Sparebank 1 SR Bank ASA
OSE:SRBNK
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Good afternoon. I hope you can hear us. Welcome to the presentation of the fourth quarter results for SpareBank 1 SR-Bank. I'm Benedicte Schilbred Fasmer. I'm the CEO of SR-Bank. And with me today, I have Inge Reinertsen, our CFO; and Morten -- I'm sorry, Morten.
Forgaard.
Forgaard. I'm sorry, Morten Forgaard, who's Head of Investor Relations and Accounting in our group. If we look back at 2022, we have had a series of events that has bought us forward. We deliver good growth, and we have taken some important strategic steps in order to lay a ground for future development of SR-Bank. And it's worth mentioning the fact that we had established a cooperation with Swedbank starting in the fourth quarter, and we've also decided to spin off our markets operations into SpareBank 1 market, and we're hoping to get the permission from the FSA to do so in the first quarter of this year.
We've also expanded our business in the Oslo region and doing some real estate or more within the real estate area in the personal market. And we're looking forward to grow that even further going forward.
If we look at the lending growth in 2022, our growth has been NOK 22.7 billion and 9.8%. Approximately half of our growth has been in the Oslo and Viken area, whilst 27% of our growth is in our main region, which is Rogaland. The other -- the remaining growth of approximately NOK 6 billion is split between Vestland and Agder.
If we look a little bit into Norwegian macro, and macro is in a way, also a bit regional, even in our small country, we've had quite diverse development in the real estate market, in the housing market, over the last 7 years, and you can see that to your upper left, whereby the prices in the Oslo region have increased significantly compared to, for instance, the Stavanger region, which is our home base, which has been around flat if you look at the 7 years all in all.
We see that the housing market is expected to decline particularly in the Oslo area when we move into 2023. And it's -- but we expect a slight increase in the housing prices in the other main cities, which you see in this chart. Three times a year, we do a survey amongst 600 businesses in Southern Norway and where they say something about their sentiment or their expectations for the period to come. And the last survey was done in the fourth quarter, and the expectations from the businesses themselves is that there will be going from growth to decline in the corporate segment, but the inflation will mean that the investment level will level out somewhat. But we also see that there is a wide array of -- or a big difference between the different industries.
And if we look at the energy sector, maybe it's quite obvious that the sentiment is quite positive whilst in the -- for instance, the building sector and the retail sector, the sentiment is a bit more sluggish. Overall, the expected employment rate is -- or unemployment rate is expected to be stable also going forward. But we believe that SR-Bank's position within the rural region where the historic price picture of the -- in the retail market has been very conservative and the fact that we have a very active energy sector, which will give us a good basis for the year to come.
If we look at the fourth quarter, we delivered an ROE of 14.6% and a result of NOK 1.25 billion. The result for the year was NOK 4.211 billion. It includes a one-off gain of NOK 106 million from the sale of our previous headquarter, which is called Bjergsted Terrasse. If we take that away, our return on equity was 13%. We've had loan growth in all 3 customer segments and above the market growth rate, which means that we've gained market shares in all 3 segments. The costs are in line with our long-term ambition of 40%. And as you see, our loan losses are close to 0. And in the fourth quarter, it actually includes a management buffer of NOK 100 million, which we took as an extra cost in the fourth quarter.
If we look at the return on equity, we delivered 12.6% over the last 2 years. We are well capitalized and ready for further growth. We have a cost ratio in line with our ambition of 40%. And we have -- our Board has suggested to the general meeting to pay out NOK 7 per share in dividends, which is dividend share of 54.4% and a yield of around 6%.
We've raised our ambition for return on equity to 13%, which is a long-term goal, some years, forward. As I mentioned, after having delivered 12.6% over the last 2 years, we think that longer term we will be able to grow the return on equity even further through actually benefiting from the investments we've already started in the geographical expansion in Norway, have a higher loan growth than growth in risk adjusted capital. The fact that the interest level is higher than before, it gives us some extra income on our own equity. And we also expect to be able to take higher margin -- or higher income from our product companies and subsidiaries which will also improve the ROE ratio. We have a well-diversified portfolio of high quality.
We hope that the loan losses will also, going forward, be lower than normalized. And last but not least, we are continuously looking at being more cost efficient and to deliver a good efficiency in our banking and other operations.
Here you see the quarterly development in the -- on the ROE, as I said, the main driver for the return on equity is actually good and solid banking operations and growth. The decline in the capital ratio is mainly explained by the fact that we have our suggested dividend of NOK 7 per share. We have a decline in the cost ratio through the year. Some one-off effects, and I guess Inge will possibly comment a little bit later on. but still good cost control. And it gives us an earnings per share and I think a switch to the full year figure of NOK 12.9 per share, and we also see the full year figures on these ratios for 2022.
