Good afternoon, everybody, and welcome to this fourth quarter presentation of the SpareBank 1 Sør-Norge Group. My name is Inge Reinertsen. I'm CEO of the company, together with me, Mr. Roald Snippen, Acting CFO, and Mona and Morten, who are in the IR department. I will give you a brief presentation of the main figures and the main events for the fourth quarter. Please bear in mind that the fourth quarter figures isolated are for the new bank, SpareBank 1 Sørøst-Norge, after the merger. The other figures from earlier quarters and full year 2023 are pro forma figures to make them comparable with what we present for the fourth quarter. 2023 has been a very good year for the SR-Bank Group, of course, with the main happening being the merger with SpareBank 1 Sør-Norge October the 1st.
Also, we have acquired two local broker companies within real estate broker companies in Bergen and Oslo, strengthening the real estate broker position and also the retail area of the bank, and we have also opened one new branch in Sandvika just outside Oslo. Together, this leaves us with a very strong footprint within the southern part of Norway, which also is underpinned by the strong growth that we present. We had the merger October the 1st last year. We will also have a technical integration, a full technical integration later this year in September 2025, so far, we kind of run the new bank on two system platforms, and also September 2025, with a full technical integration, will be an important point in time where we are able to take out even more synergies.
Also, there is an upcoming merger within the accounting companies and the real estate broker shown on the screen. The news today is that we have launched a new target on return on equity of at least 14% as a long-term target for return on equity. We have also announced a new ambition on operational synergies. They were at NOK 150 million at the time we announced the merger. Now, after October the 1st, becoming one bank, we have been able to fully verify and calculate these synergies, and they are doubled from NOK 150 million up to NOK 300 million. We have this long-term return on equity target of 14%, underpinned by cost and being cost and capital effective. We will have a profitable growth at market, or perhaps a tad added to the market growth. We will remain and even strengthen further our focus on net commission and other income.
Of course, still, the SpareBank 1 Alliance will be important for us to achieve economies of scale, both within marketing and IT, and also the jointly owned product companies. The Common Equity Tier 1 capital ratio target stands at 17.6%, also the target of less than 40% cost to income, and the dividend policy remains at approximately 50% dividend paid every year. We have also revised the capital synergies. As you are probably familiar with, the Norwegian regulators have decided to increase risk weights on mortgages from 20%-25% as of July the 1st this year. That reduces the capital synergies from around NOK 2.5 billion down to NOK 1.7 billion. But at the same time, as already commented on, we have increased the estimated operational synergies from NOK 150 million to NOK 300 million. That will be able from three major areas.
We will have even a more effective funding of the company being a systemically important financial institution, and with a larger scale on our funding, we should have synergies from that side. We also should have synergies from a lot of payable costs. And also, we intend to reduce the number of full-time employees from today's approximately 1,550 full-time employees within the parent bank down with 100 by the end of 2026. That is the ambition as of today to become even more cost-effective and thereby being able to reach the 14% return on equity target. If we look at our position now after the merger, we have a very strong position within the southern part of Norway with branches in combination with very well-developed digital services.
Now we have become a much more diversified bank, both with respect to industries and respect to geography than we were 10 years ago. Of course, the merger now with SpareBank 1 Sørøst-Norge covering the counties of Telemark, Vestfold, and Buskerud really completed this map, being a very well-balanced bank. As you can see, with steady growth in all these market areas, this distribution power makes us able to have profitable growth. This footprint also allows us to have a low churn and also have a strong position when it comes to net commission and other income. If we look at the macroeconomics, we believe we have a solid platform for further growth. We have corporates answering our three times query per year.
As you can see, all indicators are at 50 or higher, which means that the corporate sector is positive, with Rogaland as the most positive on 56. What we see is industry, excuse me, energy-related corporates and industry as such are among the most positive. Still, unemployment rate remains low in Norway and within the entire market area. This is also, I believe, one of the explanations for good steady growth and also a very strong credit quality. If we look at the main figures, we delivered a 13.4% return on equity for the full year and 7.4% 12-month lending growth. Entering into the merger, we have been very committed in planning for the merger, but having business as usual within the customer divisions. I believe we have really succeeded in that.
