Sparebanken Øst : Quarterly report 1/2023

Quarterly report

In the first quarter, the bank reported increased net interest income, increased net commission income and an improved result compared with the same quarter last year. With a high CET1 capital ratio and a high leverage ratio, Sparebanken Øst is among Norway's most solid banks in a period marked by market unrest.

Profit for the quarter amounted to NOK 98.0 million, representing a return on equity of 8.87 per cent. The bank is happy with this performance given that it uses the standard method for calculating capital weights.

The bank's net interest income increased by NOK 36.7 million compared to Q1 2022. With effect from the start of the year and from the beginning of February, interest rate increases were implemented in large parts of the bank's lending portfolio. Further interest rate increases were decided during the quarter, taking effect from the middle of May.

In a market characterised by strong competition for customers, the bank can point to stable lending growth in the quarter, with net lending down by a modest 0.3 per cent. The reduction relates to loans to business customers. In the retail market, the bank posted solid lending growth in the office channel, corresponding to 2.0 per cent in the quarter. Deposits from customer deposits were down by 3.8 per cent in the quarter.

With a robust liquidity portfolio and a balanced maturity structure for its wholesale funding, the bank has felt little impact from the banking and market turbulence that occurred in the second half of the quarter.

The bank still has a very low losses on lending and a low rate of non-performing and impaired commitments. The bank's position is very solid, with a CET1 capital ratio of 20.37 per cent (incl. 50 per cent of retained earnings).

Results for the quarter in brief

Profit in the quarter amounts to NOK 98.0 million, an increase of NOK 35.8 million from the Q1 2022. The return on equity (ROE) ended at 8.87 per cent, compared to 5.61 per cent in Q1 2022. Earnings per equity certificate were NOK 1.27, up from NOK 0.80 in Q1 2022.

The CET1 capital ratio, inclusive of 50 per cent of retained earnings, was 20.37 per cent, up from 19.01 per cent in Q1 2022.. The leverage ratio, inclusive of 50 per cent of retained earnings, was 9.29 per cent, up from 8.95 per cent in Q1 2022.

Net interest income amounted to NOK 198.6 million, up NOK 36.7 million from Q1 2022. Measured as a percentage of average total assets, net interest income increased to 1.82 percent from 1.38 percent in Q1 2022.

Net other operating income amounted to NOK 17.7

million, up by NOK 19.0 million compared with Q1 2022. Profit effects from ownership interests amount to NOK 14.4 million, an increase of NOK 8.8 million from Q1 2022. To highlight the value creation from Frende throughout the year, the bank recognised an increase in value of NOK 11.4 million in the first

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quarter. This represents a quarter of the expected dividend income for 2022, which was NOK 45.6 million in the second quarter. The value of the liquidity portfolio fell by NOK 8.8 million, compared with a reduction of NOK 17.2 million in Q1 2022. Net commission income increased by NOK 4.3 million compared to Q1 2022.

Other operating costs amounted to NOK 89.1 million, up NOK 8.0 million compared with Q1 2022. Measured as a percentage of income, the bank has a cost ratio of 41.2 percent.

Losses amount to NOK 1.7 million compared to NOK 0.2 million in Q1 2022.

The Norwegian Transparency Act

The Transparency Act is a new law which entered into force on 1 July 2022 with a duty to disclosure by 1 July 2023. The purpose of the Act is to promote respect among companies for human rights and decent working conditions, and to ensure public access to information. The Transparency Act requires businesses to carry out due diligence check to stop, prevent and limit any negative impact on human rights and decent working conditions.

Sparebanken Øst has conducted due diligence assessments both internally within the bank and at our suppliers. No risk of human and labour rights violations has been identified, either internally within Sparebanken Øst or at the bank's suppliers. An account of the bank's compliance with the Transparency Act is published on the bank's website.

More about the results for the quarter

NET INTEREST INCOME

Net interest income amounted to NOK 198.6 million, up NOK

36.7 million from Q1 2022. Interest rates are considerably higher than in the same quarter last year. In this period, the key policy rate has been raised by 2.25 percentage point from 0.75 per cent to 3.0 per cent. The increase in net interest income is mainly explained by increased deposit margins. In relation to the its wholesale financing costs, the bank's lending margin has been reduced. This is because most loans to customers are repriced with notice periods after Norges Bank decided to change interest rates, while wholesale financing is repriced continuously and in line with rising interest rates.

