GOOD RESULT IMPROVED FINANCIAL STRENGTH

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1 GOOD RESULT IMPROVED FINANCIAL STRENGTH INTERIM REPORT Q3 2013

2 Lower growth in house prices or just a quick breather? Sparebanken Vest has more than 55,000 housing loan customers who have housing loans worth a total of NOK 79 billion with the bank. That corresponds to 70 per cent of Sparebanken Vest s lending portfolio. Developments in the housing market are therefore of great importance and interest to the bank. House prices in Norway have increased strongly in the last ten years. Prices went up every year from 2002 to 2012, with the exception of 2008, the year of the financial crisis. On average, they have increased by 6.8 per cent a year. The price increase has been most marked in the biggest towns and cities. Several factors contributed to this price increase. Wage growth has been high, while interest rates have been historically low. In addition, a combination of population growth and net migration to the cities and low building activity have led to a housing shortage. Technical requirements have made building projects more expensive for developers, and a shortage of labour in the building and construction industry has also affected the start-up of new building projects. Tax arrangements that favour house owners compared with those who rent their homes have also led to more people wanting to buy a house. Lower growth rate There are signs of lower growth in house prices in In September, house prices were 1.4 per cent lower than in August this year. The prices were 2.6 per cent higher than in September 2012, according to the national estate agents association, Eiendomsmeglerforetakenes Forening. A cooler property market can be healthy for the Norwegian economy, as it will reduce the risk of financial instability. There are a number of reasons for this cooling down. High debts, signs of rising unemployment and lower wage growth, combined with more stringent equity requirements for house buyers, are all contributory causes. In addition, the banks have introduced more restrictive lending practices and cut back on instalment-free loans. Does this mean that prices will fall? Sparebanken Vest Markets believes that the period of high growth in house prices is over, but it does not expect a price fall, as the number of new homes being built is still low compared with the population growth and demographic changes. Sparebanken Vest Markets forecast* is that housing prices will increase by 5 per cent in 2013 and 2.5 per cent in According to Statistics Norway s population projections, the strongest population growth is expected to take place in the Oslo area and in Western Norway. This is related to the fact that these regions are experiencing both centralisation and strong labour immigration. The number of new homes built in Norway was 30,189 in By comparison, the number of households increased by 32,700 in the same year. In the 2000s ( ), an average of 26,969 homes were built each year. In the 1970s ( ), the number was 41,074 per year. The record year for post-war house-building was 1974, when 43,558 homes were built. Hordaland is a good example of the need for increased house-building. According to the county authority, Hordaland will need 71,000 more houses and apartments between now and The need is greatest in the Bergen area. On average, 2,337 homes were built every year for the last ten years in the Bergen area**, while the region needs 3,200 homes every year in the years ahead. That corresponds to an unmet need of almost 40 per cent. This does not indicate a marked fall in house prices in our region. However, Sparebanken Vest expects the growth in house prices in Norway to be somewhat weaker in the time ahead than we have see in the past decade, with an expected growth that is more in line with wage growth. The already high price level combined with lower wage growth and a tighter credit practice by the banks will contribute to this. *Macroeconomic forecasts SPV Markets October 2013.**) By the Bergen area is meant Bergen, Os, Osterøy, Meland, Lindås, Askøy, Fjell, Sund and Øygarden. Macroeconomist Kristina Håvås Hanson of Sparebanken Vest Markets believes that the growth in house prices will be somewhat weaker in the time ahead than we have seen in the past decade. 2

3 Third quarter 2013 Good core banking operations lead to positive profit development Pre-tax profit of NOK 370 million (NOK 303 million) in the quarter Return on equity after tax of 14.0% (12.5%) for the quarter Increase in net interest income of 25% Positive trend in cost developments continues Continued progress in associated companies Core Tier 1 capital of 10.8% up 0.2 percentage points from the previous quarter Main figures 3Q Q Operating profit before write-downs and tax 409 MNOK 329 MNOK MNOK 812 MNOK MNOK Pre-tax profit 370 MNOK 303 MNOK 975 MNOK 708 MNOK MNOK Profit / equitiy certificate 1,85 kr 1,56 kr 4,80 kr 3,67 kr 6,10 kr Net interest (annualised) 1,73 % 1,46 % 1,64 % 1,43 % 1,45 % Cost ratio 1) 46,7 % 52,9 % 50,5 % 57,1 % 59,5 % Return on equity (annualised) 14,0 % 12,5 % 12,4 % 10,1 % 12,3 % Deposits / Loans ratio 55,2 % 55,3 % 55,2 % 55,3 % 56,2 % Liquidity indicator 100,6 % 106,6 % 100,6 % 106,6 % 106,8 % Core Tier 1 2) 10,8 % 9,7 % 10,8 % 9,7 % 10,6 % Total capital 2) 12,7 % 11,6 % 12,7 % 11,6 % 12,6 % Core Tier 1 (Basel II) 2) 14,3 % 13,3 % 14,3 % 13,3 % 14,0 % Total capital (Basel II) 2) 16,8 % 16,0 % 16,8 % 16,0 % 16,6 % 1) Cost ratio excluding one-offs related to change in pension scheme in 2012 (262 MNOK) 2) Capital includes 50% of profit for the period 3

