Sparebanken Vest Boligkreditt

Annual Report 2019 Annual report for 2019

Sparebanken Vest Boligkreditt’s registered office shown great interest in purchasing covered bonds is in Bergen, and it is a wholly owned subsidiary of issued by Norwegian undertakings. Covered bonds Sparebanken Vest. The company is a finance company issued by Sparebanken Vest Boligkreditt carry a stable that issues covered bonds, and the assets mostly Aaa rating from Moody’s Investor Service since the consist of home mortgage loans originally underwritten company started up in 2008. The rating must be by Sparebanken Vest and meet the conditions set by considered highly robust since the covered bond rating the company for home loans to be included in the cover has a leeway of three notches, which implies that pool. several negative events with a bearing on the rating would need to take place for the company to lose its At year-end 2019, the company’s lending to customers AAA rating. A high and robust rating is a good point of totalled NOK 85.8 billion, an increase of NOK 1.6 departure for ensuring good, stable access to financing. billion or 1.9% during the year. Liabilities in the form of covered bonds amounted to NOK 76.5 billion at During 2019, Sparebanken Vest Boligkreditt issued year-end 2019, compared with NOK 75.5 billion at new covered bonds with a nominal value of NOK 12.2 the turn of the previous year. The company has a bond billion, 40% of which are denominated in NOK and programme with a framework of EUR 10 billion, which 60% in EUR. The company redeemed bonds in the is used in connection with the issuing of all covered amount of NOK 10.5 billion in 2019. bonds, both in Norwegian kroner and foreign currencies. Corporate governance Market conditions Sparebanken Vest Boligkreditt’s principles and policy The opportunities for raising funds by issuing covered for corporate governance are based on the Norwegian bonds have been good through 2019. The credit Code of Practice for Corporate Governance adopted by spreads for covered bond financing started 2019 with the Norwegian Corporate Governance Board (NUES). some widening in the first few weeks of 2019 due The company complies with this framework and bases to ECB stopped purchasing bonds as part of their its activities on principles and a policy that are intended quantitative easing programme, but the market soon to ensure that its governance meets generally accepted started to tighten again in February. The spreads perceptions and standards, and in compliance with remained favourable for the remainder of 2019 and laws and regulations. Moreover, the bank’s corporate ECB started purchasing bonds again in November governance shall ensure good cooperation between its making the last part of the year more active than different stakeholders, such as shareholders, lenders, normally seen. Covered bonds are a large asset class customers, governing bodies, management and society in the Norwegian market, and investors abroad have as a whole. In the Board’s view, Sparebanken Vest

Sparebanken Vest Boligkreditt Annual Report 2019 page 2 Boligkreditt’s corporate governance is satisfactory and about how they exercise corporate social responsibility, in compliance with the applicable principles and policy. cf. the Accounting Act Section 3-3c. The parent bank Sparebanken Vest prepares such a statement for the The Board of Directors held six meetings in 2019. Group that also covers subsidiaries. Reference is The Board of Directors main focus have been on therefore made to our parent bank’s annual report for following up operations, strategy and risk and capital further information. management, and on monitoring markets and framework conditions. The Board of Directors has Sparebanken Vest Boligkreditt’s business is subject to drawn up an annual plan for its work, and it endeavours supervision by the Financial Supervisory Authority of to ensure that board members have the requisite Norway. The Board of Directors and the management knowledge and expertise. endeavour to maintain a good dialogue with the Financial Supervisory Authority. Sparebanken Vest Boligkreditt being a wholly owned subsidiary of Sparebanken Vest is exempted from STATEMENT CONCERNING THE ANNUAL ACCOUNTS the requirement to have a separate audit committee. Income statement The company has independent external and internal Sparebanken Vest Boligkreditt’s financial statements auditors as well as an independent inspector appointed are reported in accordance with IFRS. The company by the Norwegian FSA. recorded an operating profit before write-downs and tax of NOK 265 million for the financial year 2019, Sparebanken Vest Boligkreditt carries out an annual compared with NOK 386 million in 2018. The profit review of the company’s risk management and after write-downs and provision for tax amounted to internal control. Any operational events that can NOK 203 million in 2019, compared with NOK 293 lead to operational non-conformities and/or losses million the year before. are registered as they occur and reported to the Board. The company’s risk strategy is approved by The company’s interest and similar income amounted the Board, and risk areas are identified and any to NOK 2,455 million in 2019, compared with NOK material non-conformities found during control of the 1,991 million in 2018. Net interest income and similar company’s financial reporting are followed up through income decreased somewhat in 2019, amounting to the company’s system for risk management and internal NOK 818 million in 2019, compared with NOK 823 control, and reported to the Board of Directors. million in 2018. Net other operating income in 2019 showed a loss of NOK 538 million, largely due to Sparebanken Vest Boligkreditt has entered into an commissions paid to the parent bank for mortgages and agreement with Sparebanken Vest that covers financial temporary losses made on valuation on internal hedging reporting, management, direct and indirect taxes of the EUR 750 million 7 year covered bond issued in and internal control relating to financial reporting. February. In 2018, net other operating income showed This includes current financial reporting, and a a loss of NOK 423 million. reporting template has been drawn up to ensure the completeness of the basis for reporting and consistent In relation to average assets interest income and use of principles. The company has also entered into similar income amounted to 2.69% in 2019 compared a Transfer and servicing agreement regulating the with 2.35% the year before. Net interest and credit servicing of the mortgages. commission income in 2019 amounted to 0.86% of average assets compared with 0.94% the year before. In addition to reviewing the accounts and risk reporting, the company’s management continuously reviews Interest expenses and similar expenses amounted to operating reports seen in relation to the company’s NOK 1,637 million in 2019, corresponding to 1.84% of budget, and briefs the Board of Directors at board average assets, compared with 1.41% the year before. meetings. The company’s recorded operating expenses amounted The company’s ethical guidelines include a duty to NOK 15 million in 2019. The corresponding figure to report matters that warrant criticism, including for 2018 was NOK 14 million. Cooperation with breaches of internal guidelines, laws and regulations, Sparebanken Vest is formalised in various agreements and a procedure for how such information is to be given. that ensure that the company has the required expertise in operational areas, while at the same time facilitating Large companies are required to prepare a statement cost-efficient operation. The commissions paid to the

Sparebanken Vest Boligkreditt Annual Report 2019 page 3 parent bank are based on normal commercial principles, for calculating capital adequacy. For a covered bond and they amounted to NOK 385 million in 2019, company specialising in lending to prime mortgages to compared with NOK 392 million for 2018. retail customers with low LTV’s, the effect on the risk weighted assets is large. In the Board’s view, using the Group write-downs and losses on loans accounted for IRB method improves the company’s risk and capital NOK 16 million in 2019, and the corresponding figure management. for 2018 was NOK 4 million. Based on IRB approach, the capital adequacy ratio in The tax expense for 2019 is calculated to be NOK 47 Sparebanken Vest Boligkreditt was 25.5% at year-end million, corresponding to 19% of the pre-tax profit. 2019, while the Core Tier 1 capital adequacy ratio was The net profit after tax for 2019 was NOK 203 million, 20.2%. The corresponding figures for capital adequacy, corresponding to a return on equity (excluding hybrid under the transitional regime, at year-end 2018 was capital) of 3.5% after tax. The reported return on 16.3% and 12.9%. Capital adequacy comprises Core equity for 2018 was 6.1%. Tier 1 capital, core capital in the form of hybrid capital and supplementary capital, such as subordinated loans In accordance with Section 3-3a of the Accounting taken out for a specific period. All the capital has been Act, the Board of Directors confirms that the accounts infused by the parent bank. The leverage ratio was have been prepared on the basis of the going concern 5.4% at yearend 2019 and 5.2% at yearend 2018. assumption. The net cash flow in 2019 was 11 MNOK. Balance sheet and capital adequacy Sparebanken Vest Boligkreditt’s total assets at the Risk end of the 2019 financial year amounted to NOK 91.7 Laws and regulations that apply to covered bond billion, which is NOK 3.3 billion lower than at year-end companies require a low risk level. The Board of 2018, when total assets amounted to NOK 94.9 billion. Directors places great emphasis on identifying, Lending to customers increased by NOK 1.6 billion, or measuring and reporting different types of risk. The 1.9%, and amounted to NOK 85.8 billion at year-end company has adopted guidelines and parameters for 2019. The corresponding figure at the end of 2018 was the management and control of different risk areas in 84.2 billion. The average assets amounted to NOK 91.2 order to ensure that the company enjoys the market’s billion in 2019, up 7.5% on average assets the year trust. In the Board’s opinion, the company’s overall risk before. exposure is low.

The company’s outstanding securities debt measured Credit risk in NOK increased by net NOK 1 billion in 2019 and Credit risk is defined as the risk that a borrower or amounted to NOK 76.5 billion at year-end, compared counterparty will be unable to meet its obligations to with NOK 75.5 billion at the end of 2018. Borrowings Sparebanken Vest Boligkreditt. The company’s credit in foreign currency are fully currency-hedged. The approval framework contains requirements stipulating company’s debt to financial institutions amounted to which loans may be included in the company’s loan NOK 9.1 billion at year-end 2019, compared with NOK portfolio. There were no significant changes in the 13.2 billion at year-end 2018. These liability items are company’s credit risk profile in the financial year. related to loans the company has taken out with the parent bank, and to collateral made by the company’s Sparebanken Vest Boligkreditt’s assets largely consist counterparties in connection with the furnishing of of home mortgage loans where the outstanding balance security for swap contracts. on the loan does not exceed 75% of an appropriate value assessment of the mortgaged property. Gross Sparebanken Vest Boligkreditt has permission from the loans in default for more than 90 days amounted to Financial Supervisory Authority of Norway to use the 0.1% of total lending at the turn of the year. The Board IRB method to calculate the company’s capital. After regards the quality of the lending portfolio as good, an 12 years of transitional regime between the Basel I assessment that is reinforced by the company’s low accord and CRD IV, who has given the company a risk losses. weight penalty compared to standardised banks, the so-called capital risk weight floor is removed as of A fall in house prices would reduce the net value of 31.12.2019. This means that the company can finally the company’s cover pool, and regular evaluations use the risk weights calculated under the IRB-approach are carried out to calculate the effect of any negative

Sparebanken Vest Boligkreditt Annual Report 2019 page 4 trends in house prices. The Board is comfortable with new liquidity requirements introduced for European the outcome of the stress tests that have been carried banks and finance companies (LCR) by 100%. The out. The credit risk involved in other investments is also liquidity coverage ration (LCR) as recorded at the end deemed to be low, since the company’s investments are of 2019 was 126%, and the corresponding figure at 31 in interest-bearing securities with a good rating issued December 2018 was 173%. by other Norwegian covered bond companies. Sparebanken Vest Boligkreditt also has an agreement Market risk with the parent bank whereby the bank will provide Market risk is defined as the risk of financial loss as liquidity support in order to ensure that all the covered the result of changes in observable market variables bonds can be repaid on the ordinary maturity date. such as interest and exchange rates and the price of Moreover, covered bonds issued by Sparebanken Vest financial instruments. Boligkreditt are based on loan agreements whereby the company has a unilateral right to extend the term to Sparebanken Vest Boligkreditt has a low market maturity of the bonds by up to 12 months. This right risk, and parameters have been adopted that define will only be used if the company were to experience maximum exposure to fluctuations in the interest and refinancing problems on the ordinary maturity date, exchange rate markets. Around 75% of the company’s and if the parent bank were unable to provide liquidity home mortgages are at a variable interest rate that can support. be adjusted with six weeks’ notice to the customers. Home mortgages at fixed interest rates are hedged by Sparebanken Vest Boligkreditt plans for large maturities interest rate swap agreements with the parent bank. in the Norwegian market by buying back its own bonds and ensuring that it has access to liquidity in good time Insofar as the company borrows at a fixed rate, and/or before the covered bonds fall due. the bonds are issued in foreign currency, the interest rate and currency risk is eliminated by entering into The Board of Directors considers the liquidity risk to be swap agreements concurrently with the bonds being moderate. issued, for the full term to maturity of the loans. Such swap agreements are entered into with high-quality Operational risk counterparties based on documentation that is Operational risk is the risk of losses as the result favourable for the company. From 2019 the company of errors and irregularities in the management of can also hedge against the parent bank, on the same transactions, inadequate internal control or irregularities swap agreements as with the external counterparties. in the systems used by the company. These agreements are approved by the rating agency the company uses, and they contribute to the Operational risk is identified through assessments company’s good covered bond rating. and management confirmations that are part of the company’s internal control. The company has entered Changes in the value of the swaps are recognised as into a management agreement with Sparebanken Vest they arise, but the effect on profit will be zero over the that includes management, bank production and IT duration of borrowings. Accounting effects will thereby operations, as well as financial and risk management. be reversed over time. Under the agreement, the bank must compensate the company for any expenses incurred as the result of any The company’s investments in interest-bearing defects in the deliveries and services the bank provides. securities are at a floating rate of interest. The market The operational risk is assessed on an ongoing basis. risk is therefore low. Management considers the company’s IT systems as central to operations, accounting and reporting of The Board of Directors considers the interest and completed transactions, as well as obtaining the basis currency risk, as well as the overall market risk, to be for important estimates and calculations. The company moderate. uses PricewaterhouseCoopers as its internal auditor, and any non-conformities are reported to the Board. Liquidity risk Liquidity risk is the risk that the company will not be The Board of Directors considers the company’s able either to refinance its commitments upon maturity operational risk to be moderate, including the risk or to finance an increase in assets on market terms. relating to the financial reporting process. Norwegian covered bond companies must meet the

