Board of Directors report 2017
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 2016 in brackets)
- Profit after tax: NOK 557 million (NOK 574 million)
- Return on equity after tax: 10.4 % (11.6 %)
- Lending grew by 7.9 % (2.7 %)
- Deposits grew by 0.7 % (10.8 %)
- At year end, primary capital amounted to NOK 6.3 billion and represented 18.4 % of the basis for calculation. Consequently, the Tier 1 capital ratio was 16.8 % and the Common Equity Tier 1 capital ratio 15.0 %
- Earnings per equity certificate: NOK 27.70 (NOK 28.80)
- The Board of Directors is well satisfied with the results for 2017
- The Board of Directors recommends that the General Meeting pays a cash dividend of NOK 14.00 per equity certificate and allocates NOK 141 million to dividend funds for local communities. In total, this represents 50.6 % of the total Group profit for 2017.
PARENT BANK'S KEY FIGURES
(Comparable figures for 2016 in brackets)
- Profit after tax: NOK 544 million (NOK 595 million)
- At year end, primary capital amounted to NOK 6.14 billion and represented 18.6 % of the basis for calculation. Consequently, the Tier 1 capital ratio was 17.0 % and the Common Equity Tier 1 capital ratio 15.2 %.
- Earnings per equity certificate: NOK 27.00 (NOK 29.85)
AREA 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 the county of Møre & Romsdal as its geographic area of operation, in which the Bank at year-end had 28 branches in 24 municipalities.
The customer-oriented activities within the retail market are organised in a central unit, the Retail Banking Division. All of the retail market departments (28) report to the EVP, Retail Banking Division, who in turn reports to the CEO.
The corporate banking activity is organised into three geographic units reporting to the EVP of the Corporate Banking Division, who in turn reports to the CEO. The Corporate Banking Division has a matrix organisation, divided into 6 different industries (marine, offshore & supply, industry, real estate, trade & services and SME).
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 great extent, prioritised in favour of direct customer-related activities. Other tasks shall, as far as possible, be attended by the Bank's central support system, which is organised in seven staff-units. Each of these units is managed by an EVP, who reports to the CEO. The EVP,Retail Banking Division, the EVP, Corporate Banking Division and the EVPs of the seven staff units form their own management groups together with their respective department heads. The EVP, Retail Banking Division, the EVP, Corporate Banking Division and the EVPs of the staff units are appointed by the Board. The CEO selects the members of the Bank's executive management group.Sparebanken Møre is a full-service provider with the following products and services for customers:
- Deposits and other forms of investments
- Asset management
- Financial advisory
- Payment transfers
- Currency and interest rate hedging
- Real estate brokerage
The Bank's distribution strategy covers its network of branches, digital channels, specialist functions and telephone services. The coordination of customer services in the various distribution channels is intended to ensure that the Bank's customers have options, easy access to a competent staff, good advices 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. This means that we will deliver high level of expertise in our personal counselling as well as provide user-friendly and good digital services for our customers.
The profit before losses on loans and guarantees amounted to NOK 752 million, or 1.18 % of average total assets, compared with NOK 777 million, or 1.28 %, for 2016.
The profit after losses on loans and guarantees amounted to NOK 739 million, or 1.16 % of average total assets, compared with NOK 755 million, or 1.24 %, for 2016.
The profit after tax for 2017 amounted to NOK 557 million, or 0.88 % of average total assets, compared with NOK 574 million or 0.94 % for 2016.
Earnings per equity certificate in 2017 amounted to NOK 27.70 (NOK 28.80) for the Group and NOK 27.00 (NOK 29.85) for the Parent Bank.
Net interest income
Net interest income totalled NOK 1 100 million (NOK 1 082 million). In relation to average total assets, net interest income was 1.72 % (1.79 %). Net interest income accounted for 82.0 % of total income in 2017.
The general low level of interest rates in the market, combined with strong competition on both loans and deposits, is affecting the development of net interest income. In addition, lower volumes combined with reduced margins due to reduced risk in the marine sector, resulted in lower net interest income compared with last year. A higher lending volume has resulted in increased net interest income in NOK.
Other operating income
Other operating income amounted to NOK 242 million (0.38% of average total assets) in 2017. This is a reduction of NOK 39 million compared with 2016. Capital gains on the bond portfolio amounted to NOK 23 million in 2017, equal to 2016.