4 Report for the third quarter 2013 Main Figures NOKm Q Q reported reported IAS19-R* 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 reported Profit for the period *) The accounts have been prepared in accordance with International Financial Reporting Standards (IFRS). In accordance with IFRS, IAS-19 R shall also be incorporated retrospectively. In the notes, historical figures (pension expenses and tax) have therefore been revised pursuant to IAS-19 R. The table shows both actual reported figures for Q and revised figures pursuant to the currently applicable principle. Comments and comparative figures in this report apply to actual figures reported for the same period last year. Pursuant to IFRS, all financial derivatives must be recognised at fair value. Sparebanken Vest has also chosen to recognise fixed-interest financial assets and financial liabilities at fair value. This includes fixed-interest lendings, deposits and securities debt. The chosen accounting principle is called the Fair Value Option (FVO), the purpose of which is to counteract large income statement effects on balance sheet items that are managed together. Holdings of certificates, bonds and shares are also valued at fair value. Third quarter 2013 Sparebanken Vest achieved a pre-tax profit of NOK 370 million (NOK 303 million) in the third quarter, and a return on equity of 14.0% (12.5%). The positive profit development is still primarily driven by good core banking operations, helped by a solid increase in nominal net interest income and an underlying reduction in operating expenses. The profit before tax, financial items and shareholdings increased by NOK 151 million from the same period last year. The increase in nominal net interest income amounts to NOK 115 million compared with the third quarter The increase is a result of repricing of the lending portfolios for both the retail and corporate markets, and reduced borrowing costs as a result of falling money market interest rates. The underlying positive development continues in associated companies. Frende Forsikring, Brage Finans and Verd Boligkreditt all make positive contributions to the Group s quarterly profit. Norne Securities delivered a break-even result. Operating expenses for the Group are NOK 30 million lower than reported in the same quarter last year. Work on implementing additional cost-cutting measures has continued unabated, and the bank is on schedule in relation to both previously announced branch office closures and staff downsizing. The measures are intended to help the bank to reach its target of 2% average annual cost growth in the parent bank (including Sparebanken Vest Boligkreditt) in the period up until Net interest income in the third quarter amounted to NOK 573 million (NOK 458 million). The increase of NOK 115 million is mainly due to increased lending margins. At the same time, the negative development in deposit margins has stabilised. The lending margin for the retail market and corporate market measured against the average 3-month NIBOR 4

5 was 2.58 (1.96) and 3.30 (2.90) percentage points, respectively, in the third quarter. This corresponds to a change of 62 and 40 basic points from the third quarter 2012, which shows that the repricing that was carried out in the first half-year has had an effect in relation to stated targets. The deposit margin for the retail market and corporate market in the third quarter was (-0.23) and (-0.28) percentage points, respectively. This corresponds to a change of -2 basic points from the second quarter for both the retail and the corporate market. Average customer interest rates were reduced by 5 basic points in the third quarter. Measures implemented to reverse the downward trend have gradually taken effect, but work continues on additional measures to improve the margin development in relation to deposits. Net interest as a percentage of average assets under management was 1.73 per cent, up 27 bp from the same period last year. In the third quarter, a fee of NOK 13 million to the Norwegian Banks Guarantee Fund was charged to net interest income, corresponding to -4 bp in relation to average assets under management. Net commission income amounted to NOK 106 million (NOK 89 mill.) in the third quarter. There is stable growth in all product areas. The number of insurance, card and investment products is growing steadily. The bank s associated companies are still showing progress, with a total profit for the quarter of NOK 20 million, an increase of NOK 10 million on the same period last year. Gain on financial instruments NOKm Q Q Dividends Gain/loss(-) on commercial papers and bonds Gain/loss(-) on shares and securities Net gain/loss(-) on other financial instruments Net gain on financial instruments The net profit from financial instruments amounted to NOK 22 million (NOK 116 million) in the quarter. The change is largely related to lower contributions from the bank s holding of certificates and bonds. The stabilisation of the financial markets has reduced the volatility of the risk mark-ups, which affects the fair value measurement of the portfolio. Gains on certificates and bonds were reduced from NOK 99 million in the third quarter 2012 to NOK 6 million in the third quarter The bank s holding of shares shows a positive development in value of NOK 2 million in the quarter seen in isolation. Operating expenses in the third quarter 2013 amounted to NOK 358 million (NOK 388 million). The cost reduction in the quarter can be attributed to the parent bank. Of the Group s total operating expenses, the parent bank s expenses (including Sparebanken Vest Boligkreditt) amounted to NOK 308 million in the quarter, which is NOK 31 million less than in the same period last year. The positive trend in cost developments from the first half-year continues into the third quarter. Work on closing down 10 branch offices has come a long way. The development in costs in the Group s subsidiaries is stable compared with the same period last year. Developments in deposits and lendings Gross lendings increased by NOK 4.7 billion to NOK billion from the third quarter 2012, corresponding to year-on-year growth of 4.4%. Growth last 12 months Growth last quarter Lending total 4,4 % 0,6 % Lending retail market 7,6 % 1,5 % Lending corporate market -4,0 % -2,0 % Of gross lendings, loans to the retail market amounted to NOK 83.3 billion (75%), NOK 43.8 billion of which are loans transferred to Sparebanken Vest Boligkreditt. Gross lendings to corporate customers amounted to NOK 27.7 billion (25%). The growth in lendings in the retail market is stable with a growth so far this year of 5.3%. The corporate market has negative growth so far this year of 2.4%. The growth in lendings in the corporate market is still driven by conscious management in order to strengthen the bank s capitalisation. Moderate, positive growth is expected for the year seen as a whole. Customer deposits increased by NOK 2.5 billion to NOK 60.9 billion, corresponding to year-on-year growth of 4.3%. Growth last 12 months Growth last quarter Deposits total 4,3 % -3,3 % Deposits retail market 7,6 % -1,8 % Deposits corporate market -0,2 % -5,4 % 5