Sparebanken Vest Boligkreditt Annual Report 2019 page 5 Employees and the working environment has fallen. It particularly affects countries with much Sparebanken Vest Boligkreditt has no employees. The export-oriented industrial activity, such as Germany. managing director and the company’s COO are formally Unemployment has been reduced for the euro area as employed by the parent bank and hired to carry out a whole and is close to the level before the financial work for Sparebanken Vest Boligkreditt. Other resources crisis. required to operate the company are provided by the relevant departments in Sparebanken Vest based on Growth in the Norwegian economy is good and agreements between the company and the parent bank. driven by higher investments, exports and private No serious work accidents or incidents occurred or was consumption. Projections from Norges Bank, Statistics reported during the year. The working environment in Norway and the Ministry of Finance point to slightly and around the company is deemed to be good, and the weaker growth in the mainland economy in the company does not pollute the natural environment. future. Employment growth is expected to slow, while unemployment is expected to remain low. The Board of Directors consists of four members and one of the board members is a woman, and three We expect Norges Bank to keep the policy rate at 1.5% of the board members hold executive positions in for the remainder of 2020. Sparebanken Vest. One new individual has been appointed to the Board in 2019, and the new CFO in Western Norway the parent bank, Frank Johannesen, was appointed new The Western Norway Index 4/2019 shows a continued chairman of the Board in October 2019. strong economy in Western Norway. The performance index is around 62, on par with recent quarters. This Changed framework conditions is above the average since the index’s inception in Sparebanken Vest Boligkreditt is required to have a 2012. The expectation index falls close to 5% from capital adequacy ratio of at least 16.0%, of which the previous quarter, to a level that is in line with Core Tier I capital must amount to at least 12.5% of 2016. This indicates lower growth expectations among the calculation basis excluding Pilar 2 supplements companies located in Western Norway. and management buffer. The risk weight on mortgages for IRB-approved financial institutions dropped Companies with a high share of turnover related to oil from 40 pct. to approximately 20 pct. as a result of and gas related business are still most satisfied with implementing CRR/CRD IV in Norway. The company both the last three months and the outlook for the next meets all the capital requirements at year-end 2019, six months. Western Norway companies report higher and it will make the necessary adaptations as regards costs this quarter, with higher purchase prices being capital and operations to ensure that the capital the dominant factor, mostly due to a weak NOK. requirements will be met in the future. Allocations The countercyclical buffer was last time increased The profit for the financial year after write-downs by further 0,5% from 31 December 2019 and is and tax amounted to NOK 203 million for 2019. It is now 2.5%. The Ministry of Finance has decided proposed that the profit be allocated as follows the systemic buffer will increase with 1.5% from 31 December 2020 for IRB-approved financial institutions. • Transferred to the hybrid capital owners NOK 37 million ECONOMIC DEVELOPMENT AND OUTLOOK • Transferred to other equity NOK 166 million Macro • Transferred from reserve for After a long boom in large parts of the world economy, unrealized gains NOK 0 million GDP growth fell through the first half of 2019. The NOK 203 million slowdown was particularly pronounced in Europe, and in the second quarter of 2019 GDP fell slightly in The Board of Directors proposes distributing a dividend Germany and the UK. Preliminary figures show that of NOK 137 million to Sparebanken Vest. The size growth was positive in all EU countries in the third of the dividend is deemed to be justifiable since the quarter. For most countries in Southern and Eastern Board assumes that the parent bank will also in future Europe, growth has remained relatively high. The increase the company’s capital base if this should division of prices must be seen on the basis of the fact be necessary. The proposed dividend has not been that demand has remained high internally in the euro recognised in the accounts because it does not qualify area, while demand from important export markets as a provision pursuant to IFRS.

Sparebanken Vest Boligkreditt Annual Report 2019 page 6 Bergen, 31 December 2019/ 29 January 2020 The Board of Directors of Sparebanken Vest Boligkreditt AS

Frank Johannesen, Chair of the Board Bjarte Fauske

Inga Lise Moldestad John Hopp

Fredrik Skarsvåg, Managing Director

Sparebanken Vest Boligkreditt Annual Report 2019 page 7 Income Statement

(NOK MILLION) Notes 2019 2018

Interest income from asset valued at amortised cost 1 877 1 543 Interest income from asset valued at fair value 578 447 Interest expenses and similar expenses 1 637 1 167 Net interest and credit commission income 22 818 823

Commission expenses and expenses relating to banking services 385 392 Net gain/(loss) on financial instruments 23 -153 -31 Net other operating income 538 423

Net operating income 280 401

Payroll and general administration expenses 11 11 Other operating expenses 4 3 Total operating expenses 24 15 14

Profit before write-downs and tax 265 386 Write-downs and losses on loans and guarantees 6, 8 16 4

Pre-tax profit/loss 249 383 Tax expenses 26 47 89

Profit/loss for the financial year 203 293

Profit/diluted profit per share 35,6 63,0

Statement of comprehensive income

2019 2018 Profit for the period 203 293 Changes in fair value due to credit risk - debt securities issued -36 0 Base margin from hedging instruments related to hedge accounting 0 -39 Taxes on items in other comprehensive income 8 9 Total profit for the period 175 263

Sparebanken Vest Boligkreditt Annual Report 2019 page 8 Balance sheet

(NOK MILLION) Notes 31/12-19 31/12-18

Assets Loans to and receivables from credit institutions 16 1 108 1 097 Loans to customers 5-11 85 782 84 196 Commercial papers and bonds 12 2 071 6 091 Deferred tax assets 26 39 32 Financial derivatives 13,14,15 2 672 3 507 Total assets 91 672 94 923

Liabilities and equity Debt to credit institutions 14,17,20 9 078 13 208 Securitised debt 15,18,20 76 494 75 490 Financial derivatives 13,14,15 49 55 Tax payable 26 45 73 Subordinated loan capital 19 501 501 Other liabilities 37 38 Total liabilities 86 204 89 364

Shareowners equity 4 650 4 650 Total paid-in equity 4 650 4 650

Reserve for unrealised gains 0 0 Other equity 140 232 Hybrid capital 19 677 677 Total equity 5 468 5 560

Total liabilities and equity 91 672 94 923

Bergen, 29 January 2020 The Board of Directors of Sparebanken Vest Boligkreditt AS

Frank Johannesen, Chairman of the Board Bjarte Fauske

Inga Lise Moldestad John Hopp

Fredrik Skarsvåg, Managing Director

Sparebanken Vest Boligkreditt Annual Report 2019 page 9 Statement of cash flows

2019 2018

Cash flows from operations Interest, commission and customer fees received 2 366 1 949 Interest, commission and customer fees paid -420 -377 Interest received on other investments 58 32 Interest paid on other borrowings -1 560 -1 197 Payments to other suppliers for goods and services -25 -4 Payments to employees, pens. schemes, empl. nat. Ins. contr., tax withholdings etc. -10 -10 Payment of taxes -81 -74 Net cash flow from operations 328 320

Cash flows from investment activities Payments made/received on loans to customers -1 696 -7 898 Paym. made/received on purch./sales of other securities not held for trading purposes 4 018 -4 389 Net cash flow from investment activities 2 323 -12 287

Cash flows from financing activities Payments made/received relating to debt to credit institutions -4 118 -1 444 Payments received relating to subordinated loan capital 0 100 Payments received on issuing bond debt 12 235 21 369 Payments made relating to redemption of bond debt -10 527 -10 159 Payments received on issuing of new shares 0 400 Payments of dividends/ group contributions -230 -129 Net cash flow from financing activities -2 640 10 137

Net cash flow for the period 11 -1 831

Net change in cash and cash equivalents 11 -1 831 Cash and cash equivalents at beginning of period 1 097 2 928 Cash and cash equivalents at end of period 1 108 1 097

Sparebanken Vest Boligkreditt Annual Report 2019 page 10 Changes in equity

Reserve for Shareowner Other unrealised Hybrid equity equity gains capital Total Equity at 31 December 2017 4 250 129 1 576 4 956 Profit/loss for the period 271 -1 23 293 Other comprehensive income -30 -30 Implementation of IFRS 9 -8 -8 Issuance of new hybrid capital 100 100 Issuance of share capital 29 november 2018 400 400 Interest paid on hybrid capital -29 -29 Tax on interest on hybrid capital, directly against equity 7 7 Distributed dividend -129 -129 Equity at 31 December 2018 4 650 232 0 677 5 560 Profit/loss for the period 166 37 203 Other comprehensive income -28 -28 Interest paid on hybrid capital -37 -37 Distributed dividend -230 -230 Equity at 31 December 2019 4 650 140 0 677 5 468

Shareowner equity as of 31 December 2019 is NOK 4.650 million and is divided between 4.650.000 shares with a nominal value of NOK 1.000. All the shares are owned by Sparebanken Vest.

The proposed dividend for 2019 is NOK 137 million.

Sparebanken Vest Boligkreditt Annual Report 2019 page 11 Notes

Note 1 Accounting principles

GENERAL INFORMATION SPPI test (see the section on financial assets). and debt)) to volun- Sparebanken Vest Boligkreditt AS is a wholly owned subsidiary of tary accounting at fair value through profit (fair value option). Fixed Sparebanken Vest. The company was established by the bank to interest rate loans are subject to financial hedging using interest rate issue covered bonds. Sparebanken Vest Boligkreditt offers loans swaps. Hedge accounting is not used for these loans. This creates secured by mortgage within 75 per cent of the residential property’s an accounting mismatch, which qualifies for voluntary accounting at value. The company was formed on 21 May 2008. Its head office is fair value through profit or loss. Sparebanken Vest Boligkreditt AS in Bergen. The address of the head office is Jonsvollsgaten 2, NO- has chosen to use this opportunity. 5011 Bergen. IAS 12 Income Taxes Unless otherwise specified, all amounts in the accounts and notes to The IASB has made a change to IAS 12 that clarifies the treatment the accounts are stated in NOK million. Norwegian kroner is the of tax on equity transactions. The consequence for Sparebanken company’s functional and presentation currency. Vest Boligkreditt AS is that tax on hybrid capital interest is kept over ordinary profit, while it was previously charged directly to equity BASIS FOR THE PREPARATION OF THE ANNUAL ACCOUNTS together with interest on hybrid capital. The company accounts of Sparebanken Vest Boligkreditt AS have been prepared in accordance with International Financial Reporting SEGMENT INFORMATION Standards (IFRS) as adopted by the EU and published by the Inter- The company’s operations are managed as one segment. Most of the national Accounting Standards Board (IASB). They are mandatory loan portfolio is related to the retail market. from 31 December 2019. INCOME STATEMENT OF INTEREST Interest income is calculated The accounts are based on the principles of historical cost using the effective interest method on gross capitalized assets. The accounting. effective interest rate is the interest rate that accurately discounts the future cash flow, through the expected life of the financial instru- Amortised cost is used for the valuation of financial assets and liabil- ment, to the instrument’s gross book value at the time of recognition. ities, with the exception of financial instruments at fair value through This entails ongoing income recognition of nominal interest, plus profit or loss, or financial instruments designated for hedge amortization of establishment fees less direct establishment costs accounting. and other additional payments or discounts.

Amortised cost is calculated using the effective interest rate method. For debt securities on the asset side, recorded at amortized cost and It is defined as the amount the instrument is initially measured at in written down as a result of objective evidence of losses (see note 6), the accounts (cost price) minus repayments of the principal, with an interest is recognized as income based on the net balance sheet addition or deduction for accumulated amortisation of all differences amount. between cost price and the nominal amount, minus all write-downs. CHARGING OF INTEREST Fair value is defined as the price that would be received for selling The interest expense for financial instruments measured at amor- an asset or paid for transferring a liability between independent tized cost follows analogously as described on income recognition of market participants on the measurement date. interest for assets. The cost is the interest rate that accurately discounts the future cash flow on the instrument, including any amorti- For financial instruments subject to hedge accounting, the hedging zation of costs at the time of establishment. For financial debt meas- instruments are recognised at fair value and the hedged items at fair ured at fair value, costs are expensed at the time of recognition and value for the hedged risks. the interest rate then consists of accrued interest payments for the instrument. Preparing annual accounts and using IFRS require the use of estimates. The application of the international standards also requires FINANCIAL ASSETS AND LIABILITIES the management to make discretionary assessments. Areas that to a Financial assets and liabilities are valued and classified in accord- great extent involve such discretionary estimates, a high degree of ance with IFRS 9, and note disclosures have been prepared in ac- complexity, or areas in which assumptions and estimates are materi- cordance with IFRS 7 - Financial Instruments - Disclosures. al are described in this note. Recognition and derecognition CHANGES IN ACCOUNTING PRINCIPLES Financial assets and liabilities are recognised in the balance sheet IFRS 16 Leases when the company becomes a party to the instrument’s contractual IFRS 16 was introduced with effect from 01.01.2019. The standard terms. Financial assets and financial liabilities are derecognised lays down principles for the recognition, measurement and presenta- when the advantage or liability that follows from the contractual tion of leases. IFRS 16 is not applicable to Sparebanken Vest Bolig- terms is met, cancelled or terminated. kreditt AS as the company does not have such contracts. A financial asset can also be deducted and recalculated if it has IFRS 9 been subject to major changes. In such cases, changes in contract In 2018, the IASB made an amendment to IFRS 9 through “Prepay- terms, materiality, as well as other commercial terms are considered. ment Features with Negative Compensation - Amendments to IFRS 9”, which means that loans at a fixed interest rate will meet the Measurement categories requirements to be repayment only of principal and accrued interest. IFRS 9 has introduced new classification and measurement princi- This was approved by the EU on March 22, 2018. This has no mate- ples. The measurement categories for financial assets in IAS 39 (fair rial consequence for Sparebanken Vest Boligkreditt AS, but the value through profit or loss, available for sale, held to maturity and classification changes the status from the accounting to fair value amortised cost) have been replaced by the following three categories through profit (as a result of the debt instrument not passing the in IFRS 9:

Sparebanken Vest Boligkreditt Annual Report 2019 page 12 • Amortised cost • Loans with floating interest rates • Fair value through other comprehensive income (FVOCI) • Receivables from credit institutions • Fair value through profit or loss (FVPL) • Financial liabilities with a floating interest rate

The measurement category is decided upon initial recognition of the Financial assets and financial liabilities recognised at amortised cost asset. are initially valued at fair value with the addition of direct transaction costs. In periods after the initial measurement, the assets/liabilities Note 2 specifies the volume for each main group of financial instru- are valued at amortised cost based on the effective interest rate ments classified in the different measurement categories. method.

