AB Artea bankas (ROE1L) Earnings Call Transcript & Summary

Good afternoon, dear shareholders, investors, analysts, journalists and listeners. Welcome to Siauliu Bankas Investor Conference to introduce financial results for the most recent Q4 as well as for the whole year 2023 and recent developments of Siauliu Bankas. I am Simona from Nasdaq Burnes, and I'll be moderating today's event. We will start with a presentation from Siauliu Bankas team, which I will introduce shortly. And after the presentation, we will open a Q&A session. Please be informed that this webinar is being recorded and will be available for watch at Siauliu Bankas website and on the Natta Baltic Q2 channel. As always, I encourage every one of you to share your questions throughout the whole webinar session using the Q&A session on the right-hand side of place. With that said, I am pleased to introduce today's costs. Tomas Varenbergas, the Head of Investment Management division, Laura Križinauskiene, the Chief Economist; and Donatas Savickas, the Chief Financial Officer. Dear presenters, we look forward to hearing from you with a great interest. Please, the floor is yours.

Good afternoon. On behalf of Siauliu Bankas, I would like to express a warm welcome to all our investors, analysis participants for joining us today for this important investor Lebanon. And we appreciate your time and interest in Siauliu Bankas, and we're excited to share our insights about our recent performance. To begin, we have just concluded an exceptional year. And our revenue growth has been impressive, driven by expansion of both net interest income and net year and commissions. This underlines our ability to generate value across various sides of our business. We have reached substantial growth in both our loan portfolio and local deposit base. Actually, this is not only that reflects our trust of our clients, but also signifies our commitment to promoting the local economy. Our commitment to strict expense discipline remains firm. Even as the growth orientated, mindful or control. And last year, we have achieved a record high net profit. This milestone reflects the effectiveness of our strategic decisions and the right course of our business. Our capital generation has been strong, and I am pleased to share that the management board intends to propose a record-high dividends per share, which represents a substantial payout up to 43%, and that underlines our commitment to delivering shareholder value. To move on since last hour meeting, there are some major developments or achievements in the bank. So first of all, again, -- we completed the merger of retail business and that emphasize our ability not only to grow our business organically, but to successfully implement M&A transactions. And we do believe that the last transaction will deliver both revenue and operational synergies going forward. We have announced our new strategy in the beginning of the year. We have a big ambition to be the best bank in line. And that strategy involves a range of value-driving initiatives, including rebranding, significant IT investments and new organizational structure. In January, we have executed our share buyback program. So that was in overall, the first one. We have implemented it successfully. And looking to the current valuation that the stock is trading; the management thinks that it's cheap stock. And going forward, we believe that this instrument should be and will be used at larger scale pretty soon. We committed ourselves to a net 0 target in 2050. The bank joined science-based targets initiatives. And now that sets a short-term sign based targets, which are aligned with Paris element goals. And last but not the least, the bank was recognized as the best customer servicing bank in a country, and that emphasize our commitment to deliver the best customer services for our clients. Before going to more details about our financial performance. We are ready to discuss the latest macro developments, and I will pass the word to Laura Križinauskiene, our Chief Economist, to lead this section.