6 Deposits break down as NOK 36.6 billion (60%) from retail customers and NOK 24.3 billion (40%) from corporate customers. The growth so far this year is 7.8% in the retail market and -6.7% in the corporate market. The breakdown between deposits and lendings is specified in Notes 8 and 9. Losses are still low. Write-downs on loans and losses on guarantees amount to NOK 39 million (NOK 26 million) in the quarter, corresponding to 0.14% (0.10%) of gross lendings on an annualised basis. See the chapter on risk and capital factors and Notes 6, 7, 8 and 9, which also describe developments in default of payment. So far in 2013 Sparebanken Vest achieved a pre-tax profit of NOK 975 million (NOK 708 million) in the first three quarters of the year, and an annualised return on equity of 12.4% (10.1%). The positive profit performance is driven by sound core banking operations. The profit before tax, financial items and shareholdings increased by NOK 364 million from the same period last year. Operating income has increased by NOK 195 million so far this year, primarily as a result of an improvement in nominal net interest income. Operating expenses have been reduced by NOK 59 million compared with the same period last year. This shows that the improvement programme and other measures implemented last year have had the expected effect. The Group employed 838 full-time equivalents as of 30 September 2013 a decrease of 43 full-time equivalents since the turn of the year. The first three quarters of the year were characterised by identifying and implementing additional cost-cutting measures that are intended to be completed by the end of 2013 and will have effect from The measures are also implemented as a consequence of the bank s adaptation to changed customer behaviour and increased use of self-service solutions. Net interest income amounted to NOK 1,581 million (NOK 1,319 million) at the end of the third quarter. Repricing of the lending portfolios in the retail market and the corporate market by 28 and 40 basic points, respectively, as well as reduced borrowing costs, have strengthened the net interest rate considerably throughout The average lending margin for the period, measured against the bank s borrowing costs, has been strengthened by 50 basic points from the third quarter The average deposit margin was reduced by 32 basic points in the corresponding period. The introduction of a permanent fee to the Norwegian Banks Guarantee Fund has reduced net interest income by NOK 38 million compared with the same period in Net interest as a percentage of average assets under management was 1.64%, compared with 1.43% in the same period last year. Net commission income has increased by NOK 25 million on the third quarter The increase must be seen in conjunction with the fact that NOK 12 million related to a new security system for the online bank was charged to the 2012 accounts. The nominal income from Eiendomsmegler Vest s estate agency activities at the end of the third quarter was on a par with last year. Other operating income increased by NOK 5 million. A reduced contribution from financial instruments has the opposite effect, down by NOK 104 million compared with the same period last year. The net profit from financial instruments amounted to NOK 98 million (NOK 202 million). This is due to a significantly lower value adjustment of certificates and bonds and a negative development in the value of the bank s share portfolio. So far this year, exchange rate gains from interest rate and currency trading are NOK 10 million higher than in the same period last year. The value adjustment of other assets, liabilities and financial derivatives recognised at fair value is NOK 60 million higher than in the same period last year. The contribution to profits from associated companies amounted to NOK 41 million at the end of the third quarter, an increase of NOK 7 million from the same period last year. Corrected for the non-recurring effect of a change in the bank s treatment for accounting purposes of the security provisions in Frende Skade of NOK 14 million, however, the overall progress amounts to NOK 21 million. The Group s operating expenses have decreased through the first, second and third quarter this year. In total, operating expenses have been reduced by NOK 59 million compared with the operating expenses reported for the same period in Expenses in both the parent bank and the Group s subsidiaries are lower than reported in the same period last year. 6

