AB Artea bankas (ROE1L) Earnings Call Transcript & Summary

Good afternoon, dear listeners. Welcome to Siauliu Bankas Investor Relations Conference. I'm Paulius from Nasdaq Vilnius and I'll be moderating today's event. We will start with the presentation from the management, which will be followed by the Q&A session. Please be informed that this webinar is being recorded and will be available for a rewatch on NASDAQ YouTube channel. [Operator Instructions] With that said, I am pleased to introduce today's presenters, the Chief Executive Officer of Siauliu Bankas, Vytautas Sinius and the Chief Financial Officer, Donatas Savickas. Vytautas, please, the floor is yours, and good luck.

Thank you, and good afternoon, dear investors. It's a pleasure to welcome you into the webinar Siauliu Bankas for the third quarter. So the results has been announced today. So we have the same day webinar as the results announced. So we will add on some notes and additional information to the already press releases made earlier this morning. And together with Donatas, we will lead you through the presentation. So let's get started. So mainly, let's move on to the macroeconomic highlights. So probably we'll keep short and condensed information about macro. The topic would be very broad, but I'd like to mention the key points of that. So I would say, overall, we -- living through the rougher challenging chapter. The good thing that the previous years, mainly '21 and '22, helped Lithuania economy to prepare for the current geopolitical and cyclical changes. So obviously, compared to the worst case scenario, we are performing really well, even taking into account a bit weaker results in 2023, including the most of the third quarter results of minus 0.5% of GDP in the third quarter. But still, I would say it's rougher in the range of our expectations and the reasoning -- one of the reasoning is a rather strong performance in the previous year. As you can see in the chart, we still have an expectation that '24, '25 will be bounced back in a positive level, close to 2.7%, 2.6% GDP growth. Inflation, it used to be quite a big issue as a worldwide, Lithuania in particular, with close to 20% inflation in '22. Now we see the trend downwards. And this issue becomes less impactful to our economy, but still, it's higher compared to the EU. Unemployment and economic sentiment of Lithuania peoples, obviously, rather strong compared to the other peers, like neighborhood countries and a euro area, I say we have pretty strong labor and sentiment elements compared to the market. So I would say, with a weaker '23 results, we still have a strong fundamental flexibility and resilience of economy to perform better next year. And most likely, Lithuania will avoid social strength and prolonged recession in the years to come. Those 3 pillars of resilience that we are standing on, I would say, mainly due to the low debts, good financial results that the country has made during the previous years. And as already mentioned, labor markets, which also performs well. So in the graph, you can see and compare Lithuania's performance with a comparable countries, mainly that the Baltic states and I would say the good to know that industrial and retail trade indexes as well as construction is performing calculating from 2019 in Lithuania, much stronger. So I would say, our economy is much more balanced structure compared to the Baltic states, really pays off and that's a solid background for us to continue to grow, as I mentioned, in the years to come. Okay. Let's move on to Siauliu Bankas and to give some highlights of the results. So financial performance of the bank, obviously was strong in the third quarter as well. So we continue to maintain a strong return on equity, close to 19%. Cost of income ratio is low compared to our historic performance stands at a 34% level. So net profit generated is close to EUR 66 million and operating income EUR 144 million. On the balance sheet highlights, I would say, is that loan portfolio is coming close to EUR 3 billion. So yearly -- year-on-year growth is 15% and quarterly's a little bit diminishing, stands at 4% growth, and deposits also reached EUR 3 billion level with 11% year-on-year and 5% quarter-to-quarter growth. Some more news on the capital and some -- also important elements such as dividends. So today, we also announced about our expected dividend payout ratio that we consider that it will not exceed 43% of annual gross profit of this year. So this figure is announced due to the fact that we included the first half year results into our capital base, and we needed to present our intentions or expectations on expected dividend payout ratio. That decision has been made, mainly looking to the current bank performance, as well as historical payout ratios that we experienced previously years, including the COVID years, and also our expectations of the growth that we will have sufficient room to grow in the 2024. So that has a guidance for the dividends and other ratios, I would say, capital adequacy ratio due to the inclusion of our first half result has reached 21.3% and other element also expected this year in the fourth quarter, [indiscernible] issue of EUR 50 million. That is also important from one of the regulatory requirements to meet. So that's a key financial highlights and let's move on the next slide with some initial targets and new targets, just before we probably just to fix that. Net profit growth was 32%. Operating profit growth was 49%, as you can see on the right-hand chart and the income taxes that we have paid in 3 quarters is EUR 90 million, including also solidarity tax, which is in the range of EUR 2.1 million in that figure. And talking about some guidance on the targets. So we see that most likely will reach more than 16% return on equity or '23, it's slightly lower than the previous quarters, since we are expecting the share issue due to the transaction that we are doing with in well