Okay.
Okay, good afternoon, everyone. Welcome to this presentation for international investors and analysts. Today, we have Benedicte Schilbred Fasmer, CEO of the bank, and Inge Reinertsen, CFO. My name is Stian Helgøy, and I'm Head of Investor Relations. First of all, we're gonna give you a brief presentation of our quarterly figures. That will take about 10-15 minutes, and after that, we open up for questions. Then I will give the word to Benedicte.
Thank you, Stian, and again, good afternoon and welcome to the presentation of our results for the fourth quarter in 2021. When we sum up after 2021, 40% of SR-Bank 's loan book is outside our core region, Rogaland, which you see to the left here, where the bank was started and which was the starting point, you know, in this region. We have since early 2000 started to grow in Vestland, Agder, and last three years also in Oslo and Viken, and our ambition now is to be a financial group for the south of Norway and not only for this region. If you look at the growth over the last year, we grew by NOK 11.1 billion.
Five of those were in Oslo and Viken, three in the Vestland region. As you see from this slide, Rogaland, our home turf, has been flat over the last three years. I'm thus very happy to tell you that within the private market, our market share has remained the same with approximately 3% yearly growth. While if we look at the corporate market, we've had a decline very much explained by the fall in the offshore sector and us taking down the exposure in that industry. We have defined our market, as I said, as the southern part of Norway or south Norway. Three out of the four largest cities in this country are within that region.
We have the highest density when it comes to population. We have low unemployment, and we have also a well-established corporate market, which gives us a good basis for further growth in southern part of Norway. If we look at the fourth quarter, our results before tax came out at NOK 1,073 million, which is up 56% compared with fourth quarter of last year. The return on equity was 14% in the quarter, and the improvement is explained by better net interest income, higher other income, better financial results on financial investments, as well as lower impairments on loans.
We also communicated in the third quarter that we were merging ODIN Forvaltning, which is our asset management company, with the asset management company of the SpareBank 1 group. The result of that sale came in in the fourth quarter with a gain of NOK 92 million. If you take that away, our return on equity would have been 12.5% in the quarter. The impairments were with a negative sign here, which is in essence positive on the result. We had NOK 138 million in reduced IFRS impairments and NOK 114 million in increased individual losses. The individual losses are still in the offshore related segments and on named customers that we've had for a number of years.
If we look at the year as a whole, the net result before tax was 52% above last year's and came in at NOK 3,828 million. We delivered 12.6% return on equity, which is nearly double of the previous year's at 6.4%, which as you may remember was influenced by COVID-19, as well as higher impairments and weak financial results on financial investments. This year's result had also benefited from a record result in this SpareBank 1 group, and particularly Fremtind Forsikring, which is our non-life insurance company, which delivered a result of more than NOK 3 billion alone, and a return on equity of more than 28%.
The impairments in 2021 are reduced compared to 2020, and the NOK 192 million is composed of NOK 231 million, I would say, negative impairments in the corporate market, while we've had reversals in the private market of NOK 39 million. Despite a decline in net interest income as well as some increased costs, we have increased the net result by more than NOK 2 billion crowns to NOK 3.8 billion Norwegian crowns.
As I mentioned, we grew by NOK 11.1 billion, which equals 5.1%, and you see the composition of that growth on the slide here between the Retail Market, our new segment which we call SME and Agriculture, and Corporate Market which is, you know, larger corporate clients, which grew by 6.4%. We also have benefited from growth in deposits of 16.5%, or NOK 19.5 billion. If we exclude the growth in the public sector, the deposit growth was at 12.1%.
The high growth in deposits can be explained by COVID-19 effects and also lower consumer spending, so I think in the private markets as well as an increased savings. If you look at the corporate market, as I said, a large portion of the deposit growth came from the public sector, about NOK 8 billion out of the NOK 12.5 billion deposit growth came from the public sector.
We have a strong capital situation with the core capital ratio of 17.4% at the end of the year, which is above the requirement from the authorities of 15.2% and also above our internal measure, which is at 16.7%. The cost to income ratio went from 38.3% in 2020 to 40.2% in 2021. The increase is explained by bonuses to the whole organization, increased activity in ForretningsPartner, which is our accounting business and where we acquired a company in April of last year when that, which has.