7 As of 30 September, operating expenses in the parent bank (including Sparebanken Vest Boligkreditt) amounted to NOK 969 million, compared with the reported figure of NOK 1,019 million for the same period last year. Excluding non-recurring expenses of NOK 10 million relating to the integration of Sparebanken Hardanger in the same period last year, expenses have been reduced by NOK 40 million, helped by reduced personnel expenses and depreciation. The reduction corresponds to cost growth of -3.9% at the end of the third quarter, which is well within the target of average annual cost growth in the parent bank (including Sprebanken Vest Boligkreditt) of 2% in the period up until amounted to NOK 1,318 million (NOK 1,234 million) for the corporate market and NOK 223 million (NOK 268 million) for the retail market. Default on gross loans is shown in Note 6. The loss cost in the third quarter amounted to NOK 39 million, compared with NOK 26 million in the third quarter Group write-downs increased by NOK 9 million in the third quarter, and individual write-downs including guarantees increased by net NOK 21 million compared with the previous quarter. Figure 2 Write-downs Write-downs at the end of the third quarter amounted to NOK 91 million (NOK 104 million). See the accumulated figures in Notes 6, 7, 8 and 9, which also show developments in defaults of payment. Provisions in % of loans 0,80 % 0,70 % 0,60 % 0,50 % 0,40 % 0,30 % 0,20 % 0,10 % 0,00 % 0,63 % Q ,63 % Q ,64 % Q ,63 % Q ,66 % Q ,67 % Q ,67 % Q ,62 % Q ,60 % Q ,58 % Q ,61 % Q NOKm Risk and capital factors Credit risk The risk in the retail market portfolio is stable and low. A total of 95% of the portfolio is secured by mortgages with a low loan-to-asset value ratio. The risk-adjusted return on the portfolio is increasing as a result of repricing. The corporate market portfolio has a stable and moderate risk profile. Due to expectations of stringent capital requirements for Norwegian banks and lower economic growth, the growth in volume is now negative. The risk-adjusted return has increased as a result of repricing and lower financing costs. Expected losses in the figure below (based on debt-servicing ability and security coverage) show a positive development over the previous quarters. At the end of the third quarter, 85.2% of the portfolio was in the category with the lowest expected losses. Figure 1 Expected losses total portfolio 100 % 90 % 80 % 70 % 60 % 50 % 40 % 30 % 20 % 10 % 0 % 7,0 % 7,5 % 7,3 % 7,5 % 7,3 % 6,7 % 10,2 % 9,4 % 8,8 % 8,5 % 8,6 % 8,2 % 82,8 % 83,2 % 84,0 % 84,0 % 84,1 % 85,2 % Q Q Q Q Q Q < 0,2 % 0,2 % > < 0,75 % > 0,75 % Non-performing loans defined pursuant to Basel II Group write-downs Individual write-downs Provisions in % of loans Market risk and operational risk The bank s interest rate and currency risk is managed within limits adopted by the Board of Directors and is considered to be low. The bank is exposed to credit spread risk, primarily through the management of interest-bearing securities in the bank s liquidity portfolio, and to a lesser extent through proprietary trading. The portfolio mainly consists of securities issued by Norwegian banks, housing credit companies, municipalities, county authorities, state and non-financial enterprises. The bank s credit spread risk was slightly up from the previous quarter, but is considered to be moderate. The bank has stock market exposure through unlisted companies and companies listed on Oslo Børs. In its management, the bank focuses on the total exposure and concentration in companies and industries. The bank s stock market exposure (excluding subsidiaries and associated companies) amounted to NOK 681 (725) million at the end of the third quarter. The identification, analysis and follow-up of operational risk are addressed at the overriding level through expert assessments, management confirmations and events. Annual processes and the continuous registration of events during the quarter have not uncovered matters that are critical to the bank s operations. The bank s biggest operational risks are deemed to be the risk of digital attack and disruptions in the ICT systems. The bank works continuously to keep risk at an acceptable level. The bank also has a special focus on the fol- 7

