Board of Directors report 2016
The financial statements 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 2015 in brackets)
- Profit after tax: NOK 574 million (NOK 503 million)
- Return on equity after tax: 11.6 % (10.7 %)
- Lending grew by 2.7 %.
- Deposits grew by 10.8 %.
- At year end, net equity and subordinated loan capital amounted to NOK 6.13 billion and represented 18.6 % of the basis for calculation. The core capital ratio was 17.0 % and the core Tier 1 capital ratio 14.6 %.
- Earnings per equity certificate: NOK 28.80 (NOK 25.25)
- The Board of Directors is very satisfied with the results for 2016
- The Board of Directors recommends that the General Meeting pays a cash dividend of NOK 14.00 per equity certificate and sets aside NOK 141 million for dividend funds for local communities. In total, this represents 48.6 % of the total group profit for 2016.
PARENT BANK'S KEY FIGURES
(Comparable figures for 2015 in brackets)
- Profit after tax: NOK 595 million (NOK 512 million)
- At year end, net equity and subordinated loan capital amounted to NOK 5.97 billion and represented 18.0 % of the basis for calculation. The core capital ratio was 16.5 % and the core Tier 1 capital ratio 14.1 %.
- Earnings per equity certificate: NOK 29.85 (NOK 25.70)
AREA OF OPERATION AND MARKETS
The Sparebanken Møre Group consists of the Parent Bank, the mortgage company Møre Boligkreditt AS, the real estate brokerage company Møre Eiendomsmegling AS, and the property company Sparebankeiendom AS. Sparebanken Møre has defined its geographic area of operation as the county of Møre og Romsdal, 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 Head of Retail Market Division, who in turn reports to the CEO. The corporate market is organised into three geographic units, and the three leaders 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.
Sparebanken Møre's day-to-day operations are organised in such a way that the resource usage in the branch network to a very great extent is prioritised in favour of direct customer-related activities. Other tasks shall, to the greatest possible extent, be addressed 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 Head of Retail Market Division, the individual corporate unit leaders, and the EVPs form their own management groups together with their respective department heads. Head of Retail Market Division, the corporate unit leaders and the EVPs are appointed by the Board. The CEO selects the members of the Bank's Executive 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. 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 trend towards digitalisation in the banking industry is developing quickly. One of Sparebanken Møre's aims is to provide good digital solutions to its customers across a variety of platforms.
EQUITY CERTIFICATES – MORG
At year-end 2016, there were 5 715 holders of Sparebanken Møre's equity certificates. 9 886 954 equity certificates have been issued. The EC holders' share of the Bank's total equity amounted to 49.6 %.
The 20 largest equity certificate holders represented 47.4 % of the Bank's equity certificate capital at year end. Of these equity certificate holders, eight were residents of Møre og Romsdal, with a relative ownership interest among the 20 largest of 48.3 % (41.1 %). Note 31 contains an overview of the 20 largest holders of the Bank's equity certificates.
As at 31 December 2016, the Bank owned 29 847 of its own equity certificates. These were purchased via the Oslo Stock Exchange at market prices.
Around 400 of the Bank's employees own equity certificates in Sparebanken Møre. These employees hold a total of 312 186 equity certificates. Cumulatively, the Bank's own employees constitute the seventh largest owner of Sparebanken Møre's equity certificates. The Bank's executive management group owns more than 43 000 equity certificates.
The equity certificates are freely negotiable in the market.
The profit before losses on loans and guarantees amounted to NOK 777 million, or 1.28 % of average total assets, compared with NOK 742 million, or 1.28 %, for 2015.
The profit after losses on loans and guarantees amounted to NOK 755 million, or 1.24 % of average total assets, compared with NOK 692 million, or 1.19 %, for 2015.
The profit after tax for 2016 amounted to NOK 574 million, or 0.94 % of average total assets, compared with NOK 503 million, or 0.87 %, for 2015. The return on equity in 2016 was 11.6 %, compared with 10.7 % in 2015.