As well as the real estate business, which both areas have a much higher cost to income ratio than the banking business as such. For the year as a whole, the costs grew by 13.7%. If you exclude bonuses, the real estate sector or activity increase in the real estate sector and ForretningsPartner or the accounting business, the cost growth was at 2.2%. The board will propose a dividend of 6 NOK per share, which is 49.7% of the group's result in 2021. I think I've touched upon most of these financial targets in our performance. I guess we can. It's worth mentioning that the total earnings per share was 12.1 NOK per share, and again, the dividend proposal is at 6 NOK.
I'll give you or hand you over to Inge, who will go a bit more in detail on the numbers.
Thank you, Benedicte. I will briefly comment on some of the lines in our P&L, starting with the net interest income, which decreased by NOK 152 million for the full year 2020. The main reason for that is the declining NIBOR from summer and up to end of year. We managed to increase the net interest income by NOK 16 million in the fourth quarter. I will also give a further explanation of the net interest income on the following page. If we let's look at net commission and other income, it grew by NOK 321 million for the full year and also with NOK 49 million in the fourth quarter.
We had significant contributions of all business areas. We managed to increase the net commission and other income on all business, on all segments except from payment facilities, and that is due to lesser travel activity from our customers due to the COVID situation and probably will be temporarily. The net income on investment securities came in at NOK 1.037 billion, which is a very strong year with respect to financial performance.
If we look at the 344 for the fourth quarter, it's mainly influenced by another very strong quarter from the SpareBank 1 Gruppen, which is the product holding company that we own together with the other SpareBank 1 Alliance members, and also due to the 65% ownership from SpareBank 1 Gruppen in Fremtind Forsikring, the non-life insurance company which had another very solid quarter. Also, we had the contribution from the transaction with SR-Forvaltning, our asset management company. Thank you, Stian, which contributed with NOK 92 million for the quarter.
Total expenses grew by NOK 328 million, but that is mainly due to the strategic activities where we have acquired Treff Regnskap, the accounting company, and also some other actions taken to strengthen, especially our net commission and other income and also the variable compensation accounts for NOK 100 million of that increase, which was entirely off the P&L in 2020. Now with a strong result, we have a variable compensation for our employees within the parent bank for 2021. We will comment briefly on the lending and the deposit margins. We lost 29 basis points on the retail margin on the lending side due to the increased NIBOR. We had change of the interest rate as of the ninth of November.
As the NIBOR has increased steeply during the quarter, we have not been able to fully adjust the interest level, and thereby maintaining the margin. On the other hand, the kind of too late adjustment of margin gives us a stronger net interest margin when it comes to deposit, but the balance is of course larger on the lending side than on the deposit side. That's why they will not fully balance each other. We expect more interest changes or increases of the interest rate in the Norwegian market, and probably we will have three increases or hikes during the next year. Then also we expect NIBOR to increase, so probably this pattern will maintain during the full year 2022.
As we eventually hit the top of the interest curve, we will then hopefully have expanded margins since we are adjusting the deposit margins to a lesser extent than we adjust the lending margins. If we look at the lending volume growth, we came in at 5.1% for the SR-Bank group as such, which was from 4.6% within the retail market, 3.1% within the SME and agriculture, and also a 6.4% in the corporate market. We believe that activity will be strong within our market area. The unemployment rate is very low and the PMIs are very positive with respect to revenue, hiring of people, and so on.
We are quite optimistic that we will have strong activity within both the corporate market and the retail market for the upcoming year. If we look at deposit, it grew by 8.9% within the retail sector, 10.7% within the SME and Agriculture, and a very strong 26.7% within the large corporate market. This shows that the liquidity within both the corporate sector and the households are very strong. We have even with rate hikes that we expect, we believe the ability to service the loans will be strong both within the retail and the corporate sector. As I mentioned, we had an increase on every line here on the net commission and other income, except from payment facilities. We increased the savings and placement line by NOK 21 million.
Even with pressure on the margin, we have more than offset that with a higher volume. Also, we increased the commission on the insurance products by NOK 25 million, which shows that we are able to build portfolio with very stable revenues. Also a very good year for our real estate broker, which increased the revenue by NOK 44 million and came in with a net result of NOK 60 million before tax. Guarantee commission ten million in increase, and as you see, a very strong quarter on arrangement and customer fees and also a very strong full year for that area, which exactly doubled the income on that area.
