate swaps Total interest rate instruments Interest rate derivatives designated for hedge accounting Interest rate and currency derivatives designated for hedge accounting Total derivatives designated for hedge accounting Note 13 Offsetting Sparebanken Vest Boligkreditt uses bilateral ISDA agreements with external counterparties when entering into derivative contracts. The agreements allows for netting in each currency, ie. NOK, SEK and EUR, but not between the currencies. The company has also entered into additional agreements on weekly margin requirement of collateral (CSA), which also apply for each currency. The agreements are one-way, meaning that only the counterparty must provide collateral when the market value fluctuates. Collateral from the counterparty shall be made when the market value breaches a threshold (in each currency) which depend on the rating of the counterparty. Higher rating gives a higher threshold for posting of collateral. The CSA agreement contains rating clauses whereby the counterparty must post more collateral if the rating drops below defined rating triggers. If the rating falls below a predetermined level, the counterparty must novate the contracts to another counterparties at the counterparties own expense. 31/ Gross capitalised value Amount to be offset on balance sheet* Capitalised value Netting agreements* Other security/ collateral Amount after possible net payment Loans to and advances to credit institutions Financial derivatives - assets Debt to credit institutions Financial derivatives - liabilities / Loans to and advances to credit institutions Financial derivatives - assets Debt to credit institutions Financial derivatives - liabilities * Netting agreements are not offset on the balance sheet, because the transactions are not settled on a net basis. 22

23 Note 14 Debt to credit institutions Liabilities to credit institutions is classified at amortised cost (see note 2). 31/ / Whithout fixed maturity With agreed term to maturity Debt to credit institutions The loans are funded through Sparebanken Vest s ordinary funding programme. As compensation, the company pays interest corresponding to 3 months NIBOR %. A term to maturity of 13 months has been agreed for debt to credit institutions. A term to maturity of 13 months has been agreed for debt to credit institutions. Note 15 Securitised debt Securitised debt is classified at amortised cost or subject to hedge accounting (see note 2). Covered bonds ISIN CODE Currency Nominal value Interest Issued Due date 31/ / NO NOK Floating 3M Nibor+0,55 % NO NOK Fixed 4,05 % NO NOK Fixed 5,20 % NO NOK Floating 3M Nibor+0,50 % NO NOK Fixed 4,96 % NO NOK Fixed 4,50 % XS EUR Fixed 2,13 % NO NOK Floating 3M Nibor+0,67 % XS EUR Floating 3M Euribor+0,51% XS EUR Fixed 1,50 % XS EUR Floating 3M Euribor+0,15% NO NOK Floating 3M Nibor+0,42% NO NOK Fixed 2,95 % XS EUR Fixed 2,25 % XS EUR Fixed 1,25 % XS EUR Floating 3M Euribor+0,28% XS EUR Fixed 0,25% XS EUR Fixed 0,375 % XS EUR Fixed 0,125% NO NOK Floating 3M Nibor+0,60% NO NOK Floating 3M Nibor+0,53% XS GBP Floating 3M GBPLibor+0,38% XS EUR Fixed 0,375 % NO NOK Floating 3M Nibor+0,40% NO NOK Floating 3M Nibor+0,42% Value adjustments Total listed covered bonds Financial derivatives to hedge securities debt (liabilities) Financial derivatives to hedge securities debt (assets) Total covered bond obligations in the cover pool Cover pool 31/ / Loans secured by a home mortgages (housing mortgages loan) Certificates and bonds Receivables that constitute supplementary assets Cover pool Overcollateralisation in the cover pool 129% 116% 1) NOK 481 million of the total gross lendings are not included in the qualified cover pool. That is 0.63% of gross loans to customers. 23

24 Note 16 Subordinated debt Balance Year Nominal Interest rate Call date 31/ /12-16 Subordinated debt 2014 Subordinated debt NOK 500 mill 3M NIBOR + 1,85% call option 20/ Tier 1 bonds classified as Tier 1 capital 2014 Tier 1 bond NOK 400 mill 3M NIBOR + 3,65% call option 10/ Tier 1 bond NOK 175 mill 3M NIBOR + 4,50% call option 14/ Note 17 Liquidity risk / remaining term to maturity Liquidity risk is defined as the risk of the company being unable to refinance its debt as it falls due or being unable to finance increases in assets. The company s liquidity risk is assessed on the basis of the company s balance sheet structure, including the company s dependence on financing and the extra cost associated with raising money market financing with a long term to maturity compared with financing with a shorter term to final maturity. Sparebanken Vest Boligkreditt s current strategy takes account of the recommendations from the Basel Committee with respect