Aktia Pankki Oyj (AKTIA) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning, and welcome to this Aktia Bank's Q1 2022 Results Presentation. My name is Mikko Ayub. I am the CEO of Aktia Bank. And with me today here is Outi Henriksson, our CFO. I trust I speak for all of us when I say that we expected this year to be more normal after 2 exceptional COVID-19 years. And I trust that I speak for all of us when I say that we were extremely disappointed to observe that that was not the case. I think we are marking a discontinuity point, both politically and economically, the consequences of which we will see as time goes in the future. Turning to Aktia Bank's first quarter 2022, I am glad to say that we had strong underlying performance in our business areas, driven by our corporate banking side. We had strong growth in net interest income. This was driven by both corporate new lending and pricing that is increase in margin of new lending for corporate customers. Probably no surprise, our net commission income was down mainly due to changes in the market. And equally, the rise of interest rates had a toll on the investment portfolio of our Life Insurance company. Turning to expenses, our comparable operating expenses were below that of last year's last quarter when one keeps in mind that the majority of the stability fee is booked during the first quarter like last year. Given all that we have, we hold our outlook unchanged. That means we keep -- we see our comparable operating profit in 2022 to be somewhat higher than that of 2021. Outi will later on come more into the details behind this unchanged outlook. Our comparable operating profit for the first quarter was EUR 13.3 million. This picture helps you put that against the development of last year and previous years. We had a somewhat slower start to the year than what we had last year. Before going into the business area specifically, I would like to pause at this slide that shows the development of interest rates, both long-term and short-term interest rates. From the chart, we can see both the magnitude and the timing of interest rate -- the change in interest rates. And I believe like also often when the interest rate picture did change, it took the market by surprise, both in terms of magnitude and timing. Like I said, the increase in interest rate had a toll on our Life Insurance company's investment portfolio in the form of unrealized value changes. On the other hand, the increase in short-term interest rates has not yet positively affected our net interest income. There are a couple of reasons to that. You may remember from my previous presentations where I have stated that the journey from negative interest rates to 0 is financially a heavy journey for us. While on the other hand, when interest rates do go above 0, we start realizing the benefits of the increased interest rates. Now the 12-month Euribor, which is the most common interest rate for mortgage loans in Finland, went above 0 towards the end of the quarter. That it has not really affected the figures of the first quarter as such. Turning into our business areas and starting from banking. We had a new lending growth of about EUR 500 million and the growth in our total loan book of about EUR 120 million, which, as I said, was driven by corporate lending. The demand among corporate customers is good and this growth was in the center of our strategy among small and medium-sized companies. What is even more important to note is that this growth was achieved without a change in our risk profile. Corporate demand at the moment is actually very strong, and we see corporates increasing and preparing to secure their liquidity towards the latter part of the year, which may be economically more challenging than the first part of the year. In such a situation, customer selection is extremely important, and we need to secure that we have the right customers, both with respect to our strategy and with respect to the risk profile that we have. So, we have had a good focus on customer selection while delivering this growth. Regarding private customers, their behavior has been more cautious, both due to the generally increased uncertainty and interest rates, and there was a reduced demand for credits during the first quarter among private customers. On the other hand, sales of interest rate hedges, both to new loan customers and existing customers has clearly increased. We do not have a market share target among household customers. So I am not worried as such in the fact that we grew slower than the market among household customers. This was balanced by a stronger growth in the corporate customers. There has been a positive development in the pricing of all loans. Actually also in household customers, we saw a marginal increase in the margin, and for corporate customers, a clear increase in the margin. We also feel we have pricing power for corporate customers at the moment that we do utilize. The quality of our loan portfolio remains healthy. We monitor this very closely and very actively. Like said, I believe there are signals pointing that the latter part of the year