Aktia Pankki Oyj (AKTIA) Earnings Call Transcript & Summary

A very good morning, ladies and gentlemen, and welcome to follow this Aktia Bank's Fourth Quarter Results Presentation. My name is Mikko Ayub, I'm the CEO of Aktia Bank Plc, and together with me here is my CFO, Outi Henriksson. We are going to walk you through the result highlights, and then we are more than happy to answer any questions you may have. Please do type in your questions, and we will take that after our presentations. I will walk you through the highlights of the results and a few comments on our 3 business areas. I am honored and proud to present the best result ever in Aktia's 200-year history. Our comparable operating profit reached a level of EUR 87.4 million, up 59% from that what it was last year. Operating income reached a level of EUR 263.2 million and comparable expenses, EUR 171.1 million. I'm even more happy to note that this growth came from all income classes and all business areas. Hence, our comparable return on equity reached a level of 10.3% and our comparable cost-to-income ratio improved 6 basis points to 0.65%. Our CET1 ratio reached 11.2%, up from 10.4% from the previous quarter. As a result, the Board of Directors is proposing a dividend of EUR 0.56 per share. Our dividend policy is to pay 60% to 80% of our after-tax profit. This EUR 0.56 per share represents 60% of the profit. Our outlook for 2022 with all the information that we have available at this point, we expect a somewhat higher comparable operating profit than that of last year, obviously, provided that market conditions and circumstances in society remain stable. This picture highlights very well the strength of last year. It was clearly above that of 2020, which was obviously an exceptional year for well-known reasons, but clearly, above that also of any previous year. The good performance began in the last quarter of 2020, carried out throughout 2021 with our second quarter last year being our historically best ever quarter. This table highlights more in detail, the performance of different business areas. We had a 19% increase in net interest rate, a 27% increase in net commissions income and an 89% increase in net income from Life Insurance. Our expenses grew 23%, the main contributor for this was obviously that we had a broader business last year than what we had during 2020. But also, due to some elements of one-off nature that were burdening our cost base. I will go more into detail on our 3 business areas, starting from Banking. We had a solid loan book growth of 7% last year. Our corporate business grew even stronger than that, 15%, with the focus being on SME segment lending, according to our updated strategy last September. The average margin on our loan book for 2020 was, throughout the year, higher than that of 2020 -- sorry, our average margin on our loan book in 2021 was throughout the year, higher that of 2020 in our corporate loan book. The same thing from another perspective for all months, except 1 month during last year. Our new lending margin was higher than that of the amortizing loan stock margin. This is particularly interesting when keeping in mind that we had an unchanged risk profile on our loan book as we expect to have going forward. So we have not changed our risk profile, we have rather segmented and repriced both existing and new loans in a more active manner. Mortgage loan demand was good throughout the year. For the 3 first quarters of the year, we grew faster than the average growth in the market. During the last quarter of the year, we slowed down as part of our updated strategy and focused more on strategically important customer segments. As a result of that, we also managed to increase the average margin on our mortgage loan. This was actually a trend throughout the year from the very beginning of the year, we have had an improving margin on our mortgage loan book. We do not search market share as such, and we do understand that we are a price taker in the market to the large extent, but according to our updated strategy, as I said, we are focusing more on the strategically important customer segments for us. Our 20% acquisition of Alexander Corporate Finance was approved early this year, and we are now working very closely to get the benefit on our side, as well as on Alexander's side of this investment that we have into their company. We are now positioning ourselves in a new way in the value creation process for our customers, and on the value chain to our customers, supporting both our banking business and our asset management business. And to a certain potential also, our Life Insurance business. Our cooperation with Finnair on the Finnair Plus program is advancing as planned. In the spring, we expect to launch a credit card with them, which opens an access to us to this very interesting customer segment that well falls into our strategic priorities, particularly the tiering customers of Finnair Plus program or something that I'm very much looking forward to serve, under our products and concepts. Moving on into Asset Management. We had a very strong growth in assets under management by 48% to EUR 15.5 million. This was, to a large extent, due to the acquisition of Taaleri Wealth Management that was closed in the beginning of May. Also, positive market development supported the favorable development of assets under management. We had good growth in private banking customers, both ex-Aktia customers and ex-Taaleri customers as well as in our retail distribution channel. Customer satisfaction among our private banking customers remains very high. for ex-Aktia customers, it remained on a very high level. And for ex-Taaleri customers, there was a clear improvement in customer satisfaction, which I'm, of course, very happy to note. Our private banking was ranked second in the Finnish Prospera survey, a very clear improvement to where we were a few years ago. On the institutional side, we had some outflows of assets as can be seen in the details to the report. I am not completely satisfied with our performance among institutional customers. And obviously, we have got work to do which we are doing in terms of improving and broadening our institutional footstep and our institutional presence. Among international customers, during the fourth quarter, we saw an outflow of assets, as one customer made a tactical change in their allocation. There is nothing dramatic to it as such. We have a good relationship with the customer. That is we have not lost the customer as such. But they did take down risk in the fourth quarter, and that is visible in our numbers. The integration process and integration projects on Taaleri Asset Management are advancing as planned. The year shift 2021, 2022 mergers of the fund management companies and the merger of the asset management company to Aktia Bank plc took place as planned, and we are now operating on a simplified end state of the legal structure that we designed. Focus on integration projects throughout this year will be on back-end integration, and those projects are running on schedule. We are pending regulatory approval for 2 ESG fund product -- 2 ESG rate fund products. One of them is more targeted on to the international markets, the other is for our domestic fund management company. They are different strategies. As such, so it is not a copy of the same. I'm very much looking forward to these approvals so that we can go marketing these 2 new strategies that we have been building. For this year, operational focus in asset management will be on sales, driving up sales activity, both towards existing customers, as well as towards acquiring new customers. Thirdly and finally, on our Life Insurance business. The result for the fourth quarter was EUR 3.2 million on the actuarially calculated result. Last year was a good year for our life insurance company. We had continued growth in sales, both in unit-linked products and in personal life insurance products and actually, our unit-linked assets under management reached an all-time high at the end of the year. We have improved further, our sales by, for example, simplifying the approval process of new life policies. This has shortened the time that we are able to, from a customer lead, actually close a deal with the customer. That is a very important competitive factor for us. And our partly owned sales company, Suomen Yrittajaturva, has ramped up its sales capacity late last year, and we expect this to be visible in improved sales volumes this year also. Our 3 strategic priorities remain unchanged. We are on our way to build the leading wealth management bank in Finland. This will happen through winning in wealth management to be the most preferred partner and to succeed in integrating Taaleri's wealth management activities. To grow among customers who are willing to increase their wealth. And to deliver excellent customer experience for these customers. Our 3 business areas are all very focal to delivering on this strategy and our strategic sweet spot is in the mid of the 3 business areas. A seamless interaction and cooperation across business areas is going to be one of the key elements in delivering on our strategy, and on the excellent customer experience. The sweet spot in the middle of our strategy offers us customer income and customer service cost that is clearly ahead of that than what it is in the other segments of this charge. Our long-term financial targets remain unchanged. We are looking at a comparable operating profit of EUR 120 million or more at the end of 2025, a comparable return on equity of 12% or better. A cost-to-income ratio of 0.60 or better. And 1.5 percentage points minimum spread above the regulatory requirements on our CET1 capital ratio. Like I said, I'm more than happy to answer any questions after our CFO, Outi Henriksson's presentation. At this point, Outi, the floor is yours.

