The Group’s interim accounts have been prepared in accordance with International Financial Reporting Standards (IFRS), implemented by the EU as at 30 September 2020. The interim report has been prepared in compliance with IAS 34 Interim Reporting and in accordance with accounting principles and methods applied in the 2019 Financial statements.

The accounts are presented in Norwegian kroner (NOK), which is also the Parent Bank’s and subsidiaries’ functional currency. All amounts are stated in NOK million unless stated otherwise.

Note 1.5 in the Annual report 2019 discloses the use of estimates applied in the preparation of the annual financial statements. One of the most important areas to which critical estimates and assumptions are linked is the measurement of expected credit losses (ECL) according to IFRS 9. Covid-19 has resulted in changed assumptions for the calculation of expected losses as at 30.09.2020. See note 3 for further information.

Sparebanken Møre applies a three-stage approach when assessing ECL on loans to customers and financial guarantees in accordance with IFRS 9.

Stage 1: At initial recognition and if there’s no significant increase in credit risk, the commitment is classified in stage 1 with 12-months ECL.

Stage 2: If a significant increase in credit risk since initial recognition is identified, but without evidence of loss, the commitment is transferred to stage 2 with lifetime ECL measurement.

Stage 3: If the credit risk increases further and there’s evidence of loss or if an individual assessment has been made, the commitment is transferred to stage 3 with lifetime ECL measurement. The commitment is considered to be credit-impaired.

Staging is performed at account level and implies that two or more accounts held by the same customer can be placed in different stages.

A commitment is defined as the total of loans, undrawn credit facilities and guarantees (undrawn credit facilities and guarantees are off-balance items). 

Classification and migration between the stages are governed by the following criteria:

• New accounts and accounts with increase in credit limits (based on credit applications) are placed in stage 1 the month after the opening date, with the following exceptions:
  • PD = 100 %. Account is placed in stage 3.

• The customer is more than 30 days in default or has been granted payment relief due to payment difficulties, in which cases, all the customer’s accounts are placed in stage 2.

• Accounts migrate from stage 1 to stage 2 if more than 30 days in default, if marked with payment relief due to payment difficulties or in case of a significant increase in credit risk. Significant increase in credit risk meaning:
  • If initial PD was less than 1 %:
    • PD has doubled since initial recognition and the increase in PD is more than 0.5 percentage points
  • If initial PD was higher than or equal to 1 %:
    • PD has doubled since initial recognition or the increase in PD is more than 2 percentage points

An account migrates from stage 2 to 1 if there is a significant reduction in credit risk compared to last time the account migrated to stage 2. Significant reduction in credit risk meaning:

• The criteria for migration from stage 1 to 2 is no longer present and this is satisfied for at least one subsequent month (total 2 months).

An account migrates from stage 1 or stage 2 to stage 3 if PD equals 100 % (Risk class M or N).

An account migrates from stage 3 to stage 1 or 2 if the account no longer meets the conditions for migration to stage 3: 

• The account migrates to stage 2 if more than 30 days in default.
• Otherwise, the account migrates to stage 1.

Accounts that are not subject to the migration rules above are not assumed to have a significant change in credit risk and retain the same stage as the previous month.

A commitment is defined to be in default and credit-impaired (non-performing) if a claim is more than 90 days overdue and the overdue amount exceeds NOK 1 000.

A commitment is also defined to be credit-impaired (non-performing) if the commitment, as a result of a weakening of the debtor's creditworthiness, has been subject to an individual assessment, resulting in a lifetime ECL in stage 3.

A commitment is defined to be subject to forbearance (payment relief due to payment difficulties) if the bank agrees to changes in the terms and conditions as a result of the debtor having problems meeting payment obligations. Performing forbearance (not in default) is placed in stage 2 whereas non-performing (defaulted) forbearance is placed in stage 3.

If known/available information is not fully reflected in the model calculated ECL, management overrides are considered. Potential management overrides of expected credit loss are reviewed by the bank’s management group.

ECL on loans are presented in the balance sheet as a reduction to «Loans to and receivables from customers» and ECL on guarantees are recognised under «Other provisions for incurred liabilities and costs».