Capital losses on shares recognised in the income statement amount to NOK 10 million in 2017, compared to a capital gain of NOK 41 million in 2016. The effect of the Visa transaction on profit before tax amounted to NOK 45 million in 2016.
Total costs amounted to NOK 590 million which is NOK 4 million higher than in 2016. The personnel costs are unchanged compared to 2016 and amount to NOK 335 million. Financial activity tax in the form of higher employers’ National Insurance contributions amounted to NOK 14 million in 2017. Staffing has been reduced by 19 full-time equivalents in the last 12 months to 359 full-time equivalents.
The cost income ratio was 44.0 % in 2017, an increase of 1.0 percentage points compared to 2016.
Losses and defaults
In 2017, the income statement is charged with NOK 13 million (NOK 22 million) in losses on loans and guarantees. This represents 0.02 % (0.04 %) of average total assets. The losses on loans and guarantees are due to a NOK 45 million decrease in collective impairments, a NOK 59 million increase in the corporate segment and a NOK 1 million reduction in the retail segment.
At year-end 2017, total impairments for losses amounted to NOK 336 million, equivalent to 0.57 % of gross lending (NOK 360 million and 0.66 %). NOK 4 million of the individual impairments involved commitments in default for more than 90 days (NOK 15 million), which represents 0.01 % of gross lending (0.03 %). NOK 96 million relates to other commitments (NOK 64 million), which is equivalent to 0.16 % of gross lending (0.12 %). Collective impairments amounted to NOK 236 million (NOK 281 million) or 0.40 % 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 decreased by NOK 296 million in the last 12 months. At year-end 2017, the corporate market accounted for NOK 181 million of net problem loans, and the retail market NOK 55 million. In total this represents 0,40 % of gross lending (0.98 %).
Total assets increased by NOK 4 898 million, or 8.0 %, in 2017 to NOK 66 491 million as at 31 December 2017. The change in total assets is primarily attributable to an increase in lending.
Lending to customers
At year-end 2017, lending to customers amounted to NOK 56 867 million (NOK 52 691 million). Net customer lending has increased by a total of NOK 4 176 million or 7.9 %, in the last 12 months. Retail lending has increased by 7.2 %, while corporate lending has increased by 9.1 % in the last 12 months. Retail lending accounted for 70.0 % of lending at year-end 2016 (70.2 %).
Deposits from customers
Customer deposits have increased by 0.7 % in the last 12 months. At year-end 2017, deposits amounted to NOK 32 803 million (NOK 32 562 million). Retail deposits have increased by 5.4 % in the last 12 months, while corporate deposits have decreased by 3.1 % and public sector deposits have decreased by 33.3 %. The retail market's relative share of deposits amounted to 60.0 % (57.4 %), while deposits from corporate customers accounted for 37.8 % (39.2 %) and from public sector customers 2.2 % (3.4 %).
The deposit to loan ratio amounted to 57.7 % (61.8 %) at year-end 2017.
Holdings of investments in securities (the LCR portfolio) at year-end 2017 amounted to NOK 6 096 million compared with NOK 6 199 million at year-end 2016. The volume of the portfolio is adapted to a LCR-requirement of 100 % from 31.12.2017.
There was no significant trading portfolio at year-end 2017.
The Bank's Additional Tier 1 capital consists of two loans, totalling NOK 627 million. 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.
The aggregate profit of the Bank's three subsidiaries amounted to NOK 166 million after tax in 2017 (NOK 153 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 18.4 billion in funding for the Group, approximately 16 % of the loans in another currency than NOK. The company contributed NOK 165 million to the result in 2017 (NOK 156 million).
Møre Eiendomsmegling AS provides real estate brokerage services to both retail and corporate customers. The company made no contribution to the overall result in 2017(NOK -2.0 million). At year end, the company employed 13 full-time equivalents.
Sparebankeiendom AS's purpose is to own and manage the Bank's commercial properties. The company contributed NOK 1 million to the result in 2017. The company has no employees.
EQUITY CERTIFICATES – MORG
At year-end 2017, there were 5 698 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 49.7 % of the Bank's equity certificate capital at year end. Of these equity certificate holders, 10 were residents of Møre og Romsdal, with a relative ownership interest among the 20 largest of 53.8 % (48.3 %). Note 31 contains an overview of the 20 largest holders of the Bank's equity certificates.
