Board of Directors report 2015
The accounts have been prepared in accordance with IFRS. All figures relate to the Group. Figures in brackets refer to the corresponding period last year.
GROUP'S KEY FIGURES
(Comparable figures for 2014 in brackets)
Profit after tax: NOK 503 million (NOK 623 million)
Return on equity after tax: 10.7% (14.0%)
Lending increased by 4.9%.
Deposits increased by 3.5%.
At the year-end, primary capital amounted to NOK 5.87 billion and represented 18.1 per cent of risk-weighted assets, 16.6 per cent of which comprised tier one capital, and 14.1 per cent of which comprised core tier one capital
Earnings per Equity Certificate: NOK 25.25 (NOK 31.20)
The Board of Directors is very satisfied with the results for 2015
The Board of Directors recommends that the General Meeting pays a cash dividend of NOK 11.50 per equity certificate and sets aside NOK 115 million for dividend funds for local communities. In total, this represents 45% of the total group profit for 2015.
PARENT BANK’S KEY FIGURES
(Comparable figures for 2014 in brackets)
- Profit after tax: NOK 512 million (NOK 581 million)
- At the year-end, primary capital amounted to NOK 5.68 billion and represented 17.4% of risk-weighted assets, 15.9% of which comprised tier one capital, and 13.4% of which comprised core tier one capital
- Earnings per Equity Certificate: NOK 25.70 (NOK 29.10)
Areas of operation and markets
The Sparebanken Møre Group consists of the Parent Bank, the mortgage company Møre Boligkreditt AS, the real 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 Retail Market Division Manager. This manager reports in turn to the CEO. The corporate market is organised into three geographic units, and the three unit managers 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 sections. Each of these sections is managed by a section general manager, who reports to the CEO. The Retail Market Division Manager, the individual corporate unit managers, and the section general managers form their own management groups together with their respective department heads. The Board appoints the Retail Market Division Manager, corporate unit managers and the section general managers. The CEO selects the members of the bank’s senior management team.
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. The bank aims 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 efficiency 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. Therefore during 2015 the bank implemented several measures to ensure that we can provide solutions that are future-oriented, automated and effective. The credit processing system is new and will enable expansion of the self-service solutions available to bank customers via the online banking system. Via the internet banking, customers will also be able to send secure e-mails and chat with customer services, whicho facilitates a more accessible and more personal dialogue with customers.
Equity certificates – MORG
The number of equity certificate holders was stable at 5,898 at the start of 2015 and 5,852 at the end of the year. Of these equity certificate holders, 3,602 were residents of the county of Møre og Romsdal, and they held 48.1% of the equity certificate capital at the end of the year, compared with 44.1% at the end of the previous year. The 20 largest equity certificate holders represented 45.8% of the bank’s equity certificate capital at year-end. Of these equity certificate holders, seven were residents of Møre og Romsdal, with a relative ownership interest among the 20 largest of 41.1% (35.4%).
At the end of the year, the bank owned 125,222 of its own equity certificates, corresponding to a nominal amount of NOK 12.52 million. The bank's own holdings are included in the list of the 20 largest owners. These equity certificates were purchased on the Oslo Stock Exchange at market prices.
Around 400 of the bank's employees own equity certificates in Sparebanken Møre. The total number of equity certificates held by these employees is almost 285,000. Cumulatively, the bank's own employees represent the seven largest owner of Sparebanken Møre's equity certificates. The bank's senior management group owns almost 25,000 equity certificates.
The equity certificates are freely negotiable in the market.
The profit before losses on loans and guarantees amounted to NOK 742 million, or 1.28% of average total assets, a reduction of NOK 102 million in relation to 2014. The results for 2014 included NOK 94 million in profit from the sale of the shares in Nets AS. The profit after losses on loans and guarantees amounted to NOK 692 million (1.19%) compared with NOK 822 million (1.51%) in 2014. The profit after tax amounted to NOK 503 million, which corresponds to 0.87% of average total assets in 2015, compared to NOK 623 million (1.15 %) last year.
