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 2023
Sparebanken Møre’s profit before tax after the first half of 2023 was NOK 604 million, compared with NOK 445 million after the first half of 2022, an increase of 35.7 per cent.
Total income was NOK 254 million higher than for the same period in 2022. Net interest income rose by NOK 220 million and other income increased by NOK 34 million. Capital losses from bond holdings amounted to NOK 16 million, compared with capital losses of NOK 66 million in the first half of 2022. Capital gains from equities amounted to NOK 6 million compared with capital gains of NOK 25 million in the first half of 2022. Income from foreign exchange and interest rate business for customers amounted to NOK 23 million in the first half-year, NOK 5 million less than in the same period last year. Income from other financial instruments increased from NOK 0 million in the first half of 2022 to NOK 7 million in the first half of 2023.
Costs amounted to NOK 409 million, NOK 57 million higher in the first half of 2023 than in the first half of 2022. Personnel costs were NOK 22 million higher than last year and other costs NOK 35 million higher.
Losses on loans and guarantees amounted to NOK 30 million and were NOK 38 million higher than in the same period last year.
The cost income ratio ended at 39.3 per cent, which represents a decrease of 5.4 percentage points compared with the first half of 2022.
Profit after tax amounted to NOK 462 million, compared with NOK 346 million for the same period last year.
Return on equity for the first half of 2023 was 12.2 per cent compared with 9.9 per cent for the first half of 2022.
Earnings per equity certificate amounted to NOK 4.42 (NOK 3.35) for the Group and NOK 5.02 (NOK 4.90) for the parent bank.
RESULTS FOR Q2 2023
Profit before losses amounted to NOK 332 million for the second quarter of 2023, or 1.39 per cent of average assets, compared with NOK 228 million, or 1.06 per cent, for the corresponding quarter last year.
Profit after tax amounted to NOK 255 million for the second quarter of 2023, or 1.07 per cent of average assets, compared with NOK 183 million, or 0.85 per cent, for the corresponding quarter last year.
Return on equity was 13.6 per cent for the second quarter of 2023, compared with 10.4 per cent for the second quarter of 2022, and the cost income ratio was 38.9 per cent compared with 43.3 per cent for the second quarter of 2022.
Earnings per equity certificate were NOK 2.46 (NOK 1.78) for the Group and NOK 1.92 (NOK 1.43) for the parent bank.
Net interest income
Net interest income was NOK 462 million, which is NOK 109 million, or 30.9 per cent, higher than in the corresponding quarter of last year. This represents 1.94 per cent of total assets, which is 0.29 percentage points higher than for the corresponding quarter last year.
In the retail market, the interest margin for lending has contracted and the deposit margin has widened compared with the second quarter of 2022. In the corporate market, the interest margin for lending was stable, while the interest margin for deposits widened compared with the same period.
Other income was NOK 81 million in the quarter, which is NOK 32 million higher than in the second quarter of last year. The net result from financial instruments was positive for the quarter and NOK 31 million higher than in the second quarter of 2022. Capital losses from bond holdings were NOK 4 million in the quarter, compared with capital losses of NOK 35 million in the corresponding quarter last year. Capital gains from equities amounted to NOK 14 million compared with capital gains of NOK 1 million in the second quarter of 2022. The positive change in value for fixed-rate lending amounted NOK 13 million, compared with a negative change in value of NOK 5 million in the same quarter last year. The value of issued bonds decreased by NOK 1 million, compared with an increase of NOK 2 million in the second quarter of 2022. Income from foreign exchange and interest business for customers amounted to NOK 11 million in the quarter, NOK 3 million less than in the same quarter last year.
Other income, exclusive of financial instruments, was on a par with the second quarter of 2022.
Operating costs amounted to NOK 211 million for the quarter, which is NOK 37 million higher than for the same quarter last year. Personnel costs accounted for NOK 16 million of the rise in relation to the same period last year and totalled NOK 116 million. The workforce has increased by 16 FTEs in the past 12 months and numbered 387 FTEs at the end of the quarter. Other costs have increased by NOK 21 million from the same period last year.