to good liquidity management for lending institutions. Remaining term to maturity for balance sheet items at 31/ Up to 1 months From 1-3 months From 3 months to 1 year From 1-5 years More than 5 years Total Debt to credit institusions 1) Securitised debt Interest disbursements Subordinated loan capital and subordinated bonds Interest disbursements Financial derivatives, gross settlement (outflows) Total liabilities Financial derivatives, gross settlement (inflows) ) Debt to credit institutions is agreed to have a term to maturity of 13 months Remaining term to maturity for balance sheet items at 31/ Up to 1 months From 1-3 months From 3 months to 1 year From 1-5 years More than 5 years Total Debt to credit institutions Securitised debt Interest disbursements Subordinated loan capital and subordinated bonds Interest disbursements Financial derivatives, gross settlement (outflows) Total liabilities Financial derivatives, gross settlement (inflows)

25 Note 18 Market risk Sparebanken Vest Boligkreditt defines market risk as the risk of a loss on financial instruments as the result of changes in market variables and/or market conditions within a specified time band. Market risk arises as a result of the company holding open positions in various financial instruments. It can be subdivided into the following main groups: Interest rate risk: The risk of a loss as the result of changes in the interest rate markets. Currency risk: The risk of a loss as the result of changes in exchange rates. Credit spread risk: The risk of a loss as the result of changes in credit spreads. The company is not exposed to risk relating to equity instruments. The company s market risk is managed on the basis of limits on maximum exposure to interest rate and currency risk stipulated by the board of directors. Interest rate risk is defined as the risk of a loss as the result of changes in the interest rate. Sparebanken Vest Boligkreditt s balance sheet largely consists of loans to the retail market at floating interest rates and borrowings through the issuing of covered bonds. For covered bonds issued at a fixed interest rate, swap agreements are entered into at floating interest rates at the same time as the bond agreements are entered into. In the company s view, the interest rate risk is therefore low. See the tables below for sensitivity analyses relating to interest rate risk. All the company s home mortgage loans are in NOK. Currency risk that arises as the result of bonds being issued in foreign currency are hedged using currency swaps on the start date with repayment on the due date. The company should therefore not be exposed to currency risk. The company has established hedge accounting for bonds issued at fixed interest rates and/or in foreign currency. See the relevant section in note 1 for a more detailed description of the principles. The table below shows the potential losses/gains in the event of a parallel interest rate increase of one percentage point for the company s overall positions. Interest rate sensitivity by period 31/ months 3-12 months More than 1 year Total Change in balance sheet value 26,3-0,1-8,7 17,5 31/ months 3-12 months More than 1 year Total Change in balance sheet value 4,1-0,8-13,2-9,9 Interest rate sensitivity broken down by balance sheet items Balance sheet 31/ / Loans -338,7-179,2 Bonds/certificates -23,2-3,8 Other 0 0,0 Total assets -361,9-183,0 Bonds/certificates 1 075, ,2 Other 12,1 10,3 Total liabilities 1 087, ,5 Derivatives -708,5-843,4 Total 17,5-9,9 25

26 Note 19 Net interest and credit commission income Interest and similar income from loans to and receivables from credit institutions Interest and sim. income from loans to and receivables from customers (am. cost) Interest and similar income from certificates and bonds Interest income and similar income Interest and similar expenses on debt to credit institutions Interest and similar expenses on issued securities Interest expenses and similar expenses Net interest and credit commission income Note 20 Net gains/(losses) on financial instruments Net gain (loss) on certificates and bonds 0 5 Net gain (loss) on fixed-interest loans Net gains (losses) related to interest swaps for fixed interest rate mortgages Net gain (loss) relating to hedge accounting of financial liabilities Of which value adjustment of basis swaps 1) Other gains (losses) 0-8 Net gain (loss) ) The company uses basis swaps as hedging instruments to convert payments on borrowings in foreign currencies to Norwegian kroner. Such basis swaps (or currency swaps) traded on the open market with external parties, based on ISDA agreements regulating formalities. The price of entering into basis