Hello everybody, and welcome to the second quarter presentation from the SpareBank 1 Sør-Norge Group. My name is Inge Reinertsen. I'm CEO of the bank, and together with me, CFO Eirik Børve Monsen and Morten Forgaard, Øyvind Knoph Askeland from the Communication and IR department. We will give you a brief presentation of the highlights for the second quarter. I will start with that, and then Eirik will follow up with some more topics covered, and it will be open for questions at the end of the presentation. The bank, we are aiming at being a strong challenger in the Norwegian banking market. Of course, the merger with our alliance friends, SpareBank 1 Sør-Norge, has been very important to us, and the juridical merger was October 1 last year, and this September, the technical integration of the two banks will be fulfilled.
Also, we will have the merger in between the real estate focus later this quarter. Everything is going according to plan, and we are well prepared for the full technical merger. Up to now, we have kind of run the two banks in two separate silos when it comes to the system side, but from September, we will be fully integrated also on the technical side. Our long-term return on equity target is to be beyond 14%. Of course, going through a merger is a challenging phase where we have some additional costs for fulfilling the merger, but in the next two years, entering into 2027, the long-term ambition is to be beyond 14%. That will be underpinned by cost-effective and being capital-effective, strong position within other income.
The position within the alliance is important to our cost efficiency, and also we have become a very well-diversified bank with respect to industries and geography. Our four targets, in addition to the 14% return on equity, are to have a capital ratio beyond 17.55%, cost-income ratio lower than 40, approximately 50% at least dividend share, and we have identified at least NOK 300 million in yearly operational synergies. If we look at the PMIs in our region, it looks quite positive with the Rogaland County as the most optimistic, but as you can see on the right-hand side, with all market areas above the 50%, which is the neutral level.
The unemployment rate remains low, both within the entire Norwegian economy and with what is our main market area, and it should all underpin or kind of show us that this should be a benign environment for running a profitable bank. If we look at our portfolio, we have become very much more diversified through the last years, both with the organic growth within the Oslo area, but also, of course, with the merger, which added a little less than NOK 100 million in the three counties Telemark, Vestfold, and Buskerud. Altogether now, approximately 50% of our portfolio is in the western part of Norway, and 50% is in the eastern part of Norway.
With a combination of very strong digital solutions and our local presence with our branches, we have a very strong distribution power, and we have had a growth now stronger than the market growth for quite a period. We should be able to benefit from this with having this strong distribution, and at the same time, making the organization more effective through the realization of the identified synergies. If we look at the main figures, we deliver 12.9% return on equity for the second quarter isolated. If we exclude the one-off effects on the cost side and also the goodwill that arised from the merger, the underlying return on equity is actually 14.9%.
The credit quality is very good, underpinned by the 8 basis points of loan losses equal to NOK 76 million, and as you can see, the growth is strong both on the lending side and the deposit side. In the retail market, the total growth of the corporate market and the SME and agriculture is approximately zero this quarter, but the 12-month growth in the retail market is 7%, and also for the quarter isolated, the growth stood at 1.9% within the retail market. The cost-income ratio is below 40%, but it is also influenced by the one-off cost mentioned. The capital ratio is very strong at 18.6%, and the board of directors has also announced that we are planning for establishing a share buyback program in addition to paying cash dividends.
On every main measure, we have a strong position, and we should be very well positioned for taking advantage of the merger for the upcoming period. I believe that concludes on the main figures. Eirik will take us through a few more topics, and we will be open for questions. Please, Eirik.
Thank you. We have a profit after tax of NOK 1.668 million in the second quarter, and despite having good growth on the lending sides in the quarter, we see that the net interest income is stable. We have a stable development from Q1 to Q2. This may be explained by two factors. We have a lower neighbor fixing to our corporate customers on average in Q2 compared to Q1. In addition, we have had, as already shown, high deposit volumes. We've seen high deposit volumes in Q2, and we have not been able to deploy this capital 100% during the quarter. That also reflects that we have a very strong liquidity situation at the end of the second quarter with an LCR about 200%, which is substantially above our minimum requirement.
