On 14 May 2020, Verd Boligkreditt AS (Verd) announced that a letter of intent had been signed by the nine banks owning Verd, organised under the De Samarbeidende Sparebankene alliance (DSS) and the Lokalbankallianse (LBA). According to the letter of intent, the LBA banks intend to become additional owners in Verd to enable them to refinance eligible mortgage loans with covered bonds issued by Verd.

The 11 Norwegian savings banks behind the LBA – Askim & Spydeberg Sparebank, Drangedal Sparebank, Nidaros Sparebank, Selbu Sparebank, Sparebank 68 Grader Nord, Sparebanken Din, Stadsbygd Sparebank, Tolga-Os Sparebank, Ørland Sparebank, Ofoten Sparebank and Aasen Sparebank – have terminated their membership agreements with Eika Group. The agreement, which expires on 31 December 2021, allows the LBA banks to use the covered bond-issuing entity of Eika Group. The LBA banks are now seeking an alternative way to refinance mortgage loans via OMF (obligasjoner med fortrinnsrett).

As of March 2020, Verd’s cover pool had NOK 9.94bn of Norwegian residential mortgage loans (see New analysis on mortgage covered bonds issued by Verd Boligkreditt AS). If the LBA banks were to enter Verd as new owners, Verd’s cover pool could double in size. Even so, the cover pool would remain small compared to those of other Norwegian covered bond issuers.

The potential combined cover pool would lead to higher regional diversification. Both alliances consist of small local saving banks with comparable risk metrics. The DSS banks are more active in south-western Norway, while half of the LBA banks operate in the Trondelag region (Trondheim). With Sparebank 68 Grader Nord the combined portfolio could further benefit from some more diversification to northern Norway.

Should the LBA’s intention result in a joint ownership of Verd, any effect on the credit quality of Verd’s cover pool and covered bonds will only emerge slowly. This is because the LBA banks’ eligible mortgage loans, currently held with Eika Boligkreditt, can only be released in line with the corresponding covered bonds’ maturities. Hence, they cannot be immediately transferred to Verd.

Scope will monitor the proceedings closely to assess the potential impact on Verd’s covered bond rating (AAA/Stable).