Thank you, Mikko. Good morning on my behalf as well. [Foreign Language]. And let's then take a look at the financials in somewhat more detail. As Mikko already pointed out, we do have a record year behind us. And I'm very pleased that the growth has come from all of the business areas that we operate in. If I start from the quarterly development of the comparable operating income, it was EUR 65.5 million, pretty flat to third quarter. We saw growth in net interest income. The growth has throughout the year 2021 come strongly from the corporate SME segment lending. However, also, in the second half of the last year, we saw a positive churn in the household margin development, corporate margins being on a positive growth track the entire year. Net commission income was solid and growing. Obviously, compared to the last year, there's Taaleri Wealth Management acquisition that has a positive impact. But also, if you look at the underlying legacy Aktia, the part of the business that we had prior to the acquisition, we saw growth. Maybe, I can take up also the fact that the credit card commissions are still somewhat under the pre-COVID levels if you look at the levels prior to 2020. Net interest -- net income from Life Insurance, that was somewhat lower than the third quarter number, also, lower than the fourth quarter 2020. As you well know, need to bear in mind that the net income from Life Insurance is quite volatile, or cost volatility in our income and results. And that comes from the fact that we need to book the value changes, unrealized value changes through the P&L having impact on income and results. And that was actually a reason for the net income from Life Insurance being somewhat lower than in the third quarter. Another thing is that you see Tier 2 loan from a Life Insurance business in the fourth quarter and booked issue-related costs plus some interest expenses. Then let's take a look at the quarterly development of the comparable operating profit. Banking Business going strong, EUR 10 million, slightly up from third quarter, clearly above first and second quarter. But we need to bear in mind that the Banking Business bears the stability of resolution fee costs that we booked in the beginning of the year, but hence, positive development in the Banking Business. Asset Management, under third quarter levels on the fourth quarter. Two main reasons for that, and I'll get back to the cost base a little bit later on as well. The first one is obviously what I just pointed out. Life Insurance business is part of the Asset Management segment, and the fact that the net income from Life Insurance was somewhat lower, can we -- that can we see also in the Asset Management segment results. The 2 main reasons -- the second main reason for that is clearly higher IT costs on the fourth quarter than third quarter. Those IT costs are actually primarily one-off type of costs. One large portion being a kind of a reserve that would be booked in the Asset Management business. We had an IT incident in the beginning of December. We fixed it fast and had some costs related to it or reserved costs for it. However, it looks like we're going to actually be able to recover those costs, now, in 2022. We have also booked integration -- dollar integration-related IT costs plus IFRS 17 project-related IT costs in the Life Insurance business. So the increase in IT cost, I would say, is primarily one-off. We also had somewhat higher marketing and other expenses on the fourth quarter, but looking at the cost base, I would actually say that the third quarter run rate is a better representative of the current run rate of the operating expenses than the fourth quarter is. Then if we look at the entire year operating profit compared to 2020, we grew from EUR 55.1 million to EUR 87.4 million. That represents a 27% underlying profit growth without unrealized value changes. So if you take out the EUR 15 million -- EUR 15.1 million block in the middle, that is the value changes in the Life Insurance. Investment portfolio, you get to the 27% underlying profit growth. As you can see, growth in all of the income categories. However, also clearly higher operating expenses, again, driven mainly by the fact that we got 100 new colleagues when we acquired Taaleri, plus normal operating expenses, IT expenses and so forth. In addition, we booked quite a bit of onetime directly transaction-related onetime expenses such as advisory fees, transfer taxes and so on. Mikko, already discussed about the assets under management change. Here's the picture by channel. As you can see from the picture on the left-hand side, our international institution net subscriptions were on minus -- Mikko went through the facts behind the drop. Domestic institution is pretty flat, and the retail channel has actually been on plus almost the entire year, showing really good growth on net subscriptions and the positive change in market values as well. Then Comparable operating expenses increase, wanted to have actually the comparable income picture in the same slide, just for the reason that I pointed out already earlier. We saw quite strong growth on an annual level if we look at the cost. But again, I would