Thanks, Tomas. Hello, good afternoon, ladies and gentlemen. It's an honor and a privilege to be here to join my colleagues in this quarterly meeting investors in bank. I sincerely hope that my us and insights will be valuable to you and set the proper macroeconomic stage for other topics we prepared for Ute. Let me start with the major categories. Yes. recent dynamics of open and economy in terms of GDP and the major drivers of the country's economic growth. And actually, we should admit that the recent situation in recent years, we are pretty challenging for all the Baltic economies, including ours because of the series of noneconomic nature, shocks and challenges they have to go through. First of all, our region was hit by the pandemic later, the trailing along inflation shock, which was even felt more by the energy crisis served for the Europe by Russia. And later, we had had pace to the Russian indignant crane and the spillover effects on our economies -- and actually, looking backwards, we can see that ocean economy managed generate through this challenging chapter pretty simply. It's even managed to avoid recession in 2020 and afterwards, experience, security, sound recovery and growth, balanced growth. And it was 2 years in 2021 and in 2022, Latina economy gathered strength accumulated sound reserves and that helps to prepare all the challenges we faced last year when the economies of our region and the whole global economy was hit by both cyclical challenges as well as economic challenges given the deepening factors between Eastern and Western between democratic and undemocratic blocks of the global economies. So last year, with renal is lift into the shallow recession of 0.3%, and that was the result of several reasons. First of all, as I mentioned, we had a significant base effect given the sound growth in 2022. And it was really hard to surpass or to take over these results. Last year, when the effects of weakness of our export markets have kicked in as well as the geopolitical effects also trailed on. Looking to the dynamics of the major growth ever, you can see that all except one, we are underperforming last year. Domestic consumption of households, we have with external drivers were in the rec territory, but fixed capital formation was the pillar, which proceed growing pretty rapidly last year and managed to compensate part of the losses experienced by cyclically affected sectors. And the main reason behind this growth of meters was the public investments, the structural funds, which were directed to energy infrastructure and civil engineering structures and constructions. And that helped the construction sector performed positively despite the private appetite for investments has been diminishing for ratable -- let's now look to the industrial sector manufacturing, which is the core pillar of Latin and externally oriented growth model. And actually, we should note that last year was pretty challenging for this, our major growth driver for the sector, which entails and tubes of longest value chains within the economy. However, some of this negative performance is also a result of the base effect, which was given the solid double-digit growth in 2021 and 2022. After Fitz Alan chapter for our exporters, which who managed well to feed from the logistic change instructions after the product and take over the contracts, which were dedicated for the Far East. Actually, last year, there was some -- the year of some rebalancing phase of some stop and check for competitiveness. And hopefully, the situation will improve this year after the external demand will move wide in the second half of the year because as we can see from the sentiment indicators in the middle and on the right-hand side of the DLM it is obvious that the worst situation is already in the past, given the -- that the hump of inventory is decreasing and the appetite of our manufacturing companies for the employment is growing once again. That's good. And another thing, which is also assuring for improving future is the situation of our labor market, which remains pretty dynamic despite the cyclical challenges our economy is going through. As you can see from the driver on the left-hand side, you can see that the employment has been growing pretty fast in recent years. And actually, last year, the number of the employed was the highest in rather than 15 years period given the high numbers of Ingram's coming to gain work, but the tariff situation of in a labor market and the structural challenges of the in labor markets help food to absorb this additional labor last year and the unemployment rate remains pretty sound at the Pakistan wells. And it also reflects that our businesses don't want to change their capacities and try to sustain the levels of labor and capital and want to be prepared for the moment when the recovery cycle of Western markets will kick in. And hopefully, they will manage to do that. as during this couple of years when the exports have been booming and the inflation brought additional revenues of the businesses. They managed to accumulate sound reserves, and they will help to improve the reformer in the pretense waters we're experiencing at the moment, and we will experience in the first quarter of this year. The average monthly wages proceed growing, first of all, followed by the decisions taken by our government, serious decisions to increase wages in the public sector to have decisions to use minimum monthly, which fuel growth of wages. And last year, we fixed -- we read the growth of average monthly wages at 12%. And this year, we expect that the trend will proceed further. But also, at a bit weaker phase of 7%. And that will help our hospitals to recover what purchasing power losses, which were well trailing around after the inflation shock experienced in 2022. As you can see, the inflation numbers have been improving pretty rapidly. It has stood out as a country registering the highest inflation -- one of the highest adulation numbers in 2022. And now the situation is radically different because the annual change in Kamari's consumer price index stands at 1.1%. And in the second half of last year, has experienced several months of monthly deflation. So that is the good news for our consumers and purchasing power should recover all losses shortly. And actually, we can all see the resilience of our consumption pillar of growth from the second diagram in the slide despite the inflation shock despite the geopolitical uncertainty and other challenges our auto had to go through. The related to retail trade turnover volumes are still significantly higher. And we registered before the pandemic. So the resilience of our wholesales are still intact as hopefully this year, keeping in mind that the wages will proceed growing and that inflation is retreating. -- this trend will strengthen even further. Looking to the dynamics of our credit market, we also see that the situation is much better in comparison to the average numbers registered in the new because for example, the notes rented to house the outstanding amounts of loans granted households have been growing by around 6% more and 6%. And in the -- on average, the loan portfolio is has increased by only 0.3% at the end of 2023. And this growth is the worst in 9 years. So our rent market remains pretty dynamic despite the restrictive and hawkish monitoring policy measures have been introduced. And the room for our households and nonfinancial corporations is also both for financial and other is also strengthened by that the indebtedness level is still among the lowest in the European Union. So that's not a surprise that keeping in mind all the strengths of labor market, also the accumulated financial elect the segments in Lithuanian are among the best in the EU. And it also strengthens our view that domestic consumption will be the one of the strongest pillars for the recovery this year. And I would like to conclude my part with a short peak to the short-term forecast all the nan economy. For this year, we expect that in economy will enter the recovery phase. It will grow by 1.8%, and it's still below Latinas recent potential growth rate because so we don't expect plus rebound in the first half of the year. The strengthening of the economy will happen in the second half of the year after the Western markets will recover and will be fueled by the easing monetary policy. And we hope that the dominating soft landing scenario will come through and will help our externally oriented economy to enter the recovery phase after this short slumping to the negative. So, thanks for your attention. The virtual floor is yours Tomas.

