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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 Q4 2015
The profit after tax for the fourth quarter of 2015 amounted to NOK 122 million, or 0.82 % of average total assets, compared to NOK 127 million, or 0.91 %, for the corresponding quarter last year. The return on equity in the fourth quarter of 2015 was 10.3 %, compared to 11.0 % last year.
The earnings per equity certificate amounted to NOK 6.20 (NOK 6.40) for the Group and NOK 4.20 (NOK 4.00) for the Parent Bank.
Net interest income
The net interest and credit commission income of NOK 279 million was NOK 3 million lower than in the corresponding quarter of last year. This represents 1.87 % of total assets, which is 0.16 percentage points lower than in the fourth quarter of 2014.
The generally low level of interest rates in the market, combined with strong competition for both loans and deposits, is affecting the development of net interest income.
Other operating income
Other operating income amounted to NOK 40 million, which is NOK 1 million lower than in the fourth quarter of last year. Other operating income amounted to 0.25 % of average total assets, 0.04 percentage points lower than in the corresponding period in 2014. The value of the bond portfolio fell by NOK 12 million over the period, while the value of financial derivatives was NOK 13 million higher than last year.
Costs
Operating costs in the quarter amounted to NOK 124 million; this is NOK 12 million lower than in the same quarter last year. Other operating costs increased by NOK 6 million and staff costs decreased by NOK 18 million compared with the same period last year and amount to NOK 61 million. The Bank's pension scheme has changed such that everyone under 57-years-old with a defined benefit scheme was transferred to a defined contribution scheme with effect from 31 December 2015. This resulted in a reduction in staff costs of NOK 24 million in the fourth quarter of 2015. The Group's total workforce has increased by 5 full time equivalents in the last 12 months to 388 full time equivalents.
The cost income ratio for the fourth quarter of 2015 was 38.8 %, which represents a decrease of 3.5 percentage points compared with the fourth quarter of 2014.
Losses
The quarter's financial statements were charged NOK 25 million in losses on loans and guarantees. This amounts to 0.17 % of average total assets on an annualised basis. The corresponding figures for the fourth quarter of 2014 were NOK 7 million (0.05 %). The losses on loans and guarantees in the fourth quarter of 2015 consist of a NOK 25 million increase in collective impairment, a NOK 1 million increase in losses in the corporate segment, and a NOK 1 million contraction in losses in the retail segment.
Lending and deposit growth
Total assets grew by 0.8 % in relation to the third quarter of 2015 to NOK 60 120 million. Lending decreased by 0.3 % to NOK 51 286 million and deposits increased by 0.4 % to NOK 29 389 million. For further comments concerning volume trends in the last 12 months, please see the comments on 2015 as a whole.
RESULTS FOR 2015
The profit before losses on loans and guarantees amounted to NOK 742 million, or 1.28 % of average total assets, a reduction of NOK 102 million in relation to 2014. The results for 2014 included NOK 94 million in profit from the sale of the shares in Nets AS. The profit after losses on loans and guarantees amounted to NOK 692 million (1.19 %) compared with NOK 822 million (1.51 %) in 2014. The profit after tax amounted to NOK 503 million, which corresponds to 0.87 % of average total assets in 2015, compared with NOK 623 million (1.15 %) last year.
The return on equity amounted to 10.7 % in 2015, compared with 14.0 % (12.0 % excl. profit from sale of Nets AS) in 2014. Sparebanken Møre's return on equity target is a minimum of 10 % after tax.
The earnings per equity certificate in 2015 amounted to NOK 25.25 compared with NOK 31.20 for 2014.
Net interest income
In total, net interest and credit commission income amounted to NOK 1 098 million (NOK 1 093 million). In relation to average total assets, net interest income was 1.89 % (2.01 %). Net interest income accounted for 84.3 % of total income in 2015.
Other operating income
Other operating income amounted to NOK 205 million (0.35 % of average total assets) in 2015. This is a decrease of NOK 110 million compared to 2014. The reduction is primarily attributable to the sale of shares in Nets AS, which produced a profit of NOK 94 million in 2014, as well as reduced mark to market value on the liquidity portfolio of NOK 51 million in 2015, compared with gains of NOK 10 million in 2014.
Costs
Total costs amounted to NOK 561 million, a reduction of NOK 3 million in relation to 2014.
The change in the Bank's pension scheme is the primary reason for the reduction in staff costs in 2015. Everyone under 57-years-old with a defined benefit scheme was transferred to a defined contribution scheme with effect from 31 December 2015. This resulted in a non-recurring effect that reduces staff costs by NOK 24 million in the fourth quarter of 2015. The Group's total workforce has increased by 5 full time equivalents in the last 12 months to 388 full time equivalents.
