Interim report from the Board of Directors

All figures relate to the Group. Figures in brackets refer to the corresponding period last year. The financial statements have been prepared in accordance with IFRS and the interim report has been prepared in conformity with IAS 34 Interim Financial Reporting.

RESULTS AS PER Q3 2022
Sparebanken Møre’s profit before tax after the first three quarters of 2022 was NOK 697 million, compared with NOK 632 million for the same period in 2021.

Total income was NOK 75 million higher than for the same period in 2021. Net interest income rose by NOK 154 million and other operating income fell by NOK 79 million. Capital losses from the bond portfolio amounted to NOK 93 million, compared with no recognised change in value after the first three quarters of 2021. Capital gains from equities amounted to NOK 12 million, compared with NOK 11 million after the first three quarters of 2021. Income from other financial instruments showed a reduction of NOK 9 million compared with the same period in 2021.

Costs were NOK 60 million higher in the first three quarters of 2022 than in 2021. Personnel costs were NOK 45 million higher than last year and other operating costs NOK 15 million higher.

Receipts on losses on loans and guarantees amounted to NOK 6 million, which improved the profit by NOK 50 million compared with the same period last year.

The cost income ratio amounted to 43.5 per cent after the third quarter this year. This is 2.5 percentage points higher than in the same period in 2021.

Profit after tax was NOK 535 million, NOK 46 million higher than for the same period in 2021. The results at the end of the third quarter represent an annualised return on equity of 10.1 per cent, compared with 9.7 per cent after the first three quarters of 2021.

Earnings per equity certificate were NOK 5.17 for the Group and NOK 6.31 for the parent bank.

RESULTS FOR Q3 2022
Profit before losses amounted to NOK 254 million for the third quarter of 2022, or 1.19 per cent of average assets, compared with NOK 231 million, or 1.15 per cent, for the corresponding quarter last year.

Profit after tax amounted to NOK 189 million for the third quarter of 2022, or 0.89 per cent of average assets, compared with NOK 176 million, or 0.87 per cent, for the corresponding quarter last year.

Return on equity was 10.5 per cent for the third quarter of 2022, the same as in the third quarter of 2021, and the cost income ratio amounted to 41.4 per cent compared with 40.4 per cent for the third quarter of 2021. 

Earnings per equity certificate were NOK 1.82 for the Group and NOK 1.41 for the parent bank. 

Net interest income 
Net interest income was NOK 398 million, which is NOK 78 million, or 24.4 per cent, higher than in the corresponding quarter of last year. This represents 1.87 per cent of total assets, which is 0.29 percentage points higher than for the corresponding quarter last year.

In the retail market, the interest margin for lending has contracted and the deposit margin has widened compared with the third quarter of 2021. In the corporate market, the interest margin for lending was stable, while the interest margin for deposits widened compared with the same period.

Other operating income
Other operating income was NOK 35 million in the quarter, which is NOK 34 million lower than in the third quarter of last year. The net result from financial instruments was NOK -30 million and this is NOK 43 million less than in the third quarter of 2021. Capital losses from bond holdings were NOK 27 million in the quarter, compared with capital losses of NOK 3 million in the corresponding quarter last year. Capital losses from equities amounted to NOK 13 million, compared with capital losses of NOK 1 million in the third quarter of 2021. The negative change in value for fixed-rate lending amounted NOK 1 million, compared with a positive change in value of NOK 3 million in the same quarter last year. The value of issued bonds decreased by NOK 2 million, compared with an increase of NOK 5 million in the third quarter of 2021. Income from foreign exchange and interest trading amounted to NOK 13 million, NOK 5 million more than in the same quarter last year.

Other operating income, excluding financial instruments, increased by NOK 9 million compared with the third quarter of 2021. The increase was mainly attributable to income from insurance sales, payment transfer services and real estate brokerage.

See Note 7 for a specification of other operating income.

Costs
Operating costs amounted to NOK 179 million for the quarter, which is NOK 21 million higher than for the same quarter last year. Personnel costs accounted for NOK 15 million of the rise in relation to the same period last year and totalled NOK 103 million. Staffing has increased by 19 FTEs in the past 12 months to 380 FTEs. Other operating costs have increased by NOK 6 million from the same period last year. See Note 8 for a specification of costs.

The cost income ratio for the third quarter of 2022 was 41.4 per cent, 1.0 percentage points higher than in the third quarter of last year.

Provisions for expected losses and credit-impaired commitments
The quarter’s accounts were charged NOK 2 million in losses on loans and guarantees (NOK 2 million), equivalent to 0.01 per cent of average assets (0.01 per cent of average assets). The corporate segment was charged NOK 6 million in losses in the quarter, while receipts on losses in the retail segment amounted to NOK 4 million.

