1 Annual report 2023 A company in the Sparebanken Sør Group
2 3 Board of Director’s report 6 Income statement 6 Statement of comprehensive income 7 Balance sheet 8 Cash flow statement 9 Statement of changes in equity 10 Notes 40 Declaration from the Board of Directors and Managing Director 41 Auditor’s report 2023 Contents
3 GENERAL Sparebanken Sør Boligkreditt AS is a wholly-owned subsidiary of Sparebanken Sør. The company is licensed by the Financial Supervisory Authority of Norway to operate as a mortgage company and is allowed to issue covered bonds. Sparebanken Sør Boligkreditt AS is part of Sparebanken Sør’s long-term financial strategy. All shares are owned by Sparebanken Sør, and the financial statements are consolidated into the financial statements of the Sparebanken Sør Group. Sparebanken Sør Boligkreditt AS’ operations are subject to supervision by the Financial Supervisory Authority of Norway. An investigator has been specially appointed for the mortgage company to attend to the quarterly analysis of the company’s cover pool. The cover pool consists of secured mortgages, substitute assets in interest-bearing securities and financial derivatives. The mortgages are granted by Sparebanken Sør and later taken on by Sparebanken Sør Boligkreditt AS. The secured mortgages meet the requirements established by the company for inclusion in the company’s cover pool. One important requirement is that any outstanding loan balance taken on by the company, must not exceed 80 percent of the mortgaged property’s market value at the date of acquisition. The EU directive 2019/2162 (The Covered Bonds Directive) came into force 8 July 2022. Only Premium European covered bonds that satisfy the guidelines and meet the requirement of Article 129 of the CRR, will benefit from preferential regulatory treatment. The Norwegian Financial Supervisory Authority has approved Sparebanken Sør Boligkreditt AS’ European Covered Bond Premium Program. Covered bonds issued by Sparebanken Sør Boligkreditt AS that complied under existing legislation before 8 July 2022, will be grandfathered and eligible for preferential treatment to maturity. The new regulation restricts funding coverage for mortgage covered bonds to the asset’s loan-to-value threshold of 80 percent (from previously 75) for residential mortgages. At the end of 2023, the company had taken on a mortgage loan portfolio totalling NOK 55 832 million, transferred from Sparebanken Sør, of which NOK 55 459 million was included in the qualified cover pool. The portfolio of bonds and certificates totalled NOK 2 158 million at the end of 2023. Sparebanken Sør Boligkreditt AS had issued covered bonds totalling NOK 49 732 million. The company has established an EMTCN (European Medium Term Covered Note) Programme, which enables the company to diversify funding by issuing covered bonds outside the Norwegian bond market. INCOME STATEMENT / BALANCE SHEET DEVELOPMENT The financial statement of Sparebanken Sør Boligkreditt AS shows a profit after tax of NOK 299.1 million at the end of 2023, compared to NOK 258.6 million in the same period in 2022. The company had net interest income of NOK 470.9 million, compared to NOK 446.4 million in 2022. Net income from financial instruments totalled NOK 7.7 million in 2023, compared to a negative contribution amounting to NOK 32.8 million in 2022. The improvement is related to an increased net income from hedging and positive changes in value from certificates and bonds. The company has issued covered bonds in Euros under the EMTCN Program. To control interest and currency exposure, the company has established swap arrangements (basis swaps), to convert foreign currency into NOK. The impact on earnings related to changes in the value of the basis swap affected the income from financial instruments by NOK 0 million in 2023. Assuming that the covered bonds in foreign currency are held to maturity, the total change in fair value is equal to zero. The accounting effects will therefore be reversed over time. Operating expenses totalled NOK 106.4 million in 2023 compared to NOK 103.5 million in 2022. Tax expenses were NOK 75.3 million in 2023. Corresponding figures in 2022 were NOK 30.9 million. In 2022, NOK 33,8 million was recognised as income as a result of changed tax rate in the company for the period 2019-2021. In 2023, an additional amount of NOK 7.3 million was recognised for the years 2017-2018 respectively. Total assets as at 31 December 2023 were NOK 60 057 million, of which net loans to customers represented NOK 55 808 million. At the same time in 2022, the corresponding figures were NOK 63 664 million and NOK 56 562 million respectively. As at 31 December 2023, the loan portfolio was financed through the issuance of bonds amounting to NOK 49 732 million and through equity and drawing rights from Sparebanken Sør. At 31 December 2023, the company had paid-in capital totalling NOK 2 575 million, of which NOK 2 075 million was share capital and NOK 500 million was share premium. Sparebanken Sør Boligkreditt AS has an overdraft facility of NOK 5 000 million with Sparebanken Sør, of which NOK 4 544 million was drawn down at 31 December 2023. In accordance with Norwegian accounting legislation, the Board of Directors confirms that the conditions for presenting the financial statements on a going- concern basis are met. Board of Director’s report
4 CAPITAL STRENGTH At the end of 2023, the net subordinated capital in the company was NOK 4 390 million. This corresponds to a common equity tier 1 capital ratio/tier 1 capital ratio/total capital ratio of 19.0 percent, while regulatory minimum requirements are set at 14.0 percent, 15.5 percent and 17.5 percent respectively. The capital adequacy ratio has been calculated based on the standard method in the Basel II-regulations. The Board of Directors considers the company’s financial strength and risk-bearing ability to be very good. CORPORATE GOVERNANCE Sparebanken Sør Boligkreditt AS’ corporate governance principles are based on the Norwegian Code of Practice for Corporate Governance (NUES). The company has adapted this framework, and Sparebanken Sør Boligkreditt AS`s principles and policy intend to ensure that its corporate governance is in accordance with generally accepted and recognised perceptions and standards, and in compliance with laws and regulations. The company’s corporate governance shall ensure good interaction between different stakeholders such as shareholders, lenders, customers, employees, governing bodies, management and society. The corporate governance principles have been specified in various documents governing the company’s operations. This includes the company’s articles of association, strategies and governance framework. In the Board of Directors’ opinion, the corporate governance of Sparebanken Sør Boligkreditt AS is satisfactory and in compliance with applicable principles and policies. Sparebanken Sør Boligkreditt AS’ mission follows from the company’s articles of association. The company’s mission is to acquire mortgages and fund lending activities primarily by issuing covered bonds. Operations will be run at satisfactory profitability and low risk. The Board of Directors of Sparebanken Sør Boligkreditt AS has an annual meeting and conducts an annual review of the company’s business strategy. 7 board meetings took place in 2023. Follow- up on operations, strategy, risk, and capital management and monitoring of the markets and framework conditions have been the areas of focus for the Board of Directors. The company’s risk strategy has been adopted by the Board of Directors, which conducts an annual review of the company’s risk management and internal control. Identified areas of risk and any material deviations are followed up and reported on a regular basis. Sparebanken Sør Boligkreditt AS has signed operating agreements with Sparebanken Sør. These agreements cover capital management, risk management, internal audit, financial reporting, internal financial control and internal financial reporting. In addition to reviewing the accounts and risk reporting, the company`s management provides regular operational reports in relation to the company’s financial objectives to the Board, at each Board meeting. The company’s ethical guidelines include a duty to report matters that warrant criticism, including breaches of internal guidelines, laws and regulations, and a procedure for how such information is to be given. Large companies must provide information about their management of corporate social responsibility (cf. Section 3-3c of the Norwegian Accounting Act). The Parent Bank, Sparebanken Sør, delivers such a statement for the Group, which also covers its subsidiaries. For further information, please refer to the annual report of Sparebanken Sør. Sparebanken Sør Boligkreditt AS is a wholly-owned subsidiary of Sparebanken Sør and is exempt from the requirement for a separate audit committee. The Compliance function is taken care of through the company’s agreement with Sparebanken Sør. The company has an independent external auditor (PWC) and an internal audit (Sparebanken Sør). BDO has been appointed as an investigators as of Q1 2023. Sparebanken Sør Boligkreditt AS’s operations are subject to supervision by the Financial Supervisory Authority of Norway. The Board of Directors and management endeavour to maintain an open and constructive dialogue with the Financial Supervisory Authorities. RISKS As a licensed mortgage company, Sparebanken Sør Boligkreditt AS is subject to a number of acts, regulations, recommendations and regulatory provisions. The objective of the company is to finance lending activities through the issuing of covered bonds with a high public rating. This means that Sparebanken Sør Boligkreditt AS strives to maintain a low risk level. The company has established Board approved guidelines and limits for management and control of various areas of risk, which meet regulatory, rating agency and investor requirements. The company places emphasis on identifying, measuring and controlling elements of risks in such a way that the market has high confidence in the company and that the company can achieve a high rating on issued bonds. The company’s credit strategy and credit policy include requirements imposed on borrowers, as well as collateral requirements for loans that may be taken on by the company. The Board of Directors considers the overall quality of the lending portfolio to be very good and the credit risk to be low. In accordance with Board-approved requirements, stress testing of the value of the cover pool was conducted in 2023 by simulation of a sharp fall in house prices. The Board of Directors found the result of the stress tests to be satisfactory. The company’s mortgages to customers are in NOK at both fixed and floating interest rates with two months’ notice of interest adjustment. Financing is met by the issuance of both floating and fixed-rate bonds in NOK and EUR. Foreign currency debt is swapped to NOK and fixed-rate debt is swapped to floating rates. Foreign currency debt and debt at a fixed interest rate, are accounted for by using hedge accounting. The Board of Directors considers the overall market risk to be low.
