INTERIM REPORT Q2 2018

Transcription

1 INTERIM REPORT Q2

2 Second quarter Significantly improved pre-tax profit: NOK 630 million (NOK 436 mill.) High return on equity: 14.9% (10.7%) Higher nominal net interest: NOK 649 million (NOK 631 mill.) Good cost development: NOK 367 million (NOK 360 mill.) Low write-downs on loans and guarantees, taking to income of NOK 5 million (NOK 21 mill. expensed) Effect of merger between Vipps, BankAxept and BankID: NOK 94 million Higher contributions from Frende Forsikring, NOK 18 million (NOK 13 mill.) and Brage Finans NOK 8 million (NOK 5 mill.) Higher pre-tax profit for Eiendomsmegler Vest: NOK 12 million (NOK 10 mill.) Profit per equity certificate: NOK 1.84 (NOK 1.28) First half-year Higher pre-tax profit: NOK 1,079 million (NOK 868 mill.) Good return on equity: 12.5% (10.7%) Net interest income up by 5.2% to NOK 1,305 million (NOK 1,241 mill.) Profit per equity certificate: NOK 3.07 (NOK 2.54) Book value per equity certificate: NOK 50.6 (NOK 48.6) Core Tier 1 capital ratio: 15.0% (14.7%) Key figures Q2 Q YtD YtD Pre-tax profit 630 MNOK 436 MNOK MNOK 868 MNOK MNOK Profit per equitiy certificate 1,84 kr 1,28 kr 3,07 kr 2,54 kr 5,42 kr Net interest (annualised) 1,42% 1,49% 1,45% 1,48% 1,50% Cost ratio 37,6% 44,7% 42,0% 44,5% 44,2% Return on equity (annualised) 14,9% 10,7% 12,5% 10,7% 11,0% Core Tier 1 15,0% 14,7% 15,0% 14,7% 15,0% Core Tier 1 (IRB) 18,1% 18,5% 18,1% 18,5% 18,3% The capital adequacy figure for the second quarter includes 70% of the profit for the period. 2

3 Ambitious goals and higher dividend expectations The first half-year shows a positive profit performance for Sparebanken Vest compared with the same period last year. The merger between Vipps, BankAxept and BankID had an overall positive effect on profit of NOK 94 million in the second quarter. The goal is for the return on equity in Sparebanken Vest over time to be among the top two for comparable savings banks. The bank s long-term goal for its return on equity has been upwardly adjusted from 11% to 12%. Continuing flat cost development, more selfservice solutions and automated processes, growth in the number of customers and good credit quality shall all help the bank to reach this goal. Another of Sparebanken Vest s goals is for the bank s equity certificates to be an attractive investment by, among other things, yielding a good direct return. In that connection, the Board of Directors of Sparebanken Vest has adopted an adjustment to its dividend policy that entails a future goal of a cash dividend of up to 50% of the equity certificate holders share of profit. The profit performance for the year to date, the expectations for the rest of the year and the bank s capital situation also entail an upward adjustment of dividend expectations to around 40% for. The distribution of primary capital s share of the profit will be the same percentage as for equity certificate holders. Competition? Yes please! For a number of years, Norwegian banks have been expecting to see competition from big foreign players particularly in the field of payment transfers. And this year saw the introduction of the first competition with the launch of Apple Pay in Norway. This was the start of a public debate, in which the banks that did not immediately open for Apple Pay were criticised. Luckily, the debate gradually became more nuanced, but its essence is very important: Who decides which solutions are the best? Norway is one of the three countries in the world with the most efficient payment systems, and the main reason for that is that we have succeeded in building a joint national infrastructure, enabling customers, irrespective of who they bank with, to carry out transactions and authentications from everyone to everyone. You don t, for example, have to worry about which bank you can receive einvoices in, which shops your bank card works in or which bank you should bank with. All the solutions work across the board. Norwegian banks have thus measured up to their responsibility and sought to avoid closed solutions tied to hardware, a limited number of card systems or solutions that only work for a handful of banks. Systems or solutions that only work from some people to some people have not been supported. Sparebanken Vest seeks to develop solutions, either under its own steam or in collaboration with others, that are so good that our customers want to use them even in open competition with big foreign players. It is, after all, our customers who decide in the end which solutions they prefer. Bank, bits and bytes Sparebanken Vest has launched a number of new digital solutions in the first half-year. Common for them all is that they address customer needs and are easy to use. This means that it is important for us as a bank to listen to our customers. When we were developing a self-service solution for topping up mortgages, our first solution was an off-the-shelf product, which was heavily criticized by our customers in the user test. This led us to see that we would have to develop our own solution to create the best and easiest user experience that our customers wanted and deserved. And since we introduced the final solution in June, more than 12,000 customers have checked to see how much they could potentially top up their mortgage by, and more than 600 have completed the application process. Other new self-service solutions that will increase sales, simplify the customer experience and rationalise the bank s operations include: More than 2,400 new children s accounts through a simple digital solution for setting up an account for children. A self-service solution for international payments takes the place of 17,000 annual enquiries to customer service. First bank in Norway with push notifications for einvoices in the mobile banking solution. In addition to the new self-service solutions, we have also made other major changes to our payment platform in the second quarter. In a seamless transfer, we have moved payment processes from an external supplier to our own digital bank solution. This move lays the groundwork and more for the development 3

