Foreign Currencies Are Fading in Norway's Covered Bond Market

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(Bloomberg) -- Norway’s biggest bank plans to issue less debt in foreign currencies after costs to swap proceeds into Norwegian kroner rose.

DNB ASA, partly owned by the Norwegian state, funds roughly a quarter of its Norwegian mortgages in krone-denominated covered bonds. The Oslo-based lender wants to change that, said Vidar Knudsen, head of Norwegian krone funding.

“Issuing in Norwegian currency would reduce the volume of swaps, cross-currency swaps, and the like,” Knudsen said. “It’s easier and more simple to have the same currency on the liability side as you have on the mortgages."

Regulations to make the over-the-counter derivatives market less opaque after it helped stoke the financial crisis are driving up costs. One forecast estimated additional annual expenses of more than 15 billion euros ($18 billion) from new reporting, clearing and capital requirements.

DNB is getting some help in its mission from Norwegian money market rates, which have climbed by about half since December.

Mortgage arm DNB Boligkreditt pitched its first krone-denominated covered bond of the year earlier this week, a 3-year floating-rate note. (The others have all been in euros.) Investors bought 8.5 billion kroner worth, or roughly twice what was expected, according to Morten Fornes, head of covered bond sales.

With the “very high” market rates, investors “get a nice return,” Fornes said. “And with all this uncertainty three-year seems to be the place where you can find a lot of interest.”

The DNB Group last year cut its use of foreign exchange derivatives, including forward contracts and swaps, by more than a third (based on nominal values.) In comparison, the nominal value of interest rate contracts rose 5.3 percent.

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DNB’s shift mirrors similar retrenchments by the region’s other big banks. Danske Bank, the region’s second largest lender, created a new Swedish mortgage company last year to issue Swedish krona-denominated bonds for loans it makes in that country.

In a chicken-and-egg dilemma, one holdup in Norway has been the relatively small size of the krone-denominated part of the market.

Since its creation in a decade ago, the market has a whole has climbed to exceed 1.2 trillion kroner ($148 billion), and the securities now make up more than half of banks’ funding, according to industry data.

But while issuance in foreign currencies has risen continuously, the volume of krone bonds has been largely unchanged since 2010. That year marked the end of surge in offerings triggered in part by the Norwegian central bank’s strategy to ease a bank liquidity squeeze by swapping Treasury bills for covered bonds.

“We opened the market and our first issue was a euro issue,” Knudsen said. The second was denominated in krone and since then DNB has “tried to increase the Norwegian krone market going forward her, but it takes time,” he said.

Danske Bank has made growth in Norway a priority and has increased the number and size of krone-covered bond issuance, according to Christoffer Mollenbach, head of group treasury.

“We hope that the larger market will encourage market makers to increase liquidity in the markets,” Mollenbach said. “It takes time to build the liquidity and the size, and that’s something that we are keen to work also with the other Nordic banks to make sure that market continues to develop.”

DNB meanwhile is looking at other larger covered bond markets for ideas how on to improve liquidity and broaden the investor base, Knudsen said.

“We have utilized the market to the extent that it has been possible, so to speak, but it is only 10 years old,” he said. “It has to be developed and the instrument to get known among the investors.”

©2018 Bloomberg L.P.

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