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 2020
Sparebanken Møre’s pre-tax profit after the first half of 2020 was NOK 342 million, compared with NOK 443 million after the first half of 2019.
Total income was NOK 35 million lower than for the same period in 2019. Net interest income fell by NOK 16 million and other operating income fell by NOK 19 million. Capital losses from bond holdings amounted to NOK 14 million, compared with capital gains of NOK 3 million in the first half of 2019. Capital gains on equities totalled NOK 5 million, compared with NOK 12 million in the first half of 2019. Income from other financial investments showed an increase of NOK 5 million compared with the first half of 2019.
Costs were NOK 7 million higher in the first half of 2020 than in 2019. Personnel costs were NOK 4 million lower than last year and financial activity tax in the form of higher employers’ National Insurance contributions amounted to NOK 7 million, NOK 1 million more than in 2019. Other operating costs increased by NOK 11 million in the same period.
Losses on loans and guarantees amounted to NOK 78 million and were NOK 59 million higher than in the same period last year.
The cost income ratio after the first half-year was 43.5 per cent. This is 2.8 percentage points higher than in the same period in 2019.
The profit after tax was NOK 267 million; NOK 76 million lower than in the same period in 2019. The half-year results show an annualised return on equity of 8.2 per cent, compared with 11.5 per cent after the first half of 2019.
Earnings per equity certificate were NOK 12.62 (NOK 16.80) for the Group and NOK 19.23 (NOK 20.35) for the Parent Bank.
RESULTS FOR Q2 2020
Profit after tax was NOK 150 million for the second quarter of 2020, or 0.76 per cent of average total assets, compared with NOK 181 million, or 0.98 per cent, for the corresponding quarter last year.
Return on equity was 9.2 per cent in the second quarter of 2020 compared with 12.0 per cent in the second quarter of 2019, and the cost income ratio amounted to 40.3 per cent compared with 40.0 per cent in the second quarter of 2019.
Earnings per equity certificate were NOK 7.16 (NOK 8.85) for the Group and NOK 4.76 (NOK 6.20) for the Parent Bank.
Net interest income
Net interest income was NOK 266 million, which is NOK 54 million, or 16.9 per cent, lower than in the corresponding quarter of last year. This represents 1.35 per cent of total assets, which is 0.40 percentage points lower than in the second quarter of 2019.
The interest rate margins for both lending and deposits contracted sharply in the second quarter of 2020 compared with the first quarter of 2020 in both the retail and corporate markets.
The Bank reduced interest rates on loans in the retail market by up to 0.85 percentage points from 8 April and by up to 0.40 percentage points from 27 May. Deposit rates were first reduced from 27 May and will be cut further from 15 July. Since lending rates were cut before deposit rates, this resulted in a sharp reduction in net interest income in the second quarter of 2020.
It will also take some weeks before the repricing of the Group’s borrowing from the capital market is implemented, at the same time as the reduced contribution from the Bank’s equity also reduced the net interest income in the second quarter.
Strong competition in both lending and deposits has also contributed to pressure on net interest income.
The combination of these factors resulted in a reduction in the net interest income in the quarter of around NOK 76 million compared with the first quarter of 2020.
The positive effects of the rate changes and reduction in borrowing costs will not be fully reflected in net interest income until August.
Other operating income
Other operating income was NOK 124 million in the quarter, which is NOK 46 million higher than in the second quarter of last year. The return on financial investments was NOK 50 million higher than in the second quarter of 2019. Capital gains from bond holdings were NOK 28 million in the quarter, compared with capital losses of NOK 3 million in the corresponding quarter last year. Capital gains on equities were NOK 12 million, compared with capital gains of NOK 7 million in the second quarter of 2019, and income from other financial investments increased by NOK 14 million compared with the same period last year.
Other income excluding financial investments decreased by NOK 4 million compared with the second quarter of 2019.
Operating costs in the quarter amounted to NOK 157 million, which is NOK 3 million lower than in the same quarter last year. Personnel costs were NOK 8 million lower than in the corresponding period last year and amounted to NOK 81 million. Staffing increased by two full-time equivalents in the past 12 months, to 360 FTEs. Other operating costs increased by NOK 5 million from the same period last year.
The cost income ratio for the second quarter of 2020 was 40.3 per cent, 0.3 percentage points higher than in the second quarter of last year.
NOK 42 million (NOK 6 million) was charged in losses on loans and guarantees in the quarter. This amounts to 0.21 per cent (0.03 per cent) of average total assets on an annualised basis. Losses in the corporate segment increased by NOK 51 million in the quarter, while losses in the retail segment decreased by NOK 9 million.
At the end of the second quarter of 2020, total expected losses amounted to NOK 446 million, equivalent to 0.65 per cent of loans and guarantees (NOK 354 million and 0.55 per cent). Of the total expected losses, NOK 24 million are linked to a credit-impaired commitment more than 90 days past due (NOK 11 million), which amounts to 0.03 per cent of loans and guarantees (0.02 per cent). NOK 272 million relates to other credit-impaired commitments (NOK 239 million), which is equivalent to 0.41 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 194 million in the past 12 months. At the end of the second quarter of 2020, the corporate market accounted for NOK 856 million of net credit-impaired commitments and the retail market NOK 85 million. In total, this represents 1.41 per cent of gross loans and guarantees (1.17 per cent).