5 The company issues covered bonds with the opportunity to extend the maturities by up to 12 months, given an approval by the FSA. In addition, financing needs are met by using equity and credit facilities with Sparebanken Sør. The Board of Directors considers the company’s liquidity risk to be low. As at 31.12.2023 the company had a liquidity portfolio in addition to substitute assets, and was compliant with the liquidity requirements imposed on financial institutions, with a LCRtotal ratio of 443 percent and LCREUR ratio > 100 percent. As of 31.12.2023 the mortgages in the cover pool had an average loan-to-value of 53.9 percent. Over-collateralization was 16.6 percent and given a stress-test on asset prices of 30 percent, the OC was above the legislative OC level of 5 percent. A Management Service Agreement has been established with Sparebanken Sør, that encompasses the supply of all necessary services for the operation of the company. The Board of Directors considers the company’s operational risk to be low. EMPLOYEES AND WORKING ENVIRONMENT At 31 December 2023, the company had no employees and there are no relevant comments regarding the internal working environment. The Board is composed of four persons, one of whom is female. GREEN COVERED BONDS Sparebanken Sør Group has a Green and Sustainability Bond Framework in place, under which Sparebanken Sør Boligkreditt AS has issued green covered bonds. The proceeds are allocated to a mortgage portfolio, financing energy-efficient residential buildings in Norway. The bond framework, which is aligned with ICMA Green Bond Principles, was updated in Q1 2022. RATING Covered bonds issued by Sparebanken Sør Boligkreditt AS in NOK and EUR have been given an Aaa rating by Moody’s. Sparebanken Sør Boligkreditt AS has since June 2023 been assigned an A1/ Prime-1 issuer rating by Moody`s, in line with ratings assigned by Moody`s on the parent bank. SOCIAL RESPONSIBILITY The company requires social responsibility work to take place in close cooperation with and according to the same guidelines as in Sparebanken Sør. The company does not carry out any activities that pollute the external environment. DISTRIBUTION OF PROFIT The total profit after tax for 2023 is NOK 299.1 million. The Board of Directors proposes to the Annual General Meeting a dividend payment of NOK 250.0 million. Kristiansand, 26 February 2024 The Board of Directors of Sparebanken Sør Boligkreditt AS Geir Bergskaug Chairman Seunn Smith-Tønnessen Member Svein Ole Holvik Member Steinar Vigsnes Member Marianne Lofthus Managing Director
6 NOK Thousand Notes 31.12.2023 31.12.2022 Interest income, assets recognised at amortised cost 14, 25 2 643 220 1 498 771 Interest income, assets recognised at fair value 14, 25 169 446 111 230 Interest expenses 14, 25 2 341 755 1 163 574 Net interest income 14, 25 470 911 446 427 Commission income 180 164 Commission expenses 2 664 5 140 Net commission income -2 483 -4 976 Net income from financial instruments 12, 15 7 683 -32 837 Personnel expenses 26 86 60 Other operating expenses 16, 25 106 319 103 394 Total expenses 106 404 103 453 Profit before loss 369 786 305 161 Losses on loans and undrawn credit 2, 7, 8 -4 615 15 645 Profit before taxes 374 401 289 516 Tax expenses 17 75 279 30 942 Profit for the period 27 299 123 258 574 Income statement NOK Thousand Notes 31.12.2023 31.12.2022 Profit for the period 299 123 258 574 Net change in value from basis swaps -118 914 98 959 Tax effect 17 26 161 -21 771 Total comprehensive income 206 370 335 762 Statement of comprehensive income Notes 1 to 28 are an integral part of the financial statements.
