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 issuer rating (A-/Positive) is aligned with the issuer rating of its ultimate parent, Totens Sparebank. The rating reflects the group’s strong market position in its home region of Mjos in south-east Norway; solid and resilient profitability underpinned by a savings bank business model, good cost efficiency and low credit costs; a managed reliance on market funding; and a sound solvency profile. The planned merger of Totens with SpareBank 1 Ostlandet is not expected to negatively impact the issuer rating.

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’ risk 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 30 June 2024, available over-collateralisation was 25.2%. 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 (89.4%) as well as liquid substitute assets (10.6%). The cover assets benefit from a low average loan-to-value ratio of 49.9% and moderate granularity with the top 10 exposures accounting for 2.8%.
    
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 additional 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% as well as coefficients of variation of 50%.

Scope assumed asset-recovery rates ranging between 99.4% in the base scenario and 71.5% in the stressed scenario (D8) for the mortgage loans.

Market value declines 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 57.5% for entire Norway. On top Scope applied 10% 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 52%.

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

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 107 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.

The programme is most sensitive to rising interest rate scenarios in combination with high prepayments.

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 1.2). 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 this Credit Rating and/or Outlook, (Covered Bond Rating Methodology, 26 July 2024), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for this Credit Rating and/or Outlook is (Covered Bonds Expected Loss Model Version 1.2), 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 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 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/or Outlook and the principal grounds on which the Credit Rating and/or Outlook are based. Following that review, the Credit Rating and/or Outlook was not amended before being issued.

Regulatory disclosures
The Credit Rating and/or Outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating and/or Outlook is UK-endorsed.
Lead analyst: Fatemeh Torabi Kachousangi, Specialist
Person responsible for approval of the Credit Rating: Karlo Fuchs, Managing Director
The Credit Rating/Outlook was first released by Scope Ratings on 30 October 2018. The Credit Rating/Outlook was last updated on 5 September 2023.

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, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
© 2024 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5, D-10785 Berlin.