Aktia Pankki Oyj (AKTIA) Earnings Call Transcript & Summary

A very good morning, ladies and gentlemen, and welcome to follow this Aktia Bank Plc's Q3 results presentation. My name is Mikko Ayub, I am the CEO of Aktia Bank Plc. And together with me here is our CFO, Outi Henriksson. She will take the floor after my presentation. And after that, you are more than welcome to post any questions you may have. I will start by raising a few highlights of our third quarter result. Interest income from lending continued to grow strongly, and the average margin from the entire loan book continued to improve. Increased funding and hedging costs, though, weighed down the net interest income during the third quarter. In Asset Management, net subscriptions were positive. However, the market decline decreased the value of assets under management in our Asset Management business. Life insurance company's solvency rose to record high levels. The investment portfolio of our life insurance company did suffer from market value development during the third quarter. Credit loss provisions remained at a very moderate level during the third quarter. Summarizing our third quarter and our 3 business areas, one could say that we had tailwind in 1 business area out of 3, and 2 business areas out of 3 faced headwind during the third quarter. Before going in deeper to the developments of our specific business areas, I would like to draw your attention to the very rapid and very strong increase in interest rates that we have faced during this year. You are certainly more than familiar with this. But I would like to remind you that never ever before in the history of the single currency euro, have we faced such an increase in interest rates. There was a very strong decrease, though, from the autumn of 2008 to the autumn of 2009 when short-term interest rates came down from about 5% to 1%, but never such an increase as we have now from more or less the beginning of the year. We have gone from minus 0.5 percentage point to almost 3 percentage points. This has various effects on different business areas in our industry, and we can take a closer look at those further down when we look at different business areas. Going into different business areas, I will start from banking, and I will start by concluding that corporate customer activity was at a high level during the third quarter. Especially in asset-based financing, there was strong growth. We were active in pricing and active pricing, together with volume growth, increased the interest income from corporate customers. We've had also pricing power, and we're able to increase the margin on new lending of mortgage customers. And as a result, the average margin of our entire loan book continued growing through the third quarter. The growth of the average margin of our loan book has continued for about a year now, a development that I am particularly happy about. Regarding household customers, demand for mortgage loans continued to decline. The uncertainty in the market and the economy around us were factors pressing down demand for mortgage loans. If you look at the picture to the right of the chart, you will see the decline, in the green bar, from the second quarter to the third quarter, and that is driven by the decreased demand in mortgage loans. Credit quality, as I said, continues to be on a high level and credit loss provisions remained low. This is something we are, as you may guess, paying close attention to, on the way forward. We continue to take good care of our existing customers and serve them well. What comes to new customers, we are very selective. I think in the environment that we now are observing in the economy around us, customer selection is ever more so important. We want to price and choose our customers -- our new customers in the way that they support our strategy and that they support the profile of the credit risk that we wish to carry. I would like to remind you here that we do not have any specific target for market share as such. So this is what is going to shape our way going forward. We have protected also our capital. Our CET1 was pretty much unchanged during the third quarter. It actually increased by 20 basis points during the third quarter. This protection of capital has come at a cost, which weighs our net interest income. However, I'm very happy so that we have protected our capital throughout the year as the market development or the increase in interest rates has been so strong as it has been, and hence would have had a strong impact on the liquidity portfolio of the bank, should we not have protected our capital the way we have. I will restate what we stated at the end of the second quarter on the effect of interest rate increase to our net interest income. There will be no new guidance on this. I would like to ask you to be mindful when making calculations and projections on the effect of increasing interest rates on net interest income as there are many factors that play into the equation such as Central Bank monetary policy, the growth of loan book, margin development, funding costs, hedging costs and of course, interest rate movements in itself. Turning on to Asset Management. I am happy to report that we had positive net subscriptions in a very difficult market environment. This good development was among domestic institutional customers as well as private banking customers. However, the negative market movement pressed down the value of our assets under management to EUR 13.6 billion during the quarter. Regardless