Also, after the merger, we have a quarter-on-quarter growth of 2% for the fourth quarter. There has been some distribution of leasing portfolio in between the corporate market and the SME and agriculture, but altogether, this gives the group as such a lending growth of 2%. For the quarter isolated, we had a return on equity of 10.9%, but after the merger, we had a goodwill of approximately 3.5 billion NOK as a result of the increasing share price of SR-Bank during the year 2024 up to the merger. Also, if you adjust for merger costs so far, the underlying return on equity is 12.3% for the quarter as such. The capital ratio stands at 18%, and that also allows the board of directors to propose a dividend of 8.50 NOK per share, which is an increase of 1 NOK compared to last year.
Credit quality remains strong with NOK 90 million in impairments, and that is equal to 11 basis points of gross lending, which we believe regard as below average through the cycle when it comes to credit losses. That leaves us with the main figures delivering 12.4% of what was the target for 2024, which was 13%. It leaves us with a cost to income ratio of 37.4%, far below the ambition of less than 40%. We have a solid capital position of 18%, 0.4% above the capital requirement and target, and thereby also increasing the earnings per share from NOK 14.9 per share up to NOK 16.3. The full year result for SR-Bank, new SpareBank 1 Sør-Norge, is built together with nine months, the three first quarters of the SR-Bank profit, and then add the last quarter of the new SpareBank 1 Sør-Norge.
If we look at the pro forma full year figures as if the merger had happened January the 1st, the NOK 8.5 accounts for 49.6% of the full year result. But if we compare it to what is the IFRS result, it accounts for, as shown down to the left, 61.6%. Altogether, we believe that we have a very strong position in a benign macroeconomic environment. We should be able to grow the bank at market or perhaps a tad beyond that in a profitable way. And by becoming even more cost-efficient, we should be able to reach the long-term target of 14%. And with respect to long-term target, we believe that we need the full year 2025 and 2026 to become as efficient as our ambitions says, and thereby entering into 2027 at kind of a full pace when it comes to profitability.
I believe that concludes the main figures and the position of the bank. So then I will leave it up to you as an audience to ask questions. So please just raise your hand and unmute, and then we will do our best to answer. I believe we have Thomas Svendsen first, and then following with Håkon Astrup. Please, Thomas. We can't hear you. I think you have to unmute.
Sorry about that. Hello. Two questions from my side. First, on loan losses, you have earlier mentioned sort of the expected normalized loan losses for SR-Bank. Do you have the same number for the combined group, sort of a normal expected normalized loan loss level? And the second question on the return on equity target, is that target including goodwill in the equity or excluding the goodwill, i.e., the return on tangible equity?
Yeah, just to answer the first question first. The portfolio from SpareBank 1 Sørøst-Norge was 80% retail and 20% corporate. And previously, we have said that normalized loan losses for SR-Bank is in the area of 15 to 18 basis points on a normalized level. So we don't have kind of an updated figure on that. But of course, with the mix, we are more in the lower end of the bracket than in the higher end if we look at the combined bank. Yeah, with probably about 15 basis points. Yeah, more in the area of 15 basis points. And may I ask, please, Thomas, to repeat your second question,
goodwill return on equity included?
Yeah, thank you. It is the return on equity as it says in our figures. That means including the goodwill.
As of today, the goodwill of NOK 3.5 billion accounts for approximately 0.8% return on equity. But of course, as the group grows, the relative implication from that will decrease. But it is with the goodwill included. Yeah, we do the way in the financial reporting. We would include a new APM named return on tangible equity. But the main reporting will be based on return on equity included goodwill in the equity capital.
Okay, understand. Thank you for that.
Thank you, Thomas. Then we leave the word to Håkon, please.
Thank you. Good afternoon. Thanks for taking the questions. Some questions from me as well. Just on the margin development and the competitive environment. So you are growing your lending at 2% quarter over quarter. At the same time, the NII is coming down.
Can you talk a little bit about the margin development, and are you focusing more on volumes over profitability?
No, if we look at the overall margin as it is shown on the screen, it's relatively flat. Of course, the market is expecting the NIBOR to come down. So far, we have been expecting that for quite a long time. And the central bank isn't too eager on reducing interest rate. Of course, there is a fierce competition, but we have succeeded in keeping the margins stable. And due to the fact that we increase our return on equity target to 14%, we will definitely choose profitability before growth. So that means that we will be even more selective on a micro kind of decision on each customer, whether they are additive to our long-term return on equity target or not.
