BackReport from the Board of Directors
OPERATIONS IN 2018
Møre Boligkreditt AS is a wholly owned subsidiary of Sparebanken Møre, a regional Norwegian savings bank operating in the county of Møre og Romsdal. Møre Boligkreditt AS is licensed to operate as a mortgage company and to issue covered bonds, and is located at Sparebanken Møre's headquarter in Keiser Wilhelmsgate 29 – 33, in the city of Ålesund. Møre Boligkreditt AS is Sparebanken Møre's most important source of long term market funding and an important part of the parent bank's funding strategy.
During 2018, Møre Boligkreditt AS’ net growth in mortgages acquired from Sparebanken Møre was NOK 2,247 million, and the company's mortgage portfolio amounted to NOK 23,409 million at year-end 2018. Mortgages in the company's cover pool are secured by residential properties, all at the time of acquisition within 75 per cent of the property's estimated value.
In 2018 Møre Boligkreditt AS issued three new covered bond loans. One covered bond loan matured in 2018. Net growth in outstanding covered bond loans in 2018 was NOK 3,561 million, and total outstanding covered bond loan volume issued by Møre Boligkreditt AS amounts to NOK 22,384 million.
RATING
The rating agency Moody's has rated all covered bonds issued by Møre Boligkreditt AS an Aaa- rating.
THE MORTGAGE COMPANY’S ANNUAL FINANCIAL STATEMENTS
The financial statements of Møre Boligkreditt AS show a profit before tax of NOK 230 million, compared with NOK 213 million in 2017. Interest income amounted to NOK 603 million, compared with NOK 530 million in 2017, while interest expenses amounted to NOK 329 million, compared with NOK 269 million in 2017. Total operating costs amounted to NOK 42 million, compared with NOK 38 million in 2017.
Møre Boligkreditt AS had no losses and allocated no provisions for individual impairment in 2018. The calculation of expected credit loss (ECL) for Møre Boligkreditt AS resulted in an increase of impairments of NOK 1 million in 2018. The ECL calculation as at 31 December 2018 shows ECL of NOK 15 million for Møre Boligkreditt AS, compared with NOK 2 million allocated for collective impairment as at 31 December 2017.
Profit after tax amounted to NOK 174 million in 2018, compared with NOK 165 million in 2017. Tax amounted to NOK 56 million, compared with NOK 48 million in 2017. Total assets at the end of 2018 amounted to NOK 25,557 million compared with NOK 21,748 million at the end of 2017.
Net cash flow from operating activities amounted to NOK -1,772 million compared to NOK -925 million in 2017. The timing of the main outflow and inflow is related to payments for acquiring loans from the parent bank and payments related to instalment loans and credit lines to customers.
The company's substitute assets included in the cover pool amounted to NOK 1,902 million, compared with NOK 520 million as at 31 December 2017. Over-collateralisation, calculated as the value of the cover pool relative to the value of outstanding covered bond loan debt was 11.1 per cent as at 31 December 2018, compared with 13.3 per cent as at 31 December 2017.
Møre Boligkreditt AS’ liquidity portfolio consisting of Liquidity Coverage Ratio (LCR) eligible assets amounted to NOK 60 million as at 31 December 2018.
It is the opinion of the Board of Directors that the presented financial statements provide correct and adequate information about the company's operations and status as at 31 December 2018.
CAPITAL STRENGTH
Paid in equity and retained earnings amounted to NOK 1, 767 million, compared to NOK 1,667 million as at 31 December 2017. Risk weighted assets amounted to NOK 9,970 million as at 31 December 2018, compared to NOK 8,936 million last year. Net equity and subordinated loan capital amounted to NOK 1,567 million, compared to NOK 1,476 million as at 31 December 2017. This corresponds to a capital adequacy/core capital ratio of 15.7 per cent as at 31 December 2018, compared to 16.5 per cent last year. Møre Boligkreditt AS uses internal rating based (IRB) models to calculate capital requirements for credit risk.
RISKS
Møre Boligkreditt AS is subject to a number of acts, regulations, recommendations and regulatory provisions. These regulations largely stipulate restrictions concerning the scope of the company's various risk exposures.
