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 2020
Profit after losses was NOK 194 million for the fourth quarter of 2020, or 0.97 per cent of average total assets, compared with NOK 231 million, or 1.22 per cent, for the corresponding quarter last year.
Profit after tax was NOK 147 million for the fourth quarter of 2020, or 0.73 per cent of average total assets, compared with NOK 190 million, or 1.01 per cent, for the corresponding quarter last year.
Return on equity was 9.1 per cent in the fourth quarter of 2020 compared with 11.8 per cent in the fourth quarter of 2019, and the cost income ratio amounted to 40.6 per cent, the same as in the fourth quarter of 2019.
Earnings per equity certificate were NOK 7.10 (NOK 9.00) for the Group and NOK 3.88 (NOK 6.10) for the Parent Bank.
Net interest income
Net interest income was NOK 314 million, which is NOK 25 million, or 7.4 per cent, lower than in the corresponding quarter of last year. This represents 1.58 per cent of total assets, which is 0.21 percentage points lower than in the fourth quarter of 2019.
Strong competition within both loans and deposits, as well as the lower contribution from the Bank’s equity put pressure on net interest income in the fourth quarter.
Other operating income
Other operating income was NOK 72 million in the quarter, which is NOK 3 million lower than in the fourth quarter of last year. The return on financial investments was NOK 3 million higher than in the fourth quarter of 2019. Capital gains from bond holdings were NOK 2 million in the quarter, compared with capital losses of NOK 9 million in the corresponding quarter last year. Dividends amounted to NOK 16 million, which is NOK 10 million higher than in the fourth quarter of 2019. Capital losses on equities were NOK 9 million, compared with capital gains of NOK 5 million in the fourth quarter of 2019, and income from other financial investments decreased by NOK 10 million compared with the same period last year.
Other income excluding financial investments decreased by NOK 6 million compared with the fourth quarter of 2019.
Operating costs in the quarter amounted to NOK 157 million, which is NOK 11 million lower than in the same quarter last year. Personnel costs were NOK 10 million lower than in the corresponding period last year and amounted to NOK 81 million. Staffing has been reduced by 11 FTEs over the past 12 months to 346 FTEs. Other operating costs were NOK 1 million lower than in the same period last year.
The cost income ratio was 40.6 per cent for the fourth quarter of 2020, which is the same as in the fourth quarter last year.
The quarterly accounts were charged NOK 35 million (NOK 15 million) in losses on loans and guarantees. This amounts to 0.18 per cent (0.08 per cent) of average total assets on an annualised basis. Losses in the corporate segment increased by NOK 44 million in the quarter, while losses in the retail segment decreased by NOK 9 million.
Lending and deposit growth
Total assets decreased to NOK 79,486 million, a 1.1 per cent change in relation to the end of the third quarter of 2020. Lending increased by 2.3 per cent to NOK 66,850 million and deposits from customers fell by 0.8 per cent to NOK 39,023 million. Lending to corporate customers increased by 4.8 per cent in the fourth quarter of 2020, while lending to retail customers rose by 1.0 per cent. For further comments concerning volume trends in the past 12 months, please see the comments for the full year 2020.
PRELIMINARY FINANCIAL STATEMENTS FOR 2020
Sparebanken Møre’s profit before losses on loans and guarantees was NOK 883 million, or 1.13 per cent of average total assets, compared with NOK 961 million, or 1.31 per cent, for 2019.
Profit before tax was NOK 734 million, or 0.94 per cent of average total assets, compared with NOK 911 million, or 1.24 per cent, for 2019.
Profit after tax was NOK 567 million, or 0.73 per cent of average total assets, compared with NOK 711 million, or 0.97 per cent, for 2019. The results for 2020 represent a return on equity of 8.6 per cent, compared with 11.7 per cent in 2019.
Earnings per equity certificate in 2020 were NOK 27.10 (NOK 34.50) for the Group, and NOK 26.83 (32.00) for the Parent Bank.
Net interest income
Net interest income totalled NOK 1,228 million (NOK 1,314 million) or 1.57 per cent (1.79 per cent) of average total assets. Net interest income accounted for 81.2 per cent of total income in 2020 (81.8 per cent).
The lending and deposit margins for 2020 were heavily affected by the interest rate changes implemented during the second and third quarters. Lending rates were reduced before deposit rates and this significantly affected the net interest income and margins for the year.
