AB Artea bankas (ZH5.F) Q3 FY2025 Earnings Call Transcript & Summary

Good morning, dear investors. I'm very grateful for your time and interest to Atea Group meeting and webinar. And today, we'll be happy to present our 9 months financial and other results and key developments. So let's get started. So key financial and strategic highlights. We can start with net profit generated. So EUR 48 million net profit for 9 months. If we count adjusted to some one-offs that we are counting during those years, the result would stand at a level of slightly more than EUR 56 million. Return on equity, 11.1% and 13%, respectively. and other parameters you also see in the slide. So I will run through the key highlights just to emphasize the most important elements of the financial and other developments. So net interest income grew by 6% quarter-on quarter, so rebounded from the previous quarter. And it was supported by the stable NIM. Overall credit portfolio dynamics looks good in all sectors. So the economic situation positive. So we have pretty good development in the loan book. Net fee and commission income is also grew by 8% year-on-year. So stronger net performance than expected in our budgets, which was driven by, of course, a strong renovation financing, Asset Management performance and other income lines. We try to keep a stable operating cost despite that we had on-off and we have investment in our strategic projects like rebranding and also our technological platform. Therefore, the cost management is key in our agenda as well. Asset quality, mainly of our loan book is performing really well. That deal ratio slightly above 2%. So it's pretty good level of NPLs and other parameters. So impairment levels, we received even reversals during the quarter. If we count on solid level, net profit for the third quarter was close to EUR 20 million, if we take adjusted profit. And this is close to our yearly indication of how profit and return on equity guidance and stood at 13.5% for the third quarter of adjusted net profit. We started a very interesting strategic partnership with Kauno Žalgiris. So I'll give some more highlights in the next slide. So not talk too much now. Another area which already was mentioned, but also to emphasize about the cost optimization. So we are looking for different type of opportunities to get more efficient with our cost base, knowing that the top line is lower due to the EURIBOR developments, cost of funding. So cost to efficiency and cost slimness is one of priorities for the forthcoming quarters as well. Successful issuance of EUR 300 million senior bonds, which continues to diversify our funding structure and also we were happy about the very strong investor demand for this issuance. As well, we are happy with the Moody's reformed rating with a stable outlook, the Baa1 and highlighting our strong performance parameters like capital and liquidity. And last but not least, share buybacks. We have resumed this program. We've already executed part of that. So the next part will be executed in the future. So we have, as before, utilizing all the elements to work efficiently with our capital base. We have a few words about our strategic partnership with Kauno Žalgiris. So basketball overall in our country, we treat it as a second religion. Therefore, to cooperate with top-notch basketball brand as Kauno Žalgiris is a privilege to us. It's a really nice and well-structured partnership. So we will be visible in most of events and both internationally and locally, since also placed in Euro League. So as you can see, the 8 of 10 Lithuanians are interested in basket and 76%, supports Kauno Žalgiris placed outside the country. So recognition of this club is very strong. And I hope each Lithuanian is proud that we have such a strong team in the universe of other best players -- basketball teams and performs really well. So along with all the communication, we also launched credit and debit cards with different type of benefits for the fans. We're willing to acquire. So also advertisers -- those cards for all those who are willing to support Žalgiris and the real plan. And with that, for the bank, we see that we will increase our brand visibility since the brand is still pretty new, and we need more awareness for this brand. The development is really good, but with such a partnership, we will reach the higher levels. With that, will also amplify our positioning supporting such a strong brand is Kauno Žalgiris, we want to emphasize our closest -- closeness to the client closest to the Lithuanian people and also naming that we are local bank, willing to be the local champion in the finance industry. With this, also, we expect to attract new clients. We have a different type of clients, and we willing to gain more longer and higher value retail clients. So this campaign with this positioning of a product we will hope to achieve that. And definitely, that will be also additional expected stream from the co-branded and cards related with this branded proposition. So that's it from my side. I will pass the word to my colleague Indre. She will present microeconomic outlook.

