Rating action

Scope Ratings GmbH (Scope) has today affirmed the AAA rating assigned to the Norwegian mortgage covered bonds (obligasjoner med fortrinnsrett) issued by Totens Sparebank Boligkreditt, the fully owned mortgage subsidiary of Totens Sparebank. All ratings have a Stable Outlook.

Key rating drivers

Solid issuer rating (positive)¹. Totens Sparebank Boligkreditt's solid issuer rating (A-/Stable) is aligned with the issuer rating of its ultimate parent, Totens Sparebank. The rating reflects its strong market position in an economically sound area of south-east Norway; healthy profitability supported by good cost efficiency and low credit costs; the managed reliance on market funding; and solid solvency metrics underpinned by the savings bank business model.

Cover pool support (positive)². Cover pool support is the primary rating driver and adds at least six notches of rating uplift. This is reflected by:

1. Cover pool complexity category (positive). Scope has assigned a cover pool complexity category of ‘low’ to the issuer’s management of the interplay between complexity and transparency. This allows for the maximum uplift of three notches on top of the governance uplift. (ESG factor)
    
2. Overcollateralisation (positive). Available overcollateralisation is 18.0% as of 30 June 2022, a level which affords protection from market and credit risks and is well above the 5.0% rating-supporting overcollateralisation. Scope has increased the supporting overcollateralisation from 4.0% one year ago due to the updated legislation requiring a minimum nominal overcollateralisation of 5.0%.
    
3. Sound credit quality (positive). The cover pool comprises well-diversified domestic residential mortgage loans (92.9%) as well as liquid substitute assets (7.1%). The cover assets benefit from a low average loan-to-value ratio of 52.0% and moderate granularity (the top 10 exposures account for 1.8%).
    
4. Market risks (negative). There is no foreign currency or interest rate risk. All bonds are denominated in local currency (NOK) and issued at floating rates – matching the profile of the cover assets. However, the programme is exposed to maturity mismatches: the weighted average life of the loans is significantly above that of the covered bonds. This exposes the programme to potential asset sales under discounts in a stressed environment. The bonds’ soft-bullet maturities, together with available overcollateralisation, reduces market risks.

Governance support (positive)³. Governance support provides the covered bonds with five notches of uplift above the issuer rating. As such, only one notch from cover pool support is needed to raise the covered bond rating to the highest achievable level.

Scope deems the new Norwegian covered bond framework, effective since 8 July 2022, positive but ultimately credit-neutral for the rated covered bonds. The new legislation resulted in only limited changes to the framework, which included requirements to provide a cover pool liquidity buffer and regular reporting to investors. (ESG factor)

One or more key drivers of the credit rating action are considered an ESG factor.

Rating-change drivers

Scope’s Stable Outlook on the mortgage covered bonds reflects a rating buffer of two notches of potential cover pool support. The rating may be downgraded upon: i) an issuer rating downgrade by more than two notches; ii) a deterioration in Scope’s view on governance support factors relevant to the issuer and Norwegian mortgage covered bonds in general as well as on the interplay between complexity and transparency; and/or iii) an inability of the cover pool to provide an additional rating uplift.

Quantitative analysis and assumptions

Scope’s cash flow analysis projected defaults for the mortgage cover pool assuming an inverse Gaussian distribution. Scope derived an effective weighted-average lifetime mean default rate of 6.0% as well as a coefficient of variation of 50%.

Scope assumed asset-recovery rates ranging between 99.6% in the base scenario and 71.4% in the stressed scenario (D8) for the mortgage loans.

Scope established rating-distance-dependent market value declines to establish recovery rates. Related assumptions reflect developments in the Norwegian housing market and its unique characteristics. An additional fire-sale discount of 20% was applied to reflect properties sold under non-standard or distressed conditions. The total stressed security value haircut for the properties securing the mortgage loans range between 47.5% and 65.0% (depending on the location of the property). Scope also applied 2.5% of variable costs and NOK 70,000 of liquidation costs.

Due to the immaterial share of substitute assets, Scope considered the sub-pool as a single exposure against a financial institution rated A- combined with a typical three-year maturity and a stressed recovery rate of 50%.

Scope used the resulting loss distributions and default timings to project the covered bond programme’s losses and reflect its amortisation structure. The analysis also incorporated the impact of rating-distance-dependent interest rate stresses as well as different prepayment scenarios. Scope tested for low (1%) and high (up to 15%) prepayments to stress the mortgage programme’s sensitivity to unscheduled repayments.

The programme is most sensitive to the combination of rising interest rates and high prepayments.

Scope assumed an annual average servicing fee of 10 bp for the substitute assets and 25 bp for the mortgage loans.

Scope calculated the cover pool’s net present value in the event of an asset sale by adding refinancing premiums to the rating-distance and scenario-dependent discount curve. The premiums are 150 bp for mortgage loans and 200 bp for substitute assets.

Scope assumed a recovery lag of 24 months for the mortgage loans and 48 months for the substitute assets. The recovery timing for the mortgage loans was based on an analysis of Norwegian enforcement processes, also considering the collateral’s regionality.

For the mortgage assets, Scope also tested the programme’s sensitivity to compressed asset margins (down by 50%), a 200 bp liquidity premium and front-loaded defaults to reinforce the programme’s break-even overcollateralisation.

Rating driver references
1. Totens Sparebank Boligkreditt – issuer rating 
2. Confidential quarterly cover pool reporting (Confidential)
3. Governance support assessment 

Stress testing
No stress testing was performed.

Cash flow analysis
The Credit Rating uplift is based on a cash flow analysis using Scope Ratings’ covered bond model (Covered Bonds Expected Loss Model version 1.0). The model applies Credit Rating distance-dependent stresses to scheduled cash flows to simulate the impact of increasing credit and market risks. The model outcome is the expected loss for a given level of overcollateralisation.

Methodology
The methodologies used for this Credit Rating and Outlook, (Covered Bond Rating Methodology, 25 April 2022; General Structured Finance Rating Methodology, 17 December 2021; Counterparty Risk Methodology, 13 July 2022), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for this Credit Rating and Outlook is (Covered Bonds Expected Loss Model version 1.0) available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Rating if the Credit Rating was to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Rating: the Rated Entity, public domain and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Rating originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Rating and Outlook and the principal grounds on which the Credit Rating and Outlook is based. Following that review, the Credit Rating was not amended before being issued.

Regulatory disclosures
The Credit Rating and Outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating and Outlook is UK-endorsed.
Lead analyst: Mathias Pleißner, Senior Director
Person responsible for approval of the Credit Rating: Marco Troiano, Managing Director
The Credit Rating/Outlook was first released by Scope on 30 October 2018. The Credit Rating/Outlook was last updated on 8 October 2021.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
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