Aktia Pankki Oyj (AKTIA) Earnings Call Transcript & Summary

I will walk with you through the highlights of our result. And after my presentation, our CFO, Outi Henriksson, will walk you into the details of our results. I am delighted and proud to present to you a record result. In the 200 years of Aktia's history, we have never before had such a result as we had from the second quarter. What makes me even more happy about the result is that all business areas delivered for this result in a very, very strong manner. Our comparable operating profit was at an all-time high of EUR 26 million, which posts a 57% growth to the reference period. Our net interest income was up 37%, and our net commissions income were up 39%. The increase in costs are related to the acquisition of Taaleri's Asset Management business, which we completed on the 30th of April. Also, Taaleri's Asset Management business is included in our numbers for the months of May and June. This picture is very descriptive of the quarter that we had and also in comparison to last year. We have a half year result of EUR 42.9 million in our comparable operating profit. I'd say, the second quarter was very strong for us. The first quarter was good. Obviously, the first quarter a year ago was very weak, as can be seen in the picture, but the second quarter last year was relatively normal, given the circumstances that we had at that point in time. Our outlook for this year remains unchanged. We see our comparable operating profit to be considerably higher than what it was last year. Our net interest income is expected to continue growing due to volume increase and both favorable funding conditions as well as volume increase. The growth in our net commissions income is expected to be strong under the second half year due to the acquisition of Taaleri's wealth management that we completed last spring. On the expense side, we do see -- we do expect to see a higher cost for this year than what we had last year. This is due to the acquisition of Taaleri's Asset Management business and is reflected in staff costs, in one-off transaction costs as well as in integration costs. Our loan loss provisions are expected to increase moderately. There is a reasonable amount of uncertainty in the surrounding economy, as you well know. We do expect our liquidity to be at a high level, and we expect our capital adequacy to be solid but at a lower level than what it was during the first quarter of this year. As you may know, the Financial Supervisory Authority has relaxed their recommendation on restrictions on the profit distribution from financial institutions as per the end of September this year. The Board of Directors of Aktia will make a decision on our dividend for year 2020 in October, and we will communicate that separately. The Annual General Meeting authorized the Board of Directors to pay a maximum dividend of EUR 0.43 per share. Going more deeper into the 3 business areas that we have and starting from Asset Management. As I said, we completed the transaction of Taaleri's wealth management on the 30th of April last spring. And after that, integration work has been able to commence. Two very strong actions in the market were brought together. I will come to the integration shortly. From a numbers perspective, I would like to state at this point that as part of our organizational change, we have shifted our Private Banking business from our Banking Business area to Asset Management and hence, those numbers are reported now under Asset Management. We had strong sales, particularly to private individuals. I'm very happy about that. Regarding international sales, we are following very closely travel restrictions, and we are hopeful that even remaining restrictions on travel will be lifted, which, of course, will be supportive for our international sales efforts. This picture shows the development of our assets under management. And as you can see from the second quarter, Taaleri Asset Management's funds are included in our numbers. Excluding Taaleri Asset Management's influence on to the numbers, we had a growth of 16% in our assets under management. And like I said, we had very strong sales to private individuals, which I am happy to report to you. I'm also happy to state that the quality of our emerging market product has remained very strong. The team that we have in our emerging markets products is now full and up to speed, and like I said, has delivered a very strong alpha into the product that was met by a discontinuity in the earlier part of the year. A few words about the integration we have with Taaleri Asset Management. It is advancing as planned according to timetable and according to all schedules that we had earlier. Focus is on cost and income synergy targets. Going forward, obviously projects of more technical nature require more time to be completed, but work is progressing there also as planned. They are just slower by nature. We rolled out a new organization in our Asset Management in the beginning of May, assigning roles and responsibilities at a managerial level. And hence, we are -- completed the, so to say, top-level integration of these 2 activities. Cross-selling and additional selling have started, meaning that we are able to provide Taaleri Asset Management's products to ex-Aktia customers and Aktia Asset Management products to ex-Taaleri customers; for example, the impact fund that we received as part of the transaction from Taaleri Asset Management and our Emerging Markets products, for example, as of the Aktia Asset Management products. The harmonization of the fund product universe and offering that we have has started. And obviously, the work on a cultural and operational entity that is united has started. That is -- or my expectations are very high that we can return to a more normal working environment from the exceptional working conditions that we have had now for almost 1.5 years. That will, of course, be supportive for this cultural and operational integration work that we have. A few words on Banking Business. The quarter was record high for mortgage sales. It was very strong for corporate sales also. On the mortgage side, we have grown faster than the market. And we have been able to smoothly process all this increased flow due to the simplified and shortened handling processes that we have in mortgage loans and also automated and very prompt indicative offers that we are able to give our customers in mortgage products. This has been well received by customers, and our throughput time in mortgages has improved. On the corporate side, I'm particularly happy to say that the growth that we have had in new customer acquisition has come very much from the focus point or sweet spot of the customer base that we have and the strategy that we have, that is SME customers with a clear owner or clear owners, giving also cross-selling potential for our wealth management products. We have also been successful in pricing in our corporate business, and our risk profile remains unchanged both on the corporate side and on the household side. Like in our outlook, we expect credit losses to increase modestly. This is due to the fact that I do not believe that uncertainty has been removed from the world, although the economy and the outlook are brighter now than what they perhaps were at the very dark moments of the COVID crisis. Still, I feel that we are not sailing in clear waters quite yet of the COVID-19 situation that we have. Our loan book growth was 2% quarter-on-quarter, and it was 9% year-on-year, which can be seen in this picture. Our Life Insurance business, likewise, delivered very strongly both in the unit-linked product universe and in the risk life products. Obviously, market -- favorable market development helped the unit-linked business, but we had very strong new sales there. Like in the risk life products -- in risk life products, we had a 15% growth in sales. And I'm particularly happy about this when one keeps in mind that the second quarter last year was also a very strong quarter for new sales in risk life products. We are preparing to broaden the product universe of investment products that can be used in our unit-linked products, thus facilitating for the new products that we have in our offering as a result of the acquisition of Taaleri's Asset Management business. On the corporate social responsibility side, I would like to highlight a couple of points. We have updated our responsible investment policy. This reflects into a more clearer and more stricter exclusion policy. Impakti investing products, we are now able to offer our customers as we have received the impact -- or Impakti fund from the acquisition of Taaleri Asset Management. It is a focused fund that invests into products which have either environmental or a social impact into their communities. On the climate side, for the first time ever, now we have assessed the CO2 and flood risk situation of our banking loan portfolio, which is very interesting as this gives us a benchmark to follow the development going forward. I'm coming to the end of my part of the presentation. And before concluding and handing over to my CFO, Outi Henriksson, I would remind you -- I would like to remind you about our Capital Markets Day that we will have on the 8th of September. Please mark that in your calendars, and I'm extremely happy to welcome you to follow us closer on the 8th of September. At this point, I thank you from my behalf and hand over the floor to Outi. Welcome.