swaps fluctuates, making the hedge imperfect. This affects fair value of the derivatives. When swap counterparties have priority in the cover pool pari passu with issued covered bonds, it has also been entered into CSA agreements on collateral that is written in strong favour of the bondholders. This has a price when the counterparties have potential liabilities if they for example should be downgraded. This price is called «credit charge» and can also fluctuate over time. The effect of fluctuations in the price of basis swaps and credit charges will over time be zero for each derivative. Note 21 Other operating expenses Payroll and fees 9 9 Administration expenses 2 2 Pay and general adm. expenses Management fees 1) 0 54 Rating expenses 2 1 Other operating expenses 1 1 Total other operating expenses 3 56 Total operating expenses ) From 1 January 2017 Sparebanken Vest Boligkreditt AS and its parent bank Sparebanken Vest have revised the pricing model of transactions concerning purchase and administration of mortgages. In 2016 and earlier years these costs have been posted as mangement fees and limited to cover the costs in the parent bank. In 2017 the pricing model has been changed and now includes net interest and other operating exspenses. In the income statement the mangement fee has been replaced by commission costs. Fee for elected auditor (amounts in thousands) Audit fee Other services (assistance with Covered Bond Programme and investigation) Tax advice 1 0 Total fees The audit fee is for the ordinary audit and includes VAT. 26

27 Note 22 Transactions with related parties The information provided is in accordance with IAS 24 Related Party Disclosures. Sparebanken Vest Boligkreditt defines the parent company, board members and Sparebanken Vest s group management as related parties in relation to this accounting standard. Information about remuneration of the managing director and board of directors is provided in accordance with the requirements of the Norwegian Accounting Act. Transactions between the company and the parent bank are conducted in accordance with generally accepted business terms and principles. Office support functions and the management of loans are largely services purchased from Sparebanken Vest. A full Transfer and Servicing Agreement has been entered into between the company and Sparebanken Vest. All values are in NOK thousands 2017 Transactions with related parties Income statement Sparebanken Vest Interest and credit commission received from related parties Interest paid on related parties' deposits Interest on subordinated debt Interest on covered bonds -650 Key personnel Wages/fees 1) Management fees Balance sheet Loans to related parties 1) Debt to related parties of which securitised debt Subordinated loan capital ) Including fee/loans to key personnel Transactions with related parties Income statement 2016 Sparebanken Vest Interest and credit commission received from related parties Interest paid on related parties' deposits Interest on subordinated debt Interest on covered bonds Key personnel Wages/fees 1) Management fees Balance sheet Loans to related parties 1) Debt to related parties of which securitised debt Subordinated loan capital ) Including fee/loans to key personnel 27

28 Payroll and other remuneration of executive personnel Sparebanken Vest Boligkreditt AS purchases administrative services from Sparebanken Vest, including the services of its general manager. Officers of the company 2017 Wages/fees Lendings Managing Director Consideration to Sparebanken Vest for the general manager Board of Directors Frank Johannesen, Chairman of the Board Inga Lise Moldestad 60 0 Åsmund Bjørndal Heen Total The directors fees are as stipulated by the Corporate Assembly. Officers of the company 2016 Wages/fees Lendings Managing Director Consideration to Sparebanken Vest for the general manager Board of Directors Frank Johannesen, Chairman of the Board Knut Ravnå, Deputy Chairman 60 0 Inga Lise Moldestad 60 0 Frank Bjørndal Siren Sundland 45 0 Pål Pedersen Åsmund Bjørndal Heen Total The directors fees are as stipulated by the Corporate Assembly. 28

29 Note 23 Tax Tax payable Change in deferred tax through profit or loss Adjustment for interest on hybrid capital classified as equity Effect of change in tax rules 6 6 Tax expense for the year 1 0 Tax expense for the year Pre-tax profit/loss % tax on Pre-tax profit/loss for accounting purposes Effect of change in tax rules 1 0 Non-deductible expenses 0 0 Insufficient/(excess) provision for tax payable 0 3 Tax expense The effective tax rate is 25 % 26 % Change in capitalised deferred tax: 31/ /12-16 Balance sheet value at 1 Jan Change in temporary differences Effect of change in tax rules 1 0 Balance sheet value at 31 Dec The deferred tax asset relates to the following temporary differences 31/ /12-16 Fixed-interest loans 5 6 Securitised debt 25 0 Swaps 3 3 Total deferred tax asset The deferred tax liability relates to the following temporary differences 31/ /12-16 Financial derivatives 0 3 Certificates and bonds 2 0 Securitised debt 0 4 Total deferred tax liability 2 7 Net deferred tax (+) / deferred tax asset (-)

