Board of Directors report 2014
The accounts have been prepared in accordance with IFRS. All figures relate to the Group. Amounts and percentages in brackets refer to the corresponding period last year.
Group's key figures
- Profit after tax for 2014 was NOK 623 million, NOK 173 million higher than in 2013
- The return on equity after tax was 14.0 %, compared with 11.6 % for 2013
- Lending volume increased by 5.7 % in 2014, while deposits grew by 1.1 %
- At year end, primary capital amounted to NOK 5.7 billion and represented 15.82 % of the risk-weighted assets, 14.40 % of which was core capital, and 12.0 % of which was pure core capital
- The Group earnings per equity certificate in 2014 amounted to NOK 31.20 compared with NOK 21.65 for 2013
- The Board of Directors is very satisfied with the results for 2014
- The Board of Directors recommends that the Board of Trustees pays a cash dividend of NOK 13.50 per equity certificate and set aside NOK 136 million for dividend funds for local communities. In total this represents 43 % of the total group profit for 2014.
Areas of operation and markets
The Sparebanken Møre Group consists of the Parent Bank, the mortgage company Møre Boligkreditt AS, the estate agency Møre Eiendomsmegling AS and the property company Sparebankeiendom AS. Sparebanken Møre has defined its geographic area of operation as Møre og Romsdal county, in which the bank had 30 branches in 24 municipalities at year end.
The customer-oriented activities within the retail market are organised in a central unit, the Retail Market Division. All of the retail market departments (28) report to the EVP, Head of Retail Divisions. The EVP reports in turn to the CEO. The corporate market is organised into three geographic units, and the three EVPs report to the CEO. The corporate market has a matrix organisation, dividing the corporate market into 6 different industries (maritime, offshore & supply, industry, real estate, trade & services, SME) as well as insurance.
The various tasks and responsibilities relating to Sparebanken Møre’s day-to-day operations are allocated in such a way that the resource usage in the branch network is to a very great extent prioritised in favour of direct customer-related activities. Other tasks shall, to the greatest possible extent, be looked after by the bank’s central support system, which is organised in five divisions. Each of these divisions is managed by a EVP, who reports to the CEO. The EVP and Head of Retail Division, the three EVPs heading the Corporate Divisions and the five EVPs at the main office form their own management groups together with their respective department heads. The Board appoints the EVP and Head of Retail Division, the EVPs heading the Corporate Divisions and the EVPs at the main office. The CEO selects the members of the bank’s Senior Management Group.
Sparebanken Møre is a full-service provider within the following areas:
- Deposits and other forms of investments
- Asset management
- Financial advisory services
- Payment transfers
- Foreign exchange and interest rate trading
- Real estate brokerage
The bank's distribution strategy covers its network of branches, digital channels, specialist functions and telephone services, which include customer service, telebanking and mobile and tablet banking. The coordination of customer services in the various distribution channels is intended to ensure that the bank's customers have options, easy access to competent staff, good advice and a high degree of service. One of the bank’s aims is to further develop and maintain a high level of quality as far as these distribution channels are concerned in order to contribute to enhanced competitiveness, a high level of effectiveness and improved profitability.
The digital development within the banking industry is occurring rapidly. One of Sparebanken Møre's aims is to provide good digital solutions to its customers across a variety of platforms. Over the last several years the bank has begun offering customer dialogue via Facebook, established tablet banking and mobile banking, launched a new and improved online bank in 2014, and rolled out customer meetings via videolink in 2014. The BankID solution is now Java-free and BankID has been launched on mobile devices for mobile banking and tablet banking. In 2015 Sparebanken Møre will further digitalise day-to-day banking services for its customers. Over the course of the first half year the bank's credit processing system is due to be replaced, and this will lead to an expansion in the self-service solutions available to bank customers via the online bank. These are solutions that both the customers and the bank will benefit greatly from and enjoy.
Equity certificates – MORG
The number of equity certificate holders was stable at 6 114 at the start of 2014 and 5 898 at the end of the year. Of these equity certificate holders, 3 565 were residents of the county of Møre og Romsdal, and they held 44.1 % of the equity certificate capital at the end of the year, compared with 45.7 % at the end of the previous year. The 20 largest equity certificate holders represented 46.3 % of the bank’s equity certificate capital at year-end. Of these equity certificate holders, six were residents of Møre og Romsdal, with a relative ownership interest among the 20 largest of 35.4 % (40.1 %).
At the end of the year the bank owned 108 661 of its own equity certificates corresponding to a nominal amount of NOK 10.86 million. The bank's own holdings are included in the list of the 20 largest owners. These equity certificates were purchased on the Oslo Børs at market prices.
Just over 400 of the bank's employees own equity certificates in Sparebanken Møre. This constitutes a little over 250 000 equity certificates in total. Cumulatively, the bank's own employees represent the five largest owners of Sparenbanken Møre's equity certificates. The bank's Senior Management Group owns a total of approximately 17 000 equity certificates.
The equity certificates are freely negotiable in the market.
Results for 2014
The profit before losses on loans and guarantees amounted to NOK 844 million, or 1.55 % of average total assets, an increase of NOK 169 million or 0.25 percentage points in relation to 2013. The year's result includes NOK 94 million in profit from the sale of the shares in Nets AS. Profit after losses on loans and guarantees was NOK 822 million and 1.51 % of total assets, an increase of NOK 201 million and 0.31 percentage points. Profit after tax of NOK 623 million represents 1.15 % of total assets, compared with NOK 450 million and 0.87 % in 2013. The return on equity was 14.0 % for 2014 compared with 11.6 % in 2013. Sparebanken Møre's return on equity target is a minimum of 10 % after tax. Earnings per equity certificate were NOK 31.20, compared with NOK 21.65 in 2013 (Parent Bank).
Net interest income
Total net interest income amounted to NOK 1 093 million in 2014 (NOK 1 042 million). In relation to average total assets, net interest income was 2.01 % (2.00 %). In relation to total income, net interest income was 77.6 % in 2014.