might be economically more challenging in Finland than the first part of the year. So far, we have not evidenced this in our corporate loan portfolio, but we of course do keep a close look at the risks that we have. Going on to Asset Management from banking, the soft market during the first quarter weighed our assets under management, which increased by EUR 1 billion. Most of this increase coming from changes in market values and the smaller part in net -- negative net sales. We did have 2-way traffic during the first quarter. But as a result of a couple of international institutional customers rebalancing their risk profile and exiting certain emerging market risk that they had, the net effect was a negative net subscription during the first quarter. New sales to Private Banking customers continued to develop well during the first quarter. Now it is good to keep in mind that all the sales that we have are not reflected in the assets under management as we reported. For example, structured products are not included in these numbers and sales, together with our partner, Taaleri Plc in their alternative investment products that we take care of, are not included in these assets under management because there have not yet been capital calls on these alternatives. So what we have sold during the latter part of last year and the beginning of this year will be visible in our AUM statistics as capital gets called into these alternatives. Very recently, we have had our first non-European customer for our emerging market products. I'm very happy about this. On the domestic institutional customer side, we are not quite there yet regarding sales where we want to be and where we can be, and that is an area where we need to continue working hard. Our funds were yet again recognized by Morningstar as top performers. The war in Ukraine has not had a direct impact on our funds as such. We were not invested into Russian government bonds when the war broke out. And actually, our emerging market products have delivered excellent alpha throughout the first quarter. Our integration projects that are focusing now more on back-end system integration are running as planned. They are on track to deliver. As are also our cost synergy programs, they are on track, and we have no reason to expect that they would not deliver what we expected prior to the acquisition of Taaleri's Wealth Management business. I understand that from our results reading this is not that easy since increase in some other cost items are blurring the picture somewhat and then again inflationary pressure on some other cost items are also weighing or disturbing the picture of the total cost picture. This is something that we have to understand in a new situation where inflation is no longer 0 or close to 0. That cost savings do not directly one-on-one necessarily fall through into the overall cost picture where we need to fight inflation as well as other cost pressures on a continuous basis. Our Life Insurance actuarially calculated result for the first quarter increased to EUR 4.3 million and actually, the premiums written increased by almost 20%, with good sales both in investment linked to unit-linked savings insurance products as well as risk insurance products. Simplification of certain terms and conditions in our policies as well as a simplified approval process have on their side also supported an improvement in sales. But like said, the rising interest rates had a toll on our Life Insurance company's investment portfolio, and this resulted in unrealized valuation changes of that portfolio. Turning into our strategy which remains unchanged, we are set out to win in wealth management. We are to grow among customers who are willing to increase their wealth, and we do this by delivering excellent customer experience. We are on a journey to build the leading wealth management bank in Finland. And our mission is to build a wealthier society, a wealthier -- through wealthier customers -- one customer at a time. The focus is on the sweet spot of our customers. We have had an increase both in the number of customers and in the income per customer in this strategic sweet spot. We also follow cross-sales between Life Insurance and Banking, Life Insurance and Asset Management, and Banking and Asset Management. And I am happy to observe that these have also developed well. Like I said, particularly on the corporate side, there is excellent demand, which plays very well into our strategy of being a wealth manager bank for SME customers with clearly identifiable owners or owner where we can serve a customer from all our business areas. Our long-term financial targets for 2025 remained unchanged. That is a comparable operating profit of a EUR 120 million or more a cost/income ratio of 0.60 or below and comparable return on equity of 12% or above and a minimum of 1.5 percentage points to the minimum -- or a buffer of 1.5 percentage points to the minimum CET1 regulatory requirement. At this point, I hand over to Outi Henriksson, our CFO. And after her presentation, we are both more than happy to answer any questions that you may have. Thank you.