Also, the commission income from ForretningsPartner more than doubled during the year. If we look at operating expenses, this high activity, of course, has an influence on the cost of the group, and perhaps, Stian, you will flip into the next page because here we have broken down the 13.7% increase, as Benedicte mentioned. If you look at the cost from ForretningsPartner, which is the accounting company, it increased by NOK 143 million, but then also the income grew by NOK 161 million. If we look at the real estate broker, the EiendomsMegler 1, it increased NOK 34 million within the cost base, but then on the other hand, increased revenues with NOK 43 million.
Even though it has a high density of cost, it's very important to us in the value chain thinking where we are aiming at selling as many products as possible to our customer, and it also contributes to the bottom line of the P&L. We have taken significant action on distribution and digitalization to strengthening our distribution power and make the bank more effective. As commented on, since we had a very strong financial performance, variable compensation to our employees account for 4.2% of the total cost increase this year. Of course, if we have a lower profitability, this will also imply a lower cost for the upcoming year.
Altogether, if we look at the other personnel expenses and then also the efficiencies and other expenses, we had only a marginal increase of the cost base of the total group of SR-Bank. Looking at the impairments, we are very happy to conclude that we are out of the challenging environment that we experienced in 2020. As commented on from Benedicte, this quarter even gave us a net reversal, even though we have strengthened even further the provision on a handful of our offshore exposures. We have also NOK 138 million in reversal of the IFRS 9 impairments.
Altogether, we believe that we have shown both the resilience of our portfolio and also been kind of proved that our provisioning from a challenging 2020 was prudent in the way that we now are on rock-solid ground with our portfolio as kind of the macroeconomic climate stands as of today. Benedicte, I will hand the word over to you to comment on sustainability activities.
Yes, I think, well, we have sustainability, as you know, a core element in our updated strategy, and we are working on how to kind of report progress both, you know, for ourselves and as well as for you as our investors and owners. We are eager to supply both capital products and services to clients who are, you know, already in a sustainable business model or to those who have a wish or an aim to improve its sustainability going forward. We have defined sustainable credits or capital financing as projects which improve the carbon footprint and has a gain when it comes to sustainability and climate emissions.
It can either be on a 100% basis if the whole company is in such an industry or it can be part of the company and the loan to that company if it's part of its activities that is within that category. I thought it was quite interesting to share with you that one or two of the five kroner is actually financing of what we call sustainable activity in 2021. Out of the new loans on the corporate market of altogether NOK 29 billion, which is the gross growth in the corporate market, NOK 5 billion qualified as sustainable.
Similarly, on the markets activities in SR Markets, we had altogether NOK 400 million income allocated to a project or companies within the renewable energy, drone technology, and food security business. We are now finalizing the framework for sustainable financing and activities. It will be built on the EU Taxonomy, and it will hopefully be of use and clear to both us, the clients and our investors what we can, you know, put in the sustainability category. For the moment, we've been fairly conservative in our approach, so these numbers are preliminary, but it gives you still a flavor of which direction we are moving on the sustainability financing front.
I think, you know, summing up, SR-Bank has a business with a good range of products and services, and we are managing our business in an efficient manner. We have significantly lower impairments in 2021, and I think we've put the challenging times, particularly in the offshore sector, behind us, and also hopefully COVID-19 will, you know, be back to normal in not too long. The corporate market in Southern Norway are expecting growth and good growth in 2022. The housing market is strong and stronger also outside Oslo, which is, you know, a bit different from what we've seen previously.
We also see increasing housing prices in this region, which has been fairly stagnant over a number of years. We believe that we are well positioned for further growth. Our financial ambitions remain the same with a long-term target of delivering return on equity of 12% while maintaining a cost of income, cost to income ratio of 40%, albeit with an increased portion of our business with a much higher cost to income ratio than the targeted 40. This means that we have to be very diligent and efficient in how we develop the parent bank. We think our growth strategy in south of Norway will be profitable and also there are good possibilities for us in, you know, market-wise, to expand.
We also, last but not least, expect the interest rate level to increase, rate hikes three times in the coming year by the central bank, which with some delay will also give us an improved interest margin in due course. With those comments, I think I'll stop there and open up for questions.