Return on equity was 10.7% in 2015, compared with 14.0% (12.0% excluding the profit from the sale of Nets AS) in 2014. Sparebanken Møre's return on equity target is a minimum of 10% after tax.
The earnings per equity certificate in 2015 amounted to NOK 25.25 compared with NOK 31.20 for 2014.
Net interest income
In total, net interest and credit commission income amounted to NOK 1,098 million (NOK 1,093 million). Relative to average total assets, net interest income was 1.89% (2.01%). Net interest income accounted for 84.3 % of total income in 2015.
Other operating income
Other operating income amounted to NOK 205 million (0.35 % of average total assets) in 2015. This is a decrease of NOK 110 million compared to 2014. The increase is primarily attributable to the sale of the shares in Nets AS, which generated a profit of NOK 94 million in 2014, as well as capital losses on bonds of NOK 51 million, compared with capital gains of NOK 10 million in 2014.
Total costs amounted to NOK 561 million, a reduction of NOK 3 million in relation to 2014.
A change in the bank’s pension scheme is the main reason behind the decrease in staff costs in 2015. All employees under 57 years of age with a defined-benefit scheme were transferred to a contribution-based pension with effect from 31 December 2015.This entailed a non-recurring effect which reduced personnel costs by NOK 24 million in 2015. The Group's total workforce increased by five full-time equivalents in the last 12 months to 388 full-time equivalents.
Personnel costs have risen by NOK 15 million and other costs rose by NOK 12 million relative to 2014. IT costs increased by NOK 6 million, while marketing costs fell by NOK 7 million compared with 2014. Total costs amounted to 0.96% of average total assets in 2015, compared with 1.04% in 2014.
The cost/income ratio was 43.0% in 2015, compared with 40.1% in 2014. Sparebanken Møre's goal is to keep the cost/income ratio below 45%.
The Visa transaction
Sparebanken Møre is a member bank in Visa Norge FLI. Visa Norge FLI is a shareholder in Visa Europe Ltd. In November 2015, an agreement was established concerning the sale of the shares in Visa Europe Ltd to Visa Inc, and the member banks in Visa Norge FLI are therefore expected to receive a fee from this sale as a result of the membership. The fee is expected to be in the form of a cash settlement and preference shares, as well as a possible conditional result-based fee. Sparebanken Møre has assessed its owner interest which gives entitlement to a fee as a financial asset, and has estimated the value of this at NOK 42 million at the year-end. The transaction has not yet been approved by the EU competition authorities. There is also uncertainty linked to the size and value of some of the fee elements. In accounting terms, the value was recognised via comprehensive income in 2015. In connection with the implementation, which is expected to take place during the second quarter of 2016, the value will be recognised via the ordinary result, and reversed from comprehensive income in line with the accounting rules.
Losses and defaults
The profit and loss account was charged NOK 50 million for losses on loans and guarantees in 2015, while in 2014 it was charged NOK 22 million. This amounted to 0.09 % of average total assets in 2015, compared with 0.04 % in 2014. The losses on loans and guarantees were due to a NOK 96 million increase in collective impairment, a NOK 43 million reduction in the cooperate segment, and a NOK 3 million reduction in the retail market.
Total impairment for losses at year-end 2015 amounted to NOK 341 million (NOK 307 million), which amounts to 0.66% of gross lending (0.63%). NOK 14 million of the individual impairment involved commitments in default for more than 90 days (NOK 21 million), which amounts to 0.03 % of gross lending (0.04 %). NOK 65 million related to other commitments (NOK 120 million), which amounts to 0.13 % of gross lending (0.25 %). Collective impairment amounted to NOK 262 million (NOK 166 million) or 0.51 % of gross lending (0.34 %).
Net problem loans (loans that have been in default for more than 90 days and loans that are not in default but which have been subject to individual impairment for losses) show a decrease over the last 12 months of NOK 84 million. Net problem loans amounted to NOK 165 million, or 0.32% of gross lending: NOK 110 million in the corporate segment and NOK 55 million in the retail segment. At year-end 2014, net problem loans amounted to NOK 249 million or 0.51 % of gross lending: the corporate market accounted for NOK 185 million and the retail market NOK 64 million.