As at 31 December 2017, the Bank owned 44 215 of its own equity certificates. These were purchased via the Oslo Stock Exchange at market prices. The equity certificates are freely negotiable in the market.
SPAREBANKEN MØRE'S DIVIDEND POLICY
Sparebanken Møre aims to achieve financial results providing a good and 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.
Dividends consist of cash dividends for equity certificate holders and dividends to the local community. The proportion of profits allocated to dividends is adapted to the Bank’s capital strength. Unless the Bank’s capital strength dictates otherwise, it will be aimed at distributing about 50 % of the profit. Sparebanken Møre’s allocation of earnings shall 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 50.6 % 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 27.70 in 2017. The recommendation to the General Meeting is that the cash dividend per equity certificate for the 2017 financial year be set at NOK 14.00.
Proposed allocation of profit (figures in NOK millions):
|Profit of the year||557|
|Allocated to holders of Additional Tier 1 capital||6|
|Dividend funds (50.6 %):|
|To cash dividends||138|
|To dividends to local community||141||279|
|Strengthening of equity (49.4 %):|
|To the dividend equalisation fund||128|
|To the primary capital fund||130|
|To other funds||14||272|
EFFECT OF TRANSITION TO IFRS 9
The Group’s equity will at 01.01.2018 be charged with NOK 6 million after tax as a consequence of increased impairments due to the implementation of IFRS 9. The implementation of IFRS 9 will have no effect on the Group’s primary capital, as expected loss according to the capital adequacy requirements already exceeds loss according to IFRS 9. Sparebanken Møre will therefore have no need to apply the transitional rule. Please see note 2 for further information.
CAPITAL ADEQUACY RATIO AND APPLICABLE REGULATIONS
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 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 2017. Operational risk calculations are performed using the basic method.
Sparebanken Møre's capital adequacy at year-end 2017 was well above the regulatory capital requirements and also above the internally set minimum target for the Core Tier 1 capital ratio. Primary capital amounts to 18.4 % (18.6 %), Tier 1 capital 16.8 % (17.0%), of which Common Equity Tier 1 capital amounts to 15.0 % (14.6 %). 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 49.4 % of the Group's profit to further build up the Group's financial strength.
The minimum requirement for leverage ratio is set at 3 % and all banks must also have a buffer of at least 2 %. At year-end 2017, the leverage ratio for Sparebanken Møre was 8.2 % (8.5 %), giving 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. During 2018, the FSA will review the level of the bank’s Pillar 2 supplement. 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 minimum requirement for the Common Equity Tier 1 capital ratio will be 13.8 %. The Board monitors capital adequacy in the Group on an ongoing 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 excisting risks. In case a 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 2017, the Board adopted a new strategic plan, "Møre 2021". 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 2017.
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. Calculations performed in connection with the ICAAP for 2017 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 is of the opinion that Sparebanken Møre's aggregate risk exposure 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 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 biggest risk area. 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 & Compliance unit. This unit is independent of the customer divisions. 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.
Through the Group's reporting portal, each member of staff with customer responsibilities has access to reports showing 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.
The Special Commitments department is part of the Risk Management & Compliance unit. 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 Custodian 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. Exposure to large commitments has been significantly reduced over the last years, but follow-up and control of this area has been enhanced. The Board finds that Sparebanken Møre is well prepared to handle potential increased credit risk in the loan portfolio, and that the Group has a good foundation for increasing its focus on solid lending 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 currency trading.
The Board stipulates limits for the Group's market risk in the market risk strategy. The limits are monitored by the Risk Management & Compliance unit. 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 dealing with market risk are reviewed and renewed at least annually by the Board, most recently in December 2017. 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 2017. 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 has been phased in over time and the requirement as of 31 December 2017 is 100 percent.
In recent years, the liquidity portfolio has stabilized at a higher level both in volume and against LCR quality securities. The targets established by the Group regarding 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 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 2017 was 57.7 %.
Møre Boligkreditt AS provides the Group with increased 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 2017, 36 % 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, 85 % 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 December 2017, 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 ensure that a relatively high proportion of funding has a term in excess of 1 year. Total market funding ended at net NOK 26.0 billion at year end – about 87 % 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 2.38 years at year-end 2017, while covered bond funding correspondingly had a remaining term of 3.48 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 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 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, established contingency plans, ransom- and conflict management exercises, contingency exercises, insurance schemes and training.