Earnings per equity certificate in 2016 amounted to NOK 28.80 (NOK 25.25) for the Group and NOK 29.85 (NOK 25.70) for the Parent Bank.
Net interest income
Net interest income totalled NOK 1 082 million (NOK 1 098 million). In relation to average total assets, net interest income was 1.79 % (1.89 %). Net interest income accounted for 79.4 % of total income in 2016 (84.3 %).
The generally low level of interest rates in the market, combined with strong competition for both loans and deposits, is affecting the development of net interest income.
Other operating income
Other operating income amounted to NOK 281 million (0.46% of average total assets) in 2016. This is an increase of NOK 76 million compared with 2015. Capital gains on the bond portfolio amounted to NOK 24 million in 2016, compared with capital losses of NOK 51 million in 2015.
The effect of the Visa transaction on profit before tax amounted to NOK 45 million in 2016.
Total costs amounted to NOK 586 million (0.97 % of average total assets). This represents an increase of NOK 25 million compared with 2015. This is primarily attributable to the fact that the fourth quarter of 2015 saw changes to the Bank's pension scheme that reduced personnel costs by NOK 24 million for 2015. Other operating costs were reduced by NOK 1 million compared with 2015 and amounted to NOK 251 million. Staffing has been reduced by 10 full-time equivalents in the last 12 months to 378 full-time equivalents.
The cost income ratio was 43.0 % in 2016, which is the same as in 2015.
Losses and defaults
In 2016, the income statement was charged with NOK 22 million (NOK 50 million) in losses on loans and guarantees. This represents 0.04 % (0.09 %) of average total assets. The losses on loans and guarantees were due to a NOK 19 million increase in collective impairments, a NOK 9 million increase in the corporate segment, and a NOK 6 million reduction in the retail segment.
At year-end 2016, total impairments for losses amounted to NOK 360 million, equivalent to 0.68 % of gross lending (NOK 341 million and 0.66 % of gross lending). NOK 15 million of the individual impairments involved commitments in default for more than 90 days (NOK 14 million), which represents 0.02 % of gross lending (0.03 %). NOK 64 million relates to other commitments (NOK 65 million), which is equivalent to 0.12 % of gross lending (0.13 %). Collective impairments amounted to NOK 281 million (NOK 262 million) or 0.53 % of gross lending (0.51 %).
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 an individual impairment for losses) have increased by NOK 367 million in the last 12 months. At year-end 2016, the corporate market accounted for NOK 476 million of net problem loans, and the retail market NOK 56 million. In total this represents 1.01 % of gross lending (0.32 %).
Net commitments in default for more than 3 months at the end of 2016 amounted to NOK 50 million (NOK 60 million), which represents a reduction from 0.11% of lending at year-end 2015 to 0.09% at year-end 2016.
Total assets increased by NOK 1 473 million, or 2.5 %, in 2016 to NOK 61 593 million as at 31 December 2016. The change in total assets is primarily attributable to an increase in lending.
The Visa transaction
Please refer to the information already provided in the 2015 annual report and the Stock Notification of 29 June 2016 on the agreement between Visa Europe Ltd and Visa Inc. concerning the sale of all of the shares in Visa Europe. Sparebanken Møre has an interest in this transaction due to its stake in Visa Norge, which owns one share in Visa Europe Ltd., as well as a smaller interest through the sale of Nets/Teller in 2014. The transaction consists of a cash payment upon implementation, as well as a cash payment payable after 3 years, and convertible preferred shares.
The effect on the profit before tax from this first tranche of the cash payment amounted to NOK 45 million in 2016, with NOK 38 million originating from the stake in Visa Norge and NOK 7 million from the interest in Nets/Teller.
Lending to customers
At year-end 2016, lending to customers amounted to NOK 52 691 million (NOK 51 286 million). Net customer lending has increased by a total of NOK 1 405 million, or 2.7 %, in the last 12 months. Retail lending has increased by 6.6 %, while corporate lending has decreased by 4.8 % in the last 12 months. Retail lending accounted for 70.2 % of lending at year-end 2016 (67.5 %).