4 of a joint digital bank regardless of whether customers are using their mobile phone, PC or other device. Sparebanken Vest is now master of its own house with respect to the development of the digital bank of the future and will be able to introduce new digital solutions more quickly going forward. This reorganisation will also reduce administration costs. National initiative in the SME market In an ever more digital banking world, our geographical catchment area is also expanding without us having to compete against ourselves. This means that Sparebanken Vest s investments in two brand new SME solutions in, Buffer and Folio, will focus on the whole of Norway. We know that liquidity is one of the biggest challenges faced by SME enterprises, and thus, by giving Buffer access to enterprises accounts, a company can loan money based on what the customers owe at any given time. This is a quick and easy solution to enterprises needs, and does not require expensive and complicated factoring, overdraft facilities or personal security. Sparebanken Vest is also investing up to NOK 25 million in the financial technology company Folio, and we are working on launching a joint initiative in the national SME market. Folio is developing a service where customers can carry out payments, bookkeeping, liquidity management and payroll transactions in one place without having to log into multiple systems. Buffer will be one of the services that will be available in the new solution. Profitable growth in an exciting market Sparebanken Vest is well capitalised for further growth with a Core Tier 1 capital adequacy ratio of 15% at the end of the second quarter. The goal is for the bank to win market shares within its ordinary activities in. The bank s goals of lending growth of 9% in the retail market and 6% in the corporate market, respectively, still apply. Targeted efforts are made to reach these goals, both through ongoing market work and new distribution and customer service solutions. The first half-year for Sparebanken Vest was characterised by sound operations, positive nonrecurring effects and write-downs on losses and guarantees being taken to income. We have seen increasing optimism in Western Norway, and we expect continued positive development in the second half-year. In September, we also expect Norges Bank to raise the interest rate for the first time in a long time. The second half-year certainly looks set to be exciting with respect to competition, the arrival of foreign players on the scene and a growing number of niche suppliers offering various banking services and products. Jan Erik Kjerpeseth CEO 4

5 Report for the second quarter Table 1: Key accounting figures NOKm Q2 Q YtD YtD Net interest income and credit commissions Commissions receivable and income from banking services Commissions payable and cost of banking services Net banking services Income from owner interests in group companies Net gain/(loss) on financial instruments Other operating income Net operating income Net operating income Salaries and general administration expenses Depreciation Other operating expenses Total operating expenses Profit before write-downs and tax Write-downs and losses on loans and guarantees Profit before tax Taxes Profit for the period Second quarter Sparebanken Vest achieved a pre-tax profit of NOK 630 million (NOK 436 mill.) in the second quarter, and a return on equity of 14.9% (10.7%). The profit performance was positively influenced by an increase in nominal net interest, good cost control and low losses. NOK 94 million has also been taken to income during the quarter as a result of the merger between Vipps, BankAxept and BankID. Net interest income in the quarter amounted to NOK 649 million (NOK 631 mill.). Net interest was positively affected by good growth in the retail and corporate markets, while increased financing costs as a result of higher NIBOR, make a negative contribution. quarter was challenging for Frende Forsikring, while the bank s share of profits of NOK 18 million (NOK 13 mill.) in the second quarter shows that the good development recorded in 2017 is continuing. The subsidiary Eiendomsmegler Vest delivered a pre-tax profit of NOK 12.5 million (NOK 10.1 mill.) in the quarter. The improvement in profit performance is the result of ongoing restructuring in the company. The Core Tier 1 capital ratio is 15.0%, including 70% of the profit for the period. That is in line with the bank s capital goal. Figure 1: Development in return on equity, in %. 15 Operating expenses in the second quarter amounted to NOK 367 million (NOK 360 mill.). Corrected for NOK 6 million in restructuring costs during the quarter, the expenses show a flat development ,7 % 12,2 % 10,6 % 10,1 % 14,9 % NOK 5 million was taken to income as write-downs on losses and guarantees. In the corresponding period the year before, the loss expense amounted to NOK 21 million. The revenue recognition is due to the good quality of the lending portfolio and a good market outlook for Western Norway Q Q Q Q1 Q2 Associated companies have recorded a positive profit development compared with the first quarter. The first 5