The Board and the Managing Director of Møre Boligkreditt AS are responsible for ensuring that proper risk management is established, and that such risk management is adequate and complies with current laws and regulations. Operational risk management in Møre Boligkreditt AS is maintained by Sparebanken Møre according to a service agreement concluded between Møre Boligkreditt AS and Sparebanken Møre.
Risk management emphasizes identifying, measuring and managing the company's risk elements in a manner that ensures that Møre Boligkreditt AS complies with the professional credit regulations and keeps the various risks at a low level.
CREDIT RISK
Credit risk is defined as the risk of losses associated with customers or other counterparties being unable to fulfill their obligations at the agreed time and pursuant to written agreements, and that the received collateral is not covering outstanding claims.
The credit risk strategy adopted by the company defines which loans can be acquired by the company. The strategy stipulates criteria for both borrowers and the collateral for the loans that can be acquired. At year-end 2018, the mortgages in the cover pool had an average loan-to-value ratio of 58.1 per cent, calculated as mortgage amount relative to the value of the property used as collateral. The Board regards the quality of the loan portfolio as very good and the credit risk as low.
MARKET RISK
Market risk is the risk that will arise due to the mortgage company holding or assuming positions in lending and financial instruments in which the values over time will be affected by changes in market prices. Møre Boligkreditt AS must, pursuant to laws and regulations, have very low market risk and Board approved restrictions concerning its maximum exposure to market risk. The company utilizes financial derivatives to keep this type of risk at a low level. A specific market strategy has been adopted for Møre Boligkreditt AS which establishes the limits for this type of risk. The company's positions in fixed interest and foreign currencies are hedged with financial derivatives. The Board considers the overall market risk as low.
LIQUIDITY RISK
Liquidity risk is the risk that Møre Boligkreditt AS will be unable to fulfill its obligations without substantial extra costs being incurred in the form of decline in asset values, forced sales or more expensive funding. The company has adopted a liquidity risk strategy and established limits for long-term funding and short-term liquidity risk limits. Bonds issued by Møre Boligkreditt AS have a soft bullet structure in which the company has the opportunity to extend the term of its borrowing by up to 12 months. Møre Boligkreditt AS reports LCR of 325 per cent by year-end 2018. The Board regards the company's liquidity risk as low.
OPERATIONAL RISK
Operational risk is the risk of losses due to inadequate or failing internal processes, human error, system failures or external events. Møre Boligkreditt AS has entered into a management agreement with Sparebanken Møre. The services covered by this agreement include administration, production, IT operations, and financial and risk management. Although the operational risk of Møre Boligkreditt AS is dependent of Sparebanken Møre's ability to manage this type of risk, Møre Boligkreditt AS independently bear risk associated with errors in the deliveries and services provided by Sparebanken Møre.
The evaluation of the management and control of operational risk is also afforded considerable space in the Group's annual ICAAP. The operational and established yearly internal control report, both within Sparebanken Møre and by the Managing Director of Møre Boligkreditt AS, is an important tool for reducing operational risk. The internal control reports will help identifying any operational risk, and enable action to be taken. The Board regards the company's operational risk as low.
CORPORATE GOVERNANCE STATEMENT
Møre Boligkreditt AS complies with the latest Norwegian Code of Practice for Corporate Governance. Møre Boligkreditt AS was established as part of Sparebanken Møre's long-term funding strategy with the purpose of funding the bank through issuing covered bonds. Møre Boligkreditt AS helps ensure that the Sparebanken Møre Group properly manages its assets, as well as providing additional assurance that goals and strategies are achieved and realized.
The Board ensures that risk management and internal control are adequate and systematic, and that they have been established in compliance with the law and regulations, articles of association, ethical guidelines, instructions, and external and internal guidelines. The Board shall lay down principles and guidelines for risk management and internal control for the various levels of activity pursuant to the company's risk bearing capacity, and assure themselves that the strategies and guidelines are being followed. The Board shall systematically and regularly assess the strategies and guidelines for risk management.
