Aktia Pankki Oyj (AKTIA) Earnings Call Transcript & Summary

And welcome to this Aktia Bank Q3 2020 Results Presentation. My name is Mikko Ayub. I am the CEO of Aktia Bank and I will walk you through the highlights of our Q3 results. After me, our CFO, Outi Henriksson, will take you more into detail to the specific items of the result. Overall, our comparable operating profit from the third quarter was EUR 16 million, which compares to EUR 16.5 million of the second quarter of this year and EUR 17.6 million of the third quarter of last year. Going more into specifics, our net interest income had a solid growth. We were 2% above that of the third quarter last year and our loan book grew 5 percentage points year-to-date. Also, our funding cost has stabilized on a more normal level compared to the disruption in the market from last spring. Our credit loss provisions remain unchanged. We are following our loan book very closely and so far, we have not identified any specific features or items in our credit book that raise any particular concern. Our credit book is strong and so we expect it to be, also going forward, through to the fourth quarter. The recovery of our net commissions income continued during the third quarter. We were up 6% compared to the second quarter of this year, however, we fell short of the third quarter of last year. Our net income from life insurance was below that of the second quarter of this year and equally below that of the third quarter of last year. The main driver behind this lower income in life insurance are the unrealized valuation changes in our real estate investments. Overall, I can say that we had strong customer demand in our banking activities, in our asset management activities as well as in our life insurance activities. Particularly, I can say that the demand for investment advice clearly increased during the third quarter. And the demand for life insurance, more specifically risk life insurance, was strong also throughout the third quarter. This was in all distribution channels that we have, equally our own sales network as well as our partner sales networks. Last March, the rapidly worsening macroeconomic outlook, together with increased volatility in the markets, led us to understand that it has a negative impact on our operating profit for this year. At this point of time, we can now state that we expect our comparable operating profit for year 2020 fall below that of 2019. However, given stable conditions in the financial markets as well as in society in general, we expect the fourth quarter to be stable. We expect the net interest income to continue its growth, while the continued recovery of net commissions income is obviously dependent on the financial markets and its impact on valuation changes in the assets under management we have. Equally the net income from life insurance is dependent upon market changes and valuation changes. We expect our credit loss provisions to remain on a low level throughout the fourth quarter, and we expect our liquidity and our capital adequacy to remain strong in the fourth quarter. Last spring, Aktia's Annual General Meeting authorized the Board of Directors to decide upon a dividend of a maximum EUR 0.63 per share for the financial year 2019. Aktia's Board of Directors aim to pay a dividend of EUR 0.63 per share next January, given that no regulatory requirements hinder this. We will communicate for -- late -- at a later point in time upon this Board of Directors' decision. Now more specifically into some features of our result, you can see the composition of our loan book on the left-hand side and our deposits on the right-hand side. There are no major changes in the composition of our loan book as you can see. However, on the right-hand side, you see that both in relative terms as well as on absolute terms, the amount of corporate deposits and deposits from public entity and nonprofit organizations have increased. This, we are obviously following closely. And if necessary, we will extend the implementation and applying negative interest rates to make sure that we are not mispricing ourselves in the deposit market. We had strong growth in the loan book, as can be seen from the chart, both in terms of new lending as well as in terms of the total loan book. Our new lending was -- grew and was strong both in household customers as well as in corporate customers. The strong development in our loan book was also supported by the installment-free periods or the installment-free applications that rushed in last spring. As a result of the second wave of COVID-19, we have not observed a similar rush of installment-free applications as we did in March and April. However, we have actively contacted selected customer groups and customer segments and offered the opportunity, where appropriate, to extend installment-free period. This suits us fine and we hope that customers also find this opportunity interesting. Taking a closer look at our asset management and the development of our assets under management, you can see that it has continued throughout the second as well as the third quarter. A more closer look at the split or at the difference between international customers and domestic customers reveals that for our international customers, the increase in assets under management is solely from net sales; while for domestic customers, both households and institutions, the increase comes mainly from market valuation changes. However, net sales have been clearly and strongly negative, both among domestic institutions and household customers equally. I think the most tangible and most concrete impact of COVID-19 for our business has been its effect on the expansion of the international sales of our asset management business as travel restrictions have been on for a number of months now in a row. Hence, we have not been able to reach those new customers that we have hoped to be able to reach throughout the second and third quarter. And thus, the international growth of our asset management business has fallen short of the expectations that we had. Obviously, we keep contact