Sparebanken Øst : Quarterly report 4/2022

Interim financial statements - Q4 2022

Key figures - Group …………………………………………………………………………………… 3

Events in the quarter …………………………………………………………………………………

4

Board of Directors' Report …………………………………………………………………………… 5

Financial statements for the Sparebanken Øst Group

Income Statement ………………………………………………… . …………………………… .. 16

Balance Sheet ………………………………........................................................................................................ 17

Changes in Equity ........................................................................................................................ 18

Cash Flow Statement ……………...................................................................................................................... 19

Additional Information - Sparebanken Øst Group

Changes in key figures ………………………………………………………………………………………………… 34

Definition of key figures and alternative performance indicators …………………………………………………… 35

Financial performance ………... ………………………………………………………………………………………… 36

Balance sheet performance ……... ……………………………………………………………………………………… 37

Financial Statements for Sparebanken Øst - Parent bank

Income Statement ………………………………………………… . …………………………………………………… 38

Balance Sheet ………………………………........................................................................................................ 39

Changes in Equity ............................................................................................................................................. 40

Cash Flow Statement ........................................................................................................................................ 41

2

Key figures - Group

Board of Directors' Report

For 2022, the bank can point to higher net interest income, increased commission income and stable low costs. The profit for the year was affected by substantial negative changes in the value of the bank's portfolio of bonds and certificates, which is held for liquidity purposes, as well as negative changes in value from ownership interests in other companies. With its high CET1 capital ratio and high leverage ratio, Sparebanken Øst is one of Norway's most financially sound banks and well equipped for the future.

The bank's 180th year of operation resulted in a profit after tax of NOK 296.4 million. The turbulence in the financial markets had a negative impact on the results, and market values decreased by NOK 82.6 million in total in 2022. The return on equity was 6.65 per cent. Apart from the turbulence in the financial markets, the bank is pleased with how income and costs developed in 2022. The bank's presentation of its results must also be seen in light of the fact that the bank, as a standard method bank, must hold substantially more equity than many of our competitors.

Following very high lending and deposit growth in 2021 and in a market where the competition for customers is fierce, the bank has chosen to prioritise lending and deposit margins. The bank's risk in its loan portfolios is low, with a high proportion of loans to retail customers secured by their homes. The bank has a modest NOK 2.3 billion in commercial property loans, representing about 6.2 per cent of gross lending.

Five interest rate hikes were carried out and took effect in the bank's customer portfolios in 2022. The bank's net interest income amounted to NOK 686.2 million in 2022, up NOK 54.9 million compared with 2021. A further two interest rate hikes have been approved since the end of the year and the start of February 2023.

The bank has very low loan losses and net non-performing commitments are very modest at NOK 128.9 million, or 0.35 per cent of net lending to customers. The bank's CET1 capital ratio is very solid at 20.11 per cent.

Earnings per equity certificate were NOK 3.83. The Board of Directors proposes that a cash dividend of NOK 3.80 per equity certificate (NOK 78.8 million in total) be distributed for 2022, with provisions for good causes totalling NOK 196.8 million. The proposed distributions deviate from the bank's dividend policy and amount to 99.2 per cent of the Group's profit for the year allocated to equity certificate holders and primary capital, respectively. The proportion of the cash dividend within the bank's dividend policy amounts to NOK 1.91 per equity certificate. The dividend policy will remain unchanged going forward with the aim being to pay out up to 50 per cent of the profit allocated to equity certificate holders as dividends. This year's allocations are based on the bank's earnings, low credit risk and very solid capital adequacy.

Results for the quarter in brief

Profit for the quarter amounted to NOK 94.9 million, down NOK 2.8 million compared with Q4 2021. The return on equity (ROE) ended at 8.29 per cent, compared with 8.86 per cent in Q4 2021. Earnings per equity certificate are NOK 1.23, down from NOK 1.34 in Q4 2021.

The CET1 capital ratio was 20.11 per cent, up from 18.24 per cent in Q4 2021. The leverage ratio was 9.27 per cent, up from 8.60 per cent in Q4 2021.

Net interest income amounted to NOK 189.4 million, up NOK 26.6 million from Q4 2021. Measured as a percentage of average total assets, net interest income increased to 1.68 percent from 1.33 percent in Q4 2021.

Net other operating income amounted to NOK 21.9 million, down by NOK 9.7 million compared with Q4 2021. Profit effects from ownership interests were negative in the amount to NOK 6.4 million and down by NOK 42.1 million compared with Q4 2021. The liquidity portfolio gained NOK 10.9 million and was NOK 27.4 million higher than at the end of Q4 2021.

Operating costs totalled NOK 82.2 million, an increase of NOK 3.2 million from Q4 2021. The increase was due to, among other things, provisions for wealth tax, consultancy services and IT costs.

Losses amount to NOK 2.5 million compared with income of NOK 1.0 million in Q4 2021. The change in recognised losses is mainly due to changes in model-based loan loss provisions.

Proposed allocation of profit for 2022

The profit for the year is allocated based on the financial statements of the parent bank. The profit for the year for the parent bank was NOK 344.7 million for 2022, compared with NOK 361.5 million in 2021. The parent bank has recognised NOK 171.1 million in dividends from wholly owned subsidiaries in 2022, compared with NOK 163.7 million in 2021.

