Negative impact of continued large-scale prepayments
- The Fund's operating results were negative by ISK 2,016 million
- Large-scale loan prepayments, totaling more than ISK 300 billion in recent years, continue to have a negative impact on the Fund's results
- Financial management of the loan portfolio and prepayment assets will, if the proposed bill will becomes law, be transferred from the Fund in the near future, as the government has agreed to divide its activities and a bill to this effect will be presented to Parliament in the upcoming fall session.
- The division will lead to the establishment of a new institution that will handle the administration of housing affairs and oversee public housing support. Civil construction issues will also be transferred to the new organization if the proposed bill will become law.
- The Fund's equity ratio is now 8.6% but the statutory minimum is 5%.
The Housing Financing Fund's Interim Financial Statements for the first six months of 2019 were approved by the Fund's Board of Directors today. Operating results for the period were negative by ISK 2,016 million. These results were expected and have already been contended with by the government's approval and the Minister of Social Affairs' bill on the division of the Housing Financing Fund, which will be presented to the parliament this fall. It is proposed that the financial management of the former Fund's operations be transferred to a separate fund.
The Fund's equity ratio is now 8.6%, but the Fund's long-term goal is to exceed 5.0%. The Housing Financing Fund's equity at the end of June 2019 is ISK 20,068 million compared to ISK 22,083 million at the end of 2018. The Fund's total assets are ISK 736 billion and total liabilities amount to ISK 716 billion.
Operations of the Fund
Net interest income from January 1 to 30 June 2019 was negative by ISK 1,456 million compared to negative interest income of ISK 81 million for the same period last year. As previously stated, this is mainly due to the imbalance that has arisen due to the significant increase in prepayments in recent years, the total amount being over ISK 300 billion. The development of net interest income is characterized by the fact that the loan portfolio has decreased by the aforementioned amount and at the same time the market's return on liquid assets, in a declining interest rate environment, has been lower.
The proportion of interest-bearing assets outside the loan portfolio increases due to increased prepayments
At the end of the period, the Fund's loans amounted to ISK 395 billion, decreasing by ISK 32 billion since the end of 2018. The reason for the reduction in the loan portfolio is large-scale prepayments. Prepayments from customers are largely due to increased penetration of banks and pension funds into the credit market. Assets outside the loan portfolio, including liquid assets, increased during the period and are now ISK 330 billion. The main challenges in managing assets outside the Fund's loan portfolio are interest rate and inflation risks and the large scope of the assets. In light of this, it is worth mentioning that the yield on the bond market has generally declined, which has a negative impact on the return on assets outside the loan portfolio.
In response to the effects of increased prepayments of the Fund's loans, the government approved in March the division of the Housing Financing Fund. This means that the Fund's main activities will be separated from the activities related to the financial management of its older loan portfolio. It has been apparent since 2012, when the Fund's general lending to the public for housing purchases was largely discontinued, that the effect of these actions on the Housing Financing Fund would have to be addressed. Furthermore, the EFTA Surveillance Authority (ESA) had also ruled that the loans were in conflict with the rules of the EEA Agreement. A bill on the division of the Fund was introduced in the government consultation portal last July and deliberations will commence in the first days of the fall session. The bill proposes, on the one hand, that the Housing Financing Fund be split up so that the Fund's activities related to the issuance of HFF bonds, former loan operations and the financial management of assets outside the loan portfolio, such as liquid funds and other securities, will remain in the Housing Financing Fund, which will be named HFF Fund, while other HFF projects will be transferred to a new institution. It is proposed that a new institution be established, named the Housing and Construction Authority, and that establishment will undertake the activities of the Icelandic Construction Authority and the activities of the Housing Financing Fund that will be separated from the HFF Fund.
If the bill is enacted into law on January 1, 2020, as proposed, the HFF Fund will continue to operate under the same registration number as the current Housing Financing Fund and manage the Fund's assets and liabilities. The bill does not include any changes to the previously issued State Guarantee of the Housing Financing Fund (HFF) bond issue.
Development of arrears and loan quality
The Housing Financing Fund's loans in arrears now account for 1.8% of total loans and this amount is unchanged from the beginning of the year. The impairment provision amounted to ISK 6,949 million the end of the period, decreasing by ISK 102 million from the beginning of the year. Approximately 98.4% of the carrying amount of the Fund's loan portfolio lies within 90% of the official property valuation at the end of the period.
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Further information may be obtained from Hermann Jónasson, CEO, tel. +354 569 6900.
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