6 The bank s return on equity was 14.9% in the second quarter, compared with 10.7% in the corresponding period last year. The main reason for the higher return is the low loss level and good performance by financial instruments. The profit performance from associated companies has also improved. The effect on profits of the merger between Vipps, BankAxept and BankID is NOK 94 million in the quarter. The return on equity excluding the effects of the Vipps merger is 12.1% in the quarter. Nominal net interest income increased in the quarter to NOK 649 million, up NOK 18 million compared with the corresponding period last year. Net interest as a percentage of average assets under management was 1.42% (1.49%) for the second quarter. Increased financing costs have a negative effect. The lending margin for the retail and corporate markets measured against the average 3-month NIBOR was 1.64 (1.88) and 2.88 (3.05) percentage points, respectively. The main reason for the decrease is higher NIBOR of 15 basis points, while there was a decrease of 9 basis points in the customer interest rate in the retail market, and 2 basis points in the corporate market. The lending margins in the retail market decreased by 13 basis points compared with the first quarter. The change is due to a 12 basis points increase in average NIBOR and a 1 basis point reduction in the customer interest rate. There was a 2 basis points decrease in the corporate market compared with the first quarter. This is due to a 10 basis points improvement in the customer interest rate, while the average NIBOR has increased by 12 basis points. The deposit margin for the retail and corporate markets measured against the average 3-month NIBOR was 0.27 (0.12) and 0.35 (0.13) percentage points, respectively, in the second quarter. Compared with the first quarter, the deposit margin in the retail market has increased by 13 basis points. The deposit margin has increased by 9 basis points in the corporate market. Net commission income amounted to NOK 115 million (NOK 103 mill.) in the second quarter. There has been good development in income from payment transfers. NOK 107 million (NOK 0 mill.). The profit contribution must be seen in conjunction with the effect on profits of the merger between Vipps, BankAxept and BankID of NOK 94 million, NOK 65 million of which affects financial instruments. The remaining effect of NOK 29 million is through the upward adjustment of the value of the associated company Balder Betaling AS. Customer business and proprietary trading make a contribution to the profit from financial instruments of NOK 24 million (NOK 18 mill.). There was particularly good development in customer business, and a growing number of customers are using the bank for currency transactions and interest rate hedging. Table 2: Gain on financial instruments NOKm Q2 Q YtD YtD Dividend Gain/(loss) on commercial papers and bonds Gain/(loss) on shares Gain/(loss) on financial instruments, recognised at fair value Gain/(loss) on currency Net gain/(loss) on financial instruments designated for hedge accounting Of which gain/loss related to basisswaps Other Net gain on financial instruments * Value adjustments used to control interest rate and currency risk are divided into the income lines of the financial instruments they are managed together with. Operating expenses amounted to NOK 367 million (NOK 360 mill.). Corrected for restructuring costs of NOK 6 million in the quarter, the bank shows a flat cost development compared with the corresponding quarter last year. This is at a time when the bank is investing considerable development resources in new innovative digital customer solutions. The number of full-time equivalents in the Group is 684 (697). The bank expects the number of full-time equivalents to decrease slightly in the coming year. Table 3: Number of full-time equivalents Quarterly Q2 17 Q3 17 Q4 17 Q1 18 Q1 18 Full-time equivalents Net income from financial instruments amounted to 6

7 The subsidiary Eiendomsmegler Vest recorded a profit of NOK 12.5 million (NOK 10.1 mill.) in the second quarter, which can be ascribed to ongoing restructuring in the company. Corrected for the effect of the merger between Vipps, BankAxept and BankID of NOK 29 million, associated companies make an overall contribution to profits of NOK 25 million (NOK 20 mill.). The change from the corresponding quarter in 2017 is due to improved profit performances by Frende Forsikring and Brage Finans. than in the first quarter, when growth was 0.6%. The average annual growth in the past three years is 6.6%. The bank has good access to projects in the SME segment, and its approach is selective and based on profitability and the amount of tied-up capital in the projects. Total customer deposits increased by NOK 1.9 billion to NOK 73.0 billion (NOK 71.1 bill.), corresponding to year-on-year growth of 2.6%. Table 4: Associated companies NOKm Q2 Q YtD YtD Frende Forsikring Norne Securities Brage Finans Balder Betaling Other Companies Net profit from associated companies The development in losses remains good with NOK 5 million being taken to income (NOK 21 mill. expensed). See the section on risk and capital factors and Notes 8 and 9, which describe the write-downs and the development in default of payment. Developments in lending and deposits Gross lending increased by NOK 10.2 billion (NOK 8.9 bill.) to NOK billion (NOK bill.) from the second quarter 2017, corresponding to year-on-year growth of 7.2%. Table 5: Growth in lending Growth last 12 months Growth last quarter Lending total 7,2% 2,0% Lending retail market 7,5% 2,3% Lending corporate market 6,1% 1,1% Of gross lending, loans to the retail market amounted to NOK billion (NOK bill.), NOK 75.3 billion of which were loans transferred to Sparebanken Vest Boligkreditt. The growth in lending to the retail market in the second quarter is 2.3%, up from 1.5% in the first quarter and at a higher level than in the second quarter last year. The average annual growth in the past three years is 7.6%. Gross lending to the corporate market amounted to NOK 36.5 billion (NOK 34.4 bill.). Lending grew by 1.1% in the second quarter, which is slightly higher Table 6: Growth in deposits Growth last 12 months Growth last quarter Deposits total 2,6% 4,6% Deposits retail market 4,1% 6,4% Deposits corporate market 0,1% 1,5% Deposits break down as follows: NOK 46.6 billion (NOK 44.7 bill.) from retail customers and NOK 26.4 billion (NOK 26.4 bill.) from corporate customers. The breakdown between deposits and lending is specified in Notes 8 and 9. First half-year Sparebanken Vest recorded a pre-tax profit of NOK 1,079 million (NOK 868 mill.) for the first half-year. The return on equity was 12.5% (10.7%). The profit development in the first half-year must be seen in conjunction with increased net interest as a result of the increase in the lending portfolio, increased income from financial instruments and low losses. Net interest income increased to NOK 1,305 million (NOK 1,241 mill.). The increase is ascribed to the increase in the lending portfolio, while increased financing costs have the opposite effect. Net interest as a percentage of average assets under management was 1.45% (1.48%). Net commission income increased to NOK 228 million (NOK 212 mill.). The increase can be explained by increased income from payment transfers and sales of savings and investment products. The contribution from financial instruments amounted to NOK 93 million (NOK 23 mill.). The effect on profits from the merger between Vipps, BankAxept and BankID makes the biggest contribution to the performance of financial instruments. 7

