Aktia Pankki Oyj (AKTIA) Earnings Call Transcript & Summary

Good morning, and a very warm welcome to Aktia's Q3 results webcast. I am Lotta Borgström and I head Aktia's Investor Relations and Group Communications. It has been an eventful quarter for Aktia, with updated strategy and new financial targets. And more of that and the Q3 results will be presented today by Aktia's CEO, Mikko Ayub; and CFO, Outi Henriksson. You are very welcome to post any questions after the presentations, either by raising your hand here at the venue or by writing them on the commentary field of the website. With these remarks, I leave the stage for Mikko Ayub.

Thank you, Lotta. A very warm welcome also on my behalf to this Aktia Q3 results presentation. My name is Mikko Ayub. I am the CEO of Aktia Bank Plc. I'm going to walk you through some highlights of the results. And our CFO, Outi Henriksson, then will take you more into details. The third quarter for Aktia Bank Plc was a very strong quarter. Our comparable operating profit was EUR 23.8 million, falling slightly short from the historical record quarter, the second quarter of this year, but being almost 50% above that of the third quarter last year. All of our 3 business areas, Asset Management, banking and Life Insurance delivered very well during this quarter. The increase in our net commissions income was on a solid level as well as our net interest income. The third quarter was the first quarter when Taaleri Asset Management was included in our numbers throughout the full quarter. That obviously had an effect on the net commissions income. But the increase that we saw and see there is not entirely due to Taaleri Asset Management, for a large part, though, but not entirely. The strong performance improved our comparable cost-to-income ratio 0.63 and our return on equity was also well above that of the third quarter last year. During the quarter, we paid a dividend of EUR 0.43 per share. And I'm glad to note that the Financial Supervisory Agency has lifted all restrictions on profit and dividend payout for financial institutions. Let's hope the situation remains so and we have -- and we can conclude that we have returned to a normal state of affairs also on this front. This picture tells a lot about the trends we have seen this year compared to the very exceptional last year and even more so, the exceptional first quarter of last year. Our comparable operating profit is well above that of the total result last year. And as we have indicated throughout the year, we see the comparable operating profit for this year to be clearly better than that from last year. Going more into the different business areas we have and starting from Asset Management, I can state that the integration work that we have had throughout the third quarter has proceeded according to plans and timetable. We have lifted 3 specific areas to receive special attention and special focus during the third quarter. Those are enabling sales, financing investments and preparing for the legal entity mergers that are to take place at year-end. I will come back to the latter of that later on. The organizational structure of our Asset Management was built or a building that was finalized at -- during the third quarter. We have got now a unified new operating model throughout our Asset Management organization. And we have also completed all the recruitments that are needed or were needed in our portfolio management to cover for certain resignations that we had earlier during the year. So we are up to full speed. And we have been piloting several projects and several ways of working when building the new operating model that we have in Asset Management. I am glad to note that financing investments, which is in the very core of our strategy, has also proved to receive very good customer traction. And the pilot projects that we have carried out there suggest that the strategic choice that we have made is the very correct choice and that there is demand and even more so, unserved and sort of catered demand out in the market. I mentioned the year-end legal entity mergers that are going to take place. Those are merging our 2 fund companies into one fund company. One is, of course, the legacy Aktia fund company and the other legacy Taaleri fund company. And we will merge the legacy Taaleri asset management company into Aktia Bank Plc, resembling the merger that we carried out for the old Aktia asset management company in year shift 2019, 2020. So after the year shift, we will be running a simplified legal structure for our Asset Management business, which will, from a governance and compliance perspective, simplify and streamline the operation that we have towards customers, this obviously expectedly and hopefully has hardly any effect. Needless to say that returning into a more normal way of interaction, a more normal way of working has supported our effort to build a new culture in our Asset Management and of course, throughout Aktia. This returning to office took place during the month of September and October. And now we are up and full-speed in running what we call at Aktia, the new normal as a working model or as an operating model. And I say that has got a -- has got and has had a favorable impact, of course, on the ability to build a new joint common culture. The assets under management that we had, had hardly any change during the third quarter compared to that of the second quarter. What these numbers hide behind is that the negative market value development was offset by positive net sales to result in a more or less unchanged situation. Later in the presentation, you'll find a more detailed waterfall on the sales of different segments in Asset Management, but I'd like to leave to the positive development, the continued positive sales development for private customers, let that be in banking or private banking, that carried out also throughout the third quarter. Turning on to our Banking Business. The growth in our loan book continued during