Net commitments in default for more than 3 months at the end of 2015 amounted to NOK 58 million (NOK 65 million), which represents a reduction from 0.13 % at year-end 2014 to 0.11 % at year-end 2015.
Total assets increased by NOK 3,815 million, or 6.7%, in 2015 to NOK 60,120 million as at 31 December 2015. The change in total assets is in addition to the increase in lending influenced by the increase in holdings in Norges Bank during the year. There was no significant trading portfolio at year-end 2015.
Net lending rose by NOK 2,402 million, or 4.9%, to NOK 51,286 million at year-end 2015. Lending to retail customers increased by 8.0% and retail customers accounted for 67.5% (65.7%) of gross lending at year-end. Corporate lending decreased by 0.7% in the preceding 12 months, and this segment accounts for 32.5% (34.3%) of gross lending.
Deposits from customers totalled NOK 29,389 million at year-end 2015, which represents growth of NOK 1,000 million or 3.5%. Deposits from corporate customers grew by 0.1%, while those from retail customers grew by 4.7%. Deposits from public sector customers were 28.8% higher than at the previous year-end. 36.4 % of deposits were from corporate customers, 60.6 % were from retail customers and 3.0 % were from the public sector.
The difference between the lending and deposit volumes, NOK 21,897 million, was funded via the Norwegian and international money and securities markets. Deposits as a proportion of loans amounted to 57.3% (58.1%) at year-end.
Holdings of short-term investments in securities at year-end 2015 amounted to NOK 4,735 million, compared with NOK 4,771 million at year-end 2014.
There was no significant trading portfolio at year-end 2015.
The bank's hybrid tier 1 capital (NOK 826 million) consists of 2 loans. One of the loans has a variable interest rate, while the other has a fixed coupon 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 178 million after tax (NOK 189 million).
Møre Boligkreditt AS was established as part of the Group'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 15.7 billion in funding for the group. The company contributed NOK 176 million to the result in 2015 (NOK 191 million).
Møre Eiendomsmegling AS provides real estate brokerage services to both retail and corporate customers. The company made a profit of NOK 0.5 million in 2015 (NOK -1 million). At the end of the year, the company had 15 full-time equivalents.
Sparebankeiendom AS's purpose is to own and manage the bank's commercial properties. The company contributed NOK 2 million to the result in 2015 (NOK -1 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 line with the rules for equity certificates, etc., and in accordance with Sparebanken Møre's dividend policy, it is proposed that 45 % of the Group's profit be allocated to cash dividends and dividend funds for local communities. Based on the accounting breakdown of equity between the ECs 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 25.25 in 2015. It has been proposed to the General Meeting that the cash dividend per equity certificate for the 2015 financial year be set at NOK 11.50.
Proposed allocation of the profit:
(In NOK million)
|Profit for the year||512|
|Dividend funds (45 %):|
|To cash dividends||114|
|To social dividends||
|Strengthening of equity (55%)|
|To the dividend equalisation fund||140|
|To the primary capital fund||142||282|
Capital adequacy ratio and applicable regulations
Through the "Møre 2019" strategic process, Sparebanken Møre’s Board of Directors decided that the Group’s core tier one capital should not amount to less than 13.5%.
Sparebanken Møre has permission from the Financial Supervisory Authority of Norway to use the Foundation IRB method for calculating capital requirements for credit commitments. The internal risk management models have been developed and implemented over a number of years within the credit area for the Group.
The Group’s capital adequacy is reported in accordance with the permission of the Financial Supervisory Authority of Norway. Sparebanken Møre had no capital requirements associated with the transitional scheme for the Basel I floor at year-end 2015. Operational risk calculations are performed using the basic method.
Sparebanken Møre's capital adequacy at year-end 2015 was well above the regulatory capital requirements and also above the internally set minimum target for core tier 1 capital. Primary capital amounts to 18.1 % (15.8 %), core capital 16.6 % (14.4 %), of which core tier 1 capital amounts to 14.1 % (12.0 %). The capital adequacy figures include the annual profit and the Board's proposed allocation of the profit. The Board's proposal concerning the allocation of profit for the year entails retaining 55 % of the Group's profit to further build up the Group's financial strength.