8 The contribution from associated companies, corrected for the merger between Vipps, BankAxept and BankID, amounted to NOK 17 million (NOK 48 mill.) in the first half-year. The decrease from the corresponding period last year is explained by the weak profit performance by Frende Forsikring in the first quarter, while the company has delivered a better profit performance in the second quarter than in the corresponding quarter last year. Brage Finans has seen strong growth in total assets over the past years, and its profit performance for the year to date shows an increase of NOK 15 million, from NOK 10 million in the corresponding period last year. Eiendomsmegler Vest recorded a profit in the first half-year of NOK 11.7 million (NOK 8.1 mill.). The company has lower costs than in the corresponding period last year, and should be in a good position for further growth. The total operating expenses for the first half-year amounted to NOK 737 million (NOK 715 mill.). The increase in costs in the first half-year is ascribed to slightly higher development costs at the start of the year, especially in the first quarter. During the first half-year, the bank developed Buffer, a new innovative lending product for corporate customers across Norway. It is the bank s first initiative targeting customers outside the bank s primary market area. Write-downs on loans and guarantees show NOK 34 million taken to income (NOK 50 mill. expensed), and the low loss level from preceding periods thereby continues. Risk and capital factors Credit risk The risk situation in the retail market portfolio follows the same trend stable and low risk. At the end of the second quarter, the retail market accounted for approx. 76% of the credit portfolio, and approx. 96% of this portfolio consists of loans secured by residential mortgages. The risk profile in the corporate market is stable and moderate. Good portfolio management and moderate exposure in industries vulnerable to cyclical fluctuations make a positive contribution to the risk profile in this segment. Commitments in default and potential bad debt in the corporate market amount to a total of NOK 1,110 million (NOK 1,321 mill.). The volume in default in the corporate market is mainly related to potential bad debt identified in previous years, and the percentage provided for on these commitments exceeds 50%. The decrease from the first quarter is primarily ascribed to improvements in potential bad debt and a better industry outlook. Commitments in default and potential bad debt in the retail market amount to a total of NOK 312 million (NOK 243 mill.). The increase from the first quarter is considered to be within the range of normal variation, where some of the increase can be ascribed to changes in the bank s loss procedures. Figure 2: Defaults and other potential bad debt ,97 % 243 Q ,96 % ,92 % 280 Q Q Retail Corporate % of total ,89 % ,82 % Q1 Q2 Default in relation to gross lending is shown in Note 9. The total losses on lending and guarantees amounted to NOK -5 million (NOK 21 mill.) in the second quarter. The decrease in losses is largely attributed to the positive development in the quality of the lending portfolio as well as a better market outlook for Western Norway. The total percentage provided for in the portfolio is somewhat reduced. Figure 3: Write-downs Write-downs as % of gross lendings 0,9 0,8 0,7 0,6 0,5 0,4 0,3 0,2 0,1 0,0 0,77 % Q ,75 % ,70 % Q Q ,67 % Q ,63 % Q2 Individual write-downs Group write-downs Write-downs as % of gross lendings % 4 % 3 % 2 % 1 % 0 % Capitalised write-downs (MNOK) 8

9 Market risk and operational risk The bank s interest rate and currency risk is managed within limits adopted by the Board and is considered to be low. The bank is exposed to credit spread risk, primarily through the management of interestbearing securities in the bank s liquidity portfolio, and to a very limited extent through proprietary trading. The portfolio mainly consists of securities issued by Norwegian banks, residential mortgage companies, municipalities, county authorities, the Norwegian state and non-financial enterprises. The bank s reported credit spread risk has increased slightly in relation to the end of the same quarter last year, at NOK 314 million (NOK 287 mill.). The bank s stock market exposure (excluding subsidiaries and associated companies) at the end of the second quarter amounted to NOK 476 million (NOK 442 mill.). Sparebanken Vest has a structured approach to operational risk through, among other things, continuous risk identification, risk assessments and registration and handling of incidents. Operational risk is part of the bank s decisionmaking processes at all levels of the organisation, is integrated in all the bank s processes and is regarded as a continuous activity. Operational risk is reported to the CEO and the Board quarterly and on an ad hoc basis as necessary. There have been no significant operational incidents in Sparebanken Vest in the second quarter that have affected operations. Compliance risk Compliance risk forms part of the bank s structured approach to operational risk. The bank has a low tolerance of compliance risk. This means, among other things, that the bank is and shall be a professional and trustful player in the market, in relation to customers, employees, investors and society as a whole. The bank s compliance function shall address the assumptions that will enable the bank to achieve its financial targets and business goals. Sparebanken Vest has an established compliance programme that makes requirements, of among other things, annual and continuous risk assessments, control activities and training. Annual plans are drawn up on the basis of a risk assessment, in which resources and measures are allocated to identify and prevent compliance deviations. Important areas are anti-money laundering, privacy protection, anti-corruption and the handling of conflicts of interest. Compliance risks and incidents are reported to the CEO and the Board quarterly, and on an ad hoc basis as necessary. Liquidity and financing The Group s liquidity situation is good. It is managed at the overall level using the Liquidity Coverage Ratio (LCR), stress tests and the deposit/loan ratio. The Group s LCR at the end of the second quarter was 173%. The Net Stable Funding Ratio (NSFR) is expected to be introduced in Norway in connection with the completion of Basel III, probably during. The deposits/loans ratio was somewhat lower than in the corresponding period last year: 47.7% (49.3%). The decrease is explained by the growth in lending exceeding the growth in deposits over the past 12 months. The Group s liquidity portfolio amounted to NOK 22.2 (19.2) billion at the end of the quarter. The total capital market financing amounted to NOK 89.9 billion (NOK 78.8 billion). The bank s relative share of covered bonds at the end of the second quarter amounted to approximately 73% (73%) of the bank s capital market financing. The proportion of financing with a remaining term to maturity of more than three years was approximately 52% (50%) at the end of the quarter. Rating Sparebanken Vest is rated by Moody s. On 10 July 2017, Moody s changed the outlook for Sparebanken Vest s rating to A1 Negative from A1 Stable. The reason given by Moody s for the change in outlook is the implementation of the Crisis Management Directive in Norwegian law. Bonds issued by Sparebanken Vest Boligkreditt AS are rated by Moody s and have an AAA rating with a stable outlook. The bank s equity certificate (SVEG) At the end of the second quarter, the book equity and profit per equity certificate were NOK 50.6 (48.6) and NOK 3.07 (2.54), respectively. For the second quarter seen in isolation, the profit per equity certificate was NOK 1.84 (1.28). The price of the equity certificate at the same time was NOK (51.75). At the end of the second quarter, the price-to-book ratio was 0.92 (1.07). In, Sparebanken Vest has distributed a cash dividend of NOK 3.75 per equity certificate for the financial year The General Meeting decided in the first quarter that, as an alternative to cash, the 9