Staff costs decreased by NOK 15 million and other costs increased by NOK 12 million in relation to 2014. IT costs have increased by NOK 6 million and marketing costs were NOK 7 million lower compared with 2014. The total costs amounted to 0.96 % of average total assets in 2015, compared with 1.04 % in 2014.
The cost income ratio amounted to 43.0 % in 2015, compared with 40.1 % in 2014. Sparebanken Møre's target is to keep the cost income ratio below 45 %.
Losses and commitments in default
The profit and loss account was charged NOK 50 million for losses on loans and guarantees in 2015, while in 2014 it was charged NOK 22 million. This amounted to 0.09 % of average total assets in 2015, compared with 0.04 % in 2014. The losses on loans and guarantees were due to a NOK 96 million increase in collective impairment, a NOK 43 million reduction in losses in the cooperate segment, and a NOK 3 million reduction in losses in the retail market.
Total impairment for losses at year-end 2015 amounted to NOK 341 million (NOK 307 million), which amounts to 0.66 % of gross lending (0.63 %). NOK 14 million of the individual impairment involved commitments in default for more than 90 days (NOK 21 million), which amounts to 0.03 % of gross lending (0.04 %). NOK 65 million related to other commitments (NOK 120 million), which amounts to 0.13 % of gross lending (0.34 %). Collective impairment amounted to NOK 262 million (NOK 166 million) or 0.51 % of gross lending (0.34 %).
Net problem loans (loans which have been 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) show a reduction of NOK 86 million over the last 12 months. Net problem loans amounted to NOK 163 million, or 0.32 % of gross lending: NOK 110 million in the cooperative segment and NOK 53 million in the retail segment. At year-end 2014, net problem loans amounted to NOK 249 million or 0.51 % of gross lending: the corporate market accounted for NOK 185 million and the retail market NOK 64 million.
Net commitments in default for more than 3 months at the end of 2015 amounted to NOK 58 million (NOK 65 million), which represents a reduction from 0.13 % by year-end 2014 to 0.11 % by year-end 2015.
The Visa-transaction
Sparebanken Møre is a member of Visa Norway FLI. Visa Norway FLI is a shareholder in Visa Europe Ltd. In November 2015 an agreement was signed for the sale of the shares in Visa Europe Ltd to Visa Inc. and the members of Visa Norway FLI are therefore expected to receive remuneration from the sale. The remuneration is expected to be in the form of both a cash settlement and preferred shares, as well as a possible performance-based contingent compensation. Sparebanken Møre has assessed our owner interest which gives right to compensation, as a financial asset and has estimated the value of this asset to NOK 42 million at year end. The transaction has not yet been approved by the EU competition authorities. There is also uncertainty regarding the size and value of some of the remuneration elements. The value adjustment is recorded in other comprehensive income in 2015. Upon completion, which is expected to be in Q2 2016, the gain will be reversed in ordinary profit in accordance with accounting rules.
BALANCE SHEET
Total assets increased by NOK 3 815 million, or 6.8 %, in 2015 to NOK 60 120 million as at 31 December 2015. The change in total assets was, in addition to the increase in lending, affected by the increase of holdings in Norges Bank during the year. There was no significant trading portfolio at year-end 2015.
Lending
Net lending increased by NOK 2 402 million, or 4.9 %, to NOK 51 286 million at year-end 2015. Lending to retail customers increased by 8.0 % and retail customers accounted for 67.5 % of gross lending at year-end 2015 (65.7 %). Corporate lending decreased by 0.7 % in the preceding 12 months, and this segment accounts for 32.5 % (34.3 %) of gross lending.
Deposits
Deposits from customers totalled NOK 29 389 million at year-end 2015, which represents growth of NOK 1 000 million or 3.5 %. Deposits from corporate customers increased by 0.1 %, while from retail customers they grew by 4.7 %. Deposits from public sector customers were 28.8 % higher than at year-end 2014. 36.4 % of deposits were from corporate customers, 60.6 % were from retail customers and 3.0 % were from the public sector.
The difference between the lending and deposit volumes, NOK 21 897 million, was funded via the Norwegian and international money and securities markets. Deposits in relation to loans amounted to 57.3 % (58.1 %) at year-end 2015.
CAPITAL ADEQUACY
The Group's Core Tier 1 capital ratio must comply with the announced regulatory plan for the escalation of capital. Sparebanken Møre has not been defined as a systemically important financial institution. Regardless of the level of the countercyclical buffer, the Group's Core Tier 1 capital shall amount to a minimum of 13.5 %.
Sparebanken Møre has been authorised to use the Foundation IRB method to calculate capital requirements for corporate commitments and the IRB method for mass market commitments. Sparebanken Møre had no capital requirements associated with the transitional scheme for the Basel I floor at year-end 2015.