Thank you, Benedicte, and we open up for questions. If you're logged on Outlook via a computer or a tablet, please press the unmute button. If you're logged on or dialed in by phone, please press star six to unmute. Please state your name and company you're working at before asking the questions. Please go ahead.
Okay. I tried to raise my hand.
Yes. Go ahead.
Perfect. Thanks for the presentation. Three questions from me. Maybe we can start on the growth side. You mentioned that outlook for 2022 looks good. Is it possible to be a bit more concrete? For instance, do you expect lending growth in 2022 to exceed the level in 2021?
Well, I know that we gave you some, you know, quite firm indications last year, Håkon, on, you know, where we were heading on the growth side. We have, you know, being hopefully now back to normal, we are, we will not be guiding on as we did, you know, in the troubled years. I think you can expect us to have similar ambitions to what we had last year, if that could be of help to you in your guidance.
Absolutely.
Sorry Håkon, just to give some more color on that. Of course, the most important thing for us is to have a profitable growth. We are seeing signs now that the market in our old market area, Rogaland, that the lending growth is picking up. It has been around 3% for the last two years, while the average for the rest of Norway has been between 5% and 6% in the same period. Now we see that unemployment rate has come down to 2.1%, and also housing prices are increasing by 6%-7% more than the average in Norway. Depending on that, we have to see, but most importantly is to have a profitable growth.
Perfect. Just a quick follow-up on that one. In your three different markets here, retail, SME, and corporate, where you see the strongest credit demand at the moment?
I guess the demand, you know, there is a fierce competition in all three segments. I mean, that's, let's, you know, just state that. I think, if we start with the larger corporate, there is an increasing margin squeeze, and particularly on financing which can be characterized as sustainable or green. There is a very high appetite on the banking side on those. Otherwise, I think, you know, our experience is that the market is as we see. I mean, we are a bit in and out all of us, aren't we, in the different industries. There are no major shifts as such at this point.
When it comes to the SMEs, what we're trying to do is, we put the ForretningsPartner business into that segment because the overlap between the accounting business and the banking business is largest in the SME segment. We believe that we will be able to, you know, have synergies on the banking and accounting side developing in that market. We also are, you know, the strongest one in accounting in the local group banks, is that?
Agriculture.
Oh, agriculture. Thank you. Which also could give us a potential to develop that sector or industry even further. The main thing is also that the way of working with SMEs vis-a-vis, you know, bigger corporates is quite different. That's also a reason for why we chose to split that into two different segments. When it comes to the private market, I think we had a very special year in 2021 with the situation around Sbanken, which gave, you know, bigger shifts and movements within the retail market than we've seen for years.
There is a fierce competition, particularly on the, you know, very core standard high quality private banking, you know, private market products, you know, loans, or housing loans with loan to value less than 75% and all that, which also has a margin pressure on it. We've decided not to, you know, go as low in margins. We believe that our clients appreciate also the advice and the relationship with the bank. So far, that strategy has proven successful.
Perfect. Just a bit, there's a smaller question on the growth side and on the green lending. Are they? I think you mentioned 20% or NOK 5 billion in gross lending. So is it possible to add some flavor if the margin there is higher than the average and the risk weight is higher than the average, just to get some flavor on what kind of lending that actually is?
Just to take the numbers first, the gross loan growth in our big corporate market was NOK 30 billion or NOK 29 billion, and the green or sustainable share of that was NOK 5 billion. All right? That is not the same as the net loan growth. You know, with all the new loans coming on the book, one out of five kroner was in, you know, in the sustainable of a sustainable character. We've maintained the same level of return requirements on those financings as we've done to other parts of the portfolio. There is no difference from, you know, in those financings in our portfolio that, you know, compared to the rest of it, to my knowledge. You agree with that, Inge, yeah?
Yes. We have to be careful with respect to credit quality because even if it's kind of green, it doesn't mean that it's without risk. We are all the time working on our kind of credit policy to make sure that we underwrite the right credit. With a lot of new companies on the Euronext Growth, it doesn't mean that they are necessarily bankable in our books. We are trying to really pick the right risk as we move forward on kind of achieving our ambitions on the ESG side.
Thank you very much. That was very helpful.
Thank you, Håkon.
Thank you, Håkon.
Thank you, Håkon.
The next person on our list is Jan Erik Gjerland from ABG.
