Interim report from the Board of Directors
INTERIM REPORT FROM THE BOARD OF DIRECTORS
All figures relate to the Group. Figures in brackets refer to the corresponding period last year. Financial statements are prepared in accordance with IFRS and the interim report has been prepared in accordance with IAS 34 Interim Financial Reporting. The levy for the Norwegian Banks Guarantee Fund was recognised on an accruals basis as at 30 September 2017. The figures for the same period in 2016 have been made comparable.
RESULTS AS PER Q3 2017
Sparebanken Møre's pre-tax profit after the first three quarters of 2017 was NOK 534 million, compared with NOK 602 million for the same period in 2016.
Total income was NOK 51 million lower than after the same period in 2016. Net interest income rose by NOK 1 million and other operating income fell by NOK 52 million. The reduction in other operating income was mainly attributable to the proceeds from the VISA transaction, which amounted to NOK 45 million at the end of third quarter of 2016. Capital gains from the bond portfolio amounted to NOK 23 million, compared with NOK 27 million after the first three quarters of 2016. Income from hedging transactions with customers in the interest rate market was NOK 6 million lower than in the same period in 2016.
Costs were NOK 3 million higher in the first three quarters of 2017 than in 2016. Personnel costs were NOK 4 million higher than at the same time last year. The financial industry tax in the form of higher employers' National Insurance contributions accounted for NOK 9 million of this increase.
Losses on loans and guarantees amounted to NOK 14 million and were NOK 14 million higher than in the same period last year.
The cost income ratio after the third quarter this year was 44.9 %. This is 2.5 percentage points higher than in the same period in 2016. The cost income ratio for the year-to-date 2017 is within Sparebanken Møre's target of maximum 45 %.
The profit after tax was NOK 400 million; NOK 61 million lower than in the same period in 2016. The result at the end of third quarter shows an annualised return on equity of 10.2 %, compared to 12.5 % after the first three quarters of 2016. Sparebanken Møre's strategic return on equity target is a minimum of 10 % after tax.
The Group's earnings per equity certificate amounted to NOK 20.10, compared to NOK 23.10 for the same period last year.
The Board of Directors is pleased with the results after the first three quarters of 2017.
RESULTS FOR Q3 2017
The profit after tax for the third quarter of 2017 amounted to NOK 139 million, or 0.85 % of average total assets, compared with NOK 146 million, or 0.95 %, for the corresponding quarter last year.
The return on equity in the third quarter of 2017 was 10.5 %, compared with 11.7 % in third quarter 2016.
The earnings per equity certificate amounted to NOK 6.95 (NOK 7.35) for the Group and NOK 4.75 (NOK 5.15) for the Parent Bank.
Net interest income
Net interest income of NOK 281 million was NOK 10 million higher than in the corresponding quarter of last year. This represents 1.72 % of total assets, which is 0.05 percentage points lower than in third quarter 2016.
The generally low level of interest rates in the market, combined with strong competition for both loans and deposits, influences the development of net interest income. Lower volumes together with reduced margins due to the reduced risk in the maritime sector have also resulted in lower net interest income compared with last year. A higher lending volume resulted in higher net interest income in NOK.
Other operating income
Other operating income amounted to NOK 55 million, which is NOK 19 million lower than in the third quarter of last year.
There was no change in the market value of the bond portfolio during the quarter, while the third quarter of 2016 showed capital gains of NOK 17 million.
The value of the equities portfolio fell by NOK 4 million in the third quarter of 2017. The proceeds from the VISA transaction amounted to NOK 7 million in the third quarter of 2016.
Operating costs in the quarter amounted to NOK 145 million, which is NOK 3 million lower than in the same quarter last year. Personnel costs decreased by NOK 1 million compared with the corresponding period last year and amounted to NOK 83 million. The financial industry tax in the form of higher employers' National Insurance contributions amounted to NOK 3 million for the quarter. Staffing has been reduced by 15 full-time equivalents in the last 12 months to 363 full-time equivalents. Other operating costs were NOK 2 million lower than last year.
The cost income ratio for the third quarter of 2017 was 44.2 %, 1.1 percentage points higher than in third quarter of last year.
NOK 6 million was recognised as losses on loans and guarantees in the quarter. This amounts to 0.04 % of average total assets on an annualised basis. The corresponding figure for the third quarter of 2016 was NOK 5 million (0.03 %). Collective impairments rose by NOK 6 million in the quarter: reversals on losses amounted to NOK 3 million in the retail segment and losses amounting to NOK 3 million were recognised in the corporate segment.
At the end of the third quarter of 2017, total impairments for losses amounted to NOK 342 million, equivalent to 0.58 % of loans and guarantees (NOK 337 million and 0.63 %). NOK 4 million of the individual impairments involved commitments in default for more than 90 days (NOK 13 million), which represents 0.01 % of lending and guarantees (0.02 %). NOK 91 million relates to other commitments (NOK 57 million), which is equivalent to 0.16 % of gross lending and guarantees (0.11 %). Collective impairments for losses amounted to NOK 247 million (NOK 267 million) or 0.42 % of gross lending and guarantees (0.50 %).
Problem loans (loans in default for more than 90 days and loans that are not in default but which have been subject to an individual impairment for losses) have in the last 12 months increased by NOK 106 million. At the end of third quarter of 2017, the corporate market accounted for NOK 188 million of net problem loans, and the retail market NOK 73 million. In total this represents 0.45 % of gross lending and guarantees (0.30 %).