Provisions for expected losses and credit-impaired commitments
Losses on loans and guarantees decreased by NOK 3 million (NOK -8 million), corresponding to -0.01 per cent of average assets (-0.04 per cent of average assets). The corporate segment was charged NOK 12 million in losses in the quarter, while losses in the retail segment decreased by NOK 15 million.
At the end of the second quarter of 2023, provisions for expected credit losses totalled NOK 365 million, equivalent to 0.45 per cent of gross loans and guarantee commitments (NOK 348 million and 0.47 per cent). Of the total provision for expected credit losses, NOK 19 million relates to credit-impaired commitments more than 90 days past due (NOK 12 million), which represents 0.02 per cent of gross loans and guarantee commitments (0.02 per cent), while NOK 210 million relates to other credit-impaired commitments (NOK 209 million), corresponding to 0.26 per cent of gross loans and guarantee commitments (0.28 per cent).
Net credit-impaired commitments (commitments more than 90 days past due and other credit-impaired commitments) have increased by NOK 211 million in the past 12 months. At end of the second quarter of 2023, the corporate market accounted for NOK 469 million of net credit-impaired commitments and the retail market NOK 168 million. In total, this represents 0.79 per cent of gross loans and guarantee commitments (0.57 per cent).
Lending to customers
At the end of the second quarter of 2023, lending to customers amounted to NOK 78,999 million (NOK 72,300 million). In the past 12 months, customer lending has increased by a total of NOK 6,699 million, equivalent to 9.3 per cent. Retail lending has increased by 7.9 per cent and corporate lending has increased by 12.0 per cent in the past 12 months. Retail lending accounted for 66.4 per cent of total lending at the end of the second quarter (67.2 per cent).
Customer deposits have increased NOK 1,393 million, or 3.1 per cent, in the past 12 months. At the end of the second quarter of 2023, deposits amounted to NOK 46,339 million (NOK 44.946 million). Retail deposits have increased by 6.8 per cent in the past 12 months, while corporate deposits have decreased by 0.5 per cent and public sector deposits have decreased by 30.8 per cent. The retail market’s relative share of deposits amounted to 61.0 per cent (58.9 per cent), while deposits from the corporate market accounted for 37.5 per cent (38.9 per cent) and from the public sector market 1.5 per cent (2.2 per cent).
The deposit-to-loan ratio was 58.4 per cent at the end of the second quarter (61.9 per cent).
LIQUIDITY AND FUNDING
The regulatory minimum LCR and NSFR requirements are both 100 per cent. The Group has established internal minimum targets that are above the regulatory requirements.
Sparebanken Møre’s liquidity coverage ratio (LCR) was 183 for the Group and 171 for the parent bank at the end of the quarter. 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 was introduced in Norway from 1 June 2022. 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. CRR2 sets new weights for asset and liability items, and for off-balance sheet items. The NSFR ended at 127 at the end of the second quarter (consolidated figure), while the bank’s and Møre Boligkreditt AS’s NSFR ended at 125 and 118, respectively.
Total net market funding amounted to NOK 37.9 billion at the end of the quarter. Senior bonds with a remaining term to maturity of more than 1 year have a weighted remaining term to maturity of 2.37 years, while covered bond funding through Møre Boligkreditt AS correspondingly has a weighted remaining term to maturity of 3.21 years – overall for market funding in the Group (inclusive of T2 and T3) the remaining term to maturity is 3.16 years.
Møre Boligkreditt AS issues bonds based on the transfer of loans from the parent bank. Loans transferred to Møre Boligkreditt AS amounted to NOK 33,664 million at the end of the half-year, corresponding to almost 43 per cent of the bank's total lending.
In an update dated 26 July 2023, Moody’s Investor Service confirmed Sparebanken Møre’s counterparty, deposit and issuer rating of A1 with a stable outlook. The rating of the bank’s senior non-preferred liabilities in local currency was also maintained at Baa1.
Bonds issued by Møre Boligkreditt AS are also credit rated by Moody’s Investor Service and have a rating of Aaa.
Sparebanken Møre is well capitalised. At the end of the second quarter of 2023, the Common Equity Tier 1 (CET1) capital ratio was 17.6 per cent (18.1 per cent), including 50 per cent of the result for the year to date. This is 2.15 percentage points higher than the total minimum requirement and the Financial Supervisory Authority of Norway’s expected capital adequacy margin (P2G) totalling 15.45 per cent. The capital adequacy ratio, including 50 per cent of the result for the year to date, was 22.0 per cent (22.4 per cent) and the Tier 1 capital ratio was 19.4 per cent (19.9 per cent).
