AB Artea bankas (ROE1L) Earnings Call Transcript & Summary

Good day, dear investors. Welcome to Siauliu Bankas webinar of the first quarter of 2025. As you see in presentation, we already have marked with our new name, Artea. So I'm both a bit sentimental, but much, much more excited about the change. And the next webinar only will be with a new name. So let's get started. Let's move on to the key financial and strategic highlights. So I would like to mention that our net profit generated during the first quarter is EUR 17.7 million. If not -- if we take adjusted net profit, it would be closer to EUR 20 million, return on equity, 12.4% and 13.6%, respectively. The quarterly performance is in line with the bank's budget expectation, and we're reiterating the full year guidance as we presented earlier this year. So loan portfolio is picking up. So 2% on a quarterly growth, slightly lower than we're expecting at the beginning. But as I mentioned before that we are expecting the growth to catch up and we will be in line with our budgeted growth for 2025. Net fee commission income performed well, 17% year-on-year growth. As well, asset quality remains strong. We're having the lowest NPL ratio in 5 years. So the underwriting is strong of our loan portfolio. Also a strong achievement during this, I would say, turbulent times, we've raised EUR 300 million senior preferred bonds with a very high oversubscription. Also, as promised, we made our dividend payment to the shareholders last week of EUR 0.061 per share, and this is the largest, highest dividend payout in the history as well. Share buybacks program, we expect to resume shortly. We will have discussions with the Management Board regarding that as well in the nearest future. And we also have an expansion of our equity research, 2 additional coverage houses also starting to initiate our share performance updates. Also new person in our Supervisory Council with high experienced colleague join -- Michael Denhof has joined our Supervisory Council as an independent member. And last but not least, our rebranding starts at May 5, so next month. And please change the records at your side with a new ticker of our bank to ROE1L. So let's move on to the -- a bit more information about our rebranding. So, Siauliu Bankas as I mentioned, rebranding to the new name Artea. And this is our dedication and commitment to Lithuanian people and businesses with this new name. And another actually key investments into our technological platform, with that, we expect to grow our customer base significantly and become even more known and loved brand in our country. Actually, the sounding of the name Artea in the Lithuanian language is meaning getting closer. And that's why we say Artea, the bank is closer to you. Okay. Let's move on to our previous developments with dividends and buybacks. So just a short recap on the recent new developments. So just to remind that in the last quarter of '24, we updated our dividend policy with a minimum 50% payout of previous year's net earnings. So we executed that during the cycle for '24. And as you know, shareholders' meetings approved the allocation. And on April 25, Siauliu Bankas paid out already mentioned dividends as we had promised. We still have introduced buybacks limit of 2.65 million shares, which was approved by the ECB last year. So we, as I mentioned, expecting to come back to the market with this buyback program. And as I said, we will have discussions on that in the Management Board when and how to start to apply that again. And we also approached the ECB for the next phase of buyback program. And our guesstimate, we should have -- we will have -- we will receive the permission in August 2025, subject to all the requirements approved by the ECB. We allow to do that. So also in graphs below, you see our development in the total shareholder return yield, also the dividend yield. So we're showing with the recent years, nice trend of growth of those parameters. So with that, I will pass the word to a colleague to define and describe in details macroeconomic overview.