Thank you very much. Good morning, ladies and gentlemen. Thanks for doing time and spending it with us. What's microeconomic perspective? Actually, it is wonderful to talk about Lithuania's economy to to look into retrospective and to see how strongly fundamentals of our economy looks. Last year, our real GDP increased by 3% and Lithuania continued on a rapid pace this year in the first half of the year, our economy even gathers the pace and grew by 3.2% and stood out among the European Union countries according to the growth rates. And also in the context of the Baltics, Lithuania outperforms other neighbors and proceeds growing rapidly. However, we expect Lithuanian economy to slow down in the second half of the year. And the main reason is the weaker external drivers, weaker manufacturing performance. And all in all, we expect Lithuanian economy to grow by 2.7% this year. However, the next year, Lithuanian economy will gather the base once again. It is interesting to look to the structural breakdowns and to see how the major economic drivers have shifted. Actually, at the moment, since the beginning of the Russian invasion of Ukraine, we see that the traditional economic activities, such as transport, manufacturing and domestic trade have been slower. However, Lithuanian economy has been driven by those higher value-added economic activities like information technologies and computer science, also on business services, finance and insurance. So this transformation, this structural transformation is taking place here in Lithuania. And hopefully, it will will proceed in the future because Lithuania should transform and should well translate into the higher value-added economy. On the other side, Lithuania is also very energetic in the cyclical upturn because we capitalized a lot on the lower interest rate environment as the European Central Bank reduced interest rates normalized to them. Lithuanian credit market gathered momentum. And as you can see from the right-hand side diagram, Lithuania tops the rank of European Union countries according to the loan portfolio dynamics. The middle graph illustrates that loans granted to nonfinancial corporations have been expanding at an accelerating pace. And in September, the portfolio was by 1/3 higher than a year ago. The credit injections into households sector also was really dynamic and the portfolio growth was also high. So the cyclical recovery, cyclical upturn stimulates local sectors, cyclical is more sensitive and also adds to the economic strength and the stronger performance of the domestic demand. Despite the real dynamic credit market, we see that the investment levels of the Lithuania still remains among the lowest in comparison to other EU economies. And also, it is useful to stress that the quality of our loan portfolio is excellent despite the interest rate environment changes. What is also interesting and useful to tell is that currently, our state budget plan for the next year is presented. And Lithuania is sticking to its targets to increase its defense spending really significantly and exceed 5% of GDP. And actually, Lithuania is walking the talk and plans to fulfill this target for the next year and the following years. And that's only natural and positive sales to both our Defense partners as well as our potential for investments -- investors and local businesses. Moreover, talking about next year, we increased our forecast significantly up to 3.3% in terms of GDP growth because the next year, we will see a lot of positive tailwinds for our economy. First of all, accommodative and socially oriented fiscal budget for the next year is planned. Moreover, the second pension pillar reform will kick in and also stimulate domestic consumption. And last but not least, the Bank of Lithuania has introduced changes to responsible lending regulations, which also add fuel to real estate housing market. So last but not the least, also EU funds are planned much higher than we used to have in recent years. And hopefully, Defense money will not only go abroad, but also find the way in form of investments here, locally creating for multiplicators -- local multiplicators. And the final slide is a summary of what I have said. First of all, we expect slower growth in the second half of this year. The next year, Lithuanian economy will have a much faster economic performance as a result of one-off factors as well as pro- cyclical fiscal stance and positive upturn of the business -- of the business cycle. So the results -- macroeconomic results will be very positive. However, in 2027, it won't be easy to outshine them and that's why we expect a bit slower economic growth. So thanks a lot, and giving the floor to Tomas.