The Group's capital adequacy at year-end 2015 was well above the regulatory capital requirements and also above the internally set minimum target for Core Tier 1 capital. Primary capital amounts to 18.3 % (15.8 %), Core capital 16.7 % (14.4 %), and Core Tier 1 capital amounts to 14.2 % (12.0 %).
The Board's proposal concerning the allocation of profit for the year entails 55 % of the Group's profit being retained to build up the Group's financial strength.
With a Core Tier 1 capital of 14.2 % after the fourth quarter of 2015, the regulatory requirements concerning capital adequacy and Sparebanken Møre's internal capital target have been met.
SUBSIDIARIES
The aggregate profit of the Bank's three subsidiaries amounted to NOK 178 million after tax (NOK 189 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. To date the company has raised NOK 15.7 billion in funding for the Group. The company has contributed NOK 176 million to the result in 2015 (NOK 191 million).
Møre Eiendomsmegling AS provides real estate brokerage services to both retail and corporate customers. The company made a profit of NOK 0.3 million (NOK -1 million) in 2015. At the end of the year, the company had 15 full time equivalents.
The object of Sparebankeiendom AS is to own and manage the Bank's own commercial properties. The company made a NOK 2 million contribution to the result in 2015 (NOK -1 million). The company has no staff.
EQUITY CERTIFICATES
The equity certificates were distributed between 5 852 owners by year-end 2015. 9 886 954 equity certificates have been issued and the EC capital accounts for 49.6 % of the Parent Bank's total equity. Note 10 provides an overview of the 20 largest owners of the Bank's equity certificates. At year-end 2015, the Bank owned 125 122 of its own equity certificates, which were purchased on the Oslo Stock Exchange at market prices.
The earnings per equity certificate in the Group amounted to NOK 25.25 in 2015 (NOK 31.20).
SPAREBANKEN MØRE'S DIVIDEND POLICY
Sparebanken Møre's dividend policy has remained unchanged for the last few years. The Group's aim is to achieve financial results which provide a good, stable return on the Bank's equity. The results shall ensure that the owners of the equity receive a competitive long-term return in the form of cash dividends and capital appreciation on the equity. The equity owners' share of the annual profits set aside as dividend funds must correspond to the Bank's equity situation. Sparebanken Møre ensures that all equity owners are guaranteed equal treatment.
PROPOSED ALLOCATION OF THE PROFIT FOR THE YEAR
In line with the rules for equity certificates and in accordance with Sparebanken Møre's dividend policy, it is proposed that 45 % of the Group's profit be allocated to cash dividends and dividend funds for the local community. Based on the accounting breakdown of equity between the EC capital and the primary capital fund, 49.6 % of the net result will be allocated to equity certificate holders and 50.4 % to the primary capital fund. Earnings per equity certificate amounted to NOK 25.25 in 2015. It is proposed to the general meeting that the cash dividend per equity certificate for the 2015 financial year be set at NOK 11.50.
Proposed allocation of the profit for the year:
Profit for the year NOK 503 million
Dividend funds (45 %):
• To cash dividends NOK 114 million
• Dividend for the local community NOK 115 million NOK 229 million
Strengthening of equity (55 %)
• To the dividend equalisation fund NOK 140 million
• To the primary capital fund NOK 142 million
• To other funds NOK -8 million NOK 274 million
Total allocated NOK 503 million
FUTURE PROSPECTS
The economic outlook for Møre og Romsdal has weakened slightly in the last few months. This is due to expectations of somewhat lower growth in the international economy in 2016 than previously assumed. Besides this, oil prices have continued to fall. This indicates an even stronger decrease in output within oil-related industries.
On the other hand, the weakening NOK exchange rate is helping to improve the competitiveness of our export industries and import-competing businesses. The drop in, and continued low level of, interest rates will improve purchasing power in the household sector and reduce interest costs for business. Fiscal policy for this year is expansionary. These factors could partly counteract the negative effects of the fall in the oil sector and oil-related activities.
Sparebanken Møre's level of losses is expected to remain relatively low.
Overall, unemployment in the county rose throughout 2015 and in December it was 2.9 %, compared with 3.0 % for the country as a whole. We assume that unemployment will rise further to some extent in the county this year.
We continue to experience strong competition in the market, both for lending and deposits, especially in the retail market, but the Bank is competitive and continues to register good lending growth in this market. Lending growth in the retail market is expected to slow somewhat during the year, while growth in the corporate market will increase. There is a constant focus on generating growth through good commitments with an acceptable level of risk.
Sparebanken Møre focuses strongly on cost-effectiveness. This has resulted in a highly satisfactory level of total costs in relation to income. This focus will continue, and the Group's cost-effectiveness will this year remain well within the internal maximum cost income ratio target of 45 %. Overall, a good result is expected for the year, with a return on equity above the target of 10 %.