The requirement for unweighted core capital ratio, or Leverage ratio, as a supplement to the risk-weighted minimum requirements has not yet been formulated with final effect. At the end of 2015, the unweighted core capital ratio for Sparebanken Møre was 8.0%, which gives a good margin with respect to the potential minimum requirement of 3.0%.
International regulatory requirements for capital and liquidity for banks entered into force on 1 January 2014 through the Capital Adequacy Directive CRD IV and the CRR Regulation. Based on the regulations, the Financial Supervisory Authority of Norway published a practice for assessing risk and capital requirements in 2015. In 2016, the Financial Supervisory Authority of Norway will establish an individual pillar 2 supplement for Sparebanken Møre, for risks which are either not covered or only partly covered by pillar 1. The assessment will be based on individual risks and the bank’s own calculations of capital requirements in ICAAP. The Board monitors capital adequacy in the Group on an on-going basis and is prepared to rapidly deploy measures in the event of a need to further strengthen capital balances.
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 owners
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.
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 on 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 2015, the Board adopted a new strategic plan, "Møre 2019". 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, operational 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 2015.
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 the ICAAP's key role in long-term strategic planning. ICAAP has been conducted for the Group in 2015 and the feedback from this was received from the Financial Supervisory Authority of Norway in the fourth quarter of 2015. Calculations performed in connection with the ICAAP for 2015 indicate 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 (or counterpart risk) is the risk of losses associated with customers or other counterparties being unable to fulfil their obligations at the agreed time pursuant to written agreements, and of received collateral not covering outstanding claims.
Credit risk also encompasses concentration risk, including risk linked to major commitments with the same customer, concentration within geographic areas or industries or with similar groups of customers.
Credit risk represents Sparebanken Møre's biggest risk area. The Group has a moderate risk profile as far as credit risk is concerned, as this risk is defined through 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 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 developed its own risk classification models for classifying customers:
- Probability of Default (PD) is used as an indicator of quality. Customers are classified in a risk class according to the probability of default.
- Exposure At Default (EAD) is a calculated amount which includes drawn commitments or lending and a proportion of approved, undrawn facilities.
- Loss Given Default (LGD) indicates how much the Group would expect to lose if the customer defaulted on his obligations. The models take account of the collateral that the customer has pledged, future cash flows and other relevant factors.
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 Department for problem loans was established under the Credit and Legal 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 branches.
The Board finds that Sparebanken Møre's overall credit risk is within the Group's adopted risk tolerance. At the end of 2015 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 meet funding requirements and safeguard access to loans from Norges Bank, as well as customer-generated interest rate and foreign exchange trading.
The Board stipulates limits for the Group's market risk in the market risk strategy. The limits are monitored by the risk management department. The amounts of the limits are agreed against the background of analyses of negative market movements. Based on an evaluation of risk profile, management and control, it is assumed that the bank accepts low risk within the market risk area. The governing documents that deal with market risk are reviewed and renewed at least annually by the Board, most recently in December 2015.The Bank’s Board 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 laid down in an overall funding strategy which is evaluated and approved by the Board at least once a year, most recently in December 2015. 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 liquidity included in the bank’s guidelines for stress testing and concentration risk describes how the liquidity situation is to be handled in unsettled financial markets.
Two key quantitative requirements have been established for liquidity:
- Requirement for liquidity coverage under stress: Liquidity Coverage Ratio (LCR)
- Requirement for long-term stable financing: Net Stable Funding Ratio (NSFR)
LCR measures an institution’s ability to survive a 30-day stress period. LCR increases the importance of high-quality liquid assets. NSFR measures the longevity of an institution's funding. NSFR entails institutions having to fund illiquid assets with the aid of a greater proportion of stable and long-term funding.