Good afternoon. Some couple of questions from my side as well. Just touch upon the growth as Håkon did. Would you say that it's easier now to see growth in Stavanger region also for large corporates and SMEs, since you said that the book was sort of flat the last three years? It seems like you have been growing the personal market side or household market a little bit more than the rest. Is the shrinking of the large corporates and SMEs now done, so to speak, or should we expect more to come also in 2022?
Well, the decline has been, you know, to a large extent explained by the fact that we've lowered our exposure in the offshore sector. You know, that's the main explanation, Jan Erik, and we certainly hope that and also that some businesses have been sold, and thus the loans have been, you know, paid back. Some major loans or bigger size. We certainly hope to see growth in this region. Our general impression is that this region has, you know, a quite interesting mix of competence and experience within technology, which is now kind of being channeled into more sustainable business models and also to make the oil and offshore sector more sustainable.
It will be an important sector, you know, in many years to come.
Perfect. On the cost side, how do you see the cost inflation now versus sort of what you saw in 2021, where it was sort of not coming as fast? Now it looks like it's coming very fast from all parties, all kind of cost levels, both wages and other costs.
Mm-hmm.
How should we read your sort of potential cost increases in 2022? Of course, maybe not the bonuses will be repeated, et cetera, but you will still have probably some wage inflation and other cost inflation coming. How should we read your sort of cost income target into 2022?
We are very aware that we have an underlying cost pressure. We have a low unemployment rate of 2% within our region, which is equal to a cost pressure on wages. The measures taken by the Norwegian authorities to help out the corporate sector and also to support the retail sector when it comes to good actions on temporary layoffs and so on. Altogether, that has made the Norwegian economy perform very well. As activity now picks up again, we believe that a lot of our corporate customers they will need to hire more people. Of course, probably that will lead to a larger migration of workers from abroad back to Norway. It will put the pressure on the cost side.
Also, we have a lot of activities within SR-Bank that has been kind of temporarily suspended due to the COVID situation, where most of the people have worked from their home office. We haven't had many kind of meeting points with our customers and so on. Of course, that will also add some cost. To make sure that we have something to offset that, being more effective will become even more important, and that also means taking a significant growth within the cost base that we already have. It's kind of my job to be professionally concerned. I'm paid to be concerned as the CFO.
Of course, the cost side is something which kind of occupies my attention to make sure that we, as it's said, never waste a good crisis, that we kind of take the right measures as things are getting more back to normal, where people go to work as we did two years ago.
Okay. Some more cost to come is the theme then after this. Finally, on the margin side, you seems to have some 29 basis points downtick on your mortgage or household margin, which is impressive, and you have the 40 basis points downtick on the NIBOR. How successful have your sort of repricing been for the household mortgage book do you think? And how is it looking now into the first quarter of 2022?
We had a rate increase effective from 9th of November . We have another one that was in effect from January 31st. Of course, due to kind of the nature of how the interest rate is changed from the bank to the customers, we are lagging definitely kind of as an industry. As we have kind of faced the sharp incline of the NIBOR due to our kind of duty to have six weeks in advance notice towards the customer and also the fact that NIBOR increases prior to the rate hike from Norges Bank, we are kind of continuously too late on adjusting the net interest rates against the customer.
Of course, every time we change the interest rate, we change it less on the deposit side than on the lending side. All else equal, that will make us gain margin, but it's kind of offset by the sharply increasing NIBOR. I'm kind of looking forward to the top of the rate curve. As we are kind of climbing the rate curve, it is challenging to expand the margins. This kind of hits us the most in the beginning of this period until we have started changing the interest rate.
Due to kind of the fierce competition among the banks, it is challenging to increase more than 25 basis points, and it's also challenging to increase the interest rate kind of on other point in time than when the central bank increased the rate. This is putting a pressure on the net interest margin, and thereby also the volume growth becomes all other equal, increasingly more important.
Indeed. On the bright side, on the COVID-19 provision, is so that you have more to give back to your shareholders from those kind of provisions? Or is a lot of it taken as losses in the offshore sector?
At all times, we aim to kind of have the exact right provision. It's our best estimate, so that means that we cannot kind of exclude the probability of having more reversals. We regard ourselves as conservative, but only to some extent. The figures that we present this quarter show that we believe it's right to reverse some of the collective impairments from the IFRS 9. Because if we look outside the window, it is a kind of better climate at this time, 2022, than it was one year ago.