7 Balance sheet Notes 1 to 28 are an integral part of the financial statements. NOK Thousand Notes 31.12.2023 31.12.2022 ASSETS Loans to and receivables from credit institutions 18, 19, 21, 23, 25 973 207 76 670 Net loans to customers 5, 6, 7, 8, 9, 10, 11, 18, 19, 22, 23 55 807 966 56 561 879 Bonds and certificates 18, 19, 20 2 158 343 6 458 757 Financial derivatives 18, 19, 23, 24 1 071 168 493 132 Deferred tax assets 17 16 714 0 Other assets 29 879 73 973 TOTAL ASSETS 60 057 278 63 664 411 LIABILITIES AND EQUITY Debt to credit institutions 12, 14, 18, 19, 23, 25 5 411 372 4 027 018 Debt incurred due to issuance of securities 12, 13, 14, 18, 19, 21, 25 49 732 184 53 277 192 Financial derivatives 18, 19, 23, 24 138 210 1 821 055 Payable taxes 17 105 259 41 317 Deffered tax liabilities 0 32 171 Other liabilities 10 446 12 221 TOTAL LIABILITIES 55 397 471 59 210 973 EQUITY Paid-in equity 4, 27 2 575 000 2 575 000 Retained earnings 4 2 084 807 1 878 438 TOTAL EQUITY CAPITAL 4 4 659 807 4 453 438 TOTAL LIABILITIES AND EQUITY CAPITAL 60 057 278 63 664 411 Kristiansand, 26 February 2024 Board of Directors of Sparebanken Sør Boligkreditt AS Geir Bergskaug Chairman Seunn Smith-Tønnessen Member Svein Ole Holvik Member Steinar Vigsnes Member Marianne Lofthus Managing Director
8 Cash flow statement NOK Thousand 31.12.2023 31.12.2022 Interest received 2 774 496 1 562 326 Interest paid -2 341 940 -1 023 757 Operating expenditure - 108 213 - 108 111 Changes in loans to customers 796 583 -6 861 995 Income tax paid - 41 343 - 98 421 Net cash flow from operating activities 1 079 583 -6 529 958 Payments received, securities 10 088 748 8 956 716 Payments made, securities -5 775 719 -10 349 803 Changes in other assets 44 094 - 31 874 Changes in deposits from credit institutions 1 384 354 - 61 550 Changes in other liabilities - 2 535 835 Net cash flow from current financing activities 5 738 941 -1 485 677 Paid-in share capital 0 700 000 Paid dividend 0 - 314 000 Payments received, bond debt 0 12 144 183 Payments made, bond debt -5 921 987 -4 694 250 Net cash flow from long-term financing activities -5 921 987 7 835 933 Net change in liquid funds 896 537 - 179 701 Liquid funds as at 01.01. 76 670 256 371 Liquid funds at the end of the period 973 207 76 670
9 NOK Thousand Share capital Share premium reserve Retained earnings Total Balance 31.12.2021 1 375 000 500 000 1 856 676 3 731 676 Dividend 0 0 -314 000 -314 000 Share capital increase 700 000 0 0 700 000 Profit 2022 0 0 258 574 258 574 Other income/expenses* 0 0 77 188 77 188 Balance 31.12.2022 2 075 000 500 000 1 878 438 4 453 438 Dividend 0 0 0 0 Share capital increase 0 0 0 0 Profit 2023 0 0 299 123 299 123 Other income/expenses* 0 0 -92 753 -92 753 Balance 31.12.2023 2 075 000 500 000 2 084 807 4 659 807 * Basis adjustments to interest and currency swaps were minus NOK 92.8 million as of 31.12.2023 and NOK 77.2 million as of 31.12.2022. The adjustment is included as a part of other equity. Statement of changes in equity
10 NOTE 1 – ACCOUNTING POLICIES 1. GENERAL INFORMATION 2. BASIS OF PREPARATION OF THE FINANCIAL STATEMENT 3. REVENUE 4. FINANCIAL INSTRUMENTS 5. HEDGE ACCOUNTING 6. ACCOUNTING OF EXCHANGE EFFECTS 7. INCOME TAX 8. EQUITY 9. CASH FLOW STATEMENT 10. CHANGES IN ACCOUNTING POLICIES AND NOTES 11. STANDARDS AND INTERPRETATIONS THAT HAVE BEEN APPROVED, BUT NOT YET ADOPTED 1. GENERAL INFORMATION Sparebanken Sør Boligkreditt AS is a wholly-owned subsidiary of Sparebanken Sør and has its registered office in Kristiansand. The company is licensed to operate as a mortgage company with the right to issue covered bonds. The main object of Sparebanken Sør Boligkreditt AS is to acquire loans secured through mortgages on residential property within 80 percent of the property value, and to issue covered bonds to national and international investors. All amounts in the financial statements are stated in NOK thousand, unless otherwise indicated. The company’s financial statements are presented in Norwegian kroner, which is the functional currency. The financial statements for 2023 were presented by the Board of Directors on 26 Febryary 2024, and will be adopted with final effect at the General Meeting on 26 February 2024. The General Meeting is the company’s supreme body. 2. BASIS OF PREPARATION OF THE FINANCIAL STATEMENT The company`s financial statements have been prepared in accordance with the IFRS Accounting Standards as adopted by the EU, in addition to the Norwegian disclosure requirements pursuant to the Norwegian Accounting Act. The measurement basis for the financial statement is historical cost with the exception of financial assets and liabilities, including derivatives that are assessed at fair value with change in value through profit or loss. 3. REVENUE Interest income and expenses related to assets and liabilities, which are measured at amortised cost, are recognised in income on an ongoing basis using the effective interest method. All charges related to interest-bearing loans and borrowings are included in the calculation of the effective interest rate and amortised over the expected term. Interest income is calculated based on gross loan for loan to customers in stage 1 and 2 and net loans for loans to customers in stage 3. Commission income and expenses which are a direct payment for services provided are recognised when the services have been delivered. Directly attributable transaction costs associated with financial instruments valued at amortised cost, are amortised over the anticipated lifetime of the instrument. 4. FINANCIAL INSTRUMENTS A financial instrument is any contract that gives rise to a financial asset for one enterprise and a financial liability or an equity instrument for another enterprise. Financial instruments are measured and classified in accordance with IFRS 9. Note disclosures have been prepared in accordance with IFRS 7. Recognition and deductions Financial assets and liabilities are recognised in the balance sheet when the company becomes a party to the contractual provisions of the instrument. A financial asset is derecognised when the contractual rights to the cash flows from the financial asset expire, or the company transfers the financial asset in such a way that the risk and profit potential of the asset concerned is essentially transferred. A financial liability is derecognised when the liability has been discharged, cancelled or has matured. When an existing financial liability is replaced by a new liability from the same lender under terms that have been materially changed, or the terms of an existing liability have been materially modified, the original liability is derecognised and a new liability is recognised. The difference in capitalised value is recognised through profit or loss. Classification and measurement Measurement of the financial asset is determined on initial recognition of the asset. Financial assets are to be measured by the following three categories in IFRS 9: Fair value with changes in value recognised through profit or loss. Amortised cost. Derivatives designated as hedging instruments recognised at fair value. Notes
11 Classification on initial recognition is based on the instruments being held in a business model both to receive contractual cash flows and for sale, and whether contractual cash flows solely consist of payments of interest and principal on given dates. Financial instruments that are held to receive contractual cash flows, are to be measured at amortised cost. Instruments with cash flows that are not only payments of interest and principal or if the purpose of possessing the instrument is not to receive contractual cash flows, are to be measured at fair value with changes in value recognised through profit or loss. Derivatives used in connection with hedge accounting are measured according to the principles for hedge accounting. See separate section. Fair value with changes in value recognised through profit or loss All derivatives are measured at fair value with changes in value recognised through profit or loss. However, derivatives designated as hedging instruments are recognised in accordance with the principles of hedge accounting. The company has chosen to recognise holdings of interest-bearing bonds and certificates at fair value through profit and loss. These are assets and liabilities that are managed, measured and reported to management at fair value. This category additionally covers interest rate swaps and currency swaps established before 1 January 2018 and used as instruments for the fair value hedging of bonds issued at fixed interest rates. Hedge accounting is discussed further in a separate section below Amortised cost The company measures financial assets at amortised cost if the following conditions are met: The financial asset is held in a business model, whose purpose is to receive contractual cash flows, and the contractual terms for the financial asset lead to cash flows which consist exclusively of payments of principal and interest on given dates. Debt instruments which sole purpose is to hold the instrument to collect contractual cash flows are to be recognised at amortised cost. All borrowings and lendings at variable interest rates are classified at amortised cost. Derivatives designated as hedging instruments recognised at fair value Interest rate swaps and currency swaps used as instruments for the fair-value hedging of bonds issued at fixed interest rates. Hedge accounting is discussed further in a separate section. Subsequent measurement Measurement at fair value with changes in value recognised through profit or loss Fair value is the price that would be obtained upon the sale of an asset or the price that would be paid to transfer a liability in an orderly transaction between market participants at the time of valuation. Measurement of financial instruments traded on an active market Financial instruments traded on an active market are valued at observed market prices. Measurement of financial instruments not traded on an active market The fair value of financial instruments not traded on an active market is determined using a suitable valuation method. Valuation techniques are based on recent transactions between independent parties, by reference to instruments with approximately the same content or by discounted cash flows. As far as possible, valuations are based on externally observed parameters. Fair value of interest-bearing securities is determined on the basis of established market values, reported by leading external market players, or at fair value calculated on the basis of the prevailing market yield and credit spread curves. In calculating the fair value of interest rate swaps, the prevailing market value of the relevant inter-bank interest rate curve is used. Measurement at amortised cost Subsequent measurement of financial instruments measured at amortised cost, is performed using the effective interest method and is subject to loss provisions. Gains and losses are recognised through profit or loss when the asset is derecognised, modified or impaired. Financial assets at amortised cost, include receivables from customers and loans to customers. Amortised cost is defined as the carrying amount on initial recognition, less received/paid interest and instalments, including accrued effective interest, adjusted for net impairment losses and the net recognised effect of any hedging. The effective interest method is a method that calculates amortised cost and accrues interest income/expenses for the relevant period. Interest income is recognised using the effective interest method. The effective interest rate is the interest rate that by discounting the loan’s cash flows over the anticipated term, gives a value equal to the loan’s amortised cost on the date of its establishment. Derivatives designated as hedging instruments recognised at fair value Interest rate and currency swaps are measured at fair value in the balance sheet. Changes in value are recognised through profit or loss with the exception of interest rate and currency swaps entered into on or after 1 January 2018. In this case changes in value due to changes in spreads will be recognised through other comprehensive income as a hedging effect.
