Interview: Kai Brander, Sp Central Bank

The Central Bank of Savings Banks Finland (Sp Central Bank) yesterday (Thursday) mandated an inaugural, senior unsecured bond and here Kai Brander, head of treasury, Sp Central Bank discusses the project.

Why is Sp Central Bank planning its debut bond issue?

This is an outcome of the closing down of Aktia Real Estate Mortgage Bank, which the Savings Banks had used to refinance mortgage loans. The Savings Banks Group was then put in a position where it had to do something about their wholesale funding.

The number one thing is of course to open up again wholesale funding channels for the group, which have not been there since Aktia Mortgage Bank was closed down.

Furthermore, we have a need to widen our funding base, which is currently very concentrated in retail deposits. Deposit funding is about 85% of the group’s total funding and the idea is that the share of deposit funding will go down to roughly 70% by 2017. This does not mean that our deposit base will shrink – it will increase. It is the projected growth of our balance sheet that explains why we will need more wholesale funding.

I understand that the group will also use covered bond funding. What are your plans?

We are working on setting up a mortgage bank of our own through which we will issue covered bonds. The most optimistic possibility is that we may be able to issue something very late in 2015, but more realistically I think it is going to be early 2016.

How will your overall wholesale funding strategy develop?

On the senior unsecured side, we have plans to issue one benchmark this year. On top of that, on the covered side – and assuming we don’t issue anything this year – it will be roughly Eu1bn in 2016 and 2017. With this combination we believe that we can issue two to three times annually in either senior unsecured or covered to keep our name sufficiently known in the market.

How does Sp Central Bank fit into the Savings Banks group?

The basic set-up is that at the core of the whole group is the central institution, the Union Cooperative, which guides the whole group. By law, the Act of Amalgamation, the Union Coop is responsible for the capital adequacy and liquidity of the group. Within this system, the Central Bank of the Savings Banks is the working arm of the Union Coop, it is the operating arm because the Union Coop is not a business entity.

Regarding the ownership structure, the Central Bank is owned by the Savings Banks directly, not by the Union Coop.

What role do the Savings Banks play in Finland?

The nature of our business is very local, directed at private clients and corporates typically run by just a couple of people. The breakdown of our loan portfolio is 71% lending to private individuals, 19% to corporates, and 10% to agriculture. But when we say corporates, we are not even speaking of SMEs – the first thing we have to do is drop the “E”, and even the “S” is perhaps overstating things, because we sometimes describe the businesses we lend to as micro-corporates – these have turnover of Eu10m or less.

And what – to me, at least – is important is that even though we have the Union Coop and the Central Bank, the savings banks operate their business independently. This makes them very important locally.

While S&P says that you have very strong capital and earnings, and regards you as average or moderate in other respects, it has described the group’s business position as weak – what do you say to that?

That comes from our business being so concentrated in mortgage lending, where we have a market share of roughly 4.8%. Our other businesses – such as fund management and life insurance – are not that strong yet.

How do you see the group’s position developing?

I see it developing very well because of the local presence. People are often sceptical about this, but I have seen that it really works. Having the strong local presence, knowing the clients, and so on, that gives us a rather sturdy base. So we are very optimistic about the future development.

S&P commented favourably on your capital position – what is the position there?

Yes, that is correct. If you look at, for instance, how our Common Equity Tier 1 has developed, in 2013 we were at 15.7% of RWA, and 2014 we are at 16.9%.

How has your loan portfolio been performing?

Very well. The impairments are really small. They amounted to 0.19% in 2014.