merging the retail businesses, and this transaction has to be closed on the first of December. Therefore, some base increase would be expected in the fourth quarter. The cost income ratio is below 40%. Capital adequacy ratio above 20% and cost of risk in the range of 0.5%, slightly higher than our initial expectations. But I would say, uncertainty and still volatile market gives us more considerations to increase provisioning, being more prudent and forward-looking, and also due to the results that the bank performs really well and have a good profitability level. Okay. From the targets, let's move on to the development of loan portfolio. So overall, I would say, taking into account all the environment, but we are performing quite well. Remaining the growth rates, not that aggressive as we used to be, but I would say overall macroeconomic environment gives that too much extreme on the growth -- could be too aggressive. Therefore, we're growing due to the different reasons in different business sectors, not that aggressive as we used to be. Therefore, now we're mainly on a 1 figure digit compare year-on-year growth. Despite that, on a year-to-year growth, we still remain in the double-digit figure. So good to know that all elements of a key growth like corporate, consumer mortgage and other loans continues to grow. So in all the sectors, we added additional to our loan portfolio. And the most increased element is under the other loans. So mainly that renovation product-related lending and also that's, I would say, roughly good compared to the current environment and knowing that those loans are very low, very good credit quality. Right. So let's move to the particular segments like corporate financing. So with that, we have 2% quarterly growth and on a year basis, we still maintain 10% growth. The new loans agreement that has been signed is close to EUR 600 million, so still quite a lot, but slightly less than in '22, 5% less than '22. And still yields are increasing, probably on -- not that based as it used to be. So you can see on a new agreement side, the interest rate stands at 7.1% compared to 7% in second quarter. The quality of the portfolio remains stable. And also due to the previous growth, we still gaining the market share and the market share of corporate financing has increased by 0.8 percentage points to 13.2% in the second -- according to the second quarter date that we have compared to the market. Mortgages and consumer financing to private individual products that we are actively providing to our customers. So I would say, rather modern growth in mortgage lending compared to the previous quarters, but still, I would say, taking into account the current environment is pretty strong at close to EUR 38 million new loans added in the third quarter. The interest rates also has increased to 5.9%. But as I said, the curve is getting more flat. So we're reaching probably the peak of interest rates. If your growth mainly stay at the current level or in the future will start to decline and this curve definitely move a bit downwards. Also, the similar as a corporate lending due to the previous growth, we've gained market share. And obviously, significantly during the quarter, it was 1.1 percentage points. And now we have a 6.3% market share in mortgage lending. On a consumer financing as, I would say, is the most resilient to the current macroeconomic environment. And I would treat as a rather higher sales with yearly growth of 31% and on the quarterly growth by 7%. So also the consumer financing still performs very strong. The yields, obviously, rather flat on a portfolio level stands at 9.7%. And new sales has increased from 10% to 10.5%. And the market share increase, also is a pretty substantial 1.7 percentage points to 13.3% of the markets. Next, information on the daily banking. So commission income generating services. So one of the key factors, I would say worth mentioning, is the growth of new private clients. We've experienced 23.5 new private clients during the 3 quarters of this year, so year-to-date figure. I'd say it's a good generation of new clients. And that also represents on the service plans. So totally, we have 190,000, an increase by 4% of service plans. And that's also pretty well shows on our card administration fees. Cards also growing rougher stably, I would say, number of the clients has reached to 35,000 and grew by 6% only in the third quarter. A bit of other story on the cash transaction. We already mentioning this trend a few quarters in a row, that due to overall trends and also our internal decisions, some limitations that we have introduced cash-related transactions declining. And currently, we'll see that trend. Probably it will stop on some lower level, but to expect a significant increase in those operations, we don't see the ground. Therefore, we are working on the compensation of other fee and commission income including like renovation projects. So also worth mentioning that we already finalizing our usage of investment fund that has been -- a modernization fund that has been created for modernization project purpose, so EUR 275 million. And now we are working on the establishment of the new fund since the renovation project in Lithuania runs really well, and additional financing is definitely needed. So ourselves and also other banks are participating in that. So I'm really happy that in a country, we have a strong focus on working with renovation projects, and we are part of that with a strong market share in this product. Also strongly performing business area is corporate bond placement. So only in the third quarter of this year, we've managed 11 corporate bond placements in the amount of EUR 40 million. And also as a base of our client service online, we are continuously improving our Internet bank and mobile application as our core service channels to serve clients online. So with that, I would pass word to Donatas Savickas with funding and liquidity.