Debt instruments Fair value through other comprehensive income (FVOCI) Debt instruments, defined as all financial assets that are not deriva- Sparebanken Vest Boligkreditt AS does not have financial instru- tives or equity instruments, must be subjected to two tests to decide ments in this category. their classification and measurement pursuant to IFRS 9. Financial instruments at fair value through profit or loss The first test, which is done at instrument level, is a valuation of the Derivatives are recognised in the balance sheet at fair value when the instrument’s contractual terms. This is often referred to as the SPPI derivative contract is entered into, and thereafter at the current fair test (SPPI = solely payment of principal and interest). Only instru- value. For more information about the scope and use of derivatives ments with contractual cash flows that solely comprise the payment by the company, see Note 14. of ‘normal’ interest and principal on given dates qualify for measurement at amortised cost. All other financial instruments must be Liquid assets are recognised at fair value through profit or loss. Rela- measured at fair value. This can include instruments with contractu- tively many transactions take place in the portfolio in order to adapt al terms that are not related to basic debt instruments, for example the quality and size to external and internal buffer requirements. It instruments with gearing or ‘built-in derivatives’. ‘Normal’ interest is also a goal to maximise returns at all times within the overall re- includes compensation for the time value of money (risk-free inter- quirements. The liquidity reserves generate credit risk and there are est), credit risk, other ‘basic’ lending risks (e.g. liquidity risk) and return targets within the framework for this risk. Liquid assets are costs (e.g. administrative costs) and profit margin. managed, measured and reported to the management on the basis of their fair value. Instruments that in principle qualify for measurement at amortised cost must then undergo a business model test. This is done at port- Financial instruments classified for recognition at fair value through folio level: profit or loss • Debt instruments shall be measured at amortised cost if the instru- Financial instruments are classified in this category if the classifica- ments are held in a business model, in which the purpose of hold- tion eliminates or significantly reduces accrual accounting differenc- ing the instrument is to receive contractual cash flows. es for gains and losses on hedging instruments and hedged items in connection with financial hedging. • Instruments with cash flows that only consist of the payment of interest and principal that are held both for the purpose of receiv- Financial liabilities that are part of a portfolio that is managed and ing contractual cash flows and for sale shall be measured at fair assessed on the basis of fair value in accordance with a documented value through other comprehensive income (FVOCI) along with risk management or investment strategy can also be classified in interest income and any write-downs recognised through profit or this category. loss. This means that the instrument is recognised in the balance sheet at fair value, and that interest on and write-downs for credit Fixed rate loans are assigned to this category. This is because the losses are recognised through profit or loss, in the same way as if company hedges the interest rate risk for this significant balance the instrument had been measured at amortised cost, while other sheet item through derivatives. The latter must always be measured changes in value are recognised through other comprehensive at fair value through profit or loss, and recognition of the loans at income. amortised cost will thus lead to significant fluctuations in profit/loss. Recognition at fair value through profit or loss will lead to a more • Other debt instruments shall be measured at fair value through harmonised presentation of the derivatives’ profit/loss and changes profit or loss. They will typically be instruments held in trading in the value of loans. portfolios, portfolios that are managed, measured and reported to the management at fair value, and portfolios whose scope of sale is Changes in the value of derivatives and changes in the value of loans too large for them to fall under the other two business models. with a fixed interest rate are presented under “Net gains / losses on financial instruments”. • Instruments that, following these tests, are to be measured at amortised cost or fair value through OCI can nonetheless be designat- For the same reason, the company’s fixed-rate financial debt is clas- ed as measured at fair value through profit or loss if this eliminates sified under this category. Gains and losses related to changes in or significantly reduces an accounting mismatch. own credit risk are recognized in the income statement.

Derivatives Other changes in value of these instruments are recognized in the All derivatives shall in principle be measured at fair value through income statement line “net gain / (loss) financial instruments”. profit or loss (FVPL), but derivatives designated for hedge accounting shall be recognised in accordance with the principles for hedge More information about fair value accounting. Financial instruments recognised at fair value are recognised at fair value upon acquisition, and transaction costs are charged to income. Financial instruments recognised at amortised cost Subsequent measurements are at fair value. Debt instruments that are subjected to the SPPI test and that are covered by a business model whose purpose is to hold the instru- Fair value of listed investments is based on prevailing rates at the ment in order to receive contractual cash flows are recognised at balance sheet date. For securities that are not listed and where there amortised cost. The following principal items are measured at amor- is no active market, the company uses prices mainly from Bloomberg tised cost in the accounts: AS for bonds and certificates.

Sparebanken Vest Boligkreditt Annual Report 2019 page 13 The value of fixed-rate loans is estimated by discounting cash flows IMPAIRMENT LOSSES ON LOANS VALUED AT AMORTISED COST with a risk-adjusted discount rate that takes into account the prefer- Under IFRS 9, the recognition shall be based on expected credit loss ences of the market participants. The discount factor is calculated (ECL). The write-downs shall be unbiased and forward-looking. This based on an observable swap rate plus a margin requirement. When differs from IAS 39 (comparative figures) where write-downs were estimating the margin requirement, the company looks at the ob- only to be made for losses if there was objective evidence of a loss servable market rates on similar loans. event having occurred. Loan approvals, unused credit facilities and guarantee commitments are also covered by the impairment model. The swap rate element of the discount rate fluctuates continuously, while the observable market rates for similar loans do not change as The measurement of the provision for expected losses under the frequently. The margin requirement is therefore estimated based on general model depends on whether the credit risk has increased the difference between the market interest rate and the swap rate significantly since initial recognition. Upon initial recognition and over a period of time. when the credit risk has not increased significantly after initial recognition, a provision shall be made for 12-month expected losses. For financial instruments on the debt side, fair value is calculated by Twelve-month expected losses are the losses expected to occur dur- discounting the cash flow from the loans with yield requirements ing the instrument’s life, but that can be linked to events occurring derived from the zero coupon curve. Credit spreads on interest-bear- in the next 12 months. If the credit risk has increased significantly ing securities are changed based on an overall assessment where since initial recognition, a provision for expected losses shall be observed turnover in the market, credit margin reports from various made for the whole life of the instrument. brokerage houses, as well as internal assessments form the basis for the overall assessment. A change in credit spread will affect the The company has established a method (See Note 6) for assessing required rate of return by changing the fee added to the zero coupon whether the credit risk has increased significantly after initial recog- curve. nition by calculating the risk of a default occurring during the financial instrument’s remaining life. The expected credit loss is calculat- Repurchases of own issued securities are netted against securities ed on the basis of the present value of all cash flows during the debt in the balance sheet (deducted). expected remaining life, i.e. the difference between the contractual cash flows under the contract and the cash flows the company -ex Realized gains / losses as well as changes in the value of financial pects to receive, discounted by the effective interest rate for the instruments at fair value through profit or loss, including dividends, instrument. are shown in the accounts under “Net gains / (losses) on financial instruments” during the period in which they arise. CURRENCY The company’s presentation currency is Norwegian kroner. Financial instruments designated for hedge accounting For financial instruments subject to hedge accounting, the hedging Receivables and liabilities in foreign currency are translated at the instruments are recognised at fair value and the hedged items at fair exchange rate on the balance sheet date. Currency items are largely value for the hedged risks. The company has also implemented IFRS hedged by matching them with corresponding items on the other 9 with respect to hedge accounting. side of the balance sheet, or by using derivatives.

Sparebanken Vest Boligkreditt uses hedge accounting to ensure that Income and expenses in foreign currency are translated into NOK at the accounting treatment reflects how interest rate risk and currency the rates on the transaction date. risk are managed for long-term borrowings. This leads to a presentation in the income statement of gains and losses on bonds issued at TAX fixed interest rates and/or foreign currency (hedged item) with gains Deferred tax and deferred tax assets are recognised in the balance and losses on pertaining interest rate and currency swaps (hedging sheet in accordance with IAS 12 Deferred Tax. instrument). This is recognised as fair value hedging. The tax expense in the income statement includes both the tax paya- A formal earmarking and documentation of the hedging relationship ble for the period and the change in deferred tax. The deferred tax/ takes place when the hedging is established. There is a clear, direct deferred tax asset is calculated at a rate of 22% of net temporary and documented connection between fluctuations in the value of the differences between accounting and tax values at the end of the hedged item that are due to the hedged risk and fluctuations in the financial year. Tax-increasing and tax-reducing temporary differences value of the financial derivatives. The hedging is documented with that are reversed or can be reversed in the same period are offset reference to the company’s risk management strategy, clear identifi- and entered net. cation of the hedged item and the hedging instrument, a clear description of the hedged risk and a description of why the hedging is The deferred tax asset is capitalised on the basis of expectations of expected to be effective. taxable income through earnings in future years.

Hedge ineffectiveness, defined as the difference between the value Tax payable in the balance sheet is the tax payable on the profit for adjustment of hedging instruments and the value adjustment of the the year. hedged risks in the items, is recognised in profit or loss as it arises. The exception is the part of the value adjustment caused by a CONTINGENT LIABILITIES/ PROVISIONS change in the basis spread relating to the hedging instruments. The A provision has been made for contingent liabilities in accordance latter is presented in the statement of comprehensive income. This with IAS 37. For a provision to be made, a contingent liability must represents a change from the comparative figures since these ef- exist as a result of previous events, and it must be highly likely that fects were presented in ordinary profit/loss pursuant to IAS 39. the liability will have to be met. The proposed dividend and dona- tions for distribution are not formally decided on the balance sheet The hedging instruments are recognised at fair value and changes in date and thus do not meet the criteria for being defined as a liability value are included in ‘Net gain/(loss) on financial instruments’ in the under IAS 37. income statement. Presentation of changes in value of the hedged items are included in the same line. POST BALANCE SHEET EVENTS Events that occur after the balance sheet date are disclosed in accordance with IAS 10. The information concerns events that are not