the third quarter. We were successful in repricing new loans and existing loans in a way that the average loan or the average margin on our corporate loan book increased during the quarter. And the decrease in private customers' loans ended during the third quarter. New lending for private customers actually saw a slight increase during the third quarter. This is -- I'm particularly happy about this given that the competitive situation for home mortgages, for example, continues to be very tight in the market in Finland. But what is more importantly here is that growth or market share in the loan book is not an outright goal for us as such. We are not after a market share or we are not after big growth numbers in the loan book. That would be actually easy or very easy to achieve in the current market that we have in Finland. We do put attention on pricing, and we do put attention on credit quality so that we maintain our solid credit quality and that we actually use our time, effort and capital in a wise way to deliver on the strategy to become an asset manager bank, as we have outlined in our September strategy update. A couple of days ago, we announced a cooperation with Finnair on credit cards. This is something that we will build up during the winter. And in late winter, early spring next year, I expect us to become -- to go into production with this. This is a very interesting opportunity for us to reach Finnair Plus program customers, who are in the very core of our strategy as a customer segment, who are willing and able to accumulate wealth. Our bankers will take a very active approach, when we have this product up and running, to offer other products and other services of our wealth management and why not, of course, other banking products also to these Finnair Plus customers, particularly platinum, gold and silver customers of the Finnair Plus program who fall either into or very close to our strategic sweet spot. Customer satisfaction developed well. During the third quarter and also prior quarters to that, we have seen in customer rankings that Aktia, both in corporate customers and household customers, was the actor to gain most in these rankings. And I think that when we look at competitors in the market, we have also reached our sweet spot in terms of positioning ourselves in the market, since those banks who are ranked by customers above Aktia are running a somewhat different operating model than what Aktia runs. So it is not something that we feel that is exactly our competitive field or competitive edge. We have also improved customer service to corporate customers and in -- product-wise, in leasing products, to further strengthen our positioning and our service towards SME customers, again in the very core of our strategy to become an asset management bank, asset manager bank for customers and corporates with identified owner or owners. Life Insurance had a good quarter, good -- it was good in many ways, also in new sales, but also in the development of insurance case incidents or -- and the investment portfolio in Life Insurance. Cooperation with Finlands Företagarskydd [Foreign Language] has advanced well. And this partner company that we have or a company that we partly own is ramping up its sales capacity during year-end and will be facilitated to sell at a much broader range next year than what it has had capacity during this year. Now the third quarter saw the publication of our updated strategy. We have 3 strategic priorities. Those are to win in wealth management, to gain new customers and grow among customers who are willing to increase their wealth, and to deliver excellent customer experiences. This is all to take us towards our vision to be the wealth management bank or wealth manager bank that does not really, as per today, exist in Finland in the way that we see there is a demand in the market, and we are able and capable to position ourselves. This builds very centrally around our 3 business areas and the seamless interaction between these business areas, both internally and towards our customers. Our strategic sweet spot is obviously in the center, where all these 3 business areas meet. Our earnings per customer is on a very different level in this segment compared to other segments. The dark gray segments are also interesting segments to us. We see, of course, cross-sells and cross-selling potential there, and we see potential to nurse our customers towards the strategic sweet spot. And as one difference to the previous strategy that we had, the light gray segments differ somewhat between Asset Management and other business areas. The so-called single-product customers in Asset Management are, of course, very interesting to us. Such customers are, for example, domestic and international institutions. However, in banking and Asset Management -- sorry, in banking and Life Insurance, we have to pay attention to production costs and customer service costs. In banking, of course, we have to be wise in how we use the capital that we have so that it best serves our strategic goals. Our long-term financial targets were updated in connection to our strategy update. We set more ambitious targets for ourselves for the year 2025, where we see to have a comparable operating profit of EUR 120 million or more, a cost-to-income ratio of 0.60 or below a return on equity of 12% or more. And our target for CET1 capital ratio was redefined to state that we want to maintain a minimum of 1.5 percentage points above the regulatory requirement. Outlook for the remaining of the year is unchanged. That is we expect this year to be considerably better than the previous year. I guess it goes without saying, at this point of the year when there are a couple of months remaining before year shift. I will end my presentation at this point. Should you have any questions or comments, please do not hesitate to post them after my CFO, Outi Henriksson, goes through more in detail the results and numbers. Please, Outi, the floor is yours.

