Biggest Norwegian Home Lender Builds Buffers Amid Property Surge

Norway’s biggest mortgage lender says it has erected buffers to withstand even the biggest shocks should the nation’s red-hot housing market start to crack.

DNB Boligkreditt, the mortgage unit of DNB ASA, had assets of 683 billion kroner ($82 billion) at the end of third quarter, while its outstanding covered bonds amounted to about 457 billion kroner. That means it’s able to withstand a drop of as much as 50 percent in home prices before there are problems with ratings or requirements, according to Chief Executive Officer Per Sagbakken.

The buffers not only give the mortgage lender plenty of room to issue covered bonds but also serve as a backstop for Norway’s biggest bank amid rising concerns over the housing market, where prices are surging at a nationwide pace of more than 10 percent. DNB topped the European Banking Authority’s stress test last year after building up capital buffers as falling oil prices hit the economy of Western Europe’s biggest oil producer.

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“You can imagine a situation when there’s uncertainty in the banking market,” Sagbakken said in an interview on Tuesday. “Then it will be more expensive to issue senior and deposits may fall. Then it’s important to have a lot of assets in Boligkreditt to issue covered bonds.”

The mortgage lender has “untapped capacity” in case of a weakening housing market, Sagbakken said. Falling prices can’t be “excluded,” he said.

“It feels like a more than 20 percent drop in prices is needed before we’re seriously affected,” he said. “But you never know how that affects the psychology. And the psychology is important so you can never say for sure.”

The borrowing plan for this year is about the same as last year, he said. The bank plans to issue about 100 billion kroner in debt, of which 65 billion to 70 billion kroner will be in covered bonds.

The lender just this month issued a 2 billion-euro covered bond, which was oversubscribed, according to Sagbakken.

“The best scenario for us is a stable housing market,” he said. “We have so much room that we’re not dependent on price growth to get capacity in our covered pool. We have more than enough.”

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