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 2022
Sparebanken Møre’s profit before tax after the first half of 2022 was NOK 445 million, compared with NOK 403 million after the first half of 2021.
Total income was NOK 31 million higher than for the same period in 2021. Net interest income rose by NOK 76 million and other operating income fell by NOK 45 million. Capital losses from bond holdings amounted to NOK 66 million, compared with capital gains of NOK 3 million in the first half of 2021. Capital gains on equities totalled NOK 25 million, compared with NOK 12 million in the first half of 2021. Income from other financial instruments showed a reduction of NOK 2 million compared with the first half of 2021.
Costs were NOK 39 million higher in the first half of 2022 than in 2021. Personnel costs were NOK 30 million higher than last year and other operating costs NOK 9 million higher.
Recoveries on losses on loans and guarantees amounted to NOK 8 million, which improved the profit by NOK 50 million compared with the same period last year.
The cost income ratio after the first half-year was 44.7 per cent. This is 3.4 percentage points higher than in the same period in 2021.
Profit after tax was NOK 346 million, NOK 33 million higher than for the same period in 2021. The half-year results represent an annualised return on equity of 9.9 per cent, compared with 9.4 per cent after the first half of 2021.
Earnings per equity certificate were NOK 3.35 for the Group and NOK 4.90 for the parent bank.
RESULTS FOR Q2 2022
Profit before losses amounted to NOK 228 million for the second quarter of 2022, or 1.06 per cent of average assets, compared with NOK 213 million, or 1.06 per cent, for the corresponding quarter last year.
Profit after tax amounted to NOK 183 million for the second quarter of 2022, or 0.85 per cent of average total assets, compared with NOK 143 million, or 0.71 per cent, for the corresponding quarter last year.
Return on equity was 10.4 per cent for the second quarter of 2022, compared with 8.5 per cent for the second quarter of 2021, and the cost income ratio amounted to 43.3 per cent compared with 42.9 per cent for the second quarter of 2021.
Earnings per equity certificate were NOK 1.78 for the Group and NOK 1.43 for the parent bank.
Net interest income
Net interest income was NOK 353 million, which is NOK 46 million, or 15.0 per cent, higher than in the corresponding quarter of last year. This represents 1.65 per cent of total assets, which is 0.12 percentage points higher than for the second quarter of 2021.
In the retail market, the interest margin for lending has contracted and the deposit margin has widened compared with the second quarter of 2021. In the corporate market, the interest margin for lending was stable, while the interest margin for deposits widened compared with the same period.
Strong competition in both lending and deposits, contributed to downward pressure on net interest income, while higher lending and deposit volumes resulted in an increase in net interest income.
Other income was NOK 49 million in the quarter, which is NOK 15 million lower than in the second quarter of last year. The net result from financial instruments was NOK -10 million and this is NOK 22 million less than in the second quarter of 2021. Capital losses from bond holdings were NOK 35 million in the quarter, compared with capital losses of NOK 4 million in the corresponding quarter last year. Capital gains from equities amounted to NOK 14 million compared with capital gains of NOK 2 million in the second quarter of 2021. The negative change in value for fixed-rate lending amounted NOK 5 million, compared with a positive change in value of NOK 1 million in the same quarter last year. The value of issued bonds increased by NOK 1 million, which is on a par with the second quarter of 2021. Income from foreign exchange and interest trading amounted to NOK 14 million, NOK 2 million more than in the same quarter last year.
Other customer related income, excluding financial instruments, increased by NOK 7 million compared with the second quarter of 2021. The increase was mainly attributable to income from fund sales/securities, income from Discretionary Portfolio Management and money-transfer services.
See Note 7 for a specification of other income.
Operating costs amounted to NOK 174 million for the quarter, which is NOK 16 million higher than for the same quarter last year. Personnel costs accounted for NOK 11 million of the rise in relation to the same period last year and totalled NOK 100 million. Staffing has increased by 28 FTEs in the past 12 months to 371 FTEs. Other operating costs have increased by NOK 5 million from the same period last year. See Note 8 for a specification of costs.