And with that little intro, I'll hand you over to Inge, who will give you some more details around the results.
Thank you, Benedicte. If we look at the income statement, you will see that we have a significant increase in the net interest income from the third to the fourth quarter, and I will comment more in detail on the margins on the lending and deposit side. We had an increase of NOK 32 million also on the net commission and other income for the fourth quarter, and you also see the net income and financial investments at NOK 274 million, which is driven mainly by 2 factors. That is the one-off by selling of our previous headquarter as mentioned by Benedicte by NOK 106 million. And also, we had a significant increase in the profit from the SR-Bank 1 group after 3 rather weak quarters in a row.
Total operating expenses came in at NOK 752 million. That is an increase from the third quarter, but also please bear in mind that for the third quarter, we had a one-off reversal caused by a new pension scheme of NOK 17 million, which, of course, did not repeat in the fourth quarter. Overall, we had a high activity, of course, the 9.8% growth on the lending side. It means that we have hired some more people during the year. We have approximately 36 full-time employees an increase for 2022, and we also had an increase on the variable compensation due to the strong result of NOK 12 million in the fourth quarter.
Impairments on loans and financial commitments remains on a very low level. Actually, the individual impairments was 0 this quarter. We had a few reversals. We also had some new impairments, but they were equal. And this increase by NOK 36 million is -- everything is caused by an increase in the IFRS 9 impairments. And we have deliberately increased PD probably of default, in some sectors, and we now have what we regard as a NOK 200 million reserve due to the situation in Ukraine and inflation and the more kind of challenging international macro-economical environment. But we feel very confident that the quality of the portfolio is -- remains high. And also, as you see, altogether, we only accounted NOK 5 million in impairments for the full year 2022.
Deducting tax expense, we reached a profit after tax of exactly NOK 1,000 million, and NOK 3.378 billion for the full year. And as mentioned by Benedicte, this gave us a return on equity of 14.6% for the quarter. And if we deduct the one-off from the headquarter, even we had underlying even 13% for the quarter and also then 12.6% for the full year of 2022.
If we look at the lending volume, it grew by 9.8%. Also the deposit side grew by 7.6%, and the total margin for the year has remained pretty stable. So the total increase of a little more than NOK 500 million on net interest income has been caused by the volume growth. If we look at the margins -- if we look at the different segments, the retail market, we had a growth of 7.4% on the lending side and 5.1% on the deposit side. But this reduction on the deposit side is also caused by a NOK 1.5 billion being transferred from the retail market to the SME and Agriculture segment.
If we look at the margin side, it has been challenging on the lending side to remain margins due to the fact that after the Central Bank has hiked its rate, we have to notice our customers in advance. That means that we are lagging on the pricing. But at the same time, we have been able to increase the deposit margin significantly. So altogether, it has been a pressure on the margin side, but the relative steep increase and net interest income in the fourth quarter shows how effective these rate hikes will be as NIBOR flattens out because it has been more challenging in the previous quarters where we had a significant increase in the NIBOR.
If we look at corporate market, we have a double-digit lending volume growth. And margins have remained pretty stable in this segment, but also in the SME and Agriculture segment, we have a significant growth, both on the lending side and the deposit side. And as you can see, also in this segment a sharp increase in the deposit margin.
If we go on further to look at draw amount on credit facilities, we see a slight increase in the average drawn on credit facilities in the corporate sector, but we don't have any increase at all when it comes to a number of applications for interest-only payment in retail market. So even with the ongoing increasing inflation also in Norway and with higher electricity prices we don't see any signs of weakening credit quality in neither the retail market nor the corporate market.
And net commission and other income shows a marginal increase from 2021 to 2022, a significant increase on the payment facilities, but only minor changes in the other areas, except from the saving placements where we now have sold SR-Forvaltning, which was a fully owned subsidiary of SR-Bank into the SpareBank 1 alliance or the SpareBank 1 Forvaltning, which is an alliance company where we now own 35%, 36% from that company. But that means that some of the revenues there have been transferred from net commission and other income and on to our financial income.
If we look at the income on financial investments, it came in on NOK 756 million for the full year, but then with a relatively strong fourth quarter underpinned by the 2 factors of the previous headquarter and Gruppen as mentioned. If we look at the operating expenses, we have a full year increase of 4% that has also been influenced by the fact that we have transferred SR Forvaltning. It also has an impact here on the cost side, which means that we have reduced costs since we now have our share of the net profit within this company. And then on the financial line.
