The Group`s interim accounts have been prepared in accordance with adopted International Financial Reporting Standards (IFRS), approved by the EU as at 31 December 2021. The interim report has been prepared in compliance with IAS 34 Interim Reporting and in accordance with accounting principles and methods applied in the 2020 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. 

Sparebanken Møre calculates and reports capital adequacy in compliance with the EU’s capital requirements regulation and directive (CRR/CRD IV). Sparebanken Møre is granted permission from the Financial Supervisory Authority of Norway (FSA) to use internal rating methods, IRB Foundation for credit risk. Calculations regarding market risk are performed using the standard method and for operational risk the basic method is used.

Sparebanken Møre has a total requirement for Common Equity Tier 1 capital ratio (CET1) of 12.7 per cent. The requirement consists of a minimum requirement of 4.5 per cent, a capital 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, the FSA has set an individual Pillar 2 requirement for Sparebanken Møre of 1.7 per cent, albeit a minimum of NOK 590 million.

The countercyclical capital buffer was reduced from 2.5 per cent to 1.0 per cent with effect from 13 March 2020. The countercyclical capital buffer can be increased with 12 months’ notice.  It is announced that the countercyclical capital buffer requirement will be increased to 1.5 per cent from 30 June 2022 and further to 2.0 per cent from 31 December 2022.

The Ministry of Finance decided to increase the system risk buffer for financial undertakings using Advanced IRB to 4.5 per cent from 31 December 2020. For other undertakings, including Sparebanken Møre, this change will come into effect from 31 December 2022.

When CRR 2, CRD V and BRRD 2 are enacted in Norwegian regulations, probably with effect from 30 June 2022, the SME discount will be expanded. It is estimated that the effect will be an improvement in the Group’s Common Equity Tier 1 capital ratio of 1.3 percentage points. On 9 June 2021, the FSA announced requirements for IRB models in circular 03/2021. An assessment has been made under the auspices of the IRB banks that the circular breaches EU regulations, and this has been communicated to the Ministry of Finance. Sparebanken Møre has estimated that the effect of changes to the benchmark model for mortgages will amount to a reduction in Common Equity Tier 1 capital ratio of 0.4 percentage points. The effect has not been incorporated into the bank’s capital reporting. Sparebanken Møre has applied to the FSA for approval of changes to the IRB models and calibration framework and is awaiting a reply.

Sparebanken Møre has an internal target for CET1 of 15.2 per cent.

Reported capital adequacy in the quarterly report is based on a proposed cash dividend of NOK 16.00 per equity certificate, a total of NOK 158 million, and an allocation of dividend funds to the local community totalling NOK 160 million.

MREL
The FSA has stipulated that Sparebanken Møre will be subject to a risk-weighted MREL requirement of 25.9 per cent of the adjusted risk-weighted assets based on the relevant capital requirements as at 31 December 2020. Since the Common Equity Tier 1 capital used to fulfill the risk-weighted MREL requirement cannot at the same time be used to fulfill the combined buffer requirement, the estimated actual need for primary capital and MREL is effectively 31.4 per cent of the adjusted risk-weighted assets.

Based on the above, Sparebanken Møre’s effective MREL requirement will amount to NOK 9,284 million and the total subordination requirement will amount to NOK 7,658 million. The overall subordination requirement must as a minimum be phased in linearly and be met in full from 1 January 2024 onwards. From 1 January 2022, the effective subordination requirement is 20 per cent of the adjusted risk-weighted calculation basis. For Sparebanken Møre, this will amount to NOK 5,914 million. The calculated primary capital available to meet the effective MREL-requirement and overall minimum subordination requirement amounts to NOK 5,094 million.

Sparebanken Møre had issued NOK 1,000 million in senior non-preferred debt (SNP) at the end of 2021.

Methodology for measuring expected credit losses (ECL) according to IFRS 9
Sparebanken Møre has developed an ECL model based on the Group’s IRB parameters and 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, including evidence of loss, the commitment is transferred to stage 3 with lifetime ECL measurement. The commitment is considered to be credit-impaired. As opposed to stage 1 and 2, effective interest rate in stage 3 is calculated on net impaired commitment (total commitment less expected credit loss) instead of gross commitment.