12 Offsetting Financial assets and liabilities are offset and recognised as a net amount in the balance sheet only when the company has a legally enforceable right to offset, and intends to realise the asset and settle the liability simultaneously as a whole. Modification When the contractual cash flows from a financial asset are renegotiated or altered in some other way, and the renegotiation or change does not lead to derecognition of the financial asset, the gross recognised value of the financial asset is recalculated and any gain or loss on the change is recognised in profit or loss. The gross recognised value of the financial asset is recalculated as the present value of the renegotiated or changed cash flows, discounted at the original effective interest rate of the financial asset. Any incurred expenses and fees adjust the recognised value of the changed financial asset and are depreciated over the remaining life of the changed financial asset. Impairment of financial assets Provision is made for expected credit losses (ECL) based on relevant information available at the time of reporting, including historical, current and future information. Loss allowances are calculated based on probability of default (PD), loss given default (LGD) and exposure at default (EAD). The model used to calculate provisions for expected losses depends on whether there has been a significantly increased in credit risk since initial recognition. On initial recognition and in cases where the credit risk has not significantly increased since initial recognition, a provision is recognised for expected losses over the next 12 months. Expected losses over the next 12 months are losses that are expected to incurre over the lifetime of the instrument, of which can be linked to events occuring during the next 12 months. Expected credit losses over the whole term are calculated for assets where the credit risk has increased materially since initial recognition, except for assets which are nevertheless assessed as having a low absolute credit risk on the reporting date. The expected credit loss for exposures that have been qualitatively assessed is calculated based on the present value of all cash flows over the expected residual lifetime. In effect, this is the difference between the contractual cash flows in accordance with the agreement and the cash flow that the company expects to receive, discounted at the effective interest rate of the instrument. The expected cash flows shall cover cash flows from the sale of collateral or other credit enhancements that are embedded in the contract terms. In the balance sheet, loan impairments reduce the carrying amounts of the exposures. In the income statement, losses on loans consist of realised losses, changes in loss allowance, income on loans and provisions for guarantees and unused credit facilities, as well as income relating to recovery of previously realised losses. Losses on loans are based on a qualitative assessment of the company’s loan portfolio in accordance with IFRS 9. For a further description, please refer to Note 7. Loans with low credit risk The company does not utilize the low credit risk exemption for loans to customers. The simplification rules are applied for lending to credit institutions and central banks. This means that the company assesses whether the instruments that had a low credit risk on initial recognition still have a low credit risk at the balance sheet date. This assessment is made using relevant available information that can be obtained without undue cost or effort. Reduction in the value on loans as a result of qualitative assessments Loss allowance based on qualitative assessments is recognised when there are objective and observable indications that a loan is impaired as a result of a credit loss. Loss allowance is reversed when the loss is reduced and the reduction is objectively attributable to an event occurring after the date on which loss allowance was recognised. All loans regarded as significant will be assessed to see whether there is objective evidence of weakened creditworthiness, and the objective indication is highly likely to result in reduced future cash flows for the servicing of the exposure. A customer’s commitment is defined as default if the contractual payments have been overdue for more than 90 days, and the amount exceeds NOK 1,000 and 1 percent of the customer’s obligations (payment default). A customer’s commitment is defined as default if it is probable that the borrower will not fulfil its obligations due to objective requirements: Loss write-downs have been registered on the customer’s obligation Incurred losses have been recognised for the customer A bankruptcy petition has been filed or the customer has been declared bankrupt The customer has applied for or is in a debt settlement Sale of credits due to deteriorating credit quality A customer’s commitment is defined as default if qualitative assessments are made that indicate that the borrower is not fulfilling its obligations. Qualitative assessments are made when observable data is available relating to the exposure, for example significant financial difficulties at the issuer or borrower. When the borrower’s lender, due to financial or contractual grounds relating to the borrowers’ financial difficulties, has granted the borrower concessions that the lender would not otherwise have considered and when it becomes probable that the borrower will enter bankruptcy or undergo another form of financial reorganization. Reduction in the value of loans and unused credit facilities as a result of model-based calculations Loans that have not been subject to qualitative impairment assessments are included in the basis of calculation for model- based impairments. The same applies to guarantees and unused credit facilities.
13 The model assessing the impairment of financial assets under IFRS 9 applies to financial assets measured at amortised cost and financial assets measured at fair value through other comprehensive income. The standard also contains requirements for loss provisions on new loans, by stipulating that an impairment must be recognised for expected credit losses resulting from expected defaults in the next 12 months. The model calculates losses for all customers at account level. The model also includes loan approvals, guarantees and unused lines of credit. For loans where the credit risk has increased materially after initial recognition, an impairment loss corresponding to the expected credit loss over the term of the loan is recognised. Realised losses When it is highly probable that a loss is final, it is recognised as a realised loss. Some realised losses will be covered by previously recognised, qualitatively assessed loss allowance, and will therefore be recognised against the existing provision. Realised losses not covered by qualitatively assessed loss allowance, as well as any surplus or deficit in relation to previously recognised loss allowance are recognised through profit or loss. Presentation in the balance sheet and income statement Loans Loans are recorded as either loans to and receivables from credit institutions or as net loans to customers. Interest is included in the income statement under interest income from assets valued at amortised cost. Changes in value due to loss allowance are included in the income statement under losses on loans, guarantees and unused credit facilities. Bonds and certificates This balance sheet item includes the company’s certificate and bond portfolio. Interest is included in the income statement under interest income from assets at fair value. All changes in value are recognised in the income statement under net income from financial instruments. Financial derivatives (assets and liabilities) This balance sheet item includes financial derivatives. Changes in value related to the derivatives are recognised in the income statement under net income from financial instruments. Liabilities to credit institutions Balance sheet items include liabilities to credit institutions. Interests is recognised in the income statement under interest expenses. Liabilities incurred due to issue of securities This balance sheet item includes issued securities debt. Interest is recognised in the income statement under interest expenses. In case of early redemption or repurchase of issued bonds, any gains and losses are recognised under net change in the value of financial instruments. Provisions A provision is recognised when the company has an obligation (legal or self-imposed) due to a previous event, where it is likely (more likely than not) that there will be a financial settlement as a result of this liability, and the size of the amount can be reliably determined. If the effect is significant, the provision is calculated by discounting the expected future cash flow with a discounted interest rate before tax that reflects the market’s pricing of the time value of money, and if relevant, the specific risks associated with this obligation. 5. HEDGE ACCOUNTING Sparebanken Sør Boligkreditt AS uses hedge accounting in relation to the company’s funding at fixed interest rate terms and in foreign currencies. Hedging instruments are used to counteract the interest risk and foreign exchange risk of the bonds. The criteria for classification of a derivative as a hedging instrument are: The hedge accounting is anticipated to be very effective, in that it counteracts changes in the fair value of the bond issued. There must be an economic relationship between the hedging instrument and the hedged object, and the effect of credit risk must not dominate any changes in value in the hedging relationship. It must be possible to measure the effectiveness of hedging reliably Satisfactory documentation has been established prior to hedging which shows, among other things, that the hedging is effective and is expected to remain effective throughout the period. Sparebanken Sør Boligkreditt AS uses fair value hedging. Hedging is measured and documented every quarter to ensure that it is effective. The dollar-offset method is used to measure the effectiveness of hedging. When the hedging is established and effective, interest rate swaps and currency swaps will be recognised in the balance sheet at fair value and in the income statement under net income from financial instruments. The hedged item is recognised in the balance sheet at amortised cost. Changes in fair value associated with the hedged risk are accounted for as a supplement or deduction in the book value of the bond debt and is recognised in income under net income from financial instruments. IFRS 9 applies qualitative requirements for hedge effectiveness, where a prospective effectiveness test is regarded as adequate. Ineffectiveness in hedge accounting, defined as the difference between the value adjustment of hedging instruments compared to the value adjustment of the hedged risks in the objects, is recognised in the profit and loss. However, the part of the value adjustment due to a change in spreads of the hedging instruments is the exception. For interest rate and currency swaps established on or after 1 January 2018, changes in value due to changes in spreads will be recognised through other comprehensive income as a hedging effect. Basis swaps created before 1 January 2018 are recognised at fair value through profit or loss until these falls due.
