AB Artea bankas (ROE1L) Q4 FY2025 Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Artea Bank Investor Webinar. Thank you for joining us today, and thank you for your continued interest in Artea Bank as we close out another transformational year for our company. Today's call will be led by our Chief Executive Officer, Vytautas Sinius; and our Chief Financial Officer, Tomas Varenbergas. My name is Tautvydas Medzius, and I will be moderating the Q&A session after the presentation. And with that, I would like to hand it over to Vytautas to kick us off with some key financial and strategic highlights that showcase our incredibly strong performance in 2025. Over to you, Vytautas.

Thank you, Tautvydas, and hello, everyone, dear investors, thank you for your interest in Artea Group results for the fourth quarter and also summarizing the whole 2025. So let's kick off with key finance and strategic highlights. So on the right-hand side, you see the major figures from the last year performance. So the year was intense, many activities, both internally, externally, and we're happy reaching a level of net profit of EUR 60.7 million. It's slightly lowered our internal budget, but close to that. So the year had some challenges. So that's why it was hard to hit the targets. But looking to the adjusted net profit, it stands at close to EUR 73 million, and that would generate adjusted return on equity of 12.4%. Cost of risk stood below our expectations. So it's good at 0.13% and with a strong CET1 ratio at 16.6%. So talking about financial performance, worth mentioning that net fee and commission income grew solidly approximately 6%, mainly was driven by asset management, renovation business, also strong performance in our capital markets activities. Cost normalization happening. So on the one hand, we had in '25, quite substantial one-offs, mainly driven by the core banking activity and rebranding costs that were fully executed during the last year, but we partly offset that with early savings in the fourth quarter, utilizing our cost optimization program. Also, we're proud of our asset quality. The growth of loan portfolio was not high, but the quality of our portfolio remains very strong, I would say. And that leads also to our strong capital base, as I already mentioned about one of the indicators. So capital base remains solid. And therefore, we expect record high distribution of generated profit of 70%. I'll be back on that shortly. Talking about strategic milestones and innovation. So we -- as everybody probably already knows that we completed our Artea rebranding. So the new umbrella brand is for the whole group. And yes, clients and investors are already clear and familiar with that, and we're strengthening our brand in our market. Core banking program is progressing forward. So we are already second year in this program in active phase. So we're moving to the final year of coming to a completion. Many activities already resolved. So we are doing a lot of testing, and we're expecting the launch in the second half of '26. Continuing strong path in the modernization of the dwellings in Lithuania. We're proud to announce that EIB has selected us as a new provider of a new program, which constitutes of EUR 625 million of fund, and that strengthens -- continues to strengthen our position in this sector. On the debt capital markets, so again, a strong year with EUR 240 million of corporate bonds origination. So we're strengthening our position in this field as well. And also close to that, our investment products have been also successfully launched during the last quarter. So we launched the new first quarterly coupon retail bond fund and also another instrument on equity side, it's a Global Equity Index Plus fund. Okay. Let's check some figures on the macro level. So you'll have more information if you need in our annexes, but a few parameters worth mentioning, it's a GDP development. So strong year-end '25 with total level of GDP growth at 2.7%, strong last quarter that contributed well to the last year growth. Also strong expectation on trading activities for the year '26, standing at level 3.2%. And as we can see Lithuania's economy development, both from the past and looking forward remains pretty strong compared to the average of the new countries. Of inflation level as well, last year was slightly higher inflation at 3.4% for '26 expectation is 3.1%, still remaining pretty high. We still expect that some of that will be driven by also second pillar reform. And previously, the year of '25 was driven by the food price increases, higher services prices also excise duties. So that's the main drivers of the inflation. However, the wages grow faster. Therefore, the purchasing power remains strong, and that leads also to the higher sentiment. And as you can see on the right-hand graph that consumer optimism still remains pretty strong compared both with the Baltics and with the Rest of the Europe. So summarizing the -- last year was pretty strong for Lithuanian economy. So as well, we see more or less similar situation continuing in '26 and potentially in '27. Let's touch a bit on modernization fund. So we won the mandate of a third already and the largest fund that we already quite knowledgeable and experts how to manage that. So the fund size, as I mentioned, EUR 625 million, and that could cover closely to 850 multi-apartment buildings. So previous funds totaling amount was EUR 475 million. So this fund will be the largest and will take time to deal with that. So we're expecting only in the end of this year to start practically using the funds, and it will take several years when we will manage to utilize all this capacity to the market. So it's a good product, both for us and for investors, low risk since it's based on the type of utility payment for the households. So it's well generating both interest income and recurring fees for Artea Bank. And that's worth mentioning that this is also our contribution to the climate goals in Lithuania and Artea Bank as well with this continuous program. Okay. And let's move to the one more topic, which is important for investors. So with already making some information at the previous slide, I would like to elaborate a little bit more that our management intends to propose a record high of 70% capital distribution for the last year's profit. So the split would be a 50% proposition for the dividends and the rest 20% goes for buybacks. So here, we will use actively both instruments of distributing profit and the capacity of the capital we treat is sufficient. And after the repayment of such profit side, we see that we will be in compliance with all requirements. This is, of course, subject to AGM approval and buybacks for also the regulatory approval. But I think we have a good track record already of delivering those instruments. And with that, we're happy to compare us with our peers, so the larger Baltic issuers, and we see that our total shareholder return starts at really solid and 6.9% level. So with that, I will be glad to pass the word to Tomas, who will continue with the financial results of Artea Group.

