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 2019.
Profit after losses was NOK 231 million for the fourth quarter of 2019, or 1.22 per cent of average total assets, compared with NOK 197 million, or 1.12 per cent, for the corresponding quarter last year.
Profit after tax was NOK 190 million for the fourth quarter of 2019, or 1.01 per cent of average total assets, compared with NOK 137 million, or 0.78 per cent, for the corresponding quarter last year.
Return on equity was 11.8 per cent in the fourth quarter of 2019 compared with 9.5 per cent in the fourth quarter of 2018, and the cost income ratio amounted to 40.6 per cent compared with 42.7 per cent in the fourth quarter of 2018.
Earnings per equity certificate were NOK 9.00 (NOK 6.80) for the Group and NOK 6.10 (NOK 5.90) for the Parent Bank.
Net interest income
Net interest income was NOK 339 million, which is NOK 30 million, or 9.7 per cent, higher than in the corresponding quarter of last year. This represents 1.79 per cent of total assets, which is 0.03 percentage points higher than for the fourth quarter of 2018.
The Bank implemented a change in interest rates with effect from 13 November. Both lending and deposit rates were increased up to 0.25 percentage points.
Charges for the Norwegian Resolution Fund and the Norwegian Deposit Guarantee Fund in 2019 reduced net interest income in the fourth quarter of 2019 by NOK 15 million compared with the fourth quarter of 2018. This increase was not accrued in previous quarters of 2019. See the comments on net interest income under the preliminary financial statements for 2019.
Other operating income
Other operating income was NOK 75 million in the quarter, which is NOK 19 million higher than in the fourth quarter of last year. Other operating income , excluding financial instruments, increased by NOK 8 million compared with the fourth quarter of 2018. The changes in value in the bond portfolio and equities constitute capital losses of NOK 3 million in the quarter, compared with capital losses of NOK 14 million in the fourth quarter of 2018. Dividends were NOK 6 million higher than in the fourth quarter of 2018.
Operating costs were NOK 168 million in the quarter, which is NOK 12 million higher than in the same quarter last year. Personnel costs were NOK 5 million higher than in the corresponding period last year and amounted to NOK 91 million. Staffing has been reduced by 4 full-time equivalents in the last 12 months, to 357 FTEs. Other operating costs increased by NOK 7 million from the same period last year.
The cost income ratio was 40.6 per cent in the fourth quarter of 2019, which represents a reduction of 2.1 percentage points compared with the fourth quarter last year.
The quarterly accounts were charged NOK 15 million (NOK 12 million) in losses on loans and guarantees. This amounts to 0.08 per cent (0.07 per cent) of average total assets on an annualised basis. Losses in the corporate segment increased by NOK 13 million in the quarter and losses in the retail segment increased by NOK 2 million.
Lending and deposit growth
Total assets grew to NOK 74,875 million, a 2.4 per cent change in relation to the end of the third quarter of 2019 . Lending increased by 0.6 per cent to NOK 64,029 million and deposits from customers rose by 1.8 per cent to NOK 36,803 million. Lending to corporate customers increased by 1.0 per cent in the fourth quarter of 2019, while lending to retail customers rose by 0.4 per cent. For further comments concerning volume trends in the last 12 months, please see the comments for the full year 2019.
PRELIMINARY FINANCIAL STATEMENTS FOR 2019
Sparebanken Møre’s profit before losses on loans and guarantees was NOK 961 million, or 1.31 per cent of average total assets, compared with NOK 820 million, or 1.19 per cent, for 2018.
Profit before tax was NOK 911 million, or 1.24 per cent of average total assets, compared with NOK 804 million, or 1.17 per cent, for 2018.
Profit after tax was NOK 711 million, or 0.97 per cent of average total assets, compared with NOK 601 million, or 0.88 per cent, for 2018. The results for 2019 represent a return on equity of 11.7 per cent, compared with 10.6 per cent in 2018.
Earnings per equity certificate in 2019 were NOK 34.50 (NOK 29.60) for the Group, and NOK 32.00 (28.35) for the Parent Bank.
Net interest income
Net interest income totalled NOK 1,314 million (1,179 million) or 1.79 per cent (1.70 per cent) of average total assets. Net interest income accounted for 81.8 per cent of total income in 2019.
Over the course of the year, rising interest rates led to increased funding costs and slightly reduced margins on lending. The interest rate hikes implemented in 2019 kept the lending margin at year end 2019 at about the same level as at year end 2018. The margin for deposits increased in the same period and, overall, this improved net interest income in 2019 compared with 2018.
In addition to this, higher lending and deposit volumes, as well as better interest contributions from the Bank’s equity, increased net interest income in NOK compared with last year.
Strong competition in both lending and deposits, and reduced risk in the lending portfolio, have contributed to downward pressure on net interest income.
In the retail market, the lending margin decreased and the deposit margin increased compared with 2018. The lending margin in the corporate market was unchanged, while the deposit margin has increased slightly.
Other operating income
Other operating income was NOK 293 million in 2019 (0.40 per cent of average total assets). This is an increase of NOK 45 million compared with 2018.