say that the cost increase entirely has to do with the acquisition. Normal running costs and directly transaction execution-related costs plus post integration cost in the second half. The transaction-related costs we booked mainly on the first half of the year. However, the integration has continued until the end of the year, and we have had also integration costs on the second half. The Wealth Management business has now merged to -- the companies have been now merged. So from that point of view, the integration is done. Change in expected credit losses, very modest again, last year, profit and loss impact, minus EUR 4.5 million. We updated the macroeconomic assumptions again on the fourth quarter, but no material impact on the ECL at all. And we still have not observed any major COVID-related risk concentrations in our credit portfolio. Balance sheet total increased to EUR 11.6 billion, some changes from the end of third quarter and obviously, from the end of 2020. Maybe, I could point out from the liability side, the liabilities to central banks and credit institutions. There, we increased the Central Bank financing TLTRO III from EUR 650 million to EUR 800 million. That change has happened between the third and fourth quarter. And on the left-hand side in other assets, the big increase from end of 2020 has to do with the fact that we booked, first of all, goodwill. From the transaction -- Taaleri transaction, and then there's actually plenty -- we have plenty of cash. So the cash has also increased in our balance sheet. Capital adequacy, the CET1 ratio was 3.5 percentage points over the regulatory requirement. It also improved 0.8 percentage points from the end of third quarter. We have now deducted the proposed dividend that the Board of Directors will propose AGM from the CET1 calculation that is EUR 0.56 per share, totaling approximately EUR 40 million. And as said, that is now taken out from the CET calculation according to the proposal. Earlier on the year, the CET capital decrease, if you look at the situation end of 2020, due to the fact that we booked goodwill from the Taaleri transactions on the second half -- first -- second quarter of the year, sorry. Funding activities. We have been very active last year. During 2021, we completed 20 senior preferred private placement transactions, total volume being approximately EUR 300 million maturities ranging from 3 to 15 a year. Earlier last year, if you probably remember, we issued AT1 capital of EUR 60 million in the second quarter from Aktia Bank and then Tier 2 from Life Insurance on the fourth quarter. Our liquidity situation is very good. The LCR ratio has been over the regulatory limit heavily, now, being 140% at the end of Q4 and the cash level has been high. Our ECB steering structure has been in full use for the whole period. Then to the outlook. We expect the comparable operating profit to be somewhat higher in 2021, provided that the market development and circumstances in society remain stable. We do expect very good solid growth from the net interest income, specifically from the corporate customer segment due to the active pricing that we do and also, expected volume growth. We do expect financing expenses to remain at moderate level. We actually completed, in the beginning of the year 2022, EUR 500 million covered bond issue at a very attractive, very good terms. So the timing was pretty perfect, looking at the current situation in the interest or the outlook what comes to the interest rate. Obviously, if the situation continues as it is, it will have some impact on the senior financing. However, it might be also that we get a little bit better return on the liquidity portfolio, given the risk profile that we have. The growth in commission income is expected to grow, obviously supported by the completion and integration of Taaleri Wealth Management business. Focus is now on running the business, it's now also physically merged. So now, we really can focus on getting the growth that we are planning to have. As pointed out earlier, development of net income is pretty dependent on the changes in the market values due to the fact that we booked the unrealized changes also to the P&L. The actuarially calculated result, we do expect to increase in 2022 as it did in 2021. The expenses are expected to be approximately at the same level as in 2021, and that does not mean 4x -- quarter 4 2021. I would actually -- maybe, it would be better to say that the kind of a normalized level of 2021, as you will remember, we booked quite a bit of onetime expenses in the second quarter of 2021. Transaction-related costs in excess of EUR 5 million. And as I said, we had some onetime type of specifically IT costs on the fourth quarter of 2021. So I would probably get -- or use maybe third quarter cost level as a kind of a run rate for the beginning of 2022. And we do not expect any surprises coming from the potential credit loss provisions, so they are expected to remain at the moderate level, while the liquidity and capital adequacy of Aktia remains stable. That was my part of the presentation. Thank you very much. And Mikko and I, we are now happy to answer the questions that you may have.