On 25 November 2015, the Ministry of Finance introduced rules which implement the new liquidity reserve requirement (LCR). The LCR requirement implies that enterprises must have a liquidity reserve of at least 100% at all times. Enterprises can phase in the liquidity reserve requirement with 70% from 31 December 2015, 80% from 31 December 2016 and 100% from 31 December 2017. Enterprises that are deemed to be systematically important financial institutions pursuant to Regulation No. 627 of 12 May 2014 on the identification of systematically important financial institutions must fulfil the liquidity reserve requirement in full with 100% from 31 December 2015.
As regards the regulation of long-term financing, liquidity indicator 1 (L1, long-term funding in relation to illiquid assets) will be used until the requirements for NSFR have been clarified. In this regard, the Financial Supervisory Authority of Norway assumes a minimum level of 105 per cent.
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.
At a general level, the stricter liquidity requirements, including the requirements laid down in the Financial Supervisory Authority of Norway’s most recent liquidity module and the new Regulation will entail a significant interest cost for the bank. It also makes the bank more vulnerable to changes in credit spreads.
To ensure that the Group's funding risk is kept at a low level, lending to customers must primarily be financed by customer deposits and the issuing of long-term debt securities. The bank's deposit to loan ratio at the end of 2015 was 57.3%.
Møre Boligkreditt AS provides the Group with greater diversification of financing sources. The company issues covered bonds. The bank transfers parts of its mortgage portfolio to the mortgage company, and this facilitates access to these funding opportunities. At year-end 2015, almost 30% of the Group's total lending (about 48% of lending to the retail market) had been transferred to the mortgage company. Sparebanken Møre will continue to transfer loans to Møre Boligkreditt AS in accordance with the plans set out in the funding strategy. At year-end, Møre Boligkreditt AS has four outstanding bond loans of an amount which qualifies for Level 2A liquidity in LCR. In the future, Møre Boligkreditt AS will issue and accumulate more loans in this category.
In order to gain access to new sources of financing 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.
The rating agency Moody’s upgraded Sparebanken Møre’s rating on 11 May 2015. The Bank's standalone rating (BCA) went to baa1. None of the Norwegian regional banks has a higher credit rating. Sparebanken Møre’s long-term rating is now A2 (stable) and covered bonds issued by Møre Boligkreditt AS are rated Aaa by Moody’s.
As regards the composition of the external financing, priority is given to ensuring that a relatively high proportion of financing has a term in excess of one year. Total market financing ended at net NOK 23.3 billion at year-end – almost 85% of this financing has a remaining term of more than one year. The Parent Bank's outstanding senior bonds had a weighted remaining term of 1.84 years at year-end 2015, while covered bond financing correspondingly had a remaining term of 4.14 years.
The liquidity risk module consists of guidance for the Financial Supervisory Authority of Norway’s assessment of the institution’s liquidity risk level and guidance concerning the assessment of the institution’s system for the management and control of liquidity risk. Sparebanken Møre has implemented the proposed reporting structure from the module in the management report linked to liquidity.
The Board considers the bank’s liquidity situation at the year-end to be good. The Board also considers 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; and it may also involve staff and customer breaches 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, contingency plans, robbery drills, contingency drills, insurance schemes and competence-enhancing measures.
Sparebanken Møre's external activities should centre on the customer. The bank has invested a lot of resources in the authorisation scheme for financial advisers over the last few years. By the end of 2015, 252 of the bank's employees were licensed financial advisers. 17 of them gained authorisation in 2015. In addition to AFA, most of the managers in frontline positions have completed an AFA 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 2015, 226 of the Bank's employees had passed this course. Sparebanken Møre participates in the national approval scheme for non-life insurance. At the end of 2015, 179 employees had been approved under this scheme. Fourteen of the bank's new recruits in 2015 have participated in the bank's standard 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 that our customers find being a customer of our bank to be a good experience. The Board is delighted with the substantial skills boost that individual employees and the bank have achieved over the last few years and will continue to emphasise this work in the years ahead.