Good morning, ladies and gentlemen. I was invited here today to make a short briefing about Lithuanian macroeconomic situation given the changed external environment, given the turbulent international trade situation and -- resulting from the Donald Trump's policies. But to start with, it should be noted that Lithuania has learned its recent crisis lessons. And during several decades of external shocks and crisis, Lithuania has managed to develop a proper formula of resilience related to its balanced and sustainable growth, which could be illustrated by the current account balance developments. You can see from the diagram on the left-hand side of the slide that Lithuania's current account balance is positive, and that reflects the strong external position. And that shows that Lithuania is living within its means. And by exporting, working and investing, the country earns enough to cover its imports. Moreover, Lithuania has developed pretty well despite exports orientation because it's a really open economy. And in recent decade, it managed to increase the share of services exports. And those services -- exported services are not only low value-added transportation services, but the weight of higher value-added services such as information business services and technologies has been increasing significantly. Moreover, Lithuania is well prepared because it has a strong fiscal position. As you can see from the low left diagram, Lithuania stands in the green territory regarding its fiscal debt. It's pretty -- it's one of the lowest in the European Union and its recent fiscal balance developments was also pretty strong, despite the external shocks related to the COVID tests. Moreover, later, we experienced external shock coming from the energy prices increases and Russia's invasion in Ukraine spillover effects. Despite all these external turbulences, Lithuania managed to sustain a strong fiscal position and is well prepared to -- well, it has enough room for maneuver in upcoming challenges and has enough room to increase funding for the defense purposes. And the final diagram points to the strong financial sector, low indebtedness of the private sector together with the strong, profitable and well-capitalized banking sector are the cornerstones of the financial resilience of the country. So Lithuania is really good prepared for the upcoming chapter and for the external turbulences triggered by the Donald Trump's policies. Now let's look to the direct connections between Lithuania and the United States. And here, you can see that those ties are pretty -- are not really close because Lithuania's local origin export share going to the U.S. accounts only less than 7%, and only 3 product groups are more tightly related to the U.S. market. Those groups are chemicals, also mineral products and small product group related to precision measuring, optical cinemato and photographic instruments. So all those product groups are of a small elasticity to the tariff barriers. And well, they managed to find the way to the U.S. market. And they also managed to find buyers in the other markets. Moreover, Lithuania might be also affected by the -- not direct, but second round effects given those trade -- the trade war escalation. However, very thorough analysis by Bruegel think tank points that the whole Europe is relatively resilient to those trade war escalation and effects and the GDP growth because of the trade war effects might be reduced only by 0.5 percentage points. And this effect feels strongly against the recent crisis of the pandemic or energy crisis in Europe. Moreover, European exports are pretty unique and the possible inflows from the rest of the world, especially from China, the risks are also pretty limited because those exports are pretty different and the competitiveness, those exports, which goes from China to the U.S., well, are pretty different from the products produced here in our region. So the effects also will be limited and only the positive effects for the consumption and for the inflationary pressures could be seen here in the region. And the positive note is that Lithuania looks pretty resilient in the -- according to the Bruegel's vulnerability score and its key export markets looks resilient also. So that strengthens our position and adds to the resilient outlook ahead. And the final touch of my presentation would be the short-term outlook, which is -- which currently looks pretty good because Lithuania started the year on a strong note. Exporting sectors were really resilient as manufacturing production has expanded by more than 8% year-on-year. Also, consumption pillar looks pretty tough given the increasing purchasing power as wages grows faster than the inflation here in Lithuania this year, and expansionary fiscal policies will also strengthen the cyclical recovery because of the planned bigger investments in both the defense sectors, defense infrastructure and also planned EU structural fund influx. So despite all the increased external environment, Lithuania stands on a strong footing and is expected to sustain one of the strongest macroeconomic performances among the other Baltic economies and compared to the other Central and Eastern Europe countries.

