Sparebank 1 SR Bank ASA
OSE:SRBNK
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Excellent. Good afternoon, everybody. It's 1:30 here local time, Oslo, and we are ready to give you a brief presentation on the Q3 figures for SpareBank 1 SR-Bank. My name is Inge Reinertsen; I'm CFO of the Bank. Together with me is Mr. Morten Forgaard, who is Head of Investor Relation and will try to run you through the figures. And also, we are open for questions after that.
That we just have to -- have the people here. SR-Bank, our strategy is to become a finance group for the southern part of Norway. And as shown on the left-hand side, we have a significant growth, especially outside our own market area of Rogaland. Strong branch or a strong branch network with altogether 35 branches and with an operation model, what we call, phygital, that means it's a combination of physical resources at a state-of-the-art Internet back. This gives us a strong distribution. And after a few years of a slowdown and a growth in the Rogaland country, we now have a strong growth within the entire SR-Bank Group.
If we look at some of the macro in Norway, we have some development of housing prices in Stavanger and the nearby area of 7%, which was impacted by the slowdown in the oil sector. But now also the housing prices in the Southwestern part of the Norway is growing. The unemployment rate is very low. It's 2% on average for Norway as such, and in our market area, it's even lower with 1.8% in the Rogaland country.
If we look at the investments on the Norwegian continental shelf, they are expected to be relatively stable for the upcoming years, but of course, with the situation in Europe with lack of energy, we strongly believe that the Norwegian continental shelf has become even more important than it has been. If we look at the PMIs, they are neutral now, of course what happens in the international economy has an impact on our region as well with a pretty neutral expectation when it comes to PMIs.
And if we look at the main figures, the return on equity after tax was 11 -- excuse me, 12.5% for the quarter. Year-to-date figures shows 12.0%, which is aligned with our ambition when it comes to return on equity. So far, we have reversed NOK 31 million on loan losses. And as shown in the middle, we have a strong growth on the lending side. Also, the deposits has shown a significant growth of 8.8%. And if we look at the lending side, the retail market and the large corporate institution with 14.8% and also SME and agriculture shows a double-digit growth.
For the large corporate institutions segment of 14.8%, approximately 2.8% has occurred due to the weakening Norwegian kronor and that some of our clients have exposure in dollar. So the underlying growth is more in the area, 12% if we exclude the currency effect. The common equity Tier 1 ratio stands at 17.8%, which is 95 basis points above the internal target of SR-Bank, which says 16.85%. And the 16.85% is also with a fully turn on counter-cyclical buffer of 2.5 percentage points.
If we look at then the main financial targets and ambitions, we have a return on equity target that says above 12%. Year-to-date, we are now on 12%, that means spot on. We are almost 100 basis points above on the common equity Tier 1 ratio, which stands at 17.82%. We were a bit above the ambition when it comes to cost efficiency, that says below 40%. Year-to-date shows 48.2%. Our dividend policy is to pay out approximately 50% of the profit each year as a dividend. And of course, by this quarter, we don't have dividend decision, but last year, we were almost at exactly 50% dividend.
If we look at the quarterly figures, 12.5% return on equity, for the quarter, the common equity Tier 1 ratio was 17.8%, as commented on. If we look at the cost-to-income ratio for the quarter, it says 39.2%. That means below the target of 14%. The earnings per share came in at NOK 3.16, which is NOK 0.13 higher than the previous quarter.
A quick dive into the main figures, we increased net interest income from NOK 1,101 million to NOK 1,115 million this quarter, and I will comment more in detail with respect to the margin, which we have both on the lending side and deposit. A bit slow down on the net commission and other income, down from NOK 466 million, down to NOK 421 million, which is mainly explained by seasonal variations from our real estate broker and our accounting company. The net income from financial positions came in at NOK 190 million, which is higher than last quarter, we had out spread on the bond side. However, we had positive effect of the basis swaps and the NOK 190 million is what we call as totally a normalized level for the net financial.
On the cost side, cost came in at NOK 676 million, which is down 26% from last quarter. Here, we have a positive one-off of NOK 17 million due to a change in the pension schedule for some senior employees that had a defined benefit pension previously. The write-down on loans came in at NOK 6 million, and as shown year-to-date, we have reversed NOK 31 million. So this underpins that position of our -- financial position of our customers and also the provisions that we increased in 2020 has been sufficient, and we have a very solid development within the portfolio. This gave us a net profit after tax of NOK 829 million, which then was equal to a 12.5% return on equity.
Just to give you a short explanation of the net interest margin which is probably of most interest. As you can see on the left-hand side, the lending margin in the retail market was significantly reduced during the quarter from 104 basis points down to 40. The reason for that is that we had a steep increase in the NIBOR during this quarter with 120 basis points increase, and we only had one rate adjustment towards the customers.
In Norway, you have to give a 6 weeks in advanced notice if you increase interest rate, and we had one rate change in effect from August 8. But we have 2 more rate changes that one came into effect October 4. The next one will be taken in effect from November 8. So that [Technical Difficulty] mortgages, we're kind of heavily impacted by the increase in NIBOR this quarter, and we don't expect that to maintain. That means that we expect improvement of the margin for the upcoming quarters as we do not expect the same increase in NIBOR and the same lag effect.