Lending to customers
At the end of the second quarter of 2020, lending to customers amounted to NOK 65,094 million (NOK 62,529 million). Customer lending has increased by a total of NOK 2,565 million, or 4.1 per cent, in the past 12 months. Retail lending has increased by 3.2 per cent, while corporate lending has increased by 6.4 per cent in the past 12 months. Lending to corporate customers decreased by 2.0 per cent in the second quarter of 2020, while lending to retail customers rose by 1.2 per cent. Retail lending accounted for 68.5 per cent of total lending at the end of the second quarter of 2020 (69.3 per cent).
Deposits from customers
Customer deposits have increased by NOK 1,734 million, or 4.6 per cent, in the past 12 months. At the end of the second quarter of 2020, deposits amounted to NOK 39,055 million (NOK 37,321 million). Retail deposits have increased by 8.1 per cent in the past 12 months, while corporate deposits have decreased by 0.7 per cent and public sector deposits have increased by 9.4 per cent. The retail market’s relative share of deposits amounted to 60.6 per cent (58.7 per cent), while deposits from the corporate market accounted for 37.1 per cent (39.1 per cent) and from the public sector market 2.3 per cent (2.2 per cent).
The deposit-to-loan ratio was 60.0 per cent at the end of the second quarter of 2020 (59.7 per cent).
Sparebanken Møre is very well capitalised. At the end of the second quarter, the Common Equity Tier 1 capital ratio was 17.3 per cent (15.1 per cent), incl. 50 per cent of the result for the year to date. This is 4.6 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 21.2 per cent (19.1 per cent), while the Tier 1 capital ratio was 19.1 per cent (17.2 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 applicable from 31 December 2019 are the elimination of the transitional rule for the Basel I floor and the introduction of an SME discount of 23.82 per cent 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 second 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 second quarter of 2020 was 7.7 per cent, 0.2 percentage points lower than at the end of the second 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 amounted to NOK 96 million after tax in the first half of 2020 (NOK 99 million).
Møre Boligkreditt AS was established as part of the Group’s long-term funding strategy. The main purpose of the covered bond company is to issue covered bonds for sale to Norwegian and international investors. At the end of the second quarter of 2020, the company had outstanding bonds of NOK 27.4 billion in the market. Around 32 per cent was issued in currencies other than NOK. NOK 2.1 billion of the volume of bonds issued by the company was held by the Parent Bank at the end of the second quarter of 2020. Møre Boligkreditt AS contributed NOK 94 million to the result in the first half of 2020 (NOK 97 million).
Møre Eiendomsmegling AS provides real estate brokerage services to both retail and corporate customers. The company contributed NOK 0.7 million to the result in the first half of 2020 (NOK 0.9 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 commercial properties. The company contributed NOK 0.9 million to the result in the first half of 2020 (NOK 0.7 million). The company has no employees.
At the end of the second quarter of 2020, there were 5,747 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 2020, the Bank owned 22,111 of its own equity certificates. These were purchased on the Oslo Børs at market prices.
COVID-19: LIQUIDITY, FINANCING AND PROFITS
Sparebanken Møre entered the corona crisis with good key figures for capital and liquidity. At the start of the year, the net stable funding ratio (NSFR) was 113 and the Group’s Common Equity Tier 1 capital was 17.7 per cent. The liquidity coverage ratio (LCR) was 172 at the end of February 2020.
The Group’s first market loan matures on 23 September 2020, NOK 3,000 million in MOBK14 from Møre Boligkreditt AS. The next major maturity date is in February 2021, a NOK 2,100 million MORG44 senior loan. At the end of the first half-year, buybacks in the market resulted in the outstanding amounts related to these loans decreasing to NOK 1,283 million and NOK 1,850 million, respectively.
At the end of the second quarter, NSFR was 115, LCR 170 and Common Equity Tier 1 capital 17.3 per cent.
As the Group has not reached any maturity dates for market funding in H1, it is the normal seasonal variations and changes in growth rates for loans and deposits due to the current situation that have affected the Bank’s liquidity in the last few months. The government’s tax deferral measures, as well as support schemes, etc. related to Covid-19 have also, to some extent, affected the liquidity situation.
Following a slight drop in institutional deposits in March, April saw relatively weak lending growth with a good influx of deposits. Deposit growth continued in the retail market in May, while tax payments and other factors resulted in a negative development in deposits from the corporate market. Overall, the growth in deposits and lending was reasonable balanced in May. Seasonally, deposits increased sharply in June. In the first six months of this year, deposits increased by almost NOK 1,200 million more than loans and the Group saw its deposit-to-loan ratio increase from 57.5 per cent to 60.0 per cent.