Sparebanken Møre attaches great importance to external activities in which the customer is in focus. The fact that our employees possess a good level of expertise is an important contribution to reducing operational risk and at the same time ensuring that our customers find being a customer of our bank a good experience.
A great deal of resources has been expended in recent years in connection with the authorisation scheme for financial advisers. By the end of 2017, 261 of the Bank's employees were licensed financial advisers. Four of these were authorised in 2017. Most of the managers in frontline positions have completed an AFA examiner course, providing the managers with good training and practice in exercising their managerial roles.
A new national authorisation scheme for credit came into force on 1 January 2017 and by the end of the year 195 employees had completed it and gained authorisation. Sparebanken Møre also takes part in the national certification scheme for non-life insurance. At year end 2017, 188 employees had passed this certification. The Bank also has a standardised training programme provided by the Bank's internal "Møreskole", which all new employees must undergo. The Board is very satisfied with the substantial rise in competence 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 generally good in 2017, with the exception of one incident in the autumn. This incident was due to a fault in an important machine at the Bank's most important systems provider and impacted multiple banks using the same provider. The fault resulted in key customer-oriented and internal systems being offline for around 24 hours. Transactions to and from customers were also delayed. Measures have been initiated, both internally in Sparebanken Møre and at the relevant provider, to avoid situations like this occurring again. Otherwise, the reliability of these services and the underlying systems has been generally good. Besides the above-mentioned incident, no material security events or losses due to breaches of security were experienced. Good cooperation between the actors in the industry 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, also amongst the Bank's employees. In 2017, all the Bank's employees completed a mandatory e-learning course on information security. In 2015, the Bank extended an 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 2018.
There is a major 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 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 2018 as well.
Sparebanken Møre's overarching contingency plan is revised annually and latest in December 2017. The underlying contingency plans, such as the ICT contingency plan, are also updated on an ongoing basis. 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, individual managers have a special individual responsibility to ensure that internal control within his or her area of responsibility functions and is implemented as intended. This means that managers at every level of the organisation monitor the control measures put in place in their areas of responsibility. This insight is normally achieved through personal presence, monitoring staff, spot checks, reviewing key figures and deviation measurements, etc. This principle also applies to the managers of the subsidiaries in the Group.
Internal control in connection with the financial reporting process
The purpose of internal control in connection with the financial reporting process is to ensure that the financial statements are prepared and presented free from material error, including that any errors shall be identified in time. Moreover, internal control shall ensure that external accounting requirements are met, as well as safeguard that information disseminated to analysts, supervisory authorities, investors, customers and other stakeholders is complete and provides a true and fair view of the Group's financial situation.
Responsibility for the financial reporting process is assigned to the Finance & Facilities Management unit, coordinated and led by the Finance Department. Plans are established, clearly specifying the distribution of work and back-up lists for both tasks and personnel in this and other departments within the section.
Transactions are registered in the Bank's core systems, and reconciliations are 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 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 the external auditor 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, with the Compliance department as 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 2017. 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 2017 in accordance with this plan.
The internal auditor's annual report for 2017 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
- Transparency 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 RESPONSIBILITY
Savings banks have long traditions and are, thanks to their functions, important contributors in local communities to both businesses and the customers who live in the savings bank's market area. Sparebanken Møre takes this responsibility seriously. Sparebanken Møre was formed on 1 April 1985 by the merger of a number of savings banks in Møre og Romsdal. Since then a number of other banks in the county have merged with Sparebanken Møre, the last, Tingvoll Sparebank, in 2009. The banking activities of the merged banks can be traced back to 1843 and the founding of Herrøe og Røvde Sparebank.
Code of conduct and corporate social responsibility
Sparebanken Møre's core values must permeate all of the organisation's activities. 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 code of conduct and corporate social responsibility, providing guidelines for behaviour and how to handle situations involving ethical judgements, human rights, labour rights, equality, social factors, the external environment and combating money laundering and corruption. The guidelines were revised and updated in December 2017 with effect from January 2018.
The guidelines are operationalised through, for example, the personnel handbook, employment regulations, security handbook, internal anti-money laundering rules, etc. New employees in Sparebanken Møre are introduced to the Group's regulations in the Bank’s introduction course for new staff. All employees also undergo e-learning.