The hybrid capital owners' share of the parent bank's profit for the year amounted to NOK 18.7 million in 2022 and has been allocated to their share of the equity. The corresponding share of the profit was NOK 14.1 million in 2021. The share of the profit is made up of interest costs on additional Tier 1 capital, where interest paid is presented as a distribution from equity.

The Board of Directors proposes that the parent bank's profit for 2022 be allocated to equity certificate holders and primary capital as shown in the table below:

(beløp i mill. kroner)

Årsresultat morbank* 326,0

Kontantutbytte til egenkapitalbeviseierne Avsatt til allmennyttige gaver

78,8 196,8

Sum utdelinger 275,5

Til utjevningsfond Til grunnfond

Fra fond for urealiserte gevinster

36,3 90,6 -76,4

Sum til egenkapital 50,5

Sum disponert 326,0

* EK-beviseiernes og grunnfondets andel av resultatet.

The proposed distribution of cash dividends amounts to NOK 3.80 per equity certificate, equivalent to NOK 78.8 million in total. The year's provisions for grants for good causes is historically high at NOK 196.8 million. Together, the dividend for equity certificate holders and grants for good causes amount to 99.2 per cent of the Group's profit for the year allocated to the equity certificate holders and primary capital, respectively. The Board of Directors' proposed allocation means that the bank's ownership fraction remains unchanged at 28.59 per cent.

The Board of Directors is proposing that more be distributed in dividends to equity certificate holders and as grants for good causes for 2022 than the bank's dividend policy indicates. The dividend policy will remain unchanged going forward with the aim being to pay out up to 50 per cent of the profit as dividends and grants.

The proposed allocation of the profit for 2022 entails 84.5 per cent of the parent bank's profit for the year allocated to equity certificate holders and primary capital being distributed as dividends and provisions for grants. According to the Financial Institutions Act, the Board of Directors has a duty to notify the Financial Supervisory Authority of Norway when it presents proposals in which total distributions exceed half of the profit. Sparebanken Øst has fulfilled its notification duty and informed the Financial Supervisory Authority of Norway of the Board of Directors' proposal. The Board of Directors' assessment of prudence regarding the distributions for 2022 are explained in more detail below.

Finanstilsynet may, when necessitated by a financial institution's financial position, order the institution not to pay out dividend or to pay less dividend than that proposed by the board of directors or adopted by the general meeting." (Section 10.6 of the Financial Institutions Act).

Any losses that might have occurred after the end of the financial year, or that must be expected to occur, are taken account of in the bank's quarterly and annual financial statements on an ongoing basis based on IFRS standards, including IFRS 9 Financial Instruments. The need to build up equity capital in the bank was assessed in the bank's ICAAP for 2022. The total capital requirement is expressed via the bank's capital target, which is equal to the regulatory requirement plus a capital margin of 1.0 per cent. Sparebanken Øst uses the standard method for calculating capital requirements. Comparable savings banks primarily use the IRB method. The standard method requires significantly higher capital weights than the IRB method for the equivalent risk and customers. Therefore, compared with banks that use the IRB method, Sparebanken Øst's real capacity for absorbing losses is significantly higher than that of IRB banks, all else being equal.

Outlook for the Norwegian and global economies

The Board of Directors has specifically considered the national and international macroeconomic factors related to the war in Ukraine, as well as the macroeconomic factors in general, and the consequences they could have for the bank. Its assessment of prudence assumes continued major uncertainty in the global economy with reduced growth and high inflation. At the same time, there are now signs that inflation has peaked in many countries. Furthermore, it is clear that the Norwegian economy has held up well so far, partly thanks to high oil and gas prices, which are providing Norway with substantial extra income through, for example, higher exports to the EU. The Board of Directors also assumes that unemployment in Norway will remain at a low level going forward, and a relatively modest fall in house prices is expected. Greater uncertainty about the demand for commercial property is also assumed. Similarly, a drop in turnover in some parts of the retail and wholesale sector cannot be excluded.

THE BOARD OF DIRECTORS' ASSESSMENT OF PRUDENCE FOR 2022

The Financial Institutions Act's requirements for an assessment of prudence

"Dividend on share capital [...] and ownerless capital [...] shall not be higher than is appropriate and commensurate with prudent, sound business practices, due consideration being given to losses that may have arisen after the end of the financial year, or which must be expected to arise, and based on the need to build up the equity capital of the financial institution. [...] If the board of directors decides to present a proposal for a payout that entails that the overall dividend in a single year will exceed one half of the profit pursuant to the approved accounts for the latest financial year, the board of directors shall notify the proposal to Finanstilsynet.

The Board of Directors' assessments

In the opinion of the Board of Directors, the quality of the bank's loan portfolio is very good and the risk of impaired and non-performing commitments going forward is considered low. It also believes that the ongoing macroeconomic turbulence will have a limited impact on the bank's future lending activities. At the end of 2022, net non-performing commitments as a percentage of net lending amounted to 0.35 per cent. In 2022, losses represented 0.02 per cent of net lending to customers. The bank reduced its lending exposure to commercial property during the course of 2022 as a risk mitigation measure due to greater macroeconomic uncertainty. The proportion of lending to businesses is 9.6 per cent of total lending. The bank regularly analyses the composition of the tenant base in the commercial buildings mortgaged to the bank. The bank's exposure to vulnerable