On the other side of the balance scheme, we have a significant increase on deposits and the margin shows increase. And if we then look at the volume growth, on the one hand side, together with increased deposit margin, that was sufficient to offset the pressure that we had on the lending margin, leaving us with a net interest margin going down from 140 basis points, down to 137 basis points and with a year-to-date interest margin that only has changed 1 basis points from the same period last year.
I believe that was the most important highlights from this quarter, and we will now leave the word to you and we are open for questions. And perhaps we can just -- is the escape button. And I don't know whether you are able to see us, but please unmute and ask your questions. Anyone with questions?
Yes. We have one from [ Thomas Svendsen ]. Thomas, we are not able to hear you.
Yes. Hello.
No, we can hear you, excellent.
On the net interest margin side, was it anything on the funding side that you are almost sort of unlucky on the fixing. So you got more negative impact from the NIBOR? Or was everything straightforward? I'm just thinking about underlying margin seems to be a little bit -- the improvement was less than -- from the peers, we look that way?
Yes. We don't have kind of any specific incidents on the funding side with respect to fixing. I believe that is kind of business as usual. So kind of what I kind of is -- satisfied with is the margin on the lending side of the retail portfolio with a lag effect. And of course, losing 64 basis points in the quarter, down from 104 basis points down to 40 basis points of course has a significant impact on the net interest income as such. But we believe that is kind of a negative one-off and are now looking forward for the 2 rate hikes to be -- to take place in the fourth quarter.
Okay. And just a follow-up on the deposit margins. If you think about the marginal further positive effects into 2023. When looking away for what has already happened, but what is going to happen? How much lower do you think the positive effect will be?
Of course, that's a very valid question, and it's always coming of risky to have too much speculation on that topic. The increased interest margin on the deposit side has kind of offset the pressure that we have on the lending side. We are looking forward to kind of having a higher yield curve because it's more convenient to have margins on both sides of the deposit -- excuse me, the balance scheme.
And we expect the lending margin to increase, and of course we adjust the deposit margin as much as possible due to kind of the competitive environment. And still with the 2 rate hikes that now is to be taking into effect, we have adjusted less on the deposit side than we have done on the lending side. But of course, the deposits are cheap now as funding compared to senior and also cover bond. So of course, over time, the different funding sources will kind of be leveled more out, but in the short term now, it's a very positive environment for the positive margins.
Okay. Final question from my side, on loan losses, given what's happening with the economy, disposal income, et cetera. Do you think 2023 will be a year with normal loan losses? Or is it too early?
We believe that both the corporate sector and the households in our market area is robust. We have seen deposits increase. We have not experienced any short-time non-performing engagements nor asking for a postponed installments. So we -- of course, the disposable income for the household will be reduced due to increased energy prices, increased rates, but the unemployment rate is very low. So we believe that even though it will perhaps give the society as such a bit more headwind into 2023, we believe that the position is very sound, and we don't expect any kind of credit losses exceeding what we can regard as a normalized level for a bank of our size.
I can see the hand of Mr. Vegard Toverud.
Yes. It's trying to dig into the details, or as we have discussed, a little difficult on the corporate margins here. But could you give us some pointers, could you give us an update on how much of the lending on SME and on other corporates that are NIBOR linked now? And what you are repricing the remaining loans with?
Yes. If we look at the lending on the large corporate and institution, that would be around 75%, 80% related to NIBOR. And you might expect that since a large share of it is related to NIBOR that we will not have a pressure on the margin as NIBOR increases. But the coupons are kind of decided 3 months prior in advance for every period. So that means that even on the corporate segment, you have a lag effect due to the quarterly fixing as you have a NIBOR that has increased as much as it did through the third quarter. So we have, of course, adjusted the margins, and that means that we also have kind of a reduction in the rate on the lending side, which is mainly driven by the steeply increasing NIBOR.
And just to follow-up, Vegard. The problem with large corporates is that on the deposit side you don't have the same 5 months fixing, because on the deposit side, you have fixing every day. So you take the costs immediately when NIBOR rises and then you have this difference between the lending and the deposit side. So that could be an explanation for us having slightly more pressure on the interest rate margin.
Yes. And the 75% to 80%, is that the same also for the SME segment?
That is for the large corporate institution segment. If you look at the SME and agriculture, you don't have...
I think it's quite opposite. So on the SME side, you will have 80%, which will be standard fixed time, it's not 6 weeks' notice, we have 2 weeks' notice, and then you have around 15% to 20%, which is linked to NIBOR.
NIBOR, yes.
Excellent.
Anyone else with questions? It doesn't seem like more questions. Then on behalf of SR-Bank, we thank you all for joining this meeting and also give you an apology that the presentation was on the Norwegian version. Next time, we will ensure that we have the English version on screen as well. And of course, both the Norwegian and English presentation is available on our website.
Yes. Thank you very much, and have a good day.
Thank you. Bye-bye.