with customers, both new and existing customers with the means available to use. But for attracting new customers, these are not as efficient as on-site visits and on-site presentations, both us meeting the customers and customers visiting us. During the third quarter, we acquired the fund business of Askel Partners. This is in intention to further broader -- broaden our product selection in our asset management business. We expect to come out with an infrastructure fund during next year. Equally, we have continued our structured products business activity with a new structured product issued last September. And taking a closer look at the performance quality of our funds, I'm happy to tell you that we have reached an all-time high in the Morningstar Ratings that our funds carry now. On average, we have 4.21 Morningstars per fund and for an extended period of time, we have been outperforming all our domestic competitors in the quality of our funds. This is something that we will become even more active in marketing and communicating towards our customers, both existing and potential customers. I already mentioned about our life insurance business and the demand for risk life insurance that has been strong in all distribution channels, both our own as well as our distributor partners. This strong demand is obviously helping us in our cross-sales between banking and life insurance and between asset management and life insurance. And we begin to see the positive outcome of this momentum in the market for demand for life insurance. No surprise probably due to COVID-19, the level of digital interaction with our customers has remained on a high level. Our market share actually in digital mortgage transactions is more than double that of our market share in traditional mortgage transactions. We are continuing our digital investments and our digital transformation. I do believe that our customer base is more ready than ever for this in today's situation. And I do expect that this will prevail also going into the future. The demand from corporate customers for financing has increased from this lump that it faced after the first wave of COVID-19. We have had good attraction and we have had good growth in the SME corporate segment. We are naturally analyzing very carefully those customers that we are choosing to finance, whether they suit the risk profile that we have, there is no change in our risk profile. As such, we are seeking growth within the given risk profile and risk parameters that we have had up until so far. A few words on the COVID-19 impact and measures, I have partly touched upon them already. To summarize, I think our business is still very much dependent on the COVID-19 situation. Visibility is restricted and it remains to be seen what is the overall impact both in the economy, in the markets and in society, in general. However, we were very well prepared for the second wave of COVID-19. From an operational point of view, I have not seen any challenge or any problem in adapting to the second wave of COVID-19. But as I said, some areas of business are being impacted, more specifically, the search for new customers usually benefits from on-site meetings, particularly when we think of high-value customers or institutional customers abroad. To summarize up, I want to remind you of this strategy picture that you may have seen also earlier, our strategy remains unchanged. Our ambition is to win in asset management, to gain new household and corporate customers in growing cities and to have an operationally efficient platform that we can build upon. Equally, our financial targets remain unchanged for the year 2023, those including the comparable operating profit of EUR 100 million, the cost income ratio of below 0.60, a return on equity of 11% or above and a buffer of 1.5 to 3 percentage points over the minimum requirement of CET1 equity. With this, I would like to thank you for following my part of the presentation. And I will hand over to our CFO, Outi Henriksson, who will walk you more into details about our result. Thank you. Outi, you are welcome.

[Foreign Language] Good morning, everyone, on my behalf as well. Let's take a look at the financial performance in more detail, and I do start with the third quarter comparable operating profit. Our operating profit was EUR 16 million and it was lower than the comparable period last year, which was EUR 17.6 million. And while we saw a very solid net interest income development as well as net provision income development, we saw a dip in our life insurance business results. And that comes from the value changes, negative value changes in the life insurance company investment portfolio. If you look at the comparable operating income then, as said, very solid net interest income. However, on a cumulative basis, the net provision income still lower than last year and that comes from the second half. If you look at the quarterly bars in the operating income picture, you saw a dip on the second quarter, and that was as a result of the dip that we saw in our asset under management as a result of COVID pandemic in the end of first quarter. Also, if you take a look at the first quarter net income from life insurance operations, actually, income was negative as a result of realized and unrealized value changes in the life insurance portfolio. So the minus EUR 5.2 million was a negative income from that quarter. And if you take a look at the comparable operating profit, on a cumulative basis, 9 months of this -- first 9 months of this year compared to comparable period last year, again, I can point out here the positive EUR 3.4 million from net interest -- organic growth in net interest income coming from lending and borrowing both. And also, the net income from life insurance operations, if we exclude the investment operations from life business, EUR 5.3 million positive. So 3% underlying profit growth without unrealized value changes. And then this picture shows the total operating income by revenue type and a little bit of the same story. Net interest income again, despite low interest rate or