Consequences of Covid-19 and measurement of expected credit loss (ECL) for loans and guarantees
Pursuant to the accounting rules (IAS 34), interim financial reports must provide an explanation of events and transactions that are significant to an understanding of the changes in financial position and performance of an entity since the last annual report. The information related to these events and transactions must take into account relevant information presented in the most recent annual report.

The interim report for Q3 2020 has been prepared in a period when the economic outlook differs from that in the annual financial statements for 2019.

The Bank’s loss provisions reflect expected credit loss (ECL) pursuant to IFRS 9. When assessing ECL, the relevant conditions at the time of reporting and expected economic developments are taken into account. COVID-19 has resulted in an extraordinary situation for the Bank’s customers. Many corporate and retail customers have seen their income reduced in the short term, and the level of uncertainty associated with estimating the future cash flows and debt servicing capacity of these customers is high.

The situation has impacted the ECL calculation as at 30.09.2020. Changes in economic conditions have impacted macroeconomic scenarios and weightings. Weightings for Q1 2020 have been continued in Q3 2020.

Weighting as at 30.09.2020:            Weighting as at 31 December 2019:

• Best:            10%                 Best:              10 %
• Base:            50%                 Base:             80 %
• Worst:          40%                 Worst:            10 %

Changes made to the scenario weightings from 31.12.2019 are based on analyses and estimates from Norges Bank and Statistics Norway. The estimates for key macro factors have been adjusted downwards in relation to previous estimates. In addition to the external estimates, the Bank has applied its best judgement to ensure that the forecasts are unbiased. On the other hand, the government’s package of measures might limit expected losses. State guarantees are reflected in the Bank’s LGD model (reducing expected degree of loss).

The major economic uncertainty that arose at the end of the first quarter of 2020 due to Covid-19 and the fall in oil prices, resulted in increased credit risk and increased credit losses. Despite of the macroeconomic conditions improving during the year and a continued low level of default, uncertainty regarding the development of the Covid-19 situation and the consequenses of the fall in oil prices still reigns. Changes in these conditions could impact the Group’s level of credit losses.

In its assessments, the Bank has taken into account a significant increase in approved payment holidays. A specific, individual assessment is made of whether the payment holiday is forbearance and thus should migrate the commitment to stage 2 (performing) or stage 3 (non-performing).

This has been further supplemented with a more portfolio- or segment based (hotels, tourism, travel industry, personal services industry) approach to assess significantly increased credit risk and migration to stage 2. This due to the fact that changes in future prospects are not fully captured by the ECL model.

Parts of the corporate portfolio were granted interest-only periods in spring due to Covid-19. Most corporate customers were granted interest-only periods of six months. A survey of customers granted interest-only periods in spring was conducted in September. Feedback shows that a very low proportion require a further interest-only period.

In addition to Covid-19, oil prices have fallen dramatically due to high output and a substantial drop in demand. This has resulted in the overriding of relevant variables in the ECL model in order to take account of the increased uncertainty for individual commitments within the oil services industry. 

Financial assets and financial liabilities are recognised in the balance sheet at the date when the Group becomes a party to the contractual provisions of the instrument. A financial asset is derecognised when the contractual rights to the cash flows from the financial asset expire, or the company transfers the financial asset in such a way that risk and profit potential of the financial asset is substantially transferred. Financial liabilities are derecognised from the date when the rights to the contractual provisions have been extinguished, cancelled or expired.

CLASSIFICATION AND MEASUREMENT
The Group’s portfolio of financial instruments is at initial recognition classified in accordance with IFRS 9. Financial assets are classified in one of the following categories:  

• Amortised cost
• Fair value with value changes through the income statement

The classification of the financial assets depends on two factors:

• The purpose of the acquisition of the financial instrument
• The contractual cash flows from the financial assets

Financial assets assessed at amortised cost
The classification of the financial assets assumes that the following requirements are met:

• The asset is acquired to receive contractual cash flows
• The contractual cash flows consist solely of principal and interest

All lending and receivables, except fixed interest rate loans, are recorded in the group accounts at amortised cost, based on expected cash flows. The difference between the issue cost and the settlement amount at maturity, is amortised over the lifetime of the loan.

Financial liabilities assessed at amortised cost
Debt securities, including debt securities included in fair value hedging, loans and deposits from credit institutions and deposits from customers, are valued at amortised cost based on expected cash flows. The portfolio of own bonds is shown in the accounts as a reduction of the debt.