Thank you, Indre, and good morning, everyone. We had a decent quarter and delivered a net profit of EUR 17.7 million on a reported basis, EUR 19.1 million on an adjusted basis, excluding one-off nonrecurring items. Our return on equity expanded sequentially and reached 12.4% on a reported basis and 13.6% on an adjusted basis. This is broadly in line with what we're guiding the markets for the full year of 2025 as we continue executing our transformational initiatives. Although revenues declined as expected, given declining net interest income, which was partially offset by increasing fees and commission income, specifically, fees and commission increased 17% year-over-year. On the expense side, we maintained a disciplined approach. However, our OpEx, excluding insurance-related activities increased this quarter. That's mainly driven by increasing head count, inflationary pressures and one-off items in relation to our transformational activities. Our credit performance remains very strong as evidenced by stable provisioning levels and the declining NPL ratio. Specifically, NPL ratio is the lowest over the last 5 years. Overall, I think it was a good quarter as we continue strengthening our balance sheet, diversifying our revenues and continuing executing on our strategic initiatives. Net interest income, I'm not going to spend too much time on this slide; I already mentioned that NII has decreased, and that's mainly driven by changing interest rate environment. We should see the cost of funding to continue to decline as we are pricing our deposits, which remains the main source of income for our bank. In terms of NIM guidance, we should start seeing it stabilizing in the next quarter. Loan portfolio, I'll start by saying that we have a very well-diversified book of business. 53% of our business is with corporate clients, 27% is for mortgages and 10% with the consumer. And that's the strength of resilience of our business model. Year-over-year, loans has increased by 15%, and that's been visible across most of the segments. Sequentially, the loan portfolio increased only by 2%. But as a reminder, we had a similar level of growth last year. So this seasonal effect comes as no surprise to us. The demand for loans was slow at the beginning of the year, but we're seeing a notable uptick in March, which is continuing in April, especially in our corporate loan book. On loan yields, we have observed a meaningful contraction over the past year. But it's important to notice that the Euribor has increased even more over the same period. So we're maintaining a little bit of the pricing power. Consumer credit, as a reminder, it's a fixed rate product, therefore, less sensitive to fluctuations in base rates. Moving on to Slide 14, net fees and commissions, as I mentioned, increased by 17% year-over-year. It's now accounting for 16% of total revenues, further strengthening our business model and resilience. What's good that this growth was broad-based and seen across different lines of the business. In asset management fees was -- growth of the fees was driven mainly by AUM on the back of the market performance, strong client inflows in pillar 3 pension funds. Our mutual funds and alternative investment funds continue to perform well and attracting new client funds. Capital markets, we're maintaining strong momentum and leading DCM positions in Lithuania with the bond placements. The renovation fees increasing materially as we continue to disburse our latest fund and dealer banking activities also delivered a minor increase. Now I will hand it over to my colleague, Tomas.

Good morning, everyone. It's Tomas Varenbergas and pleasure to continue today's webinar. Starting with operating expenses, so we keep our focus on well controlling the operating expenses. And during the last year, the salaries increased mainly by EUR 2.6 million. It was mainly driven by inflation rate in the country, which is still pretty high and by the head count, which is needed by the bank for rapid growth and executing the strategic initiatives. IT expenses, marketing, buildings or other expenses are being flat year-on-year, so which is good. And we spent EUR 2.2 million on one-offs. So, just to remind that we have communicated that during this year, we will expense EUR 15 million -- up to EUR 15 million for one-offs. And during the first quarter, we've expensed for rebranding and for core banking platform that amount. Moving forward to the asset quality, we are growing fast, but keeping very good quality of our loan portfolio, and it's been improving for several quarters already, and we have reached NPL ratio, which is lowest during the last 5 years. That was driven by closure of nonperforming loans in the last quarter. And that ratio itself is in the area of 2% and the coverage ratio stands at very comfortable 77%. With the cost of risk, we are below our communicated long-term over-the-cycle ratio. So during the last quarter, it stood at 22 basis points, which was mainly driven by private clients' methodology changes in calculating the impairments. What is good to note that on corporate loans portfolio size, we had loan impairments reversals. On the funding, so our highlight of the last quarter is our successful comeback to the international debt markets. So we have issued again EUR 300 million of senior preferred bonds. So that was our second issuance during the last 6 months. We again attracted massive investors demand for our debt with more than 3x oversubscription and we have reached a better pricing that we had by issuing our debit bonds. By this transaction, we have secured almost all wholesale funding which is needed for us during this year. We still have one issuance planned for late this year. On the deposit side, so we are cutting the rates because by having issued new bonds and having a good liquidity position, we can optimize our cost of funding on the deposit side. What is seen that the cost of funding itself started to decrease, and we do see that this decline will accelerate further in next several quarters. Going to the capital, so we'll not spend much time here because we have a good and strong capital position, which is enough for the bank to keep growing fast and to commit to a new dividend policy, which we have approved last year. As what was planned, we have received ECB permission to redeem our Tier 2 notes. So the actual redemption took place last week. Again, just to remind that we have one bonds transaction planned for this year. So we're not doing that now because we are in a good position with our capital ratios. So that new issuance is more needed for us going for the next cycles of our growth for next year. So the last slide of our webinar presentation before going to a Q&A session. So as already mentioned by Vytautas, we're keeping our outlook for this year in place. Even Q1 was weaker on loan origination. We do see already that this operating business line is picking up, and we are catching up with our planned numbers. So we are keeping what was communicated during the last webinar, and the management is committed to deliver the guidance that we have presented. So passing the word to Tautvydas to conclude our presentation.