Sparebanken Møre has received liquidity from Norges Bank’s F-loan scheme with two loans totalling NOK 1,000 million. NOK 500 million with a six-month term to maturity and NOK 500 million with a 12-month term to maturity. The liquidity from these loans has be used to strengthen the Bank’s LCR liquidity portfolio correspondingly. At the same time, the Group has followed its planned funding strategy. In June, we accordingly placed a covered bond issue in the market of NOK 3,000 million with a maturity of 5.25 years, replacing the bond maturing in September. The issue was well received.
The Bank has monitored liquidity developments closely over the past few months: liquidity, financial status and risk assessment. Frequent meetings have been held by the contingency group for liquidity, reporting to the executive management team and Board on a very frequent basis. The status of liquidity and the development of deposits have also been regular items on the agenda in the Bank’s Crisis management group. LCR has been monitored continuously and reported daily throughout the period and we have not registered any days without robust margins in relation to the minimum requirement.
The development of the market value of the Bank’s LCR liquidity portfolio was the item with the largest negative impact on the Bank’s results in the first quarter. This effect significantly decreased in the second quarter, although it will remain an uncertain factor going forward as well. The Bank has no trading portfolio in equities or significant ownership stakes in product companies, which indicates that the volatility in relation to financial performance will be low for the remainder of the year as well.
The Group’s market funding is raised at floating interest rates or by swapping fixed-rate issues to floating rates. The funding cost will therefore follow developments in the 3 month NIBOR with a time lag corresponding to the timing of the rate fixing. It takes a quarter before the funding portfolio is fully repriced to the new levels for the money market rate. Sparebanken Møre will thus not see normal funding costs until July.
The funding portfolio’s interest rate fixing profile, and the fact that our lending rates to customers were reduced immediately after the central bank’s cut its rates while deposit rates were not cut until six weeks later, markedly weakened the Bank’s net interest income in the second quarter. Net interest income was also negatively impacted by a lower return on the Bank’s equity. This has led to a lowering of the net interest income forecast for the year as a whole. We expect, however, a significant increase in net interest Income in the coming quarters compared to the second quarter.
The major economic uncertainty that arose at the end of the first quarter of 2020 due to the Covid-19 situation and fall in oil prices resulted in increased credit risk and increased expected losses. In spite of the macroeconomic conditions improving in the second quarter and continued low credit impaired commitments, uncertainty about the development of the Covid-19 situation and the consequences of the fall in oil prices still reigns. Changes in these conditions could impact the Group’s level of losses.
The probability weightings for macro scenarios were kept unchanged at the end of the second quarter of 2020. In the first quarter of 2020, the probability of the pessimistic scenario occurring was increased from 10 to 40 per cent, while for the base scenario it was reduced from 80 to 50 per cent. For further information about the consequences of Covid-19 and the measurement of expected credit loss see note 3.
Economic key figures indicate that output and demand in Møre og Romsdal increased during the second quarter of 2020. This was due to the easing of infection control measures. Comprehensive fiscal policy measures, lower interest rates and a weak Norwegian kroner exchange rate were positive contributory factors. Unemployment also fell sharply. At the end of June, unemployment in the county amounted to 4.1 per cent of the labour force. In comparison, the national unemployment rate was 4.8 per cent. If there are no new periods of activity reducing measures aimed at preventing the spread of infection, unemployment may continue to fall until the end of the year.
However, several business sectors face the prospect of declining earnings. This applies to sectors such as the tourism industry and the maritime industry. At the same time, oil-related industries will be negatively impacted by the prospects of a sharp decline in petroleum investments in the next few years. Therefore, although production growth is rising, it is likely that unemployment in the county and nationally will remain higher in the long term than it was prior to the coronavirus pandemic.
Household debt in Norway as a whole has decreased steadily in the year to date and at the end of June, the annualised rate is 4.4 per cent. The growth in lending in the corporate market has also fallen in the year to date to an annualised rate of 3.5 per cent.
During the first half of the year, the Bank noted somewhat slower growth in both lending to the retail market and lending to the corporate market compared with the annual growth at the end of the fourth quarter. Deposit growth in the year to date has been very good and the deposit-to-loan ratio is high and climbing.
The Bank expects the lending growth in 2020 to be somewhat lower than anticipated at the beginning of the year. This is due to tough competition, a strong growth in 2019, a lower level of investments as a result of the corona pandemic and the reduction in oil price.
The Bank has a solid capital base and good liquidity, and will also remain a strong, committed supporter of our customers going forward. The focus will always be on good operations and profitability.
Sparebanken Møre’s long-term targets of a return on equity above 11 per cent and a cost income ratio below 40 per cent remain unchanged. The duration and consequences of the government’s activity reducing measures aimed at countering the coronavirus are expected to have a significant effect on the level of activity in the remainder of the year. This, combined with weaker net interest income due in part to market practices regarding changes to lending and deposit rates in spring 2020, means that it is unlikely that the Bank’s strategic target for the return on equity will be achieved in 2020. The Bank expects, however, to achieve it's long-term targets in 2021.
Ålesund, 30 June 2020
12 August 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