30 Note 24 Capital adequacy Since the second quarter 2009, Sparebanken Vest Boligkreditt AS has had permission to use the IRB method to calculate the minimum requirement for own funds for credit risk in the mass market for real property. This means that the company must apply the transitional rules in the Capital Adequacy Regulations. The transitional rules are based on the former Basel I rules, with a gradual reduction in the capital requirement. 31/ / Weighted calculation basis IRB Credit risk IRB Operational risk Commitment under the standard method Exceptional commitments Total weighted calculation basis before correction to transitional arrangement Correction to the transitional arrangement Weighted calculation basis pursuant to the transitional arrangement Own funds Share capital Revaluation reserve 1 1 Other equity Total book equity excl. hybrid capital Deduction for expected losses IRB Value adjustment for prudent valuation requirement Deduction for provision for dividend Core Tier 1 capital Subordinated bonds Core capital Supplementary capital Net own funds Core Tier 1 capital adequacy 12,9% 12,5% Subordinated bonds 1,8% 2,3% Supplementary capital 1,6% 2,0% Capital adequacy, transitional arrangement 16,3% 16,8% Core Tier 1 capital adequacy 23,5% 22,5% Subordinated bonds 3,3% 4,1% Supplementary capital 2,9% 3,6% Capital adequacy IRB 29,7% 30,2% Minimum requirements Minimum requirement own funds, 8% Surplus own funds of which surplus Core Tier 1 capital to meet buffer requirement Buffer requirement Conservation buffer, 2.5% Systemic risk buffer, 3% Countercyclical buffer, 2% Total buffer requirements, Core Tier 1 capital Surplus Core Tier 1 capital

31 Note 25 Leverage ratio 31/ /12-16 Total assets Off-balance sheet Regulatory adjustments Other adjustments to the calculation (leverage ratio) Calculation basis for leverage ratio Core Capital Leverage ratio 5,3% 5,3% Note 26 Events after the balance sheet date There is no information to indicate that material events have taken place from the balance sheet date on 31 December 2017 until the Board s final consideration of the accounts on 31 January Note 27 Description of IFRS 9 GENERAL INFORMATION ABOUT IFRS 9 The accounts for 2017 have been prepared on the basis of IAS 39 Financial Instruments: Recognition and Measurement. This standard will be replaced by IFRS 9 Financial Instruments from 1 January IFRS 9 addresses recognition, classification, measurement and derecognition of financial assets and liabilities, and hedge accounting. Transitional rules IFRS 9 will be applied retrospectively, except in the case of hedge accounting. Retrospective application means that Sparebanken Vest Boligkreditt AS shall prepare an opening balance sheet on 1 January 2018 as if it had always applied the new principles. This does not mean that the comparable figures for 2017 have to be revised pursuant to the new principles, and the standard states that comparable figures must not be revised unless it can be done without the use of hindsight. Therefore, Sparebanken Vest Boligkreditt AS will not revise its comparable figures in the 2018 accounts. The effects of the new principles in the opening balance sheet for 2018 are entered against equity. Among other things, IFRS 9 will entail new classification and measurement principles. The measurement categories for financial assets in IAS 39 (fair value through profit or loss, available for sale, held to maturity and amortised cost) have been replaced by the following three categories in IFRS 9: Amortised cost Fair value through other comprehensive income (FVOCI) Fair value through profit or loss (FVPL) The measurement category is decided upon initial recognition of the asset. For financial assets, a distinction is drawn between debt instruments, derivatives and equity instruments, where debt instruments are all financial assets that are not derivatives or equity instruments. The recognition of financial commitments is largely the same as pursuant to IAS 39, except for gains and losses relating to own credit risk. The effects of the latter shall be recognised through other comprehensive income. The introduction of IFRS 9 entails relatively major changes to the impairment rules for