Other operating income
Total other operating income (net commission and other income, as well as net return on financial investments) was NOK 315 million (NOK 202 million). The increase is primarily attributable to the sale of shares in Nets AS, which produced a profit of NOK 94 million, as well as capital gains on bond holdings of NOK 10 million, compared with capital losses of NOK 24 million in 2013.
Total costs amounted to NOK 564 million, a reduction of NOK 5 million in relation to 2013. Personnel costs have increased by NOK 11 million and other costs were reduced by NOK 16 million in relation to 2013. The Group's total workforce was reduced by 8 full-time equivalent positions in 2014 to 383 full-time equivalents. IT costs were reduced by NOK 11 million and marketing costs were NOK 4 million lower compared with 2013. The total costs amounted to 1.04 % of average total assets in 2014, compared with 1.09 % in 2013. The cost/income ratio amounted to 40.1 % in 2014, compared with 45.7 % in 2013. Sparebanken Møre's target is to keep the cost/income ratio below 50 %. This target was achieved by a good margin in 2014.
Losses and defaults
The profit and loss account was charged NOK 22 million for losses on loans and guarantees in 2014, while NOK 54 million was charged to the profit and loss account in 2013. This amounted to 0.04 % of average total assets in 2014, compared with 0.10 % in 2013. The losses on loans and guarantees were due to a NOK 26 million increase in group write-downs, a NOK 5 million reduction in the corporate segment, and a NOK 1 million increase in the retail market.
Total write-downs for losses at year-end 2014 amounted to NOK 307 million (NOK 306 million), which represents 0.63 % of gross lending (0.66 %). NOK 21 million of the individual specific provisions involved commitments in default for more than 90 days (NOK 35 million), which amounts to 0.04 % of gross lending (0.08 %). NOK 120 million related to other commitments (NOK 131 million), which amounts to 0.25 % of gross lending (0.28 %). Collective impairment amounted to NOK 166 million (NOK 140 million) or 0.34 % of gross lending (0.30 %).
Net impaired commitments (loans that have been in default for more than 90 days and loans that are not in default but which have been subject to an individual write-down) show a reduction over the last 12 months of NOK 119 million. Net impaired commitments amounted to NOK 249 million (NOK 368 million), or 0.51 % (0.80 %) of gross lending: NOK 185 million (NOK 284 million) in the corporate segment and NOK 64 million (NOK 84 million) in the retail segment.
Net commitments in default for more than 3 months at the end of 2014 amounted to NOK 65 million (NOK 117 million), which represents a reduction from 0.25 % at year-end 2013 to 0.13 % at year-end 2014.
Total assets increased by NOK 1 678 million and 3.1 % to NOK 56 305 million as per 31 December 2014. The change in total assets was affected by a reduction in holdings of short-term investments in securities and a reduction in holdings in Norges Bank during the year.
Net lending was up by NOK 2 643 million and 5.7 % to NOK 48 884 million in 2014. Lending to retail customers increased by 5.9 % and retail customers accounted for 65.7 % of gross lending at year-end 2014. Corporate lending increased by 5.2 % in the preceding 12 months, and this segment accounts for 34.3 % of gross lending.
Deposits from customers totalled NOK 28 389 million at the end of 2014, an increase of NOK 321 million and 1.1 %. Deposits from corporate customers fell by 4.9 % in 2014, while there was an increase of 6.4 % from retail customers. Deposits from public sector clients were 18.3 % lower than at year-end 2013. 37.5 % of deposits were from corporate customers, 60.0 % were from retail customers and 2.5 % were from the public sector.
The difference between the lending and deposit volumes, NOK 20 495 million, was financed in the Norwegian and international money and capital markets. Deposits in relation to loans ended at 58.1 % by year-end.
Holdings of short-term investments in securities at year-end 2014 amounted to NOK 4 771 million compared with NOK 5 117 million at year-end 2013.
There was no significant trading portfolio at year-end 2013.
The bank's hybrid tier 1 capital (NOK 878 million) consists of 3 loans. Two of which are subject to variable interest rates, and the third has a fixed interest rate. Subordinated bond loans (NOK 501 million) are subject to variable interest rates.
The aggregate profit of the bank's three subsidiaries amounted to NOK 189 million after tax (NOK 152 million).
Møre Boligkreditt AS was established as part of Sparebanken Møre’s long-term funding strategy. The mortgage company’s main purpose is to issue covered bonds for sale to Norwegian and international investors. To date the company has raised NOK 14 billion in funding for the Group. The company contributed NOK 191 million to the result in 2014 (NOK 152 million).
Møre Eiendomsmegling AS provides real estate brokerage services to both retail and corporate customers. The company reported a loss of NOK 1 million in 2014 (NOK 0 million). At the end of the year the company had 16 full-time equivalents.
Sparebankeiendom AS's purpose is to own and manage the bank's own commercial properties. The company reported a loss of NOK 1 million in 2014. (NOK 0 million). The company has no employees.
Dividend policy of Sparebanken Møre
Sparebanken Møre's dividend policy has remained unchanged for the last few years. The Group's aim is to achieve financial results which provide a good, stable return on the bank's equity. The results shall ensure that the owners of the equity receive a competitive long-term return in the form of cash dividends and capital appreciation on the equity. The equity owners' share of the annual profits set aside as dividend funds must correspond to the bank's equity situation. Sparebanken Møre must ensure that all equity owners are guaranteed equal treatment.
Proposed allocation of the profit for the year
In 2014 the market was informed that based on Sparebanken Møre's strategic plan and the stipulated return on equity capital, the normalised dividend ratio is expected to be in the range of 40–50 %. In line with the rules for equity certificates, etc., and in accordance with Sparebanken Møre's dividend policy, it is proposed that 43 % of the Group's profit be allocated to dividend funds (cash dividends and dividend funds for local communities). Based on the accounting breakdown of equity between equity capital and the primary capital fund, 49.6 % of the net result will be allocated to equity certificate holders and 50.4 % to the primary capital fund. Earnings per equity certificate amounted to NOK 31.20 in 2014. It has been proposed to the Board of Trustees that the cash dividend per equity certificate for the 2014 financial year be set at NOK 13.50.