Sparebanken Øst | Interim Report Q1 2023

NET OTHER OPERATING INCOME

Net other operating income comprises commission income and costs, dividends, net value changes and gains/losses on financial instruments and other income. Net other operating income amounted to NOK 17.7 million, up by NOK 19.0 million compared with Q1 2022.

Net commission income amounted to NOK 15.6 million, up NOK 4.3 million from Q1 2022. The increase is mainly due to increased commission income from insurance intermediation.

Dividends received amount to NOK 0.1 million in Q1 2023 and are at the same level as in Q1 2022.

Net value changes and gains/losses on financial

instruments were positive by NOK 1.5 million, up NOK 14.7 million from Q1 2022. The value of the liquidity portfolio fell by NOK 8.8 million, compared with a reduction of NOK 17.2 million in Q1 2022. The rise in the value of the bank's shareholding in Frende amounts to NOK 11.4 million, compared with NOK 4.8 million in Q1 2022. The rise in the value of the bank's shares in Norwegian Block Exchange AS (NBX) amounted to NOK 0.6 million, against a change of NOK 0.0 million in Q1 2022. The value of the bank's shares in Kraft Bank ASA fell by NOK 3.5 million, against a rise of NOK 0.3 million in Q1 2022. Positive value adjustments related to shares and equity rights in Visa Inc. totalled NOK 5.9 million, compared with a value increase of NOK 0.5 million in Q1 2022. The negative profit effects from foreign exchange, derivatives and fixed rate loans at fair value amounted to NOK 2.3 million. The corresponding profit effects were positive and amounted to NOK 0.6 million in Q1 2022. The cost of buying back debt issued by the bank amounted to NOK 1.7 million. The corresponding buy-back costs amounted to NOK 2.1 million in Q1 2022.

*eksklusiv resultateffekter fra finansielle derivater inngått med formål for økonomisk rentesikring i likviditetsporteføljen

OPERATING COSTS

Other operating costs amounted to NOK 89.1 million, up NOK 8.0 million compared with Q1 2022.

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Salaries and other staff costs amount to NOK 48.9 million, up by NOK 2.2 million from Q1 2022 as a result of an increased number of full-time equivalents and general salary growth.

Other operating costs amounted to NOK 33.1 million, up NOK

5.3 million compared with Q1 2022. Of this increase, NOK 1.2 million comes from an increase in the rate of wealth tax and NOK 1.4 million from increased IT costs. The bank has also increased costs of about NOK 1.3 million for consultants, as well as costs from the establishment of a green framework.

IMPAIRMENT AND NON-PERFORMING COMMITMENTS Losses on loans, unused credits and guarantees amounted to NOK 1.7 million, of which changes in model-basedloan loss provisions amounted to income of NOK 0.1 million. By comparison, losses amounted to NOK 0.2 million in Q1 2022, of which changes in model-basedloan loss provisions amounted to income to NOK 1.5 million.

Total loan loss provisions amount to NOK 114.7 million, equivalent to 0.31 per cent of gross lending to customers. For comparison, total loan loss provisions amounted to NOK 126.5 million at the end of Q1 2022, or 0.33 per cent of gross lending to customers. Individually assessed loan loss provisions amounted to NOK 87.4 million, compared with NOK 98.3 million at the end of Q1 2022. The bank's loan loss provisions are mainly related to AS Financiering and, compared with the end of Q1 2022, they constitute a reduced percentage of gross lending at AS Financiering.

Sparebanken Øst | Interim Report Q1 2023

Net non-performing commitments are very modest at NOK 154.8 million, or 0.42 per cent of net lending to customers. For comparison, net non-performing commitments amounted to NOK 165.2 million, corresponding to 0.43 per cent of net lending to customers at the end of Q1 2022.

INCOME TAX

Income tax stands at NOK 27.6 million, equal to 22.0 per cent of the profit before income tax.

Main items on the balance sheet

Total assets amounted to NOK 44.5 billion at the end of the quarter.

LENDING TO CUSTOMERS

Net lending to customers amounted to NOK 36.7 billion, down NOK 0.1 billion in the quarter.