The cost income ratio for the second quarter of 2022 was 43.3 per cent, 0.4 percentage points higher than in the second quarter of last year.
Provisions for expected losses and credit-impaired commitments
The quarter’s accounts were credited with recoveries on losses on loans and guarantees of NOK 8 million, equivalent to -0.04 per cent of average assets (loss last year of NOK 28 million/0.14 per cent of average assets). The corporate segment saw recoveries on losses of NOK 13 million in the quarter, while losses in the retail segment amounted to NOK 5 million.
At the end of the second quarter of 2022, provisions for expected credit losses totalled NOK 348 million, equivalent to 0.47 per cent of gross lending and guarantee commitments (NOK 364 million and 0.51 per cent). Of the total provisions for expected credit losses, NOK 12 million concern credit-impaired commitments more than 90 days past due (NOK 18 million), which amounts to 0.02 per cent of gross lending and guarantee commitments (0.03 per cent). NOK 209 million concern other credit-impaired commitments (NOK 224 million), which is equivalent to 0.28 per cent of gross lending and guarantee commitments (0.32 per cent).
Net credit-impaired commitments (commitments more than 90 days past due and other commitments in Stage 3) have decreased by NOK 457 million in the past 12 months. At end of the second quarter of 2022, the corporate market accounted for NOK 356 million of net credit-impaired commitments and the retail market NOK 70 million. In total, this represents 0.57 per cent of gross lending and guarantee commitments (1.24 per cent).
Lending to customers
At the end of the second quarter of 2022, lending to customers amounted to NOK 72,300 million (NOK 69,132 million). In the past 12 months, customer lending has increased by a total of NOK 3,168 million, or 4.6 per cent. Retail lending has increased by 4.1 per cent and corporate lending has increased by 5.6 per cent in the past 12 months. Lending to corporate customers increased by 4.0 per cent in the second quarter of 2022, while lending to retail customers rose by 2.1 per cent. Retail lending accounted for 67.2 per cent of total lending at the end of the second quarter of 2022 (67.6 per cent).
Deposits from customers
Customer deposits have increased by NOK 3,462 million, or 8.3 per cent, in the past 12 months. At the end of the second quarter of 2022, deposits amounted to NOK 44,946 million (NOK 41,484 million). Retail deposits have increased by 6.2 per cent in the last 12 months, while corporate deposits have increased by 13.5 per cent and public sector deposits have decreased by 14.0 per cent. The retail market’s relative share of deposits amounted to 58.9 per cent (60.0 per cent), while deposits from the corporate market accounted for 38.9 per cent (37.1 per cent) and from the public sector market 2.2 per cent (2.9 per cent).
The deposit-to-loan ratio was 61.9 per cent at the end of the second quarter of 2022 (59.7 per cent).
Sparebanken Møre’s Liquidity Coverage Ratio (LCR) was 140.12 for the Group and 129.25 for the parent bank at the end of June this year. The EUR is a significant currency for the Group and Møre Boligkreditt AS. A currency is considered a ‘significant currency’ when liabilities denominated in that currency amount to 5 per cent of total liabilities. When the EUR and/or USD are significant currencies, a minimum requirement for NOK of 50 per cent applies.
The EU Banking Package, CRR II/CRD V, was introduced in Norway from 1 June this year. This entails, among other things, the introduction of a binding requirement that the net stable funding ratio (NSFR) must be more than 100 at all reporting levels. CRR II sets new weights for asset and liability items, and for off-balance sheet items. The bank has measured and reported NSFRs for several years, and the NSFR was 127 at the end of the second quarter (consolidated figure), while the NSFRs for the bank and Møre Boligkreditt AS were 125 and 116, respectively.