Capital losses from bond holdings were NOK 9 million, compared with losses of NOK 19 million in 2018. Capital gains on equities were NOK 16 million, compared with NOK 10 million in 2018. Income from other financial investments increased by NOK 17 million compared with 2018.
Other operating income increased by NOK 12 million compared with 2018.
Total costs were NOK 646 million, which is NOK 39 million higher than in 2018. Personnel costs increased by NOK 14 million compared with 2018 and were NOK 354 million. Financial activity tax in the form of higher employers’ National Insurance contributions was NOK 15 million in 2019, NOK 1 million higher than in 2018. Staffing has been reduced by 4 full-time equivalents in the last 12 months to 357 FTEs. Other operating costs were NOK 25 million higher than in 2018.
The cost income ratio was 40.2 per cent in 2019. This represents a decrease of 2.3 percentage points compared with 2018.
In 2019, the income statement was charged with NOK 50 million (NOK 16 million) in losses on loans and guarantees. This represents 0.07 per cent (0.02 per cent) of average total assets. At year end 2019, total expected losses were NOK 375 million, equivalent to 0.57 per cent of loans and guarantees (NOK 338 million and 0.55 per cent). Of the individually assessed commitments, NOK 14 million of the impairments were linked to commitments in default for more than 90 days (NOK 11 million), which amounts to 0.02 per cent of loans and guarantees (0.02 per cent). NOK 361 million relates to other commitments (NOK 327 million), which is equivalent to 0.55 per cent of gross loans and guarantees (0.53 per cent).
Net problems loans (loans in default for more than 90 days and other problem loans subject to individual impairments) have increased by NOK 465 million in the last 12 months. At the end of 2019, the corporate market accounted for NOK 668 million of net problems loans, and the retail market NOK 80 million. In total, this represents 1.14 per cent of gross loans and guarantees (0.46 per cent).
Lending to customers
At year end 2019, lending to customers amounted to NOK 64,029 million (NOK 60,346 million). Customer lending has increased by a total of NOK 3,683 million, or 6.1 per cent, in the last 12 months. Retail lending has increased by 4.5 per cent, while corporate lending has increased by 9.8 per cent in the last 12 months. Retail lending accounted for 68.4 per cent of lending at year end 2019 (69.2 per cent).
Deposits from customers
Customer deposits have increased by NOK 2,389 million, or 6.9 per cent, in the last 12 months. At year end 2019, deposits amounted to NOK 36,803 million (NOK 34,414 million). Retail deposits have increased by 5.1 per cent in the last 12 months, while corporate deposits have increased by 10.2 per cent and public sector deposits have decreased by 0.4 per cent. The retail market’s relative share of deposits amounted to 58.9 per cent (59.9 per cent), while deposits from the corporate market accounted for 39.0 per cent (37.9 per cent) and from the public sector market 2.1 per cent (2.2 per cent).
The deposit-to-loan ratio was 57.5 per cent at year end 2019 (57.0 per cent).
The EU Capital Requirements Directive CRR/CRD IV was introduced with effect from 31 December 2019.
The most important changes that apply from 31 December 2019 are that the transitional rule associated with the Basel I floor has been eliminated and an SME discount of 23.82 per cent has been introduced for SME customers with loans of up to EUR 1.5 million and an annual turnover of less than EUR 50 million.
At the same time, the countercyclical buffer has been increased from 2.0 to 2.5 per cent from 31 December 2019.
The risk weight for loans with security in residential property must be a minimum of 20 per cent and the risk weight for loans with security in commercial property must be a minimum of 35 per cent. These two requirements will be introduced from 31 December 2020 and will apply up to 31 December 2022. As at 31 December 2019, Sparebanken Møre’s average risk weight for loans to the mass market with security in real property was 18.3 per cent and for loans to enterprises it was 81.8 per cent. Therefore, the minimum requirement of 20 per cent would have required an increase in the Group’s basis for calculation of NOK 822 million as at 31 December 2019, which would be equivalent to a reduction in CET1 ratio of 0.43 percentage points. The minimum requirement of 35 per cent for commercial property will not affect Sparebanken Møre.
Approval has also been given to increase the systemic risk buffer requirement from 3.0 to 4.5 per cent from 31 December 2020 for advanced IRB banks. However, Sparebanken Møre uses the IRB Foundation method for credit risk and will, therefore, be subject to a systemic risk buffer requirement of 3 per cent until the 4.5 per cent requirement comes into force on 31 December 2022.
The overall requirement for Sparebanken Møre’s CET1 ratio, including the countercyclical capital buffer and Pillar 2, was 14.2 per cent at year end 2019. 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. This means that the effective capital requirement for the Group as at 31 December 2019 was 14.34 per cent. The requirement is met by a good margin.
The Group’s capital adequacy at year end 2019 exceeded the regulatory capital requirements and the internally set minimum target for CET1 capital. Primary capital amounted to 21.5 per cent (19.6 per cent), Tier 1 capital 19.3 per cent (17.6 per cent), and CET1 capital 17.4 per cent (16.0 per cent).