Good afternoon, dear investors and everyone who is interested in activity of Siauliu Bankas. As you know, I will continue starting from funding and liquidity, and commenting information presented on the slide. The main message would be that the structure of funding is changing, and we see an increase in term deposits and decrease in demand deposits. Demand deposits are shifting to term deposits. This is understandable, due to the significant interest rates for term deposits, which became attractive for the depositors. And that shift affects the cost of funding. You see in the chart in the bottom of the slide, the cost of deposits including insurance, increased up to 0.83%. And probably this can -- will continue for some mile because there's not all deposits reprice, which are normally 1 year duration, and the shift for increasing interest rate began probably 1 year ago, and it still continues because competition is quite significant, and Siauliu Bankas is playing an active role. I'm not afraid to be a market maker in certain deposits. Loan-to-deposit ratio decreased slightly, but it's still in the very healthy level, close to balanced level. And we already -- this year, we made several steps that change a little bit -- diversify the source of funding. And Vytautas already mentioned, I will repeat once again that in the last few months of this year, we are going to issue additional MREL eligible bond issue, the amount of EUR 50 million that will diversify our portfolio and help to meet regulatory requirements set by regulatory authorities. And this is possible and the fact that we get upgrades from Moody's in June, we get Baa1 stable outlook rating helps us to attract more institutional investors, and our risk profile is acceptable for them. We can move on to the next slide and talking about operating expenses, nothing unusual is here. Growth is noticed in both parts of operating expense segments. Salary increased by 10%. And actually, it follows our budget forecast, which we made last year. Talking about growth of other operating expenses, which grew by 19%. We noticed a slightly -- slightly below the target. And this is mainly caused due to the carry forward of budgeted projects -- what was planned to execute in this year. And this delay, mainly because there's a huge work out that we are busy with, related with preparation to this transaction with [indiscernible], what we are planning to complete in the first of December. Despite of growing expenses, but operational efficiencies maintained at a very good level of below 35%, which is our long-term target. We can move on. And this slide summarizes the main metrics from capital and risk management issues. Some of them are already touched by Vytautas. But I will start from the fact that with the inclusion of part of the 6-month results of profit into the capital, the pressure on the capital adequacy ratio and well subordinated requirement ratio decreased. And obviously, we are ready to meet tightening requirements, which is anticipated from the beginning of next year. And measuring carefully what the capital level would be optimal in order to meet expectations from investors, we issued this maximum payout ratio percentage that Vytautas already mentioned. So this figure of 43% of annual profit as anticipated payout ratio or results of 2023 is not obviously just a wishful thinking, but we think that if situation will be more or less what it is now, we are ready to follow our dividend policy. We're saying that not less than 25% of group profit will be distributed as a dividend, and taking into account all factors from earlier development and taking into account what possibilities we see to grow in a long year. So this figure is highly reliable with the disclaimer that situation will be more or less as it is now. Cost of risk, it's higher than previous year and Vytautas mentioned main factors, but when we see the NB loan dynamics, nothing worrying signal is noticed even last quarter that a level of NB loans decreased due to the fact that of bad loans we have managed and sold. Liquidity position remains safe, but it's more -- on a healthy level. LCR ratio stands at 183%. But it is to say, well above the regulatory requirements, but not on healthy levels of 30% or so. Yes, we can move on. This slide traditionally ends our presentation. Probably it will be not the case this time, but commenting about the main parameters of this information. So what was to be mentioned that the number of shareholders increased and we are approaching to the magic figure of 20,000 shareholders. And also, what we anticipate, I already mentioned that with this closing of retail business merged within Invalda. So a new share issue will be made. It will be designated especially for Invalda. And after that, taking into account coming acquisition from EBRD, so Invalda state will approach to the level of 20%, which is mentioned in the slide, but it's on the way. But several steps remains to be done in order to reach this level of shareholding. Yes. And probably, that's it. I saw -- already saw some questions from you, and probably I will take opportunity to answer and elaborate the more when we will come to Q&A session. And now I'm passing board back to Vytautas.