financial assets valued at amortised cost. Under IAS 39, a loss shall only be recognised when there is objective evidence that a loss event has occurred. Under IFRS 9, the recognition shall be based on expected credit loss (ECL). The write-downs shall be unbiased and forward-looking. This means that the company must calculate expected losses for all debt instruments held as assets that are not valued at fair value through profit or loss, in addition to guarantees, loan commitments and undrawn credit facilities. CLASSIFICATION AND MEASUREMENT Financial assets that are debt instruments must undergo two tests to decide their classification and measurement pursuant to IFRS 9. The first test is done at instrument level, and it is a valuation of the instrument s contractual terms. This is often called the SPPI test (SPPI = solely payment of principal and interest). Only instruments with contractual cash flows that only consist of the payment of interest and principal on given dates qualify for measurement at amortised cost. All other instruments shall be measured at fair value through profit or loss. Instruments that in principle qualify for measurement at amortised cost must then undergo a business model test. This is done at portfolio level: Debt instruments shall be measured at amortised cost if the instruments are held in a business model, in which the purpose of holding the instrument is to receive contractual cash flows. Instruments with cash flows that only consist of the payment of interest and principal that are held both for the purpose of receiving contractual cash flows and for sale shall be measured at fair value through other comprehensive income (FVOCI) along with interest income and any write-downs recognised through profit or loss. this means that the instrument is recognised in the balance sheet at fair value, and that interest on and write-downs for credit losses are recognised through profit or loss, in the same way as if the instrument had been measured at amortised cost, while other changes in value are recognised through other comprehensive income. Other debt instruments shall be measured at fair value through 31

32 profit or loss. This will typically be instruments held in trading portfolios, portfolios that are managed, measured and reported to the management on a fair value basis and portfolios whose scope of sale is too large to fall under the other two business models. Instruments that, following these tests, are to be measured at amortised cost or fair value through OCI can nonetheless be designated as measured at fair value through profit or loss if this eliminates or significantly reduces an accounting mismatch. Amortised cost: Debt instruments that undergo the SPPI test and that are covered by a business model whose purpose is to hold the instrument in order to receive contractual cash flows shall be valued at amortised cost. In Sparebanken Vest Boligkreditt AS s accounts, outstanding loans with a floating interest rate are defined under this category. Receivables from credit institutions will also be valued at amortised cost. Fair value through other comprehensive income (FVOCI): Debt instruments that undergo the SPPI test and that are covered by a business model whose purpose is both to be held for the purpose of receiving contractual cash flows and for sale shall be measured at fair value through other comprehensive income (FVOCI) along with interest income and any write-downs recognised through profit or loss. Sparebanken Vest Boligkreditt AS has not identified financial instruments under this category. Fair value through profit or loss (FVPL) Derivatives: All derivatives shall in principle be measured at fair value through profit or loss (FVPL), but derivatives designated for hedge accounting shall be recognised in accordance with the principles for hedge accounting. Liquid assets: Liquid assets are managed, measured and reported to the management on a fair value basis. Substantial parts of the portfolio also comprise fixed-rate securities with interest rates hedged through derivatives, which shall nonetheless be recognised at fair value through profit or loss. Liquid assets will therefore be recognised at fair value through profit or loss. Fixed-interest loans: Fixed-interest loans can be redeemed before they mature in return for the payment of excess or shortfall values that have arisen as a result of the market interest rate changing after the interest rate was set (above or below par). The possibility of redeeming a loan below par means that fixed-interest loans must be measured at fair value through profit or loss because the instruments cash flows do not only consist of the payment of interest