The leverage ratio (LR) at year end 2019 was 8.0 per cent, 0.1 percentage points lower than at year end 2018. The regulatory minimum requirement (3 per cent) and buffer requirement (2 per cent), 5 per cent in total, was met by a good margin.
The aggregate profit of the Bank’s three subsidiaries was NOK 222 million after tax in 2019 (NOK 177 million).
Møre Boligkreditt AS was established as part of the Group’s long-term funding strategy. The main purpose of the mortgage company is to issue covered bonds for sale to Norwegian and international investors. At year end 2019, the company had net outstanding bonds of NOK 23.1 billion in the market; almost 34 per cent of the borrowing was in a currency other than NOK. The company contributed NOK 222 million to the result in 2019 (NOK 174 million).
Møre Eiendomsmegling AS provides real estate brokerage services to both retail and corporate customers. The company contributed NOK 0.8 million to the result in 2019 (NOK 1 million). At year end, the company employed 13 full-time equivalents.
Sparebankeiendom AS’s purpose is to own and manage the Bank’s commercial properties. The company contributed NOK -1.1 million to the result in 2019 (NOK 2 million). The company has no employees.
At year end 2019, there were 5,526 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 31 December 2019, the Bank owned 25,251 of its own equity certificates. These were purchased on the Oslo Stock Exchange at market prices.
Sparebanken Møre’s aim is to achieve financial results that provide a good, stable return on the Bank’s equity capital. The results should ensure that the owners of the equity receive a competitive long-term return in the form of cash dividends and capital appreciation on their equity.
Dividends consist of cash dividends to equity certificate holders and dividends to the local communities. The proportion of profits allocated to dividends is in line with the Bank’s capital strength. Unless the Bank’s capital strength dictates otherwise, it will be aimed at distributing about 50 per cent of the profit.
Sparebanken Møre’s allocation of earnings should ensure that all equity owners are guaranteed equal treatment.
PROPOSED ALLOCATION OF PROFIT FOR THE YEAR
In line with the rules for equity certificates, etc., and in accordance with Sparebanken Møre’s dividend policy, it is proposed that 50.7 per cent of the Group’s profit should be allocated to cash dividends and dividends to the local communities. Based on the accounting breakdown of equity in the Parent Bank between equity certificate capital and the primary capital fund, 49.6 per cent of the profit will be allocated to equity certificate holders and 50.4 per cent to the primary capital fund. The earnings per equity certificate in the Group were NOK 34.50 in 2019. The recommendation to the General Meeting is that the cash dividend per equity certificate for the 2019 financial year should be set at NOK 17.50.
Proposed allocation of profit (figures in NOK million):
Profit for the year 711
Allocated to holders of AT1 capital 23
Dividend funds (50.7 %):
To cash dividends 173
Dividends to the local community 176 349
Retained earnings (49.3 %):
To the dividend equalisation fund 144
To the primary capital fund 146
To other funds 49 339
Total allocated 711
The county is expected to see moderate production growth going forward. Continued low interest rates, a weak Norwegian kroner exchange rate and growth in our export markets will contribute to this. It appears that the uncertainty surrounding Brexit and the trade war between the US and China has diminished.We expect the activity in our main industries to remain high.
Unemployment in the county has fallen heavily since the beginning of 2017. According to NAV, registered unemployment at job centres in Møre og Romsdal amounted to 2.0 per cent of the workforce at the end of December. In comparison, the national unemployment rate is 2.2 per cent. With moderate production growth going forward, unemployment is likely to remain low throughout the current year.
Growth in household debt in Norway as a whole fell steadily throughout 2019 and ended up at around 5 per cent. The downward trend has been of this magnitude ever since 2012. The growth in lending in the corporate market was more stable in 2019. The total growth in lending fell slightly during the year.
Sparebanken Møre is still experiencing strong competition in the market, both for lending and deposits.
The Bank has noted a somewhat slower pace of growth in lending to the retail market compared with the end of the third quarter. The growth rate in the corporate market remained good throughout the quarter. Deposit growth is good and the deposit-to-loan ratio is high.
Lending growth in the retail market will remain at around 5 per cent in 2020 as well. The growth in the corporate market will be somewhat lower, mainly due to the strong growth throughout 2019. There is a constant focus on good operations and increased profitability.
The Bank will remain strong and committed in supporting our customers.
Sparebanken Møre’s target for cost-effective operations is a cost income ratio of less than 40 per cent.
Sparebanken Møre’s losses are expected to be low also in 2020. Overall, good results are expected in 2020, with a return on equity above the Bank’s strategic target of 11 per cent.
Ålesund, 31 December 2019
29 January 2020
THE BOARD OF DIRECTORS OF SPAREBANKEN MØRE
LEIF-ARNE LANGØY, Chairman
ROY REITE, Deputy Chairman
RAGNA BRENNE BJERKESET
ANN MAGRITT BJÅSTAD VIKEBAKK
HELGE KARSTEN KNUDSEN
MARIE REKDAL HIDE
TROND LARS NYDAL, CEO