Thank you, Laura. It's actually a very extensive review of macro trends. So let's continue our webinar with our overview of financial performance. So we have achieved record revenue with actually notable net interest income growth, which arise from expanding loan portfolio and higher base rates. Our net fee and commission income grew almost double digit. And you do see that hit our revenue line will expected to increase substantially in the future due to the completion of Vital merger. -- actually, some of that impact already seen in our Q4 performance. Despite facing inflationary pressures and nonrecurring expenses, our operating profit surged been impressive 30% year-on-year. And well, our cost-to-income demonstrated actually improvement during the last year. Increased impairments actually attributed to our prudent risk management and revised parameters. And actually, our specific borrowers' financial situation is good. In a significant milestone, we have achieved a record net profit of EUR 75.4 million. And notably, that excluding the one-offs, the profit should be in area of EUR 81 million, and our return on equity would exceed 16.5%, and that underlines our business strength. Loan portfolio growth was mainly financed by our local depositors. And I have to mention that we have a substantial increase in our clients under management and under custody. So clients' assets under management increased to again, our retail business merger. And currently, these assets are more than EUR 1.5 billion. And assets under custody as well doubled, more than doubled during the last year and build at emphasize our clients' trust in us -- let's look on how this -- all these financial numbers transport into the KPIs. And we do see that our financial targets we have largely met. Of course, we were impacted by some one-offs. These one-offs will be elaborated now on our operating expenses section -- but just to put a note that excluding these one-offs, we are above our initial guidance and even above our revised guidance. But as we are taking these are one-offs. So yes, so we are close, but below our revised guidance on return on equity and cost-to-income ratio. But again, about one-offs or even by taking them, we have concluded an exceptional year. Digging in to the loan portfolio performance. We do see that on portfolio continued to grow across all the key segments, including corporate, mortgage, consumer renovation financing segments and we expanded at a very fast pace. Yes, it should be noted that during the last quarter towards to the end of the year, the growth flattened and the Q4 loan growth rate is just below 1.5%. But still, the loan portfolio growth is above 10% for the last year. The yield -- portfolio loan yield growth flattened in the second half of the year. Well, the key reason behind this, I would say, 2. The first one is that the base rate changed its dynamics. And the second one is that the loan portfolio structure becomes more and more diversified and mortgage, renovation loans mix up be a part of our loan book. Looking to our market share dynamics. The performance, again, the very exceptional performance again results in our increase in the market share. And according to the Q3 data, it increased by 30 basis points, and it's above 10%. I Cost of funding is an important part, looking to our net interest income generation capabilities. On that part, I would emphasize that our deposit portfolio stickiness increased or even all the funding structure stickiness increased during the last year because we have faced a big movement of client funds from the current accounts to term deposits accounts. Of course, that influenced our cost of funding, and it increased throughout the year. Well, our strong growth of deposits decreased our loan-to-deposit ratio during last year. And at the end of the year, it stood below the 93%. Worth to mention that we are going forward to diversifying our funding structure and we completed the second capital markets transaction in Q4. We issued EUR 50 million of senior unsecured bonds. And going forward, we're going to 2024, we are planning to be, again, active in debt capital markets. So just to make some conclusions on net interest income from some insights on loan book development and deposit portfolio, funding portfolio development. No, we do have a strong net interest income growth that was almost 50% in 2023. And well, actually, the net interest income margin growth was due to our good performance on loan portfolio. Well, of course, that was partially offset the NIM was partly offset by increasing funding costs. So looking forward, we see, I would say, 2 challenging challenges. So the first one is to keep our cost of funding growth balanced and more and more flattening and to keep working on our loan portfolio growth, diversified loan portfolio growth. Going to the net Lithuania‘s commission income part, well, -- you do have a solid Q4. And it's more than 20% better result than we had in 2024, 2022 of Q4. Partly, it's driven by the retail business that was concluded the transaction that was concluded in December. So that had a positive effect on the whole quarter result. Nevertheless, you do see increasing diversification in our net fee and commission income structure slightly decreasing daily banking fees are being compensated by increasing our revenues from the capital markets products after the merger of retail business by even bigger pallet or our offering for retail clients, other savings and investments needs. It was to mention that the fees that comes from our SB modernization fund is also increasing. And I'm pleased to say that we are close to launching our second modernization fund and that will keep commission income growing going forward. I already mentioned that the bank was recognized for services on providing or serving the clients. And the bank was named and recognized as the Best Bank in Lithuania last year by international differ agency. At this point, I will pass the word to Donatas Savickas, our CEO, to make some conclusions on our topics in our investor revenue.

