AB Artea bankas (ZH5.F) Earnings Call Transcript & Summary

Good day, everyone, dear investors. Welcome to the webinar of Artea Bank for the first half of the year. So we will present financial information for you about the results of our bank. My name is Vytautas Sinius, I'm CEO of Artea Bank and with me, Tomas Varenbergas, Head of Investment Management division. So we will lead you through the presentation. And yes, we started with a nicely made video of Artea brand. So I hope you enjoyed that. So this is the first quarter that we are operating under the name of Artea. And this is important milestone in the bank's history, when we evolved from the historically regional bank to much more covering all the country with all services as a national bank. So we have a bank for the whole Lithuania. And I think we are progressing very well with this project, with this transformation to the new name, expressing our historic expertise and evolving to be a much more modern bank. So we made all the necessary work to prepare well and the process moves, I would say, very smoothly. We rebranded all our branches, also our websites, mobile applications, Internet bank was also upgraded and the clients all of them felt this change, and I think it was very positive. Important to mention that the project is delivered on time and within the budget. And yes, we're now operating all our subsidiaries under the same Artea brand. If we move forward, to talk about key financial and strategic highlights. So the first strategic change has happened on the rebranding -- as I mentioned, now we are working hard on core banking system upgrade, so I will give a bit more details on the next slide. On other key highlights, I would mention that loan book growth rebounded in the second quarter following a bit slower first quarter. Important milestone we reached with our mortgage portfolio, which went through the EUR 1 billion milestone and our portfolio becomes even much more diversified. Net fee and commission income grew by 10% year-on-year, which is also showing strong development in this field. supported by renovation financing, asset management and capital market businesses. Asset management, also an important part of our income generation. So we are well delivering according to our Index Plus strategy, which reduces volatility during more volatile times, and it helps to swiftly recover through allocating some of our investments to the private assets. Asset quality remains stable, low NPLs and as you see, our cost of risk stands at 0.24%. So, so far, so good with the loan portfolio quality, no major issues there. We completed in the second quarter, our buyback program. And now we're expecting information from ECB on the next phase of our share buybacks. And delivering each quarter profit generation, it positively affects to book value per share despite that we are doing significant investments. So overall, for the first half, we have delivered close to EUR 37 million, looking to the adjusted profit with approximately EUR 17 million from the second quarter coming to this figure and return on equity at 11.1%, if not adjusted, and close to 30% when we include effect of one-offs. So if we can move forward to highlight some key notes on our projects on a core banking system. So symbolically, I would say we're in the midst of a project. So we started that in the last quarter of '23. Now we are in the implementation phase after the discovery phase that has had been finalized in the beginning of this year. And now we are in the first stage of implementation phase, where we have actually 3 releases of programming and testing of a new system. And before the launch in the midst of '26, we are expecting also to run so-called friends and family, testing on a production environment that would allow us to be well prepared for the full launch for the old clients. So the program is developing on track with the budget. It's a big project for the bank, but we are running, obviously, pretty successfully, taking into account the scope of the program. So as I mentioned, we are prepared a lot with the data migration that all data should be properly migrated to the new system, and all the functionalities programmed and tested there. And also, I would like to give some insights about the changes in the environment in Lithuania on the regulatory angle. So during those 2 years in '25, '26, we have some developments in our legislation, so some of them already has been approved and passed in a Parliament and signed by the President. Some of them are still in the discussions. So one part is related to -- with investment environment, and we see them as providing some new opportunities for developing investment services in the country. So the first one is so-called individual investment accounts, which is international known as ISA, which effective is from the first of January '25 but it will fully will be operational in 2016 when declaration of the taxes will be made. So it will allow for the clients to invest via the tax-deferred account. We -- it could be used for a different type of instruments, stocks, bonds, ETFs. So it would allow to participate for the clients in the capital markets. And also, we think that it will positively affect our investment culture in a country which is still developing and such instrument will allow for the clients to be more active, and that would also will be reflected on the liquidity of instruments in the country, including I believe, Artea stock too. The second initiative is a Pillar II pension reform, which is taking place at the beginning of next year. So this change will allow participants to opt out from the second pillar of a pension system. So the participants could withdraw the accumulated funds during the 2-year period and transfer them to the private investment accounts. So we're expecting better part people will cash out these funds, but the another part will use further for the investments. Therefore, there is an opportunity to provide all the services that we have and we historically known as after the merger with Invalda retail business that this part will be applicable for the clients that's willing to continue investment and to use investing into the first pillar, investment funds and et cetera. So we are getting prepared for this change in the pension system, working hardly with our clients to explain and to all the needed information for the future long-term investments. The second part of changes related with the mortgage market. So February of '25, there is a new regulation of how the mortgages could be refinanced. So it becomes more easier and smooth for the clients to change the banks. And that has been tested. It's working and clients could migrate. But the most clients seems remaining with the banks, renegotiating other conditions. And so it's working, but the most of the clients as we see from the trends with our banks still willing to stay with the bank. But this opportunity is working, and the clients now can much easier make changes within their mortgage engagements with the banks. And the last change, which is also could impact mortgage market development is related with revision of some parameters in the granting of mortgage loans, whether it's a first mortgage or secondary mortgage. So the current minimum of down payment is 15% and the discussions are for first-time buyers to go down to the 10%, so the down payment could be smaller for them. And some adjustments on debt service to income ratio, but I would say that would not be that significant. So the down payment probably one of the most interesting changes will happen potentially shortly if those decisions will be made. So with that, I'll pass word to Tomas to continue with financial results and see you later.