At the same time, we have, instead of having even a larger reversal, we have decided to increase the provision on a handful of offshore engagement even further. Of course, our customers, they are aiming at having utilization for their fleet. We are kind of monitoring the situation, and of course, there is also a probability that we can have even more reversals.
Perfect. Thanks for your answers. That's all from my side.
Thank you, Jan Erik Gjerland.
Thank you, Jan Erik Gjerland. The next person on our list is Vegard Toverud from Pareto.
Oh, thank you for taking my questions. I have 4, I think. The arrangement fees have been fluctuating, but ended with a very strong year and a strong quarter. What are your expectation for arrangement fees for 2022?
We don't have a kind of budget on that, Vegard. Of course, it will be kind of linked to the general activity within the market. We have a very strong cooperation in between the corporate division and our Markets division, where a large share of the projects that we work on is kind of on customers that we also have credit line for on loan engagement. We try to have even kind of more synergies coming up. Of course, it's dependent on the general activity.
Yeah, of course. If you look from your position now and what's going on, would you say that 2021 was artificially high, or is this a level that's also achievable for 2020?
I definitely think it's achievable also for the upcoming year. We know that activity within kind of this sector within Norway has been very high for the last year. Of course, it's difficult to predict, and I believe everyone's guess is as good as mine on that topic actually.
I think, you know, to give you some indication, Vegard, you have to remember the SpareBank 1 Markets activities are mainly with companies that are not listed and on the M&A and private placement side, you know, in those types of businesses. The activity in that sector or in that segment has been, you know, particularly high over the last couple of years. It's difficult to say exactly, you know, where it ends up.
Okay. Thank you very much. Inge, you mentioned that you as CFO are concerned about the costs. Were you more concerned about the cost in Q4 than you were in Q3 or Q2?
No, actually not, Vegard. We have taken kind of measures to significantly reduce the cost during the COVID situation. Something kind of has been deliberate, some things have been kind of caused by the COVID situation in itself. As things are kind of coming back to a more normalized situation, I believe our attention needs to be even higher on the cost side to prevent that we have spending which is not kind of linked towards increasing the revenues for the SR-Bank Group as such. My concern on the cost side is not new, but it's more easily to spot in the fourth quarter than in the previous quarters.
Excellent. What do you expect as the cost income for ForretningsPartner?
It's 85%.
Yeah, 85%. If you have a margin on this activity of 15%, you will be kind of in benchmark with the industry as such. A 15% margin is equal then to 85% cost/income. If we were only kind of having focus on the KPI cost/income ratio, we shouldn't have had either the broker, the real estate broker nor the accounting companies within the SR-Bank Group. On the other hand, we would have been even more dependent on net interest. We believe that in order to achieve our 12% long-term return on equity target, we should also have a significant contribution from net commission and other income.
You still have the 40% cost income ambition.
Yeah. That's a long-term target, Vegard. We also communicated today that we expect our cost income ratio short-term to go up somewhat as a result of increased, you know, part of our business being within, you know, the high cost to income areas, which ForretningsPartner and EiendomsMegler 1 are the two companies, you know, in that category.
What would you expect then as the cost/income for 2022?
We haven't kind of posted any specific target. It's also important to bear in mind that as we measure the cost/income ratio, you also have the finance line within this measure. From time to time, the variation on the income side thereby is more volatile in the income than it is on the cost side. In the long term, we are pinpointing the 40% target and we have of course a lot of quarters where we are even below 40%. Then usually it's due to a strong contribution from the finance line.
Just lastly from me.
Yeah, one thing which is worth remembering. I guess maybe it doesn't impact that particular ratio, but when we've now sold the asset management company, SR-Forvaltning AS, and which has been, you know, come in as other income, you know, in our accounts up until now. When we now merge that with ODIN Forvaltning, it will kind of transfer, transform into financial or return on investments. So it will kind of move between lines in the P&L. That won't impact the cost to income ratio.
No, that is correct.
It's nice maybe for you to be aware of anyways.
Just, finally then to understand the ambition of 40%. When you are referring to it as a long-term target, what would be long-term? Is that 2023, 2024, or even longer out?