and principal as defined in IFRS 9. This point in IFRS 9 was amended this autumn with effect from 1 January 2019 (not approved by the EU). The amendment will make it possible for fixed-interest loans to be recognised at amortised cost. Sparebanken Vest Boligkreditt AS hedges the interest rate risk for this significant balance sheet item through derivatives. Derivatives shall always be measured at fair value. As developments in the value of the derivatives are recognised through profit or loss, the recognition of fixed-interest loans at amortised cost will lead to significant fluctuations in profit/loss. Recognition at fair value through profit or loss will thereby lead to a more harmonised comparison of the derivatives profit/loss and changes in the value of loans. Hedge accounting IFRS 9 simplifies the requirements for hedge accounting by linking hedge effectiveness more closely with risk management activities and leaving greater room for assessment. The requirement for a hedge effectiveness of per cent has been removed and replaced by more qualitative requirements, including that there must be an economic relationship between the hedging instrument and the hedged item, and that the effect of credit risk must not dominate the value changes in the hedging relationship. Under IFRS 9, a prospective (forward-looking) effectiveness test is sufficient, while hedge effectiveness under IAS 39 must be considered both retrospectively and prospectively. Hedging documentation is still required. Hedge ineffectiveness, defined as the difference between the value adjustment of hedging instruments and the value adjustment of the hedged risks in the items, is recognised in profit or loss as it arises. The exception is the part of the value adjustment caused by a change in the basis spread relating to the hedging instruments presented in the statement of comprehensive income. IMPAIRMENT LOSSES ON LOANS VALUED AT AMORTISED COST Under IAS 39, a loss shall only be recognised when there is objective evidence that a loss event has occurred. Under IFRS 9, the recognition shall be based on expected credit loss (ECL). The general model for impairment of financial assets in IFRS 9 applies to both financial assets measured at amortised cost and assets measured at fair value through other comprehensive income (FVOCI). Loan approvals and guarantee commitments are also covered by the impairment model. The measurement of the provision for expected losses under the general model depends on whether the credit risk has increased significantly since initial recognition. Upon initial recognition and when the credit risk has not increased significantly after initial recognition, a provision shall be made for 12-month expected losses. Twelve-month expected losses are the losses expected to occur during the instrument s life, but that can be linked to events occurring in the next 12 months. If the credit risk has increased significantly since initial recognition, a provision for expected losses shall be made for the whole life of the instrument. Sparebanken Vest Boligkreditt AS has established a method for assessing whether the credit risk has increased significantly after initial recognition by calculating the risk of a default occurring during the financial instrument s remaining life. The expected credit loss is calculated on the basis of the present value of all cash flows over the expected remaining life, i.e. the difference between the contractual cash flows under the contract and the cash flows the bank expects to receive, discounted by the effective interest rate on the instrument. The method in the IFRS 9 standard entails slightly higher volatility in write-downs and is based on the economic outlook. Write-downs must be expected to take place earlier than under the current practice. This will be especially marked at the beginning of an economic downturn. RECOGNITION OF INTEREST Under IFRS 9, as in IAS 39, interest is recognised on the gross carrying amount using the effective interest rate method. The effective interest rate is the rate that exactly discounts the estimated future cash flow through the expected life of the financial instrument. This entails recognising nominal interest and amortisation of establishment fees after the deduction of direct establishment costs, as they arise. For debt instruments held as assets that are written down as a result of objective evidence of loss (Stage 3), interest is recognised based on the net carrying amount. 32