Sparebanken Vest Boligkreditt Annual Report 2019 page 14 recognised in the consolidated financial accounts, but whose nature pal + accrued interest on the valuation date) and the present value makes them material to assessing the business. of future cash flows discounted on the basis of the effective interest rate over the useful life of the loan. Write-downs are classified as a CASH FLOW STATEMENT loss expense in the income statement. The cash flow statement is broken down into cash flows from operations, investment activities and financing activities. When estimating write-downs on individual customers, both the current and expected future financial position is assessed. The over- Cash flows from operations are defined as current interest, charges all assessment of these factors forms the basis for estimating future and commission related to lending and borrowing, interest relating to cash flows. The discounting period is estimated on an individual liquid assets, unpaid operating expenses and direct and indirect basis or based on experience data about the period up until a solu- taxes paid. tion is found to the conditions that have led to a fall in the value of the commitment. Investment activities are defined as cash flows relating to changes in the nominal lending volume, cash flows from securities transactions Estimates of future cash flows are based on experience data, the and investments in tangible fixed assets. interpretation of available information and extensive use of discretion. Cash flows relating to the raising and repayment of subordinated loans and bond debt, and equity are defined as financing activities. Fair value of financial instruments The fair value of financial instruments that are not traded in an ac- EQUITY tive market is determined using various valuation techniques. This is Equity consists of shareowner equity, other equity, reserve for unre- based on assumptions about what the market will use as the basis alised gains and hybrid capital. for the valuation of corresponding financial instruments and the information available on the balance sheet date. Reserve for unrealised gains arise when a fair value increase on financial instruments are recognized in the financial statements, Fixed-interest loans: where the measurement method in IFRS deviates from Norwegian Pursuant to IFRS, the valuation shall be based on an assessment of G A AP. what an external investor would have assumed when investing in corresponding loans. A well-functioning market does not exist for the Hybrid capital consists of tier 1 bonds that do not meet the defini- buying and selling of fixed-interest loans between market players. tion of financial liability in accordance with IAS 32. Accrued interest The value of the fixed-interest loans is estimated by discounting the on hybrid capital is allocated to hybrid capital. Interest rates are cash flows using a risk-adjusted discount factor that takes market presented gross in the statement of changes in equity. players’ preferences into account. The discount factor is calculated on the basis of an observable swap interest rate with the addition of Proposed dividend is presented as equity in the balance sheet until a margin requirement. a final decision is made in the general assembly. When estimating the margin requirement, the company looks at ACCOUNTING ESTIMATES AND DISCRETIONARY ASSESSMENTS observable market interest rates for corresponding loans. The swap When preparing the annual accounts in accordance with IFRS, the interest rate element of the discount factor fluctuates continuously, company’s management has used estimates and assumptions that while the observable market interest rates for corresponding loans affect the amounts recognised for assets, liabilities, equity and prof- do not change as frequently. The market players’ margin requirement it/loss. The estimates used are based on discretionary assessments is thereby not directly observable, and it is estimated on the basis of and assumptions that were deemed to be realistic on the balance the difference between the observable market interest rates and the sheet date. New information and future events may lead to signifi- swap interest rate over a given period. Since the margin requirement cant changes in estimates, with pertaining changes in recognised is not directly observable, there is uncertainty attached to the calcu- amounts. The company’s most important estimates and assumptions lation of the fair value of fixed-interest loans. are discussed below. Basis swaps: Losses on loans, unused credit facilities and guarantees Sparebanken Vest Boligkreditt AS uses basis swaps as hedging in- Discretion is required at several levels when using the company’s struments to convert payment commitments in foreign currencies loss model. See Note 6 for a more detailed description of the loss into Norwegian kroner. The price of entering into basis swaps varies, model. which means that the hedging is not a perfect hedge. This affects the fair value of the derivative. In addition, CSA agreements have For Sparebanken Vest Boligkreditt AS, the most important elements been entered into on the furnishing of security that clearly favour the that involve a high degree of discretionary assessment will be the bond owners. This has a price, because the counterparties face establishment of macro data in different scenarios and transforming potentially large commitments if, for example, they are downgraded. a macro view into PD paths and the value of security. This price is called a credit charge and may also vary over time. There is uncertainty associated with the calculation of fair value for If there is objective evidence of one or more events having occurred such financial instruments. since the initial recognition of the asset that are expected to entail a risk of reduced debt-servicing ability, an individual loss assessment For the volume of financial instruments classified at level 3 (subjec- is carried out for the commitment. Objective events could be default tive elements in the valuation), reference is made to Note 4. It also of payment, illiquidity or other material financial problems on the provides information about sensitivity relating to the parameters part of the debtor. used in the calculations.

The company’s loss assessments will be the result of a process that involves the parent bank’s business areas and important credit environments.

The amount of the write-down is determined based on an assessment of the difference between the balance sheet value (loan princi-

Sparebanken Vest Boligkreditt Annual Report 2019 page 15 UPCOMING AMENDMENTS TO STANDARDS AND framework under IFRS has been revised with some amendments INTERPRETATIONS having effect from 1 / 1-2020. The audit is related to definitions of As of December 31, 2019, there are relatively few known future assets and liabilities as well as new guidelines for measurement, changes in accounting principles that will have consequences for the deduction of presentation and notes. The significance of the ac- accounts of Sparebanken Vest Boligkreditt AS. The conceptual counts is considered to beof immaterial nature.

Note 2 Classification and valuation of financial instruments Financial instr. subject Recognised at to hedge Recognised at 31 Dec. 2019 fair value accounting amortised cost Total

Assets Loans to and receivables from credit institutions 1 108 1 108 Net lending 18 794 66 989 85 782 Certificates and bonds 2 071 2 071 Financial derivatives 331 2 341 2 672 Total 21 195 2 341 68 097 91 633

Liabilities Debt to credit institutions 9 078 9 078 Securitised debt 8 145 37 386 30 963 76 494 Financial derivatives 49 49 Subordinated loan capital 501 501 Total 8 194 37 386 40 542 86 122

Sparebanken Vest Boligkreditt AS has no financial instruments classified at fair value through other comprehensive income.

31 Dec. 2018

Assets Loans to and receivables from credit institutions 1 097 1 097 Net lending 22 145 62 051 84 196 Certificates and bonds 6 091 6 091 Financial derivatives 42 3 465 3 507 Total 28 278 3 465 63 148 94 891

Liabilities Debt to credit institutions 13 208 13 208 Securitised debt 41 883 33 607 75 490 Financial derivatives 55 55 Subordinated loan capital 501 501 Total 55 41 883 47 316 89 253

Sparebanken Vest Boligkreditt Annual Report 2019 page 16 Note 3 Fair value of financial instruments recognised at amortized cost 31/12-19 31/12-18

Balance Fair Balance Fair sheet value value sheet value value

Assets Loans to and receivables from credit institutions 1 108 1 108 1 097 1 097 Loans to customers 66 989 66 991 62 051 62 051

Total 68 097 68 099 63 148 63 148

Liabilities Debt to credit institutions 9 078 9 078 13 208 13 208 Securitised debt, amortized cost 30 963 31 137 33 607 33 748 Securitised debt, classified as hedge accounting 37 386 37 737 41 883 41 764 Subordinated loan capital 501 511 501 502

Total 77 928 78 463 89 199 89 222

Loans and receivables to credit institutions are recognised at amortised cost. These are loans with floating interest rates and fair value is approx. amortised cost. The same applies to loans to customers and liabilities to credit institutions.

Note 4 Valuation hierarchy for financial instruments at fair value Level 1 valuation methods maximise the use of observable data where Financial instruments traded in active markets are classified as level available and, as far as possible, are not based on the use of own 1. A market is deemed to be active if the market prices are easily estimates. If all the material data required to determine the fair and regularly available from a stock exchange, broker, industry value of an instrument are observable data, the instrument is group, pricing service or regulatory authority, and these prices included in level 2. represent actual and regularly occurring market transactions at arm’s length. The market price used for financial assets is the applicable Level 3 purchase price, while the applicable sales price is used for financial If one or more data items are not based on observable market commitments. information, the instrument is included in level 3.

Level 2 The fair value of financial instruments that are not traded in an active market is determined by using valuation methods. These

31.12.2019 Level 1 Level 2 Level 3 Total Financial assets Bonds and certificates at fair value through profit 407 1 664 2 071 Loans to customers 18 794 18 794 Financial derivatives 331 331 Financial derivatives designated for hedge accounting 2 341 2 341 Total financial assets 407 4 336 18 794 23 536

Liabilities Securitised debt 8 145 8 145 Financial derivatives 49 49 Financial derivatives designated for hedge accounting 0 0 Total 0 8 194 0 8 194

Loans to customers Financial instruments valued at level 3 as of 1 Jan. 2019 22 145 Additions/acquisitions 207 Sales/redemption/repayment -3 439 The year's value adjustment -119 Financial instruments valued at level 3 as of 31 Dec. 2019 18 794

An increase in the discount rate of 10 basis points for loans valued at fair value will lead to a reduction in value of NOK 28 million.

Sparebanken Vest Boligkreditt Annual Report 2019 page 17 Note 4 Valuation hierarchy for financial instruments at fair value (cont.) 31.12.2018 Level 1 Level 2 Level 3 Total Financial assets Bonds and certificates at fair value through profit 1 513 4 578 6 091 Loans to customers 22 145 22 145 Financial derivatives 42 42 Financial derivatives designated for hedge accounting 3 465 3 465 Total financial assets 1 513 8 085 22 145 31 743

Liabilities Financial derivatives 55 55 Financial derivatives designated for hedge accounting 0 0 Total 0 55 0 55

Loans to customers Financial instruments valued at level 3 as of 1 Jan. 2018 19 384 Additions/acquisitions 4 329 Sales -1 524 The year's value adjustment -43 Financial instruments valued at level 3 as of 31 Dec. 2018 22 145

An increase in the discount rate of 10 basis points for loans valued at fair value will lead to a reduction in value of NOK 40 million.

Sparebanken Vest Boligkreditt Annual Report 2019 page 18 Note 5 Risk classification of the credit portfolio

Credit risk default. EAD is estimated as the expected utilisation of credit plus Credit risk is the risk of losses if Sparebanken Vest Boligkreditt’s the expected utilisation of unutilised drawing rights. customers are unable to meet their commitments to the company relating to loans, credit facilities, guarantees etc. Credit risk relating iii) Loss given default (LGD) indicates the loss ratio on a to derivative transactions is quantified using conversion factors that commitment in default expressed as a percentage of EAD. For the depend on the contract type and term to maturity. retail market (PM) this is calulated based on internal models. Collateral type, value, and the probability of recovery are key Risk classification of loans and guarantees parameters in the calulation of the loss ratio. In addition to The measurement of credit risk is based on the following main calculating the expected loss ratio, adjustments are made for components: i) probability of default (PD), ii), expected exposure at downturns by calculating the”downturn LGD”. This is used for capital default (EAD) and iii) loss given default (LGD). adequacy purposes. Risk class K comprises commitments in default. i) Probability of default (PD) is defined as the probability of a The scorecard models combine internal and external data to predict customer defaulting on a loan within the next 12 months. A default statistical relationships. The results are interpreted and form the can be default of payment in excess of 90 days or other concrete basis for logical key figures, and they have a central place in the circumstances (‘unlikely to pay’, cf. Basel II), that affect the management of credit risk. A risk classification of all commitments customer’s ability to service the debt. The probability of default is is carried out every month in which data from internal and external calculated using statistical models (scorecards) based on logistic sources are retrieved automatically. regression. Eleven risk classes from A to K are used in order to group the credit portfolio by debt-servicing ability. ii) Expected exposure at default (EAD) is an estimated amount that shows the total exposure in relation to the customer in the event of

Risk classes based on probability of default Risk class From and incl. Up to A 0,00% 0,10% B 0,10% 0,25% C 0,25% 0,50% D 0,50% 0,90% E 0,90% 1,50% F 1,50% 2,75% G 2,75% 5,00% H 5,00% 10,00% I 10,00% 25,00% J 25,00% 99,99% K 100,00% 100,00%

Loans broken down by risk class Commitment Write-downs 31/12-19 31/12-18 31/12-19 31/12-18 A-D 88 206 87 301 5 3 E-H 4 190 3 250 13 9 I-J 130 116 2 2 K 154 129 16 15 Total 1) 92 680 90 796 36 29 1) 1) The definition of a customer’s commitment in connection with the calculation of risk classification will deviate somewhat in a few areas from the definition of credit exposure pursuant to IFRS. The total amount in this note will therefore not be fully reconcilable with commitments as defined in Note 10.

Sparebanken Vest Boligkreditt Annual Report 2019 page 19 Note 6 Description of the impairment model under IFRS 9

This note describes the company’s impairment model for financial since the loan was furnished and is at least 0.6%, it is classified as assets that are debt instruments and that are not classified at fair Stage 2. value through profit or loss. Stage 3: Stage 3 of the loss model includes assets for which the Sparebanken Vest Boligkreditt AS has prepared a procedure for the credit risk has increased significantly since initial recognition, and quarterly calculation of losses based on data warehouses that con- where there is objective evidence of a loss event on the balance tain historical information about account and customer data for the sheet date. For these assets, a provision for lifetime expected losses whole credit portfolio, loans, credit and guarantees. will be made, largely corresponding to today’s IAS 39.

