Note 2 - Critical estimates and assessment concerning the use of accounting principles

When it prepares the consolidated accounts the management team makes estimates, discretionary assessments and assumptions which influence the application of accounting principles. This accordingly affects recognised amounts for assets, liabilities, revenues and expenses. Last year’s annual accounts give a closer explanation of significant estimates and assumptions in Note 3 Critical estimates and assessments concerning the use of accounting principles.

Investment held for sale

SpareBank 1 SMN's strategy is that ownership duse to defaulted exposures should at the outset be of brief duration, normally not longer than one year. Investments are recorded at fair value in the Parent Bank's accounts, and is classified as investment held for sale.

  Assets Liabilities Revenue Expenses Profit Ownership
Mavi XV AS Group 104 2 3 - 3 100 %
Total Held for sale 104 2 3 - 3  
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Losses on loans and guarantees

For a detailed description of the Bank's model for expected credit losses, refer to note 3 and note10 in the annual accounts for 2023. 

Measurement of expected credit loss for each stage requires both information on events and current conditions and information on expected events and future economic conditions. Estimation and use of forward-looking information requires a high degree of discretionary judgement. Each macroeconomic scenario that is utilised includes a projection for a five-year period. For credits where credit risk is assessed to have increased significantly since loan approval (stage 2), loss estimates for the period after year 5 are based on year 5 as regards level of PD and LGD.

Our estimate of expected credit loss at stage 1 and 2 is a probability-weighted average of three scenarios: Base Case, Best Case and Worst Case. The model that computes model write-downs is based on two macro variables – interest rate level (three-month NIBOR) and unemployment (Statistics Norway’s Labour Force Survey, AKU). The assumptions in the baseline scenario are based on the assumptions in Norges Bank’s Monetary Policy Report 1/24. The downside scenario features high interest rates and high unemployment, which are largely based on Finanstilsynet’s stress test reported in Financial Outlook, June 2023. The upside scenario features low interest rates and low unemployment.

Calculation of the group’s overall model write-downs is based on calculations of expected credit loss (ECL) for each of five portfolios below. For each portfolio, separate assumptions are defined with regard to how the macro variables ‘interest rate’ and ‘unemployment’ impact PD and LGD. The relationships between the macro variables are developed using of regression analysis and simulation, while the relationships between the macro variables and LGD are based largely on expert assessments and discretionary judgement. The five portfolios are:

  • Residential mortgages
  • Other retail loans
  • Agriculture
  • Industries with large balance sheets / high long-term debt ratios (real estate, shipping, offshore, aquaculture, fishery)
  • Industries with smaller balance sheets / low long-term debt ratios (other industries)

As in the previous quarter, the building and construction industry is generally considered to have acquired significantly increased credit risk since loan approval and customers in this industry are accordingly classified to stage 2 or 3. Customers in some fishery segments have also been moved to stage 2 for the same reason.

ECL as at 31 March 2024 is calculated as a combination of 80 per cent expected scenario, 10 per cent downside scenario and 10 per cent upside scenario (80/10/10 pct).

The effect of the change of assumptions in 2024 is shown in the line “Effect of changed assumptions in the ECL model” in note 7.

The model write-downs are reduced in the quarter for the retail market due a somewhat lower interest rate path than in the previous quarter in the baseline scenario and an upward adjustment of the expected trend in house prices. The model write-downs in the corporate portfolio have increased, in particular with respect to fishery due to increased credit risk. Overall, this amounts to NOK 32m for the bank and NOK 22m for the group in terms of increased write-downs.



The first part of the table below show total calculated expected credit loss as of 31 March 2023 in each of the three scenarios, distributed in the portfolios Retail Market, Corporate Market and offshore, tourism and agriculture, which adds up to parent bank. In addition the subsidiary SpareBank 1 Finans Midt-Norge is included. ECL for the parent bank and the subsidiary is summed up in the coloumn "Group".

The second part of the table show the ECL distributed by portfolio using the scenario weight applied, in addition to a alternative weighting where downside scenaro weight has been doubled.

If the downside scenario’s probability were doubled at the expense of the baseline scenario at the end of March 2023, this would have entailed an increase in loss provisions of NOK 105 million for the parent bank and NOK 124 million for the group.

  CM RM Agriculture Total parent SB 1 Finans MN, CM SB 1 Finans MN, RM Total group
ECL base case 626 86 72 784 39 16 839
ECL worst case 1,326 259 257 1,842 161 76 2,078
ECL best case 407 51 40 498 20 11 528
ECL with scenario weights used 80/10/10 674 99 88 861 49 22 932
ECL alternative scenario weights 70/20/10 744 117 106 967 61 28 1,056
Total ECL used 70 17 18 105 12 6 124
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The table reflects that there are some significant differences in underlying PD and LGD estimates in the different scenarios and that there are differentiated levels and level differences between the portfolios. At group level, the ECL in the upside scenario, which largely reflects the loss and default picture in recent years, is about 60 per cent of the ECL in the expected scenario. The downside scenario gives about double the ECL than in the expected scenario. Applied scenario weighting gives about 10 percent higher ECL than in the expected scenario.

Report and notes

© SpareBank 1 SMN