8 low-up of compliance in the areas capital adequacy, liquidity, anti-money laundering, securities and bank testament. Liquidity and financing At the overriding level, the group s liquidity risk is managed using liquidity indicators, structural liquidity and the deposits/loans ratio. The Group s liquidity situation is good. At the end of the quarter, the group s net liquidity was approximately NOK 18.5 (55.7) billion. The group s liquidity indicator (6-month rolling average) is (106.6) per cent, and the bank meets the target of minimum 12-month structural liquidity by a good margin. The decrease in the liquidity indicator is a result of the bank changing its definition to ensure better compliance with the Financial Supervisory Authority s indicator. The total capital market financing amounts to NOK 59.6 (55.7) billion. The bank s relative share of covered bonds at the end of the third quarter accounted for approximately 61 per cent of the bank s capital market financing, including the swap arrangement with Norges Bank. The proportion of financing with a remaining term to maturity of more than three years was approximately 44 per cent at the end of the quarter. As a result of seasonal variation, the deposits/loans ratio was slightly down in the third quarter, but is on a par with the same period last year, at 55.2 (55.3) per cent. Rating Sparebanken Vest is rated by Moody s and Fitch Ratings. The bank s rating for long-term borrowing is A- from Fitch with a stable outlook, and A2 from Moody s with a stable outlook. Bonds issued by Sparebanken Vest Boligkreditt AS are rated AAA by Moody s. Financial strength The bank s capital adequacy was further strengthened in the course of the third quarter. This must be seen in conjunction with accumulated profits and low growth in the calculation basis. The banks meets the applicable internal capital adequacy targets by a good margin. Pursuant to the transitional arrangement, the group s Core Tier 1 capital increased by 0.2 percentage points and overall capital adequacy increased by 0.1 percentage points from the previous quarter. Pursuant to Basel II, Core Tier 1 capital and overall capital adequacy are up 0.1 percentage points compared with the previous quarter. Figure 3 Capital adequacy, transitional arrangement 18 % 16 % 14 % 12 % 10 % 8 % 6 % 4 % 2 % 0 % 11,6 % 0,3 % 1,6 % 9,7 % 2012 Q Q Q Q Q3 Total Capital 11,6 % 12,6 % 12,4 % 12,6 % 12,7 % Add. Cap. (Tier 2) 0,3 % 0,3 % 0,2 % 0,2 % 0,3 % Hybrid Cap. (Tier 1) 1,6 % 1,7 % 1,7 % 1,7 % 1,6 % Core Tier 1 Capital 9,7 % 10,6 % 10,5 % 10,6 % 10,8 % Figure 4 Capital adequacy, Basel II 18 % 16 % 14 % 12 % 10 % 8 % 6 % 4 % 2 % 0 % 16,0 % 0,5 % 2,2 % 13,3 % 12,6 % 12,4 % 12,6 % 12,7 % 0,3 % 0,2 % 0,2 % 0,3 % 1,7 % 1,7 % 1,7 % 1,6 % 10,6 % 10,5 % 10,6 % 10,8 % 16,6 % 16,4 % 0,4 % 0,3 % 2,2 % 2,2 % 16,7 % 16,8 % 0,3 % 0,4 % 2,2 % 2,2 % 14,0 % 13,9 % 14,2 % 14,3 % 2012 Q Q Q Q Q3 Total Capital 16,0 % 16,6 % 16,4 % 16,7 % 16,8 % Add. Cap. (Tier 2) 0,5 % 0,4 % 0,3 % 0,3 % 0,4 % Hybrid Cap. (Tier 1) 2,2 % 2,2 % 2,2 % 2,2 % 2,2 % Core Tier 1 Capital 13,3 % 14,0 % 13,9 % 14,2 % 14,3 % From 1 July 2013, Norwegian banks are required to have overall capital adequacy of at least 12.5% pursuant to the transitional arrangement in order to meet the minimum requirements and the applicable buffer requirements. Taking into account 50% of the accumulated profit after tax, the bank meets this requirement. Sparebanken Vest will, as a rule, meet the regulatory minimum requirement of 8% through maximum use of subordinated bond capital and additional capital, thereby freeing up Core Tier 1 capital to meet new buffer requirements. The bank has therefore issued a new subordinate loan of NOK 500 million in the third quarter, and a new subordinated bond issue of NOK 250 million for which payment will be received in early October The issues contribute to strengthening the bank s overall capital adequacy. 8