Thank you, Tomas. So this concludes our prepared remarks. I'd like to use a moment briefly to mention that we're planning to attend multiple investor conferences, both retail and institutional investor related, as you can see from the busy schedule will be depicting on the right-hand side of the slide. If you happen to be attending one of those conferences, please reach out to us. We'd love to meet you and have one-on-one meetings.

Now we'll switch to the Q&A session. First question comes from -- the question is, what development do you anticipate for net interest income in the coming years? Could you please indicate what levels NIM will stabilize at? I'll ask my colleague, Tomas take this question.

Sure. Tomas here. So we do see that the NII is bottoming out, and we do expect that during Q2, we will reach that level. The reason behind that is our cost of funding is decreasing and it's accelerating to decrease further. So that will eliminate a negative impact on our loan book contraction in terms of interest in asset yield. And by picking up in loan originations during the last month and coming months, what we have already noticed we will be able to increase our NII during this year further. In terms of net interest margins, so we have reached 3% area. So we do expect that, that level would be expected for the bank to deliver during this year.

Thank you. We have one more question from Erste. How does the recent market turbulence affect the asset management business? What do you expect for the AUM in the coming quarters? Tomas, maybe you can also take this question on?

Yes, very good, interesting question. So our revenues depends on asset management from clients' inflows and outflows and from the market performance. What is good that regarding the clients, they are sticky ones because our main assets are in pension funds that are not a very client migrating product. But we are more vulnerable to financial markets' performance. So in case we have very volatile or decreasing market, so our revenue stream will be affected by that. But by looking to the Q1 performance and the beginning of the Q2 performance, so we do expect that fee and commission income from this business line should more or less stay at the same level during this year.

Thank you. The next two questions come from IPOPEMA. How much will you spend on the rebranding? And is that process going to be completed in 2025? I'll ask Vytautas to comment on this.

Yes. Thank you Vladan for the question. Yes, it's an important project and life theory in Siauliu Bankas' history in changing the bank's name. So we treat that as not as a cost, but as investments because we're projecting that for the longer period of time despite that we are expensing that through our P&L. And we're expecting that the costs related with that would be in the range of EUR 5 million. The lion's share will be expensed during this year. So most of the activities starting from the May. So that -- the largest part will be communication, marketing expenses as well as the IT costs related with the change in our IT systems as well as some real estate-related things that we need to change our logos on the branch network. So that's -- we treat as our main investments needed to well communicate and to reach the current awareness of Siauliu Bankas Group brands names and of course, to become more well known and beloved brand, as I mentioned earlier in the country.

Thank you. The next question is, what is your cost of risk guidance for the remainder of 2025? Tomas, do you want to comment on that?

Yes, absolutely. I can take this one. So just again, to repeat our communication of -- on cost of risk that over the cycle, we do expect up to 50 basis points of cost of risk. But given strong Lithuanian economy and macro performance and by looking in performance on our clients during the last period, so we do expect that cost of risk should be between 20 and 30 basis points this year.

The next question comes from Swedbank. The question is, are you witnessing increased competition from local incumbents as well as fintechs like Revolut? I'll ask Vytautas to take this question.

Yes. Thank you as well. Good question. So overall, I would describe that the competition in the market is pretty healthy in mainly all business areas. So the macroeconomic situation in Lithuania shows that quite positive environment to grow for the bank. So that's been happening during the last year, including ourselves and other banks where the market is active, clients are able to choose offers from the bank and I think each of the banks is finding the market position, how they compete, how the value is created. So we're confident in our position, and we're able to provide additional value for the clients and additionally charge for that. So I think the competition is intense. It's healthy and each player finds their role, both incumbent and newcomers in the market.

