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 AS PER Q3 2020
Sparebanken Møre’s pre-tax profit for the first three quarters of 2020 was NOK 540 million, compared with NOK 680 million for the same period in 2019.
Total income was NOK 66 million lower than for the same period in 2019. Net interest income fell by NOK 61 million and other operating income fell by NOK 5 million. Market assessment of the bond portfolio showed losses of NOK 6 million, compared with losses of NOK 1 million after the first three quarters of 2019. Capital gains on equities totalled NOK 6 million, compared with NOK 12 million at the end of the third quarter of 2019. Income from other financial investments showed an increase of NOK 8 million compared with the same period in 2019.
Costs were NOK 5 million lower in the first three quarters of 2020 than in 2019. Personnel costs were NOK 12 million lower than last year and other costs show an increase of NOK 7 million in the same period.
Losses on loans and guarantees amounted to NOK 114 million and were NOK 79 million higher than in the same period last year.
The cost income ratio amounted to 42.0 per cent after the third quarter this year. This is 1.9 percentage points higher than in the same period in 2019.
The profit after tax was NOK 420 million; NOK 104 million lower than in the same period in 2019. The results at the end of the third quarter show an annualised return on equity of 8.6 per cent, compared with 11.6 per cent after the first three quarters of 2019.
Earnings per equity certificate were NOK 20.00 (NOK 25.60) for the Group and NOK 22.95 (NOK 25.90) for the Parent Bank.
RESULTS FOR Q3 2020
Profit after tax was NOK 153 million for the third quarter of 2020, or 0.78 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 9.4 per cent in the third quarter of 2020 compared with 11.8 per cent in the third quarter of 2019, and the cost income ratio amounted to 39.0 per cent, the same as in the third quarter of 2019.
Earnings per equity certificate were NOK 7.38 (NOK 8.80) for the Group and NOK 3.72 (NOK 5.30) for the Parent Bank.
Net interest income
Net interest income was NOK 306 million, which is NOK 45 million, or 12.8 per cent, lower than in the corresponding quarter of last year. This represents 1.54 per cent of total assets, which is 0.37 percentage points lower than in the third quarter of 2019.
Most of the interest rate changes for loans in both the retail and corporate market were introduced at the start of the third quarter. The last interest rate changes on deposits were implemented with effect from 15 July.
The repricing of the Group’s capital market borrowing was completed during the quarter and increased net interest income.
Strong competition within both loans and deposits, as well as the lower contribution from the Bank’s equity, reduced net interest income in the third quarter.
The combination of these factors resulted in an increase in net interest income in the quarter of around NOK 40 million compared with the second quarter of 2020.
Other operating income
Other operating income amounted to NOK 77 million in the quarter, which is NOK 14 million higher than in the third quarter of last year. The return on financial investments was NOK 16 million higher than in the third quarter of 2019. Capital gains from bond holdings were NOK 8 million in the quarter, compared with capital losses of NOK 3 million in the corresponding quarter last year. Capital gains on equities were NOK 1 million, compared with capital losses of NOK 1 million in the third quarter of 2019, and income from other financial investments increased by NOK 3 million compared with the same period last year.
Other income excluding financial investments decreased by NOK 2 million compared with the third quarter of 2019.
Operating costs in the quarter amounted to NOK 149 million, which is NOK 12 million lower than in the same quarter last year. Personnel costs were NOK 7 million lower than in the corresponding period last year and amounted to NOK 81 million. Staffing has been reduced by 1 full-time equivalent in the last 12 months, to 353 FTEs. Other operating costs decreased by NOK 5 million from the same period last year.
The cost income ratio was 39.0 per cent for the third quarter of 2020, which is the same as in the third quarter of 2019.
NOK 36 million (NOK 16 million) was charged in losses on loans and guarantees in the quarter. This amounts to 0.18 per cent (0.09 per cent) of average total assets on an annualised basis. Losses in the corporate segment increased by NOK 45 million in the quarter, while losses in the retail segment decreased by NOK 9 million.