Thank you, Mikko. Good morning, everyone, and let's take a look at the financial performance in somewhat more detailed way. As Mikko pointed out, we had a record quarter in the second quarter of this year. I'm obviously very pleased with the results. There has been a lot going on, starting from the acquisition of Taaleri wealth management. And I'm hoping to be able to take you through the -- in my presentation, take you through to analyze the underlying business development that has been very good and solid. If I start with the comparable operating profit and income, as said that the second quarter was a record-high EUR 26 million, EUR 10 million higher than the second quarter last year. Very pleased that it comes from the income side from a very, very good income growth. Although on the other hand, we obviously had higher costs, part of which are of onetime nature and transaction-related. If I start on the net interest income, solid growth in lending credit loan book grew by EUR 160 million in the second quarter, as Mikko showed. On top of that, the bank's -- the financing costs of the banks were at very modest unfavorable level. We booked EUR 5.3 million from European Central Bank's TLTRO III program in the second quarter of the year and as we have now fulfilled the criteria for doing so. I will go through certain details behind that in the coming slides. Then net commission income, obviously, here, good growth as well, and we can see Taaleri wealth management impact -- positive impact on the -- in CI. At the same time, I want to point out that also the pre-transaction net commission income has increased from the comparison period last year. Very good quarter in the Life Insurance business not only from the investment side, the actuarially calculated result grew also on the second quarter. So EUR 10.5 million from Life, really good. And the remaining other is then from treasury operations central functions. Now if you then take a look at the comparable operating profit, as said, very much driven by the income growth, Banking business, EUR 7.5 million, strong lending Asset Management growth we talked about. And then -- and it includes the operating profit also Life Insurance business and centralized functions, then including treasury and the TLTRO. Now comparable operating profit, first half of this year versus first half of last year, 68% underlying growth. So if you take out the block in the center, value changes in the Life Insurance investment portfolio, you get to that growth percent. We need to bear in mind, obviously, the first quarter of last year was quite weak as a result of the COVID pandemic, but the second quarter of last year was actually quite good. Here, you can see increase both on the income side again and on the expense side again. And as Mikko pointed out, the increase in the expenses are coming from 2 main sources. First, it's the acquisition-related costs. So those normal business running costs that we got as we acquired Taaleri's wealth management business. We got 100 new colleagues in Aktia and normal IT and business operations costs. We also booked EUR 5.6 million directly transaction-related costs in the first half. They are of a nonrecurring nature. Plus, we had EUR 1.4 million higher stability fee in the first half of this year versus last year. And here, now handle with care and with all the disclaimers. What I've done here, I have tried to, to some extent, adjust certain major items that have been affecting the first half and the second quarter to make your work slightly easier maybe to analyze the underlying business. So if I start from the left-hand side, the first block is actually the reported comparable operating profit. The second one is the first one where I have taken out the directly transaction -- acquisition transaction-related costs, advisory fees and so forth, taxes. The third one is actually the second block. And then, what I have done there, I have adjusted the TLTRO III positive impact in a way that I have taken the current run rate, the normalized level going forward with the current interest rate level valid for this year, and included that for the period. And the fourth one is then the third block, and then I've taken out the unrealized value changes in the Life Insurance portfolio. But again, I would like to remind you that taking any one quarter, any half year, multiplying with something is not the way to make an estimate. But hopefully, this helps you with analyzing our results. And here are the details of the transaction costs, onetime costs that we have booked in the first half. EUR 1.2 million in the first quarter, EUR 4.4 million second quarter and EUR 5.6 million in the first half of this year. A few words about the assets under management. If you look at the international institutions and domestic institutions, net subscription, quite flat, positive changes in the market values. And there in the domestic institutions, you can also see the impact that is