10 dividend for 2017 could be awarded in the form of equity certificates. Around 25% of dividend had been subscribed for in the form of new certificates at the end of the subscription period. The capital increase thus corresponds to just under NOK 60 million. Capital adequacy The bank s Core Tier 1 capital adequacy ratio, taking into account the Basel I floor, is down 0.1 percentage points from the first quarter to 15.0%. The bank meets the current combined minimum and buffer requirement of 12% plus the statutory Pillar II requirement of 1.8%, in total 13.8% Core Tier 1 capital, by a very good margin. Figure 5 Capital adequacy, IRB 24 % 22,9 % 23,3 % 22 % 2,6 % 2,6 % 20 % 1,9 % 1,9 % 18 % 16 % 14 % 12 % 10 % 8 % 18,5 % 18,9 % 6 % 22,8 % 2,5 % 2,0 % 18,3 % 22,3 % 2,4 % 2,0 % 17,9 % 22,4 % 2,4 % 2,0 % 18,1 % Figure 4 Capital adequacy, Basel I floor 20 % 18,3 % 18,4 % 18,7 % 18 % 2,1 % 2,0 % 2,1 % 16 % 1,5 % 1,5 % 1,6 % 18,8 % 2,0 % 1,7 % 18,6 % 2,0 % 1,6 % 4 % 2 % 0 % Total Capital Tier 2 Capital Add. Tier 1 Cap. Core Tier 1 Capital 2017 Q2 22,9 % 2,6 % 1,9 % 18,5 % 2017 Q3 23,3 % 2,6 % 1,9 % 18,9 % 2017 Q4 22,8 % 2,5 % 2,0 % 18,3 % Q1 22,3 % 2,4 % 2,0 % 17,9 % Q2 22,4 % 2,4 % 2,0 % 18,1 % 14 % 12 % 10 % 8 % 6 % 14,7 % 14,9 % 15,0 % 15,1 % 15,0 % The leverage ratio at the end of the second quarter was 7.1%, down 0.1 percentage points from the first quarter. Sparebanken Vest thereby meets the regulatory minimum requirement (3%) and the buffer requirement (2%), in total 5%, which applies from 30 June this year, by a very good margin. 4 % 2 % Figure 6 Leverage ratio 8 Total Capital Tier Capital Add. Tier 1 Cap. 0 % Core Tier 1 Capital 2017 Q2 18,3 % 2,1 % 1,5 % 14,7 % 2017 Q3 18,4 % 2,0 % 1,5 % 14,9 % 2017 Q4 18,7 % 2,1 % 1,6 % 15,0 % Q1 18,8 % 2,0 % 1,7 % 15,1 % Q2 18,6 % 2,0 % 1,6 % 15,0 % 6 4 From the first to the second quarter, the Core Tier 1 capital adequacy ratio based on the IRB method has increased from 17.9% to 18.1%. This is largely due to profit accumulation and a marginal reduction in the calculation basis as a result of a positive development in risk weights ,1 % 6,6 % 7,3 % 7,1 % Q Q Q Q ,2 % Q The bank s capital adequacy is specified in Note 13. MREL On 29 June, the Financial Supervisory Authority of Norway published a consultation proposal covering, among other things, proposals for the stipulation of MREL requirements (Minimum Requirement for Own Funds and Eligible Liabilities). The legislation enters into force on 1 January 2019, and a phasein period has been proposed that means that the MREL requirement 10

