Aktia Pankki Oyj (AKTIA) Earnings Call Transcript & Summary

A very good morning to you all, ladies and gentlemen, and welcome to this Aktia Bank's first half year results presentation. My name is Mikko Ayub, I'm the CEO of Aktia Bank Plc. Our second quarter result was EUR 16.5 million. It was clearly better than our first quarter result. Sorry, our second quarter result was EUR 16.5 million. It was clearly better than our first quarter result. It was 6x better than that. That is perhaps not that much of a surprise, knowing what has happened in the markets and in the surrounding conditions. However, what I would like to point out is that we were 15%, 16% above our second quarter result of last year. And that tells me that the direction we have taken in implementing our strategy and the actions we have taken in working it through are correct ones, and they are actually bearing fruit. During our second quarter, we had continued organic growth in our net interest income. The market recovered, asset values recovered, and that had a positive effect on the recovery of our assets under management. I'll come back to that a bit later, but I would like to state at this point already that the recovery in our assets under management was not completely due to market value recoveries, we had also very solid net sales of our asset products. The increased use of digital banking is something that I raised already in our first quarter result. That has continued very strongly. I am now even more confident in believing that this is not of temporary nature, but that is something that we have as a takeaway from the COVID-19. I believe people have found the easiness of these services, and we'll continue using them very actively. Our credit quality remained solid. During the second quarter, we had EUR 1.2 million increase in our expected credit losses that was mainly model-based development and that was mainly in our credit book. The effects on our liquidity portfolio and in our life insurance investments are insignificant here. Our liquidity position and our capital position remained solid also during the second quarter. We have updated our outlook for year 2020. Our result is very much dependent on a possible second wave of COVID-19 and the effect it may have on financial markets, on customer behavior and on impairment levels. Hence, the outlook is highly uncertain, and at this point, we do not extend any outlook on our operating profit for this year. However, I will say that our financial performance is expected to be stable, given stable conditions in the financial markets and in society, in general. I would like to raise 3 points here, though. Firstly, we do see continued growth in our net interest income, while the continuation of the recovery in commissions income is, of course, dependent on the development of the underlying markets; secondly, our net income from life insurance is also highly dependent on developments in market values; and thirdly, I do expect that our impairments and our loan losses remain on a moderate level and that our liquidity position and our capital position remain solid. At this point, I would like to remind you of the composition of our loan and lending book. If you look at our lending book, which is on the left-hand side, we see that changes are relatively minor. 3 quarters of our lending book consists of lending to household customers; some 12% to housing companies, meaning in Finnish, [Foreign Language]; in Swedish, [Foreign Language]; and some 13% to corporate customers. If we look at our deposit books. On the right-hand side, we see a slight relative shift from household deposits to corporate deposits in the relative distribution of the deposit book. We have not had any specific attempt to encourage corporate deposits. I see this merely as a development of corporates getting prepared, and perhaps, even protecting the liquidity position, which reflects in an increase in corporate deposits. Coming back to the positive development in asset management that I also -- that I already mentioned earlier, of the recovery in our assets under management, some 60% relates to market value changes and some 40% relates to net sales. This varies a bit among customer groups. Looking at our international customers, the recovery is -- or the increase is mainly due to net sales. While looking at domestic retail customers, it is mainly due to changes in underlying market values -- sorry, in domestic institutional customers, it is mainly related to underlying market values. Now COVID-19 has had an impact on our international sales in the form of restricting traveling to our customers. Hence, we have not been able to advance our international strategy at the speed as we would have liked to do. There is no change in our strategy as such, and as soon as international travel returns to more normal conditions, we will become active again to go and meet our existing customers and our potential customers. Regarding our life insurance, as I said, the market value development has supported the improvement of our life insurance result. It is also visible that the demand for risk insurance products, life insurance products has increased, and I see a clear relation to COVID-19 in this development. The acquisition of Liv-Alandia was completed under the second quarter, and that is now an integral part of our business, and we are active in taking care of and taking action of these new customers that we have received. As said, the use of digital banking services has grown considerably. We see double-digit growth numbers in the uses of our mobile bank. When we observe the statistics of digital mortgage transactions, I'm happy to note that our market share in digital mortgage transactions in Finland is clearly higher than what our market share in the mortgage market generally is in Finland. This suggests we are more digitally oriented than what our competitors are, at least in this field. We had an avalanche of application for installment-free periods during the months of March and April. That situation has now normalized, but approximately 20% of our household customer loan book is now