AB Artea bankas (ROE1L) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Artea Bank's Second Quarter 2026 Earnings Call. Thank you all for joining us today. My name is Tautvydas, and I'll be presenting today alongside our newly appointed Chief Executive Officer, Tomas Varenbergas; and our Chief Financial Officer, Paulius Dauksa. We are pleased to report a strong quarter in our core lending franchise. The good results were partially offset by a noncash nonrecurring goodwill impairment charge, which we'll discuss in greater detail later in the presentation. And with that, let me hand it over to Tomas to walk us through.

Good morning, everyone. Pleased to excited and happy to lead today's webinar. And let's start from financial highlights -- to second quarter financial highlights. So after a weak first quarter, during the second quarter, we have noticed a good caught up to our plan. Lending portfolio grew by 6%. So that's more than we have expected. But as I said, the first half plan is achieved. And we are in a good position to meet our growth target for this year, which is 12%. While growing mainly in corporate and mortgage segments, we protected our margins and net interest margin has bottomed out. It also is supported by Euribor dynamics and good development of our cost of funding. Going forward, we do expect a flat or gradual recovery of our net interest margin. While growing business, we keep our operating resilience in place. Asset quality is good. Capital and liquidity position is also very robust. At the end of the day, our first half results and especially second quarter results was negatively impacted by impairment that we had to do by taking all the assumptions of second pillar reform. So I will give more comments and arguments and how do we see a situation going forward in the next slide. But before going into that, we had a big strategic shift in the management during the last month. I assume a Chief Executive role and naturally, it should be expected that some changes in how to operate and how do we approach into the business will change. In strategic business line, I wouldn't say that revolution will take place. It's more about evolution. But we need to reassess and to review our strategic initiatives, including our core banking platform project. There will be -- and we are already changes in senior management in our organization. We need to bring risk and compliance profile into a new level. So I will spend a lot of time in building organization in this field. And well, the growth in the future depends on how much we invest today. So this also should be reassessed and reviewed. And by saying that all, well, finance team is already working on reviewing our guidance for this year. And it's expected that with the Q3 results, we will come with updated figures and what could be expected during this year. So moving to the second pillar, reform update. So a big shift in assumptions. In first half of this year, so the first quarter of the whole duration of the reform, already 47% of our assets was withdrawn. So we have updated what could be expected during the whole 2-year period. And our model shows that up to 70%, so additionally 20% of the assets under management will leave us. So based on these assumptions, we had to write down EUR 10 million gross of funds rights and goodwill. On the net result by adjusting for the tax benefit, so negative impact stands at EUR 8.2 million. We believe that we took right assumptions, and we take a pain once, and we do expect that we will not need to come back to that topic again in 1.5 years, while the pension reform still be in a place. So let's go to the financial results, and let's a little bit more deep dive into key performance indicators. So first of all, some extended highlights on our performance. Net interest income started to increase. So our loan book growth and positive dynamics in net interest margin supported that dynamics. So with growth in a place and the pipeline that we do have on lending business, we do believe that a gradual recovery of net interest income will be in place in Q3 and in Q4. Our core lending business is well supported by net fees and commission income development. It increased substantially quarter-on-quarter and year-on-year. It's mainly driven by our capital market activities. They are volatile, but they contribute significantly into our revenue lines. We have a good development on daily banking, but it's more related to the pension reform and more activity on private client base. So it shouldn't be as high activity itself going forward as well, the highest activity in the second pillar of funds already took place. Cost discipline is in place for 3 quarters in a row. We put emphasis here. Our recurring costs are well controlled. But by saying that, going forward, it's going to be, I would say, more difficult situation to keep that in -- under such dynamics and pickup in operating expenses should be expected. Macro in Lithuania is doing well. Our underwriting standards are good. So that helps us to keep asset quality at a good level and impairments are low. Only the second pillar reforms contributed mostly to the impairment losses in Q2 and the first half of this year. So at the end, we have achieved a net profit figure of almost EUR 8 million. So ROE is 5%. So that's below our expectations, but it's mainly driven again by noncash, nonrecurring impairment on second pillar funds. Our core business, our lending business is picking up, and it's started to grow nicely.