So with the strong volume growth that we have, we should be able to be even more kind of selective on what we decide to grant or not.
And I was just elaborating on that, Håkon, that if you look at the change in net interest income in fourth quarter compared with third quarter, there are some external effects on high funding costs, mainly due to some subordinated loan being issued in third quarter, having full effect in the fourth quarter. And then there are some fixings in the euro funding, which has a negative effect. And in addition, there has been some margin pressure on retail deposits in the market that the customers are moving from zero interest rates to more saving rates.
You'll also see from the other figure that on the top right-hand side, you see there is a decrease in the interest margin on the retail deposits, mainly due to that move the deposits from zero rates to higher rates. We're guiding ahead lower growth in the volumes because we mainly focus on having a non-dilution of return on equity in the pricing of the products. So there was a higher growth in fourth quarter as we guide more or less ahead of the market and fairly above the market to have a focus on return. All of the divisions have a focus on increased profitability and stable margins.
Perfect.
Excuse me, Håkon, if I may just add, as shown on the screen, we have been able to have a strong growth in the retail segment without putting pressure on the lending margin.
But of course, this is at all times dependent on kind of the competitive situation among us and our peers.
Perfect. And then just one clarification on your communication regarding reduction of employees. Is it that you expect the reported number of FTEs in the parent bank to be 100 lower in 2027, or is that this reduction of 100, is that a gross number? So for instance, if you decide to open a branch in Fredrikstad, then that number will be higher?
Yeah, of course, if we have decisions on that, that could kind of change the numbers. But of course, since we have this increasing focus on profitability, opening new branches is usually not additive to return on equity as cost before profitability. So we believe now we have a very good distribution power. We have the presence where we want to be.
We will still consider structural changes, but if we are to enter into new market areas, kind of entering into this as a result of a merger is more probably than opening a new branch because that is very costly.
Thank you. On the NOK 300 million in expected synergies, will you report on the progress on the synergy harvesting going forward, or how will we know that you will actually deliver on that NOK 300 million?
Yes, we will report on that, Håkon, just as we report on the estimate on expenses. We will report on that. Of course, at the end, everything is kind of how we kind of closing in on our ambition on 14%. We will report on our ability to realize these synergies forward.
I think on the time scale, I think it's reasonable to do that two times a year, fourth quarter and second quarter. And some synergies have already been taken out from some divisions. But mainly, it will be after the technical conversion on the systems in third quarter this year.
Yeah. And this is underpinned by if you compare the fourth quarter cost base compared to the same quarter 2023, as shown on the lower right-hand side, we have been able to already reduce cost. But of course, also shown, we have merger expenses, and we will still have merger expenses in the following quarter in 2025.
We're guiding on NOK 140 million with merger costs made due to technical merger in the second half year of 2025.
If you look at some of these figures, you might see that the administrative expenses are increased rather much compared with third quarter. Some of those expenses should probably be back in the third quarter. But due to the merger taking place on 1st October, we had to close the books in Sørøst-Norge some weeks going ahead. So some of the costs are in the fourth quarter. We should be back in the third quarter. But that's how it is. And some of those also are related to synergies in merger costs, travel, and we would implement a new strategy, new policy going ahead to follow up travel costs due to the integration of the organization. So I think on the right-hand side, on the bottom, the parent company looks rather good going ahead.
We are working with expenses going ahead and would also be strict on that going ahead. And if there are some 100 people reduction, Inge and the head of the HR department need to approve all external new employees.
Yeah. Perfect. Can I have one last question for me?
Yes, please, Håkon.
Yeah. And that's on the capital. You have this very good slide with different impacts from the capital synergies, but also the risk weight headwind. How certain are you on the timing there? Is it, for instance, a risk that you will get the headwinds from the higher risk weights before you get, say, the positive impact from IRB on the Sørøst-Norge portfolio?
Of course, we have kind of this third-party dependence here. That means reliant on FSA. We feel pretty comfortable that the CRR3 effect will occur before July the 1st.