Based on a board authorisation from the general meeting to acquire equity certificates, Sparebanken Møre applied to the Financial Supervisory Authority (FSA) for approval of the authorisation. The FSA’s reply provided information about its new practice. This follows from the limits laid down in Article 78(1), second paragraph, fourth sentence, of the CRR, which entails that a general prior authorisation to reduce CET1 capital may not exceed 3 per cent of the bank's equity certificate. Nor may the authorisation exceed 10 per cent of the -CET1 capital in the institution that exceeds the regulatory requirement for CET1 capital pursuant to the Financial Institutions Act and regulations, and by a margin deemed necessary by the supervisory authority. Another condition is that the bank deducts the amount in the authorisation from the CET1 capital from the date the authorisation is granted and for the duration of the authorisation. Sparebanken Møre has been granted permission to carry out acquisitions in accordance with the above limits, which in isolation contributed to a reduction of CET1 capital of 0.18 percentage points in the quarter.
The banking package was enacted in Norway on 1 June 2022 and resulted in several changes such as the expansion of the SME discount and the introduction of a minimum NSFR requirement. On 21 December 2021, Sparebanken Møre applied to the FSA to make changes to the bank’s IRB models and calibration framework.A letter from the FSA dated 22 June 2023 grants approval for the proposed models for the corporate market. The FSA also states that it is aiming to finalise its consideration of the model changes for retail market lending during the course of 2023. Sparebanken Møre will incorporate the new models in the second half of 2023. Based on figures from the end of the first quarter this year, the new institution weights resulting from the model changes would have resulted in a CET1 capital ratio of about 0.5 percentage points higher than that reported.
Sparebanken Møre’s total CET1 capital ratio requirement is 14.2 per cent. The requirement consists of a minimum requirement of 4.5 per cent, a capital conservation buffer of 2.5 per cent, a systemic risk buffer of 3.0 per cent and a countercyclical buffer of 2.5 per cent. In addition, the FSA has set an individual Pillar 2 requirement for Sparebanken Møre of 1.7 per cent, as well as an expected capital adequacy margin of 1.25 per cent. The FSA has informed the bank that it plans to implement SREP this year. At least 56.25 per cent of the new Pillar 2 requirement that results from the aforementioned SERP must be met with CET1 capital, while 75 per cent must be met with Tier 1 capital.
The leverage ratio (LR) at the end of the second quarter was 7.4 per cent (7.7 per cent). The regulatory minimum requirement (3 per cent) was met by a good margin.
The FSA has set Sparebanken Møre’s effective MREL requirement as at 1 January 2023 at 32.4 per cent and the minimum requirement for subordination at 23.5 per cent. Based on the set capital requirements and announced changes that will come into force by 1 January 2024, Sparebanken Møre will operate on the basis of an effective MREL requirement of 35.9 per cent and a subordination requirement of 28.9 per cent.
Sparebanken Møre had issued NOK 2,000 million in subordinated bond debt at the end of second quarter of 2023.
The aggregate profit of the bank's subsidiaries amounted to NOK 93 million after tax in the first half of 2023 (NOK 86 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 first half of 2023, the company had nominal outstanding covered bonds of NOK 28.2 billion in the market. Around 30 per cent was issued in a currency other than NOK. At the end of the quarter, the parent bank held no bonds issued by the company. Møre Boligkreditt AS contributed NOK 90 million to the Group’s result in the first half of 2023 (NOK 83 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 2023 (NOK 1.0 million). At the end of the quarter, the company employed 18 FTEs.
The purpose of Sparebankeiendom AS and Storgata 41-45 Molde AS is to own and manage the bank’s own commercial properties. The company contributed NOK 1.6 million to the result in the first half of 2023 (NOK 2.2 million). The companies have no staff.
At the end of the second quarter of 2023, there were 6,549 holders of Sparebanken Møre's equity certificates. The proportion of equity certificates owned by foreign nationals amounted to 2.7 per cent at the end of the quarter. 49,434,770 equity certificates have been issued. Equity certificate capital accounts for 49.65 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 2023, the bank owned 86,565 of its own equity certificates. These were purchased on the Oslo Stock Exchange at market prices.