Good day, everyone, and happy to take and continue our today's webinar. So let me walk you through our financial performance in the second quarter and the first half of this year. To begin, I think we still have a pressure on our net interest income from a declining rate environment, what is good that the active funding cost management, we enabled to maintain our net interest income flat during the second quarter compared to the first quarter of this year. And that was what we expected and communicated in the first quarter webinar. And we believe that this stabilization will continue in the upcoming quarters of this year. Our net fees and commission income grows nicely. We have achieved a 10% growth rate compared to this year first half to the last year first half. The large contribution comes from our asset management business, renovation segment and capital markets. On operating expenses, it still increases, primarily due to salary costs together with our investments that we treat as a one-off. So it's a rebranding and IT replatforming. Cost discipline is our top priority. And currently, we are undertaking a comprehensive review of our cost base. So some important cost initiatives that will take place. And in the upcoming quarters, we will communicate you on these developments. On bottom line, we have achieved EUR 14.2 million of net profit, excluding the one-off, second quarter profit was EUR 17.5 million. Looking to our balance sheet metrics. So the key point to mention is that our loan book growth rebounded 5% growth rate quarter-on-quarter. And we have achieved 15% growth rate within year-on-year. So to summarize, so there is still some headwinds on our top line, but we are undertaking cost-cutting measures as we commit to delivering our bottom line guidance this year, and we are still focusing on ensuring the profitability targets that we have communicated for this year. Going forward, to give you some insight on net interest income. So as I said that on top line, there's still pressure, but we have actively managed the funding cost, we are on a path on stabilization. So current, our net interest margin stands at 2.9%. We do expect that 2.9%, 2.8% area is what could be expected at the end of this year. On our loan portfolio, so Q2 was a rebound in growth in all the segments. Looking on year-on-year development, the situation is the same that all the key segments contributes to the growth, and we have achieved 15% on growth rate. on a loan or asset yields, different segments faces a different situation. So on the corporate side, we see in the recent quarters, intensified competition. So together with decreasing base rates, additional pressure on the yields are coming from the competition. On the mortgages, with reforms that mortgage market had, there is higher competition on the margins. but strong demand from the clients helps to mitigate that effect. And you do see a stabilization or even some pickup in the margins on mortgage market recently. On Consumer segment, so our fixed rate products, we introduced dynamic pricing and that helps us, more effectively manage our yields. And we see some pickup in asset yield on these products. Net fee commission income, as said, nicely growing 10% a year, quarter-on-quarter flat, but more -- we are focused more on long-term development. And on the bottom left-hand side, we see that fees are growing nicely, and we contribute as a higher proportion into our total revenues looking for the last several years. To comment what segments contribute most. So asset management is one of them, client inflows, growing nicely. Our asset management performance results are best-in-class, looking in the short term or long term the performance compared to the competitors are very good. So inflows plus good performance helps us to grow assets under management and revenues effectively. On renovation, so we have fully disbursed our second modernization or retrofit fund. So the revenues increased by having higher also assets that we are manning on renovation. We are working on new solutions and new funds that will continue to grow our renovation segment going forward. I would also mention capital markets, we're keeping our leading position in the Lithuanian market by originating corporate bonds in a country. So capital market is still growing, and we do see a good potential to grow that business going forward as well. Let's turn to our operating expenses. So some insights was delivered in highlights section, so costs still increased during the second quarter of this year. It mainly was driven by the salaries, that increased by EUR 1.6 million, looking year-on-year. The other expenses lines, IT marketing buildings, they are flattish, which is good. We didn't pay any solidarity tax this year. That was the case last year. So that last year, we paid EUR 2.2 million in second quarter for the 2023 on solidarity tax. We do not expect that and that was previously communicated that the bank won't to pay any solidarity tax during this year and EUR 4.1 million of one-offs. So it's rebranding and our IT replatforming costs. To mention again, we are currently undertaking our cost base review and cost-cutting initiatives are underway. Asset quality remains good. In Q2, the increase in NPLs was actually due to one reclassification from Stage 2 to stage 3, the coverage ratio remained high. The total stage 2 and stage 3 portfolio also remained stable. So there is no deterioration on our assets, mainly one ticket contributed increase of stage 3 from reclassification of Stage 2 loans. Our cost of risk for the first half running at 0.25 basis points. 12-month trailing cost of risk stands a little higher at 33 basis points. As previously communicated, we do expect that for this year, 0.3% of the cost risk, that's what could be expected. So we expect that asset quality will continue to be stable and at a good level. On the funding, so cost of funding is decreasing. There is a natural rotation from term deposits to demand deposits, due to the lower rates and lower kind of adjustability of term deposit as a product from the clients. Going forward, we see a need to grow our deposit portfolio, especially term deposits, we do see that term deposits, it's a good entry product for our private clients. So we are working on different marketing initiatives, and we will be visible in the market by promoting our savings products. In overall, we do see kind of a need and a will from us to decrease our loan-to-deposit ratio, currently stands above 100%. So we aim to decrease that at least to 100% and probably a more sustainable level would be down to 90%. So deposits growing deposit portfolio will be one of our also focus areas moving forward. On other funding lines, so as planned, we redeemed EUR 20 million of our subordinated bonds. And on other funding sources, there was not much development to mention. Our capital, so probably not worth to spend much time here. Position -- our position is very good. We stand at a position to continue to grow our asset base and to still -- to be committed to high capital distribution to our shareholders. Our risk-weighted asset density remains stable. So while we're growing our balance sheet, our risk profile do not change, and we keep the balance looking from that metric perspective. On our shareholder value creation, so as said, we are committed for high capital distributions and our capital position reflects that, but we can be committed to this. Our book value per share from -- to shareholders are increasing fast. So CAGR for the last 5 years stands for 14%, we do expect to receive permission from ECB for our new share buyback program. So starting from the mid August, we expect to have that in place, and we plan to resume our open market buybacks are to -- the tender offer, it's not decided, but we are willing to start buyback sooner than later. And in general, we continue to proactively manage the capital that the shareholders provided us to running business and to return the sustainable but high long-term return for the shareholders.