Falling interest rates reduced funding costs, but also significantly reduced the net interest contribution from the Bank’s equity.
Strong competition in both lending and deposits, and reduced risk in the lending portfolio, contributed to downward pressure on net interest income, while higher lending and deposit volumes resulted in an increase in net interest income.
The retail market saw a weak increase in the interest margin for lending, but there was a large reduction in the deposit margin compared with 2019. In the corporate market, the interest margin for lending was on a par with 2019, while the interest margin for deposits decreased.
Other operating income
Other operating income was NOK 285 million in 2020 (0.36 per cent of average total assets). This is a decrease of NOK 8 million compared with 2019.
Dividends were NOK 22 million, compared with NOK 12 million in 2019. Capital losses from bond holdings were NOK 4 million, compared with losses of NOK 9 million in 2019. Capital losses on equities totalled NOK 3 million, compared with gains of NOK 16 million in 2019. Income from other financial investments increased by NOK 8 million compared with 2019.
Other operating income decreased by NOK 8 million compared with 2019, with income from money-transfer services decreasing by NOK 16 million.
Total costs were NOK 630 million, which is NOK 16 million lower than in 2019. Personnel costs decreased by NOK 22 million compared with 2019 and were NOK 332 million. Staffing has been reduced by 11 FTEs in the past 12 months to 346 FTEs. Other costs were NOK 6 million higher than in 2019, primarily due to higher ICT costs.
The cost income ratio for 2020 was 41.6 per cent, which represents an increase of 1.4 percentage points compared with 2019.
In 2020, the income statement was charged with NOK 149 million (NOK 50 million) in losses on loans and guarantees. This represents 0.19 per cent (0.07 per cent) of average total assets.
At year end 2020, total expected losses were NOK 326 million, equivalent to 0.47 per of gross loans and guarantees (NOK 375 million and 0.57 per cent). Of the total expected losses, NOK 18 million is linked to credit-impaired commitments more than 90 days past due (NOK 24 million), which amounts to 0.03 per cent of gross loans and guarantees (0.04 per cent). NOK 191 million relates to other credit-impaired commitments (NOK 216 million), which is equivalent to 0.28 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 105 million in the past 12 months. At year end 2020, the corporate market accounted for NOK 750 million of net credit-impaired commitments and the retail market NOK 91 million. In total, this represents 1.22 per cent of gross loans and guarantees (1.12 per cent).
Lending to customers
At year end 2020, lending to customers amounted to NOK 66,850 million (NOK 64,029 million). Customer lending has increased by a total of NOK 2,821 million, or 4.4 per cent, in the past 12 months. Retail lending has increased by 4.0 per cent, while corporate lending has increased by 5.3 per cent, in the past 12 months. Retail lending accounted for 68.2 per cent of lending at year end 2020 (68.4 per cent).
Deposits from customers
Customer deposits have increased by NOK 2,220 million, or 6.0 per cent, in the past 12 months. At year end 2020, deposits amounted to NOK 39,023 million (NOK 36,803 million). Retail deposits have increased by 7.8 per cent in the past 12 months, while corporate deposits have increased by 3.4 per cent and public sector deposits by 5.8 per cent. The retail market’s relative share of deposits amounted to 59.9 per cent (58.9 per cent), while deposits from the corporate market accounted for 38.0 per cent (39.0 per cent) and from the public sector 2.1 per cent (2.1 per cent).
The deposit-to-loan ratio was 58.1 per cent at year end 2020 (57.2 per cent).
Sparebanken Møre is very well capitalised. At year end 2020, the Common Equity Tier 1 capital ratio was 17.5 per cent (17.7 per cent) and this is 4.8 percentage points higher than the total regulatory minimum requirement of 12.7 per cent. Primary capital amounted to 21.3 per cent (21.7 per cent) and Tier 1 capital 19.2 per cent (19.5 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.
With effect from 31 December 2020, a 20 per cent floor has also been introduced for commitments secured by collateral in residential property.
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 year end 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 year end 2020 was 8.0 per cent, 0.1 percentage points lower than at year end 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 was NOK 232 million after tax in 2020 (NOK 222 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 year end 2020, the company had outstanding bond volume of NOK 24 billion, of which around 35 per cent was issued in currencies other than NOK. NOK 500 billion of the volume of bonds issued by the company was held by the Parent Bank at year end 2020. Møre Boligkreditt AS contributed NOK 230 million to the Group’s result in 2020 (NOK 222 million).