At the end of the third quarter of 2020, total expected losses amounted to NOK 481 million, equivalent to 0.72 per cent of loans and guarantees (NOK 370 million and 0.57 per cent). Of the total expected losses, NOK 22 million are linked to credit-impaired commitments more than 90 days past due (NOK 33 million), which amounts to 0.03 per cent of loans and guarantees (0.05 per cent). NOK 312 million relates to other credit-impaired commitments (NOK 217 million), which is equivalent to 0.46 per cent of gross loans and guarantees (0.33 per cent).
Net credit-impaired commitments (commitments more than 90 days past due and other commitments in Stage 3) have increased by NOK 195 million in the past 12 months. At the end of the third quarter of 2020, the corporate market accounted for NOK 793 million of net credit-impaired commitments and the retail market NOK 86 million. In total, this represents 1.31 per cent of gross loans and guarantees (1.07 per cent).
Lending to customers
At the end of the third quarter of 2020, lending to customers amounted to NOK 65,367 million (NOK 63,647 million). Customer lending has increased by a total of NOK 1,720 million, or 2.7 per cent, in the past 12 months. Retail lending has increased by 3.4 per cent, while corporate lending has increased by 1.6 per cent, in the past 12 months. Lending to corporate customers fell by 0.4 per cent in the third quarter of 2020, while lending to retail customers rose by 0.8 per cent. Retail lending accounted for 68.7 per cent of lending at the end of the third quarter of 2020 (68.3 per cent).
Deposits from customers
Customer deposits have increased by NOK 3,182 million, or 8.8 per cent, in the past 12 months. At the end of the third quarter of 2020, deposits amounted to NOK 39,329 million (NOK 36,147 million). Retail deposits have increased by 7.6 per cent in the past 12 months, while corporate deposits have increased by 10.6 per cent, and public sector deposits have increased by 10.8 per cent. The retail market’s relative share of deposits amounted to 59.2 per cent (59.8 per cent), while deposits from the corporate market accounted for 38.5 per cent (37.9 per cent), and from the public sector market 2.3 per cent (2.3 per cent).
The deposit-to-loan ratio was 60.2 per cent at the end of the third quarter of 2020 (56.8 per cent).
Sparebanken Møre is very well capitalised. At the end of the third quarter, the Common Equity Tier 1 capital ratio was 17.5 per cent (15.4 per cent), incl. 50 per cent of the result for the year to date. This is 4.8 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 21.4 per cent (19.0 per cent), while the Tier 1 capital ratio was 19.3 per cent (17.0 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 third 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 third quarter of 2020 was 7.9 per cent, 0.1 percentage points lower than at the end of the third 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 167 million after tax in the first three quarters of 2020 (NOK 161 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 third quarter of 2020, the company had outstanding bonds of NOK 24.9 billion in the market. Around 35 per cent was issued in currencies other than NOK. NOK 498 billion of the volume of bonds issued by the company was held by the Parent Bank at the end of the third quarter of 2020. Møre Boligkreditt AS has contributed NOK 164 million to the result so far in 2020 (NOK 161 million).
Møre Eiendomsmegling AS provides real estate brokerage services to both retail and corporate customers. The company has contributed NOK 2.2 million to the result so far in 2020 (NOK 1.5 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 has contributed NOK 1 million to the result so far in 2020 (NOK -0.8 million). The company has no employees.
At the end of the third quarter of 2020, there were 5,753 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 September 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 crisis with good key figures for liquidity and capital. At the end of 2019, LCR (short-term liquidity indicator) was at 165 and NSFR (long-term liquidity indicator) was at 113, while Common Equity Tier 1 capital (CET1) was at 17.7 per cent.
The Group’s first major maturity date in the bond market this year came on 23 September 2020, with a gross amount of 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. Early buyback had reduced MOBK14 to NOK 438 million upon maturity, while MORG44 had similarly been reduced to NOK 1,774 million at the end of the quarter.
At the end of the third quarter, LCR was 126, NSFR was 114 and Common Equity Tier 1 capital was 17.5 per cent.
In addition to maturity dates for market funding, 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 year to date. The government’s tax deferral measures, as well as support schemes, etc. related to Covid-19 have, to some extent, also affected the liquidity situation.
