AB Artea bankas (ROE1L) Earnings Call Transcript & Summary

Good day, dear investors. Thank you for joining Siauliu Bankas webinar on the -- our third quarter results. So today, we are -- we'll be 3 presenters. Tomas Varenbergas, who is the Head of Investment Management division; Tautvydas Medzius, who is a strategy partner; and myself, Vytautas Sinius, CEO of the bank. So let's just started with the presentation, and we'll start with the key financial and strategic highlights. So I would say the quarter was strong. The profit generated -- net profit generated was in the range of EUR 20-plus million. So with that, we reached almost EUR 64 million net profit for 9 months, with 15.4%, maintaining rather stable efficiency levels for cost-to-income ratio, 45.6%, slightly better than our indications in the beginning of the year. Of course, fourth quarter, traditionally will be slightly, potentially, higher with the cost. So this ratio will be, I hope, somewhere in between those two ranges. We had a strong quarter on the new lending volume growth, and it was mainly through the old business lines, predominantly with corporate lending and that led to 18% year-on-year growth of loan portfolio. So with that, we made growth of our market share, again, in all business segments. So we are gaining that market share in the [ Lithuanian ] market. That also led to pretty sustainably low cost of risk parameter of 0.31%. And the main impact mainly was coming from new and -- newly signed loans. The third quarter was also important on the capital efficiency and distribution events. So we have revised our dividend payout policy and increased that up to 50%, and also initiated share buybacks programs. And as you saw that positively, it were impacted -- impacting our share price performance. And last but not least, we're becoming more and more visible in international markets. So Erste Bank initiated coverage of our bank, and they started with a buy recommendation with a target price of EUR 1 per share. So if we move to highlights of the particular client segments, so we will talk about Corporate side. So growth was even higher than the average of the portfolio. It was 22% year-on-year, and that led to the volumes of around EUR 400 million of new origination. And that was mainly on all business segments, including energy, manufacturing, retail. Slightly less, we were active on the real estate market, but planning was actively in all business segments. And as I mentioned, that led to growth of our market share during the first half of the year up to -- close to 14%, gaining about 1 percentage points during the 6 months of 2024. Talking about Private Clients, again, mortgages were -- rebounced strongly after the last year slowdown in the market. So we gained strong growth during this year, about 99% year-on-year. Origination was in the third quarter, plus -- EUR 76 million and consumer lending was close to EUR 66 million of newly issued loans. Also, we strengthened our capabilities of cross-selling. So we actually collecting new direct consents of the clients. So that increase was about 40% from the beginning of the year. And we also each year making Net Promoter Score index. So this year, we maintained a strong level of 81, which is almost at the same level as last year. And taking into account different type of activities, we are doing, our previous merger with INVL retail, I treat that as a very strong achievement on customer experience dealing with Siauliu Bankas. And on the Investment side, I would say strong origination of bond issuance, so EUR 185 million in the first 9 months, and that already has reached our target and overcame the target of the full year by 16%. And also important investments in our digitalization of our service provision. So we made available online bond subscription in our systems so that clients can now easily subscribe for bonds through our digital channels. And also strong performance of the pension funds. So pensions funds maintained competitive results, both in the short- and longer-term horizon. In third quarter, the returns of second-pillar pension funds were highest in the 7 out of 8 life cycle funds. And the 4-year fund results were the best in 6 out of 8 life cycle funds. I would say strong performance both on the short-term evaluation and on the longer term, which is important for those who are investing into those pension funds. So pass word now to my colleague, Tautvydas, who will overview the macroeconomic situation.