Thank you, Mikko. Good morning, everyone. [Foreign Language] Let's then take a look at the financial results in somewhat more detail. We had again a good quarter behind us. The comparable operating profit was EUR 23.8 million. That is somewhat down from the second quarter, which was actually a record quarter in the history of Aktia. But let's first take a look at the comparable operating income. If I start with the net interest income, that was somewhat down from the second quarter. It was EUR 23.1 million. And the sole reason for that is that in the second quarter, we booked a cumulative accrued interest from the Central Bank financing, namely TLTRO III program that totaled somewhat over EUR 5 million, while now in the third quarter, we booked the part that belongs to third quarter being approximately EUR 1.5 million. The loan book developed well, again, so the net interest income from lending and -- borrowing and lending was at a good level. Then net commission income, as Mikko pointed out, nice growth there as well, partially driven by the Taaleri acquisition, but if we also look at the legacy Aktia prior to the acquisition, the development was good. And same goes for the net insurance income, net income from Life Insurance business. It has been at a very good level in the whole year, very pleased about it, EUR 9.7 million, slightly down from previous quarter but, again, at a good level. And the other, somewhat lower than in the second quarter. On the second quarter, we booked gains from certain bonds that we sold from the treasury's liquidity portfolio, those we didn't have now on the third quarter. And then the comparable operating profit, EUR 23.8 million. Banking Business nicely above first and second quarter. We need to bear in mind that in the second and -- first and second quarter, we booked the stability fee of [Foreign Language]. First quarter, 12 -- EUR 2.8 million; second quarter, EUR 1.4 million. So that is now done and does not exist in the cost base in the third quarter of the Banking Business. As said, also nice growth there on the income side and also a good development on the Asset Management segment, as you can see. Centralized functions and eliminations, there is a drop. But again, we booked the treasury-related items and also Central Bank financing costs in the central functions. Then if we look at the comparable operating profit, the cumulative one for 9 months this year compared to last year. Very nice underlying profit growth, plus 43%. So we had taken, in this picture, account those blocks that we point out here and excluded the value changes in the Life Insurance investment portfolio. Solid net NII growth, as you can see, compared to last year. Net commission income at EUR 18.1 million growth partially coming obviously from Taaleri acquisition. And same goes for the cost side. If you look at the operating expenses that were EUR 20.7 million higher than last year, as said, if -- we acquired the Taaleri Wealth Management business in May and those operating expenses, normal running cost for the business shows there and, on top of it, the transaction -- directly transaction-related, the M&A transaction costs such as advisory fees and transfer taxes that we booked in the second quarter. A few words about assets under management. The assets under management, third quarter versus second quarter, entirely flat. We were on plus. What comes to the net subscription, slightly plus and slightly minus if we look at the values -- the market changes. Domestic institutions, small minus on the net subscription side but a small plus on the market changes. And the international institutions, the first picture on the left-hand side, EUR 37 million, plus, net subscriptions. Market changes, approximately same amount negative. And the retail segment that has performed really well. The retail channel still on plus on the third quarter. The big red block there is actually a structural change. We moved the private banking assets under management to domestic institutions from the retail channel, so that is structural. The retail channel has been on plus what comes to the net subscriptions the entire