Good morning, everyone. I'm happy to take over our today's webinar, and we'll continue to walk you through our financial performance in 2025 and Q4. So starting with the highlights that will be more deeply covered -- the most important topics will be covered in the following slides. But -- so in general, our net interest income in Q4 and 2025 was highly influenced by the low base rate environment and specifically in Q4, our increased funding base, the market funding that we have attracted impacted slightly negative development. On fees, we do have a very good performance. In Q4, it increased by 8%. And looking on a year-on-year basis, we have 6% increase. Our all key fees generating segments are doing very well. Operating expenses, I would say that recurring operating expenses are under control. We do have 2 quarters already with no cost increase. Of course, we're undergoing investment period and our one-offs depends on our strategic initiatives and it lasted during the last year, and it will be a case for this year as well. So we have achieved EUR 12.3 million of net profit in Q4. Full year figure stands at EUR 60.7 million. So it's 7% below the target that we have set in the beginning of 2025. But well, we are going and implementing the strategic initiatives, and we believe that we will be back on the track on profitability that we are set in our strategic objectives. Looking on our balance sheet development. So last year was a little bit different from the years that the bank had a couple of years ago. The loan book growth was lower than our funding side. Loan book grew by 8%, while deposits by 17% of the total funding base more than 20%. The case behind that is, strategically, we need to balance more our loan-to-depo ratio. It peaked almost at 105%. And in 2 quarters, we managed to bring it back to 94%, 95%. And we believe that at that level, we can further grow our assets and liabilities in parallel. So moving forward to the net interest income. So in Q4, we arrived at 2.5% NIM. So the biggest influence of the decline came from our market funding. So we took a chance to issue Eurobonds and we are fully funded from the wholesale market for this year as the funding was invested in securities and government bonds. So the yield is lower. So effectively, that brought our NIM at 2.5%. We do see that the asset yield to remain at the current level. The EURIBOR already started slightly to increase. So all the repricing on the asset side already is in place. And with a proactive management of the cost of funding, we will be able to come back to above 2.5% of net interest margin. Going to the loan portfolio. So it increased by 8%. The main growth areas was corporate and mortgage segments. But as you see in the bottom right-hand side, all our core segments was growing. And you do see, as I said, good momentum in mortgages. We do see a good opportunities arising in the corporate financing, and we are entering, I would say, new segments. I could mention one example in Q4 that we have financed renewable energy project. So it's on energy storage and new projects that are being brought into Lithuanian market and well, the size of the potential of that segment, we do see pretty high for the bank. And as I said, the growth for -- lower growth was mainly impacted by our strategic focus to balance our loan-to-deposit ratio. Moving to the net fee and commission income, performance good. These segments are growing, those supported by asset management, capital markets, renovation, asset management was also supported by very good performance on our financial -- on financial markets. Yes, worth to mention that from the 1st of January, our clients can withdraw funds from the second pillar funds. And looking to the January statistics, you do see that in the market, 20% of the clients chooses this option to withdraw. What is good that our client base withdrawals are slightly lower. But nevertheless, we do see a high client activity and our net fee and commission income will be affected. But we are working closely with these clients and we do have a wide product offering, either it's third-pillar funds, either our term deposit product or capital markets solutions. So we believe that the clients will stay with the bank, but in different products. Daily banking slightly decreased during 2025, but mainly that was attributable to our rebranding and one-off costs that we had to bear in order to rebrand. Let's move to the operating expenses. So as said already 2 quarters in a row that our recurring expenses are flat or even declined as was the case in Q4. And the overall operating expenses development is dependent on one-off expenses. So it's increased looking year-on-year, but it depends on the pace of our core banking platform change. And that's investment for the future. So currently, our cost of income, including the one-offs is elevated, but with strict recurring cost management, what was already the case in the second part of 2025. And what we're going to continue during this year as an example, very strict hiring process. We are working on changing our organizational structure. We do look into our distribution channels and what can be done in order to make it more efficient. So plenty of initiatives in place to further to optimize our recurring expenses that could bring us into our desired cost-to-income below 45% in the long-term. Let's move to the asset quality. So we are very happy on developments in this field. Given the strong macro situation, disciplined underwriting, good performance on our client base. Our cost of risk stood at 13 basis points. We do have some elevations in particularly mortgage segments, but primarily, it's due to that during the last year, many methodological changes was implemented, and it shouldn't be expected such kind of a cost of risk for that segment going into 2026. According to our budgeted level, mortgages cost of risk should stand close to 1 basis point for this year, again, due to very good macro situation in the country. We had a slight increase of Stage 3 loans in Q4, but primarily it was of one exposure that was classified into Stage 3. But in the beginning of the year, we came back to kind of a 2.5% or so level that was seen throughout 2025 year. So on funding side, so that was a high focus area for the bank, especially during the second half of 2025. Our funding base increased by more than 20%. Deposits grew by 17%. We did have good inflows either it's in demand deposits or in term deposits. Cost of funding didn't decrease much in Q4, primarily due to our additional issued bonds in Q4. Going forward, we do see a room on our cost funding to improve, especially given the, I would say, liquidity event in the country if the second pillar funds withdrawals and that should lead to pretty sizable amounts of cash to settle into the current accounts in private clients segment. On the capital, so capital levels are very solid. So given the lower growth rate, which was not fully utilized as expected for the increase of our loan portfolio, the ratios are very comfortable and to emphasize that it's still without inclusion of the profit of last year profit that could lead another 100 basis points -- to 100 basis points higher level. So that lower growth lead on our proposition for the higher distribution to the shareholders. So as we look into the best ways of how to utilize the capital, which is locked in the bank. And as 1 year ended and another started. So as always, we provide updated guidance. We believe that our ambition to become a national champion in Lithuania remains unchanged, and we do commit to that. But given the financial performance and some strategic corrections in terms of lower growth and bringing our loan-to-deposit ratio below 100%. And we do see that financial projections should be updated, and that's the case. Nevertheless, we do see that the growth trajectory for this year and the next 3 years in the area of 11% and 13% is a good rate and a good rate to achieve profitable growth, what is the most important. And at that growth level, we can protect our margins. Deposit growth, it will match our loan book growth. For this year, we expect a little bit lower growth because we attracted and prefunded ourselves during the end of the last year. Our revenue will get operational leverage with completion of our core banking change. So the growth will come more at a higher pace starting from 2027 and especially fees growth could be influenced also by the second pillar fund. But operational leverage should come up with the completion of our core banking replatforming. On efficiency, well, we are undergoing investment phase. So our costs are elevated, but with strict recurring cost management and after the investment phase will end, we believe that in 1 or 1.5 year, our cost-to-income ratio will come back to below 45%. And on profitability, well, our goal is unchanged above 17% long-term return is what we are targeting. Again, current elevation is due to our investment phase that we do expect to end in 2026. Some of the still investments could be in 2027. But as you see in the mid column, it's only the minor compared to what investments were made in last year -- during the last year and what's expected during 2026. And our commitment on distributions unchanged minimum 50% of the payout. That could be supplemented by additional share buybacks. So in the case that what is planned to propose for annual shareholders' meeting. And the final thing, the total shareholders' return. So what was said in the beginning of 2024 that well, we commit for at least 20% of return. So after the 2 years, we do see that on average 25% was delivered to our shareholders. And well, we believe and we are committed that we can deliver that in upcoming years as well.