14 If circumstances should occur which render hedging ineffective, the company will amortise the change in value associated with the hedged item over the residual period. The associated hedging instrument will continue to be measured at fair value with changes in value through profit or loss. 6. ACCOUNTING OF EXCHANGE EFFECTS Income and expenses in foreign currencies are translated into Norwegian kroner (NOK) at the exchange rates prevailing on the transaction date. Balance sheet items denominated in foreign currencies are hedged by corresponding items on the opposite side of the balance sheet, or through hedging transactions. Currency derivatives (currency futures) traded with customers are hedged in a similar manner against another external party. Assets and liabilities in foreign currencies are translated into Norwegian kroner at the banks’ median rates on the balance sheet date. Foreign exchange gains and losses are recognised in the income statement under net income from other financial instruments. 7. INCOME TAX Income tax is accrued as a cost, irrespective of when payment is made. The tax expense reflects this year’s and future taxes payable as a result of the year’s activity. The tax is expected to offset net income included in this year’s tax expense and in the balance sheet and is designated as tax payable. Deferred tax is calculated based on differences between the reported results for tax and accounting purposes that will be offset in the future. Tax-increasing and tax-reducing temporary differences within the same accounting period, are offset against each other. Any net deferred tax assets are recognised as an asset in the balance sheet when it is probable that the tax-reducing differences will be realised. The company will likewise reduce the deferred tax asset to the extent that the company no longer considers it probable that it can make use of the deferred tax asset. 8. EQUITY The equity in Sparebanken Sør Boligkreditt AS consists of sharecapital, share premium reserve and retained earnings. Proposed dividend is presented as equity in the balance sheet until a final decision is made in the general assembly. 9. CASH FLOW STATEMENT The cash flow statement shows receipts and payments of cash and cash equivalents during the year. Cash and cash equivalents are defined as loans to and receivables from credit institutions. 10. CHANGES IN ACCOUNTING POLICIES AND NOTES Applied accounting policies are consistent with the standards used for the previous accounting period. 11. STANDARDS AND INTERPRETATIONS THAT HAVE BEEN APPROVED, BUT NOT YET ADOPTED There are no changes in new standards or interpretations of existing standards that are relevant and will affect future accounting periods.
15 NOTE 2 – DISCRETIONARY ASSESSMENTS, ESTIMATES AND ASSUMPTIONS With the preparation of the financial statements, the management makes estimates and discretionary assessments. Areas that are largely comprised of discretionary estimates have a high degree of complexity, and assumptions and estimates are significant for the company’s financial statements, which are presented below. GENERAL In applying the Group’s accounting policies, the company’s management has exercised discretion in some areas and made assumptions about future events. There will naturally be an inherent uncertainty related to accounting items based on the use of discretion and assumptions about future events. When exercising discretion and making assumptions about future events, management will use information available at the balance- sheet date, previous experience with similar assessments, as well as market and third-party assessments of current conditions. Although management exercises its best judgment and bases itself on the best estimates available, it must be anticipated that the actual outcome may, in some cases, differ materially from the accounting estimates. Estimates, assumptions and conditions that represent a significant risk of material changes in the carrying value of assets and liabilities within the next financial year are discussed below. PROVISIONS FOR LOAN LOSSES The accounting area provisions for loan losses is subject to a large degree of discretionary assessments. The accounting area provisions for loan losses is subject to a large degree of discretionary assessments. In 2022, there were major turmoil and fluctuations in the financial market that continued into 2023. There was an uncertain macro situation with geopolitical turmoil, hight inflation, increasing wages, rising interest rates, and a weak exchange rate, leading to ongoing uncertainty by the end of the year. Models used to calculate future credit losses contains forward- looking macro data, and in events of major changes to the economy, the current models and parameters must be changed accordingly. Macro-data used in the model for calculating future credit losses is shown in note 7 in the financial statements. All loans to customers classified at amortised cost have loss allowances based according to IFRS 9. Loss allowances are to be recognized on all commitments based on expected credit losses (ECL). Each month, all commitments are calculated for future expected losses. At initial recognition, future expected losses are calculated for the next 12 months and all commitment receive an application score. For subsequent periods, commitments where there has been no significant increase in credit risk, expected loss for the next 12 months will be calculated and allocated. If there has been a significant increase in credit risk, the expected loss for the entire lifetime will be calculated and allocated. In cases when there is observable data related to commitments which, for example, relate to significant financial difficulties of the borrower, the loans will be assessed qualitatively. In such cases, an individual assessment of model-calculated losses will be made and, if needed, model-calculated losses will be overdrawn. For qualitative assessments, write-downs will be calculated as difference between the loan’s book value and the present value of future cash flows based on the effective interest rate at the time of initial calculation of qualitative impairment. Provisions for loan losses are mostly based on the Group’s risk classification models. The group has models for application scores and portfolio scores that form the basis for the risk classification. Any weaknesses in these models affect the loss provisions calculated in the model. Assessment of loss allowances, where there is objective evidence of impairment, will always be based on a significant degree of discretion. Predictions based on historical information may prove to be incorrect because it can never be known with certainty what relevance historical data has as a basis for making decisions. When collateral values are linked to particular objects or industries in crisis, collateral will have to be realized in low-liquid markets, and assessment of collateral values will be subject to significant uncertainty in such situations. The loss model contains data for macroeconomic conditions, and relevant parameters must be adjusted to take account of any changes in the economic climate or macroeconomic conditions. The Group largely uses input from the Monetary Policy Report from Norges Bank and statistics from Statistics Norway as a basis for macro conditions. The timing and selection of parameters to be updated depends on discretionary assessments and may vary between the different banks. The quality of the Group’s score and risk classification models also has a direct impact on calculated losses allowances. NOTE 3 – RISK MANAGEMENT The objective of Sparebanken Sør Boligkreditt AS is to be a funding instrument for Sparebanken Sør to secure the long-term value creation for the Group. With this objective, it is essential that risk is subject to active and satisfactory management. The objective of Sparebanken Sør Boligkreditt AS is to utilize high- quality residential mortgage portfolios to issue covered bonds. Part of the Sparebanken Sør Group’s business strategy is to keep a low to moderate risk profile for all enterprises. Taking on risks is a basic feature of banking, and risk management is therefore a key area in both daily operations and the Board’s ongoing work. Reference is also made to the Group’s Pilar 3 document, which is available on the website of the Parent Bank (www.sor.no). ORGANISATION Board of Directors The Board has overall responsibility for the company’s total risk management and aims to ensure that the company has appropriate systems in place for risk management and internal control. The Board determines risk strategies, framework for risk appetite, risk profile and tolerance. The Board also determines the guidelines for the capital plan and composition of the capital and approves the process to ensure an acceptably adequate capital level at all times.