Overview of proposed allocation of the profit:
(in million NOK)
|Profit for the year
|Dividend funds (43 %):
|To cash dividends
|To social dividends
|Strengthening of equity (57 %):
|To the dividend equalisation fund
|To the primary capital fund, etc.
|To other funds
Capital adequacy ratio and applicable regulations
Through the Møre 2018 strategic process, the Board of Directors of Sparebanken Møre resolved that the Group's plan for core tier 1 capital must comply with the regulatory plan for the escalation of capital. The bank has not been defined as a systemically important financial institution. The bank's internal capital target is that regardless of the level of the countercyclical buffer, the Group's core tier 1 capital shall amount to a minimum of 12%.
Sparebanken Møre has been authorised to use the IRB Foundation Approach to calculate capital requirements for corporate commitments in 2014. The Financial Supervisory Authority of Norway stipulated new requirements for IRB models for home mortgages on 1 July 2014. Sparebanken Møre has also submitted an application to use the IRB Foundation Approach for calculating capital requirements for the retail market. The application is still being considered by the Financial Supervisory Authority of Norway. A decision on the application is expected once the Financial Supervisory Authority of Norway has assessed the Group's documentation showing that the internal models match the assumptions on which the new requirements for home mortgage models are based.
The Group's capital adequacy is reported according to the standard method in Basel II for retail market commitments and the IRB Foundation Approach for the corporate market. Sparebanken Møre had no capital requirements associated with the transitional scheme for the Basel I floor at year-end 2014. Operational risk calculations are performed using the basic method.
Sparebanken Møre's capital adequacy at year-end 2014 was well above the regulatory capital requirements and also above the internally set minimum target for core tier 1 capital. Primary capital amounts to 15.8 % (17.0 %), core capital 14.4 % (15.5 %), of which core tier 1 capital amounts to 12.0 % (12.5 %). The bank repurchased part of a hybrid tier 1 capital issue with a face value of NOK 200 million in the third quarter of 2014. NOK 54 million of this is included in the reporting of the primary capital and core capital. The capital adequacy figures include the year's profit and the Board's proposed allocation of the profit. The Board's proposal concerning the allocation of profit for the year entails retaining 57 % of the Group's profit to further build up the Group's financial strength.
The internal risk management models have been developed and implemented over a number of years within the credit area for the Group. As mentioned, approval has been granted for the use of the IRB Foundation Approach for corporate commitments, while the application for the use of the IRB Foundation Approach for the retail market is still under consideration. Sparebanken Møre has already begun working on the application for use of the advanced IRB method. Work on the application will intensify during 2015.
The EU capital adequacy regulations for financial institutions and securities firms, Capital Requirements Regulation and Capital Requirements Directive IV (CRR and CRD IV), came into effect on 1 January 2014. The Norwegian authorities have stipulated national deadlines for implementing the international regulations. Sparebanken Møre is monitoring the development of the regulations closely. The analysis conducted shows that the Group satisfies the capital requirements of the new regulations. The Board continuously monitors capital adequacy in the Group and is prepared to implement measures quickly should there be a need to further strengthen capital.
Risk-taking is a fundamental element of banking operations. Risk management and risk control are two of the Board's focus areas. The overall purpose of risk management and risk control is to ensure that set targets are attained, ensure effective operations, manage risks which may prevent the attainment of commercial targets, ensure high quality internal and external reporting, and ensure that the Group's operations comply with all relevant laws, regulations and internal guidelines.
The stated goal of the Board of Sparebanken Møre is to ensure that the operations of the Group maintain a low to moderate risk profile. Earnings should be a product of customer-related activities, and not financial risk taking. Sparebanken Møre constantly strives to maintain control of the risks that exist. In those cases where the risk is deemed to exceed an acceptable level, immediate steps will be taken to reduce this risk.
The overall framework and limits for Sparebanken Møre's risk management are assessed annually by the Board in connection with the preparation of the bank's strategic plan. In August 2014, the Board adopted a new strategic plan, “Møre 2018”. The Board approves overall guidelines for management and control in the Group each year, and the Parent Bank and subsidiaries adopt individual risk policies tailored to their activities. Separate policies have been approved for each significant risk area, including credit risk, counterparty risk, market risk, concentration risk and liquidity risk. Risk strategies are approved by the Board and reassessed at least once a year, or when particular circumstances make it necessary. Sparebanken Møre's risk policies were last reviewed and approved in a revised form in December 2014.
The various policies form the framework for the Group's ICAAP. The Board actively participates in the annual process and establishes ownership of the assessments and calculations made, including through ICAAP's key role in long-term strategic planning. ICAAP has been conducted for the Group in 2014 and the feedback from this was received from the Financial Supervisory Authority of Norway in the fourth quarter of 2014. Calculations performed in connection with the ICAAP for 2014 show that the Group's capital adequacy is sufficiently robust to tolerate an economic development that is significantly more negative than the development on which the basic scenario in the long-term strategic plan is based. This is supported by both the economic calculations and simulations based on various stress tests.
Sparebanken Møre has established a follow-up and control structure that is intended to ensure compliance with the overall framework of the bank's strategic plan. The Group’s risk exposure and risk development are followed up on an overall basis through periodic reports submitted to management, the Audit and Risk Committee and the Board of Directors. One of the Audit and Risk Committee's primary purposes is to ensure that Sparebanken Møre's risk management is addressed satisfactorily.
The Board is of the opinion that Sparebanken Møre's aggregate risk exposures conform to the Group’s targeted risk profile. The Board considers the Group's and bank’s risk management to be satisfactory.
Credit risk is the risk of losses associated with customers or other counterparties being unable to fulfil their obligations at the agreed time and pursuant to written agreements, and the received collateral not covering outstanding claims. Included in this risk area are counterparty risk and concentration risk.
Credit risk represents Sparebanken Møre's largest risk area. The Group has a moderate risk profile for credit risk, as this risk is defined by the Group's credit risk strategy. The strategy provides, for example, limits for concentration in industrial sectors and the size of commitments, geographic exposure, growth targets and risk levels.