Good morning on my behalf as well. [Foreign Language] We certainly have an interesting quarter or should I say, challenging quarter behind us. Forecasting is always difficult, now it is even more difficult than usually. As Mikko pointed out, we saw rapidly increasing interest rates in January, followed by the war in Ukraine in February. That was something that we obviously didn't expect in the last quarter of 2021 when we were planning this year. The impact of the raising interest rates as well as the Ukrainian war can be seen in the values -- market values of assets under management as well as the investment portfolio of the Life Insurance company. If you take a look at the profit and loss statement from the last -- of the first quarter this year, total operating income was EUR 59 million somewhat higher than the first quarter 2021. However, the quarters are not fully comparable. We acquired Taaleri Wealth Management business in May 2021, so those income figures, neither operating expenses are not with the group numbers in the first quarter 2021. We saw solid good growth in net interest income, as Mikko has already pointed out. The weakest negative compared to the last year was the negative unrealized value changes in the Life Insurance company investment portfolio. Last year in the first quarter, those changes unrealized gains -- in unrealized changes were positive. That is the big difference between the EUR 9.9 million last year versus EUR 1.8 million this year. If we then look at the operating expenses, EUR 45.9 million. That is clearly above the first quarter for the reason that I just explained. Taaleri expenses were not in the group expenses in the first quarter last year and we also booked EUR 1.8 million higher stability fee now in the first quarter of this year. And then comparing the fourth quarter last year and first quarter this year, the expenses are comparable. However, you need to bear in mind the EUR 4.6 million stability fee that was booked in the first quarter of this year. Taking that out, makes the comparison quite different. Looking at the comparable operating income development quarter-on-quarter. As pointed out, nice development in net interest income driven by the corporate lending from EUR 24.1 million on the fourth quarter to EUR 25.1 million in the first quarter of this year. Net commission income somewhat down from fourth quarter, driven by the lower assets under management, again, driven by the negative changes that we saw in the market in the first quarter and then the big change, the net income from Life Insurance business. The actuarially calculated result developed well, but the unrealized losses, as pointed out earlier, had an impact. Good to bear in mind, when you look at the quarterly development of the net interest income is that you may remember that in the second quarter of 2021, we booked the cumulative negative interest on Central Bank financing that is TLTRO III on the second quarter, making that quarter not directly comparable with the other quarters in terms of net interest income. And same picture regarding the operating profit, that picture is obviously very much driven by the income side and that impact comes quite directly through the P&L to the operating profit. Between the quarters again, some comparability issues coming from the stability fee. As said, we booked EUR 4.6 million on the first quarter. That is EUR 1.8 million more than first quarter last year. And we got actually the confirmation on the final amount now in the end of April, which will be EUR 5 million and $80,000, meaning that we book another EUR 0.5 million in the second quarter. As Mikko already pointed out, we did see quite nice underlying profit increase. In this picture, I'm not going to go through all the components that you see here. But if we take out a negative impact of the unrealized value changes, stability fee and direct transaction costs related to the Taaleri acquisition, the growth was 8%. And this is the quarter-on-quarter comparison between the first quarter this year, first quarter last year, income and expenses. Operating profit was affected again by higher net commission income. We didn't have Taaleri income with us in the first quarter. Solid net interest income. A little bit impact there from the fact that last year in the first quarter we did not have the TLTRO impact being approximately EUR 1.5 million. The other is purely organic growth. And then, again, the big impact that you see, EUR 8.1 million coming from the value changes in the net income from Life Insurance investment portfolio. On the right-hand side, the costs versus first quarter last year, staff costs higher, obviously, as we got quite a few new colleagues from Taaleri after the first quarter. Somewhat higher depreciation, and that, is to some extent, explained by the fact that we