16 The company’s management The management and day-to-day operation of Sparebanken Sør Boligkreditt AS is based on a Management Service Agreement between the company and the parent company, Sparebanken Sør. The Managing Director has overall responsibility for the implementation of the company’s credit strategy and credit policy within general mandates and limits adopted by the Board. Responsibility for implementation of the annual assessment of the risk situation and the capital adequacy requirement is handeled by Sparebanken Sør and is regulated by an agreement between the Mortgage Company and Sparebanken Sør. Plans and analyses are integrated with the strategies and plans at Group level. Risk management in Sparebanken Sør takes place at Group level and includes Sparebanken Sør Boligkreditt AS. The bank`s department for monitoring risks will identify, measure and evaluate the overall risk and is in addition handling compliance measures. Internal auditor Sparebanken Sør`s internal auditors handle internal auditing of Sparebanken Sør Boligkreditt AS, as regulated in a separate agreement. This is a monitoring function independent of the administration in general, designed to perform risk assessments, controls and investigations of the company’s internal control and governance processes to assess whether they are appropriate and proper. Risk management process The Group has expedient and appropriate strategies and processes for risk management, the assessment of its capital requirement and how this can be maintained. The collective term for this is ICAAP. RISK CATEGORIES All risks are managed through a framework for risk appetite and risk tolerance. Targets for the different risk parameters are in place, and these are: Credit risk Credit risk is defined as the risk of losses due to customers or counterparties being unable to meet their obligations to the company, and the value of underlying security not being sufficient to cover the receivables if the security must be realised. Credit risk is the company’s greatest risk, and the risk that requires most capital. Credit risk concerns all claims on counterparties/customers. This means loans and credits, securities and counterparty risk arising from derivatives and foreign exchange contracts. Credit risk is a function of two factors (events): ability and willingness to pay, and the value of underlying collateral. Both factors must occur for losses to take place. The first is the lack of ability to pay or willingness to pay of the debtor, and the other is the value of the underlying collateral not being sufficient to cover the Company’s requirements for any default and subsequent realization of security. Credit risk is defined as a significant risk, and the Company’s policy is that credit risk exposure should be low. The Board approves the Company’s credit strategy and credit policy, and credit risk is controlled by adopted limits and measures linked to the risk profile and exposure on portfolio levels. The Board receives regular reports on credit risk. The development of lending by the various risk classes and migration between these classes are vital in this respect. Counterpart risk Counterparty risk is the risk of the Company’s business partners in the financial field not being able to fulfil their contractual obligations towards the Bank. Derivative contracts must be established with reputable counterparties with a good rating and must be regulated by an underlying ISDA agreement. Derivative contracts must be spread across various counterparties to avoid counterparty concentration. The Company follows the regulations for derivatives trading under EMIR (European Market Infrastructure Regulation) regarding settlement, confirmations, documentation and reporting to authorities. The Company’s counterparty risk is regulated through the establishment of agreements on the furnishing of collateral (Collateral Support Annex) between the parties. Under CSA settlement, the value of derivatives is reconciled with the derivative counterparty, and settlement of collateral takes place. In entering into an agreement for collateral settlement for changes in the value of derivatives, the Company maintains the lowest possible counterparty risk. Settlement risk Settlement risk is a form of credit risk where a contracting party fails to fulfil its obligations regarding settlements in the form of cash or securities, upon the Company has given notice of the payment or transfer of a security. Settlement risk that the Company is exposed to is considered to be low. Liquidity risk Liquidity risk is defined as the risk of Sparebanken Sør Boligkreditt AS being unable to meet its obligations or unable to fund its assets, but also not being able to achieve funding without incurring significant additional costs, impairment in value of assets that must be realized, or funding costs above a normal cost level. Liquidity risk can arise when events in the financial market mean mean that ordinary financing can not be established. Liquidity risk is managed through the Group’s liquidity strategy, overarching and Board-approved guidelines, routines, risk tolerance levels and limits. Key operational management parameters are the requirement for the deposit-to-loan ratio, the long-term funding indicator, and the stress indicator for liquidity disposals within 30 days (LCR), as well as the guidelines for survivability in situations where there is no access to market funding. Liquidity risk is also managed by ensuring that funding from the capital market is distributed across various terms to maturity, sources of funding and instruments. Liquidity risk is periodically stress tested, and contingency and recovery plans have been established for the Group. In addition to the LCR, the company analyses liquidity risk using stress tests. According to these analyses, the company would be able to continue operating normally for 24 months in a stress alternative, where new market funding is assumed to be unavailable and the regulatory liquidity reserves can be used. Sparebanken Sør Boligkreditt shall have a moderate to low liquidity risk. Liquidity risk should be on par with comparable companies, but be reconciled with the Bank’s overall risk profile and the Board’s approved capital requirements. The risk profile should be adapted to the current market situation and outlook.
17 Market risk Market risk is the risk of changes in value as a result of changes in market prices. Market risk is divided into interest rate risk, credit spread risk and exchange rate risk. Sparebanken Sør Boligkreditt AS has a low market risk Interest rate risk Interest rate risk is defined as the risk of financial losses arising from changes in interest rates if the interest period for the Bank’s liabilities and assets on and off the balance sheet does not coincide. The interest rate risk limit is determined as an upper limit for losses on unsecured interest rate positions, given shifts or distortions in the interest rate curve. Exchange rate risk Foreign exchange risk is defined as the risk of financial (earnings- related) losses arising from an unfavorable change in the value of asset and liability items (on and off the balance sheet) measured in the base currency (NOK) due to changes in exchange rates. Exposure is measured as the size of the potential losses in a stress scenario, given a change in foreign exchange rate of 25 percent. Spread risk Spread risk is defined as the risk of changes in the market value of interest-bearing securities due to a general change in credit spreads. A general increase in credit spreads would lead to a reduction in value of a portfolio of interest-bearing securities. Changes in credit spread are a consequence of changes in investors’ requirement for risk premium given an anticipated credit risk and / or changes in other market conditions. The company’s credit spread exposure is related to the liquidity portfolio. Business risk Business risk is defined as the risk of unexpected revenue fluctuations from other factors than credit risk, market risk and operational risk. The risk can occur in various business and product segments and is linked to cyclical fluctuations and changes in customer behavior. Business risk can also arise as a result of government regulations. The risk also includes the reputational risk, which is associated with increased losses, reduced income and/or increased costs as a result of a deterioration of the company’s reputation. Strategic risk Strategic risks are defined as internal matters related to the strategy, plans and changes that the Company either has or has proposed. Operational risk Operational risk is the company`s exposure to financial losses or loss of reputation due to inadequate or failing internal processes or systems, human errors or external events. The Group has identified seven main risks within operational risk: supplier and outsourcing risk, financial crime, ICT risk, behavioral risk, process risk, compliance risk, risk due to changes and risk related to resources, expertise, and human error. The various main risks have their own qualitative description of risk appetite which is also supplemented with the measurement of quantitative key risk indicators. The group’s overall risk appetite for operational risk is moderate, but for certain subgroups of operational risk, such as financial crime, behavioral risk and compliance risk, the bank has a low risk appetite. The bank has zero tolerance for losses that could threaten strategic goals and the bank’s independence. Operational risk is monitored by regular qualitative assessments. The estimated capital requirements for operational risk are carried out under the basic method. The operational business in Sparebanken Sør Boligkreditt AS has been secured through agreements with Sparebanken Sør. Sparebanken Sør Boligkreditt AS’s operational risk is considered to be low. Concentration risk Concentration risk is defined as credit risk arising from high overall exposure to a single counterparty or issuer of security, associated groups of counterparties, Counterparties with operations in the same sector or geographical area and enterprises that use the same kind of security, trade in the same goods or have the same type of operations. With regards to credit risk, it is an objective to avoid major risk concentrations, including large exposure to individual customers or customer groups and groups of commitments in classes within high-risk industries or geographic areas. The company’s view is that Sparebanken Sør Boligkreditt AS is not exposed to any additional risk as a result of debtor concentration. This is a result of low credit exposure taken into account the quality of the pledged security. Compliance risk The company is interested in having good processes to ensure compliance with current regulations and industry standards. Compliance risk is the risk that the company incurs legal or regulatory sanctions, financial losses, or loss of reputation as a result of non-compliance with laws, regulations or governing documents. Efforts are continuously made to assess the best adaptation to new regulations and new regulations in order to ensure both compliance and efficiency in the organisation. New regulations are implemented in the group’s management documents and routines. Compliance risk is monitored by regular qualitative assessments. The compliance division in Sparebanken Sør Boligkreditt AS has been secured through agreements with Sparebanken Sør. Sparebanken Sør Boligkreditt AS’s compliance risk is considered to be low. HEDGING INSTRUMENTS The Company uses the following hedging instruments: Interest rate swaps - agreements to exchange interest rates for a particular nominal amount over a specified number of periods Basis swaps – agreements to exchange both interest rates and foreign currencies The purpose of using these instruments is to hedge interest rate and foreign exchange exposure.