11 will not be implemented until 31 December The Financial Supervisory Authority of Norway will present its final proposal to the Ministry of Finance by 1 November. Preliminary calculations suggest that Sparebanken Vest requires Tier 3 capital in the amount of around NOK 10 billion. This corresponds to around 50% of the Group s outstanding senior debt. Business in subsidiaries and associated companies Subsidiaries Eiendomsmegler Vest (holding 100%) recorded a pre-tax profit in the second quarter of NOK 12.5 million (NOK 10.1 mill.) and NOK 11.7 million (NOK 8.1 mill.) for the year to date. The profit is affected by lower costs following the restructuring carried out the preceding year. The number of homes sold for the year to date is on a par with last year and the number of new orders for the third quarter is good. Although its profit performance has improved considerably compared with last year, major efforts are still being made to strengthen its market position. In the time ahead, the company will increase its visibility and the number of estate agents, which is expected to pay off. Sparebanken Vest Boligkreditt AS (holding 100%) manages housing loans in the amount of NOK 75.3 billion (NOK 61.8 bill.). At the end of the second quarter, the company had issued covered bonds in the amount of NOK 67.9 billion (NOK 60.6 bill.). Associated companies The share of profit/loss from associated companies amounted to a total of NOK 54 million (NOK 20 million). It was included in the accounts in accordance with the equity method in the second quarter. Accumulated for the first half-year, the contribution amounted to NOK 46 million (NOK 48 million). The merger between Vipps, BankAxept and Bank ID affects the contribution from associated companies in the amount of NOK 28.8 million through the upward adjustment of Balder Betaling AS. Frende Holding (holding 39.7%) recorded a pre-tax profit of NOK 10.7 million (NOK 96.6 mill.) in the first half-year. The pre-tax profit for the second quarter was NOK 58.6 million (NOK 40.6 mill.). The profit performances in the second quarter are positive for both life and general insurance, though the biggest contribution is from actuarial results in the life insurance company. Sparebanken Vest s share of profits for the half-year amounts to NOK 3.8 million (NOK 34.8 mill.), while the share of profits for the quarter was NOK 18.0 million (NOK 13.1 mill.). Frende Skade recorded a pre-tax loss of NOK 49.8 million (NOK mill.) for the first half-year. The profit performance for the second quarter seen in isolation was NOK 16.4 million (NOK 22.1 mill.). The company has total premiums of NOK 1,900 million (NOK 1,675 mill.) divided between 159,000 customers. Its market share continues to grow, and was 3.4% at the end of the first quarter. The loss ratio for the year to date was 89.4% (83.5%), and the company s combined ratio was 108.1% (101.8%). In the second quarter seen in isolation, the loss ratio was 82.3%, a slight improvement from 83.9% in the corresponding period in As in the first quarter, the second quarter is also characterised by many large fire losses. There is also still a very high claims frequency, particularly in relation to motor vehicles. Frende Liv recorded a pre-tax profit of NOK 62.9 million (NOK 47.2 million) in the first half-year. The profit performance for the second quarter seen in isolation was NOK 44.2 million (NOK 18.7 mill.). The last quarter has shown very good risk results, and, in NOK, is the best quarter in the last four years. In the first half-year, the financial profit was NOK 9.9 million (NOK 29.1 mill.), while for the second quarter seen in isolation, it made a contribution of NOK 6.9 million (NOK 12.0 mill.). Premiums in Frende Liv increased by NOK 47 million in the first half-year, and amounted to NOK 966 million (NOK 918 mill.) at the end of the first half-year. Norne Securities AS (holding 47.6%) is a securities firm that offers investment services to the corporate and retail markets. Frende Liv recorded a pre-tax profit of NOK 0 million (NOK 5.0 mill.) in the first half-year. Turnover in the first half-year amounted to NOK 25.9 million (NOK 35.7 mill.). Sparebanken Vest s share of the profit was NOK 0 million (NOK 2.4 mill.) for the half-year. In the second quarter, it has worked very actively on 11