Good afternoon, ladies and gentlemen. Tomas talked about exciting things, and I will start my part of presentation talking with not such exciting but still very important part of very big expenses because without investing into the systems into the people, we cannot reach sustainable targets that we are trying to achieve. And fourth quarter was notable from the negative side because the expenses were increased significantly comparing to fourth quarter of 2022. And among the main reasons we could distinguish 2 parts. One is caused by merger of 2 companies. Since December 1, we have an increase in staff in systems and also that affect our operating expenses quite significantly. Of course, at the same time, we enjoy the positive impact to our commission and fee income. And we see this is a huge potential to have positive impact on our net result in the coming quarters and years. And also, in the fourth quarter, we faced some one-off expenses. And on this slide, there are mentioned 3 main ones. So one is that nonrecurring expenses in relation with this measure was in Velletri. And that could be, obviously, separated in 2 parts. One is that related with insurance company that actually we match 2 insurance companies previous one that we have in Siauliu Bankas group, and they managed with Lithuanian. And after major models used in the insurance subsidiary was streamlined in order to have one system. And these models were streamlined in that way that we use by conservative approach and putting some negative impact in this quarter and having more, how to say, room for coming quarters because this is the very important new impact of introduced IFRS 17 standard that came in force in this year. And also another part for these nonrecurring expenses was that the project of Mega itself was, I would say, important bank history and a lot of this negative impact was recorded in the fourth quarter. In total, these 2 factors, insurance and the project itself gave EUR 4.4 million in the fourth quarter. Second windfall reallocation that previously in water reports, we've shown this kind of expenses in profit and loss statement in the profit tax line and awarding recommendations of our auditors, we reallocated to operating expenses, and that gives close to EUR 2 million negative impact. And the that's simple technical thing that we increase minimal value for product plant and equipment recognition used to be EUR 350 now we bank growing, and we focus into more important and significant things that we increased this up to EUR 1,000, and that give one-off impact of EUR 0.5 million. But in the future, it will be less burden to our depreciation and amortization costs. And altogether, these 3 factors, we had EUR 6.6 million negative impact. And of course, the bank is growing. We invest in more and more in systems and not only the fourth quarter was affected. But when we come the previous year -- whole year with this year, so we see increase in both in seller expenses and other operating expenses and with total rose 28% and probably is not exceptional here. So the expenses will grow in the future as well. But of course, it's important, as I mentioned in the beginning, to get outweighed by the income lines and commissions mainly. Moving forward, in order to leave some room time for Q&A session, which going on. So I will... Move on... On portfolio quality. Again, negative impact in fourth quarter due to the, I would say, mainly models driven because bank uses, I would say, conservative approach in models that estimate expected credit losses. And in fourth quarter, after updating parameters that we took from the Bank of Lithuanian Ministry of Finance. So we estimated EUR 7 million new allowances for impairment losses due to impact of parameters. And individual assessment gave small but still a positive impact. So this is important. And the models itself would be not perfect, but the approach is that we create in cushion for some unexpected events in the future if something happens. And we are quite sure that due to the fact that these models are conservative, the session is sufficient to absorb future losses in -- moving on about capital and liquidity position. So I would say a few words that it's a safe situation. Bank tries to balance interest of 2 main groups of stakeholders, shareholders and regulators. And saying that we keep promises that we gave to investors providing dividends and return for their investment. At the same time, we want to be safe on the safe side and to how you say, be stable and safe when we talk with the regulators, and we feel ourselves being in a safe position. And it used to be have that used to be the case that only capital adequacy ratio limits our possible dividend payout. But recently, we have more and more new ratios introduced and one of this is related with MREL requirements. And due to the increase in -- since first quarter of 2022, we will be in advance. And you can see from the graph on the bottom left side of the slide that we create sufficient reserves in the form of capital and eligible liabilities to meet this increased requirement. Talking about liquidity situation, again, is safe, and we are well above this limit that we introduced ourselves, taking into account the requirement of regulator and also taking additional reserve forming a minimum requirement of 150%. And last but not least, just repeating what Tomas mentioned in the beginning presentation, and so we keep keeping our promises, and we are going to intend to propose a record of higher dividends regarding 2023. And this circle in the right-hand side of the slide shows that -- what I said earlier that we are trying to balance the interest of all parties and to have enough capital for organic growth and possible M&A transactions. At the same time, using different forms of payment to shareholders, namely dividends and more recently introduced share buybacks instrument to provide adequate return to investors. And we tested this share buybacks in this year, actually the but going to use this in more, bigger scale this year, subject to payable situation that make this instrument attractive. And from this last graph on the bottom of this slide. Most important part is that date before which shareholders could buy dividends by or shares in order to have dividends if shareholders meeting will approve the decision. This is the April 12 ex-dividend date and all she has bought before that will be eligible for dividends. Thank you very much.