We see that we have a very good development on commission and other income, and that's mainly explained that the growth from Q1 is mainly explained by the real estate business, the real estate brokerage business, where we also get help from the new companies acquired in Oslo and Bergen. In general, there is a very high activity on the real estate brokerage side, which also reflects part of the growth in the private lending volume. On the financial income from financial investments, we had a very strong Q1 where we saw a very good positive development on the basis swap evaluation and also the certificate and bond evaluation.
Part of that is reduced in the second quarter, but that's almost fully offset by in the second quarter receiving high dividends on SpareBank 1 Bobilkredit, NN-kredit, and also from SpareBank Nord Rogaland, and also receiving a good result from SpareBank 1 Gruppen in the second quarter. Operating expenses, as already mentioned, we have two large one-off items in the second quarter. We have the tiered to every cost, which we have taken in the second quarter of NOK 74 million, and in addition, we have a merger cost of NOK 68 million included in the Q2 operating expenses. Adjusting for those two one-off items, we see that we have a stable or a 0% growth on operating expenses from Q1 to Q2. We have a good control on the operating expenses, and from Q2 last year to this year, we have an increase of 3%.
As already mentioned, low impairment losses, NOK 76 million or 8 basis points. We have individual losses of NOK 103 million in the quarter, and then we have a revision of the model-based provisions of NOK 26 million. The revision of the NOK 26 million is explained by improved credit quality. Let me move over to the cost slide. As already mentioned, we have two large one-off items as shown on this slide of NOK 74 million and NOK 68 million, the tiered two cost and also the merger cost. As you look on the upper right-hand side, we have a 0% growth on the operating expenses in the mother company. The largest item on this is the improvement on administration expenses, which is explained by a reduced consultant cost and also reduced other losses.
On the lower right-hand side, you see we have an increase of 3% in the operating costs from the second quarter last year to the second quarter this year. The main explanation is the personnel cost as shown here in an increase of NOK 31 million. Two-thirds of this is explained by a salary increase, and one-third is explained by some more people employed in Q2 and Q3 last year, the two last quarters before the merger. Let me move on to the synergies. As we said after Q1, we will from this quarter report on the synergies, the realized synergies going forward. On the capital synergies, the message is unchanged from Q1, and the same on the operational synergies. Expectation is NOK 300 million annually by the end of 2027. We also, as earlier, have divided the operating synergies into these three items.
The personnel synergies is to take out the 100 full-time employees by the end of next year. In addition, we have the cost and income synergies, which is a mix of many things, including taking out valuation tax and a lot of other costs, including also merging the product portfolios of the two banks. The funding cost is expected, the improved funding on the sourced portfolio going forward. On the right-hand side, we also show the personnel synergy, the development showed as a full-time employee. We are on track with this synergy takeout. The next very important milestone is the technical merger in the end of this quarter, in the end of this quarter, Q3. You can go to the next, that one more. On the capital ratio side, we have a CET1 capital ratio of 18.63% at the end of the quarter and a minimum requirement of 17.55%.
We have, during Q2, implemented the new CR3 regulations, and we expect in Q3 to have this uplift on the mortgage, the floor on the mortgage loans from 20%- 25%. In addition, we also expect the AIRB approval of the Southeast portfolio in Q3. As we said after Q1, we expect the net effect of these three items to be close to zero or neutral for the bank. After this year's HREP process, we also expect the minimum requirement on the CET1 capital ratio to be reduced from 17.55%- 17.08% at the end of this year. Based on what we have said in this presentation, we are confident that we are well positioned for profitable growth and a strong capital distribution. As Inge said, we have now also from the board got go to start to work on a share buyback program.
Thank you, Eirik. I believe that concludes the highlights from the second quarter, and you are welcome to ask questions just by raising your hand. Please, everybody.
Please, Fredrik, your question first.
Yes, thank you for taking my question. I just had a question about the buybacks. Is this something, is this about reducing the capital ratios, or is it something you're going to do forward in addition to dividends?
It is something that we will have as a tool available for the management and the Board of Directors. Of course, this will not be in, there will be the cash dividend, and that will be a strong dividend in itself. To optimize the capital situation at all times, to also make sure that we don't have excess capital which is unemployed, we would like to have both the possibility of paying an additional dividend and also a share buyback program just to optimize the total capital situation.
Can I add one question? That is.