Deposits from customers
Customer deposits have increased by 10.8 % in the last 12 months. At year-end 2016, deposits amounted to NOK 32 562 million (NOK 29 389 million). Retail deposits have increased by 4.7 % in the last 12 months, while corporate deposits have increased by 19.9 % and public sector deposits have increased by 20.7 %. The retail market's relative share of deposits amounted to 57.4 % (60.8 %), while deposits from corporate customers accounted for 39.2 % (36.3 %) and from public sector customers 3.4 % (2.9 %).
The deposit to loan ratio amounted to 61.8 % (57.3 %) at year-end 2016.
Holdings of investments in securities (the LCR portfolio) at year-end 2016 amounted to NOK 6 199 million compared with NOK 4 735 million at year-end 2015. In addition to the increase in the LCR requirement from 70 % to 80 %, the increase in the portfolio reflects the Bank's good liquidity situation due in part to the strong growth in deposits throughout the year.
There was no significant trading portfolio at year-end 2016.
Hybrid Tier 1 capital and subordinated loan capital
The Bank's hybrid Tier 1 capital (NOK 816 million) consists of two loans. One of the loans is subject to a variable interest rate, while the other is subject to a fixed coupon rate swapped to a variable interest rate. In the event of early redemption, or at the latest in the event of a call on 9 October 2017, the General Meeting of Sparebanken Møre has given the Board of Directors authority to redeem one of these hybrid Tier 1 capital loans (NO0010659972 nominal NOK 500 million), as well as authority to take out a new hybrid Tier 1 capital loan of between a minimum of NOK 300 million and a maximum of NOK 500 million, as well as a new subordinated loan of between a minimum of NOK 200 million and a maximum of NOK 400 million. The subordinated bond loan (NOK 502 million) is subject to a variable interest rate.
The aggregate profit of the Bank's three subsidiaries amounted to NOK 153 million after tax in 2016 (NOK 179 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. At the end of the year, the company had raised a net NOK 16.1 billion in funding for the Group. The company contributed NOK 156 million to the result in 2016 (NOK 176 million).
MØRE EIENDOMSMEGLING AS provides real estate brokerage services to both retail and corporate customers. The company's result in 2016 was NOK -1.9 million (NOK 0.2 million). At year end, the company employed 14 full-time equivalents.
SPAREBANKEIENDOM AS's purpose is to own and manage the Bank's commercial properties. The company made no contribution to the result in 2016. The company has no employees.
SPAREBANKEN MØRE'S DIVIDEND POLICY
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.
In line with the rules for equity certificates, and in accordance with Sparebanken Møre's dividend policy, it is proposed that 49 % of the Group's profit be allocated to cash dividends and dividend funds for local communities. Based on the accounting breakdown of equity between equity certificate capital and the primary capital fund, 49.6 % of the profit will be allocated to equity certificate holders and 50.4 % to the primary capital fund. Earnings per equity certificate amounted to NOK 28.80 in 2016. The recommendation to the General Meeting is that the cash dividend per equity certificate for the 2016 financial year be set at NOK 14.00.
|Proposed allocation of the profit:|
|Profit for the year||NOK 574 million|
|Dividend funds (48.6 %):|
|To cash dividends||NOK 138 million|
|To social dividends||NOK 141 million||NOK 279 million|
|Strengthening of equity (51.4 %):|
|To the dividend equalisation fund||NOK 156 million|
|To the primary capital fund||NOK 159 million|
|To other funds||NOK -20 million||NOK 295 million|
|Total allocated:||NOK 574 million|
CAPITAL ADEQUACY RATIO AND APPLICABLE REGULATIONS
Sparebanken Møre has permission from the Financial Supervisory Authority of Norway to utilise 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 Financial Supervisory Authority of Norway's permission. Sparebanken Møre was subject to capital requirements associated with the transitional scheme for the Basel I floor at year-end 2016. Operational risk calculations are performed using the basic method.
