Interim report from the Board of Directors
All figures relate to the Group. Figures in brackets refer to the corresponding period last year. The financial statements have been prepared in accordance with IFRS and the interim report has been prepared in conformity with IAS 34 Interim Financial Reporting.
RESULTS FOR Q1 2020
Profit after tax was NOK 117 million for the first quarter of 2020, or 0.61 per cent of average total assets, compared with NOK 162 million, or 0.92 per cent, for the corresponding quarter last year.
Return on equity was 7.1 per cent in the first quarter of 2020 compared with 11.0 per cent in the first quarter of 2019, and the cost income ratio amounted to 47.2 per cent compared with 41.2 per cent in the first quarter of 2019.
Earnings per equity certificate were NOK 5.46 (NOK 7.95) for the Group and NOK 14.47 (NOK 14.13) for the Parent Bank.
Given the circumstances, the Board of Directors is satisfied with Sparebanken Møre's results for the first quarter of 2020.
Net interest Income
Net interest income was NOK 342 million, which is NOK 38 million, or 12.5 per cent, higher than in the corresponding quarter of last year. This represents 1.80 per cent of total assets, which is 0.11 percentage points higher than for the first quarter of 2019.
The interest rate margins for both lending and deposits were at the same level in the first quarter of 2020 as in the first quarter of 2019 in both the retail and corporate markets.
The increase in net interest income compared with the first quarter of 2019 is therefore mainly due to higher lending and deposit volumes, as well as an improved interest contribution from the Bank’s equity.
Strong competition in both lending and deposits, and reduced risk in the lending portfolio, have contributed to downward pressure on net interest income.
The Bank reduced interest rates on loans by up to 0.85 percentage points from 8 April and deposit rates will be reduced at the end of May. This will result in a reduction in net interest income in the second quarter.
Other operating Income
Other operating income was NOK 12 million in the quarter, which is NOK 65 million lower than in the first quarter of last year. The return on financial investments was NOK 69 million lower than in the first quarter of 2019. Capital losses from bond holdings were NOK 42 million in the quarter, compared with capital gains of NOK 6 million in the corresponding quarter last year. Capital losses on equities were NOK 7 million, compared with capital gains of NOK 6 million in the first quarter of 2019, and income from other financial investments decreased by NOK 8 million compared with the same period last year.
Other income excluding financial investments increased by NOK 4 million compared with the first quarter of 2019.
Operating costs were NOK 167 million in the quarter, which is NOK 10 million higher than in the same quarter last year. Personnel costs were NOK 4 million higher than in the corresponding period last year and amounted to NOK 89 million. Staffing has been reduced by 2 full-time equivalents in the last 12 months, to 354 FTEs. Other operating costs increased by NOK 6 million from the same period last year.
The cost income ratio for the first quarter of 2020 was 47.2 per cent, 6.0 percentage points higher than in the first quarter of last year.
The quarterly accounts were charged NOK 36 million (NOK 13 million) in losses on loans and guarantees. This amounts to 0.19 per cent (0.07 per cent) of average total assets on an annualised basis. Losses in the corporate segment increased by NOK 9 million in the quarter and losses in the retail segment increased by NOK 27 million.
At the end of the first quarter of 2020, total expected losses amounted to NOK 406 million, equivalent to 0.61 per cent of loans and guarantees (NOK 348 million and 0.56 per cent). Of the total expected losses, NOK 23 million are linked to a credit-impaired commitment more than 90 days past due (NOK 19 million), which amounts to 0.03 per cent of loans and guarantees (0.03 per cent). NOK 231 million relates to other credit-impaired commitments (NOK 239 million), which is equivalent to 0.35 per cent of gross loans and guarantees (0.38 per cent).
Net credit-impaired commitments (loans more than 90 days past due and other commitments in Stage 3) have increased by NOK 35 million in the last 12 months. At the end of the first quarter of 2020, the corporate market accounted for NOK 658 million of net credit-impaired commitments and the retail market NOK 89 million. In total, this represents 1.12 per cent of gross loans and guarantees (1.14 per cent).
Lending to customers
At the end of the first quarter of 2020, lending to customers amounted to NOK 65,145 million (NOK 61,270 million). Customer lending has increased by a total of NOK 3,875 million, or 6.3 per cent, in the last 12 months. Retail lending has increased by 4.3 per cent, while corporate lending has increased by 10.4 per cent in the last 12 months. Lending to corporate customers increased by 3.0 per cent in the first quarter of 2020, while lending to retail customers rose by 1.0 per cent. Retail lending accounted for 67.7 per cent of total lending at the end of the first quarter of 2020 (69.2 per cent).
Deposits from customers
Customer deposits have increased by NOK 2,366 million, or 6.7 per cent, in the last 12 months. At the end of the first quarter of 2020, deposits amounted to NOK 37,432 million (NOK 35,066 million). Retail deposits have increased by 6.9 per cent in the last 12 months, while corporate deposits have increased by 6.7 per cent and public sector deposits have increased by 2.9 per cent. The retail market’s relative share of deposits amounted to 59.6 per cent (59.5 per cent), while deposits from the corporate market accounted for 38.1 per cent (38.2 per cent) and from the public sector market 2.3 per cent (2.3 per cent).
The deposit-to-loan ratio was 57.5 per cent at the end of the first quarter of 2020 (57.2 per cent).
