Interim report from the Board of Directors

All figures relate to the Group. Figures in brackets refer to the corresponding period last year. The levy for the Norwegian Banks Guarantee Fund for 2017 is distributed through 2017. The figures for the first quarter of 2016 have been made comparable.

Financial statements are prepared in accordance with IFRS and the interim report has been prepared in conformity with IAS 34 Interim Financial Reporting.

The profit after tax for the first quarter of 2017 amounted to NOK 131 million, or 0.86% of average total assets, compared to NOK 134 million, or 0.89%, for the corresponding quarter last year. The return on equity in the first quarter of 2017 was 10.1%, compared to 11.2% for the first quarter of 2016.

The Group's target is a return on equity of a minimum of 10%.

The earnings per equity certificate amounted to NOK 6.55 (NOK 6.80) for the Group and NOK 12.60 (NOK 13.60) for the Parent Bank.

The Board of Directors is satisfied with Sparebanken Møre's results for the first quarter of 2017.

Net interest income
The net interest income of NOK 261 million was NOK 9 million lower than in the corresponding quarter of last year. This represents 1.69% of total assets, which is 0.11 percentage points lower than in the first quarter of 2016.

The generally low level of interest rates in the market, combined with strong competition for both lending and deposits, is affecting the development of net interest income. Lower volumes together with reduced margins due to the reduced risk in the maritime sector have also resulted in lower net interest income compared with last year.

Other operating income
Other operating income amounted to NOK 66 million, which is NOK 10 million higher than in the first quarter of last year. Other operating income amounted to 0.43% of average total assets, 0.06 percentage points higher than in the corresponding period in 2016.  The change in the value of the bond portfolio shows capital gains of NOK 16 million compared with NOK 1 million at the same time last year.

Operating costs in the quarter amounted to NOK 150 million, which is NOK 2 million higher than in the first quarter of last year. Personnel costs rose by NOK 3 million compared with the corresponding period last year and amounted to NOK 85 million. The increase was due to a tax rise for the financial industry in the form of higher employers' National Insurance contributions. The Group's total workforce has been reduced by 17 full time equivalents in the last 12 months to 371 full time equivalents. Other operating costs were NOK 1 million lower than in the same period last year.

The cost income ratio for the first quarter of 2017 was 45.9%, which represents an increase of 0.5 percentage points compared with the first quarter last year.

Problem loans
Losses of NOK 2 million on lending and guarantees were recognised in the quarter. Annualised this amounts to 0.01% of average total assets. Corresponding figures for the first quarter of 2016 was a reversal of NOK 2 million (-0.01%). Collective impairments remained unchanged in the first quarter. Reversals of NOK 1 million were recognised in the retail segment, while losses of NOK 3 million were recognised in the corporate segment.

At the end of the first quarter of 2017, total impairments for losses amounted to NOK 335 million, equivalent to 0.62% of gross lending (NOK 334 million and 0.65% of gross lending). NOK 5 million of the individual impairments involved commitments in default for more than 90 days (NOK 11 million), which represents 0.01% of gross lending (0.04%). NOK 49 million relates to other commitments (NOK 61 million), which is equivalent to 0.09% of gross lending (0.12%). Collective impairments amounted to NOK 281 million (NOK 262 million) or 0.52% 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 20 million in the last 12 months. At the end of the first quarter of 2017, the corporate market accounted for NOK 52 million of net problem loans and the retail market NOK 69 million. In total, net problem loans represent 0.22% of gross lending (0.27%).

Lending and deposit growth
At the end of the first quarter of 2017, lending to customers amounted to NOK 53,993 million (NOK 51,440 million). Customer lending has increased by NOK 2,553 million, or 5.0%, over the last 12 months. Retail lending has increased by 8.0%, while corporate lending has decreased by 0.7% in the last 12 months. Retail lending accounted for 70.0% of lending at the end of the first quarter of 2017 (67.7%).

Customer deposits have increased by 9.8% in the last 12 months. At the end of the first quarter of 2017, deposits amounted to NOK 32,656 million (NOK 29,738 million). Retail deposits have increased by 6.7% in the last 12 months, while corporate deposits have increased by 14.2%, and public sector deposits have increased by 18.6%. The retail market's relative share of deposits amounted to 58.0% (59.7%), while deposits from corporate customers accounted for 38.8% (37.3%) and from public sector customers 3.2% (3.0%).

Deposits as a percentage of loans amounted to 60.5% at the end of the first quarter of 2017 (57.8%).

The Group's capital adequacy ratio at the end of the first quarter of 2017 exceeded the regulatory capital requirements and the internally set minimum target for the Core Tier 1 capital ratio. The Capital ratio, including 50% of retained earnings in the year-to-date, amounts to 18.6% (18.2%), the core capital ratio amounts to 17.1% (16.6%) and the Core Tier 1 capital ratio amounts to 14.9% (14.2%).

Sparebanken Møre has a capital requirement of NOK 152 million associated with the transitional scheme for the Basel I floor at the end of the first quarter of 2017.

The aggregate profit of the Bank's three subsidiaries amounted to NOK 31 million after tax in the first quarter of 2017 (NOK 41 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 first quarter, the company had net outstanding bonds of NOK 16.1 billion in the market. The company contributed NOK 32 million to the result in the first quarter of 2017 (NOK 42 million).

Møre Eiendomsmegling AS provides real estate brokerage services to both private and business customers. The company has so far experienced a loss of NOK 1 million in 2017 (NOK -1 million). At the end of the quarter, the company employed 14 full time equivalents.

Sparebankeiendom AS's purpose is to own and manage the Bank's business properties. The company has made no contribution to the overall result to date in 2017 (NOK 0 million). The company has no employees.

At the end of the first quarter of 2017, there were 5,709 holders of Sparebanken Møre's equity certificates. 9,886,954 equity certificates have been issued. Equity certificate capital accounts for 49.6% of the Bank's total equity. Note 10 contains an overview of the 20 largest holders of the Bank's equity certificates.

As at 31 March 2017, the Bank owned 50,851 of its own equity certificates. These were purchased on the Oslo Stock Exchange at market price.

In line with the general development of the Norwegian economy, Møre og Romsdal's economic outlook appears to have improved during the spring. Large parts of the local corporate sector are seeing increases in activity. The most important reasons for this are the weak Norwegian krone, low level of interest rates and an expansionary fiscal policy. These factors are also contributing to the sentiment indicators for Norwegian households being at their highest levels for many years.

The rise in oil prices in the last year 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, there is a risk that unemployment in the county will rise slightly in the next few months.

In March, registered unemployment in Møre og Romsdal amounted to 3.2% of the labour force, according to the Norwegian Labour and Welfare Administration (NAV). The unemployment rate for the country as a whole was 2.9%.

Sparebanken Møre's losses are expected to remain low also in 2017.

Credit growth in Norway slowed slightly in 2016, but the pace has picked up again a bit this year, both for households and for the corporate sector. The growth in total deposits has also been rising in the country seen as a whole.

We continue to experience strong competition in the market, both for lending and deposits, but the Bank is competitive and is recording good and rising lending growth in both the retail market and the corporate market. We experience good growth in deposits. It is anticipated that the growth in lending within the retail market will tail off to some extent during the year, while the pace of 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 targeting cost-effective operations with a cost income ratio target of less than 45% in 2017. This has resulted in a satisfactory level of costs.

Overall, good results are expected in 2017, with a return on equity reaching the target of 10%.

Ålesund, 31 March 2017
26 April 2017


ROY REITE, Deputy Chairman