SpareBank 1 Sørøst-Norge

Earnings Release • Feb 11, 2021

Strong performance in a challenging year

Strong performance in a challenging year

The SpareBank 1 BV Group achieved a profit from ordinary operations before losses of NOK 660.7 million (667.1 million). Profit after tax was NOK 504.7 million (538.6 million), which represents 1.27% (1.41%) of average total assets. The Group’s annualised return on equity was 9.9% (11.3%).

The Group’s annualised return on equity was affected by gains related to the insurance merger (Fremtind) of NOK 53.0 million in 2020 and NOK 71.9 million in 2019, respectively. Excluding these items, the Group’s annualised return on equity was 8.8% (9.8%).

Earnings per equity certificate in the parent bank were NOK 3.62 (4.43).

Result Group

Net interest income amounted to NOK 649.1 million (656.5 million). Net interest income as a percentage of average total assets was 1.63 % (1.72 %).

At the end of the quarter, the Bank had transferred mortgages worth NOK 12,660 million (12,040 million) to SpareBank 1 Boligkreditt AS, and NOK 752 million (843 million) to SpareBank 1 Næringskreditt AS. Earnings from these loan portfolios are shown under net commission income and amounted to NOK 132.7 million (101.5 million).

Net commission and other income totalled NOK 476.9 million (427.1 million).

Net commission income amounted to NOK 311.7 million (280.2 million). The increase in commissions from SpareBank 1 Boligkreditt AS and SpareBank 1 Næringskreditt AS accounts for NOK 31.2 million of this.

Other operating income amounted to NOK 165.2 million (146.8 million). The change since last year largely consists of NOK 9 million in increased earnings from subsidiaries and NOK 8 million in gains from the realisation of properties.

Net income from financial assets amounted to NOK 133.8 million (171.9 million). The key items in 2020 consist of dividends received totalling NOK 31.2 million (25.5 million) and net income from ownership interests of NOK 101.1 million (125.4 million). The latter item includes the share of the gains from the insurance merger for personal risk products (Fremtind) amounting to NOK 53.0 million (71.9 million), as well as the Bank’s NOK 30.3 million (38.8 million) share of the result in SpareBank 1 Gruppen AS as at 31.12.2020. In addition, net income from the Bank’s other financial investments amounted to NOK 1.5 million (20.9 million).

Total operating expenses were NOK 599.1 million (588.3 million). Operating expenses as a percentage of total operating income for the Group came to 47.6% (46.9%). The corresponding cost-income ratio for the parent bank was 44.5% (41.6%).

Personnel expenses amounted to NOK 359.4 million (344.2 million). The average number of FTEs in the Group increased by eight compared with the same period last year.

Other operating expenses amounted to NOK 239.7 million (244.2 million).

Net impairment of loans and guarantees amounted to NOK 30.7 million (2.3 million) as at 31.12.2020. Net impairments as a percentage of average gross lending amounted to 0.10% (0.01%). The net decrease in impairment provisions in Stage 3 amounted to NOK 12.6 million. In addition to this, NOK 24.4 million in previously recognised impairments in Stage 3 were recognised as losses. Provisions in Stage 1 and Stage 2 increased by NOK 10.8 million and NOK 8.3 million, respectively. In the fourth quarter, net impairment of loans and guarantees amounted to NOK -2.6 million. The income recognition primarily relates to the realisation of losses where previous periods’ impairment provisions exceed realised losses.

Mortgages for retail customers account for around 81% of the Bank’s total lending. The Bank has no direct exposure to the oil sector and has relatively little loan exposure within industries such as hotels, restaurants, tourism, services and the transport sector. These industries have been especially hard hit by the pandemic.

Balance sheet Group

The Group’s total assets amounted to NOK 40,455 million. This represents an increase of NOK 1,633 million over the past 12 months. The Group’s business capital (total assets including loans transferred to SpareBank1 Boligkreditt AS and SpareBank 1 Næringskreditt AS) amounted to NOK 53,868 million (51,705 million).

Gross lending (including volume transferred to SpareBank 1 Boligkreditt AS/SpareBank 1 Næringskreditt AS) amounted to NOK 45,999 million. The past 12 months have seen an increase of NOK 1,707 million, equivalent to growth of 3.9%. Some NOK 1,447 million, equivalent to 4.0%, of the growth came in the retail market and NOK 260 million, equivalent to 3.2%, in the corporate market. The retail market’s share of lending (including SpareBank 1 Boligkreditt) at the end of the quarter was 82% (82%).

At the end of the quarter, the Group had a deposit volume of NOK 25,864 million (24,443 million) with deposit growth of 5.8% in the past 12 months. Some NOK 599 million, equivalent to 3.9%, of the growth came in the retail market and NOK 821 million, equivalent to 9.0%, in the corporate market. The Group had a deposit coverage ratio of 79.4%, compared with 77.8% at the same time last year. Including the volume transferred to SpareBank 1 Boligkreditt AS/ SpareBank 1 Næringskreditt AS, the deposit coverage ratio amounted to 56.2% (55.2%). The retail market’s share of deposits at the end of the quarter was 61% (63%).