Compliance with the Board’s resolutions within the area of credit is monitored by the bank's risk management department as well as the Credit and Legal Services Division. These are independent of the customer units. The Board receives reports on credit risk trends throughout the year in monthly risk reports. In addition, periodic reviews of the credit area are carried out by the Audit and Risk Committee. The Board receives quarterly reports on mortgage lending, in line with the guidelines of the Financial Supervisory Authority of Norway. Sparebanken Møre's internal guidelines conform to the Financial Supervisory Authority of Norway's guidelines for mortgage lending.
Sparebanken Møre has prepared its own risk classification models for classifying customers. These models make an important contribution to the in-house management of credit risk. The customers are scored on a monthly basis, and this provides the basis for ongoing monitoring of the development of Sparebanken Møre's credit risk. Specific application scoring models have also been implemented and are used in the credit approval process.
Through the Group’s reporting portal, each member of staff with customer responsibility has access to reports which show the development of the credit risk in his or her portfolio. The portal has a hierarchical structure allowing managers in Sparebanken Møre to monitor performance within their respective area of responsibility. The reports are used to analyse customers, portfolios and segments, among other things. The portal also provides customer account managers with an overview of the customers' positions and limits in relation to exposure in financial instruments.
At the end of 2014 the Special Commitments Department was established under the Credit and Legal Services Division. The purpose of this department is to improve the efficiency of the processes associated with losses and commitments in default, as well as increase interaction between the legal department, the safe custody department and the credit department. This will improve the quality and professionalism in handling impaired commitments, and ensures that case processing will be objective and independent. The department reports upwards in the management hierarchy independent of the line.
The Board finds that Sparebanken Møre's overall credit risk is within the Group's adopted risk tolerance. At the end of 2014 there were no breaches of targets or limits with regard to the most recently adopted credit risk strategy. Exposure to large commitments has been significantly reduced over the last several years, but follow-up and control of this area has been enhanced. The Board finds that Sparebanken Møre is well prepared to handle any increased credit risk in the loan portfolio, and that the Group has a good foundation for increasing its focus on good loan projects in Sparebanken Møre's area of operation in the future.
Sparebanken Møre's market risk is primarily a reflection of activities which are conducted in order to support the Group's daily operations. This relates to the Group's funding, the bond portfolio which is maintained in order to maintain liquidity requirements and secure access to loans from Norges Bank, as well as customer generated interest rate and foreign exchange activity.
The Board stipulates limits for Group market risk in the market risk strategy. The limits are monitored by the risk management department. The limits are stipulated based on analysis of negative market movements, and the Board of Directors has stipulated that only low risk is acceptable in this area. The governing documents that deal with market risk are reviewed and renewed at least annually by the Board, most recently in December 2014. The Board of the bank receives monthly reports on the development of market risk. The limits for market risk are conservative, and on an overall basis, market risk represents a small part of the Group’s aggregate risk.
The Board finds that the Group's risk exposure in the area of market risk is within the adopted risk tolerance limits.
The management of Sparebanken Møre's funding structure is incorporated into an overall funding strategy that is evaluated and approved by the Board at least once a year, most recently in December 2014. The strategy reflects the moderate risk level that is accepted for this area of risk. It describes Sparebanken Møre's targets for maintaining its financial strength. Specific limits have been defined for different areas of the Group's liquidity management. Sparebanken Møre's contingency plan for funding management includes a description of how the liquidity situation should be handled in turbulent financial markets.
Basel III introduces two new separate and supplementary requirements in the area of liquidity. LCR (Liquidity Coverage Ratio) measures institutions' ability to survive a 30-day stress period. LCR increases the importance of high quality liquid assets. NSFR (Net Stable Funding Ratio) measures the long-term sustainability of institutions' funding. NSFR means that institutions have to fund liquid assets with the aid of a greater proportion of stable and long-term funding. When LCR is fully implemented, the minimum requirement of 100% will apply for normal periods. In periods of stress, the banks are expected to be in a position to use their liquid assets and could thus fall below the minimum requirement. Liquidity coverage ratio requirements will be phased in gradually from 2015. The initial phase will commence on 1 October 2015 with a minimum requirement of 60% fulfilment. The requirement will apply in full from 1 January 2018. Sparebanken Møre is adapting to the new liquidity standards by both modifying strategies and implementing internal adaptations. The bank regularly reports trends associated with the new liquidity indicators to the supervisory authority pursuant to the reporting requirements.
In recent years, the liquidity portfolio has increased in volume and investments have been switched to LCR quality securities. The targets the Group has established for LCR comply with the regulations' escalation plan. Reporting shows that Sparebanken Møre is well within the announced requirements.
In order to ensure the Group's liquidity risk is kept at a low level, lending to customers must primarily be financed by customer deposits and long-term securities issued. The bank's deposit coverage ratio at the end of 2014 was 58.1 per cent.
Møre Boligkreditt AS provides the Group with wider diversification of funding sources. The company issues covered bonds. The bank transfers parts of its mortgage portfolio to the mortgage company, and this allows the Group to take advantage of funding opportunities, which the establishment of the mortgage company facilitated. At year-end 2014 approximately 32 per cent of the Group's total lending (around 48 per cent of lending to the retail market) has been transferred to the mortgage company. Sparebanken Møre will continue to transfer mortgages to Møre Boligkreditt AS, and the bank's refinancing needs in 2015 will be met by issuing covered bonds, according to plan.
In order to gain access to new sources of funding and seek stable access to funding from external sources, securities issued by both Sparebanken Møre and Møre Boligkreditt AS are rated by the rating agency Moody's.
Bonds issued by Møre Boligkreditt AS have been assigned the highest possible rating from Moody's, Aaa. In addition to issuing securities in Norway, the mortgage company has also issued bonds in the Swedish market. As far as the composition of the external funding is concerned, priority is given to having a relatively large share of funding with terms in excess of one year. Of the NOK 20.8 billion of external funding, NOK 14.7 billion is long-term funding (remaining term of more than 1 year) consisting of covered and senior bonds. The Parent Bank's outstanding senior bonds had a weighted remaining term of 1.9 years at year-end 2014, while covered bond funding correspondingly had a remaining term of 3.9 years.