Yes, please.
How far down do you want to go on the capital side? Can you say something about the size of a potential buyback?
No, we haven't decided on that yet. This is to inform the market that we are taking the necessary steps. It will, of course, imply an approval from the General Assembly, and also we will need an application to the FSA. We want this tool in order to kind of more seamlessly adapt the capital to, of course, the capital requirements. We should not go below the capital requirements. As you, Eirik, have mentioned, we expect both the requirement to be reduced by year-end, and that should give us a strong ability to distribute to owners.
Do you have any target headroom for the capital requirements?
No, it's kind of, we shouldn't go below the 17.08%. We haven't decided how many basis points on top of that. Of course, we will have also a cushion on these levels to make sure that we at all times are beyond the capital requirements. In every quarter, there can be incidents kind of having an influence on this. We should, of course, have some space on top of the 17.08%.
Okay, thank you.
Thank you.
I think it's [Roy Tillis], the time.
Thank you. Can you hear me?
Yes, we can. Roy, please.
Great. Thank you very much. A couple of questions, just a quick follow-up on Fredrik's question there. In terms of the buybacks, you will have to wait for the AGM next year for approval, or could you do it earlier? Could you really wait until next year to ask the AGM?
We definitely expect it to be in place quicker than a year from now. As commented on, there will be some kind of lead time here to have this in place. This is just to give the message that we are taking the necessary action to have this in place, and of course, as quickly as possible.
Okay. Thank you. One more quick question on capital, the temporary pillar two requirement. Is there any updates on that process and when we'll know if that goes away or when you will get the IRB model approvals?
Yeah, that is partly the approval on the models, and also it is the approval of being able to take the former Southeast portfolio into SpareBank 1 Sør-Norge's now IRB system. This is still pending with the FSA, and it's kind of difficult for me to give too explicit guiding on when since it's dependent on the FSA approval. At least we expect the approval of the Southeast Norway's portfolio that is expected within the third quarter.
Thank you very much. Can I do one more?
Yes, please.
Yeah. Just a quick one on the large corporate growth in the quarter. It was a bit slower than we had expected. I'm just looking at the figures. It seems to be shipping and commercial real estate in the quarter, which was a bit below last quarter. Is that just a couple of larger customers repaying, or is there anything else in those figures?
Yes, we are, of course, very committed in delivering the 14% return on equity target. That means that we are very focused on the growth should be additive, and also if we have engagement, which we don't kind of regard as sufficient when it comes to profitability, we will let them go. I believe the zero growth also mirrors what has been a quarter with very much kind of unsecurity with the tariffs and what has been going on outside Norway. We've had several periods with also negative growth on the corporate side. I'm not worried. I believe that growth will pick up again.
Okay, thank you very much.
Thank you.
Thank you. It is [Amand Sal], please.
Yes, thank you. I just have a question on the pillar two guidance and requirement you received during the quarter, and specifically on the 1% margin expectations that you received. We just know it's lower than your sort of closest peer. Just wondering if you received any specific reasoning from the FSA on why that was lowered in your case. That's the first question.
I believe going from an old SR Bank and becoming even more diversified, also the merger with SpareBank 1 Sør-Norge was with a bank with 80% retail and 20% corporate. Altogether, the new bank is even more diversified in all aspects, both with corporate versus retail and with respect to geography and also with respect to industry. We have received some benefit from that on the pillar two guidance. That was not among what we calculated as synergies on the capital side within the bank, but it's a positive effect, a recognition, I believe, from the FSA that this is a very well-diversified bank.
Okay. Thank you. Understood. Just on the buybacks, is that something you have received a lot of feedback from your shareholders that they prefer some buybacks instead of, let's say, ordinary cash extra dividends?
Yeah. Speaking to our shareholders, which are approximately 25,000, of course, you have different opinions. It's kind of dependent whether you are a native Norwegian or you're an international investor, whether you're a private person or a corporate. We must kind of underline that this is our action to have this tool available. Of course, we will make careful consideration of how to use it and how much we will distribute as ordinary dividend, perhaps extraordinary dividend, or share buyback. We should not conclude on that topic as of today, but we, of course, will use the different tools to optimize the total return for our shareholders.
Okay, thank you very much.