Lending to customers
At the end of third quarter of 2017, lending to customers amounted to NOK 56 488 million (NOK 51 753 million). Customer lending has increased by a total of NOK 4 735 million, or 9.1 %, in the last 12 months. Retail lending has increased by 7.8 %, while lending to corporate customers has increased by 12.3 % in the last 12 months. Lending to corporate customers decreased by 1.6 % in the third quarter of 2017, while lending to retail customers rose by 1.6 %. Retail lending accounted for 69.1 % of lending at the end of the third quarter of 2017 (70.1 %).
Deposits from customers
Customer deposits have increased by 2.3 % in the last 12 months. At the end of the third quarter of 2017, deposits amounted to NOK 33 082 million (NOK 32 350 million). Retail deposits have increased by 6.4 % in the last 12 months, while corporate deposits have decreased by 1.7 % and public sector deposits have decreased by 23.5 %. The retail market's relative share of deposits amounted to 59.5 % (57.3 %), while deposits from corporate customers accounted for 38.1 % (39.5 %) and from public sector customers 2.4 % (3.2 %).
The deposit to loan ratio amounted to 58.6 % at the end of the third quarter of 2017 (62.5 %).
The Group's capital adequacy at the end of the third quarter of 2017 was above the regulatory capital requirements and the internally set minimum target for Core Tier 1 capital. The Primary Capital ratio, including 50 % of retained earnings in the year-to-date, amounts to 19.1 % (18.8 %), the Core Capital ratio amounts to 17.1 % (17.3 %) and the Core Tier 1 capital ratio amounts to 14.5 % (14.9 %).
At the end of the third quarter of 2017, Sparebanken Møre had a capital requirement linked to the transitional scheme for the Basel I floor of NOK 227 million.
The aggregate profit of the Bank's three subsidiaries after the first three quarters of 2017 amounted to NOK 109 million after tax (NOK 122 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 third quarter, the company had net outstanding bonds of NOK 18.7 billion in the market. About 20% of the borrowing was in a currency other than NOK. The company has contributed NOK 108 million to the result as at 30 September 2017 (NOK 123 million).
Møre Eiendomsmegling AS provides real estate brokerage services to both retail and corporate customers. The company has made no contribution to the overall result to date in 2017 (NOK -1 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 own commercial properties. The company has contributed NOK 1 million to the result in the year-to-date 2017. The company has no employees.
At the end of the third quarter of 2017, there were 5 677 holders of Sparebanken Møre's equity certificates. 9 886 954 equity certificates have been issued. Equity certificates and related capital account for 49.6 % of the Bank's total equity. Note 10 contains an overview of the 20 largest holders of the Bank's equity certificates.
As at 30 September 2017, the Bank owned 55 851 of its own equity certificates. These were purchased on the Oslo Stock Exchange at market price.
ADJUSTING THE DIVIDEND POLICY
Sparebanken Møre has the recent years specified a dividend ratio in the range of 40 to 50 per cent. The Board now states that about 50 per cent of the profit can be distributed as dividends in the form of cash dividend to the equity certificate owners and dividend to the local community.
After recovering before the summer, the economic outlook for Møre og Romsdal has stabilised during the autumn. The level of activity in most industries is high and the downturn in oil-related industries is more subdued. The level of activity in the public sector is also high. The decline in housing prices has however increased and there is greater uncertainty about how prices will develop.
The county's labour market has developed satisfactorily this year, although there are large local differences. At the end of September, registered unemployment in Møre og Romsdal was 2.5 % according to the Norwegian Labour and Welfare Administration (NAV). This is the same unemployment rate as the nationwide rate. Unemployment in the county is now at the lowest level in 2 years. Meanwhile, NAV Møre og Romsdal has said in a September press release that they are still receiving warnings of lay-offs and dismissals. It is therefore not unlikely that unemployment may rise slightly in the next few months.
Sparebanken Møre's losses are expected to be low in 2017.
Credit growth to the retail sector in Norway has been relatively stable this year, but has increased for the corporate sector. The rate of growth for deposits in the third quarter was somewhat lower than at the start of the year for the country as a whole.
We continue to experience strong competition in the market, both for lending and deposits, but the Bank is competitive and has registered good, albeit slightly lower, lending growth in both the retail market and the corporate market. Deposits are growing well. Lending growth within both the retail market and the corporate market is expected to slow further during the rest of the year. There is a constant focus on efficient operations and increased profitability.
The Bank will remain strong and committed in supporting businesses and industries in our region, Nordvestlandet.
Sparebanken Møre is targeting cost-effective operations with a cost income ratio target of less than 45 % in 2017.
Overall, good results are expected in 2017, with a return on equity reaching the target of 10 %.
Ålesund, 30 September 2017
18 October 2017
THE BOARD OF DIRECTORS OF SPAREBANKEN MØRE
LEIF-ARNE LANGØY, Chairman
ROY REITE, Deputy Chairman
RAGNA BRENNE BJERKESET
ELISABETH MARÅK STØLE
ANN MAGRITT BJÅSTAD VIKEBAKK
HELGE KARSTEN KNUDSEN
MARIE REKDAL HIDE
TROND LARS NYDAL, CEO