year. Comparable operating expenses, somewhat higher than last year. But again, staff costs driven mainly by the Taaleri Wealth Management acquisition and same goes for the IT expenses. They are normal business running costs that we acquired together with the income side, obviously. Somewhat higher depreciations that comes from the acquisition of intangible assets related to the transactions, then those we depreciate and now from the beginning of May. And then the EUR 4.9 million of one-off expenses, this is a comparison with this year -- this year's comparison with last year so that they were EUR 4.9 million higher than last year. Impairments for future expected credit losses still at a very modest level, minus EUR 4.6 million P&L impact from the beginning of the year. On the third quarter, we did update our macroeconomic assumptions but no material effect. That was actually EUR 50,000. So nothing there. And we still have not observed any major COVID-related or other new risk concentrations in our credit portfolio. So the financial summary, once again, very happy about the operating profit development plus 49%. If you look at the whole year, plus 89%, but then we need to bear in mind that the first quarter of last year was really weak as a result of the value changes driven by the COVID pandemic, but very solid development, as you can see. A few words about the balance sheet. Structural lending and deposits. Our loan book totaled EUR 7.4 billion end of the third quarter, up from exactly EUR 7 billion at the year-end. And the composition of the loan book hasn't changed much. The household portion dominates the loan book, then followed by the corporate and housing association and the relative portions have remained relatively the same as in the beginning of the year, some increase on the corporate side. As it goes for the deposits, dominated by household and then small portion coming from the corporates and housing associations. And this is a picture of the balance sheet total in a simplified format than in looking at the balance sheet in numbers. Lending -- the loan book lending and borrowing, I covered. Deposits, the previous slide as well. The increase in other assets is actually cash goodwill and intangible assets, and that increased the light gray block that comes from the Taaleri Wealth Management acquisition. Then a few words about the capital adequate. Our CET1, common equity Tier 1 ratio was at 10.4% at the end of the period. It was 2.7 percentage points over the regulatory requirement, 0.4 percentage points lower than in the end of the second quarter, and the drop at the -- 0.4% drop comes from the fact that the risk-weighted assets have increased over EUR 80 million as a result of the growth in the loan book. We have also included this year's result -- or got a permission to include this year's result in the capital adequacy calculations, which means that we also -- as we include the results from this year at the end of the second and at the end of the third quarter, we need to deduct the full maximum amount of dividend, 80% according to our dividend policy in the calculation, and that has a minor negative impact on the CET1 ratio as well. However, it improved the conglomerate's, the whole group's capital adequacy. We have been quite active on the funding front. This year, we completed 2 private placement transactions in the third quarter. And from the beginning of the year, we have issued 14 pieces of senior preferred debt under our EMTN program. Total volume has been somewhat over the EUR 200 million and the maturities ranging from 3 to 10 years. We are in the process of getting prepared for a Tier 2 issue from life insurance company as we speak and expect to complete that on the fourth quarter of this year. And that will, in turn, strengthen the capital structure of the Life Insurance company. Our liquidity is still at a very good level. The LCR ratio was 125% at the end of Q3, and the cash has been at a high level. And we have used the ECB tiering structure in full the entire quarter or the whole period. That's everything I had. Mikko and I, we are happy to answer your questions and welcome, Mikko.

