Sparebank 1 Ostlandet

OSE:SPOL

Earnings Call Transcript 2019-Q4

[Inge Reinertsen, Chief Financial Officer]

SpareBank 1 SR-Bank is Norway's largest regional bank and the second largest Norwegian-owned bank with gross lending, including covered bond companies, of NOK 211 billion and market cap of some NOK 26 billion as at end of 2019. Head office is in Stavanger. SR-Bank operates in the south of Norway, with offices in the counties of Rogaland, Agder, Vestland and Oslo. The group has some 1,200 employees and provides a full range of products and services within financing, investments, money transfers, pensions as well as life and nonlife insurance. The customer-oriented activity is organized in 3 divisions: retail market, corporate market and capital market. The group's pretax profit for 2019 was approximately NOK 3.8 billion, up NOK 925 million compared with 2018. The result for 2019 was marked by significant one-off income in connection with the merger and establishment of Fremtind Forsikring on January 1, 2019; write-ups on properties in the life insurance company in Sparebank 1 Gruppen; and reversed impairments. At the same time, underlying banking operations also delivered a good and improved contribution to the result. The good annual result in the group was due to a combination of increased net interest income, substantial income from financial investments and lower impairments on loan and financial liabilities than 2018. The group's return on equity after tax was 14.0% for 2019. Excluding the merger effects associated with Fremtind Forsikring, the return on equity was 12.1%. The Board proposes a dividend of NOK 5.50 for the year 2019. Gross loans amounted to NOK 211 billion at the end of 2019. Gross lending growth was 4.9% in the last 12 months with growth rate of 5.2% for corporate lending and 4.8% for lending to retail customers. Over the last 12 months, deposits from customers increased by 4.3%. The group's net interest income amounted to NOK 4 billion in 2019. The increase of NOK 548 million was mainly due to higher lending volumes and margins. The average interest margin rose to 1.61% compared to 1.54% for 2018. Net commissions and other operating income totaled NOK 1.4 billion in 2019. The NOK 21 million reduction compared with 2018 was primarily due to the fact that commissions from SpareBank 1 Boligkreditt and SpareBank 1 Næringskreditt were down NOK 55 million to NOK 33 million in 2019. The reduction in commissions from the mortgage company was a consequence of the group buying back NOK 5.1 billion in loans from SpareBank 1 Boligkreditt and SpareBank 1 Næringskreditt in 2019. Net income from financial investments amounted to NOK 1.1 billion in 2019, an increase of NOK 558 million compared to 2018. The share of the net profit from SpareBank 1 Gruppen increased by a total of NOK 423 million from 2018 to 2019. NOK 460 million of the increase was due to effects from the merger and establishment of Fremtind Forsikring in the first quarter of 2019, and NOK 116 million was due to write-ups on properties in the life insurance company in SpareBank 1 Gruppen in the second quarter of 2019. The group's operating costs were NOK 2.5 billion in 2019, an increase of NOK 249 million or 11.2% since 2018. The growth in costs is a consequence of the group's aggressive market strategy and increased use of resources and strategically selected priority areas. Going forward, this should increase the group's income and efficiency, which should help to improve the contribution to the result. It should also ensure that customers get the best available products in the market at competitive prices. The group's cost-income ratio, costs measured as a percentage of income, was 37.8% for 2019, an improvement from 40.9% in 2018. The group's net impairments on loans and financial liabilities were reduced by NOK 89 million from 2018 to NOK 235 million in 2019. The low impairments were due to NOK 92 million in previous impairments being reversed in the second quarter of 2019, following a legally enforceable judgment in which Kluge lawyer firm and others were ordered to pay NOK 92 million, including interest and damages to SpareBank 1 SR-Bank. At year-end 2019, the common equity Tier 1 capital ratio was 7.0% compared to 14.7% in 2018. The higher common equity Tier 1 capital ratio was primarily due to the implementation of new capital adequacy rules in Norway. The EU's capital adequacy regulations, the CRR/CRD IV came into force on December 31, 2019. These entail, among other things, a reduction in the capital requirements for loans to small and medium-sized enterprises and the elimination of the so-called Basel I floor. The leverage ratio was at 7.8% at year-end, well above the minimum requirement at 5.0%. Financial targets for 2020. The group's long-term return on equity target is a minimum of 12%. A number of factors should contribute to the group's achievement of this goal in 2020, including profitable lending growth, moderate impairments on loans and financial liabilities, growth and other operating income, gains from financial investments and greater cost effectiveness through the automation of processes. The group's target for its common equity Tier 1 capital ratio is 16.7% by year-end 2020. SpareBank 1 SR-Bank is a solid, profitable group and has, in recent years, increased its financial strength, in line with the authorities' requirements. This was achieved through earnings via a business model involving good breadth in earnings and efficient operations. Loan growth is expected to be in the range of 5% to 7% for the upcoming year and growth in cost is coming down to a more normal level, below 4%. SR-Bank's dividend policy remains unchanged, with an expected dividend of around 50% of the profit for the full year.