Net lending to retail customers amounts to NOK 33.3 billion and is stable compared to the end of Q4 2022. In the last 12 months, the reduction amounted to NOK 0.9 billion, or 2.6 per cent. Within the retail market in Sparebanken Øst (RM office channel) and in AS Finansiering, the bank can point to solid lending growth. Lending growth in the RM office channel was 2.0 per cent in the quarter and 6.8 per cent in the last 12 months. In AS Finansiering, lending growth was 0.2 per cent in the quarter and 4.3 per cent in the last 12 months. Lending growth in RM digital concepts is negative by 4.0 per cent in the quarter and negative by 18.8 per cent in the last 12 months. Retail market loans and credits are generally only granted with security in a customer's home. The bank's exposure to lending and credit without associated security is very low. Over time, the bank has given priority to providing loans to customers with low LTV ratios. The LTV ratio in the residential mortgage portfolio averages 55.7 per cent, based on the value of the collateral at the date of approval. Given the Group's high share of loans to the retail market, which mainly covers the central area of Eastern Norway, the retail market portfolio is considered to serve low-risk customers in a housing and labour market that is expected to function well over time. Gross lending to retail customers accounted for 90.7 per cent of total lending to customers.

Net lending to business customers amounted to NOK 3.4 billion, a decrease of NOK 0.1 billion in the quarter. In the last 12 months, the reduction amounted to NOK 0.9 billion, or 2.6 per cent. There is still considerable uncertainty around

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developments in the commercial property market. The market has seen very few transactions, which has created uncertainty about future values. After a long period of rising commercial property values (lower yields), yields have increased over the last period as have financing costs for commercial property. The bank has chosen to take a defensive approach to business customers and reduce risk in the business portfolio. Exposure to commercial property represents a relatively large proportion of the business portfolio, but a very limited proportion of the bank's total loan portfolio. The bank's commercial property lending is modest at NOK 2.2 billion, or about 5.9 per cent of total gross lending, down from NOK 2.6 billion, or approx. 6.7 per cent, at the end of Q1 2022. The bank does not have exposure to oil and oil-related activities or fishing and aquaculture activities. In general terms, the bank can also be said to have little direct or indirect exposure to the accommodation/hospitality industry, import/export businesses and major industrial and trading operations. There is little direct or indirect exposure to trading activities with the exception of groceries.

DEPOSITS FROM CUSTOMERS

Deposits from customers amounted to NOK 15.2 billion, down NOK 0.6 billion in the quarter. The reduction in the quarter is mainly explained by a larger deposits from businesses. The bank has also chosen a more defensive approach in a deposit market characterised by stiff competition. The deposit-to-loan ratio is 41.3 per cent. Deposits from retail customers amount to NOK 10.1 billion. Deposits from business customers amount to NOK 5.1 billion.

LIQUIDITY AND FINANCING

With a robust liquidity portfolio and a balanced maturity structure for its wholesale funding, the bank has felt little impact from the banking and market turbulence that occurred in the second half of the quarter. The turbulence has resulted in higher credit premiums for Norwegian banks also. During this period, the bank has not needed to issue any new market financing.

The bank takes a conservative approach to liquidity risk and exercises proper liquidity management so that the Group has sufficient liquid assets to cover its obligations upon maturity at all times. The bank must be able to run normal operations for a period of at least 12 months without access to external financing. The bank also takes on credit risk through the management of liquidity reserves and excess liquidity. The bank intends to retain interest-bearing securities with low credit risk for liquidity purposes (reserve for disposal when needed) and as a deposit basis for borrowing facilities at the central bank. The bank's liquidity risk is monitored continuously, and updated overviews of the bank's total counterparty risk are available.

Holdings of certificates and bonds totalled NOK 6.0 billion, an increase of NOK 0.4 billion in the quarter.

The short-term liquidity target measured by LCR exceeds the bank's agreed limit of 102 per cent and amounts to 301.7 per cent, compared with 257.7 per cent at the end of Q1 2022.

Sparebanken Øst | Interim Report Q1 2023

The bank's liquidity strategy involves a high proportion of securities that are included in the LCR calculation. The maturity structure for market funding significantly affects LCR.

Securities issued totalled NOK 22.3 billion, an increase of NOK 0.9 billion in the quarter. The bank also has senior non- preferred debt (SNP) with a nominal value of NOK 0.9 billion, an increase of NOK 0.2 billion over the past 12 months. The bank considers its access to wholesale funding to be good.

The degree of stable and long-term financing measured by NSFR amounted to 132.5 per cent compared with 124.0 per cent at the end of Q1 2022. The average term to maturity for market funding was 3.10 years compared with 3.17 years at the end of Q1 2022. Short-term borrowing (defined as borrowing with a remaining term to maturity of less than 1 year) amounted to NOK 3.6 billion at the end of the quarter.