In the first three quarters of this year, deposits have increased by almost NOK 1,200 million more than loans and the Group’s deposit-to-loan ratio has increased from 57.5 per cent to 60.2 per cent.
Sparebanken Møre received liquidity from Norges Bank’s F-loan scheme with two loans totalling NOK 1,000 million. NOK 500 million with a 6-month term to maturity and NOK 500 million with a 12-month term to maturity. The first loan matured in September. The liquidity from the loans has been used to strengthen the Bank’s LCR liquidity portfolio correspondingly. Besides this, the Group has also followed a planned funding strategy. In June, we accordingly placed a covered bond issue in the market of NOK 3,000 million with a term to maturity of 5.25 years, replacing the bond maturing in September. The issue was well received. In September, Møre Boligkreditt AS issued a further EUR 30 million in a private placing with a term to maturity of 7 years.
The Bank monitors liquidity developments closely. 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 Group’s market funding is raised at floating interest rates or by swapping the fixed-rate issues to floating rates. The funding cost of borrowing will therefore follow developments in the 3-month NIBOR with a time lag corresponding to the timing of the rate fixing. Therefore, it was not until July that Sparebanken Møre’s funding costs for outstanding market funding were adjusted to the new lower level of market interest rates.
The above-mentioned interest rate fixing profile and the fact that our lending rates to customers were reduced immediately after the central bank cut its rates, while deposit rates were not cut until 6 weeks later, markedly weakened the Bank’s net interest income in the second quarter. Net interest income is also generally negatively affected by lower returns on the Bank’s distributable equity as well as opportunities to maintain the deposit margin in a low interest rate environment. This has led to a lowering of the net interest income forecast for the year as a whole. However, the Bank strengthened net interest income by NOK 40 million in the third quarter compared with the second quarter.
The development of the market value of the Bank’s LCR liquidity portfolio was the item that had the largest negative impact on the Bank’s results in the first quarter. This effect was significantly reduced before the end of the third quarter, but will remain an uncertainty 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 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 during the year and a continued low level of 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.
Parts of the corporate portfolio were granted interest-only periods during the spring due to Covid-19. Most corporate customers were granted interest-only periods of 6 months. A survey of customers granted an interest-only period in spring was conducted in September. Feedback shows that a very low proportion require a further interest-only period.
The probability weightings for macro scenarios in the Group’s ECL model were kept unchanged at the end of the third 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 continued to increase during the third quarter of 2020. Unemployment in the county fell from 3.7 per cent to 3.1 per cent of the labour force from August to September. In comparison, the national unemployment rate was 3.7 per cent. If there are no new lockdown periods, unemployment may continue to fall further until the end of the year.
However, the economic situation for a number of industries remains serious. These include the tourism industry, the maritime industry and oil-related industries. Therefore, any further fall in unemployment will probably be slower as the labour market normalises and the economic effects of the second wave of the coronavirus pandemic bite.
After having fallen up to June, the latest figures show that the annual growth rate for lending to households in Norway as a whole, has again seen a slight rise. The growth rate in lending to the corporate market is now at its highest since February this year.
During the first three quarters 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 rate at the end of the fourth quarter of 2019. The annual growth in lending was 2.7 per cent at the end of the quarter. The growth in deposits so far this year has been very good with an annual rate of 8.8 per cent. The deposit-to-loan ratio is high and rising.
The Bank expects lending growth to be somewhat lower in 2020 than expected at the start of the year. This is due to good growth in 2019 and a lower level of investments due to the coronavirus pandemic and fall in oil prices. Nevertheless, the growth in lending is expected to rise during the fourth quarter and be higher at the end of 2020 than it was at the end of the third quarter. The growth in deposits is expected to remain high.
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.
The economic second wave effects of the coronavirus pandemic are expected to impact the market during the fourth quarter. This, combined with weaker net interest income due in part to market practices regarding changes in lending and deposit rates in spring 2020, entails that the Bank’s financial strategic targets will not be achieved in 2020.
Sparebanken Møre’s targets of a return on equity exceeding 11 per cent and a cost income ratio of less than 40 per cent remain unchanged, and the Bank has implemented measures to achieve these targets.
Ålesund, 30 September 2020
21 October 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