Aktia Pankki Oyj (AKTIA) Earnings Call Transcript & Summary

A very good Tuesday morning to you all, ladies and gentlemen, and welcome to follow Aktia's Q1 result presentation. My name is Mikko Ayub. I am the CEO of Aktia Bank, and I will go through some key elements of our first quarter results. After me, our CFO, Outi Henriksson, will take you more into details of our result. Our comparable operating profit of the first quarter in 2020 was low, EUR 2.8 million. There is one underlying core factor behind these low results that plays in through a couple of avenues. Actually, our January and February were very strong months for us, and we were very much on track implementing our 2023 strategy. However, in March, as the corona crisis landed in Europe and in Finland, that had an effect on our result. But as said, when we look at full quarter net interest income and net commissions income results, we actually can witness growth in these categories. And even more so, if we look at the growth in our underlying operating income, excluding unrealized valuation changes, we posted a growth during the first quarter of 16%, 1-6 percent, of which I'm particularly proud. But as said, when the corona crisis landed in Finland, this had a negative effect on our business in a couple of areas. The most significant of this being the unrealized valuation changes in our life insurance portfolio. And hence, we had a loss there of EUR 5.2 million compared with a solid profit a year ago. Loan demand was good among our customers, both household customers and corporate customers as such. And we also had flat cost base, actually a somewhat lower cost base, but generally speaking, flat cost base compared to the reference quarter as we compare it to. Our expected credit losses were up with EUR 2.4 million compared to the beginning of the quarter. Regarding our credit book, our loan book, there is no particular single issue or event that raises any concern among me at this very point. So I'm very comfortable with our credit book at the moment. Of course, this is all subject to how situations develop and how the economy develops in Finland. But right now, there is nothing that creates any particular concern with me. The same goes for our capital position. I see no issue regarding our capital at the moment. And equally, I see no concerns or issue regarding our liquidity at the moment. Going more into detail in our banking business area, as I say, January and February were particularly good months. We saw solid growth in loan demand. Actually, investment appetite among corporate customers exceeded somewhat that of what our expectation was beforehand. Now as the corona situation landed in Finland, there was, during the very first and second week, a sharp drop in demand for mortgage loans. However, it recovered after that, close to the level where it started from. In any case, fluctuations from week to another appear to be relatively big. We introduced our campaign for redemption-free periods for mortgage loans, and this resulted in a 15-fold demand compared to a normal year in installment free periods. And this 15-fold demand only within a few weeks or a month or so compared to what the demand for a full normal year is. We are approaching these installment free applications, applying the same credit policies and same credit principles as normally. And I see this as a very interesting and a good business for us even more so should we be entering a period with the subdued loan demand on mortgages going forward. So this campaign has been well welcomed among our customers, and we also see it as an interesting opportunity for Aktia as a bank. On the corporate customer side, dialogue and discussions have been much around working capital issues and perhaps around different scenario projections, how the economy is to develop and what sort of outcomes, different developments may have on our customers. We are, of course, more than happy to engage in such dialogues and discussions as I do see us to have some know-how in this area that can be made of use to our good customers. Our inorganic growth of purchasing house loans from Suomen Hypoteekkiyhdistys discontinued during the first quarter. We acquired EUR 48 million -- a stock of EUR 48 million from the Mortgage Society of Finland during the first quarter of the year. Going further into our asset management business. No surprise as such. The assets under management that we have decreased during the quarter. What is positive, though, is that I have not witnessed any major panic or concern among our customers, and actually corona-related redemptions have been quite small in quantity. We have continued to broaden our product offering during the quarter. We, for example, introduced structured products in our offering at the beginning of the year. And we have also continued work to improve the reach of our products. During the quarter, we have now entered into a situation where our asset management expertise can be offered also outside Europe. Our growth ambitions in broadening the range and reach of our asset management products remain unchanged going forward. And now we believe that we have got a framework that can well support this development. Our life insurance business, putting aside the unrealized valuation changes in our portfolio -- in the investment portfolio of our life insurance company, has had good and solid growth during the quarter. Actually, it had -- it posted good growth also during the second half of last year, but that growth continued over to this year. We have also witnessed some corona-related increase in demand for life insurance policies after the outbreak here in Finland. From a risk perspective, I do not have any particular concern about corona-related casualties or corona-related debts that could have a material impact on our policies in the life insurance company. So I'm quite comfortable with the situation we have over there. Our acquisition of Alandia life insurance company is still pending approval from the authorities. This was originally communicated to us to be available at the end of the quarter, which did not happen. We expected to receive the approval at the end of March, but that neither took place. There is nothing in my knowledge that is pointing towards some issue in approving the transaction. It is rather so that the Finnish Financial Supervisory Authority has communicated that corona-related issues have been prioritized ahead of other issues. So although not approved, there is no change in the underlying transaction itself or in the ambition to complete that transaction. Our Annual General Meeting was held as planned on the 16th of April. However, the shape and form of the meeting was quite different than what we are used to due to the circumstances prevailing. We also received recommendation from the