That means the 0.4% will appear prior to the 0.8 reduction. When it comes to having the application for the Advanced IRB Sørøst-Norge portfolio, we are kind of dependent on how fast they are able to proceed with our application, but we feel pretty comfortable that this is how we expect it to appear. That means that the plus will appear prior to the minus.
We have been having a dialogue with the Norwegian FSA due to the fact that if you have a loan in the parent bank in Sørøst-Norge, and you move it directly to what do you call it again?
The covered bond company.
You can do that instantly. Why should you have some time to move it through the parent bank in the standard and then to the IRB, and the FSA said we would make it an efficient process.
That's why we are quite certain that this is going to be implemented the first half year of 2025. And of course, the IRB taking place from the first of July 2025.
Perfect. Thank you so much.
Thank you, Håkon. Please, anyone else? Any questions?
I saw the hand of Herman, please.
Okay, please.
Yes, thank you. Just could you confirm that we should expect the merger costs you now guide for this year to be tilted towards second half?
Actually, it's depending also on the kind of the speed of the work from third parties. So I will not be too firm on that confirmation. But of course, it will be accounted for in the 2025 figures. But I have to be a bit cautious here on the exact timing.
Thank you. And
probably most of it will come in the second half, if I think.
Let's say something like that. But we are quite uncertain on that.
Yeah.
I guess it's too early.
Yeah. And then on the operational risk requirement, you now reported that's based on the combined historicals, right? So in line with what should be expected in the CRR3?
It's a possibility that the Norwegian FSA will put up the SREP methodology in the third quarter this year. That means if we get a new P2, Pillar 2, we might get it from the end of 2025 and not the first quarter in 2026.
Yeah. But of course, it's dependent on the FSA and their pace here.
SR-Bank had 1.6. We were given 1.9. So there might be some change on that and taking place in this year. But there's also some uncertainty going ahead.
But that's the latest information I got that we start SREP third quarter and have a new Pillar 2 in the end of 2025.
Just one comment, Herman, you were on the operational risk. The calculation for December now is combined banks. But of course, CRR3 has a bit different interpretation. So it could be a smaller change on it. But we have reported on both banks. So it shouldn't be any big difference from what we have reported now.
Yeah. Okay. Thank you. And then I just interpreted some of your answers earlier today. So correct me if I'm wrong, but that you see some potential to reprice some exposure to higher margins. I guess that would be on the corporate side. Could you elaborate on what kind of exposures that would be and if those are primarily within the former SR-Bank portfolio?
We have been an IRB advanced bank now for quite a few years and working on the repricing, being able to try to kind of decide the risk and price thereafter. But at all times, we have a potential because you have migration, you have corporate customers entering into the portfolio, perhaps you have competition, and you price according to what you expect the risk weights to become. So at all times, we have a potential of repricing. Also, by having this 14% target on return on equity, we are not only communicating with you as investors, it's also communicating to our own organization that we increase the focus on profitability. And that will have an impact on how we decide the price on every new engagement. But of course, we have our peers and we have the competitive environment.
But it is also setting a direction for the entire organization when it comes to new investments, granting applications of new loans, and so on.
We also think that the cooperation we have with SpareBank 1 Markets is very important for the large customers division. We see that large customers accept much higher margin and provisions compared with SME clients. That doesn't mean that we are going to fully implement the full leverage, but we could syndicate and still have good margins on large customers with acceptable risk because we syndicate a large part of the credit risk. And also, we get commissions from SpareBank 1 Markets. That's a very high fee with low capital costs. Yeah.
Okay. Sounds good. Thank you. And just a very short one. On the volumes with the covered bond company, you got SpareBank 1 Boligkreditt.
What should we expect for how long will those be within the company?
We will take those loans back when they come to when they have a maturity. When they have maturity at latest. So that means that we will decrease this portfolio steadily and perhaps even earlier than the four to five years where I believe we had the last maturity. Yeah.
Very good. Thank you.
Thank you very much. I don't see any more hands, I believe. No, I believe that concludes the questions. Thank you very much for taking your time, and if any of you have any follow-up questions, you have the contact details at the last page of the presentation, so then, thank you very much and have a good day. Thank you. Bye-bye.