In 2015, the delivery of digital banking services and other ICT services was characterised by good quality and stability. The level of security in these services and the underlying systems has been good, and there have been no security incidents or losses as a result of this. Collaboration between stakeholders in the sector makes an important contribution to the work to reduce the consequences of targeted attacks aimed at banks and other financial institutions. Sparebanken Møre has a strong focus on ICT security, including amongst the bank’s employees. In 2015, all the bank’s employees completed a mandatory e-learning course on information security. In 2015, the bank entered into an extended agreement with Evry concerning the delivery of an effective platform for modern banking operations, including digital solutions for future customer needs. A focus will again be placed on quality, stability and security in 2016.
There is a strong focus on the anti-money laundering regulations in the Group. The bank carries out a risk assessment of the area annually. The number of internal spot checks in the area increased significantly in 2015. Furthermore, employees have received new training linked to this area, and the head of anti-money laundering in the bank has convened morning meetings with the various Retail and Corporate 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 by FNO, Økokrim and the Financial Supervisory Authority of Norway. The work to combat money laundering and the financing of terrorism will again be a strong focus in 2016.
Sparebanken Møre's overall contingency plan was revised in 2014. The underlying contingency plans, such as the ICT contingency plan, were updated during 2015. Drills take place annually. The experience gained from the drills is used to supplement the emergency preparedness plan with additional details, and provides 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 issues that may arise during a crisis.
Sparebanken Møre has established various forums and committees that actively work to manage the Group's operational risk. This includes the annual security forum for employees within the Group who are responsible for security. The Group also has a security committee which is consulted regarding important security matters and which also performs an approval function for the bank’s BankID regulations. The committee's members represent a wide range of people from many functions within 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 laws 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 errors, 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, HR 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 consolidated financial statements are produced both monthly and quarterly. Items in the income statement, statement of financial position and note disclosures are reconciled against the various systems and previous reports.
Part of the internal control in connection with reporting the annual financial statements is the cooperation with the external auditor and their audit of the Group accounts. The cooperation is considered to be satisfactory, and contributes to the good financial reporting process.
Both the quarterly and annual reports are reviewed by both the bank's management group and the Audit Committee and Risk Committee prior to final consideration by the Board and the General Meeting.
Internal control reporting
Internal control reporting at Sparebanken Møre is decentralised and the Risk Management department 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, independently 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 satisfactory manner.
The Group's internal auditing was outsourced to BDO in 2015. 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 Committee, the Risk Committee and the Board received regularly reports from the internal auditor in 2015 in accordance with this plan.
The internal auditor’s annual report for 2015 to the Board states that the Group’s corporate governance, risk management and internal controls are 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.
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 videolink can be used. On those occasions when the bank refurbishes and alters 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 points of contact with our customers.
Our Group has a zero tolerance policy as regards 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. Through systemic measures and staff training, Sparebanken Møre does its utmost to uncover and prevent potential corruption and financial crime at the earliest stage possible. Some of the general challenges within this area stem from the fact that criminals are increasingly becoming more speculative, and the fact that the technological opportunities for hiding corruption and financial crime are continually improving. 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 reported cases of fraud has remained relatively stable in recent years, but went up somewhat in 2015 compared with 2014.
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 programmes 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 working environment and job satisfaction. The collaboration between management and the employees' elected representatives is good throughout Sparebanken Møre.
The Group’s workforce totalled 388 full-time equivalents at year-end, an increase of 5 full-time equivalents in 2015.
The average age of the bank’s employees fell from 47.7 to 47.4 years. The average length of service with Sparebanken Møre of the current staff is 17.7 years.
Total sick leave was 2.52% in 2015, compared with 3.59% in 2014. Long-term absence due to illness was 1.34% in 2015, compared with 2.23% in 2014. Short-term absence due to illness was stable at 1.36% in 2014 and 1.18% in 2015. Employees 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 cooperation with public sector organisations has been positive as regards finding individually tailored arrangements for those employees who have needs within this area. Leave of absence was 2.46 per cent in 2015.
The monitoring and follow-up system for health, environment and safety 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 personnel responsibility. Drills are also arranged at regularly intervals in order to teach staff how to deal with crisis situations, such as fires, robberies and conflict management. Two incidents of threatening and adverse behaviour by customers towards the bank's employees were reported in 2015. There were also a number of false alarms. With the exception of these events, no other similar incidents, damage or accidents were registered or reported during 2015.