Thank you, Tomas. It truly has been another successful year for Artea Bank, continue executing on our strategy. And most importantly, we're serving our clients with excellence and delivering strong returns for our shareholders. I want to wrap up today's webinar with a few key takeaways. Starting with the growth. Our top line performance remains compelling. Our loan book expanded by 8%. Yes, admittedly, pace a little bit slower compared to the last few years, but our deposits increased at 17% rate, which is exceptionally high. And that was intentional. We're trying to expand our funding base, accelerating deposit inflows and reinforcing our balance sheet. Tomas mentioned that we're focusing on rebalancing our loan-to-depo ratio. And importantly, to note that this has been achieved while we're executing some of the most important strategic initiatives in our history, rebranding, replatforming, revamping of distribution channels are all firmly on track. Second thing is we're very excited and happy with the momentum in our fee-generating business. Our net fees and commissions increased significantly this year, primarily due to successful performance in asset management and renovation. And we're very happy about it. We want to have more fees and commissions in our income profile. It makes our revenue stream more diversified and our business profile more resilient. Moving on to credit. Asset quality remains pristine. That's primarily due to strong macroeconomic environment in Lithuania and our prudent underwriting. Rigorous risk management is part of our DNA and will remain one of our top priorities going forward. On the capital, our balance sheet remains fortress. Our common equity Tier 1 ratio stands at 16.6%, significantly above regulatory requirements. Very important to note that this does not include 2025 profit, which will take this ratio even to a higher level. As a result, we are starting 2026 from a position of strength, and we're very excited to announce the record high distribution to our shareholders of 70%. 50% will come from dividends and additional 20% will come from the buybacks. We remain very optimistic about the future, and we remain confident about our ability to serve clients well and continue delivering superior returns for our shareholders. And this concludes our presentation today.

