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 H1 2019
Sparebanken Møre's pre-tax profit after the first half of 2019 was NOK 443 million, compared to NOK 415 million after the first half of 2018.

Total income was NOK 68 million higher than for the same period in 2018. Net interest income rose by NOK 44 million and other operating income increased by NOK 24 million. Capital gains from bond holdings amounted to NOK 3 million, compared to losses of NOK 2 million in the first half of 2018. Capital gains on equities totalled NOK 12 million, compared to NOK 13 million in the first half of 2018. Income from other financial investments showed an increase of NOK 15 million compared to the first half of 2018.

Costs were NOK 18 million higher in the first half of 2019 than in 2018. Personnel costs were NOK 5 million higher than last year and financial activity tax in the form of higher employers' National Insurance contributions amounted to NOK 6 million, the same as in 2018. Other operating costs increased by NOK 13 million in the same period.

Losses on loans and guarantees amounted to NOK 19 million and were NOK 22 million higher than in the same period last year.

The cost income ratio after the first half-year was 40.7 per cent. This represents a decrease of 1.4 percentage points compared to the same period in 2018.

Profit after tax was NOK 341 million, NOK 26 million higher than for the same period in 2018. The half-year results show an annualised return on equity of 11.5 per cent, compared to 11.2 per cent after the first half of 2018.

Earnings per equity certificate amounted to NOK 16.80 (NOK 15.45) for the Group and NOK 20.35 (NOK 18.40) for the Parent Bank.

The Board of Directors is pleased with the results for the first half of 2019.

RESULTS FOR Q2 2019
The profit after tax for the second quarter of 2019 amounted to NOK 179 million, or 0.98 per cent of average total assets, compared to NOK 174 million, or 1.00 per cent, for the corresponding quarter last year.

The return on equity in the second quarter of 2019 was 12.0 per cent, compared to 12.3 per cent for the second quarter of 2018.

Earnings per equity certificate amounted to NOK 8.85 (NOK 8.50) for the Group and NOK 6.20 (NOK 6.40) for the Parent Bank.

Net interest income
The net interest income of NOK 320 million was NOK 29 million higher than in the corresponding quarter of last year. This represents 1.75 per cent of total assets, which is 0.07 percentage points higher than for the second quarter of 2018.

Rising interest rates have led to increased funding costs and reduced margins on loans, as well as higher margins on deposits, compared to the second quarter of 2018. This reduced net interest income in NOK. On the other hand, higher lending and deposit volumes, as well as better interest contributions from the Bank's equity, increased net interest income in NOK compared to the corresponding quarter last year.

Strong competition in both lending and deposits, and reduced risk in the lending portfolio, have contributed to downward pressure on net interest income in percentage.

The Bank implemented a change in interest rates with effect from 10 May in which both lending and deposit rates were increased by up to 0.25 percentage points. A similar change in interest rates has been announced and will be effective from 9 August.

Other operating income
Other operating income amounted to NOK 78 million in the quarter, on a par with the second quarter last year. Other operating income apart from financial instruments showed an increase of NOK 3 million compared to the second quarter of 2018. The changes in value in the bond portfolio and equities constitute capital gains of NOK 4 million in the quarter, compared to capital gains of NOK 10 million in the second quarter of 2018. The valuation of other financial derivatives shows an increase of NOK 3 million.

Costs
Operating costs in the quarter amounted to NOK 160 million, which is NOK 10 million higher than in the same quarter last year. Personnel costs were NOK 3 million higher than in the corresponding period last year and amounted to NOK 88 million. Staffing has increased by two full-time equivalents in the last 12 months to 358 full-time equivalents. Other operating costs increased by NOK 7 million from the same period last year.

The cost income ratio amounted to 40.0 per cent in the second quarter of 2019, which represents a reduction of 0.6 percentage points compared to the second quarter last year.

Problem loans
The quarterly accounts were charged NOK 6 million in losses on loans and guarantees (reversal of losses of NOK 5 million was recognised in the corresponding period last year). This amounts to 0.03 per cent (-0.03 per cent) of average total assets on an annualised basis. Losses in the corporate segment increased by NOK 6 million in the quarter, while no losses were recognised in the retail segment.

At the end of the second quarter of 2019, total expected losses amounted to NOK 355 million, equivalent to 0.55 per cent of loans and guarantees (NOK 335 million and 0.55 per cent). Of the individually assessed commitments, NOK 11 million of the impairments were linked to commitments in default for more than 90 days (NOK 5 million), which amounts to 0.02 per cent of loans and guarantees (0.01 per cent). NOK 225 million relates to other commitments (NOK 93 million), which is equivalent to 0.37 per cent of gross loans and guarantees (0.15 per cent).