33 Note 28 Description of the impairment model under IFRS 9 This note describes the company s impairment model for financial assets that are debt instruments and that are not classified at fair value through profit or loss. General impairment principles are described in Note 27. Sparebanken Vest Boligkreditt AS has prepared a procedure for the quarterly calculation of losses based on data warehouses that contain historical information about account and customer data for the whole credit portfolio, loans, credit and guarantees. The goal of the model is to calculate expected credit loss (ECL) based on forward-looking and unbiased estimates. The loss estimates will be calculated on the basis of 12-month and lifetime probability of default (PD), loss given default (LGD) and exposure at default (EAD). The data warehouse contains historical data about the observed default rate (PD) and loss ratio (LGD). This will form the basis for producing good estimates of future PD and LGD values. Sparebanken Vest Boligkreditt AS considers forwardlooking information about macroeconomic factors such as unemployment, interest rates, housing prices and other financial estimates, to be able to produce forward-looking estimates for PD and LGD. Forward-looking EAD is based on agreed repayment plans and observed levels of actual repayments and redemptions. All estimates shall be as unbiased as possible. They thereby differ from corresponding estimates for PD, LGD and EAD that are used in the calculation of capital. The estimates used to calculate capital are more conservative, for example by including safety margins or estimates for serious economic downturns. In line with IFRS 9, the company groups its loans into three stages based on the probability of default (PD) at the time of recognition compared with the balance sheet date, and instalments paid more than 30 days after the due date. In other words, each individual loan (or commitment) is classified as Stage 1, 2 or 3. This means that one and the same customer can have loans classified in different stages. Sparebanken Vest Boligkreditt AS uses the same PD model as in IRB, but with unbiased calibration, meaning without safety margins, as the basis for assessing increased credit risk. The PD estimate represents 12-month probability. Validation shows that it is accurate for both short and long timeframes. It is therefore considered to be a reasonable and pragmatic approach to assessing the increase in credit risk over the lifetime of a loan. Stage 1: The starting point for all financial assets covered by the general loss model. A loss provision corresponding to 12-month expected losses, meaning losses relating to incidents that may occur in the 12 months after the reporting date, will be made for all assets for which the credit risk is not significantly higher than upon initial recognition. This category includes all assets not transferred to Stage 2 or 3. Stage 2: Stage 2 includes assets for which the credit risk has increased significantly since initial recognition, but where there is no objective evidence of a loss. For these assets, a provision for lifetime expected losses will be made. This group includes loans for which the credit risk has increased significantly but that are not in default (i.e. not Stage 3; see below). As regards delimitation in relation to Stage 1, the company itself defines what constitutes a significant increase in credit risk. However, IFRS 9 states that a significant increase in credit risk will have occurred, unless this can be refuted, if payment is delayed by 30 days or more (up to 90 days, which is defined as actual default). more than doubled since the loan was furnished and is at least 0.6%, it is classified as Stage 2. Stage 3: Stage 3 of the loss model includes assets for which the credit risk has increased significantly since initial recognition, and where there is objective evidence of a loss event on the balance sheet date. For these assets, a provision for lifetime expected losses will be made, largely corresponding to today s IAS 39. The definition of default under IFRS 9 is the same as in IAS 39, and a provision is made for lifetime expected losses. The definition of default in Stage 3 also concurs with internal risk management and capital requirement calculations. Also here, 90 days delayed payment is used as an important criterion for default. Forward-looking information The process starts when a macroeconomist sends macro data expectations to the credit environment. This is done on the basis of three different scenarios. The three scenarios consist of a base case intended to cover a probability range of 60%, as well as a worst case and a best case with a probability weighting of 20%. Scenarios are used to adjust non-linear characteristics of subcomponents in the ECL calculation. The use of macro data Together with its parent bank, Sparebanken Vest