We'll now switch to the Q&A session. I will ask everyone to limit themselves to 2 questions. If you have additional questions or if any of your questions were unanswered during this call, please feel free to e-mail Investor Relations team, and we'll get back to you directly. And with that, we'll switch to first few questions. The first question is about core banking. What is the current status of this project? What are the key milestones we should be looking at it? And what are you planning the migration now?

Yes. Thank you for the question. I can take it. So the core banking program remains as a key project in Artea Bank. So all the team who are participating in this project are very closely focused on that because it's an important endeavor in the bank history and changing core banking systems is a big exercise. So what is good as we have moved to the final phase when we already made most of the developments, still of them remaining. We are producing a lot of different type of APIs to interconnect the systems. So the work is going as planned. We're now in active testing phase. And so it's a lot of evaluation of end-to-end process evaluation and testing. So before the launching, we want to be sure that everything operates properly. So as I mentioned, the system integration is planned in the second half of this year. So we still -- we don't want to mention an exact date because we want to make sure that the preparation and testing is completed and we have sufficient time to [indiscernible] clients and to be fully prepared. As a good milestone to illustrate the development that we already have changed in February our card processor. So we switched from one vendor to another one who's provided more functionality needed for the future. And that went smoothly without any major impact to the clients. It went as planned. So this is a very good reversal of change that we're expecting. Of course, we will be on a bigger scale, but known that the card processing and card business is a kind of blood flowing in organism, so the same with the cards and making that successful it inspires us to continue firmly with the old program and to complete it successfully.

The next question is about a partnership with Žalgiris. How is this partnership performing against your expectations? Are there any additional updates on that front?

Yes. Thank you. It's a really emotional partnership with a strong brand of Žalgiris and especially victories like yesterday, [indiscernible] it really inspires us to be in the same mood, in the same aspiration going for our targets. So the cooperation goes really smooth, and we have multiple brand integrations with Žalgiris, including our co-branded cards and different type of other integrations. So we will continue Žalgiris further, and we see very good synergies working with this brand.

The next few questions come from Erste. Maybe I'll read them together because they are similar. So question number one, what is your outlook for the net interest margin in the coming quarters? Question number two, what is the interest rate and net interest margin embedded in your revised outlook for 2026 and '28?