SR-Bank, we are targeting steady growth, but a profitable growth. And to some extent, we add cost to strengthen our distribution, but we are very concerned to remain cost efficient both within our day-by-day operation and also on the joint initiatives that we take within the Alliance Corporation, together with the other alliance banks where we develop state-of-the-art products and also invest in systems to increase efficiency within our daily operation. We have some -- we have inflation also having an impact on the cost level in Norway. But the combination of some cost growth with a high growth on income, we believe is compliant to reach the target of 13% return on equity going forward.
Perhaps Benedicte, you will add a few comment on the outlook for the upcoming period?
Yes. And I think it's -- just summing up a little bit from what I said earlier. I think the business sentiment is turning from growth to downturn. I think we are well positioned in SR-Bank within the Rogaland region where the energy businesses are very dominant and where we expect that trend to be less severe. We have higher inflation, which is impacting both people and businesses and the investment levels, obviously. And I think I've also explained to you how we hope to achieve the 13% new target for return on equity longer term. So by that, I think I'll leave it up to you to ask us questions.
So please, I don't believe -- we are not able to see the different participants. So please unmute and just feel free to ask questions.
May be we can take down the presentation, would that help?
Perhaps we can try to push escape, Morten?
It's now open to ask questions for those who would like to do that.
Excellent.
This is Håkon from DNB. Start off with your new return on equity target. It's a new long-term target of 13%, if I understood it correctly, but is it only for the long term and not for 2023?
That's right. Håkon, it's a long-term ambition to reach 3 years -- at least 3 years horizon.
Okay. So it's 12% for 2023 then.
We haven't explicitly said that Håkon. Of course, we have delivered 12.6% return on equity now for 2 years. And of course, it is also possibility that we can reach it already by 2023. But that will, of course, be due to a financial line and also loan losses lower than what we regard as a normalized level. But of course, there are scenarios that could make us able to reach it already within 2023, but we cannot kind of -- we don't kind of issue any guarantees for that, of course.
Understand. So you hope to deliver higher, but you will not be disappointed if it's just 12%, right?
I believe that is a good way to say it, yes.
If you look at our normalized results, taking away one-offs and the fact that we have very low loan loss level for 2022. I think last year's return on equity would have been around 11%. So I think to move it 2 percentage points in 1 year is a very ambitious target, but we hope to move to progress towards the 13%.
Sounds very good. One other question, if I may. On net interest income, there it was very strong performance in the quarter. And you've talked about previously that you will see some lag effects from the higher rates. And now I guess you're starting to see that momentum coming through. But I was just wondering if you can shed some light on what you expect here going forward? Have we now seen all the expansion in net interest margin that we should expect from the rate hikes that have been carried out? Or is it still some more room here going forward?
If we look at the third quarter, we had interest hikes from the Central Bank, but they were not coming into effect until the fourth quarter for SR-Bank. That means that within the third quarter, September was kind of the weakest month on the net interest income. And then by the 3 rate hikes finally coming into effect within our books during the fourth quarter we started kind of to repair the margin. But if you look at the lending margin on the retail segment, it only improved 2 basis points during the fourth quarter compared to the third quarter. But that also means that within the quarter, December was a better month than October. So that means that the sentiment going into the new year is pretty benign compared to what was the situation in many of the previous months. So we feel pretty optimistic when it comes to the margin side at least in the short run, in the long run, we are always dependent on the competition among the different banks. But in the short run, we feel pretty confident that we should be able to strengthen the margin.
Just approximately how much higher was the net interest income in December versus October?
We haven't enclosed that Håkon. So this is more on a kind of qualitative basis. We haven't enclosed the margins month by month. And I don't want to do that during this presentation either.
Thomas Svendsen from SEB here. Just a question on dividends and CET1 ratio. So it seems you steering towards just slightly above your CET1 expectation, including the contracyclical, that's applied from March this year. So is this how we should think going forward that is at that level, including the extra Pillar 2 requirement you have?
Yes, we want to be kind of capital efficient. That means that we should meet requirements from the Norwegian FSA, but we don't want to have excess capital. And the combination of what we expect to be also a profitable year for the upcoming year. We believe that we should be able to be both compliant with regulatory requirements and also have growth capacity for profitable growth. And at the same time, we want to have a strong dividend to our shareholders. So we believe that we should be able to kind of combine these 3 kind of issues.
Just second question on deposit margins. You showed how they have skyrocketed. So how comfortable are you that you should keep this blended deposit margin when rates sort of stabilize it gets more visible for the clients?
