Annual report 2024A company in the Sparebanken Sør Group

Sparebanken Sør Boligkreditt AS is a wholly owned subsidiary of Sparebanken Sør. The company is licensed by and subject to supervision from the Financial Supervisory Authority of Norway to operate as a mortgage company and issue covered bonds and is a part of Sparebanken Sør’s long-term financial strategy. All shares are owned by Sparebanken Sør and the financial statements are consolidated into the financial statements of the Sparebanken Sør Group. Sparebanken Sør Boligkreditt AS’ operations are subject to supervision by the Financial Supervisory Authority of Norway. An investigator has been specially appointed for the mortgage company to attend to the quarterly analysis of the company’s cover pool.

The cover pool consists of secured mortgages, substitute assets in interest-bearing securities and financial derivatives. The mortgages are granted by Sparebanken Sør and later taken on by Sparebanken Sør Boligkreditt AS. The secured mortgages meet the requirements established by the company for inclusion in the company’s cover pool. One important requirement is that any outstanding loan balance taken on by the company must not exceed 80 percent of the mortgaged property’s market value at the date of acquisition.

The EU directive 2019/2162 (The Covered Bonds Directive) came into force 8 July 2022. Only Premium European covered bonds that satisfy the guidelines and meet the requirement of Article 129 of the CRR, will benefit from preferential regulatory treatment.

The Norwegian Financial Supervisory Authority has approved Sparebanken Sør Boligkreditt AS’ European Covered Bond Premium Program. Covered bonds issued by Sparebanken Sør Boligkreditt AS that complied under existing legislation before 8 July 2022, will be grandfathered and eligible for preferential treatment to maturity.

The new regulation restricts funding coverage for mortgage covered bonds to the asset’s loan-to-value threshold of 80 percent (from previously 75) for residential mortgages.

At the end of 2024, Sparebanken Sør Boligkreditt AS had taken on a mortgage loan portfolio totalling NOK 60 652 million, from Sparebanken Sør, of which NOK 60 354 million was included in the qualified cover pool.

The portfolio of bonds and certificates totalled NOK 5 606 million at the end of 2024, of which NOK 4 500 million was included in the cover pool. Corresponding figures at the end of 2023 were NOK 2 158 million and NOK 990 million respectively.

Sparebanken Sør Boligkreditt AS had issued covered bonds totalling NOK 59 573 million, compared to NOK 49 732 million at the same time in 2023.

The company had established an EMTCN (European Medium Term Covered Note) Programme, which enables the company to diversify funding by issuing covered bonds outside the Norwegian bond market.

The financial statement of Sparebanken Sør Boligkreditt AS showed a profit after tax of NOK 362.3 million at the end of 2024, compared to NOK 299.1 million in the same period in 2023.

The company had net interest income of NOK 615.2 million, compared to NOK 470.9 million in 2023.

Net income from financial instruments totalled minus NOK 28.3 million, compared to NOK 7.7 million in 2023. The negative effect on net income from financial instruments is related to hedging, buyback effects on own bonds in addition to negative changes in value from certificates and bonds.

The company had issued covered bonds in Euros under the EMTCN (European Medium Term Covered Note) program. In order to control interest and currency exposure, the company had established swap arrangements (basis swaps), to convert foreign currency into NOK. The impact on earnings related to changes in the value of the basis swap, affected the income from financial instruments by NOK 0 million and other comprehensive income by minus NOK 50.0 million in 2024. Assuming that the covered bonds in foreign currency are held to maturity, the total change in fair value will be equal to zero. The accounting effects will therefore be reversed over time.

Operating expenses were NOK 116.8 million in 2024, compared to NOK 106.4 million in the same period in 2023.

Tax expenses were NOK 104.6 million in 2024. Corresponding figures in 2023 were NOK 75.3 million. In 2023, NOK 7,3 million was recognised as income as a result of changed tax rate in the company for the period 2017-2018.

Total assets as at 31 December 2024 were NOK 72 358 million, of which net loans to customers represented NOK 60 625 million. At the same time in 2023 total assets were NOK 60 057 million, of which net loans to customers were NOK 55 808 million. As at 31 December 2024, the loan portfolio was financed through the issuance of bonds amounting to NOK 59 573 million and through equity and drawing rights from Sparebanken Sør. At 31 December 2024, the company had paid-in capital totalling NOK 3 975 million, of which NOK 3 475 million was share capital and NOK 500 million was share premium.

Sparebanken Sør Boligkreditt AS had an overdraft facility of NOK 6 000 million with Sparebanken Sør for operational purposes that, as at 31 December 2024, was drawn down by NOK 3 749 million.

In accordance with Norwegian accounting legislation, the Board of Directors confirms that the conditions for presenting the financial statements on a going- concern basis are met.