At the end of the third quarter of 2022, provisions for expected credit losses totalled NOK 350 million, equivalent to 0.46 per cent of gross lending and guarantee commitments (NOK 365 million and 0.51 per cent). Of the total provisions for expected credit losses, NOK 11 million concern credit-impaired commitments more than 90 days past due (NOK 17 million), which amounts to 0.01 per cent of gross lending and guarantee commitments (0.02 per cent). NOK 213 million concerns other credit-impaired commitments (NOK 231 million), which is equivalent to 0.28 per cent of gross lending and guarantee commitments (0.32 per cent). 

Net credit-impaired commitments (commitments more than 90 days past due and other commitments in Stage 3) have decreased by NOK 319 million in the past 12 months. At end of the third quarter of 2022, the corporate market accounted for NOK 486 million of net credit-impaired commitments and the retail market NOK 66 million. In total, this represents 0.73 per cent of gross lending and guarantee commitments (1.22 per cent). 

Lending to customers
At the end of the third quarter of 2022, lending to customers amounted to NOK 73,689 million (NOK 69,423 million). In the past 12 months, customer lending has increased by a total of NOK 4,266 million, or 6.1 per cent. Retail lending has increased by 5.8 per cent and corporate lending has increased by 6.8 per cent in the past 12 months. Lending to corporate customers increased by 1.8 per cent in the third quarter of 2022, while lending to retail customers rose by 2.0 per cent. Retail lending accounted for 67.3 per cent of total lending at the end of the third quarter of 2022 (67.5 per cent).

Deposits from customers
Customer deposits have increased by NOK 3,906 million, or 9.6 per cent, in the past 12 months. At the end of the third quarter of 2022, deposits amounted to NOK 44,686 million (NOK 40,780 million). Retail deposits have increased by 6.3 per cent in the last 12 months, while corporate deposits have increased by 16.7 per cent and public sector deposits have decreased by 19.7 per cent. The retail market’s relative share of deposits amounted to 58.3 per cent (60.1 per cent), while deposits from the corporate market accounted for 40.0 per cent (37.6 per cent) and from the public sector market 1.7 per cent (2.3 per cent). 

The deposit-to-loan ratio was 60.4 per cent at the end of the third quarter of 2022 (58.5 per cent).

LIQUIDITY AND FUNDING
Sparebanken Møre’s liquidity coverage ratio (LCR) was 152 for the Group and 142 for the parent bank at the end of the quarter. The EUR is a significant currency for the Group and Møre Boligkreditt AS. A currency is considered a ‘significant currency’ when liabilities denominated in that currency amount to 5 per cent of total liabilities. When the EUR and/or USD are significant currencies, a minimum requirement for NOK of 50 per cent applies.

The EU banking package was introduced in Norway from 1 June this year. This entails, among other things, the introduction of a binding requirement that the net stable funding ratio (NSFR) must be more than 100 at all reporting levels. CRR2 sets new weights for asset and liability items, and for off-balance sheet items. The bank has measured and reported NSFRs for several years, and the NSFR was 125 at the end of the third quarter (consolidated figure), while the NSFRs for the bank and Møre Boligkreditt AS were 125 and 115, respectively.

Total net market funding (excluding AT1) amounted to NOK 32.2 billion at the end of the third quarter. Senior bonds with a remaining term to maturity of 1 year have a weighted remaining term to maturity of 2.42 years, while covered bond funding through Møre Boligkreditt AS correspondingly has a weighted remaining term to maturity of 3.17 years – overall for market funding in the Group (inclusive of subordinated loan capital (T2) and SNP (T3)) the remaining term to maturity is 3.15 years. Møre Boligkreditt AS issues bonds based on the transfer of loans from the parent bank. The loans transferred to the mortgage company amounted to NOK 28,210 million at the end of the quarter, equal to around 38 per cent of the bank’s total lending.

RATING
In an update dated 25 July this year, Moody’s Investor Service confirmed Sparebanken Møre’s counterparty, deposit and issuer rating of A1 with a stable outlook. The rating of the bank’s Junior senior unsecured bank debt (SNP) in local currency was also maintained at Baa1.

Bonds issued by Møre Boligkreditt AS are also credit rated by Moody’s Investor Service and have a rating of Aaa.