18 NOK Thousand 31.12.2023 31.12.2022 EQUITY CAPITAL Share capital 2 075 000 2 075 000 Share premium reserve 500 000 500 000 Other equity capital 2 084 807 1 878 438 Deductions - 20 082 - 8 773 Dividend - 250 000 0 Net subordinated capital (common equity tier 1) 4 389 725 4 444 665 Minimum requirements for equity capital Credit risk 21 752 321 21 942 354 Market risk 0 0 Operational risk 868 489 882 133 CVA addition 0 Deductions 448 605 0 Risk weight balance (calculation basis) 23 069 415 22 824 487 Common equity tier 1 capital ratio 19.0 % 19.5 % Tier 1 capital ratio 19.0 % 19.5 % Total capital ratio 19.0 % 19.5 % Leverage Ratio 7.0 % 6.7 % MINIMUM CAPITAL REQUIREMENTS Minimum Tier 1 capital requirements 4.50 % 4.50 % Conservation buffer 2.50 % 2.50 % Systemic risk buffer 4.50 % 3.00 % Countercyclical buffer 2.50 % 2.00 % CET1 requirements. incl. Pilar 2 14.00 % 12.00 % Tier1 Capital requirements. incl. Pilar 2 15.50 % 13.50 % Total capital requirements. incl. Pilar 2 17.50 % 15.50 % CET1 requirements. incl. Pilar 2 3 229 718 2 738 938 Tier1 Capital requirements. incl. Pilar 2 3 575 759 3 081 306 Total capital requirements. incl. Pilar 2 4 037 148 3 537 795 Above CET1 requirements. incl. Pilar 2 1 160 007 1 705 726 Above Tier1 Capital requirements. incl. Pilar 2 813 966 1 363 359 Above total capital requirements. incl. Pilar 2 352 577 906 869 NOTE 4 – CAPITAL ADEQUACY The Sparebanken Sør Group has an objective of maximising long-term value creation. In addition the Group has an objective that the risk profile should be moderate to low. This means that effective risk and capital management is a key strategic element. Sparebanken Sør Boligkreditt AS is an instrument to underpin this objective. The Group has established a strategy and process for risk measurement, -management and -control that provide an overview of the risks the company is exposed to. The setup provides the basis for the assessment and calculation of the Group’s total capital needs, and how this can be maintained to cover the specific risks in an adequate manner. This is referred to as ICAAP (Internal Capital Adequacy Assessment Process). The assessment of capital needs includes the evaluation of size, composition and capital distribution according to each risk to which the Group is or will be exposed to. ICAAP includes stresstesting of relevant macroeconomic variables, which could inflict significant losses on the company. Sparebanken Sør Boligkreditt AS uses the standard method for credit- and market risk and applies basic method for operational risk to calculate capital adequacy in accordance with the capital adequacy rules – CRR/CRD. Capital adequacy has to ensure that the company has the necessary buffer capital for events that arise in addition to ordinary loss provisions. In order to have greater flexibility in terms of strategic choices and business opportunities, the Sparebanken Sør Group has higher equity and subordinated loan capital above the requirements given by ICAAP. The minimum requirement for common equity tier 1 ratio was 14.0 percent, tier 1 capital ratio 15.5 percent and total capital ratio 17.5 percent.
19 NOTE 6 – CREDIT AREA AND CREDIT RISK Credit risk represents the greatest area of risk for the company. The Board of the Group sets the credit strategy, which together with credit policies and guidelines for credit processes ensure that the customer portfolio has an acceptable risk profile and contribute to maximise the long-term value creation of the Group. Loans broken down by risk classes The models used have been based on internal and external data for calculation of probability of default (PD) in the next 12 months and expected credit losses (ECL) at customers and portfolio level. Customers are scored each month, and are divided into 11 classes (A – K) based on the probability of default. Class K consists of defaulted loans and commitments with individual write-downs. The table below shows the intervals for the different risk classes based on the probability of default. All customers must be classified in terms of risk before the loan is transferred from Sparebanken Sør to Sparebanken Sør Boligkreditt AS. Loans that are taken on by Sparebanken Sør Boligkreditt AS must have a probability of default (PD value) not exceeding 3.00 percent. The company’s risk categories are as follows: Risk classes Lower limit of default (PD-values) Upper limit of default (PD-values) A 0.00 % 0.10 % B 0.10 % 0.25 % C 0.25 % 0.50 % D 0.50 % 0.75 % E 0.75 % 1.25 % F 1.25 % 2.00 % G 2.00 % 3.00 % H 3.00 % 5.00 % I 5.00 % 8.00 % J 8.00 % 99.99 % K 100.00 % Probability of default Low risk (A-D) 0.00 - 0.75% Medium risk (E-G) 0.75 - 3.00 % High risk (H-J) 3.00 - 99.99 % Default (K) 100 % Specification within risk categories at 31.12.2023 NOK Thousand Commitments In % Gross loans Potensial exposure Low risk 52 042 951 84.3 % 46 372 214 5 670 737 Medium risk 8 119 272 13.2 % 7 938 733 180 539 High risk 1 131 971 1.8 % 1 132 504 -533 Non performing and write-downs 166 906 0.3 % 166 712 194 Unclassified 256 637 0.4 % 221 347 35 290 Total 61 717 737 100.0 % 55 831 510 5 886 227 Specification within risk categories at 31.12.2022 NOK Thousand Commitments In % Gross loans Potensial exposure Low risk 51 598 909 83.4 % 46 551 828 5 047 082 Medium risk 8 274 301 13.4 % 8 098 758 175 543 High risk 899 509 1.5 % 900 514 -1 005 Non performing and write-downs 176 382 0.3 % 172 132 4 250 Unclassified 905 251 1.5 % 866 746 38 506 Total 61 854 352 100.0 % 56 589 977 5 264 375 Commitments include gross loans and potential exposure. Potential exposure consists of undrawn credit facilities on flexi-loans. NOTE 5 – SEGMENT REPORTING The company consists of one segment only, lending to consumers in Norway. Please refer to note 10 regarding geographical break down of loans. The company`s activity consists of residential mortgages up to 80 percent of the property`s market value (changed from 75 percent to 80 percent in Q4 2022). None of the company`s customers individually accounts for more than 10 percent of the turnover. This applies to both 2023 and 2022.