As you commented on, there has been a significant increase, and we always kind of respect the forces of competition, but it's better to have a margin on the portfolio than aiming at increasing it. So we feel pretty comfortable that we should be able to maintain also in the upcoming quarter, a high margin on deposits. But that is also reliant on the growth within -- in the market, the growth of the consumer banks and their appetite for funding. They are dependent entirely on deposits. So it's difficult to have kind of an exact prediction of the margins going forward. But we also believe that we should be able to increase the lending margins due to these rate hikes that hasn't been fully applied on the portfolio.
We don't see the different camps on our screen. So please feel free to ask more questions if you have.
I think it's my turn again, Håkon here. So just to follow up on the discussion on the deposit side. You had a very nice overview in the presentation of quarterly development in the deposit volumes in the personal large corporates and the SME business. So I was just wondering to get some flavor on what is happening should deposits account with 0 interest rates on it? Are you seeing -- are the -- are those amounts also say, falling in the personal segment and what is happening with them in the SME segment.
I think -- I mean, if you're thinking about the volume side, Håkon, is that your question?
Yes. Well, your volume of transaction accounts in the business segment and also in the personal segment, what is happening with volumes there?
There hasn't been any significant changes so far. I think it's -- we've chosen to be very transparent on all elements of the combined margin in each of the 3 segments, which is -- and in times where we have large interest rate movement, which we've had over the last year, and I mean, these are the kind of movements you see that are more dramatic than we've seen in many years. And I think -- if you look at the combined market in the -- combined margin, sorry, in the Personal and the SME margin, they are fairly stable. And I think you have to look a bit at the combination of the 2 because there is a -- we came from a negative territory when it came to margin on deposits.
And now that has kind of improved somewhat, whilst we've had quite a decline on the margin on the loan lending side. And I think -- if we look a bit forward, both of them would probably normalize somewhat without being able to tell you anything about how we -- how our pricing strategy is going forward because I think we cannot disclose for obvious reasons.
The answer to your question is in effect what -- how will the competition look in this space going forward, as Inge said, and we'll have to adjust accordingly. And I think -- I know it's not a very nice answer you would like, but I guess it's the closest we can be specific as we can be.
But I was just also wondering a bit what happened in this quarter. For instance, if you look at your SME deposits, you're seeing that increased from NOK 17.5 billion to over NOK 20 billion. And is that driven by deposits with a high interest rate, meaning that you're competing for volumes there? Or is it the more transaction accounts that increases with such a large degree.
Well, NOK 1.5 billion of that increase, if you look into the notes on the slide is actually an internal move of NOK 1.5 billion in deposits from personnel -- from retail to SME. So that's just an adjustment, right? And the other -- and then the answer to your question, if you take that away or set that aside is that -- and we -- it's actually an increase -- it's just increasing market share. It's not a very pricing intense exercise, having said that, we're very conscious that we have solutions and products for SME and our present times so they can move funds between deposit accounts, which has 0 interest or and savings account with a higher interest level.
Great. And then 1 last question for me, I promise. On Fremtind, Benedicte, you are a Chair of that company. So they reported numbers earlier this week with looking at their insurance results that was pretty weak compared to their peers. So do you know if it's anything particular there? Or is it just bad luck with cold winter, et cetera, but it seems to have a bit more bad luck than the other companies that have reported so far.
And you're right. The answer is actually bad luck, Håkon. You have to keep in mind when you compare Fremtind to the other nonlife companies in the sector that the share of corporate business in Fremtind is very small, very limited in -- of the overall business of the company, which means that you are very vulnerable to insurance claims or events on -- particularly on the corporate side. And that's the explanation for the very weak results on that side in -- for 2022.
There was 1 fire in [indiscernible] with a big building where Fremtind had both building itself and 70% of the apartments within that building, which was caught in the fire. So that's 1 big event, even though there was a reinsurance, it covers that one. And then there was actually 5 recorded floodings, 20-year floods within 2022 that hit also, to a large extent, the clients of Fremtind. And those are the 2 main explanations.
And I think until you see Fremtind having built a more robust corporate insurance portfolio, debt volatility risk will be [indiscernible] going forward with the pace DNB's building portfolio in the corporate segment, I think it won't take very well.
Any more questions? I can't see that there are any more hands at least, but please feel free for those who are -- have a question perhaps?
Doesn't sound like it. So unless you really raise your voice very quickly, I think we'll say thank you very much, and thank you so much for your time, and hope to see you again and hear your voices again in the next quarter.
Thank you.
Thank you as well. Bye.