12 transactions that will be concluded in the second half-year. Combined with good cooperation with the owner banks and its strong position as a facilitator of equity certificate issues, a slightly better contribution is expected from the company in the second half-year. Brage Finans AS (holding 49.9%) is a financing company that offers leasing and loans secured by the purchased object to the corporate and retail markets. The company s head office is in Bergen, and it also has offices in Ålesund, Stavanger and Kristiansand. The company s products are mainly distributed through owner banks, its own sales organisation and via agents. The company recorded a pre-tax profit of NOK 21.8 million (NOK 12.8 mill.) in the second quarter. In the same period, Brage Finans recorded good top-line growth with a 53% increase in net interest income. Net interest income in the quarter was positively affected by continued good lending growth in both the corporate and retail markets. The company s initiative in the car dealer segment has got off to a good start, at the same time that it is increasing its market shares in leasing of equipment in the corporate market. Despite a high level of activity and investment in new market areas, the company s cost ratio continues to fall. The growth in costs in the first half-year, in per cent, was lower than the growth in income, which meant that the company s cost ratio fell from 49% in the first half-year 2017 to 41% in the first half-year. The company recorded a pre-tax profit of NOK 21.8 million (NOK 12.8 mill.) in the second quarter. For the first half-year, the pre-tax profit is NOK 41.0 million (NOK 24.9 mill.). At the end of the second quarter, the company had a gross portfolio of NOK 7.8 billion, which corresponds to growth of 56% over the past 12 months. The company carried out an ordinary equity certificate issue in the first quarter vis-à-vis the company s owner banks in the amount of NOK 230 million to maintain sound core capital. In the second quarter, the company strengthened capital adequacy through the issue of a subordinated loan of NOK 75 million. Sparebanken Vest s share of profit/loss in Brage Finans in the first half-year amounted to NOK 15.3 million (NOK 9.8 mill.). Balder Betaling AS (holding 36%) is a company that exercises ownership of the mobile phone payment system Vipps on behalf of Sparebanken Vest and 14 other savings banks. Balder Betaling has a holding of 12% in Vipps, and Sparebanken Vest is the biggest owner of Balder with a holding of 36%. At the start of the third quarter, Vipps has merged with BankAxept and BankID, thereby establishing a strong Norwegian alternative to large international payment transfer providers. Sparebanken Vest s share of profit/loss from Balder Betaling AS amounted to NOK 27.8 million (n.a.) in the second quarter. The share of profit/loss is affected in the amount of NOK 28.8 million by the upward adjustment of the value of the company in connection with the merger between Vipps, BankAxept and BankID. Post balance sheet events No significant events have taken place since the balance sheet date that affect the quarterly and halfyear accounts. Outlook The macroeconomic situation The global upturn is continuing, but it is probably not as synchronised as previously. The global economy looks set to grow by a healthy 3.9% this year and next year. The USA and the eurozone in particular are expected to make a positive contribution by outperforming the trend growth rate, helped by negative interest rates in Europe and good fiscal policy stimuli in the USA. However, there is slightly more uncertainty about whether the growth in Europe, which was surprisingly weak in the second quarter, will continue. Internationally, growth will probably peak already next year. The biggest risks in the coming years are the consequences of increased interest rates for debtridden countries, enterprises and households, and increased protectionism. Higher interest rates may help to put a stop to the economic upturn, while increased protectionism may result in more long-term economic consequences. Growth picked up in the Norwegian economy last year, and the capacity utilisation rate increased. Low interest rates, improved competitiveness and expansive fiscal policy have contributed to this. The upturn for our trading partners led to increased exports. Activity has picked up in the first half-year, and unemployment has continued to fall while employment is increasing. There is good growth in corporate investments and household consumption, and oil investments are expected to increase in the years to come. 12

13 House prices have risen during the first half-year and have made up much of last year s fall. Falling unemployment, increased wage growth and a more stable housing market will contribute to moderate growth in house prices going forward. There is still regional variation. The growth in mainland GDP is expected to be 2.7% this year. Sparebanken Vest expects that Norges Bank will raise the key interest rate in September, and will raise it a further twice next year. Western Norway Increased growth abroad, a continued weak krone and increasing activity on the continental shelf are positive for the economy of Western Norway. This is also confirmed by the Western Norway Index 2/, which shows the biggest upturn in the index in its history. The upturn is broad, and is visible across industry groups. The contribution from the building and construction industry and oilrelated sectors is particularly positive. The positive trend from the previous two quarters continues in the expectation index, and there is thus nothing to suggest that growth in Western Norway looks set to slow down imminently. Increasing demand means that a growing number of enterprises are reporting capacity challenges. This has contributed to the rise in employment in Western Norway. We are probably approaching full employment in Western Norway. Vestlendingen, the new quarterly private economy index in Western Norway, shows greater economic optimism in the region. The index looks at developments in the counties of Rogaland, Hordaland and Sogn og Fjordane. It shows that economic optimism has increased in the region between the first and second quarters this year. There is growing optimism in Western Norway, and the households in Hordaland and Rogaland in particular report a better economic outlook for their household. The people of Western Norway also believe that the development in the region s economy over the past year has been positive, and more than half of them believe that the economy in the region will improve in the coming year. The number of people worried about interest rate hikes on home mortgages increased between the first and second quarter. This concern is growing among households in all of the counties in Western Norway, and it is greatest in Sogn og Fjordane and in those under 30. Sparebanken Vest The Board of Directors of Sparebanken Vest expect the bank to have a return on equity of at least 11% in. The goal is for the return on equity to be among the top two for comparable savings banks. The bank s long-term goal for its return on equity has been upwardly adjusted to 12%. Sparebanken Vest s target for Core Tier 1 capital is around 1 percentage point above all regulatory minimum and buffer requirements (including Pillar II stipulated by the Financial Supervisory Authority of Norway). Today, this corresponds to 14.8% including the applicable Pillar 2 requirement of 1.8 percentage points. The bank currently meets this target by a good margin, and the Board of Directors assumes that Core Tier 1 capital will be roughly on target at the end of. The bank s dividend policy indicates a cash dividend on the bank s equity certificates of between 25 and 50% of the equity certificate holders share of profits. It has previously signalled that the dividend for the financial year is expected to be in the lower part of this interval. The Board has adopted an adjustment of the bank s dividend policy that cash dividends may be up to 50% of the equity certificate holders share of the result. Based on the performance to date this year, the expectations for the rest of the year and the bank s capital ratio, a dividend of about 40% is expected for the fiscal year. The goal is for the bank to win market shares within its ordinary activities in. The bank s goal of lending growth of 9% in the retail market and 6% in the corporate market, respectively, still apply. Targeted efforts are made to reach these goals, both through ongoing market work and new distribution and customer service solutions. The contributions from subsidiaries and associated companies have also been positive in the second quarter. Profit performances are also expected to improve in the coming quarters. Sparebanken Vest will continue transforming its operations to adapt to new framework conditions. Investments in new technology, changed expertise and new processes feature strongly in this work. This is demonstrated in the second quarter by the launch of, among other things, new solutions such as Buffer, a new fully-digital financing solution for SME enterprises, and a self-service mortgage solution. The goal is for the cost level to remain more or less flat, nominally speaking, in. Careful management, good credit quality and low exposure to industries vulnerable to cyclical fluctuations 13