9 In early October, the Ministry of Finance decided that what is known as the Basel I floor (the transitional arrangement, cf. Figure 3) shall be extended to the end of When calculating capital pursuant to IRB models (Basel II, cf. Figure 4), several variables are used, including loss given default (LGD). The Ministry has decided that the LGD floor shall be raised from 10% to 20%. A continuation of the Basel I floor combined with minimum capital requirements and full capital buffers may lead to significant capital needs for Sparebanken Vest. The requirement for a countercyclical and systemically important capital buffer is expected to be somewhat lower, however, which means that the bank will meet new capital requirements by a satisfactory margin. Sparebanken Vest has worked actively vis-à-vis the authorities to ensure that harmonised and competition-neutral regulations are introduced in the Nordic countries. Continuation of the Basel I floor is very far from Nordic harmonisation. We expect the new Government to reconsider the Ministry of Finance s regulations to ensure that the Norwegian banking industry remains competitive. The bank s equity certificates The price of the bank s equity certificate (SVEG) was NOK as of 30 September 2013, compared with NOK as of 30 September During this period, dividend of NOK 2.50 has been paid per certificate. SVEG was traded ex-dividend from 21 March The dividend-adjusted return for SVEG in the last 12 months amounted to 53.8% as of 30 September The return on the equity certificate index (OSEEX) amounted to 28.7% during the same period. The price of SVEG on 31 December 2012 was NOK and the dividend-adjusted return was 48.0% for the first three quarters of the year. The return on OSEEX was 28.9% during the same period. Business in subsidiaries and associated companies Subsidiaries Eiendomsmegler Vest (holding 100%) strengthened its market position in a challenging market in the third quarter. It handled 12.9 per cent fewer properties in the third quarter this year than in the corresponding quarter last year. Eiendomsmegler Vest recorded a pre-tax profit of NOK 22.8 million at the end of the third quarter, compared with NOK 15.1 million at the end of third quarter last year. The improvement is the result of improved margins and an adjustment of expenses. Eiendomsmegler Vest expects the real estate market to be demanding also in the fourth quarter. Sparebanken Vest Boligkreditt AS (holding 100%) manages housing loans in the amount of NOK 43.8 (38.7) billion. At the end of the third quarter 2013, the company had issued covered bonds in the amount of NOK 39.0 (33.8) billion. In the third quarter, Sparebanken Vest Boligkreditt carried out a successful issue of covered bonds in the amount of EUR 500 million on favourable terms. Associated companies The bank s share of profit/loss from associated companies shows strong progress, and a total of NOK 20 million (NOK 10 million) was included in the accounts using the equity method in the third quarter. The accumulated profit at the end of the third quarter was NOK 41 (34) million, an improvement of NOK 7 million. Frende Forsikring (holding 44.7%) continues to see growth in customers/premiums in both general insurance and life insurance. Frende Skade had a good third quarter 2013 with a total of NOK 1,093 million in premiums divided between 98,000 customers at the end of the quarter. The company acquired 8,900 new customers in 2013, and it has an estimated market share in the Norwegian retail market of more than 3%. Its market share in Hordaland is estimated to be 17 18%. Profit development for the first three quarters of the year is good. At the end of the third quarter, the cost ratio was 18.4%, compared with 21% in the corresponding period last year. The loss ratio in the same period was 75.2%, compared with 75.3% in The company s combined ratio was 93.6% at 30 September 2013, compared with 96.2% in the corresponding period in Frende Skadeforsikring expects strong, profitable growth for the rest of 2013, and results that exceed those of last year. Frende Liv had a good third quarter, with a good development in sales, where changes in organisation and new system solutions made a solid contribution. Claims 9

10 incurred were at a normal level in the third quarter. Premiums in Frende Liv increased by NOK 18 million in the third quarter and amounted to NOK 567 million at the end of the quarter. The number of customers increased to 48,314 in the first nine months of the year, including 43,628 retail customers with 85,700 policies. The company s total assets under management amounted to NOK 2,123 billion at the end of the third quarter. Frende Liv expects continued good growth and improved profitability in The share of profit/loss from Frende Forsikring at the end of the third quarter amounted to NOK 33.3 million (NOK 39.7 million). Corrected for a non-recurring effect related to the security provisions in Frende Skade, the profit for the third quarter 2012 amounted to NOK 25.7 million. Norne Securities AS (holding 47.6%) has seen positive profit development in the third quarter compared with the corresponding period in The improvement takes place in all business areas, but the biggest change is in Corporate Finance. The number of new assignments is high, so the level of activity is expected to be high in the coming period as well. The share of profit/loss from Norne Securities at the end of the third quarter amounted to minus NOK 0.2 million (minus NOK 6.7 million). Verd Boligkreditt AS (holding 40%) is a housing credit company that is owned by Sparebanken Vest and eight independent savings banks. The company is run by Sparebanken Vest Boligkreditt AS and manages housing loans in the amount of NOK 4.0 billion. The share of profit/loss from Verd Boligkreditt at the end of the third quarter amounted to NOK 5.6 million (NOK 3.3 million). Brage Finans AS (49.9%) is a financing company that has been in operation for nearly three years. Brage Finans continued to show strong growth in the portfolio and improvement in profit performance. The improvement is primarily due to strong growth in the lending portfolio, repricing of the existing portfolio and efficient operations. Net lending has increased considerably over the last year, amounting to NOK 1,650 million at the end of the third quarter. The outlook for the rest of 2013 is good. The share of profit/loss from Brage Finans at the end of the third quarter amounted to NOK 2.3 million (minus NOK 1.7 million). Outlook International and national outlook The global economy now follows the development in industrialised countries more than in the emerging economies. The USA is leading the way. The employment and housing markets are improving, household debt has been reduced, and there is room for more private spending. As fiscal policy restrictions are relaxed, the economy will be in a position to further accelerate. The biggest risk related to the US economy is how the politicians handle the sovereign debt situation. After six quarters, the eurozone seems to have emerged from the recession. The GDP in the euro area increased by 0.3 per cent in the second quarter, and the growth was mainly driven by a recovery in Germany and France. Overall, there is a slight increase in private spending and increased net export. Public spending also contributed to the growth. In the time ahead, growth will be limited by difficult financing conditions, a low investment level and record-high unemployment figures. The development in economic key figures indicates that the downside risk is diminishing. The greatest uncertainty is associated with the continued growth in new emerging economies, and in China in particular. China represents about one-third of all production in the emerging economies. Following a growth in GDP of 7.8 per cent last year, the country is now facing a lower growth rate. Other emerging economies are also showing signs of a slowdown in the growth rate. The slowdown in growth seems to have stabilised in the last quarter, however. Weaker than expected development in the global economy, combined with more difficult financing conditions, constitute a risk to the continued development. There is reason to believe that we are facing a change of pace in the Norwegian economy, as the Norwegian real economy shows a decline from last year to this year. The GDP for mainland Norway in particular was somewhat lower than expected in the second quarter, mainly as a result of less activity in the housing market and less private spending. Growth is expected to flatten out in the oil and housing investments in the time ahead. At the same time, the increase in employment is expected to slow down. 10