The Board considered the bank’s liquidity situation at the end of the year to be good. The Board also considered the ongoing liquidity management of the Group to be good.
Operational risk is defined as the risk of loss due to insufficient or failing internal processes, human or systems-related failure, or external events. This may for instance involve failures and breakdowns with regard to routines, electronic data processing systems, professional competence and the bank's subcontractors; this may also involve staff and customer breach of confidence/trust, robberies, embezzlement, etc. The Board of Sparebanken Møre has approved a low to moderate risk profile for this area of risk.
Targeted measures are necessary to prevent and reduce operational risk. Examples of risk-reducing measures include physical security measures, established contingency plans, robbery drills, insurance schemes and competence-enhancing measures.
Sparebanken Møre's external activities should centre around the customer. The bank has expended a lot of resources on the authorisation scheme for financial advisers in the last few years. By the end of 2014, 263 of the bank's employees were licensed financial advisers. 13 of them gained authorisation in 2014. In addition to Authorised Financial Advisers, most of the managers in frontline positions have completed an Authorised Financial Adviser examiner course. This has provided the managers with very good training and practice in exercising their managerial roles. In recent years, Sparebanken Møre has also organised an “approved internal credit competence” course. By the end of 2014, almost 250 of the bank's employees had passed this course. From 2014 Sparebanken Møre is also participating in the national approval scheme for non-life insurance. At the end of the year, 135 employees had been approved under this scheme. 17 of the bank's new recruits in 2014 have participated in the bank's standardised training for new employees arranged by the bank's internal “Møre Academy”. The fact that our employees possess a satisfactory level of expertise is an important contribution to reducing operational risk and at the same time ensures our customers find being a customer of our bank a good experience. The Board is delighted with the substantial skills boost that individual employees and the bank have achieved over the last several years and will continue to emphasise this work in the years ahead.
Sparebanken Møre expends a lot of resources on ensuring good ICT security. ICT threats have generally multiplied and grown in severity in recent years. Both attempts at gaining unauthorised access to the online bank and ATM skimming were registered and dealt with. No incidents of fraud or losses in connection with digital channels were registered during 2014. The cooperation within the banking and financial industry and services such as “Anti Fraud Internet Banking” from EVRY have had a positive impact. Digital channels will continue to be an area that is also vulnerable to threats in the future. During 2014 a general trend has been noted in the industry involving the banking and financial industry now becoming increasingly exposed to targeted attacks in which criminals gain unauthorised access to the organisation's IT network in order to obtain sensitive information or conduct fraudulent transactions. Work on ICT security will remain high on Sparebanken Møre's agenda in the future as well.
The Group focuses heavily on the anti-money laundering regulations. In 2014 the bank conducted new risk assessments on the area. The number of internal spot checks in the area has increased. Furthermore, employees have received new training in connection with this area, and the head of anti-money laundering in the bank has convened morning meetings with the different Retail Market departments and actively participated in Retail Market and Corporate Market meetings. Sparebanken Møre was well represented at the anti-money laundering conference which was organised under the direction of FNO, Økokrim and the Financial Supervisory Authority of Norway.
Sparebanken Møre's overall emergency preparedness plan was revised in 2014. The plan was subsequently tested in an emergency exercise in November 2014. These types of exercises are carried out annually. The experience gained from the exercises is used to supplement the emergency preparedness plan with additional details, while also providing valuable experience in being able to manage any crisis situations that could arise. The exercises also help to raise awareness and vigilance in relation to what issues may arise during a crisis.
Sparebanken Møre has established various forums and committees that actively work to manage the Group's operational risk. These include the Group's Annual Security Forum for people responsible for security, and quarterly meetings of the Group's Security Committee. The committee's members represent a wide range of people from multiple functions in the Group. The Board receives an annual report on the security situation at Sparebanken Møre, in addition to ongoing reports relating to significant deviations and events that may occur. The annual ICAAP reviews the major areas of risk for the Group, and a lot of attention is paid to operational risk in this context.
Sparebanken Møre's established, operational internal control represents an important tool for reducing operational risk, through both identification and follow-up.
The internal control system should be designed to ensure reasonable certainty with respect to attaining goals within the areas of strategic development, goal-oriented and efficient operations, reliable reporting, and compliance with acts and regulations, including compliance with internal Group guidelines and policies. A well-functioning internal control system should also ensure that the Group's risk exposure is within adopted risk profiles and risk tolerance limits.
Sparebanken Møre's internal control processes are based on the principles of the global internal control standard, the COSO model. The processes and the internal controls should apply to the Group as a whole. This also means that risks that arise as a result of ownership and operation of subsidiaries must be handled by the Group's overall internal control processes.
At Sparebanken Møre, individual managers have a special individual responsibility to ensure that internal control within his or her area of responsibility functions and is implemented as intended. This means that managers at every level of the organisation monitor the control measures put in place in their areas of responsibility. This insight is normally achieved through personal presence, monitoring staff, spot checks, reviewing key figures and deviation measurements, etc. This principle also applies to the managers of the subsidiaries in the Group.
Internal control in connection with the financial reporting process
The purpose of internal control in connection with the financial reporting process is to ensure that the financial statements are prepared and presented free from material error, including that any errors shall be identified in time. Moreover, internal control shall ensure that external accounting requirements are met, as well as safeguard that information disseminated to analysts, supervisory authorities, investors, customers and other stakeholders is complete and provides a true and fair view of the Group's financial situation.
Responsibility for the financial reporting process itself is assigned to the Finance, Risk Management, Personnel and Security Division, but with the Finance and Accounting Department as the coordinating and leading unit. Plans clearly specifying the distribution of work and back-up lists for both tasks and personnel in this and other departments within the section have been established.
Transactions are registered in the bank's core systems, and a reconciliation is performed between these systems and the accounting system (IROS) on a daily basis. Management reports are prepared periodically and quality checked. Any deviations that are recorded are rectified on an ongoing basis. Various management reports are prepared every month: Balanced Scorecard, analyses, risk reports etc. and the reports are consolidated both monthly and quarterly. Items in the income statement, statement of financial position and note disclosures are reconciled against the system and previous reports.