At the end of 2024, the net subordinated capital in the company was NOK 5 757 million, compared to NOK 4 390 million at the same time in 2023. This corresponded to a common equity tier 1 capital ratio/tier 1 capital ratio/total capital ratio of 22.1 percent ( 19.0 percent in 2023), while regulatory minimums requirements constitute 14.0 percent, 15.5 percent and 17.5 percent respectively. The capital adequacy ratio was calculated based on the standard method in the Basel II - regulations. The Board of Directors considers the company’s solidity and risk-bearing ability to be good. The company’s Leverage Ratio was 7.8 percent at 31 December 2024.

Sparebanken Sør Boligkreditt AS’ corporate governance principles are based on the Norwegian Code of Practice for Corporate Governance (NUES). The company has adapted this framework, and Sparebanken Sør Boligkreditt AS`s principles and policy intend to ensure that its corporate governance is in accordance with generally accepted and recognised perceptions and standards, and in compliance with laws and regulations.

The company’s corporate governance shall ensure good interaction between different stakeholders such as shareholders, lenders, customers, employees, governing bodies, management and society. The corporate governance principles have been specified in various documents governing the company’s operations. This includes the company’s articles of association, strategies and governance framework. In the Board of Directors’ opinion, the corporate governance of Sparebanken Sør Boligkreditt AS is satisfactory and in compliance with applicable principles and policies.

Sparebanken Sør Boligkreditt AS’ mission follows from the company’s articles of association. The company’s mission is to acquire mortgages and fund lending activities primarily by issuing covered bonds. Operations will be run at satisfactory profitability and low risk.

The Board of Directors of Sparebanken Sør Boligkreditt AS has an annual meeting and conducts an annual review of the company’s business strategy. 10 board meetings took place in 2024. Follow-up on operations, strategy, risk, and capital management and monitoring of the markets and framework conditions have been the areas of focus for the Board of Directors. The company’s risk strategy has been adopted by the Board of Directors, which conducts an annual review of the company’s risk management and internal control. Identified areas of risk and any material deviations are followed up and reported on a regular basis.

Sparebanken Sør Boligkreditt AS has signed operating agreements with Sparebanken Sør. These agreements cover capital management, risk management, internal audit, financial reporting, internal financial control and internal financial reporting. In addition to reviewing the accounts and risk reporting, the company`s management provides regular operational reports in relation to the company’s financial objectives to the Board, at each Board meeting.

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. In 2024, parent companies in large corporate groups shall include a sustainability statement for the Group in the annual report. The sustainability statement shall be reported according to the EU's Corporate Sustainability Reporting Directive (CSRD) and the associated European Sustainability Reporting Standards (ESRS). The sustainability reporting for Sparebanken Sør, including its subsidiaries, is referenced in Sparebanken Sør's annual report for 2024. The company is also obligated under Section 5 of the Norwegian Transparency Act to provide a reporting of due diligence assessments with respect to fundamental human rights and decent working conditions. The report will be updated and published by June 30, 2025 on Sparebanken Sør’s website (sor.no). This is a joint report for Sparebanken Sør and Sparebanken Sør Boligkreditt, both of which have independent reporting obligations.

Sparebanken Sør Boligkreditt AS is a wholly-owned subsidiary of Sparebanken Sør and is exempt from the requirement for a separate audit committee. The Compliance function is taken care of through the company’s agreement with Sparebanken Sør. The company has an independent external auditor (PWC) and an internal audit function (EY). BDO has been appointed as an investigator as of Q1 2023. Sparebanken Sør Boligkreditt AS’s operations are subject to supervision by the Financial Supervisory Authority of Norway. The Board of Directors and management endeavour to maintain an open and constructive dialogue with the Financial Supervisory Authorities.

As a licensed mortgage company, Sparebanken Sør Boligkreditt AS is under the regulation of The Act on the Supervision of Financial Institutions and is subject to a number of regulations, recommendations and regulatory provisions. The objective of the company is to finance lending activities through the issuing of covered bonds with a high public rating. This means that Sparebanken Sør Boligkreditt AS strives to maintain a low risk level. The company has established board approved guidelines and limits for management and control of various areas of risk, which meet regulatory, rating agency and investor requirements. The company places emphasis on identifying, measuring and controlling elements of risks in such a way that the market has high confidence in the company and that the company can achieve a high rating on issued bonds.

The company’s credit strategy and policy constitute a framework, which includes lending regulations and loan-to-value requirements for any loan taken on by the company. The Board of Directors considers the overall quality of the lending portfolio to be very good and the credit risk is considered low.

In accordance with Board-approved requirements, stress testing of the value of the cover pool was conducted in 2024 by simulation of a sharp fall in house prices. The Board of Directors found the result of the stress tests to be satisfactory.

The company’s mortgage lending to customers is in Norwegian kroner (NOK) at floating interest rates. Financing is based on both floating and fixed interest rate bonds in NOK and EUR. Foreign currency debt is swapped into NOK and liabilities established at fixed rates are swapped into floating rates. Accounting for foreign currency debt and debt at fixed interest rates, complies with the rules for hedge accounting.