with customers who have been granted installment-free periods towards the end of the year. I'm very happy of this development. I think it's a product that could be used also under normal conditions. Normally, the demand for this is not really that high. 11,000 applications, of course, stressed our organization, but we have now sorted that out, and we are back to normal operating model in that area. Regarding corporate customers, we see a slight increase for investment-need financing among corporate customers. This was low during the months of the very, let's say, active phase of COVID-19 in Finland. But here, we are seeing now a slight move towards more normal conditions. I may also mention in this context that our new Head of Corporate Customers will begin in November at Aktia. So that would be in a few months' time. Taking a look at the impacts and measures that we have over COVID-19, as mentioned also in part of our outlook, our business is very much dependent on how the situation evolves. Of course, not only in Finland, but generally, how does it affect the financial markets. However, as a relatively small organization, we are very agile to react and to adapt and also to innovate new ways of working in a changed environment as we observed during the months of March, both from an operational point of view as well as from a risk management point of view. We have returned to more normal operations. In our everyday business, we are currently working on a 50-50 basis model, where half of our staff is at office and half of our staff is working at distance, and we rotate on a weekly basis. Remote customer meetings have become very much part of our everyday banking and our everyday customer activity. I do not see this to change in the future. I think this is well received both on our side and also on the customer side. The ease of remote customer meetings, I believe, has convinced many of those customers also who may have had a more suspicious attitude towards such a way of banking. I would like to stress that our 2023 strategy that was updated last autumn remains still very much valid. We are to win in asset management. We are to go for new customers, both corporate and household customers, in growing cities, and we are striving to build operational efficiency in our organization. Some of the underlying assumptions that we made or that we took when making this 2023 strategy seem to be even more valid today than what they were at the time of making the strategy. One of the underlying assumptions was that people are not sufficiently insured in what comes to personal risk. Now as a result of COVID-19, as I said, we see an increased demand in life insurance products. And this is, of course, something that we would have liked people to think well in advance, and this fact that people are not insured sufficiently. It's one of the buildings stones or cornerstones of our '23 strategy. Another one is that people do not save enough for potential discontinuity points in their life. I think that has been witnessed also in COVID-19. For many, it would have been quite fortunate to have a buffer and to have savings for a situation like this, and that is one of the offerings that we are building upon in our strategy. The other 2 cornerstone building blocks that we have are that population is becoming older or population is aging. No change there. And that urbanization is to continue in Finland and equally, no change on that. So our 2023 strategy, I see it to be still very much valid, and we are continuing our activity and our drive in implementing this strategy. We have not changed our financial targets for 2023. They remain still valid as is. Our operating profit to be EUR 100 million. Excuse me, our comparable operating profit to be EUR 100 million. Our return on equity to be above 11%. Our cost-to-income ratio to be below 0.60. And our CET1 capital ratio to be 1.5 to 3 percentage points above the regulatory minimum. With this brief introduction to our first half year result, I would like to leave the floor to Outi. You're welcome.

Thank you, Mikko, and good morning on my behalf as well. [Foreign Language]. So let's take a look at the financials in more detail, and I would like to start with the comparable operating profit on a quarterly level. Our comparable operating profit, EUR 16.5 million, a strong recovery from the first quarter, end of the first quarter COVID-19-related drop. But what is more important, obviously, is that we were about 16% above second quarter in the corresponding period last year, little bit over EUR 2 million. So where does the recovery come from? A few things. Strong recovery. If we look at the assets under management, we will look at the details behind the development in the following slides. Strong net interest income, as Mikko already mentioned, relatively strong growth in our loan book, but also lower borrowing costs compared to last year. And then positive value changes in the life insurance company investment portfolio and a relatively flat operating expenses. So this waterfall picture shows the difference between the first half of 2019 compared to first half of 2020. Main components, we had about approximately 2% underlying growth, if we take away the unrealized value changes in the investment portfolio. So organic growth in net interest income, EUR 2.6 million, minor growth in organic growth in net commission income, again, driven by the own development in March and then gradual recovery of the assets under management towards the end of the second quarter. And actuarially calculated result, this comes from the insurance company investment portfolio. If you then take a look at the total operating income by category. Again, compared to last year, this year was above last year. If you look at the net interest income, net commission income, it was still slightly above last year's level, despite the drop in assets under management. And then net income from insurance business that is driven by the value changes, as mentioned before. The comparison of other operating income last year and this year, there is big difference, but that is outside our comparable