The goal of the model is to calculate expected credit loss (ECL) Indicators that are assessed when decisions are made regarding based on forward-looking and unbiased estimates. whether there is objective evidence of loss are material financial problems on the part of the debtor, default of payment or other seri- The loss estimates will be calculated on the basis of 12-month and ous breaches of contract, approved deferments of payment or new lifetime probability of default (PD), loss given default (LGD) and ex- credit for the payment of an instalment, agreed changes in the inter- posure at default (EAD). Historical data about the observed default est rate or other terms and conditions relating to the agreement as a rate (PD) and the observed loss given default (LGD) form the basis result of the debtor’s financial problems. If a loss event is identified, for producing good estimates of future PD and LGD values. Spare- consideration is given to whether the loss events in question have banken Vest Boligkreditt AS considers forward-looking information reduced the estimated future cash flows from the commitment. about macroeconomic factors such as unemployment, interest rates, house prices and other economic forecasts, in order to be able to The definition of default under IFRS 9 is the same as in IAS 39, and produce forward-looking estimates for PD and LGD. Forward-looking a provision is made for lifetime expected losses. EAD is based on agreed repayment plans and observed levels of actual repayments and redemptions. All estimates shall be as unbiased The definition of default in Stage 3 also concurs with internal risk as possible. They thereby differ from corresponding estimates for management and capital requirement calculations. Also here, 90 PD, LGD and EAD that are used in the calculation of capital. The days’ delayed payment is used as an important criterion for default. estimates used to calculate capital are more conservative, for example by including safety margins or estimates for serious economic Migration from step 3 to step 2 and migration from step 2 to step 1 downturns. Commitments will migrate from step 3 to step 2 at the time of default. Commitment in step 2 will migrate to step 1 at the time a In line with IFRS 9, the company groups its loans into three stages commitment does not have a significant increase in credit risk since based on the probability of default (PD) at the time of recognition the inclusion date according to the definitions referred to above. The compared with the balance sheet date, and instalments paid more exception is a commitment registered with a pre-quarantine which than 30 days after the due date. In other words, each individual loan has a quarantine period if it has first come into this category. (or commitment) is classified as Stage 1, 2 or 3. This means that one and the same customer can have loans classified in different Recognition and derecognition stages. The loss model is devised so that the establishment of a new loan account is defined as a new commitment, while the redemption of a Sparebanken Vest Boligkreditt AS uses the same PD model as in loan account is defined as derecognition. Reference is otherwise IRB, but with unbiased calibration, meaning without safety margins, made to the section on recognition and derecognition in Note 1 – as the basis for assessing increased credit risk. The PD estimate Accounting principles. The need to write down the loan (the loss represents 12-month probability. Validation shows that it is accurate being booked against the customer’s loan) is confirmed once all se- for both short and long timeframes. It is therefore considered to be a curity has been realised and it is certain that no further payments reasonable and pragmatic approach to assessing the increase in will be received on the loan. The claim on the customer remains and credit risk over the lifetime of a loan. will be followed up unless it has been agreed with the customer that the loan is to be written off. Stage 1: The starting point for all financial assets covered by the general loss model. A loss provision corresponding to 12-month ex- Forward-looking information pected losses, meaning losses relating to incidents that may occur in The basis for the macro bases case is taken from Norges Bank’s the 12 months after the reporting date, will be made for all assets monetary policy report. This ensures independence in the forecasts for which the credit risk is not significantly higher than upon initial and good quality of input. Norges Bank specifies uncertainty bands recognition. This category includes all assets not transferred to for most sizes, and in these cases the worst and best case are Stage 2 or 3. adapted to these bands. Where uncertainty bands are not specified, the worst and best case are determined by discretion. The three sce- Stage 2: Stage 2 includes assets for which the credit risk has in- narios consist of a base case that covers a probability range of 60%, creased significantly since initial recognition, but where there is no as well as the worst case and best case with a probability weight of objective evidence of a loss. For these assets, a provision for lifetime 20%. Scenarios are used to adjust for nonlinear properties of the expected losses will be made. This group includes loans for which subcomponents of the ECL calculation. the credit risk has increased significantly but that are not in default (i.e. not Stage 3; see below). As regards delimitation in relation to Important macro data for the calculation are: Stage 1, the company itself defines what constitutes a significant increase in credit risk. However, IFRS 9 states that a significant in- • Growth in GDP crease in credit risk will have occurred, unless this can be refuted, if • Unemployment rate payment is delayed by 30 days or more (up to 90 days, which is de- • Interest rate level fined as actual default). • Growth in house prices • Oil price The company uses the PD level as the primary criteria for significant- • Inflation ly increased credit risk. PD at the time of reporting is compared with PD at the time the loan was furnished. If PD has more than doubled

Sparebanken Vest Boligkreditt Annual Report 2019 page 20 The use of macro data The Financial Supervisory Authority’s reference model is used for Together with its parent bank, Sparebanken Vest Boligkreditt has LGD. Security coverage, probability of recovery and recovery of unse- divided the lending portfolio into 13 corporate market segments and cured debt are the most important elements in this model. Security 2 retail market segments. For the company, the majority of the port- coverage is calculated specifically for each loan, while the other ele- folio consists of CM commitments. Our credit department receives ments are based on historically observed average values. the forward-looking macro data and considers how they affect the probability of default (PD) and developments in the value of security In principle, losses per year are calculated using modelled exposure in each segment and each scenario. These assessments are based x PD x LGD for each year. Losses are discounted on the basis of the on expert assessments, and different macro data are assigned differ- effective interest rate for the instruments until the time of reporting ent weights in the different segments. This generates PD paths for and added together. A weighted sum is then calculated for each each industry for the next five years, which are then converged scenario. against a long-run average. Calculations and assumptions are subject to independent validation Model calculation by the parent bank’s validation team. Based on the division of commitments into different stages, the use of forward-looking probability of default (PD paths) and the value of security, expected losses are calculated in the company’s loss provision model.

Sparebanken Vest Boligkreditt Annual Report 2019 page 21 Note 7 Breakdown of gross lending between different stages of IFRS 9

Total calculated by model Individually Gross lending recognised at amortised cost Calculated by model losses assessed Stage 1 Stage 2 Stage 3 Stage 3 Total

Gross lending as of 1 January 2019 59 308 2 659 72 62 039 41 62 079 Transferred to 12-month ECL (Stage 1) 626 -626 0 0 0 0 Transferred to lifetime ECL – no objective evidence of loss (Stage 2) -1 409 1 418 -7 2 -2 0 Transferred to lifetime ECL – objective evidence of loss (Stage 3) – Calculated using model -14 -60 76 2 -2 0 Transferred to lifetime ECL – objective evidence of loss (Stage 3) – Individually assessed 0 -6 -1 -7 7 0 Newly issued or acquired financial assets 18 316 779 8 19 103 0 19 103 Financial assets derecognised – excluding loss write-down -12 758 -589 -29 -13 376 -25 -13 401 Net change in existing loans -779 20 2 -758 2 -757 Other movements 0 Gross lending as of 31 Dec. 2019 recognised at amortised cost 63 289 3 595 120 67 004 21 67 025 Loss write-down -2 -18 -10 -30 -6 -36 Net lending as of 31 Dec. 2019 recognised at amortised cost 63 287 3 577 110 66 974 15 66 989 Lending valued at fair value 18 794 Capitalised lending as of 31 Dec. 2019 85 782

Total calculated by model Individually Gross lending recognised at amortised cost Calculated by model losses assessed Stage 1 Stage 2 Stage 3 Stage 3 Total

Gross lending as of 1 January 2018 55 218 1 668 75 56 961 23 56 983 Transferred to 12-month ECL (Stage 1) 433 -433 0 0 0 0 Transferred to lifetime ECL – no objective evidence of loss (Stage 2) -1 184 1 192 -8 0 0 0 Transferred to lifetime ECL – objective evidence of loss (Stage 3) – Calculated using model -14 -19 33 0 0 0 Transferred to lifetime ECL – objective evidence of loss (Stage 3) – Individually assessed 0 -17 -1 -19 19 0 Newly issued or acquired financial assets 15 863 552 3 16 418 2 16 420 Financial assets derecognised – excluding loss write-down -10 733 -374 -40 -11 147 -2 -11 149 Net change in existing loans -275 90 11 -174 -1 -175 Other movements 0 Gross lending as of 31 Dec. 2018 recognised at amortised cost 59 308 2 659 72 62 039 41 62 079 Loss write-down -2 -12 -5 -19 -9 -29 Net lending as of 31 Dec. 2018 recognised at amortised cost 59 306 2 647 66 62 019 32 62 051 Lending valued at fair value 22 145 Capitalised lending as of 31 Dec. 2018 84 196

In line with IFRS 9, the bank groups its loans into three stages Stage 3 of the model includes assets for which the credit risk has based on the probability of default (PD) at the time of recognition increased significantly since initial recognition, and where there has compared with the balance sheet date, and checking the watch list, been objective evidence of a loss event on the balance sheet date. forbearance and instalments paid more than 30 days after the due They are divided into loans that have been individually assessed and date. In other words, each individual loan (or commitment) is loans assessed at portfolio level (calculated by model). classified as Stage 1, 2 or 3. All commitments recognised at amortised cost are included in the model.

Stage 1 is the starting point for financial assets covered by the general loss model, for which a provision will be made corresponding to 12-month expected losses. Stage 2 includes assets for which the credit risk has increased significantly since initial recognition, but where there is no objective evidence of a loss. Commitments at Stage 1 and 2 are assessed at portfolio level (calculated by model).

Sparebanken Vest Boligkreditt Annual Report 2019 page 22 Note 8 Write-down on loans and unused credit facilities

Total calculated by model Individually Changes in write-downs under IFRS 9 on loans and unused credit facilities Calculated by model losses assessed Stage 1 Stage 2 Stage 3 Stage 3 Total

Loss provision in opening balance, IFRS 9, at 1 January 2019 2 12 5 19 9 29 Transferred to 12-month ECL (Stage 1) 2 -2 0 0 0 0 Transferred to lifetime ECL – no objective evidence of loss (Stage 2) 0 1 0 0 0 0 Transferred to lifetime ECL – objective evidence of loss (Stage 3) – Calculated by model 0 -1 1 0 0 0 Transferred to lifetime ECL – objective evidence of loss (Stage 3) – Individually assessed 0 0 0 0 0 0 Net new measurement of losses -2 7 6 11 3 14 Newly issued or acquired financial assets 1 4 1 5 0 5 Financial assets derecognised 0 -3 -3 -6 -6 -12 Reversal of write-downs as a result of confirmed losses 0 0 Loss provision at 31 December 2019 2 18 10 30 6 36

Loan loss provision 2 18 10 30 6 36 Provision for unused credit facilities 0 0 0 0 0 0 Total loss provision 2 18 10 31 6 36

Loss cost for the period: Changes in individual write-downs for the period -4 Confirmed loss in the period with previous individual write-down 3 Confirmed loss in the period with no previous individual write-down 6 Recoveries in previously confirmed write-downs -1 Net effect on profit/loss from individual write-downs 5 Changes in losses for the period, calculated by model (Stage 1–3) 11 Loss cost for the period 16

Gross lending recognised at amortised cost at 31 December 2019 63 289 3 595 120 67 004 21 67 025 Loss write-down -2 -18 -10 -30 -6 -36 Net lending recognised at amortised cost in the balance sheet 63 288 3 576 110 66 974 15 66 989 Loans valued at fair value 18 794 Capitalised lending at 31 December 2019 85 782

Loans that have been recorded as losses, but which are still subject to follow-up amount to a total of 14MNOK as of 31.12.2019 and 6MNOK as of 31.12.2018

1 ECL = Expected Credit Loss

In line with IFRS 9, the bank groups its loans into three stages Transfer between the stages shows how much of expected credit based on the probability of default (PD) at the time of recognition losses in the opening balance have migrated from the other stages. compared with the balance sheet date, and checking the watch list, The effect of the new measurement method and new calculation in forbearance and instalments paid more than 30 days after the due the quarter is presented on the line ‘Net new measurement of date. In other words, each individual loan (or commitment) is losses’. classified as Stage 1, 2 or 3. All commitments recognised at amortised cost are included in the model. Confirmation of the loss write-down (booked against the customer’s commitment) takes place when all security has been realised and it Stage 1 is the starting point for financial assets covered by the is certain that the bank will receive no further payments on the loan. general loss model, for which a provision will be made corresponding The claim on the customer remains and will be followed up, unless it to 12-month expected losses. Stage 2 includes assets for which the has been agreed with the customer that the loan is to be written off. credit risk has increased significantly since initial recognition, but where there is no objective evidence of a loss. Commitments at Stage 1 and 2 are assessed at portfolio level (calculated by model).

Stage 3 of the model includes assets for which the credit risk has increased significantly since initial recognition, and where there has been objective evidence of a loss event on the balance sheet date. They are divided into loans that have been individually assessed and loans assessed at portfolio level (calculated by model).

Sparebanken Vest Boligkreditt Annual Report 2019 page 23 Note 8 Write-down on loans and unused credit facilities (cont.)

Total calculated by model Individually Changes in write-downs under IFRS 9 on loans and unused credit facilities Calculated by model losses assessed Stage 1 Stage 2 Stage 3 Stage 3 Total

Loss provision under IAS 39 at 31 Dec. 2018 17 Implementation effect, IFRS 9 11 Loss provision in opening balance, IFRS 9, at 1 January 2019 3 11 6 20 8 28 Transferred to 12-month ECL (Stage 1) 2 -2 0 0 0 0 Transferred to lifetime ECL – no objective evidence of loss (Stage 2) 0 1 -1 0 0 0 Transferred to lifetime ECL – objective evidence of loss (Stage 3) – Calculated by model 0 0 0 0 0 0 Transferred to lifetime ECL – objective evidence of loss (Stage 3) – Individually assessed 0 0 0 -1 1 0 Net new measurement of losses -3 3 3 3 2 4 Newly issued or acquired financial assets 1 2 0 3 0 4 Financial assets derecognised -1 -2 -3 -6 -1 -7 Reversal of write-downs as a result of confirmed losses 0 0 Loss provision at 31 December 2018 2 12 5 19 9 29

Loan loss provision 2 12 5 19 9 28 Provision for unused credit facilities 0 0 0 0 0 0 Total loss provision 2 12 5 19 9 29

Loss cost for the period: Changes in individual write-downs for the period 1 Confirmed loss in the period with previous individual write-down 0 Confirmed loss in the period with no previous individual write-down 5 Recoveries in previously confirmed write-downs -1 Net effect on profit/loss from individual write-downs 5 Changes in losses for the period, calculated by model (Stage 1–3) -1 Loss cost for the period 4

Gross lending recognised at amortised cost at 31 December 2019 59 308 2 659 72 62 039 41 62 079 Loss write-down -2 -12 -5 -19 -9 -28 Net lending recognised at amortised cost in the balance sheet 59 306 2 646 66 62 019 32 62 051 Loans valued at fair value 22 145 Capitalised lending at 31 December 2018 84 196

1 ECL = Expected Credit Loss

In line with IFRS 9, the bank groups its loans into three stages They are divided into loans that have been individually assessed and based on the probability of default (PD) at the time of recognition loans assessed at portfolio level (calculated by model). compared with the balance sheet date, and checking the watch list, forbearance and instalments paid more than 30 days after the due ransfer between the stages shows how much of expected credit date. In other words, each individual loan (or commitment) is losses in the opening balance have migrated from the other stages. classified as Stage 1, 2 or 3. All commitments recognised at The effect of the new measurement method and new calculation in amortised cost are included in the model. the quarter is presented on the line ‘Net new measurement of losses’. Stage 1 is the starting point for financial assets covered by the general loss model, for which a provision will be made corresponding Confirmation of the loss write-down (booked against the customer’s to 12-month expected losses. Stage 2 includes assets for which the commitment) takes place when all security has been realised and it credit risk has increased significantly since initial recognition, but is certain that the bank will receive no further payments on the loan. where there is no objective evidence of a loss. Commitments at The claim on the customer remains and will be followed up, unless it Stage 1 and 2 are assessed at portfolio level (calculated by model). has been agreed with the customer that the loan is to be written off.

