Sparebanken Midt-Norge: Second quarter 2003

Sparebanken Midt-Norge recorded a net post-tax profit of NOK 20 (119) million in the first half-year.

 

The bank recordet an operating profit before losses, gains and write-downs of  NOK 267 (191) million in the first half-year.

 

The profit reduction of NOK 99 million compared with the same period last year is due to the bank's takeover of business and assets in the integrated fish farming company Midnor Group AS. Loan losses totalling NOK 207 million were booked in connection with the takeover.

 

Profit measured 0.20% (1.04%) of average total assets.

 

Return on equity for the first half-year was 1.9% (10.8%).

 

The price of the bank's primary capital certificate (PCC) declined from NOK 154 at end-2002 to NOK 152 at end-June 2003. Dividend of NOK 7.50 per PCC was paid in the period.

 

Net interest and credit commission income totalled NOK 429 (424) million.

 

The interest spread was 2.37%  (2.53%) as of the second quarter of 2003. The spread for the full year 2002 was 2.63%.

 

The reduction in the interest spread is mainly due to a lower deposit spread resulting from the generally low level of interest rates. The higher lending spread in the business market resulting from the continuing increase in risk pricing has not been sufficient to compensate for this.

 

Any assessment of the bank's interest spread has to take into account the fact that interest income of NOK 8 (7) million on the bank's investment in fixed income funds and treasury bills is recorded as a gain on securities in the profit and loss account.

 

Overall capital gains and dividends on securities came to NOK 39 (-7) million. As of the second quarter of 2003 the bank's portfolio of short-term share investments and PCCs showed a first half return of NOK 31 (-14) million.

 

Return on money market funds, treasury bills, bonds and derivatives came to NOK 8 (7) million.

 

Currency gains came to NOK 7 (7) million.

 

Net commission income and other operating income totalled NOK 158 (140) million, an increase of 13.3 since last year.

 

Both ordinary commission income and income from the subsidiaries is increasing. Of the net increase of NOK 18 million in commission income, NOK 6 million refers to money transfer services, NOK 6 million to savings products and insurance, and NOK 5 million to increased income generated by the subsidiaries.

 

 

Overall profit reported by the bank's subsidiaries came to NOK 8.8 (6.6) million after tax. Eiendomsmegler 1 posted a profit of NOK 4.1 (3.8) million, SpareBank 1 Finans NOK 5.0 (3.3) million and Midt-Norge Regnskap NOK 0.6 (1.1) million. Allegro Finans ASA reported a loss of NOK 0.4 (-0.3) million and the bank's property company a loss of NOK 0.4 (-1.2) million.

 

The bank's stake in the SpareBank 1 Group is regarded as participation in a joint venture, and is accounted for by the equity method in the bank's accounts. SpareBank 1 Midt-Norge's stake is 14.1%. 

 

The SpareBank 1 Group recorded a first-half loss of NOK 13.8 (-171) million. SpareBank 1 Midt-Norge's share of the SpareBank 1 Group's first-half result is a negative NOK 2 (-22) million.

 

The non-life and life insurance companies showed a positive trend compared with the first half of 2002.

 

Bank 1 Oslo AS reported a pre-tax loss of NOK 28 (+23) million in the first half of 2003. The loss is due to loan losses of NOK 112 million so far this year.

 

The SpareBank 1 Group posted a net profit of NOK 14 million in the second quarter in isolation of which NOK 2 million accrues to SpareBank 1 Midt-Norge.

 

Thus far steps taken in connection with the efficiency drive by the SpareBank 1 Group are estimated to produce an effect of about NOK 130 million in 2003.

 

The change process initiated in the SpareBank 1 Group is producing the results planned for. The mid-year result is all of NOK 157 million better than at the same point in 2002

  

 

Operating expenses total NOK 365 (350) million, showing overall growth of 4.3%.

 

Personnel expenses amounted to NOK 184 (172) million, other operating expenses amounted to NOK 181 (178) million as of the second quarter.

 

Staffing was stable in the second quarter. As of 30 June 2003 the group employed 712 FTEs, of which the parent bank accounted for 594 (586), i.e. the same as at the end of 2002.

 

Relative operating expenses measured 2.02% (2.09%) of average total assets. In terms of income (exc. capital gains and affiliates), group expenses measured 61% (61%) while parent bank expenses measured 59% (59%).

 

The rise in personnel expenses is ascribable to wage growth and to some increase in resource use on the part of both the parent bank and subsidiaries. Other operating expenses are rising primarily as a result of a new agreement with Fellesdata AS.

 

To meet future competitive challenges and the effect of the generally low level of interest rates, the bank will implement a cost-reduction programme designed to identify measures that will achieve an annual cost reduction of at least NOK 50 million from 2004 onwards.

 

Reversals of previous write-downs of long-term shareholdings totalled NOK 6 (+36) million, net, in the first half-year.