Thank you for the comprehensive overview. Now we will proceed with the questions. Before that, I would like to remind you that you can still submit them in the question box on stream. And the first couple of questions we received are related to the macroeconomic situation in these. And these are the following: the recent economic results of Lithuanian appeared to be more favorable compared to the other 2 Baltic states. What are the reasons behind this parity? And what has happened to Estonia?

Yes. Thank you very much for the question. Actually, everybody thinks that the Baltics are pretty similar comes, but they differ significantly. For example, in a ton is more dominated by such sectors as manufacturing, transportation, while Estonian economy is more driven by services and actually recent developments in Estonian economy were prepare a specific case of the independents of Nordic markets, which experienced challenges in the real estate sector and the loan slowdown. So this export markets weakness resulted into or results of Estonian exports. On the other hand, Estonia had a pretty strong growth in 2022, given the changes in the country Benton system. When the pension funds were opened, if you ones were injected into the economy and the GDP increased by around 70%. So that formed a significant comparative base. And that yoga domestic demand unstable. And so as a result, in the recent years, tonic to sell out to get out of this Boeing situation. However, looking to the medium-term outlook, the country still has strong competitive advantages. And hopefully, it will manage to recover. In the meantime, we nomad a very nice chapter, as I mentioned, for our exports during 2021 and just during 2022, our exports growth was double-digit and that helped us to prepare for the challenges we faced last year. So that shortly take much.

And the next one is, how is Lithuanian bearing in attracting FDIs and is there any notable impact from external challenges such as Russia's contract with Ukraine?

Yes. Actually, it is a very important and thankful question because every economist in Bethania has been following these numbers and statistics because our economic development outlook strongly depends on the incoming FDI because epi I need to go through the transformation to higher value-added economy and incoming strong businesses add to this transformation. But the good news is that according to the data from Lithuanian, the number of projects last year have been a little lower than the record registered in 2022. So that means that for big for investors still see the area as a favorable place to come in. And actually, the whole Central Eastern European region is also benefiting from the current situation, the current global situation of reshoring markets when they developed the companies from the developed countries search for the near markets both of the businesses to develop. So hopefully, the trend will persist further because, as I mentioned, in foreign investments, very important for us.

Thank you very much. And future expectations are somewhat very important of interest of investors. So can you provide some guidance on the anticipated financial results for the year 2024.