The second quarter also saw interest rate hikes by leading central banks. Interest rates were increased because consumer price inflation was still far above the central banks’ inflation targets. The US Federal Reserve raised its key policy rate once in the period, while the European Central Bank (ECB) and Norges Bank raised their key policy rates twice. All of the central banks clearly signalled that there would be further rate hikes in the second half of 2023.
The US Federal Reserve increased the target zone for the Fed funds policy rate by 0.25 percentage points to 5.00-5.25 per cent at its monetary policy meeting on 3 May. At the monetary policy meeting on 14 June, the interest rate was kept unchanged, while the interest rate was again raised by 0.25 percentage points on 26 July. It then emerged that further interest rate developments will depend on the overall tightening of monetary policy, inflation and other key figures of importance for setting interest rates. Not least, developments int the labour market will be of great importance. The central bank will also take account of the fact that it takes time before the overall effects of interest rate hikes are seen.
Furthermore, the European Central Bank (ECB) raised its key policy rate by 0.25 percentage points to 3.75 per cent at its monetary policy meeting on 27 July. As with the US Federal Reserve, further interest rate developments, will depend on key figures, particularly the consumer price inflation and the development in the total production of goods and services (GDP). Like the US Federal Reserve and Norges Bank, the ECB is steering towards an inflation target of 2 per cent. In June, consumer price inflation in the eurozone over the past 12 months was 5.5 per cent.
Norges Bank increased its key policy rate by 0.50 percentage points at its interest rates meeting on 22 June. The interest rate path was also raised considerably. The interest rate path is Norges Bank's forecast of how the key policy rate will develop in the next few years. The new interest rate path indicates that the key policy rate will peak at 4.25 per cent this autumn. The previous peak rate was 3.50 per cent. The main reason for the increase in the interest rate path is that going forward inflationary pressures will be considerably stronger than previously assumed. This is partly due to higher wage growth and the prolonged weakness of the Norwegian krone. Expectations in the money market at the beginning of August, implied that the interest rate would be raised by a further 0.75 percentage points.
Developments in the labour market indicate that activity in the Norwegian economy and in Møre og Romsdal remains at a high level. At the end of July, the number of unemployed people in Møre og Romsdal accounted for 1.7 per cent of the workforce according to the Norwegian Labour and Welfare Administration (NAV). The national unemployment rate was 2.1 per cent. According to NAV's annual business survey in spring 2023, some companies in the county were still experiencing recruitment problems. The greatest shortage of labour is in the health sector and in various trades. 22 per cent of the companies in the county expect to have a larger workforce in a year’s time, while 11 per cent expect to have a smaller one. The survey indicates prospects of moderate growth in output and employment ahead.
The rate of growth in lending to households and non-financial companies for Norway as a whole fell during the second quarter. With a rate of growth in lending to households of less than 4 per cent, the 12-month growth is the lowest measured in the 2000s. At the end of June, the overall 12-month growth in lending to the public was 4.3 per cent, compared with 5.5 per cent at the start of this year. As a consequence of higher interest rates and the weaker development of house prices, 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.
The bank’s overall lending growth remains good. The 12-month growth rate was 9.3 per cent at the end of the quarter, slightly above the level at the end of 2022 of 8.8 per cent. The year-on-year growth in lending to the retail market ended at 7.9 per cent at the end of the second quarter, while lending growth in the corporate market amounted to 12.0 per cent. Deposits increased by 3.1 per cent in the past 12 months and the deposit-to-loan ratio is high but edging downwards.
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 bank's return on equity for the first half of 2023 was 12.2 per cent and the cost income ratio was 39.3 per cent. The Board expects that these financial results will be at least as good in the second half of 2023.
Ålesund, 30 June 2023
9 August 2023
THE BOARD OF DIRECTORS OF SPAREBANKEN MØRE
ROY REITE, Chair of the Board
KÅRE ØYVIND VASSDAL, Deputy Chair
THERESE MONSÅS LANGSET
MARIE REKDAL HIDE
TROND LARS NYDAL, CEO