No, it. When I say the long-term target, it doesn't mean that it's not kind of possible to reach it on the shorter term. We are kind of aiming at this at all times, but we are aware that we have some kind of factors influencing on this target. We also have an internal target when it comes to the cost income ratio, excluding the finance line on the parent bank, which is a more stable KPI. That doesn't cover the entire SR-Bank Group. That's why we are. It's like driving a car or a plane. You have a lot of instruments that you have to monitor closely.
The cost income ratio, we also measure both by the group and by the parent bank with and without the financial gains.
Okay, thank you.
Thank you, Vegard.
Thank you, Vegard. The next person on our list is Mr. Michael Briggs. Please.
Hi, good afternoon. It's Michael Briggs from Fitch Ratings. Thank you very much for your presentation. I have a couple of questions related to asset quality actually. Firstly, I wanted to clarify if the drop in Stage 3 loans in the fourth quarter, I think was around 20%. Is it solely linked to the write-offs in offshore?
Yes. We have during the year significantly reduced the Stage 3 exposure. The main contribution from that is that now I have to look at my colleague here, what's the right word in English as we.
Støtera.
You have that in the English translation?
We have.
No
kind of taken the provision and then wiped away the
Write-off. You can.
the write-off to
The recognition?
Take it off our balance sheet.
Yeah.
You derecognized these loans from the balance sheet?
Excuse me?
Sorry.
They're recognized?
Yes, they're recognized.
Yeah.
Okay.
It's also a result of the financial restructuring in one of our divisions.
Understood. It, for me, begs the question, if you could guide us, what is the future risk cost guidance? 'Cause you've been deleveraging in the risky area, which is this offshore, for a couple of years. The previous through the cycle cost of risk, which was, I think about 25, maybe 30 basis points, depending on the period you take into consideration, but now you got rid of that, pocket of risk to a large extent. Just what do you think is a more natural, normalized level of risk cost for the bank these days?
If you look at it through the cycle, we regard a level of 15-18 basis points to be what we'd regard as a normalized level. If you then look at 2021, which took us to 9 basis points, that's kind of even lower than what we regard as a normalized level. Of course, that will also be influenced by if we have new net reversals. We can of course end even lower than that also for the upcoming years.
Understood. Thank you. I have a question about commercial real estate, 'cause this is the, let's say the usual suspect, always, as a potential, risky lending. However, it remained quite resilient through the pandemic. Of course, the rental income was supported by different state measures. Now them being withdrawn and bearing in mind these mega trends that might be affecting office space and retail space, is there a potential risk there that can start materializing, and if yes, when?
Of course, that is a very valid question. If we look at the resilience throughout the challenging five years period that we have behind us, the corporate real estate portfolio has performed very well, what has been on our balance. We also believe that activity will pick up again. Even though we will kind of, all other equal, work more hours from our home office, still we will need the kind of the regular office to meet and have meetings. We haven't kind of experienced that there is kind of a significant reduction in demand for square meters within the corporate real estate sector within our region.
As we also are quite positive on the PMIs and expectations on activity, we are not concerned that either the rate hikes nor the kind of change in our way of working should have a significant negative impact on the corporate real estate sector.
Understood. Thank you. Maybe I saw in the presentation for the third quarter, there was guidance with regards to the issuance of senior non-preferred bonds. You said 1.3 billion, of which you already issued EUR 700 million around. I'm just wondering, can you reiterate this guidance? 'Cause it's not in the presentation anymore, this EUR 1.3 billion senior non-preferred issuance.
That was NOK 1.3 billion.
Euros
Euros. In euros, yes. I'm now looking at my colleague here.
Yeah.
I believe we have commented on the MREL demand that says 34.4%, but there has been a change or reduction in the financial authority's demand when it comes to them. We had a large issue last year, which took us kind of ahead of the path of how to achieve the requirements within 2024.
There's only been minor changes from the third quarter to the fourth quarter with our requirements. As Inge said, the requirements are a little bit less than we posted in the third quarter, but they're not significant changes.
Okay. Understood. Thank you very much. That's all from me.
Okay. Thank you very much.
Thank you.
Any further questions? We've now come to the end of the presentations, but I think we got time for yeah, one more if anyone. No? Then I would like to thank you all for participating on this webcast, and thank you very much.
Thank you. Bye-bye.
Bye-bye.