Sparebanken Vest Boligkreditt Annual Report 2019 page 24 Note 9 Loans broken down by receivable type, markets and geographical areas 31/12 2019 31/12 2018 Loans broken down by type of receivable Flexible loans 13 312 13 797 Installment loans 72 506 70 427 Gross loans to customers 85 818 84 224 Individual write-downs, loans -6 -9 Group write-downs, loans -30 -19 Net loans to and receivables from customers 85 782 84 196

Default of payment - individually assessed 31/12-19 31/12-18 Commitments in default Up to 30 days 79 57 31-60 days 116 85 61-90 days 49 13 More than 90 days 88 91 Net commitments in default 332 245

Loans broken down by geographical area 31/12-2019 Percentage Loans Ind. write-down Hordaland 73 62 458 21 Sogn og Fjordane 7 5 605 2 Rogaland 15 12 498 9 Other 6 5 130 4 Total Norway 100 85 691 36 Foreign 0 127 Total geographical areas 100 85 818 36

31/12-2018 Percentage Loans Ind. write-down Hordaland 74 62 285 5 Sogn og Fjordane 7 5 541 0 Rogaland 14 11 880 3 Other 5 4 489 0 Total Norway 100 84 195 8 Foreign 0 29 Total geographical areas 100 84 224 8

Sparebanken Vest Boligkreditt Annual Report 2019 page 25 Note 10 Total commitments

Unused credit Total 2019 Gross loans facilities commitments Retail customers, domestic 83 742 7 054 90 797 Retail customers, foreign 127 0 127 Sole proprietorships secured by mortgage on homes 1 949 0 1 949 Total gross commitments 85 818 7 054 92 873 - Individual write-downs -6 0 -6 - Group write-downs -30 0 -30 Total net commitments 85 782 7 054 92 837

2018 Retail customers, domestic 82 348 6 723 89 071 Retail customers, abroad 117 0 117 Sole proprietorships secured by mortgage on homes 1 758 0 1 758 Total gross commitments 84 224 6 723 90 947 - Individual write-downs -9 0 -9 - Group write-downs -19 0 -19 Total net commitments 84 196 6 723 90 918

Note 11 Loan to value Gross loans are secured by mortgages. The hedging objects consist of real property.

The table below shows the percentage breakdown of commitments relating to different levels of secured loans. For example, the line 0-50% denotes that the commitments are lower than 50% of the value of the asset used as security.

Loan to value 2019 2018

0% - 50% 21,3% 25,4% 50% - 75% 74,2% 70,3% 75% - 90% 3,0% 3,2% 90% - 100% 0,6% 0,5% > 100% 0,9% 0,6% Total 100,0% 100,0%

Sparebanken Vest Boligkreditt Annual Report 2019 page 26 Note 12 Certificates and bonds

Certificates and bonds are recognised at fair value (see note 2).

Fair value at Cost price 31 Dec. 2019

DNB NOR Boligkreditt AS 97 101 DNB Boligkreditt 227 228 Finnvera 98 101 Sparebanken 1 Boligkreditt 101 100 Skandinaviska Enskilda 98 99 Kommunekreditt 157 155 EUROPEAN STABILITY MECHANISM 204 199 Stockholm Kommune 371 371 NORDIC INVESTMENT BANK 206 206 Stadshypotek 202 202 SEB 106 107 SBAB 96 99 Kitus 96 100 Total 2 060 2 071

Fair value at Cost price 31 Dec. 2018

DNB NOR Boligkreditt AS 97 101 DNB Boligkreditt 1 080 1 084 Findep 2003 799 799 Gjensidige Bank 405 406 Finnvera 98 103 Sparebanken 1 Boligkreditt 954 959 Skandinaviska Enskilda 98 100 Finans og Tolldepart 305 312 Kommunekreditt 157 157 European Investment Bank 49 50 Nordea Eiendomskreditt AS 749 755 Stockholm Kommune 101 101 Danske Bank 100 101 Eika Boligkreidtt 499 501 Zero Coupun Tysk Stat 50 50 Stadshypotek 98 100 Landwirtschaftuche Rentebank 98 100 SEB 106 112 SBAB 96 100 Kitus 96 101 Total 6 035 6 091

Sparebanken Vest Boligkreditt AS accept credit spread risk by investing in fixed-income securities. To manage this risk, the exposure measured by the methodology developed by the FSA. This estimate changes in the value of bonds, taking into account the rating and maturity. The limit is set as the maximum estimated value change by this method. Calculation is performed according to the method described in market risk strategy.

Sparebanken Vest Boligkreditt Annual Report 2019 page 27 Note 13 Financial derivatives

Financial derivatives in the accounts are agreements entered into with financial institutions to stipulate interest terms and exchange rates for specific periods. The derivatives are recognised at fair value (see note 2).

The company mainly uses financial derivatives for hedge accounting of borrowings in foreign currency and/or fixed interest borrowings. The hedging instruments comprise interest rate and currency swaps. See the accounting principles and note 18- Market risk for a more detailed description.

31/12-19

Positive Negative Nom. value market value market value Interest rate derivatives 20 335 58 49 Interest rate and currency derivatives 7 275 272 Total interest rate instruments 27 610 331 49

Interest rate derivatives designated for hedge accounting 6 350 288 0 Interest rate and currency derivatives designated for hedge accounting 28 504 2 053 0 Total derivatives designated for hedge accounting 34 854 2 341 0

Total derivatives 2 672 49

31/12-18

Positive Negative Nom. value market value market value 22 320 42 55 Total interest rate instruments 22 320 42 55

Interest rate derivatives designated for hedge accounting 6 350 502 0 Interest rate and currency derivatives designated for hedge accounting 34 752 2 963 0 Total derivatives designated for hedge accounting 41 102 3 465 0

Total derivatives 3 507 55

Note 14 Offsetting Sparebanken Vest Boligkreditt uses bilateral ISDA agreements with external counterparties when entering into derivative contracts. The agreements allows for netting in each currency, ie. NOK, SEK and EUR, but not between the currencies. The company has also entered into additional agreements on weekly margin requirement of collateral (CSA), which also apply for each currency. The agreements are one-way, meaning that only the counterparty must provide collateral when the market value fluctuates. Collateral from the counterparty shall be made when the market value breaches a threshold (in each currency) which depend on the rating of the counterparty. Higher rating gives a higher threshold for posting of collateral. The CSA agreement contains rating clauses whereby the counterparty must post more collateral if the rating drops below defined rating triggers. If the rating falls below a predetermined level, the counterparty must novate the contracts to another counterparties at the counterparties own expense. Amount to Amount after Gross capitalised be offset on Capitalised Netting Other security/ possible net value balance sheet* value agreements* collateral payment 31/12-2019 Loans to and advances to credit institutions 1 108 0 1 108 0 0 1 108 Financial derivatives - assets 2 672 0 2 672 0 1 315 1 357 Debt to credit institutions 9 078 0 9 078 0 1 315 7 763 Financial derivatives - liabilities 49 0 49 0 0 49

31/12-2018 Loans to and advances to credit institutions 1 097 0 1 097 0 0 1 097 Financial derivatives - assets 3 507 0 3 507 0 1 700 1 808 Debt to credit institutions 13 208 0 13 208 0 1 700 11 508 Financial derivatives - liabilities 55 0 55 0 0 55

* Netting agreements are not offset on the balance sheet, because the transactions are not settled on a net basis.

Sparebanken Vest Boligkreditt Annual Report 2019 page 28 Note 15 Hedge accounting of debt established by issuing securities

The company uses hedge accounting to ensure an accounting treatment that reflects how interest rate risk and currency risk are managed for large long-term borrowings. The hedged items consist exclusively of debt established by issuing financial instruments, and they are recognised in accordance with IFRS 9 as a fair value hedge. Separate interest rate and/or currency swaps with corresponding principals and maturity structures are entered into for the debt instruments in the hedging portfolio. Ineffectiveness can nonetheless arise as a result of random market variations in the evaluation of items and instruments.

The hedging instruments (interest rate and currency swaps) are recognised at fair value, while the hedged items are recognised at fair value for the hedged risks (interest rate and currency). Hedge ineffectiveness, defined as the difference between the value adjustment of hedging instruments and the value adjustment of the hedged risks in the items, is recognised in profit or loss as it arises. The exception is the part of the value adjustment caused by a change in the basis spread relating to the hedging instruments presented in the statement of comprehensive income.

Hedging instrument Hedged item Ineffectiveness 31/12-2019 nominal value nominal value nominal value Borrowing at a fixed interest rate: Interest rate swaps Nominal value NOK 6 350 6 350 0

Interest rate and Borrowing in currency at a fixed interest rate: currency swaps Nominal value EUR 3 036 3 036 0 Nominal value GBP 50 50 0

Hedging instrument Hedged item Recognised Book value Book value ineffectiveness Book value assets 2 341 Book value liabilities 0 37 386

Accumulated changes in value, closing balance 2 243 -2 387 Accumulated changes in value, opening balance 3 308 -3 448 Changes in fair value -1 065 1 061 -4

Change in unrealised value recognised through profit or loss (gain/loss financial instruments) -4 Changes in value recognised through other comprehensive income (base margin) 0 Total -4

Hedging instrument Hedged item Ineffectiveness 31/12-2018 nominal value nominal value nominal value Borrowing at a fixed interest rate: Interest rate swaps Nominal value NOK 6 350 6 350 0

Interest rate and Borrowing in currency at a fixed interest rate: currency swaps Nominal value EUR 3 439 3 439 0 Nominal value GBP 50 50 0

Hedging instrument Hedged item Recognised Book value Book value ineffectiveness Book value assets 3 465 Book value liabilities 0 41 883

Accumulated changes in value, closing balance 3 308 -3 448 Accumulated changes in value, opening balance 3 803 -3 909 Changes in fair value -495 461 -34

Change in unrealised value recognised through profit or loss (gain/loss financial instruments) 5 Changes in value recognised through other comprehensive income (base margin) -39 Total -34

Sparebanken Vest Boligkreditt Annual Report 2019 page 29 Note 16 Loans to and receivables from credit institutions

31/12-19 31/12-18 No agreed term to maturity or period of notice 1 108 1 097 Net loans to and receivables from credit institutions 1 108 1 097

Geographical areas Hordaland 1 108 1 097 Total geographical areas 1 108 1 097

Receivables from credit institutions are classified at amortised cost and are in their entirety receivables from the parent company Sparebanken Vest (see note 25).

There is no agreed term to maturity or period of notice for the receivable.

Note 17 Liabilities to credit institutions Liabilities to credit institutions is classified at amortised cost (see note 2).

31/12-19 31/12-18 Whithout fixed maturity 1 315 2 197 With agreed term to maturity 7 763 11 011 Debt to credit institutions 9 078 13 208

Liabilities to credit institutions is classified at amortised cost, and is mainly liability to Sparebanken Vest (see note 25). As compensation, the company pays interest corresponding to 3 months NIBOR + 0.55%. A term to maturity of 13 months has been agreed for debt to credit institutions.

Sparebanken Vest Boligkreditt Annual Report 2019 page 30 Note 18 Securitised debt

Securitised debt is classified at amortised cost or subject to hedge accounting (see note 2).