Okay. Let's take a quick look at the big picture for Lithuanian economy. The good news is that our economy is doing really, really well and firing on all cylinders. We are on track for 2.3% GDP growth this year, which is driven by strong consumption, increasing industrial production, a good agricultural output this summer in Lithuania. Look, what's really positive is that the growth is well diversified and visible across economic sectors in the country. Inflation, which was a worry a while back, has largely retreated and it's now among the lowest in Eurozone. It might pick up next year a little bit, due to higher excise duties and wage growth, but overall outlook remains very positive, as you can see from the chart in the middle. So look, this combination of rising GDP, increasing wages and low inflation is directly impacting consumer confidence, which remains the highest in Europe. And it's not in theory. We're actually witnessing it firsthand in our bank where origination volumes at record high. And it's a nice tailwind for us for our growth, and it gives us flexibility for pricing strategies and expanding into new sectors. Looking ahead in 2025, we anticipate that this positive economic momentum will continue. The declining interest rates will further stimulate business flexibility and encourage investments. And I guess one last thing worth mentioning is that we had parliamentary elections in Lithuania, Social Democratic Party, as expected, won most seats in the parliament. It's very likely that the center-left coalition will be formed with mainstream parties. As of now, we expect to continue to -- and do not envision any radical fiscal changes. So all in all, the economy is doing well, and the outlook remains bright. I'll hand it over back to Vytautas.

Yes. Let's come back to Siauliu Bankas' performance. So a snapshot of our performance highlights of the third quarter. So I would say, as we mentioned earlier, the net profit generated is in the range of the previous quarter, which is above EUR 20 million. And despite the decline in EURIBOR, we managed to achieve comparable revenue level, quarter-on-quarter comparison. From events, which were different compared to the second quarter that our operating expenses decreased by 14%, and that was mainly a one-off effect, which increased our costs in the second quarter due to the windfall tax that was accrued during this quarter. Impairment losses highly -- are higher mainly due to the uptick of new lending volumes. So our new originated loans influenced increase of provisioning that you need to do originating the loans. And also worth mentioning that our total assets under management increased by 20% during this year. If we move to the net interest income information, a slight decrease quarter-on-quarter by 2%. Mainly the positive influences were coming from the newly originated loans, mainly from all business segments. So you can see that on the graph on the bottom. And negative impact was coming from the increased cost of funding of EUR 2.6 million. And I would say one-off influenced higher cost of funding is that we kept EUR 210 million bond issuance during [indiscernible] which overlapped with our EUR 300 million senior preferred note issuance, which we have done in the first quarter. I would say in the EURIBOR dropping environment, we managed to keep asset yield almost flat at 6.4%. And as you see, the line of cost of funding, still growing, but it should peak shortly. And our net interest margin also the decrease should be managed as well. If we move to the loan portfolio. The developments, so already we touched this topic several times. So overall figures look strong, 8% growth during the quarter and 18% during last year, compared with -- year-on-year. Strong origination on our corporate banking sector. So the lion's share comes from that, EUR 154 million. The second one is mortgages or close to EUR 60 million growth. And as you see, the loan portfolio yields remained relatively stable. A few comments on net fee and commission income. Since we still have comparative basis with Siauliu Bankas' performance in '23 without merger results, we have a quite substantial growth on a year-on-year basis by 43%. But even without that, we have 9% growth without impact of merger with INVL retail business. That is also -- I will treat as a strong performance in NFCI income. And renovation income as well showed a strong performance year-on-year basis from EUR 1.4 million in the third quarter '23, up to EUR 2 million in the last quarter. And the capital markets were a bit weaker, but it's mainly due to seasonal headwinds, which would be different, I believe next quarters.