Thank you.

Yes, let's move on with questions then. Any questions here?

Sauli Vilén from Inderes. Can you give us an update regarding the cost synergies on Taaleri's Wealth Management transaction or integration?

Sure. We are progressing as planned. The current headcount, the current IT structuring plan is progressing as we planned. So we are following the schedule that we set for ourselves as we published the transaction.

What about the sales synergies? Then you have the organization in place now, so when should we expect to see the new sales flow picking up? Obviously, the Q3 and the net sales size or inflow side wasn't too good.

Well, I think it's important to keep in mind that the impact or inflow of sales synergies is not only visible in the Asset Management organization, but also on banking side, for example, in the growth of our corporate business in banking. So looking only at the development of assets under management or the result of Asset Management gives only a partial picture of that. To your question of when do we expect to see the synergies, like we say during year 2023, we expect to see them in full. The legal merger or the merger of legal entities is going to take place at year shift, which is going to simplify compliance and governance of these operations. And during next year or latter part of next year, I expect that these pilot projects that we have been running should be business as usual, so to say.

Then if I may continue still. Regarding the EMD sales, in Q3, you finally saw some small but still positive inflow on that front. What is your general feeling about the EMD's new sales inflow going forward from here as you have the team in place now?

Obviously, I'm very happy to see new sales inflow. The team is performing very well. I'm very comfortable on both the competence and the spirit that the team has into reaching out to customers. The lift of travel restrictions is obviously supporting and supportive for our international sales. We have also, during the third quarter, appointed a person responsible for international sales. So we have stepped up our capacity on that area. Then, of course, the question comes into what is the performance of different asset classes? And what is the ideal composition of our portfolio going forward into next year, but I guess your guess is as good as my guess into what would be optimal over from that point of view.

Okay. Then final from my side. About the Asset Management fee base, as Taaleri had kind of a lot of performance fees over there, can you give us any insight about the fee split there? How big a part of the performance fees were in Q3 of your numbers?

I don't think we have specific numbers on that.

We -- yes, we haven't given out the specifics, but I would say that looking at the total net commission income, they are not a significant part of Taaleri's portion of the income.

Okay. If I may continue. Antti Saari from OP Group. Firstly, regarding Asset Management, it seems that you have now hired a lot of new people there. What's the situation? Is the headcount full? Or are you still needing more people there? And then more broadly speaking, are you concerned about salary inflation? Because it seems that, that is popping up from almost every industry right now.

We have almost 30 portfolio managers. I'm sure we are one of the biggest actors in town. And I -- in a big picture, I'm satisfied. I believe we are where we want to be. Then do we need 1 or 2 people here or there? I think that is good to keep in mind that when there are 30 people in the team, obviously there's traffic in and out in normal conditions also. So -- but yes, I think I would say we are there where we are. Regarding salary inflation or inflation generally, it might be too strong to say it is a concern, but the labor market is quite active at the moment. I would say that where we see particularly high activities, not necessarily in the field of Asset Management, but in certain specialist areas more close to sort of reporting -- authority reporting, accounting, capital adequacy calculations and the types where people who are very deep into these are actually not that many in town.

Then regarding these integration expenses. You have now booked some EUR 5 million of them this year, even though you haven't marked them as one-off, but they are sort of one-offs. Could you give us any kind of guidance, what should we expect in Q4? Should there still be some integration expenses?

We have booked -- as you pointed out, we have booked the majority of the kind of onetime directly transaction-related costs now on the second quarter. We had some integration support work also in the third quarter. We may need something minor on the fourth, but I would say that they are not material. And the big block was already in the second quarter.

Okay. Then one question regarding capital. I always ask one question about capital. Your CET1 ratio is still coming down each quarter. And we know that it's the result of a strong growth in lending. But nevertheless, it's coming down and you have a pretty nice buffer to the current requirement. But how low -- long can this continue? Because we know that, that requirements probably go up in the coming years at least somewhat. So should we expect volume growth to come down? Or is there some other solutions for this?