CAPITAL ADEQUACY 
Sparebanken Møre is well capitalised. At the end of the third quarter, the Common Equity Tier 1 capital ratio was 18.2 per cent (17.1 per cent), including 50 per cent of the result for the year to date. This is 5.0 percentage points higher than the total regulatory minimum requirement for the Common Equity Tier 1 capital ratio of 13.2 per cent. The primary capital ratio, including 50 per cent of the result for the year to date, was 22.5 per cent (20.8 per cent) and the Tier 1 capital ratio was 20.1 per cent (18.8 per cent). 

Capital adequacy is calculated in line with the EU’s Capital Requirements Directive (CRD) and Capital Requirements Regulation (CRR).

The EU’s banking package came into force on 1 June and introduces a number of changes to financial strength and liquidity requirements, as well as to crisis management regulations. The banking package also includes an expansion of the SME discount, which reduces the bank’s capital requirements for lending to SMEs. The effect of this change in the regulations amounts to an improvement of 1.3 percentage points in the Common Equity Tier 1 capital ratio for the bank.

Sparebanken Møre’s total Common Equity Tier 1 capital ratio requirement is 13.2 per cent. The requirement consists of a minimum requirement of 4.5 percent, a capital conservation buffer of 2.5 per cent, a systemic risk buffer of 3.0 per cent and countercyclical buffer of 1.5 per cent. In addition, the Financial Supervisory Authority of Norway has set an individual Pilar 2 requirement for Sparebanken Møre of 1.7 per cent, as well as an expected capital adequacy margin of 1.25 per cent.

The leverage ratio (LR) at the end of the third quarter of 2022 was 7.6 per cent, the same as it was at the end of the third quarter of 2021. The regulatory minimum requirement (3 per cent) was met by a good margin. 

MREL
One key element of the crisis management rules is that capital instruments and debt can be written down and/or converted to equity (bail-in). The Financial Institutions Act, therefore, requires the bank to meet a minimum requirement regarding the sum of its own funds and convertible debt at all times (MREL – minimum requirement for own funds and eligible liabilities) such that the bank has sufficient primary capital and convertible debt to cope with a crisis without the use of public funds.

The MREL requirement must be covered by own funds or debt instruments with a lower priority than ordinary, unsecured, non-prioritised debt (senior debt). The subordination requirement (lower priority) must be met in full by no later than 1 January 2024. Until then, senior debt with a remaining term to maturity of more than one year can be used to help meet the subordination requirement.

The overall subordination requirement must as a minimum be phased in linearly. From 1 January 2022, the effective subordination requirement is 20 per cent of the adjusted risk-weighted assets.

Sparebanken Møre had issued NOK 2,000 million in subordinated bond debt at the end of third quarter of 2022.

SUBSIDIARIES 
The aggregate profit of the bank’s three subsidiaries amounted to NOK 127 million at the end of the first three quarters of 2022 (NOK 191 million). 

Møre Boligkreditt AS was established as part of the Group’s long-term funding strategy. The main purpose of the covered bond company is to issue covered bonds for sale to Norwegian and international investors. At the end of the third quarter of 2022, the company had outstanding bonds of NOK 24.0 billion in the market. Around 33 per cent of this was denominated in a currency other than NOK. At the end of the quarter, the parent bank held no bonds issued by the company. Møre Boligkreditt AS has contributed NOK 122 million to the Group’s result so far in 2022 (NOK 190 million).

Møre Eiendomsmegling AS provides real estate brokerage services to both retail and corporate customers. The company has made a profit contribution of NOK 2 million so far in 2022 (NOK 0 million). At the end of the quarter, the company employed 19 FTEs. 

The purpose of Sparebankeiendom AS and Storgata 41-45 Molde AS is to own and manage the bank’s own commercial properties. The companies have made a profit contribution of NOK 3 million so far in 2022 (NOK 1 million). The companies have no staff. 

EQUITY CERTIFICATES 
At the end of the third quarter of 2022, there were 6,039 holders of Sparebanken Møre’s equity certificate. The proportion of equity certificates owned by foreign nationals amounted to 2.3 per cent at the end of the quarter. 49,434,770 equity certificates have been issued. Equity certificate capital accounts for 49.66 per cent of the bank’s total equity.

Note 14 includes a list of the 20 largest holders of the bank’s equity certificates. As at 30 September 2022, the bank owned 120,937 treasury equity certificates. These were purchased on the Oslo Børs at market prices. As far as the aforementioned holding is concerned, the bank acquired 10,000 equity certificates in the third quarter through seven transactions.

FUTURE PROSPECTS 
The outlook for the global economy weakened further during the third quarter. This was due to the continued war between Russia and Ukraine, higher inflation and more central banks raising their key policy rates, some of them sharply, in order to curb inflationary pressures. The central banks’ forecasts indicate that rates will continue to rise in the coming period. The prospects for growth in 2023 are weak, both domestically and internationally.