Thank you, Tomas, for presenting most of the elements of our development. So I can give some concluding remarks on the current state. So I would say we're focusing from 2 directions. One is strategic initiatives according to our strategy. And I think we have just -- as I mentioned at the beginning, I would say, closed the project of renaming the bank group. And now we will go further with that, strengthening our name and building the more practical elements that will be much more understandable and good for the clients. So the branding is one thing. And another thing is how to make that much more practical and touch and feel for the client base. Another initiative is core banking. So for this year and next year, this will be a high priority for the bank to run smooth with this project. And the other part of the line is the development of the bank on organic growth and dealing with all interest and noninterest income. So yes, we have some headwinds in the net interest income generation. Therefore, as Tomas mentioned, we will work close to our cost management and adapt to the current situation with income generation. In the longer term, we think that the adjustments will happen in our loan and deposit pricing, and we will come back to the indicated levels of our return. Such elements as the mortgages has developed really strongly during the last period, and we've reached, as I mentioned, symbolic level of EUR 1 billion, and then we see still continuously good year for the mortgages in '25, for rest of the year. Share buybacks, it has been also mentioned that we tested all the possible scenarios with share buybacks, and we expect to continue with that. So just to remind our long-term commitments of minimum dividend payout, long-term return on equity and total shareholder returns. So we committed to that despite the year's turbulence in '25 happens, but we still believe that with all measures we are planning, we need to be close to the projections that have been previously presented. So with that, I'll pass the word back to Tomas to explain a bit more on the investment -- Investor Relations calendar.

Good. Thank you, Vytautas, so the next 6 months, we're going to travel a lot. So we keep our promise on proactive investor engagement. So we are ready to meet you in person, in any of event on our calendar as well, in case any questions, we are ready to take that every day. So we have covered the information that we wanted to share today with you. We do see a plenty of questions. So we'll start with Q&A.

So in case you still have some questions, you can put it for us. So to begin, in the half -- a question on our loan book. So I'll ask Vytautas to answer, what loan book growth do you expect going forward?

Good, thanks for the question. And yes, the loan book is developing well, I would say. This is the, I would say, splitting to the parameters like mortgages. So we are running really fast on the mortgage growth. And as I mentioned, we see the potential of growing further during this year, the next half of the year. Corporate lending, again, first quarter was slower and the second rebound. So again, we see that development will be not too aggressive, but growing further in the second half of the year. So the consumer lending as well is progressing well. The market is active. We are generating good return on the consumer lending due to the fixed margin -- fixed interest rates that we have on this instrument. So with that, I would say that we will be with a total year growth in the lower or midst of double-digit figures growth for 2025 full year.