11 Western Norway A steep fall in the oil price is deemed to be the biggest risk to the Norwegian economy, and to the economy in Western Norway in particular. A steep fall in the oil price will make it less attractive to invest. As many Norwegian enterprises, especially in Western Norway, have geared their business towards the petroleum sector, many mainland enterprises may experience a fall in production and, in turn, less willingness to invest. However, the export enterprises will compensate for some of the reduction in activity if the growth in the global economy continues. Optimism is still strong among enterprises in Western Norway, but also Western Norway is noticing the effects of lower growth in Norway, as expectations for the future are slightly less positive now than in the previous quarter. The enterprises in Western Norway are nonetheless reporting only minor changes in the investment level the coming six months, which indicates that the level of economic activity is still good in Western Norway. Sparebanken Vest Expectations of lower growth in the Norwegian economy in the time ahead may have consequences for the bank s volume growth. The level of growth in the corporate market is already low, governed by a less positive outlook and the consequences of new regulatory requirements for the banks. Weaker development in house prices may also contribute to less growth in the retail market. The expected development in the macroeconomy can also contribute to higher losses in the time ahead. In the first half-year, the bank carried out repricing in both the corporate market and the retail market as a result of clear signals from the Norwegian authorities that more stringent capital requirements and higher risk weighting of housing loans will be introduced. The repricing has had an effect on profit. Developments in the time ahead will be governed by the tightness and pace of implementation of new capital requirements, and possibly by the absence of harmonised requirements between different participants in the Norwegian bank market. The Ministry of Finance s decision to let the Basel I floor continue to apply does not contribute to harmonisation among the Nordic countries and will impair Norwegian banks competitiveness. The signals from the new coalitiin government give hope of greater Nordic harmonisation of the regulations. The bank is well on track in relation to its target of a 2% average annual cost growth in the parent bank in the period up until The goal is to implement measures throughout 2013 that will have additional accounting effect from and including The bank s associated companies are also expected to continue their positive trend and to make a positive contribution overall in 2013 as well. Bergen, 22 October 2013 The Board of Directors of Sparebanken Vest Trygve Bruvik Marit Solberg Birthe Kåfjord Lange Chair of the Board Deputy Chair Arild Bødal Richard Rettedal Øyvind A. Langedal Anne Marit Hope Sivert Sørnes Kristin Axelsen Stein Klakegg CEO 11

12 Income statement, group Notes 01/ / / /09-12 Q Q 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 Pre-tax profit Tax Profit for the period Majority share of the profit for the period Minority share of the profit for the period Equity certificates' share of profits divided by the number for equity certificates 4,80 3,81 1,85 1,60 6,57 Diluted profit per equity certificate 4,80 3,81 1,85 1,60 6,57 Statement of comprehensive income 01/ / / /09-12 Q Q Profit for the period Estimate variances, pensions Tax effect on estimate variances, pensions Comprehensive income for the period Majority share of the total profit for the period Minority share of the total profit for the period

13 Balance sheet, group Notes 30/ / /12-12 Assets Cash to and receivables from central banks Loans to and receivables from credit institutions Net lendings 7, Shares at fair value through profit or loss Commercial papers and bonds Financial derivatives Shareholdings in associated companies Deferred tax asset Other intangible assets Tangible fixed assets Prepaid expenses Other assets Total assets Liabilities and equity Liabilities to credit institutions Deposits Securitised liabilities Financial derivatives Accrued expenses and pre-paid income Pension commitments Deferred tax Other provision for commitments Tax payable Subordinated loan capital Other liabilities Total liabilities Equity certificates Own equity certificates Premium reserve Equalisation reserve Total equity certificate capital Primary capital Gift fund Compensation fund Total primary capital Other equity Minority interests Total equity Total liabilities and equity