Good morning on my behalf as well. My name is Lotta Borgstrom, I head Aktia's IR and Group Communications. Let's kick off with the questions. Andreas Hakansson from Danske. A key disappointment in the Q4 result was the high cost. Some seem to have been more of one-off nature, but your 2022 cost guidance is for cost to be at approximately the same level as in 2021, so even one-off costs seem to be sticky. What is driving this 2022 guidance that is significantly above consensus that has 2022 cost down 7% from 2022? Or do we need to make some adjustments? Also, Matias Arola from Inderes, asking about the question -- about the costs. Does the guidance indicate that cost synergies will be buried under the general cost inflation? Or how should we consider that?

I do think that I, partially, at least already answered the question in my presentation, but maybe to repeat it. As said, fourth quarter expenses do not represent the ongoing running base that we have now. There have been onetime expenses in the fourth quarter and they were -- they were mainly IT-related, and the second quarter expenses were transaction execution related. So maybe to repeat, I would say that the third quarter cost level is a better representative of the running base in 2022.

May I add to that, that costs are obviously very centrally in the focus for what we do, both as outright costs, but in the shape of a cost-income ratio that we follow very closely. And what I find is extremely important for us is that the cost base that we have has to deliver. Let it be on the sales side or on the development side or whatever activity we have throughout our organizations. And that is something that we will be focusing on now that the euro or euros that we do use in the house do deliver on what it is that they are used for. But having said that, there were certain elements of exceptionality in the fourth quarter as all through and through. And from that point of view and looking at the fourth quarter, I am more comfortable than what the numbers outright are suggesting.

Antti Saari from OP also adding on this cost discussion, cost synergies of dollar acquisition, EUR 6 million annually, we're supposed to achieve the full run rate until the end of 2022. Now, you predict flat expenses in 2022 versus 2021, even though the transaction increased expenses in 2021. What happened to the synergies? Anything you'd like to add on this?