Capital adequacy

SpareBank 1 BV uses the standard method for calculating credit risk and the basic method for operational risk.

On 13.03.2020, the Ministry of Finance decided to reduce the countercyclical buffer from 2.5% to 1% with immediate effect. Based on this, the regulatory requirement for Common Equity Tier 1 capital is a minimum of 11%. In September 2018, the Financial Supervisory Authority of Norway set a new Pillar 2 requirement for SpareBank 1 BV of 1.9% effective from 31.12.2018, but at least NOK 457 million above the minimum requirement and buffer requirement in Pillar 1. The current total requirement for Common Equity Tier 1 capital is thus 12.9%. The Group’s target for Common Equity Tier 1 capital ratio is a minimum of 15.5%. From 31.12.2021, the internal target will increase to 16.0%.

On 10.12.2020, the Financial Supervisory Authority of Norway published a circular on assessing loans that should be considered high risk. The Financial Supervisory Authority of Norway explained that its interpretation of the current CRR rules indicates that property development projects constructed for the purpose of resale at a profit should be regarded as speculative investments and be risk weighted at 150%. In the Financial Supervisory Authority of Norway’s interpretation, requirements for advance sales, equity shares, prepayment of parts of the purchase sum or other risk mitigating measures would not affect the risk weighting.

Nevertheless, the Bank has chosen to implement the policy changes included in the Financial Supervisory Authority of Norway’s circular in the Bank’s capital adequacy calculation as at 31.12.2020 and has thus changed the risk weightings for all of the Bank’s property development projects to 150%. The policy change has resulted in a 0.4% reduction in the Bank’s Common Equity Tier 1 capital ratio. Historical figures have not been restated and are therefore not directly comparable.

At the end of the quarter, the Common Equity Tier 1 capital ratio was 18.8% (18.5%). The leverage ratio was 8.6% (8.6%) at the end of the quarter. The regulatory requirement for the leverage ratio is 5.0%.

In the fourth quarter of 2020, the Financial Supervisory Authority of Norway set SpareBank 1 BV’s MREL requirement at 31.8% of the adjusted calculation basis.

The requirement was based on the Group’s balance sheet as at 31.12.2019. Taking into account the primary capital in the Group, this results in a provisionally calculated increased nominal demand for convertible debt of NOK 2,127 million. The Group must satisfy the requirement by 31.03.2021.

Equity certificates

The Bank’s normal policy is that a minimum 50% of the equity certificate holders’ share of each year’s profit should be paid out as a cash dividend.

The Bank’s board recommends, based on the Ministry of Finance’s guidelines in its press release dated 20.01.2021 and the Bank’s very good financial strength as at 31.12.2020, a cash dividend for 2020 of NOK 1.90 (53%) per capital certificate and a provision for the risk equalisation fund that corresponds to NOK 1.72 (47%) per equity certificate. The proposed dividend results in a total payout of 30% of the cumulative annual profit for the years 2019 and 2020. The Financial Supervisory Authority of Norway has been informed of the proposed level of the cash dividend.

Intention to merge SpareBank 1 BV and SpareBank 1 Telemark

The boards of SpareBank 1 BV and SpareBank 1 Telemark have approved a letter of intent concerning a merger. The goal is to create a powerful bank in the banks’ market areas and be well-positioned for the future. The plan is to carry out the legal merger on 01.06.2021, assuming the banks’ supervisory boards agree, and the Financial Supervisory Authority of Norway and the Norwegian Competition Authority give their approval.

Outlook for the future

In light of the ongoing pandemic, the Board is very satisfied with both the results from the core activities and a return on equity close to 10% for 2020. The Bank’s liquidity and financial strength were very good at the end of the year and it had a Common Equity Tier 1 capital ratio of 18.8%, which is well above the regulatory requirement of at least 12.9% and the Bank’s internal target of 16.0% from 2021.

The changed weighting to 150% when financing property developments intended for onward sale is a competitive disadvantage for the standard banks. The Financial Supervisory Authority of Norway has indicated that advance sales, equity and advance payments from customers will not be considered until 2023 with the introduction of Basel III.

Net interest income is expected to remain under continued pressure in the first half of 2021 due to strong competition within mortgages and generally low interest rates.

There is still considerable uncertainty surrounding what impact the pandemic will have on the development of the Norwegian economy. Infections rose in both Norway and Europe at the beginning of 2021. However, a large proportion of the population is expected to be vaccinated during the next two to three quarters, and that this will lead to a normalisation of the situation in the Bank’s market area.

The Board regards the planned merger with SpareBank 1 Telemark as having the potential to create a powerful bank in the banks’ market areas with positive synergies for customers, capital markets and local communities.

Tønsberg, 10 February 2021

Contact persons at SpareBank 1 BV :

CEO Rune Fjeldstad, tel.:+ 47 90 07 90 17

CFO: Geir Årstein Hansen, tel.:+ 47 91 32 21 37

Head of Treasury: Per Grøtterød, tel.:+ 47 91 32 21 38