The distribution between women and men showed that of the Group's total staff of 410, 263 were women (64.1%) and 147 were men (35.9%). There are 395 employees in the bank and 15 in the subsidiaries.
Of the Parent Bank’s 395 employees, 253 are women (64.1%) and 142 are men (35.9%). The bank employs 54 part-time staff, all of whom are women.
The percentage of women in various managerial positions was 41.5, while the corresponding percentage for men was 58.5.
The Board of Directors of the bank consists of seven members – three women and four men.
During the course of 2015, Sparebanken Møre recruited 13 new employees. Seven were women and six were men. Of the 13 new recruits, four joined the Group's trainee scheme. In addition to the 13 new recruits, the bank has appointed 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 4.3% in 2015, compared with 9.1% in 2014.
"Guiding values", which is Sparebanken Møre's governing document for culture, values and attitudes, plays an important role in combating discrimination within the Group. No cases of discrimination were recorded in 2015. 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 wants to be there for customers from Møre og Romsdal. Customers who live in our county are the Group's primary market, but our strategy also involves accompanying customers when they decide 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 of 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 2015, it is proposed that a further NOK 115 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 which 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. A few 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."
To achieve this vision, Sparebanken Møre has adopted six main focus areas for the dividend funds:
- We shall help to improve schoolchildren's understanding of and interest in business, new enterprises and science. For example, we participate in Young Entrepreneurship.
- 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 sports groups.
- Culture in Møre og Romsdal. We shall help the county and the municipalities in the county develop and improve the range of cultural activities in Møre og Romsdal. Examples of this are the Opera in Kristiansund, the "Teateret Vårt" theatre and various festivals and cultural arrangements.
- We shall facilitate the development of university colleges and universities in the county.
- We shall contribute to the development of and/or funding of qualified reports on transport and the county's long-term development.
- We shall contribute to developing and reinforcing meeting places in Møre og Romsdal for private and public participants.
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, a 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 2014 financial year NOK 136 million was allocated to dividend funds for local communities. During 2015 these funds have been disbursed in accordance with the bank's main focus areas. Culture and sport 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 2015. 14 young talents within sport and music were awarded individual grants from the bank to further develop their talent. During 2015, the bank also supported a number of reports relating to new infrastructure in the county, several festivals, and made donations to various commercial events in Møre og Romsdal.
The Board wants Sparebanken Møre's corporate social responsibility to be handled well. Reports on plans, awards and the use of publicly beneficial funds are therefore prepared 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.
Even with the increasing uncertainty during last year, the general macroeconomic conditions for the county remained satisfactory at the beginning of 2016.
The economic outlook for Møre og Romsdal has weakened slightly in the last few months as a result of reduced activity in the maritime industry.
On the other hand, the weakening NOK exchange rate is helping to improve the competitiveness of our export industries and import-competing businesses. The recent drop in, and continued low level of, interest rates will improve purchasing power in the household sector and reduce interest costs for the corporate sector. Fiscal policy for the current year is expansive. These factors could partly counteract the negative effects of the decline in the oil sector and oil-related activities.
In total, unemployment in the county rose during 2015 and stood at 2.9% in December, compared with 3.0% in the country as a whole. We expect unemployment in the county to increase somewhat further during the present year.
Sparebanken Møre's losses are expected to remain relatively low.
We are experiencing further strong competition in the market for both lending and deposits, particularly within the retail market, but the bank is competitive and is still seeing strong growth in lending in this market. It is anticipated that the growth in lending within the retail market will tail off to some extent during the year. There is a constant focus on generating growth through good commitments with an acceptable level of risk.
Sparebanken Møre focuses strongly on cost-effectiveness. This has resulted in a highly satisfactory level of total costs in relation to income. This focus will continue, and the Group's cost-effectiveness will this year remain well within the internal maximum cost in relation to income target of 45%. Overall, a good result is expected for the year.
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 2015. 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 2015
24 February 2016
THE BOARD OF DIRECTORS OF SPAREBANKEN MØRE