operating profit. It comes from the sale of our Samlink shares as well as Visa Europe shares that was in total EUR 10 million. The growth in our loan book was EUR 265 million, and that apparently drives the growth in net interest income, mainly coming from the corporate side of the business and specifically, housing companies. Then I do think this is an interesting slide and shows what has happened to our asset under management by category. So if you look at those pictures, the left-hand side of the picture shows what happens in the first quarter of the year. So the net subscriptions were somewhat negative. Market value changes were negative. But then on the second half of the year -- second quarter of the year, there was quite a nice recovery, both in terms of subscriptions and in terms of market changes. We are still not at the same level as before the COVID-19, but a very nice recovery, over EUR 1 billion, during the second quarter. And I said before, if you look at the net provision -- net commission income. When the AuM dropped in March, obviously, when it starts to recover, it doesn't happen overnight, which means that in April, we were still at the lower levels and the recovery actually happened towards the end of the second quarter. So now at the end of June, we were already at a very, very good level compared to even where we started from in the beginning of the quarter. Our operating expenses relatively flat, slightly increased personnel costs coming from, to some extent, higher running costs. But also, there are some variable compensation-related increases that are partially kind of phasing related in the second quarter. We also have to remember that we booked EUR 2.8 million worth of stability fee in the first half of this year, and last year, it was EUR 2 million, so EUR 800,000 increase in stability fees in the first half of this year affecting the comparison. IT expenses have been slightly lower than earlier, and that also drives partially the increase in personnel costs as a result of us recruiting rather than using consultants. So one slide about the future expected credit loss reservations or changes in the reservations. This is due to the fact that, obviously, this has been under discussion when we look at the bank's results. We have divided this into 2 portions: credit loan book, credit-related ECL; then other portion comes from the liquidity portfolio and life insurance company's investment portfolio. If you look at the right side of the business, that shows the liquidity portfolio and life insurance investment portfolio related, pretty much 0. It was actually somewhat negative in the end of first quarter, but then as a result of the market development -- so the market development, the credit spreads have come to the lower levels and are pretty much at the same level in the beginning of the year. So the impact is close to 0. So the impact of EUR 3.2 million this year has come from the credit portfolio, impairment of credits and other commitments. That's the left part of the picture. So this shows the P&L impact in the first half. So this picture shows again the development of comparable operating profit by segment. And maybe worth mentioning here is that the asset management segment includes life insurance business. And there, the major negative contributor has been the value changes in the investment portfolio. And here, what I have just gone through in more of a P&L format. And again, worth mentioning here that solid comparable operating profit, EUR 16.5 million, 16% over the corresponding period last year. In the second quarter, first half, still negative in comparison as a result of the first quarter. Balance sheet. Total assets -- assets total (sic) [ total assets ] increased to EUR 10.3 billion. Mikko already mentioned, there's been close to EUR 0.5 billion increase in deposits. We saw that was already happening in the end of first quarter, coming mainly from the corporate side, but it has stayed at a relatively high level. We've been proactive in the debt securities senior market. I will cover that in a second. And then some increase in technical provisions. This relates to life insurance business and the acquisition of Liv-Alandia insurance portfolio. Our common equity Tier 1 is at a very solid level, 15.7%, end of the period. Positive development partially driven by the fact that we postponed the decision of dividend payment for the financial year '19 at later stage. On the other hand, the risk-weighted assets have increased by a little bit over EUR 200 million due to an increase in corporate exposures. Another thing has been under discussion in addition to expected credit losses has been obviously the liquidity of a bank, very solid level. We've been pretty active, active issuer in the senior preferred market completed 9 private placement type of transactions, plus 2 tap issues, totaling almost EUR 0.5 billion under our existing EMTN program, and we are planning to issue further EUR 300 million to EUR 400 million on the second half of the year. We issued, for the first time, a EUR 300 million retained Covered Bond that we use as a collateral in the European Central Bank. Our LCR, liquidity coverage ratio, at a very, very good level. And we also participated in the ECB's TLTRO III program in June, and that is going to -- we will be using that to refinance the redeeming TLTRO II EUR 200 million, plus an additional EUR 100 million. So in total, EUR 300 million. To conclude, the main factors to follow in the second half and in the -- at least in the near future. Obviously, the growth or development of the customer, assets under management, net subscriptions, value changes of the life insurance company portfolio, model-based credit losses, ECL and then obviously, the funding costs. We saw the funding costs go up significantly in the end of the first quarter -- in the beginning of the second quarter. We have come down to a more reasonable level if we think about senior debt, but we are still apparently above the levels that we were prior to COVID-19 pandemic started. I would like to thank you, everyone, and have a nice day. Thank you.