Møre Eiendomsmegling AS provides real estate brokerage services to both retail and corporate customers. The company contributed NOK 0.5 million to the result in 2020 (NOK 0,8 million). At the end of the quarter, the company employed 11 FTEs.
Sparebankeiendom AS’s purpose is to own and manage the Bank’s commercial properties. The company contributed NOK 2 million to the result in 2020 (NOK -1,1 million). The company has no employees.
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.
At year end, LCR was 138, NSFR was 114 and Common Equity Tier 1 capital was 17.5 per cent.
The Group had one major maturity date in the bond market in 2020 when the gross amount of NOK 3,000 million from MOBK14 from Møre Boligkreditt AS matured on 23 September. Early buybacks had reduced MOBK14 to NOK 438 million at the time of redemption.
In addition to maturity dates for market funding, the Bank’s liquidity was affected by the normal seasonal variations and changes in growth rates for loans and deposits due to the current situation. The government’s tax deferral measures, as well as support schemes, etc. related to Covid-19 have also affected the liquidity situation to some extent.
During the year, lending increased by NOK 600 million more than deposits. The Group’s deposit-to-loan ratio increased from 57.2 per cent to 58.1 per cent.
The capital markets functioned throughout 2020, although there was a marked margin expansion early in the coronavirus pandemic. This margin expansion reversed during the course of the year. Sparebanken Møre has had good access to competitive financing, not only in the form of deposits but also through the issue of senior debt and covered bonds, and the Group executed its planned funding strategy in 2020. Nevertheless, in the first quarter, the Bank chose to take advantage of 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 2020. The liquidity from the loans has been used to strengthen the Bank’s LCR liquidity portfolio correspondingly.
The Bank monitors liquidity developments closely. Since March 2020, 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 continuously monitored and reported daily. 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 interest rate fixing. Therefore, it was not until July last year that Sparebanken Møre’s funding costs for market funding were adjusted to the new lower level of market interest rates.
The above-mentioned interest rate fixing profile and the fact that lending rates to customers were reduced immediately after the central bank cut its rates, while deposit rates were not reduced until 6 weeks later, markedly weakened the Bank’s net interest income in the second quarter of 2020. During 2020, net interest income was generally also negatively affected by lower returns on the Bank’s equity as well as the ability to maintain the deposit margin in a low interest rate environment. Net interest income amounted to NOK 1,228 million in 2020, compared with NOK 1,314 million in 2019. As a proportion of average total assets this represents a drop from 1.79 per cent to 1.57 per cent.
The item that had the largest negative impact on the Bank’s results in the first quarter was the development of the market value of the Bank’s LCR liquidity portfolio. This effect was largely reversed before the end of the year. The Bank has no trading portfolio in equities or significant ownership stakes in product companies, which results in low volatility in relation to financial performance due to developments in the capital market.
Changes in economic conditions have had consequences for macroeconomic scenarios and weightings in the Group’s calculations of expected credit loss (ECL) in 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 case scenario it was reduced from 80 to 50 per cent.
During the fourth quarter the outlook was more positive and clearer. The macroeconomic conditions improved. A public vaccination programme started. There were very few bankruptcies and the level of default was relatively low. The authorities announced new stimulus packages for the hardest hit industries. Oil prices also rose markedly during the fourth quarter.
The Bank granted payment relief in the first and second quarters of 2020 due to the consequences of Covid-19. Customers who applied were granted 6-month interest-only periods until the second half of 2020. Most of the customers granted interest-only periods are now paying their installments in line with their original agreement.
As part of the process of granting payment relief, a specific, individual assessment is made of whether the application for payment relief is ‘forbearance’ and whether the loan should thus migrate to stage 2 (performing) or stage 3 (non-performing) in the Group’s ECL model.
This has been further supplemented with a more portfolio or segment based (hotels, tourism, travel industry, and personal services industry) approach to assess significantly increased credit risk and migration to stage 2. This was due to the fact that current changes in future prospects are not adequately captured by the ECL model.