Net problem loans (commitments in default for more than 90 days and other problem loans which have been subject to individual impairments) have increased by NOK 514 million the last 12 months due to the recognition of individual impairments for commitments previously in stage 3 in the Group’s ECL model. At the end of the second quarter of 2019, the corporate market accounted for NOK 700 million of net problem loans and the retail market NOK 61 million. In total this represents 1.19 per cent of gross loans and guarantees (0.41 per cent).

Lending to customers
At the end of the second quarter of 2019, lending to customers amounted to NOK 62,529 million (NOK 58,874 million). Customer lending has increased by a total of NOK 3,655 million, or 6.2 per cent, in the last 12 months. Retail lending has increased by 6.2 per cent and corporate lending has also increased by 6.2 per cent in the last 12 months. Lending to corporate customers increased by 1.7 per cent in the second quarter of 2019, while lending to retail customers rose by 2.1 per cent. Retail lending accounted for 69.3 per cent of total lending at the end of the second quarter of 2019 (69.0 per cent).

Deposits from customers
Customer deposits have increased by 9.0 per cent in the last 12 months. At the end of the second quarter of 2019, deposits amounted to NOK 37,321 million (NOK 34,239 million). Retail deposits have increased by 5.1 per cent in the last 12 months, while corporate deposits have increased by 15.7 per cent and public sector deposits have increased by 6.1 per cent. The retail market’s relative share of deposits amounted to 58.7 per cent (60.9 per cent), while deposits from the corporate market accounted for 39.1 per cent (36.9 per cent) and from the public sector 2.2 per cent (2.2 per cent).

The deposit-to-loan ratio was 59.7 per cent at the end of the second quarter of 2019 (58.2 per cent).

CAPITAL ADEQUACY
The Group’s capital adequacy at the end of the second quarter of 2019 was above the regulatory capital requirement and the internally set minimum target for Common Equity Tier 1 capital (CET1). The primary capital ratio, including 50 per cent of year-to-date profit, was 19.1 per cent (19.1 per cent), the Tier1 capital ratio was 17.1 per cent (17.1 per cent) and the CET1 ratio was 15.1 per cent (15.5 per cent). The decrease in CET1 in the quarter was mainly due to the recognition of individual impairments on commitments previously in stage 3 in the Group’s ECL model.

Sparebanken Møre had no capital requirements associated with the transitional scheme for the Basel I floor at the end of the second quarter of 2019. The calculation basis of NOK 35,999 million was NOK 309 million higher than the calculated Basel I floor.

SUBSIDIARIES
The aggregate profit of the Bank's three subsidiaries amounted to NOK 99 million after tax in the first half of 2019 (NOK 92 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 second quarter of 2019, the company had net outstanding bonds of NOK 22.3 billion in the market. About 25 per cent of the borrowing was in currencies other than NOK. The company contributed NOK 97 million to the result in the first half of 2019 (NOK 90 million).

Møre Eiendomsmegling AS provides real estate brokerage services to both retail and corporate customers. The company contributed NOK 0.9 million to the result in the first half of 2019 (NOK 0.3 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 0.7 million to the result in the first half of 2019 (NOK 2 million). The company has no employees.

EQUITY CERTIFICATES
At the end of the second quarter of 2019, there were 5,453 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 30 June 2019, the Bank owned 24,832 of its own equity certificates. These were purchased on the Oslo Stock Exchange at market prices.

FUTURE PROSPECTS
A moderate rise in output and demand is expected in the county going forward. Interest rates are still low, the exchange rate remains weak, and the upturn in oil investments has positive ripple effects for a large part of the rest of the business sector. However, geopolitical uncertainty, Brexit and the trade conflict between the US and China are contributing to a slowdown in growth in our export markets.   

Unemployment in the county has dropped markedly in the last few years. This is especially true in oil-related segments. According to NAV, registered unemployment at job centres in Møre og Romsdal amounted to 2.0 per cent of the workforce at the end of June. This is lower than the national rate. Unemployment is likely to stabilise around the current level for the rest of this year.

Credit growth in Norway, both in households and the corporate sector, remains largely unchanged so far this year.

Competition in the market remains strong, both for lending and deposits.

The Bank is competitive and recorded a good, and increasing, growth rate in lending to the retail market. An increase in the growth rate for lending to the corporate market was also registered in the second quarter of 2019. Deposit growth is very good and the deposit-to-loan ratio is high, especially in the corporate market. Lending growth in both the retail market and the corporate market will be around 5-6 per cent in 2019. This implies growth on a par with or above market growth. There is a constant focus on effective operations and increased profitability.

The Bank will remain strong and committed in supporting business and industries in our region, Nordvestlandet.

Sparebanken Møre’s target for cost-effective operations for the strategy period 2019-2022 is a cost income ratio of less than 40 per cent.

Sparebanken Møre’s losses are also expected to be low in 2019. Overall, a good result is expected for 2019. The Bank’s strategic target is for the return on equity to exceed 11 per cent in the strategy period 2019-2022.