The next few questions come from Wood & Company. The question, how is the Temenos project going? Are you still on schedule and within the budget? Vytautas, do you want to take that?

Yes, of course. From our strategies development, I think this is the most active period when we are investing into our transformation, both from the brand perspective as well from technological platform. So this period, I was quite critical running those 2 projects in parallel, and we took this challenge. I'm really thankful for the team, for the colleagues and partners who are very well planning all endeavors how to manage both those changes since, as I said, they are running in parallel. But the project is running well. We've entered the implementation phase after the previous phase, which was diagnosis phase, where we have identified the gaps, and we now find solutions how to efficiently cover those gaps, whether it's with the Temenos support or with the other third-party solutions. So we're contracting with the project with Temenos and some other partners that are developing together with our team, the -- all the changes needed to upgrade the technological platform to the new one. So expectations have remained the same, the midst of '26, that's our target to deliver with the new -- with the new platform. And so far, everything goes well according to the budget and plan.

The next question is about commission income. NFCI development seems to be ahead of your guidance. So what can we expect for the next few quarters? Tomas, do you want to take that one?

Sure. We're actually very delighted with our net fee and commission income performance, and it's very good that it comes not from one business line, but through different segments. So capital markets is doing well, or innovation is doing well, asset management is doing well. So that kind of outperformance is really seen during the last quarters and by the whole period after acquiring the retail business, asset management and life insurance business. Looking forward, so quarter-to-quarter, it should be expected some fluctuations in our net fee and commission income as by taking the asset management business, which is vulnerable to the financial market performance, so there could be some fluctuations, but we would be happy if we could finish this year with positive single high-digit change on our net fee and commission income revenues.

The next question is about the consumer credit. Can you please provide some color on your consumer loans interest spike in Q1 2025? I can take this question. So when it comes to consumer credit, we have the second largest book in Lithuania. We've been growing steadily and winning market share over the last few years. We think we have a really good product. We're able to underwrite loans in less than 3 minutes for the customer. We have point-of-sale financing reach the scale and we have a product where we think we don't no longer need to compete on the price, we can start playing and trying to combine the growth as well as squeeze a little bit of the margin from the customer. And that's what we're going to do in the future. The next phase of our consumer credit line is to play with the dynamic pricing, try to balance those 2 effects so that we achieve the highest possible net interest income. The next question comes from Signetningalers. What -- does the impairment expense model adjustment already includes the potential impact from the U.S. tariffs? Tomas, maybe you want to comment on that?

No. The current stance of our models doesn't take into account these kind of potential impacts that could be in the future.

And the next question comes from Dan. How do you see nonperforming assets in the near term? Tomas, maybe you can help with that as well.

So as I said that given Lithuania macro situation, our performance recently, we do see that we can end up at 20 to 30 basis points cost of risk. So again, quarter-to-quarter, there could be some fluctuations in case, some of the logical changes will be implemented into our calculations. But looking at the longer-term period, let's say, 4 quarters period, so 20 to 30 basis points expectation is a good choice.

And the other question from Dan. In spite of the wonderful performance, why Siauliu Bankas stock price stock remains underpriced. Happy to take this question. So it's no secret that bank stocks do trade on profitability and dividend yield. What we're trying to do here in Lithuania is we're trying to achieve growth and win market share, which not necessarily stock market is rewarding. Over the next couple of years, our ROE will be depressed. But if you take the medium or long-term view, you'll see the ROE expanding. That's why we're changing our ticker and that's -- we expect that people who take the current price levels will win and will be happy in the medium term. So that is our answer. Don't see any additional questions. So I think this concludes our Q&A session. If you do have additional questions, please reach out to the Investor Relations team, and we'll get back to you as soon as possible, and we're always happy to take one-on-one calls. Thank you, and have a wonderful day.