have higher depreciation on intangible assets that is coming from the purchase price allocation from the Taaleri Wealth Management acquisition and those depreciations. Expected credit losses were again at a very moderate level. We actually were -- the changes were plus EUR 0.3 million positive. We haven't found any major new risk concentrations in our credit policy portfolio. We haven't actually done any management --overlay management judgment making reservations on top of the -- what comes from the ECL model. We do recognize that the risk is increasing, and we do not expect the development that we saw now in the first quarter to develop throughout the year. So we do expect to see increasing credit loss provisions towards the end of the year. Given by the fact that -- assuming -- knowing that the interest rates are now clearly higher than there might be customers who have difficulties with their housing loans. Balance sheet increased to EUR 11.7 billion from year-end, slightly up. No major changes, slightly higher lending to the public and public sector entities. Loan book grew to EUR 7.6 billion. On the liability side, deposits are again at a very solid level, some growth there as well. No major changes in the Central Bank piece. EUR 800 million of Central Bank financing TLTRO. Our CET ratio was 2.9 percentage points over the regulatory requirement in the end of the first quarter. It was 10.6% and a decreased from the year-end by 0.6%. The biggest change -- negative change came from the increase in risk-weighted assets that increased by EUR 132 million. That growth came from corporate lending. Another negative contributor was the negatively affected the fair value reserve as a result of the raising interest rate that is the treasury's liquidity portfolio, having approximately EUR 21 million negative impact on CET capital. On the other hand, we saw EUR 20 million positive, which came from a Life Insurance company paying EUR 20 million dividend to the parent. We have again been quite active on the funding market. We completed 8 senior preferred private placement transactions. Total volume was EUR 276 million, maturities ranging from 2 to 12 years. In January 2022, we issued a EUR 500 million benchmark covered bond redeeming October 2028. The transaction was very successful, more than twice oversubscribed and very actively priced. Liquidity continues to be at a good level. LCR was 136% at the end of Q1, and the cash level is very good. And we have had a Central Bank tiering structure in full use for the whole period. And now over to the outlook. As Mikko promised, I'm going to open this now a little bit more. The comparable operating profit is expected to be somewhat higher in 2021, provided that the market development is favorable or at least stable compared to what has been now in the first quarter. So the question is, obviously, after the weaker-than-expected first quarter due to the market conditions, what do we expect? We do believe in interest income growth continuation, mainly coming from the corporate side. As you can see, the first quarter was really strong and we have no reason to expect that, that growth wouldn't continue towards the end of the year. We also expect growth from a net commission income. Again, that requires a stable market, hopefully, a little bit positive market, but we do still believe that we see growth from there as well. The most difficult part is obviously the net income from Life Insurance business that was heavily negative in the beginning of the year due to the unrealized losses that we booked through the P&L. They were minus EUR 6.2 million. However, we do expect positive value changes from our real estate portfolio in the Life Insurance business with a high certainty. That's why it's here. And that will, to some extent, offset or compensate the minus that we saw in the beginning of the year, depending on how the transaction that we are planning will go through. The actuarially calculated result is expected to improve compared to last year. Considering the impact of inflation that we will see in the expenses, we see it already, we will see some labor union-related salary increases in June 2022. And we expect the expenses to be approximately last year level. Inflations are adjusted. And when I'm talking about last year level, I mean comparable last year level adjusted for the Taaleri transactions. As you know, Taaleri wasn't with the numbers, expenses were not with the numbers first quarter, and then we booked some directly transaction-related advisory fees plus transfer taxes. And we expect the potential credit losses provision be at a moderate level also towards the end of the year, although the first quarter was on plus that we do not expect to continue. That concludes my part. Mikko and I, we are happy to answer any questions that you may have.