Yes. Hello, everyone. Thank you, Indra, and let's continue our webinar with our financial performance during the Q3 and the 9 months of this year. So to begin, a general overview of our performance in income statement and balance sheet. So on the top line, our net interest margin or income stabilized and given by slow growth of our loan portfolio, but together with active management of cost of funding, we managed to increase our net interest income by 6% quarter-on-quarter. Net fee and commission income supports our revenue generation and shows high growth, 8% year-on-year. Quarter-on-quarter, we deliver sustainable growth. And it's all supported by generation and Asset Management business. Capital Markets business also delivering a good contribution to our net fees and commission income. On OpEx side, we remained with flat operating expenses. And only our strategic investments brings the growth of operating expenses itself. As I said, during the last our webinar, we are taking comprehensive review of our cost base, and we'll elaborate on that topic a little bit later. On the bottom line, we achieved strong result, 16.5% of net profit for Q3. And even if we take out the one-off expenses, we are close to EUR 20 million for Q3 and 13.5% ROE for quarter. Our loan book expanded by 8% year-on-year and deposit portfolio by 15%. So we are happy about that our focus on increasing deposit portfolio and bringing our loan-to-deposit ratio below 100%, was quickly implemented. And going forward, we believe that our deposit portfolio growth will match loan book expansion. So going forward, more deeply into some important segments. So starting with net interest income. Yes, we are operating under a declining rate environment. But we do see that our asset yield already repriced with a decline in EURIBOR. And going forward, we expect that by taking a flat EURIBOR performance, we'll keep asset yield at the same level. We are actively managing our cost of funding, and it's nicely decreased during the last quarter, mainly by repricing of our Deposit portfolio. Going forward, as we have issued a new bond issues. So cost of funding should remain at more or less the same level. Additionally, we have introduced hedging instruments, and it will reduce our sensitivity in case the rates are going to decline in upcoming quarters. Looking to the fourth quarter or upcoming quarters, so we do expect still that our net interest margin should and up at 2.8% to 2.7%. Let's turn to the loan portfolio. So our loan portfolio increased by 8% year-on-year, and the key segments that contributed to the growth is Corporate and Mortgage segments and Consumer. The overall credit demand is good in a country, and it's well supported by the macro environment. During the last quarter, we have a slower growth in Corporate segment. The reason is that in July, we had a couple of large exposures that we have refinanced. And the amount of refinancing was close to EUR 100 million. So we had to run fast in order to to catch up with our growth rates for the quarter and for the whole year. We believe that we can bring our loan portfolio growth rate in the area of 13% or 14% for this year. Net commission income, good growth, mainly contributed by Asset Management and Renovation segment. Asset Management fees are supported by the strong financial market performance. Our Fund Management team is delivering not much results compared to the competitors. The Renovation segment performs well. We keep being active by originating these loans, and we are working to launch additional funds in order to keep that business line performing well in the coming quarters. The decline in daily banking was actually driven by one-off or onetime costs that be related to rebranding as we needed to change some of our products into the new branded ones. Overall, our net income contribution to the total revenues is nicely increasing and is close to 15% of our total revenue. Let's turn to the operating expenses. So we had a good development in Q3, by digging out the one-offs. So our operating expenses are stabilizing. Salaries, IT marketing buildings, more or less flat. Our Other expenses increased by EUR 1.3 million. It's twofold effect. The one is we have changed the accounting of our digital authentication expenses from the IT to the other ones. And we had EUR 0.5 million of one-off nonrecurring expenses on Corporate development that won't be in Q4 or going forward. And one-offs. So we are implementing our strategic initiatives, rebranding our technologic update upgrade is underway. Rebranding is already finished. And in Q4, only minor expenses still will be accounted as one-offs. But technological upgrade, it's still in progress. We are midway and the launch is expected mid next year, so we'll still -- we'll be investing in that strategic initiative. On cost-cutting initiatives, as it's very important for us organization as our top line is lower than we have anticipated. So we have already started implementing the measures in the Q3. We have changes in the Management Board. So we have streamlined the structure and the responsibilities of the Management Board. We're still working on consolidating the leadership roles and finding the best way in order to support our strategic priorities going forward. We are under way on optimizing our operational structure. We have merged 2 divisions in Q3 and working forward to bring the organizational structure into the more efficient way to operate the business. And we are undertaking the review of our noncore initiatives. So we have post initiatives that low impact and are not supporting our strategic goals and actually we are taking a zero-based budgeting. So in order to put all the expenses that the organization is bearing that we have the background in order to deliver the guidance that was communicated to our shareholders. Going forward to Asset Quality. So it's performing well, with reversals and it's well supported again by the macro station that we having in Lithuania and our disciplined underwriting of the loan portfolio. We have implemented a significant increase in credit risk rule. So we had a reallocation of part of our portfolio from Stage 1 to Stage 2. So we have increase in Stage 2. We are doing that to meet the best practice. And during the last couple of years, we implemented many methodological changes. How do we provision, how do we make impairments? And how do we monitoring our Loan portfolio performance? We believe that we are at the endpoint of doing these changes. So going forward, you do not expect that. It will be a driver on our impairments or cost of risk. So in overall, we're happy our Asset Quality, cost of trailing 12 months cost of risk stands at 22 basis points. The last quarter -- the 9 months of this year, cost of risk is 14 basis points. We do expect that given the macro station in the country that these levels are sustainable in upcoming quarters. On funding, so we do have a nice development and a nice quick development as we have highly focused in building our liquidity during the second half of this year. So from the beginning of the year, our Deposit portfolio increased already by 8%. And year-on-year, it's a 15% growth, good growth, and we are still able to decrease our cost of Deposits. Going forward, we believe that the decrease the rate or the pace of the decrease will not be so significant as to see that term deposits that a product that we promote in a country is a good product to build liquidity, and it's a good product as an entry product for our retail clients. We have issued the second Eurobond issue, EUR 300 million, better well received by investors, and we took a chance or opportunity by having very favorable market conditions. So we have secured our wholesale funding for the next year. And we will keep fully focused on growing the deposit portfolio during the last quarter and the next year. Let's turn to the capital. We run strong capital ratios, given slower growth rate for this year compared to our initial budgeted levels. So we have a capital that the management will consider for higher payout potential ratios over 2025 year. So giving a word to Tautvydas to elaborate more on our shareholder returns and capital and distribution.