Sparebanken Møre is well capitalised. At the end of the second quarter, the Common Equity Tier 1 capital ratio was 18.1 per cent (16.9 per cent), including 50 per cent of the result for the year to date. This is 4.9 percentage points higher than the total regulatory minimum requirement for the Common Equity Tier 1 capital ratio of 13.2 per cent. The primary capital ratio, including 50 per cent of the result for the year to date, was 22.4 per cent (20.6 per cent) and the Tier 1 capital ratio was 19.9 per cent (18.6 per cent).
Capital adequacy is calculated in line with the EU’s Capital Requirements Directive (CRD) and Capital Requirements Regulation (CRR).
The EU’s Banking Package, CRR II/CRD V, came into force on 1 June and introduces a number of changes to financial strength and liquidity requirements, as well as to crisis management regulations. The banking package also includes an expansion of the SME discount, which reduces the bank’s capital requirements for lending to SMEs. The effect of this change in the regulations amounts to an improvement of 1.3 percentage points in the Common Equity Tier 1 capital ratio for the bank.
Sparebanken Møre’s total Common Equity Tier 1 capital ratio requirement is 13.2 per cent. The requirement consists of a minimum requirement of 4.5 percent, a capital conservation buffer of 2.5 per cent, a systemic risk buffer of 3.0 per cent and countercyclical buffer of 1.5 per cent. In addition, the Financial Supervisory Authority of Norway has set an individual Pilar 2 requirement for Sparebanken Møre of 1.7 per cent, as well as an expected capital adequacy margin of 1.25 per cent.
The leverage ratio (LR) at the end of the second quarter of 2022 was 7.7 per cent, 0.1 percentage points higher than at the end of the second quarter of 2021. The regulatory minimum requirement (3 per cent) was met by a good margin.
One key element of the BRRD II (Bank Recovery and Resolution Directive) is that capital instruments and debt can be written down and/or converted to equity (bail-in). The Financial Institutions Act, therefore, requires the bank to meet a minimum requirement regarding the sum of its own funds and convertible debt at all times (MREL – minimum requirement for own funds and eligible liabilities) such that the bank has sufficient primary capital and convertible debt to cope with a crisis without the use of public funds.
The MREL requirement must be covered by own funds or debt instruments with a lower priority than ordinary, unsecured, non-prioritised debt (senior debt). The subordination requirement (lower priority) must be met in full by no later than 1 January 2024. Until then, senior debt with a remaining term to maturity of more than one year can be used to help meet the subordination requirement.
The overall subordination requirement must as a minimum be phased in linearly. From 1 January 2022, the effective subordination requirement is 20 per cent of the adjusted risk-weighted assets.
Sparebanken Møre had issued NOK 2,000 million in senior non-preferred debt(SNP) at the end of second quarter of 2022.
The aggregate profit of the bank’s three subsidiaries amounted to NOK 86 million after tax in the first half of 2022 (NOK 122 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 2022, the company had outstanding bonds of NOK 24.0 billion in the market. Around 33 per cent of this was denominated in a currency other than NOK. Of the volume of bonds issued by the company, NOK 500 million (both nominal values) was held by the parent bank at the end of the second quarter of 2022. Møre Boligkreditt AS contributed NOK 83 million to the Group’s result in the first half of 2022 (NOK 121 million).
Møre Eiendomsmegling AS provides real estate brokerage services to both retail and corporate customers. The company contributed NOK 1.0 million to the result in the first half of 2022 (NOK 0.1 million). At the end of the quarter, the company employed 19 FTEs.
Sparebankeiendom AS’s purpose is to own and manage the bank’s commercial properties. The company contributed NOK 2.2 million to the result in the first half of 2022 (NOK 0.8 million). The company has no employees.
At the end of the second quarter of 2022, there were 5,855 holders of Sparebanken Møre’s equity certificate. The proportion of equity certificates owned by foreign nationals amounted to 3.2 per cent at the end of the quarter. 49,434,770 equity certificates have been issued. Equity certificate capital accounts for 49.66 per cent of the bank’s total equity.