Yes, I will reemphasize what Tomas just said, our core underlying lending business remains remarkably strong and resilient, but this is the remention of Artea Bank franchise, the key generator of profits. Looking to our total loan book, it increased by 6% quarter-over-quarter and 8% year-over-year. That was predominantly driven by corporate banking activity, which added roughly EUR 180 million in the quarter. And this was driven by a couple of factors. One is a pent-up demand. We are catching up after a seasonally slow Q1 and after harsh wind in Lithuania that pushed some of the activity into Q2, especially some sectors like construction. But also the other factor is the generally strong underlying fundamentals. Macro in Lithuania is strong, and we see our business and entrepreneurs continuing investing into the future. If you look into our mortgage book, it also saw a nice uptick, supported by a healthy and well-functioning real estate market in the country. We also saw a portion of young families leaving Pillar 2 system and deploying those proceeds as a down payment on the first property. We look ahead, we feel very good about this book of business. In the short term, in August, the new legislation comes into effect, which reduces the down payment for the first-time buyers from 15% to 10%. And we think that will act as a nice additional catalyst for increased demand in the short run. But even more structurally, if we look into the long run, we think that mortgage will be one of our key growth drivers. Product penetration in Lithuania is one of the lowest in Lithuania, but that's changing rapidly, and we sit right at the center of this convergence. If you look into the consumer credit book, it still effectively flat. But it's a combination, again, of two factors. The underlying demand for the product is healthy. But again, some of the customers use the Pillar 2 withdrawal proceeds to pay down the outstanding balances, which canceled out a nice growth. It's a temporary effect, and the loan book resumed growing in July. If we switch to net interest income and net interest margin, I'll highlight a couple of things. One of them is asset yields stayed effectively flat at 4.6%. However, our cost of funding went down from 2.2% to 2.1%. And as a result, our net interest margin expanded by 5 basis points. Yes, it's a very modest increase, but one we're generally proud about because it marks an inflection point after several years of contraction. Looking ahead, we feel cautiously optimistic about the future. As Tomas was saying, we expect the NIM will be between flat and minor increase. On the asset side, we could start seeing some repricing flowing through the corporate book and mortgage book. However, on the funding side, we recently launched a deliberately aggressive retail term deposit marketing campaign, which gives a limited offer for Lithuanian customers to earn 4%. It will help us attract new customers, but also will put some additional pressure on cost of funds in the near term. Switching to net fees and commission income. It grew nicely, 16% quarter-over-quarter and 14% year-over-year and reached EUR 8.6 million in total. What's good and what we like about that net fees and commissions is growing as a portion of total revenue. It reached 18% this quarter. But just a year ago, it was 15%, as you can see from the chart on the bottom left-hand side. And this is exactly what we're building towards the revenue mix, which has an element of capital-light recurring cash flows. And we like it, and we'll continue doing so in the future. If you look into this particular quarter, the increase was driven by two things. One is capital markets and the other daily banking activity. In debt capital markets, we saw a healthy activity because issuers typically come to the market once they have full year audited financial results in hand. And we, as a market leader, stand ready to facilitate those issuances. Secondly, on daily banking, we saw a couple of things. One is our daily banking customer activity is growing. But secondly, more specifically, for this quarter, we had an elevated transaction and prepayment and card volumes, which again was driven by the temporary effect of Pillar 2 pension reform, where we had an excess liquidity into the system. Now I'll hand it over to Paulius to walk us through the remaining slides.

Thank you, Tod, and good morning, everyone. This is my first presentation as acting CFO, and I'm happy to join Artea management team and contributing to the future growth of this bank. Let's move to the operating expenses. As you can see from year-to-year, our expenses are mainly flat just with a slight increase into two items, salaries, which was due to inflation and buildings. This was because we have moved to a new headquarter here in Vilnius. If you are looking to the two main metrics, cost-to-income ratio and adjusted cost-to-income ratio, both improved more than 1%. Our operating structure in general are stable and it's the same quarter-to-quarter and mostly year-to-year. As mentioned before by Tomas, we expect a slightly increase in the future of operating expenses. We can move to the next slide. Our asset quality remains strong in our loan book increased. Loan impairment losses for this quarter have positive impact of EUR 0.2 million. And if you're looking to the trailing 12-month cost of risk, we have just 2 basis points, which is pretty significant increase comparing to the quarter 1, which was 9 basis points. General 3 main metrics: Stage 2 ratio, Stage 3 ratio and late-stage NPL, all improving. If we look into the late-stage NPL, we are accounted only for 15 basis points, and we do not believe -- we believe that it's not going to increase in the near future. We can move to the next slide. Our funding. So our funding have 3 main items and well-diversified items. We have term deposits, demand deposits and debt securities. Our total cost of funding, as Tod has mentioned before, decreasing this quarter, decreasing from -- in more detail from 2.17% to 2.12%. This was mainly impacted by the increasing in demand deposits. We expect to continue to optimize our funding structure going forward, and we want that our funding structure will be primarily driven by deposit funding. We can move to next. If you look into the capital ratio, we see that we have pretty solid surplus above management buffers. Of course, if you look into generally comparing to the previous quarter, they all CET 1, Tier 1 and total capital decreased. This is because our loan book increased significantly. When we look into the risk-free assets, we can see that from the year back, our risk-weighted assets increased 10%. Our risk-weighted asset density comparing the same period decreased almost 4%. So we remain comfortable with our capital portfolio balanced risk profile. And we believe that our overall loan portfolio growth, solid liquidity ratios, solid operating expenses control, we have a good foundation for future growth. With that, I want to give back to Tomas.

Good. So before going to the Q&A session, let's wrap up our webinar. So just to repeat that, our core business picked up. Did we see a good pipeline to meet the growth targets for this year? We operate with resilient fundamentals. Asset quality is doing well. Capital and liquidity positions are robust. Unfortunately, results are negatively impacted by one-off noncash nonrecurring impairment. We took a pain once, and we do not expect that we'll need to come back to the second pillar impairment topic again in 1.5 year. And again, with new CEO, with the new management, we are reassessing our strategic initiatives and strategic priorities. That's going to be finished during Q3, and we do expect to come back to you with the new financial guidance for this year and review what are the most critical and the most important things for organization to focus in the near future. So thank you, and let's switch to the Q&A session.

Thank you, Tomas. We will now switch to the Q&A session. I will ask everyone to limit themselves to two questions per person. Any of your questions remain unanswered during today's presentation, feel free to e-mail Investor Relations team, and we'll get back to you very shortly. The first 2 questions come from Enlight Research. And I'll ask Tomas to answer those. The first question is about what's the probability that more pension impairment charges will be expensed? Is it highly dependent on withdrawals in coming quarters? Or have you taken an elevated figure for further withdrawals in your assumptions?

So yes. So a couple of times said that, but let me give another explanation that we believe that the assumptions that we have plugged into our models puts us in a comfortable position not to come to the impairments discussion in 1.5 years. So that's while the pension reform window is open.

Okay. And I think we already answered the second question that I'll let Tomas to repeat and reiterate. The question is, will you revise the post-impairment targets, net profit, return on equity following the pension reform impairment?