In order to curb inflationary pressures, the US Federal Bank increased the range of its key federal funds rate by 0.75 percentage points to 3.00-3.25 per cent at its monetary policy meeting on 21 September. The bank has also indicated that the rate will be increased by a further 1.25 per cent over the following two l monetary policy meetings of the year.

The rate rises in the USA are due to very high inflation. In August, 12-month consumer price inflation was 8.3 per cent. Moreover, core inflation, i.e. inflation exclusive of taxes and energy, was at 6.3 per cent. The factors affecting prices in the US economy are therefore broadly based.

Global long interest rates have risen due to the prospect of higher rates in the US. During the third quarter, the 10-year Treasury note rate in the US, which is referred to as the world’s most important rate, rose from 3.0 to 3.7 per cent. Long interest rates are based on expectations concerning the development of the key policy rate.

Furthermore, the European Central Bank (ECB) raised its key policy rate by 0.75 percentage point to 0.75 per cent at its monetary policy meeting on 8 September. This sharp rate rise must also be viewed in the context of high inflation. Consumer price inflation in the euro zone was 9.1 per cent in August.

Domestically, Norges Bank increased its key policy rate by 0.50 percentage points to 2.25 per cent at its monetary policy meeting on 22 September. In parallel with this, the bank published a new projected path for interest rates. This path indicates that interest rates will rise by 0.25 percentage points in November and December this year and in March 2023. Moreover, there is some likelihood of a final interest rate hike in June next year.

However, since the interest rate path was published, the development of inflation means that the probability of an interest rate increase of 0.50 percentage points in November has increased. In September, overall 12-month consumer price inflation was 6.9 per cent. Core inflation, i.e. inflation exclusive of taxes and energy, was at 5.3 per cent. Both inflation figures were clearly higher than Norges Bank had assumed.

So far, it appears that the interest rate hikes and high energy prices have had no significant impact on the development of output in Norway. Norway’s Mainland GDP rose by 0.4 per cent from July to August, adjusted for seasonal and calendar effects. In addition, the figures for June and July were revised upwards.

Unemployment remains low due to demand for domestically produced goods and services remaining at a high level. At the end of September, the number of unemployed people in Møre og Romsdal accounted for 1.4 per cent of the workforce. The national unemployment rate was 1.6 per cent.

Growth in lending to households has fallen so far this year for Norway as a whole, while growth in lending to the corporate market has increased markedly. At the end of August this year, the overall 12-month growth in lending to the public was 5.2 per cent, compared with 5.0 per cent at the end of 2021. As a consequence of higher interest rates and the weaker development of house prices, a further slowdown in the growth of lending to households is expected going forward, while corporate investments, including petroleum investments, are helping to keep the rate of growth in corporate lending up.

The bank’s overall lending growth remained good during the first three quarters of the year. The 12-month rate ended at 6.1 per cent at the end of the quarter, markedly above the level at the end of 2021 of 4.6 per cent. The year-on-year growth in lending to the retail market ended at 5.8 per cent at the end of the third quarter, while lending growth in the corporate market over the past 12 months to the end of September was 6.8 per cent. Deposits increased by 9.6 per cent in the past 12 months up to the end of the third quarter of 2022, and the deposit-to-loan ratio remains high.

Based on feedback the bank has received from customers, business- and industry asscociations and signals from the market following the presentation of the proposed State budget, proposed activity dampening measures will have negative impact on investments and consumption. This is expected to have significant consequences for the growth rate going forward. In particular, stricter taxation of the hydropower-, wind- and aquaculture industries, stricter taxation of owner’s capital, as well as the tightening of the regulations on temporary employment, will have negative consequences in our region.

The bank has a solid capital base and good liquidity and will remain a strong and committed supporter of our customers also going forward. The focus will always be on good operations and profitability.

Sparebanken Møre’s strategic financial performance targets are a return on equity of above 11 per cent and a cost income ratio of under 40 per cent. The Board expects the financial targets for 2022 to be achieved and the cost income ratio to be below 40 per cent at the end of the year.

Ålesund, 30 September 2022 
26 October 2022 

THE BOARD OF DIRECTORS OF SPAREBANKEN MØRE 
LEIF-ARNE LANGØY, Chair of the Board   
HENRIK GRUNG,  Deputy Chair   
JILL AASEN
KÅRE ØYVIND VASSDAL
THERESE MONSÅS LANGSET
SIGNY STARHEIM
BJØRN FØLSTAD
MARIE REKDAL HIDE

TROND LARS NYDAL, CEO