Note 14 includes a list of the 20 largest holders of the bank’s equity certificates. As at 30 June 2022, the bank owned 110,937 of its own equity certificates. These were purchased on the Oslo Børs at market prices.
The outlook for global growth has weakened as a result of geopolitical uncertainty, high inflation and the prospect of higher interest rates in many countries. The US Federal Reserve increased interest rates by 0.75 percentage points at its interest rate meeting on 27 July in order to curb inflationary pressures. It also indicated that interest rates would probably be raised by a further 0.50-0.75 percentage points in September.
Consumer price inflation in the US, measured over the past 12 months, was 9.1 per cent in June. This is the highest price inflation rate since 1981. The increase in expected inflation rates and prospect of higher interest rates has affected the international financial markets. Equity markets have seen large fluctuations and long-term interest rates have risen sharply on expectations of higher policy rates.
The European Central Bank (ECB) has also started to tighten monetary policy. It increased its deposit rate by 0.50 percentage points to 0.00 per cent at its interest rate meeting on 21 July. The decision to raise interest rates by 0.50 percentage points, and not 0.25 percentage points as previously indicated, was due to higher than expected inflation. In June, 12-month consumer price inflation was 8.6 per cent.
Norges Bank increased its key policy rate by 0.50 percentage points to 1.25 per cent at its interest rates meeting on 23 June. Additionally, its interest rate path, i.e. the central bank’s prognosis regarding its key policy rate, was raised. Norges Bank is now indicating that its policy rate will increase to around 3 per cent towards summer next year. In its reasons for raising interest rates and the rate curve, the bank pointed to high levels of activity in the economy and little available capacity. Inflation is also clearly above the target rate for core inflation of 2 per cent.
The output of goods and services in Mainland Norway was almost 3 per cent higher in May than before the pandemic. Mainland Norway is the Norwegian economy exclusive of oil activities and foreign shipping. As a consequence of the upturn in demand, the unemployment rate has continued to fall. At the end of June, the number of unemployed people in Møre og Romsdal accounted for 1.5 per cent of the workforce. This is the lowest unemployment rate since 2008.
Growth in lending to households fell somewhat during the first half of this year for Norway as a whole, while growth in lending to the corporate market increased markedly. At the end of June this year, the overall 12-month growth in lending to the public was around 5.1 per cent, compared with 5.0 per cent at the end of 2021. As a consequence of higher interest rates and house prices levelling off, a further slowdown in the growth of lending to households is expected going forward, while corporate investments, including petroleum investments, are helping to keep the rate of growth in corporate lending up (Norges Bank, June 2022).
The bank’s overall lending growth remained good during the first half of the year and our market share is increasing. The 12-month growth rate ended at 4.6 per cent, the same as at the end of 2021. The year-on-year growth in lending to the retail market ended at 4.1 per cent at the end of the second quarter, while lending growth in the corporate market over the past 12 months to the end of June was 5.6 per cent. Deposits increased by 8.3 per cent in the past 12 months up to the end of the second quarter of 2022, and the deposit-to-loan ratio remains high.
The bank has a solid capital base and good liquidity and will remain a strong and committed supporter of our customers also going forward. The focus will always be on good operations and profitability.
Sparebanken Møre’s strategic financial performance targets are a return on equity of above 11 per cent and a cost income ratio of under 40 per cent. The Board expects the return on equity to be achieved in 2022 and that the run rate for the cost income ratio will be below 40 per cent at the end of the year.
Ålesund, 30 June 2022
10 August 2022
THE BOARD OF DIRECTORS OF SPAREBANKEN MØRE
LEIF-ARNE LANGØY, Chair of the Board
HENRIK GRUNG, Deputy Chair
KÅRE ØYVIND VASSDAL
THERESE MONSÅS LANGSET
MARIE REKDAL HIDE
TROND LARS NYDAL, CEO