 

Loan losses totalled NOK 237 (53) million.

 

The main reason for the rise in loan losses is the bank's involvement with the fish farming company Midnor Group AS which alone accounts for NOK 207 million of the loss figure.

 

Of the losses, NOK 269 (35) million are specified losses referring to business customers, while specified losses on retail customers came to NOK 14 (7) million.

 

In the period under review the bank carried out a thoroughgoing review of risk represented by loans to the real estate industry. As a result of this, and of specified loss provisioning of the bank's largest fish farming commitments, unspecified loss provisions were reduced by NOK 46 (+11) million.

 

After the review unspecified loss provisions totalled NOK 318 (399) million, 1.0% of overall lending.

 

As of 30 June 2003, specified loss provisions totalled NOK 594 million, an increase of NOK 64 million since end-2002.

 

Loans in default for more than 90 days have risen by NOK 34 million to NOK 603 million since year-end. Loans in default between 30 and 90 days have risen by NOK 141 million to NOK 315 million.

 

Of defaults exceeding 90 days totalling NOK 603 (571) million, NOK 291 (271) million or 48% (47%) are loss provisioned.

 

Other doubtful commitments total NOK 802 (339) million of which NOK 303 (135) million or 38% (40%) are loss provisioned. The increase in other doubtful commitments is entirely ascribable to Midnor Group AS and Pan Fish.

 

The default in the retail market is reduced.

 

It became clear in the course of the second quarter that the bank's customer Midnor Group AS would be unable to continue operations without a substantial capital injection. The main reason for the company's problems was the low salmon price. The company's owners were unable to raise the capital needed.

 

After a thorough review the bank opted to take over the business in order to secure its claim and position as far as possible, which included securing an opportunity to recover all or parts of the loss totalling NOK 207 million that was recorded upon taking over the business.

 

The bank took over the business by acquiring a recently founded company, Nye Midnor AS, which prior to the takeover had taken over the core business of former Midnor Group AS and its subsidiaries. The business taken over includes smolt production with five hatchery licences, fish breeding with 26 food fish licences, as well as slaughter and processing operations.

 

Nye Midnor AS is a wholly-owned subsidiary of the bank. First Securities ASA has been engaged as adviser in connection with the takeover, restructuring and subsequent sale of the company. The bank will take the time needed to ensure that any sale to previous owners or new partners takes due account of the bank's aim to recover its loss and its desire to safeguard the jobs of the company's more than 250 employees. A number of potential investors have already indicated their, in some cases keen, interest in the company.

The bank's assets totalled NOK 37.6 billion at 30 June 2003, NOK 1.6 billion (4.4%) more than at the end of 2002.

 

Total outstanding loans rose by NOK 0.9 billion (3.0%) in the first half-year to reach NOK 32.0 billion at mid-year. Loans to the retail market rose by 5.0% (4.6%), while loans to the business market fell by 0.4% (-0.3%).

 

Lending grew by NOK 2 billion (6.7%) in the 12 months to end-June. Loans to the retail market grew by 11.2% in the same period, loans to the business market by 0.9%.

 

Loans to the retail market accounted for 59% (57%) of ordinary loans to customers as of 30 June 2003

 

Total customer deposits rose by NOK 0.9 billion (4.9%) to reach NOK 20.0 billion at end-June.

 

Retail customer deposits grew by NOK 0.9 billion (9.5%) in the second quarter, business customer deposits showed zero growth. These figures do not include capitalised interest.

 

Deposits grew by NOK 1.5  billion (7.9%) in the 12 months to end-June. Growth from the retail market was 6.6%, from the business market 9.5%.

The value of equity and fixed income funds sold to our customers in the first half-year totalled NOK 844 million, NOK 81 million higher than at year-end. The bank's overall portfolio of unit linked, pension saving and annuity products rose from NOK 404 million to NOK 501 million in the first half of 2003.

 

The bank's insurance portfolio continues to show moderate but stable growth, both for life and non-life products.

At end-June total capital adequacy was 11.7% compared with 11.1% at year-end. For core capital adequacy the figures were 8.3%, 8,1% at year-end.

 

Over the year the bank has reduced its risk-weighted assets (measurement base) due to reduced exposure to the business market and reduced market risk. 

 

 

 

The book value of the bank's PCC as of end-June was NOK 187.

 

Disregarding the loss provisions on Midnor Group AS, the bank's operations are satisfactory. The Directors prioritise measures designed to reduce exposure to the bond market, including reduction of lending activity targeted at large customers, higher risk pricing and general improvement of portfolio quality.

 

The Directors will also focus on measures designed to maintain sound underlying banking operations in the longer term. In view of the prospect that interest rates will remain low for some time, the Directors consider it particularly important to reduce the bank's operating expenses.

 

SpareBanken Midt-Norge is satisfied with the positive trend now shown by the Group

 

The Directors expect therefore substantially improved results for the second half of 2003.