Sparebanken Møre's capital adequacy at year-end 2016 was well above the regulatory capital requirements and also above the internally set minimum target for the core Tier 1 capital ratio. The capital adequacy ratio amounts to 18.6 % (18.1 %), Core capital 17.0 % (16.6%), of which Core Tier 1 capital amounts to 14.6 % (14.1 %). 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 51.4 % of the Group's profit to further build up the Group's financial strength.
The Leverage ratio requirement is fixed with effect from and including 30 June 2017. The minimum requirement is 3 % and all banks must also have a buffer of at least 2 %. At year-end 2016, the Leverage ratio for Sparebanken Møre was 8.5 %, which results in a good margin with respect to the total requirement of 5 %.
Based on the capital adequacy regulations, the minimum requirement for capital adequacy consists of a Pillar 1 requirement and a Pillar 2 requirement. The Pillar 2 supplement applies to risks that are not covered or are only partly covered by Pillar 1.
The Financial Supervisory Authority of Norway set the Bank's Pillar 2 requirement at 1.8 %, applicable from 31 December 2016. The total minimum requirement for the core Tier 1 capital ratio is thus 13.3 %. The Ministry of Finance further decided that the countercyclical buffer will be increased by 0.5 percentage points to 2 % such that from 31 December 2017 the total requirement for the core Tier 1 capital ratio will be 13.8 %. 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 strengthen capital balances.
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 of 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 as part of the preparation of the Bank's strategic plan. In August 2016, the Board adopted a new strategic plan, "Møre 2020". 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 2016.
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. The ILAAP process, which is the Bank's assessment of liquidity and funding risk, is included as part of the ICAAP. The ICAAP process has been conducted for the Group in 2016 and the feedback from this was received from the Financial Supervisory Authority of Norway in the fourth quarter of 2016. Calculations performed in connection with the ICAAP for 2016 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 economic calculations and simulations based on various stress tests.
Sparebanken Møre has established a monitoring 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 of Directors is of the opinion that Sparebanken Møre's aggregate risk exposure conform to the Group's targeted risk profile. The Board of Directors considers the Group's and Bank's risk management to be satisfactory.
Credit risk (or counterparty 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 most significant area of risk. The Group has a moderate risk profile for credit risk, 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, as part of the IRB system, 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, loan commitments, 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.
Each member of staff with customer responsibilities has access to reports which show the development of the credit risk in his or her portfolio. The reporting 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. Customer account managers are also provided with an overview of the customers' positions and limits in relation to exposure in financial instruments.
The Department for problem loans is part of 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 of Directors finds that Sparebanken Møre's overall credit risk is within the Group's adopted risk tolerance. 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 of Directors 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 2016. 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 of Directors 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 2016. 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 funding: 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 liquid assets with the aid of a greater proportion of stable and long-term funding.
LCR is being phased in over time, which means that the requirement from 31 December 2016 is 80 % and will rise to 100 % from 31 December 2017.
As regards the regulation of long-term funding, Liquidity Indicator 1 (L1, long-term funding in relation to illiquid assets) will be used until the requirements for NSFR have been clarified. The Financial Supervisory Authority of Norway is assuming a minimum level of 105 % in relation to this.
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 issuing of long-term debt securities. The Bank's deposit to loan ratio at year-end 2016 was 61.8 %.
Møre Boligkreditt AS provides the Group with greater diversification of funding 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 2016, 38 % of the Group's total lending (52 % 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, 70 % of Møre Boligkreditt AS' outstanding bond volume was of an amount that qualifies for Level 2A liquidity in LCR. Møre Boligkreditt AS will issue and accumulate more loans in this category going forward.
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.
In August 2016, Moody's maintained its good A2 rating of Sparebanken Møre. Bonds issued by Møre Boligkreditt AS are rated Aaa by Moody's.