Good morning, everyone, and thank you, Tomas. We have resumed our share buyback program earlier this month, starting from 6th of October until now, we purchased close to 1.2 million shares. And under the current ECB authorization, we can buy additional 3.3 million shares, which we fully intend to do. And we will restart our share buyback open market operations in the near future. Overall, we view share buybacks as a very effective way to return capital to our shareholders, given the current trading levels. Our stock continues to bring a blow-book value and remains significantly undervalued. And as long as that is the case, we'll always stand ready to deploy buybacks . We're shareholder-friendly institution, in addition to buybacks would be a generous dividend, which we'll announce next quarter. Whilst at the same time, prudently managing our capital needs to support organic growth. Our book value per share keeps compounding steadily quarter-after-quarter, as you can see from the chart at the bottom left-hand side of this page, and we believe that our share price should start reflecting that over time. To wrap up today's webinar, I wanted to say that it was a solid quarter despite the ongoing top line pressures as we continue to operate in a low rate environment. We remain focused. We continue executing on our strategy. Our core banking replatforming project is progressing well. We said it last quarter, I'm going to repeat this quarter again. The project is within the budget and on schedule. Our rebranding some was being completed -- was very well received by our customers and other stakeholder groups in the country. And we continue to transforming our Retail business. We're very glad and excited about this new partnership with Kauno Žalgiris, which is the most in sports club in Lithuania and help us can access new customer segments. Now in terms of the specific whatever one lever takeaways. Number one is that our NIM is stabilizing and our net interest income increased sequentially quarter-by-quarter. Number two, we're proactively managing costs. I'm glad that our operating expenses are normalizing when you exclude one-off nonrecurring project-related items. And then finally, we delivered adjusted net profit of EUR 19.5 billion, which equates to ROE of 13.5%, very strong and solid results for the quarter. I want to reiterate that we are shareholder-friendly institution, which is committed to open dialogue and transparency. And what I continue building connectivity with our investor community. As a result, we're going to be on the road in Q4 a lot, as you can see from our busy Investor Relations schedule depicted on the slide. We're going to be participating in a number of retail focused conferences across all 3 Baltic capital cities, we're also going to be participating in a number of institutional investor events. On November 17, we're going to be London participating in Goldman Sachs Annual CMA Conference. And then on December 2nd, we're going to be in Prague, participating in what's in the Wonderland Conference, which remains the flagship event for CMA investors. As always, the management team is available for follow-up discussions and one-on-one meetings. If you have any questions, feel free to reach out and reach a call. And this concludes our prepared remarks for today. Thank you for dialing in and thank you for your continued interest in our stock. We will now switch to Q&A.

First question is about rebranding. How was it received? And whether you have any tangible measures?

Thank you, Tautvydas. I can take this question. So overall, I would say the rebranding went really smooth. And as you also mentioned, it was pretty well accepted also in the country and our side. Our targets were to regain as soon as possible our awareness of the previous brand. So we're very moving successfully in that path. So our brand awareness now is in the level of 51%. So the historical of [indiscernible] Used to be 81%. So we regained -- we thought it was really be half that would be really good results. So we already overcame our target. I'm sure we will reach the same level in the future. Also worth mentioning that our spontaneous awareness has already reached 15%. It's almost on the same level as [indiscernible] awareness in January of this year. And with that, we also all became [indiscernible], Citadel and also [ Revo ]. And our top of mind awareness as well is on the same level as our previous brand name. And also we came [indiscernible] The same level with [indiscernible] . So I'm really happy with those results. And also the other area which is important that we are now attracting also new type of class, which much younger, slightly higher income. So that's our focus on using the new brand to position ourselves a bit different way. So overall, I would say it's a successful project that we've managed to complete.

Great. Thank you. The next question is about the upcoming ability pension reform in Lithuania. How will new reform will affect the Asset Management business?

I will take that question. We believe that it will be a twofold effect. So from business development and business growth side, we think that it will have a positive contribution to our performance as the activation of the client base will be high. So we will be able to talk to the clients to discuss their long-term saving needs and to offer our saving product to them. From other side, so absolutely, in case there will be a high big draws from the pension funds. So it will be a negative financial impact. But as I said, we are seeing that as an opportunity to discuss -- to talk to our clients and to mitigate the negative effect with the positive opportunity to sell our products to the clients.

The next few questions come from Swedbank. Question about the loan book growth. Can you please provide additional color on the quarterly growth in loan book? The report shows that corporate loan book growth was a little bit slow, was it deliberate? Or do you feel increased competition? And can you share additional details on that?