Hello, everyone. So Tomas Varenbergas speaking, and I will continue today's -- our webinar with operating expenses section. Cost discipline is maintained despite the overall inflationary cost environment. We keep our cost-to-income ratio below 45%, take it as an adjusted one as we treat windfall tax as a one-off expenses for the bank as we do not project and forecast any of such tax to be paid going forward. We had to account in Q2 some of the windfall tax for the last year, and that increased our Q2 operating expenses amount and that was -- and it is the key reason why in Q3, we have almost 10% lower operating expenses. This -- we have some uplift in IT expenses, and that's primarily driven by our investments into IT platform. So that's the expected expenses. And going forward, we do see that IT will be one of the fastest growing expenses for the bank. Looking to the overall expenses. Expenditures compared to the last year Q3, so we do have increased by more than 40%, but that is explained by our retail M&A transaction that took place in Q4 last year. Let's turn to the asset quality. And well, we keep a very good and strong asset quality. Actually, the impairments mainly was driven by the new lending because we do have to accumulate on originating loans, some of the impairments. And it accounted more than EUR 6 million in the last quarter. But the positive things comes that the improving development of Lithuanian economy had a favorable impact of a level of impairment, and it's already for the few quarters. So the total amount of the cost of risk is close to 30 basis points, and it's below our targeted level, 50 basis points. And even if you look to our stage 2 and stage 3 loans portfolio dynamics, you do see, again, a positive trend. So two reasons that the whole portfolio is increasing. But if you look to the stage 2, so we do have some positions that actually was eliminated for the stage 2 portfolio. So we do have good dynamics on stage 2 loans development. And going forward, we do not expect that somehow in the Q4, we will deviate significantly from cost of risk of 30 basis points. On the funding side, we had significant changes in our structure during the Q3. The key funding source term deposits and demand deposits are growing steadily. So in the Q3, we have 2% of growth rate and very healthy growth rate in the 9 months, which is 8%. We have repaid TLTRO loan, which is close to EUR 0.5 billion. Just to remind that we took that loan in order to invest these funds into securities, and we just earned the spread between the borrowing costs and our investment revenue. So you have already repaid that and it's not on our funding structure. We issued our debut Eurobond transaction in late August, that was very well accepted by investors. Bank got very high demand for our inaugural issue. So the reason that we went for this issuance is that in October, we have repaid EUR 210 million of our locally leased issue. And it will work for our MREL requirements or meeting the MREL requirements and improving our liquidity position. Looking to the cost side. So do see that the cost of funding peaked in the Q3. And if you look to our main funding source of the deposits. So the cost of deposits started to decline in Q3. Actually, we decreased term deposits rates in June, and we're making another step and from next week, even lower rates for term deposits will be paid for -- to our clients. On capital ratios and our capital position. So we do see that we have a very robust capital position, which supports our growth and future capital distribution. We have some post-quarter activities with our capital. So we have issued AT1 debt issue. So it's not still in our capital ratios, took place post Q3 period. On MREL side, we do have high surplus on our ratio. The reason behind that is that at the end of September, we got EUR 300 million of a new issue and still -- EUR 210 million issue wasn't still repaid. So overall, we do have a strong position in order to finance our growth and to meet a high shareholder distributions. So turning to that part. So yes, we have approved our new dividend policy with a minimum payout of 50% of last year net earnings. The other path that we are emphasizing. So it's share buybacks because we do see at the current valuation, the bank is trading that we can enhance the shareholder value. So we already have executed a tender offer in October. So the result that we have achieved, we treat as very good because we didn't see kind of a huge supply from the current investors who wants to exit our position as the final tender offer price was above the market price. And we are ready to begin share buybacks in regulated markets. So we'll start next week on Monday. And the share buyback program will last till 24th of January. And the bank aims to buy back up to 125,000 of own shares, each trading day. So the bank will place orders throughout the trading session and these orders could be -- we'll be able to adjust it if needed. There are some restrictions on the price that the bank can execute its orders. So the key messages that bank orders can't initiate the transactions in the open market. So the orders that will be placed by the bank will stand on the bid side and not -- will execute orders that on the ask side. And we will continue that share buyback program until the fair value -- valuation will be achieved. So we believe that we need to close the gap between the bank's valuation and the peers group, which is still in the area of 30%. We believe that buybacks will increase liquidity in the market and will increase the equity story and its attractiveness for the future and the current -- our investors. Passing the word to Tautvydas to...