Good. Thank you, Vytautas. We have a question from Vladan Pavlovic from IPOPEMA. Deposit growth has slowed for a couple of quarters now. How do we see this development in the future? So I will take that question. As mentioned in the presentation that deposit portfolio growth is one of the focus areas for us in the upcoming quarters. We do see it has a good entry product for our private clients. And on the same note, we are looking on a more conservative loan-to-deposit ratio. So currently, it stands above 100%. So at least we need to drive that into 100% and even probably some 90s level is more sustainable looking into the bank development for the story. Let's move on. We have a question from Miguel Dias from Wood & Co. So there are 4 questions. Let us cover these ones. There you see our total capital circles at the end of the year. So it will be at a higher level due to slightly lower growth rate, loan growth rate for this year. Did you expect to be above 17% on our CET1 ratio? So what does it mean that our commitment for the high capital distributions for the shareholders in place. You expect net interest margin to remain as reported levels for the rest of the year. Does that assume any more rate cuts by ECB? Our expectations for our base rate is that Euribor will increase by another 20 basis points until the end of the year. And as said that net interest margin currently stands at 2.9%. So we do expect that at the end of the year, we will be in the area of 2.9% or 2.8%. The next question is on fees. Our fee income is this level a good indicative for run rate for the rest of the year? Yes, that's a good run rate. We do see a good potential to grow our fees at a fast pace. So what we have achieved during the last year. So asset management, renovation, capital markets. So our key -- our business segments, where we do see a potential to grow further. The next question is on cost savings. So I will ask Vytautas to cover that. What are the cost saving measures you are putting into place?

Thanks for the question. So as we explained, that getting a bit lower income, but according to our expectation for the first half of the year, we've seen this trend and started to practically consider impact on the cost side as well. So obviously, the largest part of the operating cost in the bank is HR costs. So that part will be touched probably the most. So they are different type of areas like training, like bonuses and other lines will be reviewed thoroughly. Other part is the marketing part. So again, even delivering well on the rebranding. We still saw some optimizations there. And as I mentioned, we will be within the budget, meaning that some savings will be made in this year also in some campaigns. So that's the largest part. And of course, all the other administrative cost lines will be reviewed. And according to our budget, it will be lower, actually. The other area, I would say, which is not from the cost side, we still have a potential for some savings is the provisions since we expected a slightly higher cost of risk. And now we see that the development is more safer or better on the NPL side. So most likely, if nothing happens bad during the third and fourth quarter, we could have some lower provisions there as well.

Good. Thank you, Vytautas. Another question comes from Andrej Rodionov from Swedbank. Term deposits accounted for 34% of total funding in Q2. Where you see this ratio in the long term? As I said that we are more focused on the loan-to-depo ratio, rather than looking on a term deposits contribution in our total funding cost term deposits in a low rates environment, we tend to decrease. So our loan-to-depo is the ratio that we track. And as I said, below 100 is the first aim what we are focused to achieve. And 90s is the long-term level that we are targeting. The other question comes on a no-name basis. Have you evaluated possible impacts of pillar pension reform on your net fee commission income or assets under management within pension funds in 2026. Yes. So we do model different scenarios. And there is 2 things to say. So the first one is, we do expect some outflows and there we can be 20%, 30%, 40%, in such kind of a scenario, our bottom line could be expected by up to EUR 2 million. But that's not what we are kind of taking as granted. Our focus is to discuss with the clients about what is the best to be on where funds as long-term savings. What is the best solution and what should be done with these funds. And our focus is to keep our clients' assets in a bank and organization. And in case we are not happy with Pillar II, funds as a product or the results that these funds we have achieved. So we're ready to offer different solutions. Either it will be the Pillar 3. Either it will be a life insurance solution. Either it will be our term deposits. So we are in place to discuss and we are proactively approaching our clients and we already started to do the needed things in order to mitigate the worst case scenario. And the last question from Vladan Pavlovic, again from IPOPEMA. What is the maximum payout ratio we consider in 2026, given the capital circles? I would say, our dividend policy states that the minimum payout is 50% of the last year's profit. So that's one thing. Another thing is there is no cap or ceiling on the maximum payout. So I would answer it this way. The decision or final decision, all the payouts will be made when we will finish this year or beginning next year. We covered, I hope all the questions, in case we missed some of them, so we will give answers after the webinar. Thank you for listening to us. And you have a nice summer day, and let's meet in our Q3 results meeting. Thank you, and bye-bye.