As far as the composition of the external funding is concerned, priority is given to ensuring that a relatively high proportion of funding has a term in excess of 1 year. Total market funding ended at net NOK 21.3 billion at year end – about 88 % of this funding has a remaining term of more than 1 year. The Parent Bank's outstanding senior bonds had a weighted remaining term of 1.72 years at year-end 2016, while covered bond funding correspondingly had a remaining term of 3.87 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 of Directors considers the Bank's liquidity situation at year-end to be good. The Board of Directors 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 adopted 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 exercises, contingency exercises, insurance schemes, and training.
Sparebanken Møre attaches great importance to external activities in which the customer is in focus. A great deal of resources has been expended in recent years in connection with the authorisation scheme for financial advisers. By the end of 2016, 267 of the Bank's employees were licensed financial advisers. Of these, 24 gained authorisation in 2016. Most of the managers in frontline positions have completed an AFA examiner course, which provides the managers with very good training and practice in exercising their managerial roles. Sparebanken Møre's advisers also completed the "Approved Internal Credit Competence" course up until 2015. At year-end 2015, 226 of the Bank's employees had passed this course.
Sparebanken Møre was a pilot enterprise in a new national authorisation scheme for credit in 2016. This will come into effect on 1 January 2017. 46 employees have already completed and passed the authorisation. Sparebanken Møre also participates in the national authorisation scheme for non-life insurance and 190 employees had passed this authorisation at year-end 2016. In 2016, 7 new employees participated in the Bank's standardised training for new employees provided by the Bank's in-house "Møre Academy". The fact that our employees possess a good 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 very pleased 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.
The quality and stability of our digital banking services and other ICT services were good in 2016. The level of security in these services and the underlying systems has been good, and there have been no serious security incidents or losses as a result of this. Good cooperation between stakeholders in the sector makes an important contribution to the work on reducing 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 2016, 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. Quality, stability and security will also be in focus in 2017.
There is a heavy focus on preventing money laundering and terror financing in the Group. The Bank carries out a risk assessment of the area annually. A lot of resources are expended on internal control and training employees linked to this area. The Bank's anti-money laundering manager has also had meetings with the various retail and corporate market departments and participated in retail and corporate market meetings. The Bank was well represented at the annual anti-money laundering conference arranged by Finance Norway, the Norwegian National Authority for Investigation and Prosecution of Economic and Environmental Crime (ØKOKRIM) and the Financial Supervisory Authority of Norway in November. Sparebanken Møre will continue to prioritise money laundering and terror financing prevention in 2017 as well.
Sparebanken Møre's overarching contingency plan was revised in 2016. The underlying contingency plans, such as the ICT contingency plan, were updated during 2016. Exercises are arranged annually. The experience gained from the exercises is used to supplement contingency plans with additional details and provides valuable experience in managing 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 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, each leader has 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, 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 system 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 the external auditor contributes to the good financial reporting process.
Both the quarterly and annual reports are reviewed by both the Bank's Executive Management Group and the Audit Committee and Risk Committee prior to final consideration by the Board of Directors 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 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 2016. 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 2016 in accordance with this plan.
The internal auditor's annual report for 2016 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.
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 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 and monitoring 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.
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
Sparebanken Møre's social responsibilities 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 the Bank has at its disposal 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.
Code of conduct
Sparebanken Møre's core values must permeate everything we do. Both the Executive Management Group 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 supports and respects international human rights. The Bank is a member of Finance Norway and is bound by agreements in this area.
All of Sparebanken Møre's business takes place in Norway and we have no employees or customers of size with addresses abroad.
External environment and climate change
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.
Sparebanken Møre has a broadly differentiated corporate portfolio. A number of enterprises the Bank has made loans to have operations that will have an impact on the environment. The Bank's provision of credit gives an indirect opportunity to impact the external environment.
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 when it comes to internal fraud. We also have 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. Sparebanken Møre does its utmost, through systemic measures and staff training, to ensure potential corruption and financial crime are uncovered and prevented 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, ØKOKRIM and the police. The number of reported cases of fraud has remained relatively stable in recent years, but fell slightly in 2016 compared with 2015.