Covered bonds Net outstanding balance Nominal Interest Maturity ISIN CODE Currency value Type rate Issue year1) 31/12-19 31/12-2018 NO0010607237 NOK 1 100 Fixed 5,20 % 2011 2021 1 100 1 100 NO0010622012 NOK 500 Fixed 4,96 % 2011 2022 500 500 NO0010634546 NOK 500 Fixed 4,50 % 2012 2027 500 500 NO0010695075 NOK 4 000 Floating 3M Nibor+0,42% 2013 2019 0 4 000 XS1015552836 EUR 403 Fixed 1,25 % 2014 2019 0 3 401 XS1014861253 EUR 10 Fixed 2,25 % 2014 2024 84 84 XS1057728740 EUR 26 Floating 3M Euribor+0,28% 2014 2021 214 214 NO0010710841 NOK 1 000 Fixed 3M Nibor+2,95% 2014 2020 1 000 1 000 XS1225004115 EUR 500 Fixed 0,25% 2015 2022 4 223 4 223 XS1294537458 EUR 500 Fixed 0,38% 2015 2020 4 619 4 619 XS1373992616 EUR 500 Fixed 0,125% 2016 2021 4 785 4 785 NO0010748338 NOK 1 889 Floating 3M Nibor+ 0,60% 2015 2020 1 889 5 000 NO0010777253 NOK 5 500 Floating 3M Nibor + 0,53% 2016 2021 5 500 5 500 XS1550166554 GBP 50 Floating 3M GBP Libor + 0,38% 2017 2022 521 521 XS1565074744 EUR 500 Fixed 0,375 % 2017 2024 4 421 4 421 NO0010798044 NOK 7 500 Floating 3M Nibor + 0,40% 2017 2022 7 500 7 500 NO0010805179 NOK 8 500 Floating 3M Nibor + 0,42 2017 2023 8 500 7 000 XS1781811143 EUR 500 Fixed 0,750 % 2018 2025 4 829 4 829 NO0010833387 NOK 3 250 Fixed 2,700 % 2018 2028 3 250 3 250 XS1854532865 EUR 500 Fixed 0,125 % 2018 2023 4 740 4 740 NO0010835390 NOK 7 500 Floating 3M Nibor + 0,42 2018 2024 7 500 4 550 XS1951084638 EUR 750 Fixed 0,50 % 2019 2026 7 264 0 NO0010849367 NOK 500 Fixed 2,03 % 2019 2024 500 0

Adjustments 3 055 3 753 Total securities issued 76 494 75 490 Own holding 111 1 264 Total covered bonds in the cover pool, including own holding 76 605 76 754

Covered pool 31/12-19 31/12-2018 Mortgages2) 85 454 83 854 Commercial Papers and bonds 2 071 6 091 Financial derivatives to hedge securities debt (assets) 1 357 1 808 Financial derivatives to hedge securities debt (liabilities) -49 -55 Supplementary assets 1 108 1 097 Total collateralised assets 89 940 92 795

Net overcollateralisation 13 335 16 041

Net Overcollateralisation in the cover pool 117 % 121 %

The composition of the cover pool is defined in Section 11-8 of the Financial Institutions Act. The cover pool represents assets in the balance sheet that are designated for collateral for covered bonds. «The overcollateralisation in the cover pool indicates the relationship between the cover pool and recognised covered bonds. «

Overcollateralisation in excess of the minimum requirement of 102% where own commersial papers and bonds held for LCR- purposes are deducted. 9 733 8 415

1) With a right to a one-year extension. 2) NOK 328 million is not eligible for the cover pool. This amounts to 0,38 % of the cover pool.

Sparebanken Vest Boligkreditt Annual Report 2019 page 31 Note 19 Subordinated loan capital and subordinated bond loans

Balance Year Nominal Interest rate Call date 31/12-19 31/12-18 Subordinated debt 2018 Subordinated loan NOK 500 mill 3M NIBOR + 1,70% call option 07/12-2028 501 501 501 501

Tier 1 bonds classified as Tier 1 capital 2016 Tier 1 bond NOK 175 mill 3M NIBOR + 4,50% call option 14/6-21 175 176 2018 Tier 1 bond NOK 500 mill 3M NIBOR + 3,75% call option 07/12-2023 502 501 677 677

Note 20 Liquidity risk / remaining term to maturity Liquidity risk is defined as the risk of the company being unable to refinance its debt as it falls due or being unable to finance increases in assets. The company’s liquidity risk is assessed on the basis of the company’s balance sheet structure, including the company’s dependence on financing and the extra cost associated with raising money market financing with a long term to maturity compared with financing with a shorter term to final maturity. Sparebanken Vest Boligkreditt’s current strategy takes account of the recommendations from the Basel Committee with respect to good liquidity management for lending institutions.

The company’s Liquidity Coverage Ration («LCR») was 125.6% as of 31.12.2019.

Remaining term to maturity for balance sheet items at Up to From From 3 months From More than 31/12-2019 1 months 1-3 months to 1 year 1-5 years 5 years Total Debt to credit institusions 1) 1 315 0 7 763 9 078 Securitised debt 0 0 7 818 51 750 16 073 75 641 Interest disbursements 63 273 728 2 564 529 4 157 Subordinated loan capital and subordinated bonds 0 0 0 0 500 500 Interest disbursements 0 4 13 72 71 160 Financial derivatives, gross settlement (outflows) 45 270 5 573 21 719 12 732 40 340 Total liabilities 1 423 547 14 132 83 868 29 906 129 876 Financial derivatives, gross settlement (inflows) 79 183 5 366 21 948 12 882 40 457

1) Debt to credit institutions is agreed to have a term to maturity of 13 months.

Remaining term to maturity for balance sheet items at Up to From From 3 months From More than 31/12-2018 1 months 1-3 months to 1 year 1-5 years 5 years Total Debt to credit institusions 1) 1 700 497 11 011 13 208 Securitised debt 4 011 0 4 000 48 299 18 342 74 652 Interest disbursements 123 185 645 2 346 664 3 963 Subordinated loan capital and subordinated bonds 500 500 Interest disbursements 4 11 60 75 150 Financial derivatives, gross settlement (outflows) 3 443 161 592 20 934 9 728 34 858 Total liabilities 9 277 847 5 248 82 650 29 309 127 331 Financial derivatives, gross settlement (inflows) 4 145 87 312 21 795 10 596 36 935

1) Debt to credit institutions is agreed to have a term to maturity of 13 months.

Sparebanken Vest Boligkreditt Annual Report 2019 page 32 Note 21 Market risk

Sparebanken Vest Boligkreditt defines market risk as the risk of a loss on financial instruments as the result of changes in market variables and/or market conditions within a specified time band. Market risk arises as a result of the company holding open positions in various financial instruments. It can be subdivided into the following main groups:

• Interest rate risk: The risk of a loss as the result of changes in the interest rate markets. • Currency risk: The risk of a loss as the result of changes in exchange rates. • Credit spread risk: The risk of a loss as the result of changes in credit spreads.

The company is not exposed to risk relating to equity instruments.

The company’s market risk is managed on the basis of limits on maximum exposure to interest rate and currency risk stipulated by the board of directors.

Interest rate risk is defined as the risk of a loss as the result of changes in the interest rate. Sparebanken Vest Boligkreditt’s balance sheet largely consists of loans to the retail market at floating interest rates and borrowings through the issuing of covered bonds. For covered bonds issued at a fixed interest rate, swap agreements are entered into at floating interest rates at the same time as the bond agreements are entered into. In the company’s view, the interest rate risk is therefore low. See the tables below for sensitivity analyses relating to interest rate risk.

All the company’s home mortgage loans are in NOK. Currency risk that arises as the result of bonds being issued in foreign currency are hedged using currency swaps on the start date with repayment on the due date. The company has some currency risk in the form of investments in the liquidity portfolio in EUR held as assets matched by debt to credit institutions in EUR held as liabilities in the balance sheet.

The company has established hedge accounting for bonds issued at fixed interest rates and/or in foreign currency. See the relevant section in note 1 for a more detailed description of the principles.

The table below shows the potential losses/gains in the event of a parallel interest rate increase of one percentage point for the company’s overall positions.

Interest rate sensitivity by period

0-3 3-12 1-3 3-5 More than 31/12-2019 months months years years 5 years Total Change in balance sheet value 14,2 2,2 3,1 0,8 -3,8 16,5

0-3 3-12 1-3 3-5 More than 31/12-2018 months months years years 5 years Total Change in balance sheet value -3,3 -4,6 -4,3 -0,8 -6,4 -19,5

Interest rate sensitivity broken down by balance sheet items

Balance sheet 31/12-2019 31/12-2018 Loans -356,2 -376,7 Bonds/certificates -13,3 -21,3 Total assets -369,5 -398,0 Bonds/certificates 1 713,9 1 522,2 Total liabilities 1 713,9 1 522,2 Derivatives -1 327,8 -1 143,6 Total 16,5 -19,5

Sparebanken Vest Boligkreditt Annual Report 2019 page 33 Note 22 Net interest and credit commission income 2019 2018 Interest and similar income from loans to and receivables from credit institutions valued at amortised cost 20 27 Interest and similar income from loans to and receivables from customers valued at amortised cost 1 857 1 516 Interest and similar income from loans to and receivables from customers valued at fair value 546 422 Interest and similar income from commercial papers, bonds and other interest-bearing securities 31 25 Interest income and similar income 2 455 1 991

Interest and similar expenses on debt to credit institutions 98 138 Interest and similar expenses on issued securities 1 521 1 029 Fee Norwegian Banks’ Resolution Fund 18 0 Interest expenses and similar expenses 1 637 1 167 Net interest and credit commission income 818 823

Note 23 Net gains/(losses) on financial instruments 2019 2018 Net gains/(losses) on fixed interest rate mortgages -119 -43 Net gains/(losses) related to interest swaps for fixed interest rate mortgages 48 24 Net gains/(losses) on commercial papers and bonds -11 -10 Net gains/(losses) own debt -52 0 Net gains/(losses) on financial instruments designated for hedge accounting -4 3 Other gains/(losses) -15 -5 Net gains/(losses) -153 -31

Note 24 Other operating expenses 2019 2018 Payroll and fees 11 10 Administration expenses 0 1 Pay and general adm. expenses 11 11

Rating expenses 1 2 Other operating expenses 3 1 Total other operating expenses 4 3

Total operating expenses 15 14

Fee for elected auditor (amounts in thousands) 2019 2018 Audit fee 229 143 Other services (assistance with Covered Bond Programme and investigation) 355 305 Tax advice 0 0 Total fees 584 448

The audit fee is for the ordinary audit and includes VAT.

Sparebanken Vest Boligkreditt Annual Report 2019 page 34 Note 25 Transactions with related parties

The information provided is in accordance with IAS 24 ’Related Party Disclosures’. Sparebanken Vest Boligkreditt defines the parent company, board members and Sparebanken Vest’s group management as related parties in relation to this accounting standard. Information about remuneration of the managing director and board of directors is provided in accordance with the requirements of the Norwegian Accounting Act. Transactions between the company and the parent bank are conducted in accordance with generally accepted business terms and principles. Office support functions and the management of loans are largely services purchased from Sparebanken Vest. A full Transfer and Servicing Agreement has been entered into between the company and Sparebanken Vest.

All values are in NOK thousands 2019

Sparebanken Key Transactions with related parties Vest personnel Profit and Loss Interest and credit commission received from related parties 15 Interest income from asset valued at fair value 19

Interest paid on related parties' deposits -96 Interest on subordinated debt -16 Interest on derivatives paid/received to/from related parties -94 Interest on covered bonds -2 Interest expenses and similar expenses -209

Wages/fees -11 -3 Commission costs -383

Balance sheet Loans to and receivables from credit institutions 1 108 10 Financial derivatives assets 282 Liabilities to credit institutions 7 978 Financial derivatives liability 49 Covered bonds 429 Subordinated loan capital 501 Other liabilities 34 Hybrid instruments classified as equity 677

All values are in NOK thousands 2018

Sparebanken Key Transactions with related parties Vest personnel Income statement Interest and credit commission received from related parties 22 Interest income from asset valued at fair value

Interest paid on related parties' deposits -139 Interest on subordinated debt -45 Interest on derivatives paid/received to/from related parties Interest on covered bonds -2 Interest expenses and similar expenses -185

Wages/fees -10 -3 Commission costs -390

Balance sheet Loans to and receivables from credit institutions 1 097 15 Debt to related parties 11 011 Subordinated loan capital 501 Hybrid instruments classified as equity 677

Sparebanken Vest Boligkreditt Annual Report 2019 page 35 Payroll and other remuneration of executive personnel Sparebanken Vest Boligkreditt AS purchases administrative services from Sparebanken Vest, including the services of its general manager.

Total intra-group transactions (NOK 1000)

Officers of the company 2019 Wages/fees Loans Managing Director Consideration to Sparebanken Vest for the general manager 2 384 3 484

Board of Directors Frank Johannesen, Chairman of the Board 3 3 194 Inga Lise Moldestad 60 0 Bjarte Fauske 60 3 430 John Edwin Nicolay Hopp 60 0 Jørgen Gudmundsson (resigned) 90 Total 2 657 10 107

The directors’ fees are as stipulated by the Corporate Assembly. Loans to individuals are stated on a group basis

Officers of the company 2018 Wages/fees Loans Managing Director Consideration to Sparebanken Vest for the general manager 2 314 37

Board of Directors Jørgen Gudmundsson, Chairman of the Board 20 5 862 Inga Lise Moldestad 60 0 Bjarte Fauske 0 3 344 John Edwin Nicolay Hopp 0 5 660 Åsmund Bjørndal Heen (resigned) 40 Frank Johannesen 90 Total 2 524 14 904

The directors’ fees are as stipulated by the Corporate Assembly. Loans to individuals are stated on a gruop basis

Sparebanken Vest Boligkreditt Annual Report 2019 page 36 Note 26 Tax Tax expense for the year 2019 2018 Tax payable 45 73 Change in deferred tax through profit or loss -7 6 Adjustment for interest on hybrid capital classified as equity 8 7 Change in deferred tax due to correction for the transition to IFRS 9. 0 3 Effect of change in tax rules 0 1 Tax expense for the year 47 89

Pre-tax profit/loss 382 199 22% tax on Pre-tax profit/loss for accounting purposes 55 88 Effect of change in tax rules 0 1 Non-deductible expenses -8 -0 Insufficient/(excess) provision for tax payable 0 0

Tax expense 47 89

The effective tax rate is 18,8% 23,4%

Change in capitalised deferred tax asset: 31/12-19 31/12-18 Balance sheet value at 1 Jan. -32 -31 Change in temporary differences -7 -3 Effect of change in tax rules 0 1 Balance sheet value at 31 Dec. -39 -32

The deferred tax asset relates to the following temporary differences 31/12-19 31/12-18 Fixed-interest loans 19 6 Lending recognised at amortised cost 0 3 Securitised debt 81 26 Swaps 13 6 Total deferred tax asset 113 40

The deferred tax liability relates to the following temporary differences 31/12-19 31/12-18 Financial derivatives 73 0 Certificates and bonds 1 7 Total deferred tax liability 74 7

Net deferred tax (+) / deferred tax asset (-) -39 -32

Sparebanken Vest Boligkreditt Annual Report 2019 page 37 Note 27 Capital adequacy

Since the second quarter 2009, Sparebanken Vest Boligkreditt AS has had permission to use the IRB method to calculate the minimum requirement for capital on credit risk on retail mortgages. The company has been subject to the transitional arrangement until the end of the financial year.