The positive changes in economic conditions resulted in changes to the macroeconomic scenarios and weightings as at 31 December 2020. The probability of the pessimistic scenario occurring was reduced from 40 to 20 per cent, while for the base case scenario it was reduced from 50 to 70 per cent. The best case scenario’s weighting was kept unchanged at 10 per cent. For further information about the consequences of Covid-19 and the measurement of expected credit loss see note 3.
At year end 2020, there were 5,758 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 2020, the Bank owned 22,111 of its own equity certificates. These were purchased on the Oslo Børs at market prices.
The aim of Sparebanken Møre is to achieve financial results which provide a good and 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 for equity certificate holders and dividend funds for 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 is expected that about 50 per cent of this year’s surplus can be distributed as dividends.
Sparebanken Møre’s allocation of earnings should ensure that all EC holders are guaranteed equal treatment.
PROPOSED ALLOCATION OF PROFIT FOR THE YEAR
In a letter to the Financial Supervisory Authority of Norway dated 20 January 2021, the Ministry of Finance expressed an expectation that Norwegian banks, which after a careful assessment and based on ESRB’s recommendations find a basis for distributions, keep overall distributions within a maximum of 30 per cent of the cumulative annual result for the years 2019 and 2020 up to 30 September 2021.
The Bank’s dividend policy implies a cash dividend for 2020 of NOK 13.50 per equity certificate. Based on the current extraordinary situation and the authorities’ expectations, the Board has deemed it appropriate to propose to the General Meeting a cash dividend per equity certificate of NOK 4.50 for the 2020 financial year. The corresponding provision for dividend funds to the local community will amount to NOK 45 million. The total dividend for 2019 and 2020 will thus amount to 30 per cent of the cumulative annual result for the years 2019 and 2020.
The Board will also propose to the General Meeting that the Board is issued authorisation to make an additional payment of up to NOK 9.00 per EC for distribution as cash dividend and allocate up to NOK 91 million as dividend funds to the local community for the 2020 financial year. In the event of such further distribution, the overall dividend for the 2020 financial year will thus be in line with the Bank’s dividend policy.
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 27.10 in 2020.
Proposed allocation of profit (figures in NOK millions):
Profit for the year 567
Share allocated to AT1 instrument holders 27
Dividend funds (16.5%):
To cash dividends 44
To dividend funds for local communities 45 89
Strengthening equity (83.5%):
To the dividend equalisation fund 221
To the primary capital fund 224
To other funds 6 451
Total allocated 567
Labour market developments in Møre og Romsdal indicate that the total output of goods and services in the county stabilised during the fourth quarter of 2020. At the end of December, registered unemployment amounted to 2.9 per cent of the workforce according to the Norwegian Labour and Welfare Administration (NAV). By comparison, the unemployment rate for the country as a whole was 3.8 per cent.
However, there is a risk of some rise in unemployment and the number of bankruptcies increasing due to prolonged activity-reducing infection control measures. A number of industries are facing serious economic situations. This is particularly true for tourism-related sectors such as the hotel and restaurant industry, personal services, and the maritime industries and their suppliers. Challenges will also remain in oil-related industries.
After falling prior to June, the figures for the second half of 2020 show that the pace of growth in lending to households was increasing in the second half of the year for Norway as a whole. At year end 2020, the growth in lending to the corporate market was somewhat lower than at the end of the year before.
During the first three quarters of 2020, the Bank noted somewhat slower growth in both lending to the retail market and lending to the corporate market compared with the annual growth rates at year end 2019. The pace of growth increased in the fourth quarter and ended the year at 4.0 per cent for the retail market, while the growth in lending to the corporate market ended 2020 at 5.3 per cent. Deposits increased by 6.0 per cent in 2020 and the deposit-to-loan ratio remains high.
Sparebanken Møre expects lending growth for the full year 2021 to be slightly higher than the growth in 2020. The growth in deposits is expected to remain high.
The Bank has a solid capital base and good liquidity, and will also going forward remain strong and committed in supporting our customers. The focus will always be on good operations and profitability.
Although Sparebanken Møre’s strategic financial targets were not achieved in 2020 and the activity-reducing measures due to the coronavirus pandemic are expected to impact the market in 2021 as well, the targets of a return on equity in excess of 11 per cent and a cost income ratio of less than 40 per cent stand. The Bank has taken steps aimed at achieving these targets.
Ålesund, 31 December 2020
11 February 2021
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