Okay. So you can look to some questions that are coming, and I will continue with some extra information that we also have present -- prepared for today. So some highlights on changes where the bank is going through the current days. And so the first thing I would have to mention that we are on final phase of closing transaction with INVL. So many transactions, just to remind on acquisitions and retail business, mainly investments. On the next slide, I will show and remind more. But first of all, yes, the due date is first of December, as we call day 1, when we need to close the transaction. So far, we don't see any major issues to complete the transaction. The team is working hard. That type of transactions not an easy one, but I'm very thankful and grateful for the team not counting hours and completing needed tasks to make this transaction completed. So truly -- using opportunity, and I'm really thankful for the team and related who supports us in this transaction. So most of the needed permissions licenses has been received, including -- as per Asset Management and also a recent permission by the Central Bank of Lithuania, an increase of capital [indiscernible] so another element that the establishment of the branches -- the branches in Latvia and Estonia [indiscernible] business. So all those technical but time consuming and resource assuming exercises has been executed. But nevertheless, we're also doing extra mile in preparing our organization for the future. So we also already reviewed our organizational structure. And also, I'm glad to present several colleagues that already showed in the slide, who will -- already in the team are joining the team and strengthening that. So that -- 3 new business division heads, [indiscernible] private clients division, by the corporate client division and Thomas Investment Management business. So all people with deep messages of the business for many years in the industry, so I'm happy having those colleagues on the board, with strong commitment and ambition to grow in those business areas. Of course, there will be more changes in the structure since the organizations are merging. But I would say those are key, and we are already not waiting for the closure of the transaction. Starting to be prepared. Of course, that would be related that sales networks will be integrated of Siauliu Bankas and INVL. Private individuals and corporate clients will be served in the bank branches, also on a call center and online. So yes, there's many integration stuff is happening also on a technical level. And we see this opportunity for our new strategy as a springboard to expand business model and to do much more that we've been able to do and achieve a loan, Siauliu Bankas and INVL retail business. So combined business, we see as a strong platform for the growth. So with the new strategy, we will come later next year and give more information and more messages related with the renewed strategy of the bank. And the next slide would be just to remind you about the merger of the retail banking businesses of the bank and INVL, mainly that comes from asset management part. So second, third pillar, pension funds, retail investment funds. On the life side, that's life insurance products, Lithuania, Latvia and Estonia. So in total, that would be in the range of 2,030 -- 230,000 new clients for the group, EUR 1.1 billion of assets under management and 160 experts with a strong know-how joining the team. So with that, we'll be the player with 12% and 33% market share on the second and the third pillar, respectfully. And with that transaction, we'll have approximately 8% market share in life insurance business. And in Latvia and in Estonia 1% and 9%. So with that, I would stop with the presentation and we'll be happy to answer your questions. So thank you. Thank you for your attention.