In order to ensure that Møre Boligkreditt AS' risk management and internal control are carried out satisfactorily, the Board continuously receives various types of reports throughout the year from Sparebanken Møre's control bodies, as well as from internal and external auditors. The Board actively participates in the annual implementation of the long-term strategic plan. The Board revises and approves all the company's general risk management documents at least once a year. Every year in the 4th quarter, the Managing Director of Møre Boligkreditt AS reports on the structure and efficiency of the company's internal control.
The overall responsibility for ensuring that principles of accounting and financial control are identified, monitored and evaluated is outsourced to the Finance department and the Risk Management department in Sparebanken Møre. The responsibility for the preparation of financial statements, and the reporting of these to the Managing Director in Møre Boligkreditt AS, is assigned to the Finance department in the parent bank.
The Board of Directors (the Board) and the Chairman of the Board is elected by the General Meeting, and shall consist of four to six members elected for a period of two years. After one year, at least half of the elected members shall step down, based on the drawing of lots, while the remainder shall step down after one more year. Board members can be re-elected.
The Chairman of the Board in Møre Boligkreditt AS shall, by the end of October and in consultation with the Managing Director, set out a proposed annual plan for the Board's work for the coming year and the main items on the agendas of board meetings for the next calendar. Each year, the Board evaluates its own methods and professional competence to see if improvements can be made.
The Chairman of the Board shall ensure that the Board of Directors convenes at least once every quarter and otherwise as often as is called for by the nature of the company's activities, or when requested by a board member. A valid Board resolution is passed by at least three board members voting in favor of the resolution. The annual General Meeting shall be held each year before the end of June.
The company's paid-in equity of NOK 1,600,000,000 consist of 1,140,000 shares of NOK 1,250 fully paid in, together with a share premium of NOK 175,000,000. With the consent of the Financial Supervisory Authority of Norway, the General Meeting may raise additional share capital, subordinated loan capital and guarantee capital.
Møre Boligkreditt AS is part of the Sparebanken Møre Group. The parent bank, Sparebanken Møre prepares the statement on ethics and corporate social responsibility which also covers subsidiaries. Reference is made to Sparebanken Møre’s annual report available on www.sbm.no for further information.
The Group’s corporate governance is based on the Norwegian Code of Practise for Corporate Governance, most recently updated on 17 October 2018. The Group’s corporate governance report also cover subsidiaries, and reference is made to Sparebanken Møre’s annual report for further information on corporate governance
INTERNAL CONTROL
The Managing Director of Møre Boligkreditt AS is responsible for establishing proper risk management and internal control based on the guidelines decided by the Board, making sure that these are adhered to, and providing the Board with information about developments within the various areas. The Managing Director reports on structure and efficiency of the company's internal control in the fourth quarter every year.
Møre Boligkreditt AS bases its internal control on an overall risk management process. This is set out in various documents included in the company's Risk Policy. The Board has decided upon guidelines for establishing proper risk management and internal control, and ensures that risk management and internal control in Møre Boligkreditt AS are adequate and systematic, and that the processes have been established in compliance with the law and regulations, articles of association, instructions, and external and internal guidelines. The Board systematically and regularly assesses the strategies and guidelines for risk management.
In the financial reports, written procedures relating to critical areas within the company, as well as the level of achievement of both the company's financial goals, and the qualitative goals relating to risk managing are presented. This ensures a close and accurate monitoring of the financial reporting and increases the possibility of early risk detection. The Managing Director of Møre Boligkreditt AS has the primary responsibility for managing risk associated with the company's operational and financial reporting, which is the foundation for satisfactory quality in the financial reporting.
The internal control and risk assessment of the financial reporting is one of the areas of focus in the Managing Director’s annual confirmation on the quality of, and the compliance with internal controls. The Internal Auditor has an important role in the monitoring of internal controls related to financial reporting. The financial statements provide additional information about the risk management and internal control of Møre Boligkreditt AS.
PROFIT DISTRIBUTION POLICY
Møre Boligkreditt AS’ profit distribution policy states the following: ”The company shall make a maximum payment from the profit generated in the fiscal year, either in the form of a dividend or as a group contribution. Such payments, however, shall not conflict with the requirement for liquidity and financial strength of the company, and shall in any case abide by what is considered good and prudent business and accounting practice.”