Okay, I will take this. We mentioned the forecast for next 3 years in the presentation for our strategic plan. And we also included the same summary slide in material that was presented and shared with you, but I could name several main figures from that list that main probably most interesting ratio is return on equity. And we -- for long-term goal is above 15, what we are declaring consecutive many years in a row. But for the next 2 years, it will be affected negatively slightly due to the -- our planned investment into the core system. And that will -- according to our estimations to 2024, return on equity will be close to 14%, slightly lower. And the other ratios and figures you would see in this material mentioned.

Thank you, Donatas. -- let's stay with you for the next one, which is -- could you please give some detail on the EUR 6.6 million one-off costs and the negative result contributing from the insurance activities.

Probably this question came before I spend this -- my part of the presentation on operational expenses. So I went through the detailed name and the figures for each sector. So I just only could repeat, but in order to save time, I probably did it and look obviously listen this but recorded presentation later on.

Okay. And could you please elaborate a bit more on the search cost of risk in Q4? It seems like it was mostly model based.

Yes, exactly. Exactly. This is true. And again, probably so a similar thinking what could be interesting to investors and the question that came exactly matched my main idea what I said. So it's model related to allowances for time.

And one participant asked that some more detail about the decline in return on equity would be also very helpful.

It's still my turn. But again, first part of this question in LA, I mentioned that declining is mainly caused by our planned investment into the core system. So this is the main reason. But there, of course, this other increase in expenses is outweighed by increased revenue in the form of commission and net interest income.

How do you expect the asset management segment, the development moving forward. Can you please share asset under management targets, projections at this point in time?

Yes. So I will take that question. And thank you for this question. So well, actually, we do look positively with asset management business, and that's one was one of the reasons why we did the transaction. We've in Wilder last year. Talking about this year, the asset under management depends from market fluctuations, but looking to what we can do. So we have a goal to get up to EUR 100 million of inflows during 2024.

Thank you very much. And I would like to group 2 questions about Macro, again, at what pace do you expect deposits to develop in the next, say, 3 to 5 years? And there has been much of a change in the deposit mix. How do you expect that to evolve during 2024.

Yes. So maybe I'll start because of the world macro. Actually, as fine and staying amount of the deposits have been dominated only by the overnight at levels, it's so the dynamics correlate strongly with the growth of earnings in the country. And actually, the trend -- this correlation was pretty obvious and David but it was started in 2022 when the governmental measures that means scrubbed kicked in and stimulated deposit growth to strong pace. But we expect a normalization and return to the vehicle levels of growth. And I believe that if we expect our earnings growth to proceed 7.5 and later count to 5%. So the deposit growth rate should be close to that. And currently, we see a different situation triggered off by the change in the interest rate environment and the search and the share of term deposits in the deposit mix. So we believe that this year, this trend will proceed and even accelerate even the accelerator a bit given the expectations that monetary policy will ease and the interest rates will go down in the second half of the year. As the markets expect so well, we believe that depositors would like to somehow walk in their high-interest rates. So we will try to benefit from the situation. Maybe Micos like to ask some.

So Bill, I guess I've seat good answer for in from my side, I would add that looking to internal stats that we are monitoring closely. We do see that movements from current accounts to deposits of flattening. The growth rate is flattening. And well, what is good, but we do see some signs of decreasing term deposit rates, so not in the market. So that will stop that client's movement to these interest-bearing accounts for the bank and now will help to make cost of funding more growth rate, more flattening.

Thank you for your answer. And one more question has arrived. Do you expect to pay windfall tax in 2024?

I will take this question. So, our current structure of loans and deposits, which is very balanced makes us not vulnerable to this rental tax, and we pay significantly lower amounts in 2023 compared to her other new banks and according to our estimations, we will not be subject to this windfall tax in 2024. So the answer would be 0.

So thank you very much for your answer. It seems like all questions are answered. So on behalf of Siauliu Bankas, at Nasdaq Burnes. Thank you, everyone. It was a pleasure being with you today. The recording of the presentation will be available at Siauliu Bankas' website and on the NASDAQ Baltic YouTube channel. Dear Partners, thank you for a very informative conference. Dear listeners. Thank you for your active participation. Have a good day. Goodbye.