Thank you, Vytautas and Donatas for the comprehensive presentation. Now we will proceed with the questions. And let's start with the first one. How will the windfall tax impact the bank's profitability in the second half of 2023 and 2024?

I will take that. Thank you. And I see quite a big number of questions, so I will try to be short in answering the straightforward question. So all negative impact from windfall tax is already shown in our financial statements of 6 months this year. So we put into our best second quarter, we put into expenses EUR 2.2 million, and we adjusted by EUR 100,000 to the opposite side in third quarter, and that we expect that will be sufficient for this year. And for the next year, we don't see any negative impact from windfall tax and mainly due to the -- we see good interest rates with depositors. We offer good interest rates for depositors that decrease our tax base. And also, we continue new lending, which also extension from the tax base. That's it. Thank you.

Could you explain the decision on setting the maximum limit on dividend payout ratio? Is it correct to think that the pay out range will be between 25% to 43%?

Yes. We touched this topic already several times. But answering precisely to this question, so yes, I believe that the range will be between these 2 figures. And of course, we hope that the second sector will be favorable to be closer to the maximum level of that rate.

Proceeding with the next one. Looking to the current share price trading level, does the management consider activating share buyback process?

Yes. Short answer would be yes. And of course, the situation is favorable, but the buyback process is not so easy to implement it. We need to -- we need to make certain budget decisions, plans. And then when we decided that, that situation is favorable to that, we must get approval from the European Central Bank. And for that level that we plan to make in 2023, we are awaiting this approval from ECB. And talking about future, we making plans in our budget that this practice will be continued and even increased levels in the following year.

What is the split of total loan portfolio between fixed rate loans and variable rate based loans?

Main principle is that except from consumer loan portfolio, which is in the range of close to EUR 200 million, slightly below, they're all majority of 90% -- 95% of remaining portfolio is on the floating interest rate, mainly based on the 6 months [indiscernible]. So as would be the majority is variable rate mode.

Now we will try to merge the 2 follow-on questions on -- what is the average deposit EBITDA, and what is the average effective time lag pass-through in repricing variable rate based loans when the market rate changes?

Okay. Regarding deposits, we are not noticing following any relation with the short-term interest rate -- base rate for short-term durations. We -- our change in interest rate for deposits is mainly driven by the competition and how our competitors act in order -- we -- in order to reach the level of our funding that we need. We have to monitor more what the banks offering and act accordingly. And so far, this relationship between base rate and deposit rates were, how to say, not very high, EBITDA was low. But the competition increases and just how to say, more and more becoming closer to the one. And the second part of question about the time [indiscernible]. So I mentioned in my previous answer that 6 months [indiscernible] means that in 6 months, we repriced almost all our portfolio, that is the price. Therefore all positive impact from asset side, we probably have already in our books.

Now the next question is concerning why the bank has not been performing well, even though the interest rates are at the highest level so far.

Yes, thanks for the question. I could join. Yes, I would say that's a structural issue, I would say that the -- our strategy is to be more balanced on deposit and loan ratio. So historically, we were attracting as much deposits as we can see or able to land. Therefore, our loan-to-debt ratio, taking today's situation, stands at the level of 96%. Therefore, there is no extra liquidity that is not needed for our growth. So that strategy that we used to keep for quite a long time in some periods of time, we're providing efficient results, but not providing the additional income that some other banks experience in the current phase, when the current liquidity could be employed even on the ECB deposits and generate additional income. So in our situation, we are more dependent on our client generated interest than the -- compared to the other banks that are placing those extra liquidity funds on ECB level and generating additional income. So I would say that's the main answer, that structurally, we are different with some peers. And that's why in some periods of time, we are gaining. And then sometimes, we are not gaining as much as those banks do on this period.

Thank you for the answer. Now let's proceed with the next ones. Congrats on solid results. SCB plans to present its new strategy early next year. Could you please elaborate what early means? And also regarding the sneak peek of the new strategy, will it be fine-tuning of the current one or a complete makeover that is bigger and as bolder goes?