"Guiding values", which is Sparebanken Møre's steering document for culture, values and attitudes, is designed to counter discrimination within the Group. No incidents of discrimination were recorded in 2017. The Bank has specific guidelines for whistle-blowing, which must be followed if the Bank's employees see a need to report unwanted incidents of importance either to themselves or their colleagues.
The Bank's annual surveys of the internal working environment analyse different aspects of the working environment and general working situation in the Bank. The survey provides a concrete starting point for prioritising various improvement measures. The 2017 working environment survey shows that the staff perceives both the working environment 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 376, 235 were women (62.5%) and 141 were men (37.5%). There are 362 employees in the Bank and 14 in the subsidiaries. Of the Parent Bank's 362 employees, 228 are women (63.0%) and 134 are men (37.0%). The Bank employs 40 part-time staff, all of whom are women. The percentage of women in various managerial positions was 44.1%, while the corresponding percentage for men was 55.9%. The Bank wants to increase the proportion of women in senior positions.
Sparebanken Møre's Board consists of eight members – four women and four men.
The Group’s workforce totalled 359 full-time equivalents at year end, a reduction of 19 full-time equivalents in 2017. The average age of the Bank's employees changed from 47.9 to 48.3. The average length of service with Sparebanken Møre of the current staff is 18.5 years. Sparebanken Møre recruited seven new employees in 2017. Staff turnover was 6.4% in 2017, compared with 4.4% in 2016.
Sparebanken Møre strives to be an attractive workplace in which individual employees are given independent responsibilities and an opportunity for personal development. Competition in the financial services market is strong and it is important to adapt to meet market expectations in the long term, both with respect to availability and expertise. The quality and efficiency of work processes that address the market are always a priority in the competency measures implemented in the Bank. Sparebanken Møre ensures this partly through development programmes 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 the working environment and job satisfaction. The collaboration between management and the employees' elected representatives is good throughout Sparebanken Møre.
Sick leave and Inclusive Workplace
The total sick leave rate was 3.91% in 2017, compared with 3.44% in 2016. The long-term sick leave rate was 2.52% in 2017, compared with 2.05% in 2016. The short-term sick leave rate was stable and unchanged at 1.39% in 2017. Employees on long-term sick leave are followed up closely with the aim of helping them return to work as quickly as possible.
Sparebanken Møre is a member of the Inclusive Workplace programme. The Bank's experience of collaborating with public sector organisations on facilitating adapted arrangements for employees that need them has been positive. The leave of absence rate was 2.55% in 2017.
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 each year. This must survey dangers and problems, assess risks and draw up plans that reduce the risk factors. Exercises are also arranged at regular 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 2017. 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 2017.
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 it has no employees or major customers with addresses outside Norway.
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, including amongst others, signing of 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 Skype 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 granted loans to, have operations impacting the environment. The Bank's provision of credit gives an indirect opportunity to impact the external environment.
The Group must carry out special assessments when financing businesses (or people) where the customer's products or activities could be associated with material environmental risk. Environmental factors must be assessed in the same way as other forms of risk.
Combating corruption and financial crime
As an actor in the financial services industry, we are subject to a range of laws and requirements aimed at countering corruption and other types of financial crime. Sparebanken Møre shall appear with 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 helping to prevent money laundering, corruption and other financial criminal acts. Among other things, the Bank regularly reports suspicious transactions to the Norwegian National Authority for Investigation and Prosecution of Economic and Environmental Crime (ØKOKRIM). Anti-money laundering measures when opening accounts for new customers and in other contact with our customers are also a high priority area.
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 any corruption and financial crime are identified and prevented as early as possible. Some of the general challenges within this area stem from the fact that crimes 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 actors 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, although the trend was slightly increasing from 2016 to 2017.
Our contribution to 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 in turn established to ensure communities having some financial infrastructure, while the banks also 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 on them. At the same time, parts of the profits would be used to benefit good social causes in the Bank's area of operations.
Sparebanken Møre has two groups of owners: equity certificate holders and local communities. The Bank's dividend strategy plainly states that our owners must be treated equally. The local communities in Møre og Romsdal own around 50% of Sparebanken Møre, which means that half of the year's distributed profit is channelled back to the county through what we have chosen to call "dividend funds for local communities" ("TEFT funds").
Funds averaging NOK 120 million have been allocated as TEFT funds annually 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 TEFT funds
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 corporate social responsibility vision 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 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. In 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 2016 financial year NOK 141 million was allocated to dividend funds for local communities. These funds were distributed throughout 2017 in line with the Bank's main focus areas: sports, culture, local communities, transport, competence and business development.