Very good morning on my behalf as well. My name is Lotta Bozeman. I head Aktia's IR and Communications. You may now post questions to Mikko Ayub and Outi Henriksson, either here on site or by writing your questions on the question field on the webpage. But let's move over to the questions. Do you have some questions on site?

Regarding the international sales on the Asset Management side, can you open up a little bit more about that? You also mentioned that in your report.

What I can say is that we are happy about travel restrictions being lifted. That certainly supports our sales activities internationally. Like I said, now we had recently our first non-European customer to invest in our Emerging Market funds. We also are working on new European distribution agreements. When we get them actually signed we will flag those also. And then in addition, what we have on the drawing board at the moment is to have in Luxembourg, our first non-EMD related fund, hence expanding the product offering that we have outside Finland. But I will tell more about that also once we have nailed it down finally.

Then about the outlook. You mentioned that you -- provided that the market development is favorable or stable or are you referring to the end of Q1, so March? Or development at the moment since, obviously, the last 6 weeks has been kind of rough for the market, one could say?

We are referring to the development on the first quarter. So we don't expect that to continue until the end of the year situation to stabilize at certain point. As you point out, Sauli, the April hasn't been any easier, but we do expect -- obviously, it's a disclaimer. I mean, if the rally goes on as it went in the first quarter, then it becomes more difficult. But we do expect growth, assuming relatively stable conditions towards the end of the year.

Then about the Taaleri integration, it's roughly been 1 year now. So can you shed some light how -- what processes are -- you have already finished, what are still ongoing? And overall, how satisfied are you with the integration, development and speed and what you have been achieving.

Well, the clear processes that have been closed are the mergers of the company. So now we are at the legal structure since last year shift where we desire to be with the simplified easy or well simplified setup of having an asset management company and a fund management company. Very early in the integration process, we enabled cross-selling of products that has taken place. The funding of investments has kicked off well. We are actually ahead of our, should I say, projected use of balance sheet for this activity and that is of course a part that then generates the -- or comes in as a part of the cross-selling income or cross-selling synergy -- positive synergies, sorry. Then on the Life Insurance side, like mentioned, we are running a project now to make our own Life Insurance unit-linked products, so that they could accommodate other products also than the, to say, ex-Aktia products in their investment portfolios. And then the big project that we have is to finally merge the CRMs, the customer management systems, for our bankers so that they have one unified cockpit or one unified dashboard where they can see customers regardless of whether these were ex-Aktia customers or ex-Taaleri customers. And this is a project that we expect to complete in the latter part of this year. Yes, I think that sort of summarizes the activity. And your question on how satisfied we are. The business of Taaleri Wealth Management has been very much of that what we anticipated it to be prior to the acquisition, so there have been no surprises on that side. We are very satisfied with the transaction and what it delivers. Of course, we need to work hard as the market environment becomes tougher. But I'm happy to note that, for example, customer satisfaction is on a very good level and rather improving than weakening. So at least our customers believe in what we are doing, and I think that's probably the most important thing.

Then finally, about the net subscriptions. If you look at the past 12 months or so, you have been at least comparing some of your closest peers, you have been not selling as much as them. And obviously, when the integration -- you made the Taaleri deal, you -- first quarter, you said that the focus is on the integration and not on the new sales, but I guess that's not the excuse anymore. So how do you feel about the net subscriptions at the moment, overall new sales at Asset Management side.

Of course, I want to see positive net subscriptions rather than an outflow of funds. What we do observe is that actually cross sales is on a good level and has performed well. But we have had simultaneously outflows of the funds due to certain events that took place last year. So for me, it is important to, on one hand, block the outflow of funds. And if we do that, I believe that the gross sales that we have is going to take us forward in towards our targets. But improving sales and having a close focus on sales is very central for us, not only in asset management, also in banking and in Life Insurance for that matter too.

Then we have 2 questions from journalist [indiscernible] both to Mikko Ayub. The market environment is really volatile at the moment. How do you expect this to affect your investment portfolio in your Life Insurance business during this year?

The market environment is indeed volatile at the moment. Like we see from this quarter and from previous quarters, sudden and sizable interest rate increase has a toll on the unrealized value changes of the Life Insurance investment portfolio. On the other hand, the portfolio as such is conservative. It does not hold a significant amount of equity market risk as such, so a soft equity market does not affect the portfolio to the same extent as one might think it could affect. So generally speaking, the portfolio is conservative, but -- and a rise in interest rates and more specifically, long-term interest rates does have a toll on the unrealized value changes.

And the question number two, when do you expect to see a positive effect in your margins when the rates start rising more rapidly?

I think to a certain extent, we have seen that for corporate customers. Now it is difficult to say what is the effect of rising interest rates and what is the effect of the political situation and what is the effect of COVID. But we do see that for corporate customers, we do have pricing power. And we have taken benefit of that and we have executed this pricing power, not least for the fact that, like Outi said and stated earlier also, there are certain signs up in the air that the latter part of the year might be economically more challenging in Finland and other countries for that matter, for customers than what the first part of the year was.

No more questions.

Thank you. Thank you very much for joining in today. We wish you a very good continuation for the Wednesday.