coming from the fact that we acquired Taaleri wealth management. It also includes a portion that came from the changed segment structure that we took in use. So internal move of certain assets under management from retail segment, as you can see here. Very solid growth quarter-on-quarter in retail segment, and that continued on the second quarter as well. Comparable operating expenses. This is now the details behind why the operating expenses have grown from comparison period last year. Three main components, staff costs or personnel costs. As said, running costs are now higher as a result of the acquisition, normal business on new colleagues, as I pointed out earlier. Second big block is the other operating expenses, which now include the EUR 5.6 million that I just showed you on the previous slide. Resolution fee or stability fee, EUR 1.4 million higher than last year, booked now in the second quarter, the second part of it. And then depreciations, here, I would like to point out, and now after the acquisition of the Taaleri wealth management, we booked as was expected in this type of transactions, goodwill and intangible assets. And going forward, our intangible asset depreciations will be higher. That impact from the 2 months, you can see here in the increase of depreciation. Impairments on expected credit losses, no major changes here. P&L impact in the first half, EUR 3.6 million. The new definition of default that entered into force in January, as we pointed out already when we presented first quarter, minus EUR 0.8 million, negative impact on the second quarter. We have again updated our macro parameters in the ECL model this time. No material impact at all. It was around EUR 50,000. And we still have not observed any major COVID-related new risk concentrations in our credit portfolio. So financial summary in the P&L format. And here, I would like to point out that 57% growth in comparable operating profit second quarter last year was pretty good as well. So it's apples to apples. 57%, we can be proud of it. If you look at the first half of the year, 122% growth. But obviously, as said, we need to bear in mind that the first quarter was weak. So growth there can be pretty much -- was pretty much expected. Structure of lending and deposits, no major changes here. Loan book EUR 7.3 billion, as Mikko showed already earlier. No major changes in the composition, a slight increase in the portion of the corporate side but still very much driven by households and housing associations. Then if you look at the deposits, some growth there and very much some minor change there, and again, very much driven by households. Then the structure of the balance sheet. The total assets increased from year-end, EUR 10.5 billion to EUR 11.2 billion. Lending, as said, growth there. We can also see increase in other assets, which is actually cash and intangibles and goodwill. Then we took a look at the liability side. As said, deposits still at a high level. Liabilities to central banks and credit institutions, now EUR 806 million, includes the EUR 650 million from Central Banks or the TLTRO III. Technical provisions that is insurance-related and then some growth also in other liabilities but no major changes here. Then a few words about the capital adequacy. Our common tier equity ratio, CET1, at the end of the period was 10.8%. That is obviously lower than in the end of first quarter and very much expected as a result of the transaction that we did. Now I would like to also point out here that the minimum requirement for CET is now 7.7%. You may remember, at the end of the first quarter, it was actually 9.8%. And the change in the requirement -- minimum requirement comes from the fact that we are now covering the AT1 portion with AT1 capital instead of CET capital. So that has lowered the requirement. Another component in a lowered requirement is that we are now covering the Pillar 2 requirement, 25% of that with Tier 2. So we are still above the target range. Target range now being 9.2% to 10.7% as we have presented our long-term financial targets, 1.5% to 3% over regulatory requirement. And again, the CET1 was now at 10.8%. A few words about funding. We have completed now one private placement transaction in the second quarter. If you look at the whole first half of the year, 12 senior preferred issued under the EMTN program, volume being approximately EUR 195 million, maturities ranging from 3 to 10 years. And as said, we did our first AT1, Additional Tier 1 issue in the second quarter. Very good pricing, very well-diversified and good investor base, so very happy with the execution of that as well. Liquidity situation is very good. LCR in the end of the period was 161%, and the cash levels have been also very good. And we've been using the ECB tiering structure in full almost the whole period. That concludes my part of the presentation. And Mikko and I, we are now happy to answer your -- the questions that you may have.