GENERAL MEETING AND COMPANY BOARD
The General Meeting is the supreme body of Møre Boligkreditt AS. The General Meeting of Møre Boligkreditt AS consists of the Board of Directors of Sparebanken Møre, Sparebanken Møre being the sole owner of the company.
The Board shall consist of four to six members elected for a period of two years.
In electing the members of the Board, the goal is to meet the need for continuity and independence, as well as ensuring a balanced composition of the Board.
The Board's responsibilities and tasks are set forth in a separate document which is discussed and revised by the Board regularly. The document contains the dividing of responsibilities and tasks between the Board and the Managing Director of the company. Each year, the Board evaluates its own methods and professional competence.
GOING CONCERN ASSUMPTION
The Board is of the opinion that the prerequisites for the going concern assumption exist, and the Board confirms that the 2018 annual financial statements is prepared on the basis of the going concern assumption.
EMPLOYEES
Møre Boligkreditt AS had no employees at year-end 2018. One man-year from Sparebanken Møre is dedicated full time to the mortgage company. Furthermore, a number of services are outsourced to Sparebanken Møre, regulated by a specific agreement between the mortgage company and the bank.
No special work environment measures have been implemented in Møre Boligkreditt AS.
EQUAL OPPORTUNITIES
The Sparebanken Møre Group strives for gender-neutral employment – and wage policy. The Board and management in Sparebanken Møre systematically and actively work to promote equality. The Board of Møre Boligkreditt AS consists of two men and three women.
POLLUTION OF THE EXTERNAL ENVIRONMENT
The activities of Møre Boligkreditt AS do not pollute the external environment.
OTHER FACTORS
As far as the Board is aware, no events have occurred after the end of the financial year 2018 of material importance to the position and result of Møre Boligkreditt AS.
RESEARCH AND DEVELOPMENT
Møre Boligkreditt AS has no research and development activities.
CORPORATE SOCIAL RESPONSIBILITY
For information on corporate social responsibility, Møre Boligkreditt AS being a wholly owned subsidiary of Sparebanken Møre, we refer to Sparebanken Møre Group's Annual Report.
FUTURE PROSPECTS
A strong household sector due to record low interest rates, low unemployment levels, together with a solid public sector has kept Norwegian production levels high. The still weak NOK is positive for the competitiveness of the export industry and the tourist industry.
The development of house prices, together with growth in debt, is the most important risk factors to Norwegian households. The Norwegian key policy rate was announced unchanged at 0.75 percentage points 24 January 2019. Inflation is just above Norges Bank’s target of 2 percent and stand at 2.1 percent year-over-year by December 2018. This will support Norges Bank’s current rate path, and we believe the first of two hikes in the policy rate in 2019 will be announced in March. Important risk factors going forward are also the oil price development, macroeconomic growth in export markets, the growing concern for a global trade war and the NOK exchange rate.
The combined activity of businesses located in the county of Møre og Romsdal remains high despite recent years decline in the petroleum related industries. The registered unemployment rate in the county of Møre og Romsdal was 2.3 per cent in December 2018, at the same level as the Norwegian national average. We expect unemployment level in the county around national average levels.
Annual retail lending growth in the Sparebanken Møre Group was 6.1 per cent in 2018. The Board believes that the low level of unemployment, still low interest rates and high disposable household income will contribute to further mortgage loan growth in Sparebanken Møre. This mortgage growth will position Møre Boligkreditt AS to acquire further mortgage loan portfolios from the parent bank and further increase the volume of outstanding bond loans from Møre Boligkreditt AS.
DISTRIBUTIONS
Profit after tax amounted to NOK 174 million in 2018. The recommendation from the Board of Directors to the annual General Meeting is a dividend payment of NOK 167 million.
Ålesund, 31 December 2018
4 February 2019
THE BOARD OF DIRECTORS OF MØRE BOLIGKREDITT AS
KJETIL HAUGE, Chairman
BRITT IREN TØSSE AANDAL
ELISABETH BLOMVIK
GEIR TORE HJELLE
SANDRA MYHRE HELSETH
OLE KJERSTAD, Managing Director