TEFT grants are grants Sparebanken Møre gives to talented young people aged 15-35. In 2017, we awarded 16 grants within the categories culture and sports, which included three top grants of NOK 100,000.
NÆRINGSTEFT business innovation grants
2017 saw the launch of our new NÆRINGSTEFT business innovation grants, an entrepreneur concept based around a competition where the winner receives NOK 1 million. The business innovation grants have attracted great interest and almost 200 entrepreneurs in the Bank's market area submitted applications. 50 of them were chosen to take part in a competitive journey under the direction of the Bank and knowledge parks in the county. This group was gradually reduced to 10 semi-finalists and the winner will be announced at Sparebanken Møre's "Børs og Bacalao" investor seminar on 8 March 2018.
Partnerships with schools and business
Sparebanken Møre is an active partner for many schools in the county. One of the ways in which several of the Bank's employees contribute is by teaching in primary and secondary schools and at a university/university college level.
Sparebanken Møre is a main partner of Young Entrepreneurship Møre og Romsdal (UE). This collaboration stretches back to 2005. We do not just contribute financially, we make a considerable professional contribution. UE involves pupils and students across the country in pupil-, youth- and student enterprises. The local association in Møre og Romsdal is very active and several of the companies have made it to both the Norwegian finals and the European finals. It is natural for Sparebanken Møre to support enthusiastic young innovators and help ensure they acquire the knowledge they need to make good, independent choices.
One important part of the collaboration with UE involves teaching people about personal finances. Around 50 of the Bank's staff are involved as mentors in the "Economics and Career Choices" and "Boss of Your Life" programmes in secondary schools in the county. The Bank taught 2,100 secondary school pupils in the 2016/2017 school year through the "Economics and Career Choices" programme. In addition to this, almost 1,000 secondary school pupils in the county received teaching through the "Boss of Your Life" programme. The feedback from both teachers and pupils indicates that this is very useful, and the Bank is experiencing increasing demand for both programmes from the schools.
In 2017, Sparebanken Møre established a formal research collaboration with the Norwegian University of Science and Technology (NTNU) in Ålesund. The TEFT lab is meant to contribute to research in the areas of service innovation, entrepreneurship, finance and technology and is a good example of an exciting collaboration between academia and business. While contributing to expertise that business in our region needs, it also strengthens the academic environment in Møre og Romsdal. The goal for this collaboration is to contribute to exciting synergies that can create value for our region. The Bank wants to be a driving force and take part in this work.
The Board wants Sparebanken Møre's corporate social responsibility to be properly managed. 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.
Møre og Romsdal's economic prospects appear good at the start of 2018. Production is high in most industries, the downturn in oil-related industries is starting to turn around and the level of activity in the public sector is high. Higher oil prices, low interest rates, a weak Norwegian kroner exchange rate and good export market growth are important factors to this development. However, housing prices have continued to fall and there is uncertainty regarding price development going forward.
The upturn in production and demand within non-oil related industries, together with substantial restructuring in the labour market, has resulted in a fall in unemployment. Average unemployment in the county has not been lower since spring 2015. At the end of December, registered unemployment in Møre og Romsdal was 2.4% according to the Norwegian Labour and Welfare Administration (NAV). This is the same unemployment rate as the nationwide rate.
Figures for the entire country show that the growth in household debt was relatively stable throughout 2017, while the growth rate for corporate loans is rising. The growth rate for deposits also rose in the last few months of 2017. Competition in the market remains strong, both for loans and deposits. The Bank is competitive and recorded a good, although slightly weakening, lending growth for both the retail market and the corporate market in 2017.
Deposit growth in the retail market is good and the deposit-to-loan ratio is high. Lending growth within both the retail market and the corporate market is expected to be somewhat lower in 2018 compared with the growth in 2017. The focus will always be on ensuring profitable growth.
The Bank will remain a strong, committed supporter of the business sector in North Western Norway.
Sparebanken Møre's goal is to ensure cost-effective operations and its cost/income ratio target for 2018 is below 45%. Sparebanken Møre's losses are also expected to be low in 2018. Overall, good results are expected in 2018 with a return on equity of more than 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 2017. The Board of Directors would also like to thank Sparebanken Møre's customers, investors and other associates for our good partnership throughout the year.