Thank you for the question. And John, we can lead to the future. But answering the first part. So the current date is not -- particular date is not yet fixed. But as we see, most likely, it should be first quarter, as we mentioned at the beginning of next year. So we're planning to do that as early as possible next year. So once we're ready and once we have all the improvements, then we'll proceed with the particular data. And definitely, all of you will be invited there. On strategy, I would say that it's bold enough and we see a possibility of ambition goals. And as I already mentioned that we see this transaction is not only the technical transaction to merge businesses into one entity, but to see us as a transplant, as a springboard for the future growth of the bank. We treat ourselves a bit differently than the other banks from the sense of being local and close to the clients. So definitely, we'll keep the DNA and efficiency of working with the clients, and even strengthening that both on our side and INVL that is joining the retail side. So also some technological improvements we also foresee as a part of the strategy. So I would say that would be the most developed and most ambitious strategy that the bank used to have.

Proceeding with the next one. The bank's lending grew by 3.7% quarter-on-quarter or by EUR 104 million -- from EUR 104 million to EUR 4.895 million in quarter -- in the third quarter. Do I understand correctly that it was strongly held by the search renovation loans?

To be precise, I would say that the all -- as already mentioned in the presentation, that all business areas -- lending business areas like corporate, consumer, mortgage and renovation, they gave a share in the growth of the portfolio. But renovation, it was probably the one that was more visible in size. But I would say that's comparable. Corporate, consumer mortgages, they also provided more than 20% -- EUR 20 million each to the portfolio during the third quarter. Renovation and some extra lending that is under the other loans provided slightly more. So yes, the renovation part is essential important, but other areas have also increased the portfolios.

And in terms of loan growth, could you please share an outlook for loan growth in 2024? If possible, then by segment, business, mortgage, consumer or other loans. Obviously, we are in for a tangible slowdown.

Yes. Currently, we are in the phase finishing our strategic plan for the period of next 3 years, and we will present it to a supervisory console in order to get their approval. And we are -- but before that, I wouldn't like to disclose exact figures, but I can promise that in the coming years, we are going to be more transparent regarding our targets and both in profitability and portfolios as well. But for today, I could say that despite this slowdown, we plan to grow portfolio in the range of mid-teens figure in percentage terms. So some of portfolio -- we have separated 3 our priority portfolios: business, consumer lending and mortgages. So they all grow in the range of -- from 10% to 20%. And of course, there are smaller portfolios and it is easier to grow, to achieve a higher percentage growth. But this growth rate of let's say, 15% more or less, since we see us healthy growth and possible to assume growth without taking too risky loans, which probably in this volatile environment will be more and more in the market or asking for new finance. So we must be careful, but it's possible to balance this growth rate with a good loan portfolio for the future.

And do you think that one can reasonably say that quarterly net interest income has arguably peaked in the cycle? Net interest income in this quarter was EUR 40.6 million versus EUR 40 million in the second quarter.

Yes. Probably I would partially agree with the person who asked this question. And we reach, how you see peak in asset repricing. It's still the fund repricing effect. It's still coming and it will be negative. But I think that this negative effect will be outdated by this loan portfolio increase, that I mentioned just in the previous question. Therefore, it will be not hard to see a more stable phase is coming, rather than this significant increase that we noticed in the last few quarters.

And the next one is in terms of the dividends. It's the first time the bank announced some form of guidance on upcoming dividends. Reason being, you had to include the interim profit for the first half in the own funds. Why it was necessary to include first half results into capital base?

Would you like to take that?

We decided to include the first half results into capital base in order to go through this period in the beginning of next year, when our annual profit will be not audited and therefore, not eligible for inclusion into the capital. But when we have regulatory requirements system and they come into force from the first of January. In order to have smooth transition, we decided to apply for remission to include profit and European Central Bank, in order to improve part of the profit, asked what is the maximum dividend level. And therefore, we had to take this decision of this 43% maximum level. This part of profit from 6 months is not included in our capital base. Yes. I hope that answers your question.