BackInterim report from the Board of Directors
About the company
Møre Boligkreditt AS is a wholly owned subsidiary of Sparebanken Møre. The company is licensed to operate as a mortgage company, issuing covered bonds. Møre Boligkreditt AS is Sparebanken Møre's most important source of market funding and an important part of the parent bank's long-term funding strategy.
The accounts have been prepared in accordance with IFRS.
First quarter results
The financial statements of Møre Boligkreditt AS show a pre tax profit of NOK 56 million in first quarter 2016, compared to NOK 76 million in first quarter 2015. Net interest income amounted to NOK 60 million, compared to NOK 75 million for the same period last year. Costs amounted to NOK 8 million in first quarter 2016, compared with NOK 7 million in the corresponding quarter in 2015. Net gain in value of debt securities issued and related derivatives was NOK 4 million at first quarter end 2016, compared to NOK 8 million at first quarter end 2015.
Møre Boligkreditt AS has not established losses or impairment for individual losses in first quarter 2016, nor made any changes to the collective impairment. Profit after tax amounted to NOK 42 million in first quarter 2016, compared to NOK 55 million in the corresponding quarter 2015.
Total assets at first quarter end 2016 amounted to NOK 19 150 million compared to NOK 16 941 million at first quarter end 2015. Møre Boligkreditt AS acquired mortgages from Sparebanken Møre also in the first quarter 2016, and net lending increased by NOK 1 116 million. Net lending amounted to NOK 18 023 million at first quarter end 2016, compared with NOK 15 772 million at first quarter end 2015.
At first quarter end 2016, the company's substitute assets included in the cover pool amounted to NOK 581 million, including receivables from credit institutions of NOK 242 million, compared to NOK 777 million in substitute assets at first quarter end 2015.
No new bond loan volume was issued in first quarter 2016, and no outstanding bond loans matured in first quarter 2016. Møre Boligkreditt AS had twelwe bond loans outstanding at 31 March 2016 with a total bond loan debt of NOK 15 765 million, compared to fourteen bond loans with NOK 14 483 million outstanding at 31 March 2015.
The amount allocated for collective impairment was NOK 4 million at first quarter end 2016, compared to NOK 2 million at first quarter end 2015.
Rating
The rating agency Moody's has assigned Aaa-rating to all covered bonds issued by Møre Boligkreditt AS.
Capital strength
In first quarter 2016 Møre Boligkreditt AS increased its equity by NOK 200 million through an issue of 160 000 shares á NOK 1 250. The capital increase was fully paid in by Sparebanken Møre as the owner of all 940 000 shares in Møre Boligkreditt AS. Paid-in equity and other equity amounted to NOK 1 353 million by end of first quarter 2016, compared to NOK 1 153 million by end of first quarter 2015. This corresponds to a capital adequacy/core capital ratio of 16.1 per cent. Risk-weighted assets amounted to NOK 8 165 million by end of first quarter 2016.
Møre Boligkreditt AS uses internal rating based (IRB) models to calculate capital requirements for credit risk. The Board regards the company's interest bearing capacity as satisfactory.
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 that can be acquired by the company. The strategy stipulates criteria for both borrowers and the collateral for the loans that can be acquired. At end of first quarter 2016, the mortgages in the cover pool had an average loan-to-value ratio of 55 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’s 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 the Financial Institution Act, 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. A 12 months rolling revolving credit facility guarantee from Sparebanken Møre ensures timely payments to derivative counterparties and owners of bonds issued by Møre Boligkreditt AS. Furthermore the bonds have a soft bullet structure in which the company has the opportunity to extend the term of its borrowing by up to 12 months. 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.
Outlook
The Norwegian economy, and especially the oil related part of the economy will experience a further slowdown also in 2016, and we will experience lower and selective growth also in the coming quarters. This is mainly due to the low oil price and the decline in petroleum related investments. A strong household sector due to record low interest rates, still relative low unemployment levels, together with a solid public sector will however keep the production levels high in several sectors. The weak NOK is positive for the competiveness of the export industry, and for the tourist industry.
Should the Norwegian economy be hit harder than expected, monetary and fiscal policy will be moved in an even more expansive direction. The development of house prices, together with growth in debt, is probably the most important risk factors to Norwegian households. Important risk factors going forward are also the oil price development, macroeconomic growth in export markets and the NOK exchange rate.
The combined activity level of businesses located in Møre og Romsdal County will most likely remain high despite the decline in the petroleum related industries. However, the growth in production will not be enough to prevent unemployment from rising further in 2016. The registered unemployment rate in Norway was 3.3 per cent in March, compared to 3.4 per cent in the county of Møre og Romsdal. We expect unemployment in the county to stay just above national average levels during 2016.
Retail lending growth in Sparebanken Møre Group is 6.8 per cent the last twelve months, but in line with weaker national growth in household debt, we also see the Group retail lending growth rate slowing down somewhat in first quarter 2016.
The Board believes that despite the slowdown of the economy, both in Norway and in the county of Møre og Romsdal, the 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.
Ålesund, 31 March 2016
20 April 2016
THE BOARD OF DIRECTORS OF MØRE BOLIGKREDITT AS
KJETIL HAUGE, Chairman
BRITT IREN TØSSE AANDAL
TROND NYDAL
GEIR TORE HJELLE
SANDRA MYHRE HELSETH
OLE KJERSTAD, Managing Director