14 Cash flow statement, group 01/ / / / Cash flows from operations Interest, commission and customer fees received Interest, commission and customer fees paid Interest received on other assets Interest payments on other funding Payments to other suppliers for goods and services Payment to employees, pension schemes, National Insurance contributions, tax withholdings etc Payment of taxes Dividends received on securities for trading purposes Net receipts/payments on sales/purchases of securities for trading purposes Net cash flow from operations Cash flows from investment activities Payments received/made relating to customers' loans Net receipts/payments on loans to credit institutions Dividends received on securities not for trading purposes Net receipts/payments on sales/purchases of securities not for trading purposes Net receipts/payments on sales/purchases of other financial instruments Payments related to associated companies Payments received from the sale of operating assets etc Payments made on purchases of operating assets etc Net cash flows from investment activities Cash flows from financing activities Payments received/made relating to customer deposits Payments received/made on deposits from Norges Bank and other financial institutions Receipts related to issues of subordinated loan capital Payments related to redemptions of subordinated loan capital Receipts related to issues of bonds and commercial papers Payments related to redemptions of bonds and commercial papers New equity certificates Dividends paid / Gifts for the public benefit Net cash flow from financing activities Net cash flow for the period Net change in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period

15 Changes in equity, group Equity certificates Own equity certificates Premium reserve Equalisation Primary reserve capital Gift fund Comp. fund Other Minority equity interests Equity 31 Dec Convertion as of 31/ by introduction of IAS 19R - pension corridor Tax effect by recognition of corridor Equity per 1/ converted acc. to IAS Total Result third quarter 2012 converted accord. to IAS Other comprehensive income 0 Purchase/sale of own equity certificates -2-2 Issue of equity certificates - dividend Payment of dividends and gifts Equity 30 Sept Equity per 1/ converted accord. to IAS Result 2012 converted accord. to IAS Other comprehensive income Purchase/sale of own equity certificates Issue of eqiute certificates - dividend Payment of dividends and gifts Equity 31 Dec Profit for the accounting period Other comprehensive income 0 Purchase/sale of own equity certificates Payment of dividends and gifts Equity 30 Sept

16 Notes Note 1 Accounting principles The consolidated accounts for the third quarter 2013 have been prepared in accordance with the requirements of the Securities Trading Act, the Financial Supervisory Authority of Norway s Regulations relating to annual reports and accounts, and IAS 34. With the exception of amendments to IAS19, Employee Benefits, the accounts have been prepared on the basis of the same principles and using the same estimate methods as the annual accounts for The accounting principles are described in the annual report for The introduction of IAS19R means that it is no longer permitted to use the corridor method to recognise estimate variances. The difference between the balance sheet value of pension commitments and estimated pension commitments has been recognised directly against equity upon implementation. The amendment to IAS19 also involves a new classification of pension expenses in the income statement in that the expenses are divided into three components (pension earnings, net interest expenses and change in value). The earned pension rights for the period and net interest expenses are presented under the ordinary profit/loss, while estimate variances will be recognised in their entirety in the statement of comprehensive income in the period in which they arise. Comparative figures for 2012 have been converted in accordance with the amended accounting standard. All amounts are stated in NOK million and apply to the group unless otherwise specified. Conversion effects relating to the implementation of IAS19R Equity certificates Own equity certificates Premium reserve Equalisation reserve Primary capital Gift fund Comp. fund Other equity Minority interests Reported equity 31 Dec Convertion as of 31/ by introduction of IAS 19R - pension corridor Tax effect by recognition of corridor Equity 1 Jan IAS 19R Total Reported equity 31 Dec Convertion as of 31/ by introduction of IAS 19R - pension corridor Tax effect by recognition of corridor Equity 1 Jan IAS 19R The consequence for the comparative figures in the income statement for the third quarter 2012 is a reduction in pension expenses of NOK 28 million on the introduction of IAS19R. This is primarily due to corridor depreciation no longer being used in relation to the pension expense. The corresponding effect for the whole 2012 financial year amounts to NOK 92 million, which is also due to the plan change implemented in the fourth quarter The accounting effect of the plan change in the final quarter of 2012 is greater pursuant to IAS19R because estimate variances that helped to reduce the plan change effect are no longer recognised in the accounts. Estimate variances shall be recognised in their entirety in the statement of comprehensive income in the period in which they arise. For 2012, this amounted to NOK 350 million before tax. A discount rate of 3.8% was used in the calculation that forms the basis for the book pension commitment as of 30 September (implemented on 1 January 2013). In the most recent guidelines from the Norwegian Accounting Standards Board, it was increased to 4.1%. Seen in isolation, this leads to a reduction in gross pension commitments. The bank has nonetheless not chosen to carry out a new calculation because the new K2013 mortality table, which is to be implemented on 31 December, is expected to have the opposite effect on gross pension commitments. IFRS 13, Fair Value Measurement, became applicable on 1 January The standard contains principles and guidelines for measuring the fair value of assets and liabilities for which other standards require or allow fair value measurement. The standard has not led to changes in the Group s income statement or balance sheet, but it will require that more comprehensive information be provided in the notes in both the interim and annual accounts. Reference is made to Note 10, among others, which describes financial instruments measured at fair value and a classification relating to how objectively they can be valued. For a description of valuation techniques, see the annual report for