Boligkreditt has divided the lending portfolio into 13 corporate market segments and 2 retail market segments. For the company, the majority of the portfolio consists of CM commitments. Our credit department receives the forward-looking macro data and considers how they affect the probability of default (PD) and developments in the value of security in each segment and each scenario. These assessments are based on expert assessments, and different macro data are assigned different weights in the different segments. This generates PD paths for each industry for the next five years, which are then converged against a long-term average. Model calculation Based on the grouping of commitments into different stages, the use of forward-looking probability of default (PD paths) and the value of security, expected losses are calculated in the bank s loss provision model. The Financial Supervisory Authority s reference model is used for LGD. Security coverage, probability of recovery and recovery of unsecured debt are the most important elements in this model. Security coverage is calculated specifically for each loan, while the other elements are based on historically observed average values. In principle, losses per year are calculated using modelled exposure x PD x LGD for each year. The losses are discounted back to the time of reporting and added together. A weighted sum is then calculated for each scenario. Calculations and assumptions are subject to independent validation by the parent bank s validation team. The company uses the PD level as the primary criteria for significantly increased credit risk. PD at the time of reporting is compared with PD at the time the loan was furnished. If PD has 33

34 Note 29 Transition from IAS 39 to IFRS 9 Financial assets Amortised cost Balance-sheet amount under IAS 39, 31 December 2017 Change as a result of reclassification Change as a result of new measurement Balance-sheet amount under IFRS 9, 1 January 2018 Loans to and receivables from credit institutions Loans to and receivables from customers 1) Total amortised cost Fair value through profit or loss Loans to and receivables from customers 2) Certificates and bonds 3) Financial derivatives Total fair value through profit or loss Total financial assets (Note 2) Financial commitments Amortised cost Deposits from and debt to credit institutions Securitised debt Subordinated loan capital Total amortised cost Fair value through profit or loss Financial derivatives Total effect, fair value through profit or loss Securitised debt designated for hedge accounting Total financial commitments (Note 2) ) Floating interest loans Loans with a floating interest rate are common in Norway. The terms are normally standardised and apply equally to all loans of this type. The borrower s right to early redemption and competition between banks mean that the loans cash flows will not deviate, to any great extent, from what is defined as the payment of interest and principal on given dates in IFRS 9. The company s assessment is therefore that the terms and conditions for these loans are consistent with measurement at amortised cost. 2) Fixed interest loans See Note 27 3) Liquidity portfolio The liquidity portfolio comprises interest-bearing securities that generate varying turnover. The securities are managed, measured and reported to the management on a fair value basis. Capital effects of transition to IFRS Equity at 31 Dec. pursuant to IAS Write-down on loans recognised in the balance sheet at 31 Dec pursuant to IAS Write-down on loans recognised in the balance sheet pursuant to IFRS 9 28 Implementation effect -11 Tax effect of implementation effects 3 Total effect on equity of implementation of IFRS Equity at 1 January 2018 after implementation of IFRS The above-mentioned implementation effect represents an effect of 0.03% on the company s capital adequacy. 34

35 Statement pursuant to Section 5-5 of the Securities Trading Act We herby confirm that the annual accounts for the company for 2017 to the best of our knowledge have been prepared in accordance with applicable accounting standards and give a true and fair view of the assets, liabilities, financial position and profit and loss of the company taken as a whole. The directors report gives a true and fair development and performance of the business and the position of the company, as well as a description of the principal risks and uncertainties facing the company. 31 January 2018 The Board of Directors of Sparebanken Vest Boligkreditt AS Frank Johannesen, Chairman of the Board Åsmund Bjørndal Heen Inga Lise Moldestad Egil Mokleiv, Managing Director 35

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