Both the quarterly and annual reports are reviewed by both the bank's management group and the Audit and Risk Committee prior to final consideration by the Board.
Internal control reporting
Internal control reporting at Sparebanken Møre is decentralised and the Risk Management section is the coordinating unit.
The Board of Directors has received regular reports on the operations and risk situation throughout the year. The CEO has also submitted an annual report to the Board containing an overall assessment of the risk situation and an assessment of whether the established internal controls function satisfactorily. This report also contained assessments of subsidiaries subject to the requirements of the Risk Management and Internal Control Regulations.
Based on the reports received, the Board believes that internal control is being properly addressed at Sparebanken Møre.
Internal auditing is a monitoring function which, independent of the rest of the bank’s management and organisation, conducts systematic risk assessments, checks and examinations of Sparebanken Møre’s internal control in order to assess whether it is working in an appropriate and reassuring manner.
The Group's internal auditing was outsourced to BDO in 2014. The internal auditing function reports to the Audit and Risk Committee and the Board. A plan has been prepared for the work of the internal auditor and approved by the Board. The Audit and Risk Committee and the Board have received regular reports from the internal auditor in 2014 in accordance with this plan.
The annual report of the internal auditor for 2014 to the Board states that the Group has corporate governance, risk management and internal control that is satisfactory, given the size and complexity of Sparebanken Møre. No material breaches of applicable acts or regulations have been identified. The internal auditor has also reviewed the bank's self-evaluation of its risk management and internal control throughout the year. This was found to be satisfactory with regard to the process, degree of detail and execution, as well as the summary report to the Board. The bank's self-evaluation was also found to be in compliance with the requirements stipulated in the Risk Management and Internal Control Regulations.
Corporate governance report
Corporate Governance in Sparebanken Møre includes the aims, targets and overall principles in accordance with which the Group is managed and controlled for the purpose of safeguarding the interests of owners, depositors and other groups in the Group. The Group's corporate governance should ensure prudent asset management and provide assurance that the communicated goals and strategies are attained and realised.
The Board highlights the following areas as critical to maintaining the confidence of the market:
- Capital appreciation for equity certificate holders and other investors in the bank’s securities
- Competent and independent management and control
- Good internal management processes
- Compliance with laws, rules and regulations
- Openness and good communications with equity certificate holders, other investors, customers, employees and the community at large
- Equal treatment of all equity certificate holders
The Group's corporate governance is based on the Norwegian Code of Practice for Corporate Governance, most recently updated on 30 October 2014. Sparebanken Møre's corporate governance report is included in the annual report in a separate section.
Sparebanken Møre's fulfilment of its corporate social responsibilities
Being a savings bank in Norway involves substantial corporate social responsibilities. Savings banks have long played a role in society and have, through their work, been important players in local communities for both local businesses and the customers who live in the savings bank's market area. Sparebanken Møre both has and assumes such social responsibilities.
Sparebanken Møre was formed on 1 April 1985 by the merger of a number of banks in Møre og Romsdal. In subsequent years a number of other banks in the county have merged with Sparebanken Møre. The banking history of the merged savings banks can be traced back to 1843.
Social responsibility duties
The social responsibilities that Sparebanken Møre has primarily relate to human rights, employment rights and social conditions, the external environment, and combating corruption.
The Group's overall goal is to promote savings by accepting deposits from an unlimited group of depositors and managing the funds in a prudent manner and in accordance with the current statutory rules that apply to savings banks. We shall perform all ordinary banking transactions and services in accordance with the current statutory provisions, and offer investment and associated services in accordance with the provisions of the Securities Trading Act. In today's society, access to banking services is vital in order for society to function at all, and thus through our existence and day-to-day work we also contribute to the exercising of this form of social responsibility in addition to the above.
Sparebanken Møre's core values must permeate everything we do. Both the executive management team and the Group's employees must do their utmost to ensure that Sparebanken Møre is perceived as “Committed, Close, and Sound”. These core values also permeate our ethical guidelines; guidelines that provide guidance on how we should act and conduct ourselves in relation to financial crime such as fraud and the misappropriation of funds, as well as corruption, employment rights, human rights, etc.
The ethical guidelines are operationalised through, for example, the personnel handbook, employment rules, security handbook, internal anti-money laundering rules, etc. New employees of Sparebanken Møre are introduced to the Group's ethical guidelines as early as their induction programme. Every employee also has a duty to review the ethical guidelines at least once a year as part of their annual performance assessment.
Sparebanken Møre's activities do not pollute the external environment. Therefore, no special guidelines have been drawn up for this area. Nonetheless, the fact that no such guidelines have been drawn up does not mean that we do not focus on the environmental challenges the rest of society faces. Our commitment to the environment is, for example, expressed through our use of various types of consumables, purchasing plans, electricity consumption, recycling schemes, waste management, and management of scrapped electrical and electronic equipment. We strive to offer paperless services to our customers, which include signing various banking papers digitally in the online bank. When we need to communicate with customers, or vice versa, electronic channels such as email, the online bank's letterbox, and online chat via Facebook can be used. In 2014 the bank also began offering dialogue with customers via videolink. On those occasions when the bank redecorates and rebuilds existing premises, the work also takes into account additional improvements to HSE conditions as well as, for example, energy efficiency requirements for the project. There is an emphasis on reducing the overall energy consumption through upgrading lighting and heating controls.
Combating corruption and financial crime
As a player in the financial industry we are subject to a range of laws and requirements aimed at countering corruption and other types of financial crime. Sparebanken Møre shall conduct itself according to high ethical standards and shall not be associated with activities, customers or industries of dubious repute. It is important that each member of staff is aware of such situations, and this is also a priority for the Board of Sparebanken Møre. As well as focusing on the staff in this area, through internal rules and ethical guidelines, Sparebanken Møre also has both internal processes and systems that help to prevent money laundering, corruption and other financial criminal acts. The bank regularly reports unusual transactions to the Norwegian National Authority for Investigation and Prosecution of Economic and Environmental Crime (ØKOKRIM) and focuses heavily on money laundering prevention when establishing new customer accounts and other contact points with our customers.
