SpareBank 1 Sørøst-Norge

Earnings Release • Aug 13, 2019

Good result and growth in retail market

Good result and growth in retail market

The SpareBank 1 BV Group had a net profit from ordinary operations before losses of NOK 376.8 million (482.6 million). Earnings after tax were NOK 314.7 million (385.0 million), which represents 1.69% (2.22%) of average total assets. The Group’s annualised return on equity was 13.6% (18.2%).

The Group’s annualised return on equity was heavily affected in the first half of 2019 by gains the from the insurance merger (Fremtind) of NOK 71.9 million, while the corresponding period last year was affected by the sale of own commercial buildings for NOK 90.7 million and a one-time effect from winding up defined-benefit pension schemes of NOK 92.2 million. Without these items, the Group’s annualised return on equity was 10.5% (10.6%)

Earnings per equity certificate in the parent bank were NOK 2.63 (3.25).

Result Group

Net interest income amounted to NOK 297.0 million (286.5 million). Net interest income as a percentage of average total assets was 1.60% (1.65%).

At the end of the quarter, the Bank had transferred mortgages worth NOK 11,980 million (11,575 million) to SpareBank 1 Boligkreditt AS, and NOK 542 million (93 million) to SpareBank 1 Næringskreditt AS. Earnings from these loan portfolios are shown under net commission income and amounted to NOK 47.6 million (49.6 million).

Lending rates increased by up to 0.25 percentage points in the second quarter. The interest rate change took full effect from June. Compared to the first quarter of 2019, net interest income (excluding mortgage companies) increased by NOK 6.4 million (+0.02% of average total assets).

Based on the continued increase in money market rates, and the rise in the key interest rate from Norges Bank on 20 June, the bank has decided to increase lending rates by up to 0.25 percentage points from 9 August.

Net commission and other income totalled NOK 212.7 million (300.4 million).

Net commission income amounted to NOK 132.8 million (131.8 million), while other operating income amounted to NOK 79.9 million (168.6 million). Last year’s figure included gains of NOK 90.7 million from the sale of own commercial buildings.

Net income from financial assets amounted to NOK 153.4 million (80.7 million). The key items in 2019 are made up of dividends received totalling NOK 18.6 million (27.6 million) and net income from ownership interests of NOK 111.3 million (25.5 million). The last item includes gains from the Insurance merger (Fremtind) of NOK 71.9 million, and approx. NOK 18 million related to our share of extraordinary revaluation of properties in the SpareBank 1 Group’s life companies. Net income from other financial assets also amounted to NOK 23.5 million (27.5 million).

Total operating costs were NOK 286.4 million (185.0 million). Operating costs as a percentage of total operating income for the Group came to 43.2% (27.7%). The corresponding cost ratio for the parent bank was 37.6% (20.8%).

Personnel costs amounted to NOK 166.6 million (72.5 million). The previous year includes a one-time effect from winding up defined-benefit pension schemes of NOK 92.2 million. Other operating costs amounted to NOK 119.7 million (112.5 million). The increase from last year is mainly related to development/IT costs in the SpareBank 1Alliance.

Net losses on loans and guarantees amounted to NOK 3.7 million (18.1 million) as at 30 June. Net losses as a percentage of average gross lending amounted to 0.01% (0.06%).

Balance sheet Group

The Group’s total assets amounted to NOK 38,848 million. This represents an increase of NOK 2,769 million over the last 12 months. The Group’s business capital (total assets including loans transferred to SpareBank 1 Boligkreditt AS and SpareBank 1 Næringskreditt AS) amounted to NOK 51,370 million (47,746 million).

Gross lending (including volume transferred to SpareBank 1 Boligkreditt AS/SpareBank 1 Næringskreditt AS) amounted to NOK 42,868 million. In the last 12 months there has been an increase of NOK 2,087, equivalent to 5.1%. The growth was made up of NOK 2,337 million, or 7.1%, in the retail market and NOK 250 million, or 3.2%, in the corporate market. The reduction in the corporate market is mainly due to the repayment of some property loans. The retail market share of lending (including SpareBank 1 Boligkreditt) at the end of the quarter was 83% (81%).

At the end of the quarter, the Group had a deposit volume of NOK 24,689 million (21,933 million) with deposit growth of 12.6% in the last 12 months. The growth was made up of NOK 2,221 million, or 16.8%, in the retail market and NOK 535 million, or 6.1%, in the corporate market. The Group had deposit coverage of 81.4%, compared with 75.3% at the same time last year. Including the volume transferred to SpareBank 1

Boligkreditt AS/SpareBank 1 Næringskreditt AS, deposit coverage amounts to 57.6% (53.8%). The retail market share of deposits at the end of the quarter was 63% (60%).

Capital adequacy

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

At the end of the second quarter, the regulatory requirement for common equity tier 1 capital is a minimum of 12,0%. In September 2018, the Financial Supervisory Authority of Norway set new Pillar 2 requirements for SpareBank 1 BV of 1.9% from 31 December 2018, but at least NOK 457 million above the minimum requirement and buffer requirements in Pillar 1. The current total requirement for common equity tier 1 capital is thus 13.9%. The Group’s target common equity tier 1 capital ratio is a minimum of 15.5% at the end of 2019, taking account of increased regulatory requirements for the countercyclical buffer from 31 December 2019. In its consultation note on changes in capital requirements for the banks, dated 25 June, the Ministry of Finance warned that the standard banks could be required to increase their systemic risk buffer by 0.5% from 31.12.2019.

At the end of the quarter, the common equity tier 1 capital ratio was 16.6%. The profit/loss for the period, assuming a dividend level of 50%, is included in the capital adequacy calculation as at 30 June. Unweighted tier 1 capital coverage (the leverage ratio) amounted to 8.2% at the end of the quarter. The regulatory requirement for unweighted tier 1 capital is 5.0%.

The bank issued subordinated bonds for NOK 150 million in June to coincide with the maturity of similar instruments in the third quarter of 2019.

Outlook for the future

The Board is satisfied with the performance in the second quarter of 2019. The core business is still characterised by margin pressure due to strong competition and increased money market rates in the first half-year. A change in interest rates has been decided from the beginning of August, which will have a positive effect on interest margins in the third quarter of 2019.

The Group is solvent and has very good liquidity.

The proposal for amended capital requirements from the Ministry of Finance entails equal treatment of IRB and standard banks in terms of the increase in the systemic risk buffer by 1.5 percentage points. SpareBank BV will not have any difficulties with the proposed increase in the systemic risk buffer, but over time, the tighter capital requirements for standard banks will cause some distortion of competition for the lending business in favour of Norwegian and Nordic banks with IRB approval. There is currently good growth in the Norwegian economy and continued positive development is expected in 2019. Oil investment in Norway has increased considerably in the last year. The labour market has improved and the registered unemployment rate has fallen. The growth in house prices has been moderate so far this year. The growth in household debt is stable, but still above wage growth. It is assumed that higher interest rates, price rises, a gradual strengthening of the dollar rate and relatively weak GDP growth in many of Norway’s trading partners over a slightly longer time horizon could combine to slow the growth in the Norwegian economy. There are good prospects in the Group's market areas with low unemployment, a stable housing market and good conditions for local business. Lending growth in the retail market is expected to remain in line with market growth nationally, while moderate growth in the corporate market is expected. Continued low losses are expected in 2019. SpareBank 1 BV expects good profits in 2019 and maintains its long-term goal of a minimum 10% return on equity.

Tønsberg, 12. August 2019

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