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

An increase in credit risk reflects both customer-specific circumstances and development in relevant macro factors for the particular customer segment. The assessment of what is considered to be a significant increase in credit risk is based on a combination of quantitative and qualitative indicators, as well as “backstops” (see separate section regarding “backstops”)

Quantitative criteria
A significant increase in credit risk is determined by comparing the PD at the reporting date with PD at initial recognition. If the actual PD is higher than initial PD, an assessment is made of whether the increase is significant.

Significant increase in credit risk since initial recognition is considered to have occurred when either

• PD has increased by 100 per cent or more and the increase in PD is more than 0.5 percentage points, or
• PD has increased by more than 2 percentage points

A 12-months PD is used to determine whether the credit risk has increased significantly.

Qualitative criteria
In addition to the quantitative assessment of a changes in the PD, a qualitative assessment is made to determine whether there has been a significant increase in credit risk, for example, if the commitment is subject to special monitoring.

“Backstops”
Credit risk is always considered to have increased significantly if the following events, “backstops”, have occurred:

• the customer’s contractual payments are 30 days past due
• the customer has been granted forbearance measures due to financial distress, though it is not severe enough to be individually assessed in stage 3. 
  
  

Significant reduction in credit risk – recovery
A customer migrates from stage 2 to stage 1 if:

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

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

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

Customers who are not subject to the migration rules above are not expected to have significant change in credit risk and retain the stage from previous month.

Scenarios
Three scenarios are developed: Best, Basis and Worst. For each of the scenarios, expected values of different parameters are given, for each of the next five years. The possibility for each of the scenarios to occur is also estimated. After five years, the scenarios are expected to converge to a long-term stable level.

Changes to PD as a result of scenarios, may also affect the staging.

Definition of default, credit-impaired and forbearance
The definition of default has been amended from 1 January 2021 and has been extended to include breaches of special covenants and agreed payment reliefs (forbearance). The new default definition has not changed the Group’s assessment of credit risk associated with individual exposures, and there is therefore no significant effect on the Group’s losses.

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 the highest of 1 per cent of the exposure (loans and undrawn credits) and NOK 1,000 for the retail market and NOK 2,000 for the corporate market. Breaches of covenants can also trigger default.

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.

As part of the process of granting payment relief, a specific, individual assessment is made of whether the application for payment relief is ‘forbearance’ and whether the loan should thus migrate to stage 2 (performing) or stage 3 (non-performing) in the Group’s ECL model.

Management override
Quarterly review meetings evaluate the basis for the accounting of ECL losses. If there are significant events that will affect an estimated loss which the model has not taken into account, relevant factors in the ECL model will be overridden. An assessment is made of the level of long-term PD and LGD in stage 2 and stage 3 under different scenarios.

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 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 presented challenges for some of the bank’s customers. After returning to more normal everyday lives (albeit with elevated preparedness) in autumn 2021, the omicron variant led to a new shutdown. Although we are now on our way back to more normal everyday lives again, some uncertainty surrounding the developments expected in both Norway and the global economy remains, and the picture is constantly changing. Some industries have undergone fundamental changes due to the rapid digitalisation that has occurred during Covid-19. And there will be further changes in the economy due to the climate issue and focus on sustainability.

In the Group’s calculations of expected credit loss (ECL), the macroeconomic scenarios and the weightings have been impacted by the changes in economic conditions through 2020 and 2021.

While the omicron variant did result in a new shutdown, the future prospects have become more positive and clearer. Large proportions of the population are vaccinated, and macroeconomic conditions are improving. There are still very few bankruptcies and credit-impaired commitments remain low. 

The probability of a pessimistic scenario is reduced from 20 per cent to 10 per cent, the base case scenario is 70 per cent and the best case scenario is increased from 10 per cent to 20 per cent. 

The following table lists commission income and costs covered by IFRS 15 broken down by the largest main items and allocated per segment.

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 Group. Financial derivatives are recognised at fair value through the income statement and recognised gross per contract as an asset or a 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 10 million on loans with fixed interest rate.

The debt securities of 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 issued covered bonds.

As at 31.12.2021, Sparebanken Møre held NOK 514 million in covered bonds (incl.accrued interest)  issued by Møre Boligkreditt AS (NOK 503 million). Møre Boligkreditt AS held no own covered bonds as at 31.12.2021 (NOK 0 million).

The proportion of equity certificates held by foreign nationals was 5.28 per cent at the end of the quarter.

No events have occurred after the reporting period that will materially affect the figures presented as of 31 December 2021.