Our Group has a zero tolerance policy when it comes to internal fraud. There is also a very low threshold when it comes to reporting suspected criminal acts, e.g. suspicious transactions, to the correct authorities. The Board receives annual reports on the number of cases sent to ØKOKRIM in this area. There has been an increased internal focus on suspicious transactions as shown by more than twice as many cases being reported to Økokrim in 2014 than the previous year. Sparebanken Møre does its utmost, through systemic measures and staff training, to uncover and prevent potential corruption and financial crime at the earliest stage possible. Some of the general challenges in this area are that the ingenuity of those who wish to circumvent the rules has increased and the technological means of concealing corruption and financial crime have steadily improved. Sparebanken Møre therefore cooperates with other financial industry players in order to deal with these issues and maintains an ongoing dialogue with Finance Norway (FNO), ØKOKRIM and the police. The number of cases reported involving fraud has declined in 2014 compared with 2013.
Employees and working environment
Sparebanken Møre shall be an attractive workplace in which individuals are given independent responsibilities and an opportunity for personal development. In order to make your mark in the strong competition in the financial services market, it is necessary to adapt to the market's expectations in the long run as far as both the availability and skills of our staff are concerned. The quality and efficiency of work processes that address the market are always a priority in the skills upgrading measures that are implemented. Sparebanken Møre ensures this partly through the development programme for its advisers and partly through its recruitment policy.
No discrimination against employees based on age, gender, nationality, religion or civil status is tolerated. Employees are free to organise and join unions, and Sparebanken Møre has established a system for electing employee representatives. These rules are set forth in the personnel administrative handbook and provide a basis for the Group's recruitment procedures. The employees' elected representatives and members of the bank's executive management team meet regularly once every quarter to discuss matters of importance to both parties, such as the working environment and job satisfaction. The collaboration between management and the employees' elected representatives is good throughout Sparebanken Møre.
The Group’s workforce totalled 383 full-time equivalents at year end, a reduction of eight full-time equivalents in 2014.
The average age of the bank’s employees has decreased from 47.7 to 47.4. The average length of service with Sparebanken Møre of the current staff is 17.4 years.
Total sick leave was 3.59 per cent in 2014, compared with 3.51 per cent in 2013. Long-term absence due to illness was 2.23 per cent in 2014, compared with 2.20 per cent in 2013. Short-term absence due to illness was stable at 1.31 per cent in 2013 and 1.36 per cent in 2014. Those on long-term sick leave are followed up in order to help them return to work as quickly as possible. The bank has found a number of ways in which to achieve this by being part of the nationwide “Inclusive Workplace” scheme. The bank's experience of the cooperation with public sector organisations has been positive when it comes to finding individually tailored arrangements for those employees who have a need in this area. Leaves of absence in 2014 were 2.24 per cent.
The monitoring and follow-up system for health, environment and safety (HSE) forms an integral part of the bank’s other internal control procedures. Improvement measures within these areas are implemented whenever weaknesses are identified. In 2014 HSE courses were organised for the bank's 14 safety coordinators and members of the working environment committee, and an HSE course was arranged for 55 managers with responsibility for personnel. Exercises are also arranged at regular intervals in order to teach staff how to tackle crisis situations, such as fires, robberies and conflict management. Three incidents of threatening and adverse behaviour by customers towards the bank's employees were reported in 2014. There have also been a number of cases of false alarms, as well as one incident involving smoke emanating from a machine in the head office. With the exception of these events, no other similar incidents, damage or accidents have been registered or reported during 2014.
The distribution between women and men showed that out of the Group's total staff of 412, there were 267 women (64.8 per cent) and 145 men (35.2 per cent). There are 394 employees in the bank and 18 in the subsidiaries.
Of the Parent Bank’s 394 employees, 255 are women (64.7 per cent) and 139 are men (35.3 per cent). The bank employs 60 part-time staff, all of which are women.
The percentage of women in various managerial positions was 34.9, while the percentage for men was 65.1 per cent.
The Board of Directors of the bank consists of seven members – three women and four men.
During the course of 2014, Sparebanken Møre recruited 20 new employees. Eight were women and twelve were men. Of the 20 new recruits, six joined the Group's trainee scheme. In addition to the 20 new recruits, the bank has employed two apprentices in sales and office services during the previous year. The apprenticeship programme is a collaboration with Møre og Romsdal County Council.
Staff turnover was 9.1 per cent in 2014 compared with 7.8 per cent in 2013.
”Guiding values”, which is Sparebanken Møre's governing document for culture, values and attitudes, plays an important role in combating discrimination in the Group. No cases of discrimination were recorded in 2014. An internal guideline and a whistleblowing solution have been established in case some of the bank's staff see a need to report adverse events of importance either to themselves or some of their colleagues.
The bank's annual surveys of the internal working environment analyse different aspects of the environment and general working situation in the bank. The survey provides a concrete basis for prioritising improvement measures where they are most needed and where such measures will be of most use. The latest working environment survey shows that the staff perceive both the working and the learning environment to be good. Working environment surveys are discussed at board level in Sparebanken Møre.
Our social responsibilities - our contribution to the local communities in Møre og Romsdal
Sparebanken Møre's strategy is simple; we want to be there for customers from Møre og Romsdal. The customers who live in our county are the Group's primary market, but our strategy also involves accompanying customers when they choose to settle outside the county in other parts of the country. As a savings bank we have a statutory duty to accept deposits from those who wish to make them, including from customers outside our strategic market area.
Our savings bank has two groups of owners: EC holders and local communities. Sparebanken Møre's dividend strategy plainly states that owners must be treated equally. The local communities in Møre og Romsdal own around 50% of Sparebanken Møre. This means that half of the year's distributed profit is phased back to our county through what we have chosen to call “dividend funds for local communities”.
Funds in the order of NOK 100 million annually have been allocated to “dividend funds for local communities” in the last few years. Based on the profit after tax for 2014 it is proposed that a further NOK 136 million be allocated to good and useful projects in the local communities. Through these funds Sparebanken Møre highlights its responsibility and social commitment to the local communities in Møre og Romsdal that the bank is proud to be a part of.