The Group’s workforce totalled 378 full-time equivalents at year end, a reduction of 10 full-time equivalents in 2016. The average age of the Bank's employees changed from 47.4 to 47.9 years. The average length of service with Sparebanken Møre of the current staff is 18.1 years.
During the course of 2016, Sparebanken Møre recruited one new employee. Staff turnover was 4.4 % in 2016, compared with 4.3 % in 2015.
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. Rules for this 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 group 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.
Sick leave and Inclusive Workplace
Total sick leave was 3.44 % in 2016, compared with 2.52 % in 2015. Long-term sick leave was 2.05 % in 2016, compared with 1.34 % in 2015. Short-term sick leave was stable at 1.18 % in 2015 and 1.39 % in 2016. 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 the cooperation with public sector organisations has been positive when it comes to finding individually tailored arrangements for those employees who have needs within this area. Leave of absence was 2.60 % in 2016.
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. HSE courses were organised for the Bank's safety representatives and members of the Working Environment Committee, and an HSE course was arranged for all managers with personnel responsibilities. Each department must prepare its own risk and vulnerability analysis by 15 October each year. This must survey dangers and problems, assess risks and draw up plans that reduce the risk factors. Exercises are also arranged at regularly intervals in order to teach staff how to deal with crisis situations, such as fires, robberies and conflict management. A few cases of threats against the Bank's employees were reported in 2016. These were followed up immediately. 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 2016.
"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 2016. Internal guidelines and an internal whistle-blowing 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.
Sparebanken Møre systematically works to promote gender equality. The distribution between women and men showed that of the Group's total staff of 398, 253 were women (63.6 %) and 145 were men (36.4 %). There are 382 employees in the Bank and 16 in the subsidiaries.
Of the Parent Bank's 382 employees, 245 are women (64.1 %) and 137 are men (35.9 %). The Bank employs 47 part-time staff, 43 of whom are women and 4 are men. The percentage of women in various managerial positions was 42.4 %, while the corresponding percentage for men was 57.6 %. The Bank aims to increase the proportion of women in senior positions.
The Bank’s Board consists of eight members – four women and four men.
Our social responsibilities - our contribution to the local communities in Møre og Romsdal
The non-profit work of savings banks and savings bank foundations has its roots in the establishment of a savings bank authority in Norway in the 1820s. The savings banks were established to ensure the communities having some financial infrastructure. At the same time, banks had strong socio-political motivations. The general public were to be given an opportunity to invest their savings safely and be assured a sensible return. At the same time, parts of the profits would be used to benefit good causes and projects in the Bank's area of operations.
Our savings bank has two groups of owners: equity certificate holders and local communities. Sparebanken Møre's dividend policy 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 channelled 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. Through these funds Sparebanken Møre highlights its responsibility and social commitment to the local communities in Møre og Romsdal of which the Bank is proud to be a part.
Our vision for the dividend funds for local communities
The funds that are allocated to publicly beneficial purposes every year are considerable. It is therefore important for us in Sparebanken Møre that these funds are properly managed and that we have a clear strategy concerning the purpose of the funds. Our vision for our corporate social responsibility is:
"Sparebanken Møre shall help to improve opportunities for people and enterprises to live, work, develop, and enjoy a good life in Møre og Romsdal."
Main focus areas
A lot of people probably associate Sparebanken Møre's corporate social responsibility with support for various kinds of sports. However, we are also one of the county's most important sponsors of culture and an important contributor to various local community initiatives. During the last few years, we have also focused heavily on innovation and business development in close cooperation with university colleges, the university, and knowledge parks in the county.
For the 2015 financial year NOK 115 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: Sports, culture, community, communication, expertise and business development.
GNIST Mørestipend is Sparebanken Møre's grant scheme for talented young people aged 15-35. In 2016, we awarded 14 grants within the categories culture and sports, which included three top grants of NOK 100 000.
Our social commitment makes Sparebanken Møre an important contributor to Young Entrepreneurship Møre og Romsdal (UE), both financially and professionally. This collaboration stretches back to 2005.
