Rating action

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

Rating rationale

Solid issuer rating (positive)¹. TSBB’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 its home region Mjos in the south-east Norway; Sound and resilient profitability supported by good cost efficiency and low credit costs; Managed reliance on market funding; Sound solvency metrics underpinned by savings bank business model.

Cover pool support (positive)². The 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 a maximum uplift of three notches on top of the governance uplift. (ESG factor)
    
2. Over-collateralisation (positive). As of 31 March 2023, available over-collateralisation was 15.6%. This level shields from market and credit risks and is well above the 5.0% rating-supporting overcollateralisation.
    
3. Sound credit quality (positive). The cover pool comprises well-diversified domestic residential mortgage loans (91.4%) as well as liquid substitute assets (8.6%). The cover assets benefit from a low average loan-to-value ratio of 52.9% and moderate granularity with the top 10 exposures accounting for 1.7%.
    
4. Market risks (negative). The covered bond programme is exposed to maturity mismatches given the weighted average life of the loans is significantly above that of the covered bonds. This exposes the programme to potential assets sales under discounts in a stressed environment. The bonds have a soft-bullet maturity profile, that together with available over-collateralisation reduces risks. No foreign currency or interest rate risk as all bonds are denominated in local currency (NOK) and issued floating rate – matching the profile of cover assets.

Governance support (positive)³. Governance support provides the covered bonds with five notches of uplift above the issuer rating. As such, only one additional notch out of three from the cover pool support is needed to raise the covered bonds’ ratings to the highest achievable level (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 ratings 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 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 6.3% as well as coefficients of variation of 50%.

Scope assumed asset-recovery rates ranging between 99.6% in the base scenario and 75.5% in the stressed scenario (D8) for the mortgage loans.

Scope established rating-distance-dependent market value declines to establish recovery rates. Assumptions reflect developments in the Norwegian housing market and its unique characteristics. An additional fire-sale discount of 20% was also applied, reflecting the value discount of properties sold under non-standard or distressed conditions. The total stressed security value haircut for the properties securing the mortgage loans range between 52.5% and 57.5% (depending on the location of the property). On top Scope applied 2.5% of variable and 70.000NOK of fixed liquidation costs.

Due to the immaterial share of substitute assets (the effective number of substitute assets is lower than 5), 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 structures. 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 rising interest rate scenarios in combination with high prepayments.

Scope assumed an annual average servicing fee of 10 bps for substitute assets and 25 bps for 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 bps for mortgage loans and 200 bps for substitute assets. Scope derived this liquidity premium by analysing the long-term development of trading spreads for Norwegian and other ‘core country’ covered bond spreads.

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

Rating driver references
1. Totens Sparebank Boligkreditt – Issuer Rating
2. 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 methodology used for these Credit Ratings and Outlooks, (Covered Bond Rating Methodology, 24 May 2023), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings and Outlooks 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 Ratings if the Credit Ratings were 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 Ratings: the Rated Entity and public domain.
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 Ratings 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 Ratings and Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlooks are UK-endorsed.
Lead analyst: Fatemeh Torabi Kachousangi, Associate Analyst
Person responsible for approval of the Credit Ratings: Karlo Fuchs, Managing Director
The Credit Ratings/Outlooks were first released by Scope on 30 October 2018. The Credit Ratings/Outlooks were last updated on 2 September 2022.

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

Conditions of use / exclusion of liability
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