20 Maximum credit exposure Maximum exposure towards credit risk in balance items, including derivatives. The exposure appears as gross before eventual pledges and offsettings. NOK Thousand 31.12.2023 31.12.2022 Assets Loans to credit institutions 973 207 76 670 Net loans to customers 55 807 966 56 561 879 Bonds and certificates 2 158 343 6 458 757 Financial derivatives 1 071 168 493 132 Total credit exposure balance items 60 010 684 63 590 438 Potential exposure Undrawn credits 5 886 227 5 349 504 Total potential exposure 5 886 227 5 349 504 Total credit exposure 65 896 911 68 939 942
21 NOTE 7 - DESCRIPTION OF THE LOSS MODEL UNDER IFRS 9 Impairment model The model assessing the impairment of financial assets under IFRS 9 applies to financial assets measured at amortised cost. The new standard was implemented on 1 January 2018. See Note 1 for a discussion of accounting policies implemented to comply with this standard. The same calculation model is used for Sparebanken Sør Boligkreditt AS, the Parent Bank and the Group, but with different dates being defined for initial recognition. Provision must be made for expected losses, based on relevant information available at the time of reporting, including historical, current and future information. The loss is shown in the accounts before a loss event has occurred, and future expectations are included in the calculations. Loss allowances are calculated on the basis of probability of default (PD), loss given default (LGD) and exposure at default (EAD). The principal rule is that the loss provision is calculated on the basis of expected credit loss over the next 12 months or expected credit loss over the whole term. Expected credit loss over the whole term is calculated for assets where the credit risk has increased materially since initial recognition, with the exception of assets which are nevertheless assessed as having a low absolute credit risk on the reporting date. If there has not been a material increase in credit risk since initial recognition, a loss provision will be calculated for expected credit loss in the next 12 months. IFRS 9 also introduces requirements for loss provisions on new loans, by stating that impairment must be recognised for expected credit losses resulting from default in the next 12 months. Assessment of a significant increase in credit risk The company uses the PD-level as the main criteria to assess a significant increase in credit risk. A significant increase in credit risk is assessed on the basis of both the relative increase in PD and the absolute change. It requires the relative change to be material and the level of risk itself to be not insignificant compared with the low- risk consideration. In addition, any large absolute change must be, under any circumstances, regarded as a significant increase. The limits for significant increase and PD checks are summarised in the table below. Parameter RM Absolute limit (a) 0.625 % Relative change (b) 2 % Absolute change (c) 5 % Absolute limit corresponds to risk class D. If the economic cycle or national/regional development trends indicate that there is a higher risk in individual sectors/industries, this is taken into account by changing the PD level of customers in the sectors/industries concerned. PD as basis for expected loss The PD model gives PD at customer level, 12 months ahead. At the end of 2023 there is no lifetime PD model integrated. When calculating the expected credit loss over the lifetime of the commitment, it is the probability of default over the same lifetime that should be used. A methodology has been developed to estimate PD over a commitment’s lifetime. This is based on breaking lifetime down into separate years and estimating PD for each year ahead of time. The PD models are validated every year. Validations show that the models overestimate. Since the loss model is expected oriented, calibrating PD is done to an excepted oriented estimate before used in the loss model. Population The model is intended to calculate the expected loss for all customers, at account level and on not already recognised losses. Loss is calculated based on the situation statement at the end of the month. The model also includes loan approvals, guarantees and unused credit limits. For loans where the credit risk has increased significantly after initial recognition, an impairment loss must be recognised for expected credit losses over the term of the loans. All model calculations are made at the account level. Data that exists only at the customer level is linked to the individual account. For example, risk class is allocated at the customer level so that all the customer’s accounts have the same score. The most important variables in the extract are risk class and PD with associated interest, balance, approval and collateral at the time of calculation. Loans approved but not discounted at the time of measurement must also be included in the basis of calculation. Under IFRS 9, an expected loss must also be calculated on receivables from central banks and credit institutions. The company has made no loss provisions concerning these receivables for the financial year 2023. This is because the bulk of its loans to credit institutions relates to Norwegian banks. These are allocated to risk class B and have a PD of 0.175 percent. LGD are regarded as being low as they have a high rating from external agencies. The company considers the requirements for low credit risk to have been met as at the balance sheet date.
22 After the dataset has been defined, the various account commitments are noted and allocated to the different stages. Allocation to one of the three “stages” in the model is based on their change of risk since approval (change of credit risk). For a description of the individual “stages”, see the subsequent explanations. All commitments are placed in stage 1 upon initial recognition and are subsequently moved to stage 2 or 3 if there has been a significant increase in credit risk. Commitments for which qualitatively assessed loss allowances have been recognised are excluded from the model-based calculation of impairment losses. Qualitatively assessed loss allowances are added to those in stage 3. Non-performing account commitments are defined in the model as all account commitments where the customer has risk-class K. Default is defined at the customer level. For an overview of the Bank’s risk classes, refer to Note 6 – Credit and credit risk. From 01.01.2021 non-performing has been assessed according to a new definition. A customer’s engagement is defined as in default if a claim is overdue by more than 90 days and the amount exceeds 1 percent of exposure on the balance sheet and NOK 1,000 for the mass market (payment default). A customer’s commitment is defined as in default if it is likely that the borrower will not fulfil its obligations due to objective requirements. See note 1 for a description of when qualitative assessments are made. When a customer has one or several defaulted loans, it is the customer’s total commitment that is reported as default and not the individual loan. See also Note 11. Stage 1 In most cases, this is the starting point for all financial assets that come under the general impairment model. Financial instruments that have the same credit risk as at initial recognition and which have not been classified under stages 2 and 3, come under this stage. The estimated expected losses recognised in the balance sheet are equivalent to the expected losses over the next 12 months. Stage 2 The financial assets that have had a significant increase in credit risk since initial recognition is placed in stage 2. Whether an account commitment has been significantly deteriorated or not, is defined as a function of the probability of default (PD) at the measurement date and the probability of default on the date of initial recognition (loan approval). Expected losses on assets in stage 2 are calculated over the remaining term of the asset. The model has the following additional indicators and overriding rules for customer commitments (loans to customers): For commitments that qualify for a one-year loss calculation (stage 1), it will be checked whether there is a 30-day default/ account overdrawn. If this exists, the loan commitment will be transferred to lifetime ECL (stage 2). This applies to overdraws from the first krone, but older than 30 days. For commitments that qualify for a one-year loss calculation (stage 1), it will be checked whether there is a larger overdraw. If this exists, the loan commitment will be transferred to lifetime ECL (stage 2). This applies to overdraws exceeding the credit limit, starting from the first day. Commitments with changed payment obligations or refinancing resulting from payment issues (forbearance) are automatically moved to stage 2 (if initially under stage 1). In addition, commitments are checked against an internal watch-list that will capture specific commitment forward- looking risk.
23 Stage 3 Stage 3 includes assets that have had a significant change in credit risk since initial recognition and where there is objective evidence of loss at the time of reporting. In this stage, the model calculates an expected loss over the remaining term of the asset. If qualitative loss allowances have been made, these override the model-based calculation. Qualitative assessments are made when observable data related to significant financial issues are present. If the bank, based on