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). Following the 1 Nov 2024 completion of the merger of Totens Sparebank with SpareBank 1 Østlandet (Østlandet), Østlandet has become the parent of TSBB. The merger has not changed TSBBs status as a core subsidiary of its parent. Consequently, our credit view on TSBB is aligned to that of its parent, Østlandet. We also have not changed our view on governance support factors relevant for TSBBs covered bonds. However, due to a higher rating anchor, governance support has become the key rating driver for TSBBs covered bonds. The strength of cover pool means that the protection of TSBBs covered bonds against a downgrade increased to four notches.

Østlandet has announced that it intends to transfer TSBB’s covered bonds to Sparebank 1’s joint covered bond refinancing platform (SpareBank 1 Boligkreditt, SPABOL) as the bank does not maintain an own covered bond issuer. We understand that the transfer of TSBBs covered bonds, the closure of the program and ultimately the winddown of TSBB will be subject to both, Norwegian FSAs as well as bondholder approval.

The stable outlook on TSBBs covered bonds reflects that we have no indication on credit events that would reduce the protection against downgrades. We expect the credit quality of TSBB and factors supporting our view on governance support to remain stable. In addition, we have no indication that until the transfer to SPABOL rating relevant changes to the cover pool composition nor an adverse management of the overcollateralisation below the rating supporting level would occur.

Rating rationale

Sound credit quality of the issuer (positive). Our view on the credit quality of TSBB’s is aligned with that of its new parent Østlandet reflecting the expectation of full support in case of need given the importance of covered bond refinancing for the issuer.

The credit quality of the merged group reflects i) its positioning as Norway’s fourth largest savings bank focussed on retail and commercial banking activities, primarily in central Eastern Norway; ii) the Norwegian operating environment, which is very supportive of the development of banking activities; iii) the bank’s strong pre-provision income and sound return on equity; iv) solid capitalisation, including adequate buffers above regulatory expectations; v) a stable and diversified funding profile. The group is actively developing its approach to long term sustainability topics.

Governance support (plus up to five notches). Governance support is the primary rating driver and provides TSBBs covered bonds with five notches of uplift above our view on the credit quality of the issuer. This rating uplift reflects the high likelihood of TSBB’s covered bonds being maintained as a going concern in the event of regulatory action in the issuer or its parent as well as a smooth transition from the first (issuer) to the second recourse (cover pool) if needed. It consists of three notches from our resolution regime and systemic importance assessment and two notches from our legal framework and structural support assessment. Only four notches are needed to support the highest rating which means that governance support already provides a one notch protection against the downgrade on our credit view of the issuer.

Scope’s legal framework and structural support analysis for TSBB’s covered bonds considers: 1) the cover pool’s valid segregation from the insolvency estate of the issuer and its parent; 2) the very high likelihood of bond payments continuing after insolvency; 3) the strong legal and programme specific asset eligibility and risk management principles; 4) that enhancements to the covered bond programme remain available after an insolvency of the issuer; and 5) the strong regulatory oversight specifically for Norwegian covered bonds (ESG factor).

The resolution regime and systemic importance assessment considers: 1) the existence of statutory provisions (Bank Recovery and Resolution Directive) that protect the covered bonds against regulatory actions in a resolution scenario; 2) the strength of statutory provisions including their exemption from being bailed-in; 3) the moderate systemic importance of the issuers’ covered bonds and the very high systemic importance of Norwegian covered bonds; 4) Norway’s strong and proactive stakeholder community (ESG factor).

Cover pool support (plus up to three notches). Cover pool support could provide additional credit support allowing for a credit differentiation of 8 notches on top of our credit view on the issuer reflecting:

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 September 2024, available over-collateralisation was 24.6%. which fully mitigates market and credit risks and is well above the 5.0% rating-supporting overcollateralisation (legal minimum).
    
3. Sound credit quality (positive). The cover pool comprises well-diversified domestic residential mortgage loans (81.6%) as well as liquid substitute assets (18.4%). The cover assets benefit from a low average loan-to-value ratio of 49.3% and moderate granularity with the top 10 exposures accounting for 3.1%.
    
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.

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

Rating-change drivers

The Stable Outlook on TSBB’s covered bond reflects Scope’s view on the stable quality of the issuer as well as governance support factors and the cover pool which together provide a rating buffer of four notches.

Upside scenarios are not applicable as the ratings are the highest achievable.

The downside scenarios for the rating and Outlook are (individually or collectively):

• A change in our credit view on the issuer by more than four notches.
   
• A reduction in the governance support uplift by more than four notches.
   
• A deterioration in the programme’s interplay between complexity and transparency that worsens Scope’s CPC assessment and reduces the potential credit support from the cover pool in case the covered bond rating becomes reliant on cover pool support as well as available or committed OC below the -supporting level and/ or the legal minimum.

Quantitative analysis and assumptions

For its quantitative analysis Scope applied assumptions as laid down in the covered bond methodology.

Stress testing
No stress testing was performed.

Cash flow analysis
The assessment of potential cover pool support 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 outcome of the analysis is an expected loss rate and an expected weighted average life for the instruments based on the generated cash flows.

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 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 6 August 2024.

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
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