FRENDE FORSIKRING

The bank owns 13.03 per cent of Frende Holding AS which itself owns Frende Skade AS and Frende Liv AS (Frende Forsikring). Since the bank's stake in Frende is below 20 per cent, the shareholding is measured at fair value with changes of value and dividends received recognised through profit or loss. The bank's shareholding in Frende Holding AS is valued at NOK 467.5 million.

To highlight the value creation from Frende throughout the year, the bank recognised an increase in value of NOK 11.4 million in the first quarter. This corresponds to a quarter of the expected dividend income for 2022 of NOK 45.6 million in the second quarter of 2023.

The profit in Frende amounted to NOK 43.9 million in the first quarter. By way of comparison, there was a deficit of NOK

24.5 million in Q1 2022. In 2022, Frende achieved an annual profit of NOK 305.0 million.

MISC. OWNERSHIP INTERESTS IN OTHER COMPANIES The bank owns 4.85 per cent of the shares in Eksportfinans ASA, and the shareholding is valued at NOK 195.0 million.

The bank's stake in Vipps Holding AS was 0.71 per cent, and the shareholding was valued at NOK 58.2 million. Vipps Holding AS owns 72.22 per cent of the shares in Vipps AS and 100 per cent of the shares in BankID BankAxept AS.

The bank owns 'C' shares in Visa Inc. The shareholding is valued at NOK 44.0 million. The bank also has rights to shares in Visa Inc., owned via VN Norge Forvaltning AS and VN Norge AS. The rights are valued at NOK 9.3 million.

The bank owns 6.85 per cent of the shares in Kraft Bank ASA. Kraft Bank ASA is listed on Euronext Growth Oslo and the bank's shareholding is valued at NOK 22.6 million.

The bank owns 9.43 per cent of the shares in Norwegian Block Exchange AS (NBX). NBX is listed on Euronext Growth Oslo and the bank's shareholding is valued at NOK 11.5 million.

Capital adequacy

The bank uses the standard method to calculate capital adequacy and is very strong and well positioned to deal with

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announced future increases in capital requirements, and also has both dividend capacity and scope for lending growth.

Sparebanken Øst increased its financial strength during the quarter and the CET1 capital ratio amounted to 20.37 per cent (inclusive of 50 per cent of retained earnings) at the end of the quarter, up from 19.01 per cent at the end of Q1 2022.

The applicable Pillar 2 requirement for Sparebanken Øst is 1.8 per cent, with a minimum of NOK 360 million. The requirement came into effect on 30 June 2020. The countercyclical capital buffer increased by 0.5 percentage points from 2.0 per cent to 2.5 per cent on 31 March 2023, which is where it was before March 2020 and the outbreak of Covid-19. Given the current capital requirements, this entails a total CET1 capital requirement of at least 14.3 per cent at the end of the quarter. The requirement for an increased systemic risk buffer for standard method customers has been postponed and, for the bank, it will increase by 1.5 percentage points from 3.0 per cent to 4.5 per cent from 31 December 2023. With the announced increases in capital requirements, Sparebanken Øst's total regulatory requirement for CET1 capital will increase to 15.8 per cent under the applicable Pillar 2 requirement at the end of 2023.

Sparebanken Øst has a target for CET1 capital, which should be equal to the regulatory requirement plus a capital margin of 1.0 per cent. Based on the applicable regulatory requirement at the end of 2023, the bank's target for CET1 capital is 16.8 per cent.

Net subordinated loan capital at the end of the quarter amounted to NOK 4.6 billion, of which the Group's Tier 1 capital accounted for NOK 4.2 billion. With a calculation basis of NOK 19.1 billion, this corresponds to a capital adequacy ratio of 24.05 per cent, of which 21.96 per cent constitutes the Tier 1 capital ratio. The leverage ratio was 9.29 per cent at the end of the quarter, an increase from 8.95 per cent at the end of Q1 2022. The current leverage ratio requirement is 3.0 per cent.

• 50 prosent av EK-beviseiernes og grunnfondets andel av resultat (udisponert resultat) er medregnet i kvartalstall

Significant differences in treatment of equal risk between banks

On 17 April 2023, the Minister of Finance Trygve Slagsvold Vedum visited Sparebanken Øst, to discuss framework

Sparebanken Øst | Interim Report Q1 2023