Our vision and goals for the dividend funds for local communities
The funds that are allocated to publicly beneficial purposes every year are considerable. It is therefore important to Sparebanken Møre that these funds are properly managed and that we have a clear plan and strategy for which areas we want to contribute to from a social standpoint. Several years ago the bank therefore established a vision for what Sparebanken Møre should contribute to, which was formulated as follows:
“Sparebanken Møre shall help to improve opportunities for people and enterprises to live, work, develop and enjoy a good life in Møre og Romsdal.”
In order to achieve this vision, Sparebanken Møre has adopted six main focus areas for the dividend funds:
- Schoolchildren's interest in businesses, new enterprises and science subjects. We shall help to improve schoolchildren's understanding of, and interest in business, new enterprises, and science subjects. For example, we participate in Young Entrepreneurship.
- Talent development. We shall focus on and encourage talent within business, culture and sports. Examples of this include the GNIST Mørestipend, the Music Award, and grants to various sports groups.
- Culture in Møre og Romsdal. We shall help the county and local authorities in the county develop and improve the range of cultural activities in Møre og Romsdal. For example, the Opera in Kristiansund, the theatre “Teatret Vårt”, Go With the Flø, and various festivals.
- We shall help bring about good collaboration between educational institutions in the county. For example, the professorship we fund in international business and marketing at Aalesund University College.
- We shall contribute to the development of and/or fund qualified reports on transport and the county's long-term development. Examples of this include contributions to a number of transport projects and the Business Barometer for Møre og Romsdal.
- We shall contribute to developing and reinforcing meeting places in Møre og Romsdal for private and public actors. For example, the Møre Conference and Scientific Conference at Aalesund University College.
Given the focus on our priority areas, Sparebanken Møre also established an overall goal in 2010 for our corporate social responsibility work:
“In 2020, the county will have ferry-free main communication routes, larger, more effective university college provision, a high quality symphony orchestra/theatre, an increasing share of newly established businesses, positive population growth and a net inflow of college educated labour - thanks to Sparebanken Møre's social commitment.”
By fulfilling our corporate social responsibilities, including through dividend funds for local communities, Sparebanken Møre is systematically striving to realise our primary objective. We are not saying that we will be successful in every area, but having something to aim for sometime in the future helps to ensure that we, as a local and regional savings bank, always have a goal in mind as far as our work is concerned and will be an important contributor in Møre og Romsdal. Our county should be a good place to live in - and we want to help with those things we are good at!
For the 2013 financial year NOK 87 million was allocated to dividend funds for local communities. During 2014 these funds have been disbursed in accordance with the bank's main focus areas. Culture and talent development have been allocated the largest share of these dividend funds during the last year. For example, Sparebanken Møre's annual GNIST Mørestipend ceremony took place in June 2014. 16 young talents within sport and music were awarded individual grants from the bank to further their talent development. During 2014 the bank has also supported a number of reports relating to new infrastructure in the county, funded several festivals that took place during the year, as well as donated to various commercial events in Møre og Romsdal.
The Board wants Sparebanken Møre's corporate social responsibility to be handled well. Therefore, in relation to the dividend funds for local communities, it reports on its plans, grants and the use of funds for publicly beneficial purposes every six months.
Going concern assumption
The Board confirms that the prerequisites for the going concern assumption have been met, and that the annual financial statements have been prepared and presented on a going concern basis. This is based on the Group’s long-term forecasts for the coming years. The Group’s capital adequacy ratio exceeds the government requirements.
The general macroeconomic conditions for Møre og Romsdal remain good. However, current conditions indicate there will be a strong downturn in petroleum investments in 2015 due to the fall in oil prices at the end of 2014 and at the beginning of the current year, and the oil companies' focus on cutting costs. The indirect effects of this through the supplier chain are also expected to be significant. Based on this, unemployment in the county is forecast to likely increase slightly during 2015. Nonetheless, the level of unemployment in the county will continue to be among the lowest in the country.
For the county's export industries and import-competing companies a weakening of the exchange rate will help to boost their competitiveness. The drop in the bank's customer interest rates, which occurred at the end of last year and at the start of 2015, will also improve purchasing power in the household sector. The fall in oil prices, mentioned in the paragraph above, will contribute to increased growth in the international economy through lower costs for business. These factors will greatly help in counteracting the negative effects in the oil sector and oil-related industries. A moderate level of losses and defaults was expected for 2014, and this expectation was fulfilled. For 2015 Sparebanken Møre also expects the level of losses in the Group's portfolios to be low and within the long-term financial plans that have been drawn up for the Group.
The competition in the bank's market area is high and the competitive situation has intensified. Lending growth is expected to be weaker in 2015 than we have seen in the last few years within the retail market. The corporate sector is expected to maintain its rate of growth. Sparebanken Møre has a constant focus on generating growth through good commitments with an acceptable level of risk.
The Group is enjoying good access to long-term, stable funding in the Norwegian and international capital markets. This is due to the Group's prolonged good, stable results and good financial strength. During the last three years the costs of funding in the long-term capital market both for the Parent Bank and Møre Boligkreditt AS have fallen markedly. The Group will make greater use of this funding source in the years ahead. Overall, this is expected to make a positive contribution to the Group's net interest income.
Sparebanken Møre focuses strongly on cost-effectiveness. At the end of 2013 the Board expected that the organisational measures that have been implemented in previous years, in conjunction with a stronger focus on costs, will be apparent in the accounts for 2014. The annual accounts for 2014 reveal that the expectations were fulfilled, with a cost efficiency well within the internal targets. The focus on the area of costs will continue, and Sparebanken Møre is expected to be able to show a cost ratio in 2015 that is below the target of a maximum cost/income ratio of 50%. At the same time the results for 2015 are expected to be good, with a favourable return on the bank's equity.
Vote of thanks
The Board of Directors would like to thank all of the Group's employees and elected representatives for their good efforts in 2014. The Board of Directors would also like to thank Sparebanken Møre's customers, investors and other associates for our good partnership throughout the year.
Ålesund, 31 December 2014
4 March 2015