Sparebanken Møre is very well capitalised. At the end of the first quarter, the Common Equity Tier 1 capital ratio was 16.9 per cent (15.9 per cent), incl. 50 per cent of the result for the year to date. This is 4.2 percentage points higher than the total regulatory minimum requirement of 12.7 per cent for the Common Equity Tier 1 capital ratio. The primary capital ratio, including 50 per cent of the result for the year to date, was 20.7 per cent (19.4 per cent), while the Tier 1 capital ratio was 18.6 per cent (17.3 per cent).
Capital adequacy is calculated in line with the EU’s Capital Requirements Directive (CRD) IV and Capital Requirements Regulation (CRR), which were introduced with effect from 31 December 2019.
The most important changes that apply from 31 December 2019 are that the transitional rule associated with the Basel I floor has been eliminated and an SME discount of 23.82 per cent has been introduced for SME customers with loans of up to EUR 1.5 million and an annual turnover of less than EUR 50 million.
The countercyclical capital buffer was reduced from 2.5 per cent to 1.0 per cent with effect from 13 March 2020. The level is determined by the Ministry of Finance based on advice from Norges Bank.
The total regulatory minimum requirement for Sparebanken Møre’s Common Equity Tier 1 capital ratio, including the Pillar 2 supplement, was 12.7 per cent at the end of the first quarter of 2020. In its assessment of Sparebanken Møre’s Pillar 2 supplement in 2018, the Financial Supervisory Authority of Norway set it at 1.7 per cent, although it was made subject to a minimum of NOK 590 million with effect from 31 March 2019.
The leverage ratio (LR) at the end of the first quarter of 2020 was 7.8 per cent, 0.3 percentage points lower than at the end of the first quarter of 2019. The regulatory minimum requirement (3 per cent) and buffer requirement (2 per cent), 5 per cent in total, were met by a good margin.
The aggregate profit of the Bank’s three subsidiaries was NOK 48 million after tax in the first quarter of 2020 (NOK 48 million).
Møre Boligkreditt AS was established as part of the Group’s long-term funding strategy. The main purpose of the mortage company is to issue covered bonds for sale to Norwegian and international investors. At the end of the first quarter of 2020, the company had net outstanding bonds of NOK 24.8 billion in the market. Around 35 per cent of the borrowing was in currencies other than NOK. The company contributed NOK 48 million to the result in the first quarter of 2020 (NOK 47 million).
Møre Eiendomsmegling AS provides real estate brokerage services to both retail and corporate customers. The company contributed NOK -0.4 million to the result in the first quarter of 2020 (NOK 0.4 million). At the end of the quarter, 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 0.4 million to the result in the first quarter of 2020 (NOK 0.3 million). The company has no employees.
At the end of the first quarter of 2020, there were 5,671 holders of Sparebanken Møre's equity certificates. 9,886,954 equity certificates have been issued. Equity certificate capital accounts for 49.6 per cent of the Bank’s total equity.
Note 11 includes a list of the 20 largest holders of the Bank’s equity certificates. As at 31 March 2020, the Bank owned 22,111 of its own equity certificates. These were purchased on the Oslo Børs at market prices.
Given the current situation, the overall output and demand in Møre og Romsdal will probably decline this year. This is due to the government’s activity reducing measures aimed at countering the coronavirus, as well as the sharp fall in oil prices. The depreciation of the Norwegian krone will be positive for exports and import-competitive activities, while it entails higher costs and reduced profitability for companies with a high import share. However, a significant part of the business sector could get back to normal once the strictest infection control measures have been lifted. In this case, activity will pick up in the second half of the year and during 2021. Some industries will probably still be affected for a longer period. Examples of this are tourism with associated activities, trade and service industries, as well as the maritime industry. A sustained low oil price level will have a negative impact on businesses and industries in our region, Nordvestlandet.
The drop in economic activity has resulted in a steep rise in the number of furloughed workers. At the end of March, unemployment in Møre og Romsdal amounted to 10.0 per cent of the labour force. By comparison, the unemployment rate in Norway was 10.7 per cent. However, much of the rise in unemployment will probably be short-term in nature.
Household debt in Norway fell evenly throughout 2019 and to date in 2020, and is now at an annual rate of less than 5 per cent. The downward trend has persisted ever since 2012. The growth in lending in the corporate market was more stable in 2019, but has fallen markedly so far this year.
The Bank noted a somewhat slower pace of growth in lending to the retail market in the first quarter compared with the end of the fourth quarter. The growth rate in the corporate market remained good throughout the quarter. Deposit growth is good and the deposit-to-loan ratio is high.
Lending growth in the retail market is expected to remain under 5 per cent in 2020. For the corporate market, the growth will fall to a similar level, in part due to strong growth throughout 2019, but also due to a lower level of investment as a result of the coronavirus crisis.
The Bank has a solid capital base and good liquidity and will remain a strong, committed supporter of our customers also throughout the coronavirus crisis. The focus will always be on good operations and profitability.
Sparebanken Møre’s target for cost-effective operations is a cost income ratio of less than 40 per cent. The Bank’s strategic target for return on equity is more than 11 per cent. Given what now appears to be the likely duration and impact of the government’s activity reducing measures aimed at countering the coronavirus, it seems unlikely that the Bank’s targets will be achieved in 2020.
Ålesund, 31 March 2020
29 April 2020
THE BOARD OF DIRECTORS OF SPAREBANKEN MØRE
LEIF-ARNE LANGØY, Chairman of the Board
RAGNA BRENNE BJERKESET, Deputy Chairman
ANN MAGRITT BJÅSTAD VIKEBAKK
KÅRE ØYVIND VASSDAL
HELGE KARSTEN KNUDSEN
MARIE REKDAL HIDE
TROND LARS NYDAL, CEO