The transitional arrangement between the Basel I and CRD IV rules lapsed at December 31, 2019. The transitional arrangement stipulated that the risk-weighted basis of calculation could not be reduced to more than 80 per cent of the corresponding size calculated in accordance with the Basel I rules. The CRD IV rules have been implemented in Norwegian regulation from 31 December 2019.

31/12-2019 31/12-2018 Weighted calculation basis IRB Credit risk IRB 18 772 16 329 Operational risk 940 843 Commitment under the standard method 1 308 1 520 Risk of credit valuation adjustment for counterparty (CVA) 1 096 1 675 Total weighted calculation basis before correction to transitional arrangement 22 117 20 367

Correction to the transitional arrangement 0 14 234 Risk weighted assets 22 117 34 601

Own funds Share capital 4 650 4 650 Revaluation reserve 0 0 Other equity 140 232 Total book equity excl. hybrid capital 4 790 4 882

Deduction for expected losses IRB -186 -157 Value adjustment for prudent valuation requirement -29 -28 Value adjustment, own liabilities 28 0 Deduction for provision for dividend -137 -230 Core Tier 1 capital 4 466 4 468 Subordinated bonds 675 675 Core capital 5 141 5 143

Supplementary capital 500 500 Net own funds 5 641 5 643

Core Tier 1 capital adequacy 12,9% Subordinated bonds 2,0% Supplementary capital 1,4% Capital adequacy, transitional arrangement 16,3%

Core Tier 1 capital adequacy 20,2% 21,9% Subordinated bonds 3,1% 3,3% Supplementary capital 2,3% 2,5% Capital adequacy IRB 25,5% 27,7%

Minimum requirements Minimum requirement own funds, 8% 1 769 2 768 Surplus own funds 3 871 2 875 of which surplus Core Tier 1 capital to meet buffer requirement 3 470 2 875 Buffer requirement Conservation buffer, 2.5% 553 865 Systemic risk buffer, 3% 664 1 038 Countercyclical buffer, 2,5% from 31.12.2019 553 692 Total buffer requirements, Core Tier 1 capital 1 769 2 595 Surplus Core Tier 1 capital 1 701 280

Sparebanken Vest Boligkreditt Annual Report 2019 page 38 Note 28 Leverage ratio 31/12-19 31/12-18 Total assets 91 672 94 923 Off-balance sheet 3 527 3 361 Regulatory adjustments -187 -185 Other adjustments to the calculation 995 458 Calculation basis for leverage ratio 96 007 98 557

Core Capital 5 141 5 143

Leverage ratio 5,4% 5,2%

Note 30 Events after the balance sheet date

There is no information to indicate that material events have taken place from the balance sheet date on 31 December 2019 until the Board’s final consideration of the accounts on 29 January 2020.

Sparebanken Vest Boligkreditt Annual Report 2019 page 39 ALTERNATIVE PERFORMANCE MEASUREMENTS

Interest income as a percentage of average total assets 2019 2018 Interest income arising from the income statement 2 455 1 991 Average total assets 91 175 84 823 Interest income as a percentage of average total assets 2,69% 2,35%

Interest expense as a percentage of average total assets 2019 2018 Interest expense arising from the income statement 1 637 1 167 Adjustment for interest on hybrid capital directly against equity 37 30 Interest expenses used in current key figures 1 674 1 197 Average total assets 91 175 84 823 Interest expense as a percentage of average total assets 1,84% 1,41%

Net interest income as a percentage of average total assets 2019 2018 Net interest income arising from the income statement 818 823 Adjustment for interest on hybrid capital directly against equity -37 -30 Net interest income used in current key figures 781 793 Average total assets 91 175 84 823 Net interest income as a percentage of average total assets 0,86% 0,94%

Return on equity 2019 2018 Profit after tax that is shown in the income statement 203 293 Adjustment for interest on hybrid capital directly against equity -37 -23 Profit after tax adjusted for interest on hybrid capital 166 270 Average equity 4 780 4 431 Return on equity 3,5% 6,1%

Earnings per share 2019 2018 Profit after tax adjusted for interest on hybrid capital (see above) 166 270 Weighted equity fraction during the year prior to disposal 25,2% 22,3% Average number of outstanding equity certificates throughout the year 67 586 831 59 818 786 Earnings per share 0,62 1,01

Non-performing loans as a percentage of the loan portfolio Gross lending at the balance sheet date 85 818 84 224 Non-performing commitments (> 90 days) 88 91 Non-performing loans (> 90 days) in% of gross lending (OB) 0,10% 0,11%

Sparebanken Vest Boligkreditt Annual Report 2019 page 40 Statement pursuant to Section 5-5 of the Securities Trading Act

We herby confirm that the annual accounts for the company for The directors’ report gives a true and fair development and 2019 to the best of our knowledge have been prepared in performance of the business and the position of the company, as accordance with applicable accounting standards and give a true and well as a description of the principal risks and uncertainties facing fair view of the assets, liabilities, financial position and profit and the company. loss of the company taken as a whole.

Bergen, 29 January 2020 The Board of Directors of Sparebanken Vest Boligkreditt AS

Frank Johannesen, Chairman of the Board Bjarte Fauske

Inga Lise Moldestad John Hopp

Fredrik Skarsvåg, Managing Director

Sparebanken Vest Boligkreditt Annual Report 2019 page 41 Deloitte AS Lars Hilles gate 30 Postboks 6013 Postterminalen NO-5892 Bergen Norway

Tel: +47 55 21 81 00 www.deloitte.no

To the General Meeting of Sparebanken Vest Boligkreditt AS

INDEPENDENT AUDITOR’S REPORT

Report on the Audit of the Financial Statements

Opinion We have audited the financial statements of Sparebanken Vest Boligkreditt AS which comprise the balance sheet as at 31 December 2019, income statement, statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as at 31 December 2019, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by EU.

Basis for Opinion We conducted our audit in accordance with laws, regulations, and auditing standards and practices generally accepted in Norway, included International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company as required by laws and regulations, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Key audit matter How the matter was addressed in the audit IT-systems

Sparebanken Vest Boligkreditt’s IT-systems are Sparebanken Vest Boligkreditt has established essential to the accounting and reporting of an overall governance model and internal completed transactions, as well as preparing the control activities related to its IT-systems. We basis for important accounting estimates and have obtained an understanding of calculations. See the Board of Directors report Sparebanken Vest Boligkreditt’s overall under the section operational risk for the governance model for the IT systems relevant Company’s assessment of risks related to IT- to financial reporting. systems.

Deloitte AS and Deloitte Advokatfirma AS are the Norwegian affiliates of Deloitte NSE LLP, a member firm of Deloitte Touche Registrert i Foretaksregisteret Medlemmer av Tohmatsu Limited ("DTTL"), its network of member firms, and their related entities. DTTL and each of its member firms are Den norske Revisorforening legally separate and independent entities. DTTL (also referred to as "Deloitte Global") does not provide services to clients. Organisasjonsnummer: 980 211 282 Please see www.deloitte.no for a more detailed description of DTTL and its member firms.

Sparebanken Vest Boligkreditt Annual Report 2019 page 42 Page Independent Auditor’s report Sparebanken Vest Boligkreditt AS

The entity’s core ITsystems i to a large e assessed and tested te design o internal degree is based on banking soltions rom ell ontrol atiities inlding seleted atomated knon sppliers and te management o tese ontrols releant to te inanial reporting are largely otsored to serie proiders related to IT operations ange management Sparebanken Vest deelops te Company’s and inormation serity or a sample o tese stomeroriented systems ontrol atiities e tested i tey operated eetiely dring te reporting period Eetie internal ontrols related to te IT systems at bot Sparebanken Vest Boligkreditt e assessed te ISAE reports issed by and teir serie proiders is key to ensre te independent aditors o seeral serie arate omplete and reliable inanial proiders to te Company to assess i s reporting and is tereore a key adit matter serie proiders ad adeate internal ontrols in areas important to te Company’s inanial

reporting e sed or on IT speialists to nderstand te oerall goernane model or IT and in te assessment and testing o ontrol atiities related to IT

ther inforation anagement is responsible or te oter inormation Te oter inormation omprises te Annal Report bt does not inlde te inanial statements and or aditors report tereon

Or opinion on te inanial statements does not oer te oter inormation and e do not epress any orm o assrane onlsion tereon

In onnetion it or adit o te inanial statements or responsibility is to read te oter inormation and in doing so onsider eter te oter inormation is materially inonsistent it te inanial statements or or knoledge obtained in te adit or oterise appears to be materially misstated

I based on te ork e ae perormed e onlde tat tere is a material misstatement o tis oter inormation e are reired to report tat at e ae noting to report in tis regard

Responsibilities of he oard of irectors and the anain irector for the Financial tateents Te Board o Diretors and te anaging Diretor management are responsible or te preparation and air presentation o te inanial statements in aordane it International inanial Reporting Standards as adopted by te EU and or s internal ontrol as management determines is neessary to enable te preparation o inanial statements tat are ree rom material misstatement eter de to rad or error

In preparing te inanial statements, management is responsible for assessing the Company’s ability to ontine as a going onern dislosing as appliable matters related to going onern and sing te going onern basis o aonting nless management eiter intends to liidate te Company or to ease operations or as no realisti alternatie bt to do so

Auditor’s Responsibilities for the Audit of the Financial Statements Or obeties are to obtain reasonable assrane abot eter te inanial statements as a ole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that inldes or opinion Reasonable assrane is a ig leel o assrane bt is not a garantee tat an adit ondted in aordane it las reglations and aditing standards and praties generally aepted in Noray inlding ISAs ill alays detet a material misstatement en it eists isstatements an arise rom rad or error and are onsidered material i indiidally or in aggregate tey old reasonably be epeted to inlene te eonomi deisions o sers taken on te basis o tese inanial statements

Sparebanken Vest Boligkreditt Annual Report 2019 page 43 age Independent Auditor’s report parebanen est oligreditt A

As part of an audit in accordance with laws, regulations, and auditing standards and practices generally accepted in orway, included International tandards on Auditing IAs, we eercise professional udgment and maintain professional scepticism throughout the audit e also

• identify and assess the riss of material misstatement of the financial statements, whether due to fraud or error e design and perform audit procedures responsie to those riss, and obtain audit eidence that is sufficient and appropriate to proide a basis for our opinion The ris of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may inole collusion, forgery, intentional omissions, misrepresentations, or the oerride of internal control • obtain an understanding of internal control releant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of epressing an opinion on the effectiveness of the Company’s internal control. • ealuate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management • conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit eidence obtained, whether a material uncertainty eists related to eents or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty eists, we are reuired to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadeuate, to modify our opinion ur conclusions are based on the audit eidence obtained up to the date of our auditor’s report. Howeer, future eents or conditions may cause the Company to cease to continue as a going concern • ealuate the oerall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and eents in a manner that achiees fair presentation

e communicate with those charged with goernance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit

e also proide those charged with goernance with a statement that we hae complied with releant ethical reuirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards

rom the matters communicated with those charged with goernance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in etremely rare circumstances, we determine that a matter should not be communicated in our report because the aderse conseuences of doing so would reasonably be epected to outweigh the public interest benefits of such communication

Report on Other Legal and Regulatory Requirements

Opinion on the Board of Directors’ report ased on our audit of the financial statements as described aboe, it is our opinion that the information presented in the Board of Directors’ report and in statements on Corporate oernance concerning the financial statements, the going concern assumption, and the proposal for the allocation of the profit is consistent with the financial statements and complies with the law and regulations

Sparebanken Vest Boligkreditt Annual Report 2019 page 44 age Independent Auditor’s report parebanken est Boligkreditt A

Opinion on eistration and Docentation Based on our audit of the financial statements as described above, and control procedures we have considered necessary in accordance with the International tandard on Assurance ngagements ssrance naeents Other than dits or eies of istorica inancia nforation, it is our opinion that management has fulfilled its duty to produce a proper and clearly set out registration and documentation of the company’s accounting information in accordance with the law and bookkeeping standards and practices generally accepted in orway.

Bergen, anuary Deloitte A

Jon-Osvald Harila tate Authorised ublic Accountant

Sparebanken Vest Boligkreditt Annual Report 2019 page 45 Coverphoto: GettyImages

Jonsvollsgaten 2 I N-5011 Bergen 915 0555 I spv.no