14 have led to low losses for the bank in recent years. The Board expects continued low losses in although the bank s financial calculations are based on normalised losses. Declaration from the Board of Directors and the Managing Director pursuant to Section 5-6 of the Securities Trading Act We hereby declare that, to the best of our knowledge, the interim accounts for the period 1 January to 30 June have been prepared in accordance with applicable accounting standards and that the information in the accounts gives a true and fair picture of the company and the Group s assets, liabili-ties, financial position and overall performance. We also declare that, to the best of our knowledge, the interim report gives a true and fair picture of important events during the accounting period and their influence on the half-year accounts, a description of the most important risk and uncertainty factors that the company faces in the next accounting period, and a description of important transactions with related parties. Bergen, 14 August The Board of Directors of Sparebanken Vest Trygve Bruvik Arild Bødal Birthe Kåfjord Lange Chair of the Board Deputy Chair of the Board Magne Morken Richard Rettedal Gunnar Skieie Anne Marit Hope Marianne Jacobsen Kristin Axelsen Fred David Risløw Jan Erik Kjerpeseth CEO 14

15 Financial highlights, Group Summary of profit and loss 2Q 2Q / / / / CHANGE 2Q-18 vs 1Q-18 2Q-18 vs 2Q-17 Net interest and credit commission income Net commission income and income from banking services Income from associated companies Net gain/(loss) on financial instruments Net other operating income Net operating income Operating expenses Write-downs of loans and losses on guarantees Profit/loss before tax expense Tax expence Profit/loss for the period Profit/Diluted profit per equity certificate 1,84 1,28 3,07 2,54 5,42 15

16 Financial highlights, Group (cont.) Key figures 2Q 2Q 2017 Profitability 01/ / / / Return on equity after tax 14,9% 10,7% 12,5% 10,7% 11,0% Net interest as a percentage of average assets under management 1,42% 1,49% 1,45% 1,48% 1,50% Net other operating income as a percentage of net operating revenues 35,1% 23,1% 27,1% 24,4% 23,2% Operating expenses as a percentage of net operating income (cost-income) 37,6% 44,7% 42,0% 44,5% 44,2% Operating expenses as a percentage of net operating income, corrected for financial instruments 42,2% 44,7% 44,3% 45,1% 44,1% Losses and defaults Losses on loans as a percentage of gross lending -0,02% 0,04% 0,02% Commitments in default (>90days) as a percentage of gross lending 0,19% 0,18% 0,20% Potential bad debt as a percentage of gross lending (before write-down) 0,90% 1,07% 1,02% Balance sheet figures and liquidity 30/ / /12-17 Total assets Average total assets Gross loans to customers Lending growth, last 12 months 7,2% 6,6% 8,0% Customer deposits Deposit growth, last 12 months 2,6% 7,4% 3,9% Deposit coverage 48,0% 50,2% 47,0% Liquidity Coverage Ratio (LCR) 173% 157% 158% Capital adequacy 30/ / /12-17 Risk-weighted balance sheet total Core Tier 1 capital adequacy 15,0% 14,7% 15,0% Core capital adequacy 16,7% 16,2% 16,7% Capital adequacy, transitional arrangement 18,6% 18,3% 18,7% Capital adequacy, IRB 18,1% 18,5% 18,3% Leverage ratio 7,1% 7,2% 7,3% Personnel Number of full-time equivalents Number of branch offices The equity certificate 2Q 2Q / / /12-17 Owner fraction on balance sheet date 22,5% 23,2% 22,1% Weighted owner fraction in the period 22,3% 23,2% 22,2% 23,2% 23,2% Equity cert. Capital's share of profit/loss divided by no of equity certificates (NOK) 1,84 1,28 3,07 2,54 5,42 Book equity per equity certificate 50,6 48,6 51,4 Listed price of equity certificate 46,5 51,75 54,5 Price-to-book 0,92 1,07 1,06 16

17 Income statement PARENT BANK 01/ / / / Q Q Notes 2Q 2Q 01/ / / / Interest income and similar income Interest expenses and similar expenses Net interest and credit commission income Commission income and income from banking services Commission expenses and expenses relating to banking services Income from ownership interests in associated companies Net gain/(loss) on financial instruments Other operating income Net other operating income Net operating income Payroll and general administration expenses Depreciation Other operating expenses Total operating expenses Profit before write-downs and tax Write-downs on loans and guarantees 7, Pre-tax profit Tax Profit for the period ,19 2,29 2,46 1,10 1,43 Profit/Diluted profit per equity certificate 1,84 1,28 3,07 2,54 5,42 Statement of comprehensive income PARENT BANK 01/ / / / Q Q 2Q 2Q 01/ / / / Profit/loss for the period Estimate variance, pensions Changes in fair value due to credit risk - debt securities issued Other profit/loss elements that will not be reclassified to profit or loss Base margin from hedging instruments related to hedge accounting Total other profit/loss elements in the period Tax on other profit/loss elements Total other profit/loss elements in the period after tax Total profit for the period