Okay. Let's spend a few minutes on segmental overview. So Corporate Clients segment is our largest and most profitable segment in the bank [indiscernible] we have a loan book exceeding EUR 2 billion, which is growing and just very well diversified across different industries. As you can see from the chart in the top right-hand side, and it's also there actually diversified across different regions in Lithuania. It's a high-quality book of business that -- characterized by low LTVs and high collateralization levels, as you can see from the chart in the bottom right-hand side. As we already mentioned a couple of times, we had a record quarter origination levels, record high in Q3, corporate banking, we underwrote close to EUR 400 million of new loans. And we've seen that growth across different sectors, including manufacturing, retail and alternative energy. And not only we're upsizing our existing clients, but we're also winning new clients from other banks, which helps us to expand our market share. So to be perfectly honest, we think that the growth will moderate in the future. But we like the nice tailwind, which helps our growth and allows us to be little bit more flexible about pricing strategies and also to expand into new sectors. Moving on to Private Clients segment. The division delivered strong results in Q3. The demand for mortgages and consumer credit remains very high in Lithuania. As you can see from the chart in the top right-hand side, we originated close to EUR 76 million of new mortgages in the last quarter, and that's sort of double the size compared to the same period last year. Consumer credit, we originated close to EUR 65 million. And during this quarter, we also increased the price a little bit. So despite the price uptick the origination volumes increased by 11%. The overall loan book increased by 21%. And we're also doing well in collecting deposits. As you can see our private client deposits increased by 16%. So the division still is going through a transformational phase as we continue to integrate Invalda acquisition, and we'll continue to transform our sales force. We are laying the groundwork for cross-sell, and we expect to expand into high-value clients in the future. But we need to do a lot of homework for that, which includes collecting direct marketing consents, testing new CRM and training our salespeople. It's not going to happen overnight, but we're investing a lot of time and energy in this division, and we feel good about the achievements to date. Moving on to Investment Clients division. That's a combination of different businesses, including asset management, which we acquired late last year. It's a life insurance business. It's a custodian business and it's a leading local capital markets desk. So when we acquired Invalda retail last year, we knew it's a really, really good business, probably one of the best in Baltics. And we've proven to be right. If you look into AUM, it increased 25% compared to the same period last year, and it's been driven both by new client inflows as well as strong investment performance. Our pension fund, as Vytautas already mentioned, doing really well, 7 out of 8 pillar-2 pension funds generated best results in Lithuanian pension market last quarter which is strong testament for the team's capabilities and competencies. Then on the right-hand side, you see the quick overview of our life insurance business. It continues to perform really well and growing steadily. Both AUM and risk under management decreased this quarter. So in this business, what we actively trying to do is we're trying to replace the broker channel. We're trying to sell more life insurance from our internal Siauliu Bankas channels and sales force. We've seen some traction in that regard, and we think that's going to help with the unit economics going forward. And last but not least, Page 19, we have a quick overview of our DCM business. We did originate close to EUR 31 million of new bonds in Lithuanian market, which may seem a little bit low, but Q3 usually is slightly slower given we have [ fewer summer ] months. But overall year-to-date performance is solid. It's exceeding what we had last year. And we expect the strong growth to continue. We're also investing in technology to enhance our services. In Q3, we launched an online bond subscription platform which will help our clients to subscribe to new issues through a digital channel. But overall, again, we have it with this business, and we envision to maintain a leading position in Lithuanian DCM market, which at the moment, we have 70% to 80% market share. Now then I'll hand over to you Vytautas.

Well, thanks. And this slide, I believe, pretty well represents our growth performance of the business, how the bank runs the business model and the -- our capital efficiency steps that we've made recently. So both, a newly announced dividend policy and share buybacks that are initiated now and already stated and as Tomas explained, we'll continue in a few months from now. That had a positive impact to our share price performance, including the intensive growth that we executed during those 9 months. Another important thing to mention is about share price -- share liquidity. So as you can see, in the gray color, we have quite a strong peak of trades. And that's, I believe, attractive thing for many investors to invest in the positions which are more liquid and more traded. Another important milestones. We crossed the EUR 500 million capitalization level. So we getting closer to a EUR 1 billion bank. And also closing our price-to-book gap with the peers. And even of uplift of share price recently, we still traded in the range of 0.9 price-to-book value. And last slide from our side today is the events that we are -- welcome all of you to meet with us in the nearest future, starting with the Baltics and as well in the Prague and Vienna during this year and the beginning of the next one. And definitely, please subscribe our Investor Relations newsletters, if you still don't and you will be updated continuously as we present information. So thank you for your attention, and wish you good day, and we will be ready for Q&A.

Okay. Let's switch to the Q&A session. We have a few questions. The first question is about Siauliu Bankas' market share. And the question is -- and the comment is that it's visible that you guys are winning market share in corporate banking and business loans. Could you please give us some color on that? Is Siauliu Bankas winning new clients, upsizing existing clients? Is the average ticket size increasing or the same? Maybe Vytautas, you want to take that question?