Financial instruments assessed at fair value, any changes in value recognised through the income statement
The Group's portfolio of bonds in the liquidity portfolio is classified at fair value through the income statement. The portfolio is held solely for liquidity management and is traded to optimize returns within current quality requirements for the liquidity portfolio.

The Group’s portfolio of fixed interest rate loans is assessed at fair value to avoid accounting mismatch in relation to the underlying interest rate swaps. 

Financial derivatives are contracts signed to mitigate an existing interest rate or currency risk incurred by the bank. Financial derivatives are recognised at fair value through the income statement and recognised gross per contract as an asset or liability.

The Group’s portfolio of shares is assessed at fair value with any value changes through the income statement.

Losses and gains as a result of value changes on assets and liabilities assessed at fair value, with any value changes being recognised in the income statement, are included in the accounts during the period in which they occur.

LEVELS IN THE VALUATION HIERARCHY
Financial instruments are classified into different levels based on the quality of market data for each type of instrument.

Level 1 – Valuation based on prices in an active market
Level 1 comprises financial instruments valued by using quoted prices in active markets for identical assets or liabilities. This category includes listed shares, as well as bonds and certificates in LCR-level 1, traded in active markets.

Level 2 – Valuation based on observable market data
Level 2 comprises financial instruments valued by using information which is not quoted prices, but where prices are directly or indirectly observable for assets or liabilities, including quoted prices in inactive markets for identical assets or liabilities. This category includes derivatives, as well as bonds which are not included in level 1.

Level 3 – Valuation based on other than observable market data
Level 3 comprises financial instruments which cannot be valued based on directly or indirectly observable prices. This category includes loans to customers, as well as shares.

A change in the discount rate of 10 basis points will have an impact of about NOK 9 million on loans with fixed interest rate. 

The debt securities in the Group consist of covered bonds quoted in Norwegian kroner (NOK) and Euro (EUR) issued by Møre Boligkreditt AS, in addition to certificates and bonds quoted in NOK issued by Sparebanken Møre. The table below provides an overview of the Group’s covered bonds.

As at 30.09.2020, Sparebanken Møre held NOK 498 million in covered bonds issued by Møre Boligkreditt AS (NOK 589 million). Møre Boligkreditt AS held no own covered bonds as at 30.09.2020 (NOK 0 million). 

Capital adequacy for Sparebanken Møre is calculated in accordance with IRB Foundation for credit risk. Market risk calculations are based on the standard method and operational risk calculations on the basic method.

The countercyclical capital buffer was reduced from 2.5 per cent to 1.0 per cent with effect from 13 March 2020. The level is set by the Ministry of Finance based on advice from Norges Bank.

The requirement for Common Equity Tier 1 capital (CET1) for Pillar 1 is 11.0 per cent. The requirement consists of a minimum requirement of 4.5 per cent, a conservation buffer of 2.5 per cent, a systemic risk buffer of 3.0 per cent and a countercyclical capital buffer of 1.0 per cent. In addition, Finanstilsynet has set an individual Pillar 2 requirement of 1.7 per cent, however a minimum of NOK 590 million.

The capital adequacy reported in the 2019 Annual report was based on a proposed cash dividend of NOK 17.50 per equity certificate, a total of NOK 173 million, and an allocation to dividend funds for the local community totalling NOK 176 million. The final cash dividend for 2019 was approved by the General Meeting 16 April 2020, at NOK 14.00 per equity certificate, a total of NOK 138 million, and dividend funds for the local community was set at NOK 141 million. As a result of the reduced dividends, the Group’s Common Equity Tier 1 was strengthened by 0.3 p.p, from 17.4 per cent to 17.7 per cent. Equally, the Tier 1 capital was increased from 19.3 per cent to 19.5 per cent and the Capital adequacy ratio increased from 21.5 per cent to 21.7 per cent.

The capital adequacy figures as of 31.12.2019 are in the interim report restated compared to the reported figures in the 2019 Annual report, thus reflecting the resolution of the General Meeting dated 16 April 2020.

No events have occurred after the reporting period that will materially affect the figures presented as of 30 September 2020.

There is still great uncertainty associated with Covid-19 and the consequences of the fall in oil prices. This uncertainty is reflected in the calculations of expected losses. Please see the interim report from the Board of Directors as well as note 3 for further information.