Finnish Supervisory Authority regarding dividend payments or the proposal our Board of Directors had made regarding dividend payments. And based on this recommendation, the Board of Directors proposed to the AGM and was further approved by the AGM, that the Board of Directors is authorized to approve a dividend payment of EUR 0.63 per share at their own consideration no earlier -- to take place no earlier than October 2020. Going more into the exceptional operating environment that we have and some thoughts around that. We have had our crisis management group and our contingency plans activated and all has gone as planned. So we have not faced any major operational or administrational problems as such related to the exceptional situation we are in. About 80% of our staff are working remotely at the moment. And this has been very well functioning both from a technical perspective and from an operational perspective. I'm also glad to say that the coronavirus has not had any major issue or our staff has not had any major incidents with the coronavirus. So we have remained also operational to a very large extent, a few exceptions excluding. What is observable in the existing situation is that customer behavior has changed. The number of remote customer meetings has increased remarkably, while the number of physical customer meetings has decreased. We can also see that the number of electronic signatures has increased dramatically compared to the prevailing situation prior to corona. We can also see that the number of electronic and digital mortgage transactions has increased. I believe these are all changes that will not return to the precorona level whatever the outcome of the crisis is to be and whenever that is to be. I believe that our customers are more prepared to take the next step or next steps down the avenue of digitalization, which, of course, suits us well as we do have the capability and tools to support them on this journey. We also completed the very first fully digital mortgage transaction. This means that the process from the very beginning of identifying the customer running through a KYC process, opening the account and so on and so on. Finally, to closing the mortgage deal took place digitally with us -- without us even once physically meeting the customer. I'm glad to say that our share of digital mortgage transactions is well higher than our market share overall in the mortgage business. So either our customers or Aktia or a combination of these 2, and I actually believe the latter of this is very suitable to support and suit this digital journey. We have, in our crisis management group, prepared plans and are working on plans to return to a more normal operating model whenever the situation -- the overall situation is supportive for this. We have not agreed on any specific timetable, but we are building up readiness. And as soon as possible, I do want us to see to return to a more normal operating model as an Aktia, which means that we can shift from immediate crisis management mode and an immediate supportive operational mode back to the more forward-looking 2023 strategy implementing Aktia. I say January and February were very strong months for us. We were very much on the track in implementing our 2023 strategy, and I want us to return Aktia as soon as possible back onto that track. I know that it is a complex issue for society and for the economy, the corona crisis as we are having it. My strong recommendation to the government of the Republic of Finland is to take firm and decisive actions to factor in all elements of society and all elements of financial and nonfinancial activity when deciding upon how to unwind the extreme corona actions that have been taken and how to return society back to more normal, I believe. And I can see that the price that society is paying is very severe. And I'm glad to see that other voices have been raised in this area also. So hopefully, without any unnecessary delay, we can return to a more normal operating environment. Unfortunately, visibility is still very low or close to nonexistent, which means we are not in a position to extend or issue any outlook regarding this year. We hope to be able to do that in the shift of July and August when our half year result is presented. But unfortunately, at this moment, we are not in the position to extend any guidance for this year. We have also evaluated our 2023 strategy in the postcorona or in the corona crisis environment. I must admit that, that evaluation was rather brief in the sense that when in my management group, we opened the topic whether something has changed due to the corona crisis that would lead us to change some assumptions behind our 2023 strategy. We very briefly concluded that no such elements are visible. Perhaps even more so, the certain underlying elements behind our strategy, for example, that urbanization continues, population is aging, people need to save more, people are underinsured in what comes to their life insurance. Digitalization will improve customer service models will change. We need to adapt to become more efficient in our operational platform and so on and so on. All the assumptions behind our 2023 strategy hold as they did prior to corona and in many cases, even stronger so. So we do not see any reason or motivation as such to change our strategy. We have also gone through a discussion on do we see any changes in the way and in the timetable we should implement our strategy and that was an equally clear discussion. We did not identify any such need. Rather on the contrary, certain areas, we do hope to be able to speed up even more so than what plan in the original strategy. These areas, such as, for example, automization, robotization, effectivation of certain processes, digitalization, remote customer service concepts and the likes. So we are looking into whether and what actions could we possibly take in this area to speed up the implementation of our strategy. Equally, our inorganic ambitions and inorganic strategy is unchanged. The areas that we have identified where we believe we could have benefit of inorganic actions and inorganic leaps remain unchanged. The areas of strength and the areas of buildup that we have are not affected as such by the corona crisis in any specific way. Hence, our financial targets for 2023 remain unchanged. That means we are going -- or we have as a long-term financial target, a comparable operating income of EUR 100 million. A return on equity above 11%, a cost-to-income ratio of below 0.60 and the CET1 capital ratio 1.5 to 3 percentage points above the minimum requirement. With this, I want to thank you on my behalf for the Q1 results presentation. And I will hand over to our CFO, Outi Henriksson, who will walk you into more details regarding the results. Floor is yours, Outi.