The Board of Directors considers the overall market risk to be low.

The company issues covered bonds with the opportunity to extend the maturities by up to 12 months, given an approval by the FSA. In addition, financing needs are met by using equity and credit facilities with Sparebanken Sør. The Board of Directors considers the company’s liquidity risk to be low. As at 31 December 2024 the company had a liquidity portfolio in addition to substitute assets, and was compliant with the liquidity requirements imposed on financial institutions, with a LCR total ratio of 287.3 percent and LCR EUR ratio above the requirement of 100 percent.

As of 31.12.2024 the mortgages in the cover pool had an average loan-to-value of 53.5 percent. Over-collateralization was 15.1 percent and given a stress-test on asset prices of 30 percent, the OC was above the legislative OC level of 5 percent.

A Loan Service Agreement and Management Service Agreement are in place with Sparebanken Sør encompassing the supply of all services necessary for operating the company, and the Board of Directors considers the company’s operational risk to be low.

At 31 December 2024, the company had no employees and there are no relevant comments regarding the internal working environment. The Board is composed of three persons, one of whom is female.

Sparebanken Sør Group has a Green and Sustainability Bond Framework in place, under which Sparebanken Sør Boligkreditt AS has issued green covered bonds. The proceeds are allocated to a mortgage portfolio, financing energy-efficient residential buildings in Norway. The bond framework, which is aligned with ICMA Green Bond Principles, was last updated in October 2024.

Covered bonds issued by Sparebanken Sør Boligkreditt AS in NOK and EUR, have been given an Aaa rating by Moody’s. Sparebanken Sør Boligkreditt AS has as of June 2023 been assigned an A1/Prime-1 issuer rating by Moody`s, in line with ratings assigned on the parent bank.

The company requires social responsibility work to take place in close cooperation with and according to the same guidelines as in Sparebanken Sør. The company does not carry out any activities that pollute the external environment.

Total profit after tax for 2024 is NOK 362.3 million. The Board of Directors proposes to the Annual General Meeting a dividend payment of NOK 310.0 million.

Growth in the Norwegian economy picked up in 2024 and is back to a normal pace. Economic activity was driven by high public demand and petroleum investment.

Unemployment is low and has shown little change but with a somewhat negative trend in recent months. As a consequence of an expected higher activity in the construction market in 2025, the development in the labour market is expected to be positive going forward.

Growth in household consumption and housing investments was negatively affected by the high interest rates. In 2025 consumer behaviour might change as a consequence of lower interest rates and a positive real wage growth. This will underpin a strong development in house prices, especially in the larger cities.

Inflation has fallen markedly since the peak, and stood at 2.2 percent at year’s end. This is close to the targeted inflation level of the Norwegian Central Bank, at 2 percent, but was to a large extent driven by lower energy prices in December compared to previous year. International inflation has declined and moved closer to inflation targets. As a consequence, several central banks have reduced the key policy rates. Markets participants expect further rate cuts going forward, but the expectations are somewhat dampened compared to the situation earlier in 2024.

The Norwegian Central Bank’s assessment of the outlook as at December, is that the key policy rate will probably be reduced by 25 basis points from 4.5 percent as of March. A further easing of the monetary policy with one additional cut, is expected to take place during the pace of 2025.

Sparebanken Sør Boligkreditt AS has ample access to wholesale funding both from the domestic as well as from the bond market abroad. The Board of Directors anticipates the company’s business to continue to be satisfactory going forward. Sparebanken Sør Boligkreditt AS is well-positioned to further acquire loans from Sparebanken Sør, and issue covered bonds towards investors in Norway and abroad.

Proposed merger with Sparebanken Vest Boligkreditt AS
In August 2024 it was announced that the Boards of Directors of Sparebanken Sør and Sparebanken Vest had approved a plan for merging the two banks. Sparebanken Vest will be the overtaking entity and will thus assume all rights and liabilities upon the completion of the proposed merger. The aim is to complete the proposed merger in the early part of May 2025, upon which the new bank will be rebranded to Sparebanken Norge.

Following the completion of the bank merger it is proposed that Sparebanken Sør Boligkreditt AS will merge with Sparebanken Vest Boligkreditt AS, and the new boligkreditt company will be rebranded to Sparebanken Norge Boligkreditt AS. The boligkreditt merger has been approved by an extraordinary general meeting of each of Sparebanken Sør Boligkreditt AS and Sparebanken Vest Boligkreditt AS. The boligkreditt merger is conditional on the completion of the merger between Sparebanken Sør and Sparebanken Vest and will be completed immediately after this. Sparebanken Vest Boligkreditt AS (Sparebanken Norge Boligkreditt AS) will assume all rights and liabilities upon the proposed merger.