Thank you, Thomas, for the question. So for the next couple of quarters, we do expect to be close to the level that was seen in the end of the last year. So it's at 2.5%. But gradually, we do expect with better cost of funding to go to 3% net interest margin. On the asset side, the repricing took place, and we do see already some pickup with increasing EURIBOR, and on the cost of funding, we are undergoing kind of initiatives to improve conversion of our term deposits to the current accounts that could help us to more effectively manage our funding profile.

The next question comes from [indiscernible]. Is there anything new on the regulatory front? Maybe I'll take this question. So there's a couple of things. One is the ongoing Pillar II pension reform in Lithuania, which you might be aware of. Customers are given a choice to the window to exit the system, which was compulsory before that. So they give [indiscernible] window to exit the system and withdraw the funds. So what's happening at the moment is that around -- at the industry level around 20% of the customers left the system already. The statistics at Artea Bank a little bit better than that. So we're running below 20%. And important to note that these things usually the largest activity is in the first few weeks and then withdrawals moderate significantly. We're converting a lot of these withdrawals into other products such as deposits, current accounts and Pillar III pension funds. So we're mitigating the impact. The other thing worth mentioning is that the mortgage regulation is changing a little bit, starting from August this year in Lithuania, the down payment for the first time buyers will go down from 15% to 10%, and that will spur the demand for mortgage even further. We feel good about this product and the demand for it will continue to be seeing in our country. The next question comes from Andre, Swedbank. Could you please provide more granularity on a slower loan book growth across all segments in Q4? Was it competition or other factors affecting you?

Yes. Thank you for the question. Yes, colleagues already mentioned that during the presentation. So this is a complex impact. So there were some competition elements where we were not too aggressive on the pricing and didn't want to go for the pricing on some tickets. So therefore, some refinancing happened, but that was choice ours not to be too aggressive, as I mentioned. One of the reasons was balancing our loan-to-debt ratio, what Tomas already mentioned in more detail. So I will not repeat. But I'm kind of confident with that, that our growth in the loan book will continue. And also, we gave our projections that we -- I believe we will come back to a double-digit growth in '26 in all areas. So we see profit positive for all main areas of our financing, both corporate lending, mortgages, consumer lending. So rather positive for this year with a strong capital and liquidity base. I see that we will continue growing in line with the market.

Thank you, Vytautas. The second question from Andre. It's about loan book growth in 2026. What are the conditions to achieve targeted 11% loan book growth in the next year?

Yes. So I will take that question, Andre. So our deposit portfolio growth for this year is set at a lower rate than the loan book because we prefunded ourselves during the last year. So to grow at 11%, we do not have -- we do not see any risk, and we are confident to achieve that. We do see that high demand for the credit in the country, either it's mortgages or corporates. Of course, some seasonality between the quarters could be. But in overall, 11% and loan growth together with a lower growth of the deposits, it's what we are confident that we can achieve.

The next question comes from Signet. Good morning, Valters. Assuming no reversals, how cost of risk is expected to develop in 2026?

Yes. Valters, I will take that question. So actually, our budgeted cost of risk level for 2026 is more or less similar to what we have achieved during the last year. And well, given the macro situation in the country, we do believe and we are confident that we can end up at that level.

The next question is from David. Why did you feel the need to strategically improve your loan-to-depo ratio and strengthen the balance sheet resilience last year?

Yes, David. Again, I will take that question. So we hit the levels of ratio itself as high. To be at 105% on loan-to-deposits ratio, we believe it's a high level. So that's why we decided to bring that to 90s -- mid-90s. And well, we always said that to be at 95% or 90% loan-to-depo ratio is what our long-term target level is.

And the next question comes from Darius. How are we so cautious about 2026 guidance? We're very bullish on 2027 and '28 with big profit growth in those 2 years?

Darius, so actually, the profit line development depends on the one-offs, the one thing. So if we look into the adjusted ratios, so the growth is not as significant as the line with the one-offs. So we do believe with the end of the investment phase that is expected to be end of this year or beginning of next year, our operational leverage will increase and the investments that we are making now is the reason in order to bring the bank growing and to the level of the profitability that we committed to achieve for the shareholders, and it's above 17%.

I don't see any additional questions at this given moment. If you have any additional questions after this call, please feel free to e-mail Investor Relations team and we'll get back to you shortly after. So we'll conclude our Q&A session. Thank you for dialing in today, and thank you for your continued interest in our story. We'll see you next quarter.