Thank you, Mikko. Good morning on my behalf as well. My name is Outi Henriksson, and I'm CFO of Aktia Bank. I'll walk you through a little bit more detailed overview of the first quarter financials. And I would actually -- before we go into the details, I would like to maybe point out a few areas to take a look when we go through the first quarter results and also when you follow the results development throughout the rest of the year. The first one is our assets under management. There has been a decline in the first quarter, but we have already seen some recovery during the month of April. The second area are the value changes in the life insurance business portfolio. As Mikko already explained, we'll take a look at those as well. The third one is the model based expected credit losses so ECL changes in there and how that affects our results. And the fourth one, which was -- which didn't have an impact on our net interest income on the first -- in the first quarter of the year, but an area to focus on is the financing costs of the bank going forward as we issue covered bonds and seniors. So then over to the first quarter result. As Mikko said, first quarter comparable operating profit, only EUR 2.8 million, and that is driven by what you see on the right-hand side of the picture. That is our net interest income at a very good level. Actually, higher than it has been over the past few quarters. Our net commission income, also at a very good level. And what was the issue was really the net income from life insurance business, leading also to operating loss in the month of March and then EUR 2.8 million for the whole quarter. Then Mikko already mentioned that if we actually take out the unrealized value changes from our P&L, the underlying growth was 16%, which I do consider very strong. Here, you can see the largest components -- negative components affecting the results. That is the net income from life insurance. Absolute majority coming from unrealized losses we saw in the portfolio. And there you can see the total model-based expected credit losses, so ECL minus EUR 2.4 million for the first quarter of this year. So then over to total operating income. As said already, net interest income at a good level, slightly above last year level, if you look at the borrowing and lending. The growth in our credit stock was EUR 160 million, mainly coming from the corporate side of the business. Net commission income also at a good level. We saw a decline in our assets under management in the month of March, but it didn't have a large effect on the net provision income in the first quarter. And then the net income from life insurance business. As said, it's been actually, if you look at the numbers, it's been ranging from EUR 6.5 million to over EUR 8 million per quarter. Now it was minus EUR 5 million negative that has absolutely the largest negative impact on our first quarter results. We have communicated to the market that our aim is to keep our cost level flat. And if you look at our long-term financial target, it relies on the fact that the cost level stays flat and we better invest our cost to generate the top line growth that we've been communicating. And as you can see, the flat cost base is something we delivered also in the first quarter of the year. Some minor shifts between the lines, mainly slightly higher personnel cost as a result of going down on the IT cost, such as purchased services outside the company. And this shows now the comparable operating profit by business segment. Banking business, 47% higher than previous year, obviously driven by strong net interest income, also, to some extent, net commission income. And the asset management business segment as a whole, negative as life insurance business is part of our asset management. But as said, largest part of our net provision income goes to asset management, and that was still or at a very good level in the first quarter of the year. Then the financial summary in a P&L format. I pretty much went through this, but maybe here to point out as said that the total credit losses or provisions for credit losses, ECL was minus EUR 2.4 million in the first quarter of the year. And actually, you can see it in several lines of the P&L, not just in the impairments of credit losses --impairments of credits and other commitments. But in total, first quarter, EUR 2.4 million negative and a certain part of it coming from the model-based changes. So we updated the macro parameters in our ECL model. Our CET1, our capital ratio, still strong, 15-point -- CET1, 15.9%. Obviously, improvement driven by the fact that we postponed our dividend payment decision to the fourth quarter of this year. On the other side, we had an increase of risk-weighted assets, mainly coming from the balance sheet growth from the corporate side of the business. The FIN-FSA has decided on removing the systemic risk buffer requirement for Finnish credit institution now in April 2020, and that will lower Aktia's capital requirement by 1 percentage point. Obviously, now as we go through these times, it is interesting -- it is of interest to everyone what is the bank's liquidity position. And Aktia's liquidity is continuously on a very good level. We have been an active issuer in the senior preferred market in the beginning of the year. We have completed 5 private placement type of transactions, plus 2 tap issues to existing bond, totaling EUR 250 million. Maturities are ranging from 2 to 15 years. And we are planning to issue further EUR 400 million to EUR 500 million towards the end of the year as our existing covered bonds or seniors expire, replacing those. Our liquidity position, as said, is very good. Our LCR, so liquidity coverage ratio has been ranging typically from 120 to 135 requirement. Regulatory requirement being 100. And we have been able to utilize also ECB tiering structure at full. We are prepared to continue to utilize ECB TLTRO III operation or program and replacing the expiring trends from TLTRO II in June with that. And for the first time, we also use self-issued covered bond. So retained covered bond as a collateral for this operation. And the proceeds of the TLTRO will be used for supporting the corporate lending as before with TLTRO II. So again, repeating what I started with, what the focus and now when you look at our results: our customer assets under management; the value changes in the investment portfolio, specifically of the life insurance business; our model-based credit losses, ECL; as well as our funding cost should the situation continue as it is now. I would like to thank you, everyone, for listening to the presentation, and have a nice day. Thank you.