Thank you, Andre, for the question. I already mentioned that in Q3, we had a refinancing on some -- on a couple of our larger exposures. So we had to catch up for growth. So that's why we had only 1% growth rate for the third quarter. But we do see a good environment, strong demand for for loans. So we believe that Q4 will be our normal loan portfolio growth, and we expect our 2025 growth rate will end up at 13% or 14%.

And then the additional question from Andre is, can you please indicate when is it reasonable to expect a little bit more tangible effect on deposit repricing and have lower rates?

So we already see tangible effect and the dynamics is good. Even during the Q3, our cost of deposit decreased by 20%. We believe that the pace of decrease of cost of deposits will decrease as we proactively promoting our term deposit as a product as it's a good entry product for our retail license into the bank.

The next question comes from Erste. What are your expectations for NIM, net interest margin in the coming quarters? How do you expect asset yields and funding costs to develop over Q4 and the following quarters?

Yes, I will take that question. Good morning Thomas. So, our Q3 net interest margin stands at 2.9%. We expect 2.8%, 2.7% level for the upcoming quarters. Mainly increase will be driven by our cost of funding. We believe that asset is already repriced, and it won't change significantly in the upcoming quarters.

The next 2 questions come from IPOPEMA. Do you have rebranding costs in Q3 marketing expense line item, they seem to increase a lot in Q3?

Yes, correct. As rebranding took place mid-Q2. So the majority of the marketing expense on building our new brand costs came out in Q3. And then on this minor expenses will be booked in Q4. And going forward, only the -- would say, operating marketing cost or normalized marketing costs will be spent.

An additional question from Vladen is about the Deposits. Deposit growth was strong, plus 15% year-over-year, while funding cost declined. Is this improvement mainly driven by term deposit campaigns or is it driven by a lower rate environment? Where do you see deposit rates in 2026?

So our deposit portfolio is growing nicely, 15% year-on-year, faster than the market. Yes. Our funding costs are declining. So it means that we are not only building our Deposit portfolio by attracting term deposits. We do have a good flow of current accounts into a bank. So it means that more and more clients choose Artea as a home bank. So we believe that going forward, we will be able to match deposit growth together with the current accounts growth. And Deposit rates for 2026. We believe that we will have -- we will decrease, slightly decrease. One of the key reason we think that the second pillar pension reform, that will bring more liquidity into the market, and that will be a driver for the financial sector to lower the rates.

Great. The next question is about nonrecurring expenses. One-off costs for the new core banking system and the branding remain high and seems recurring on the face of it. How long will we see these investments continue and when we should expect a visible decline?

Yes. Hello, [indiscernible] . So I will continue. So rebranding, as I said, the projects already finished and the costs already are visible in our performance on the minor expenses will be in Q4 and going forward only operating or normalized level of the marketing and will be spent. On core banking system. So it's a 2-year project for the bank. We are midway. The project itself is still in the time line and within the budget. So during the next year, our investment into the technological platform will continue. And and that's what we have in our business and in the guidance.

The next question is about the partnership deal regarding Kauno Žalgiris partnership. How do you measure its potential commercial impact? Have you already seen any gains in new customers, co-branded product sales?

Thank you for the question. And Yes, this is a cooperation, which provides both new client acquisition and also the brand awareness. So planned acquisition is based on co-branded cards. We have a partnership with Kauno Žalgiris, on revenue sharing. So the expectations that we have internal targets when we know that this will repay. But I would say the main emphasis is for the attraction of new clients for the bank, new segments of clients and the main focus to strengthen our brand awareness for this partnership. So that's -- there is our focus. And branded product as part of that. As also as Tomas mentioned, it's important to emphasize that this partnership is already outside of our one-off costs, talking about rebranding. So it will be just running some costs for the coming years.

Okay. And I think we had the last question about our capital management policy. After resuming share buybacks will be approval, what's your long-term capital return strategy, what payout ratio, buyback, [indiscernible] profitability increases and stabilizes?

We have a dividend policy in place. We as an organization committed to at least 50% of dividend payout. So it's what we as organization follow. On buybacks. So it will depend on the evaluation of the bank stock is trading and on the capital position, the bank is earning. Looking to the current situation, as the growth rate for this year was lower, we will need as a management to reassess the capital that was not employing to the growth, what is the best way to utilize that. So either to bring back to the growth for the next year, either to distribute it for the shareholders.

Thank you, Tomas. And that was our last question. We will always available for follow-ups and one-on-one discussions. Free feel to reach out if you have additional questions after this webinar. Thank you again. Bye.