If I answer in a way that Mikko pointed out that we are not focusing on growing volumes at the cost. So we are probably a little bit more selective what comes to the growth of our loan book. And in all conditions, we will make absolutely sure that there is enough buffer on the capital side compared to the regulatory requirement. So that is something we monitor. We obviously have long-term scenarios. We are not just looking at year '22 or '23, our scenarios in ICA process. They extend over a long period of time. So we are running scenarios to ensure that in all circumstances, we are well-capitalized.

But there are no sort of modeling side that could push down your risk-weighted assets? Or anything like that?

No. We are obviously working in our budget right now, and we are ensuring that the capital buffers are sufficient to support the growth that we are looking at next year. And I'm obviously very happy about the growth that we have had about the price capital.

If I just continue with a few words on that. Like I said, it is -- in the current market situation, it would be very easy to grow outright. There is a lot of demand out there, but we have, as part of our strategy update, stated that the risk profile of Aktia is not intended to change, meaning that we will be and are and have been selective for the business that we take in. And now with the sharpened strategy, even more so, we are looking for potential among customers who are willing and able to accumulate wealth rather than going outright for market share.

Yes, I -- and if I may continue. Sauli from Inderes still here. So regarding the Asunto VIII, I -- is it Residential 8, the English name? And anyway, I know it's like a obviously a small product for you, but it's still like the kickoff of your alternative strategy. So in that sense, it's kind of interesting. So how has the sales proceeded there?

The sales is still going on. I'm not sure I have the figures of as per today on that. But generally speaking, it has been well received by customers, yes.

Is that the only alternative, what you're currently selling? Or are you also selling the other Taaleris like Infra or Bio or what currently have?

I'm not sure I -- if I were to say something, there's a risk that my answer would not be correct or complete. But my understanding, that is that we have 2 residential mortgage-related products at sale as we speak. Do we have more than that, then we would need to get back on that.

Okay. Then I want to try my luck with one question. Hypothetically speaking, if a larger M&A opportunity would arise in Finland, would you be in -- hypothetically speaking, would you be interested to look or discuss? Or are you fully focused on the Taaleri integration at the moment?

And we are speaking in the field of banking and finance now or sort of more generally?

Yes, yes. On your field, yes.

On banking and finance. Well, yes. When we came out with our updated strategy in September, it was not really built on M&A or built on any need of M&A, but rather a strategy that we feel we can execute with the transaction that we made last year -- sorry, earlier this year. Then obviously, we are following very closely of what happens in the market here in Finland. And if and when opportunities arise, then of course, we will take a look at them and out of interest, see what is available.

Then let's take some questions from our webcast website. The following questions are from Andreas Hakansson at Danske Bank. The first question is actually about Handelsbanken and Aktia's interest in it. I think we already got that answer. Let's go for the second question. You have seen turmoil on staff, but you have not suffered outflows in the quarter. Do you feel the risk of outflows is now under control?

I think -- well, is it -- I guess it depends on how do we define risk of outflows. I don't think there is an immediate, imminent risk of outflows as such. But then, of course, one has to keep in mind that being in the Asset Management business and even more so with a fair share of business from institutional customers, there is always the risk that institutions reallocate their portfolios, they rebalance their portfolios. They changed their view on the ideal allocation going forward. So I think that risk is, should I say, part of the game in being in institutional business.

Then let's go back to CET1 and precision on that. The risk-weighted assets grew relatively fast in the quarter. What drove that? And are you comfortable with your CET ratio that has continued to fall?

Yes. As I pointed out, the risk-weighted assets increased by over EUR 80 million and affecting the CET1 by approximately 0.3 percentage points. And the answer is, first of all, happy with the growth that we have seen. And second, I'm very confident with the CET1 capital adequacy ratios that we have. And as said, in all circumstances and short term, long term, we will ensure that we stay comfortably over the regulatory requirement and have sufficient buffers to take potential shorts.

Thank you. It seems we have no more questions from the audience.

Thank you very much.

Thank you.

Thank you.