We are still expecting to get those synergies that we communicated earlier. Actually, we are very well on a way, if you look at the personnel costs in terms of synergies. At the same time, we have seen, now, some increases on the cost base and that has to do with the investments that we need to do to get the growth in place. So no reason to worry about the synergies. As I said, specifically the personnel synergies that we thought are going to be executed in 2021, they have been executed. Now, it's the IT that we need to see and some other areas that we are focusing on and also, the sales synergies that are on top of the cost synergies.

If I may add on that also, like we said, in connection to the transaction that we do expect to take, cost synergies in the shape of personnel costs more upfront, which we have taken last year. And then we expect income and cross sales synergies to take or to materialize at a larger phase. Technical infrastructure or back-end integration, as I said, is something that is running this year and -- or is running throughout this year. It is also good to keep in mind when evaluating the income synergies that a part of these income synergies actually materialized in our banking result. So it is not only to look at the asset management results since cross-sales of funding products do land in our banking business area.

Antti Saari continues. You mentioned that Q3 '21 is good proxy for cost run rate. That would mean EUR 166 million. What causes as difference compared to guidance?

As I said, when we are saying that the expenses are expected to be approximately at the same level in 2021. I admit, maybe we should have been quite better in a sense that we are looking at the normal running cost that we have in 2021 rather than all the onetime expenses that we needed to book as a result of the transaction.

Matias Arola from Inderes. In 2021, your net subscriptions in asset management were clearly negative. What are the concrete steps to improve the sales in asset management business this year? Should we expect new alternative fund launches?

I can take that. That is true. That has been more from the institutional customer segment, like I said, on our private banking side, let it be ex-Aktia or ex-Taaleri customers as well as in our retail distribution, our assets under management and net sales have developed just as expected in a good way. Our institutional sales, we do need to broaden and develop and strengthen our institutional sales. And here under institutional sales goals, also our international sales, where actually, we do have -- we are working on new distribution and distributor agreements, but we have not -- we do not announce anything until we have actually signed our contracts with these distributors. But on this front, I do realize that we are not quite there yet where we want to be.

Let's move on to TLTRO. Andreas Hakansson from Danske. Were there any TLTRO impact in Q4? And what are the expectations for 2022? Also, Antti Saari continues, does the NII guidance strong growth include expected TLTRO effects? Or is it guidance for, so to say, operative NII?

If I answer the last one first, it's the guidance for the operative NII. As said, we -- in the outlook, we say that financing expenses are expected to remain at the moderate level, we'll see how the interest level now develop. The TLTRO was done at the end of fourth quarter, it didn't have any substantial impact on the NII on the fourth quarter. The negative interest that we can book on TLTRO loan is minus 1 percentage points. And that is, as we know, that should be valid until June 2022 after that being lower than that. But we have included that in our budget, obviously, for the year. However, it didn't have any material impact on 2021.

Antti Saari from OP. Risk rate floor for mortgages expired. Could you tell us what is the average risk weight of your mortgage portfolio currently? Is this the reason why CET1 improved in Q4?

The risk-weighted assets decreased the entire year by EUR 89 million. There's movement to higher and lower -- do not have with me the details behind that, what we can get back to that. As said, there's a lot of movement in the risk-weighted asset calculation behind the change that for the full year, EUR 29 million.

Matias Arola from Inderes. What is your general view or feeling regarding the interest rate outlook?

Well, if I am to take on that, I think the era of sub-zero interest rates is coming to an end. If it has not come to an end, I think that is healthy in many ways, both for the economy and for the markets. I trust I'm speaking for many in the industry who say that we hope this happens in a controlled manner. And that is, of course, something that will support us, the change and transformation will take place in a controlled manner. Increase in interest rates do have an effect on Aktia in opposite directions depending on what business area one looks at. Let that be Banking, Asset Management, Life Insurance, treasury. So building an equation of what the effect is on us is not straightforward. But as a rule of thumb, the area from sub-zero levels to zero is probably more of a tougher ride than the area where we go clearly above zero in interest rates where it then turns to become more favorable for us.

Then at least one more question. Aktia had some IT problems, I think, referring to the server issues by the year-end. How do you prevent that going forward?

Obviously, we have taken -- we have studied very closely of what happened in this case. In this very specific case, there is as such, directly, not much that we could have done ourselves. The issue was originated and caused by a third party or a vendor, partner that we had. A very respected and established partner in the market. But together with this partner, we have gone through how we can help them and how we can also, on our side, work better to avoid these type of events in the future. Very unfortunate, obviously.

No more questions.

Thank you for joining.

Thank you.