UE involves pupils and students across the country in pupil, young people and student enterprises. More than 1 000 young enterprises have been established so far and that number is increasing. Work on entrepreneurship in school stimulates the pupils' creativity and willingness to learn. The young people learn to have greater faith in themselves and become more aware of their role as contributors to future value creation. It also provides important lessons in how business and industry works meaning that the pupils are better equipped in the labour market when they complete their schooling. In today's society, it is by no means as normal as it once was for there to be jobs available that school leavers and university graduates can walk straight into.
Jobs are a resource that must be created. Indications are that far more of those who take part in UE later start their own enterprises compared with those who do not take part. Sparebanken Møre finds it natural to support young people who have faith in their own creativity. We want to stimulate young people to succeed and we want to help them develop a conscious relationship to both entrepreneurship and their own finances. Taking part in this work is therefore important to us. We also work with schools on young people and student enterprises and make jury members available for county fairs.
As well as supporting the organisation financially, the Bank is an important partner for the "Boss of Your Life" and "Economics and Career Choices" programmes in which the Bank's staff visit lower and upper secondary schools to teach pupils about private finances. In the 2015-2016 school year, 82 % of lower secondary school classes in the county were visited by the Bank's advisers who taught the "Economics and Career Choices" programme. Sparebanken Møre was nominated for Finance Norway's "Finansstafetten" award for this work in 2016. Sparebanken Møre is the only bank in the country to have previously won Finance Norway's award twice since it was first presented in 2010.
The Board of Directors is concerned with Sparebanken Møre's corporate social responsibility being 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 authorities' requirements.
EVENTS AFTER THE REPORTING PERIOD
The Bank is participating in debt restructuring which will involve conversion of loans to shares. Conversion is expected to take place in the first quarter of 2017. The event will have no significant impact on results. The Group's core capital will be strengthened by about 50 basis points after the conversion is completed as a result of actual losses on loans which will result from implementation of the debt restructuring.
In line with the outlook for the Norwegian economy, Møre og Romsdal's economic outlook appears to have stabilised during the autumn and winter. A large proportion of businesses are currently seeing increased activity. The most important reasons for this are the weak Norwegian krone, low level of interest rates and an expansive fiscal policy. The rise in oil prices has also helped to reduce uncertainty for oil-related industries. The situation in this industry will, however, remain challenging in 2017. As a consequence of this, unemployment in the county might continue to rise slightly.
In December, registered unemployment in Møre og Romsdal amounted to 3.1 % of the labour force, according to the Norwegian Labour and Welfare Administration (NAV). The unemployment rate for the country as a whole was 2.8 %.
Sparebanken Møre's losses are expected to remain low also in 2017.
The growth in credit in Norway slowed slightly throughout 2016, while the growth in total deposits was positive, but weak. We continue to experience strong competition in the market, both for lending and deposits, but the Bank is competitive and continues to record good lending and deposit growth. It is anticipated that the growth in lending within the retail market will decrease somewhat during the year, while the growth in the corporate market will increase. There is a constant focus on generating growth through good commitments with an acceptable level of risk.
The Bank will remain strong and committed in supporting businesses and industries in our region, Nordvestlandet.
Sparebanken Møre is focusing on cost-effective operations. This has resulted in a highly satisfactory level of costs. This focus will continue, and the Group's cost income ratio in 2017 is again expected to remain within the target of 45 %.
Overall, good results are expected in 2017, with a return on equity exceeding the target of 10 %.
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 2016. 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 2016
22 February 2017
THE BOARD OF DIRECTORS OF SPAREBANKEN MØRE
LEIF-ARNE LANGØY, Chairman
ROY REITE, Deputy Chairman
RAGNA BRENNE BJERKESET
ELISABETH MARÅK STØLE
ANN MAGRITT BJÅSTAD VIKEBAKK
HELGE KARSTEN KNUDSEN
TURID HÅNDLYKKEN SYLTE
OLAV ARNE FISKERSTRAND, CEO