Thank you, Amand. Next in line is [Simon Aas].
Hello everyone, and thank you for taking my questions. Basically, I've been partly answered already, but just to clarify, you said that you're happy about the liquidity position currently, obviously driven by the strong deposit growth, as you mentioned. Along with the spread, the corporate growth basically went flat over the past couple of quarters and also negative in this quarter. Do you expect to deploy this capital during the second half of this year, or do you feel that the corporations are more in wait-and-see mode?
We believe that the growth will pick up again. Of course, having kind of excess funding, we will eliminate that with respect to how much market funding we have. Since we have a quite extensive growth this quarter, we haven't been able to fully put this deposit funding to work in the second quarter isolated. We don't want to have the LCR stands, I believe, Morten, at 209%. That is far above our target, which is more in the area of 130%- 150%. We are kind of overly clear at the moment.
It's fair to assume that you will try to deploy this if possible during the second half, maybe. Growth might pick up.
Absolutely. As you can see on the 2025 bar, we have quite a lot of funding coming to maturity also for the rest of 2025. Of course, we will kind of adapt what we have in deposits on how much market funding we will raise later this year.
Thank you for that. Maybe on the personal customer side, now with the rate cut announced in June and coming through for most of the larger banks, at least in late August, have you started to see any negative effects on the NOI side here already in Q2, or do you expect this effect to be more prominent in Q3 and Q4 this year?
The rate reduction will take place in August 2024. That means kind of midway in the third quarter for the existing customers. Of course, the surprising rate cut increased the activity in the retail market. I'm very happy to see that even with the kind of disturbance that arised from this, we have a growth of NOK 5 billion this quarter. Our position within the market should be undoubtedly strong. At all times, we kind of experience the fierce competition in between the banks. That also kind of just makes us even more sure that being cost-effective is very important, whether we have headwind or tailwind on the margin side arising from the fierce competition.
I guess you haven't seen any initial effects on the new volumes coming in that obviously maybe somewhat lower margin or no big effects yet. It's sort of what I'm fishing for here. We should expect a more prominent effect in Q3 and Q4 is what I'm asking. I think that's probably what you're saying.
Of course, we haven't automatically reduced the interest rate by 25 basis points to all customers. We make those adjustments individually or looking at the total profitability. We are doing our very best to maintain the margin even with the rate reduction from SpareBank 1 Sør-Norge.
Thank you. That's very helpful.
Thank you. Any more questions?
Yeah, we have one from Thomas Svensen.
Thomas, please.
Yes. Hello. Good afternoon. Back to the capital issue again. Should we think that the dividend you gave for accounting year 2024 as sort of a base for future dividends before you consider share buybacks? That's the first question.
We always try to keep dividends either stable or growing within our capital kind of position and our ambition of at least 50% of the yearly profit distribution. I believe that is kind of a fair rationale that we will not go down on a regular dividend to buy back shares. That will be something that comes in addition to a decent or strong capital cash dividend.
Would it also be fair to assume that you even will intend to try to grow it in nominal terms year by year, this dividend?
Usually, arising from a 50% distribution also means that we hold back 50% of the yearly profit. Of course, holding profit back should also give all other equal an increased earnings per share, thereby increasing the dividend. It is fair to say that in kind of an unchanged condition as a shareholder, you should expect the cash dividend to grow year by year.
Okay. Understood. The second question on the deposit side, if you try to look away from possible interest rate declines, etc., but just look at savings deposits among households and SMEs, where do you see margins are heading now? Do you see increased competition? Is it stable competition? How much should we expect margins on these savings accounts to go down, let's say, the next couple of quarters?
I believe we should leave kind of the main speculations here to you as analysts. What we always prepare for is that we will have margin pressure because of the fierce competition. The best way to protect yourself is becoming more effective. I would comment on the market conditions as stable, but that is not a guarantee for how the competition will evolve. We always prepare ourselves for margin compression, but at the same time, becoming more effective, we should be able to maintain what is our ambition when it comes to the total return on equity to shareholders.
Okay, thank you for that.
Thank you, Thomas.
I don't think there's any more questions. Okay.
Thank you, everybody, for joining this conference. We wish you all a good day, and thank you very much for participating.
Bye-bye.