negative interest rate levels and depressed margins, improvement there; net commission income, pretty flat. We can be quite happy as the recovery after the dip in the AuM happens obviously, quite, quite slowly, and we are approaching to the levels where we were, pre-COVID-19. And then the net insurance -- net income from life insurance, there you see the difference between the first 9 months of this year and last year. So we have gone from over EUR 20 million to EUR 9 million on a comparable basis. And the other income in this picture includes approximately EUR 10 million gain from the sale of Samlink shares in the comparison period. Mikko already said a few words about the assets under management development and this picture now shows it by channel and by quarter. And if I start from the international side of the business, so we saw a heavy dip on the first quarter. That's the picture on the left-hand side. But however, on the second quarter already, a nice recovery that continued on the third quarter. And important here is that the growth really comes from, not only from positive market value changes, but also positive net subscriptions. And we can see the same development if you look at the domestic institutions. That's that picture on the right-hand side. And here, we have the banking business, so retail AuM development. Again, drop in the first quarter and then steady recovery on the second and the third quarter. Let's take a look at the comparable operating expenses. They've been pretty flat. We do see some increase in the personnel or staff costs, and that is coming from recruitment. So we've been investing in development, in process automatization and also sales to speed up the growth in the future. So that increase is recruitment related. Other operating expense is pretty flat, EUR 800,000 higher stability fee than last year. In 2019, it was EUR 2 million, now EUR 2.8 million this year. Now it's fully booked in the end of second quarter for the full year. Then provisions for future expected credit losses, i.e., ECL, we have not updated our macro assumptions now in the third quarter. Reason for that is that although our chief economist took a little bit more positive approach to unemployment and household -- housing prices, when we booked the ECL provisions, it was a beginning of the second wave of the COVID-19 pandemic. So we made a decision not to do anything to the parameters right now, and we take a further look at them towards the end of the year. And this means that the change in ECL was pretty much -- the write-downs in the third quarter were pretty much close to 0. For full year -- or the 9 first months of the year, EUR 3.2 million coming from the impairments of credits and other commitments. And this one now shows the comparable operating profit by segment. So banking business, nice improvement there coming from net interest income. Mainly, as pointed out earlier, and even though the write-downs or ECL provisions hit the banking business, they'd be at a very modest level and still led to better than last year operating profit. Asset management includes asset management and the life insurance business. And there you see the drop that is really coming from the investment portfolio of the life business. Then the financial summary, this is just a short version of the P&L, which shows the third quarter of this year and the cumulative results compared to comparison periods last year. I do think that I covered most of the details that I wanted to cover already earlier. Then a quick look at the balance sheet from the asset side, we -- I can maybe point out that the lending to public and public sector entities has grown very, very nicely from EUR 6.5 billion to close to EUR 6.8 billion. And then on the liability side, deposits are still at the very high level. I do think that I mentioned that already earlier. So we saw a growth in our deposits in the beginning of the year and we haven't seen any escape from there. So they are still at a high level. Then the liabilities to central banks and credit institutions, that includes EUR 550 million from Central Bank. We have participated to TLTRO III and replaced the expiring TLTRO II EUR 200 million with higher amount of TLTRO III. And then the purple block, they're the debt securities that are the -- they are the senior debt that we have issued, I'm coming to that a little bit later. Technical provisions have to do with the life insurance business, [Foreign Language]. And that has grown as a result of the acquisition of Liv-Alandia credit stock or the life insurance stock. Our CET1 is still at a very solid level and above the target that we have set for ourself, together with the other strategic financial target, i.e., 1.5% to 3% over regulatory requirement. So CET1, 15.6%, and if we would have taken in the maximum amount of dividend from year 2019, which is approximately EUR 44 million, both the CET1 on the first period been 14.0%. Our funding activities have been at the record high level. We have been a very active issuer, completed 23 transactions under the EMTN program. Total volume close to EUR 750 million and not only have we not -- done now in euro-denominated bonds, but also Swedish Krones and Norwegian Krones, we do convert them to euros immediately, so we do not leave the FX risk open. Maturities between 2 to 15 years, and if you think about the issues that we have done. Then a few words about the liquidity, LCR at a very solid level. We have plenty of liquidity, so at a very, very good level, and we have used the ECB tiering structure in full, the whole period, which, in our case, means over EUR 300 million. And as said before, we have participated in the TLTRO III program and replaced the expiring EUR 200 million already with the TLTRO III. And to conclude my part, again, those areas that you -- I should be following, customer assets under management, the growth are coming from the subscriptions and the market value changes; life insurance business investment portfolio; ECL; and obviously, the funding costs as well. Thank you very much on my behalf, and have a nice day, everyone.