Yes. Good morning on my behalf as well. I'm Lotta Borgström from Aktia's IR and Communications. Let's go over to the questions. Please write more questions on the Comments field on the webcast site. First question from Andreas Hakansson of Danske Bank. "What size of Taaleri restructuring costs should be expected in H2 compared to H1?"

Maybe I can take that. Vast majority of the costs have been now booked. We continue with the integration. So we will see some integration-related costs but totally at a different level where we have been in the second quarter and first quarter. So low integration costs but some still.

Hakansson continues, "Will there be TLTRO benefits also going forward?"

Yes, there will be. And now going forward, we will be accruing the negative interest on a monthly basis. The impact with the current interest rate level, which runs till somewhere of '22 as far as we know or according to the current information, we're accruing approximately EUR 540,000 per month.

Antti Saari from OP. "Net subscriptions in Asset Management seems to be around minus EUR 100 million in Q2. Is the last asset under management coming from old Taaleri's clients? Could you open this a bit?"

I can take that. The answer to the question is no. That is not the case. We had some outflow during the first quarter, as you surely have noted. That outflow has stopped during the second quarter. We have got now 2-way flow in those products, and in some institutional -- domestic institutional products, we have had some outflow. Like I said, on the household side -- on the private individual side, we have had very strong sales during the second quarter also.

Saari continues, "Are you really happy with CET1 ratio, 1.5% to 3% above the current requirement? Is it reasonable to expect requirement to increase materially after COVID crisis?"

Well, I can take that. As you know, we have our corridor of 1.5 to 3 percentage points. We have been for an extended period of time outside that corridor. Now we have come close to the upper limit of that corridor. I'm comfortable at this level. Of course, we have to follow closely the requirements and the, should I say, the political climate about the capital requirements for banks. On the other hand, it is also important that we are -- we use efficiently the capital that we have and do not stock excessive amounts of extra capital.

Yes. Maybe I can continue with the fact that our loan book has grown really well, and we expect it to continue on the second half, as Mikko already said. And I do think that the capital adequacy is at the good and solid level. And obviously, we follow the situation and make sure that going forward, we are very much in the target range.

Andreas Hakansson asks, "When do you expect CET1 buffers that were removed going into COVID to come back, and what size?"