of this, we have advanced on a number of fronts and continued a number of development projects in Asset Management. To lift a couple of those, I'm happy to tell you that we launched 2 new funds during the third quarter, an Article 9 Dark Green Sustainable Corporate Bond Fund and our Aktia Alternative Investment Fund. We also expanded to 3 new markets in our international sales. And a very important project is to be closed towards the year-end, and that is in our life insurance company where we are going to renew our unit-linked insurance product, making it possible for our customers to add a very broad range of investment products into our life insurance wrappers, including alternative investments. Apart from this being very practical and easy for our customers, it also makes it possible for us to take these unit-linked products as collateral against lending, hence, taking us yet again a step further for being a true wealth manager bank. We have also made some changes in our institutional sales. We will go in a very determined fashion for institutional customers' direct investments as well as mandate investments going forward. We have no intention of giving up in the very tough competition of institutional customers, on the contrary. And finally, I would like to raise our family office and family office concept that has had advancement during the year. We have had 10 new customers to our family office. And although the number may sound small, it is good to keep in mind that the segment of ultra-high net worth individuals in Finland is rather slim. So this advancement that we have had in our family office, I'm particularly proud about. Turning to our third business area, life insurance. The trend has been now during the few last quarters that focus is attracted to the portfolio -- investment portfolio and the unrealized market value changes of the investment portfolio for quite understandable reasons, that is due to increasing interest rates. That unfortunately leaves under the shadow, a few interesting important good developments that we have had in our life insurance company. Our net sales into life insurance wrappers to unit-linked products was positive during the third quarter. It was net positive in a very difficult market environment. Also, the sales of risk life insurance products continued to grow during the third quarter. We actually are now witnessing a fourth consecutive year of growth in the sales of the risk life products. And as I said in the very beginning, the solvency of our life insurance company is at record high levels. It was almost 250% at the end of the third quarter. I have mentioned also earlier the cooperation with Finnair and Visa. This cooperation on a credit card has exceeded our expectations, and we look forward to even stronger growth out into next year. This has become a very important vehicle for sourcing new customers in our strategic sweet spot to Aktia. Another development or another product that I would like to raise up here is the Sustainable Corporate Bond Fund that I mentioned in connection to Asset Management. This has drawn very good customer interest and is yet an example of product development in the area or in the field of sustainability-driven products. As you may have noted, we changed our guidance in late October, now stating that the comparable operating profit for this year is expected to be lower than that of last year. And the key uncertainty regarding the outlook is in the value of different asset classes for the remaining part of the year. Going slightly more into details, we expect net interest income to be at the same level or slightly higher during the last quarter of the year than what it was during the third quarter. We expect commission incomes to be slightly higher during the last quarter, while market value changes are driving the result or the net income from life insurance also during the last quarter of the year. Expenses are expected to be approximately at the same level as comparable expenses of last year, potential credit losses at a moderate level, while liquidity and capital adequacy remains stable also looking forward. Our long-term financial targets remain unchanged. And here, I would like to take the opportunity to restate our commitment to cost control. You may have noted earlier in the quarter that we announced a strategic cooperation on banking -- on core banking IT regarding development and maintenance of that with CGI. Apart from that being, strategically and from a business perspective, a very interesting opportunity for us as it enables us to redirect focus in Aktia from maintenance to product development, apart from this, it also is financially a very interesting opportunity for us during the few years to come. Now as this has been made public, it is understandable that the buildup, consultancy and other costs of this joint venture have weighed the cost base of Aktia during the year. Now you may have also noted that we initiated cooperative discussions with labor union representatives in Aktia as part of planning a streamlining and realignment of different roles and responsibilities in the bank with the objective of being even more efficient, customer-focused and centralized in certain actions and activities that we take. The financial impact of these negotiations, [Foreign Language], as they are called in Finnish, the financial impact will be clarified during the coming weeks as these negotiations are carried out. At this point, I will end my presentation. I will welcome our CFO, Outi Henriksson. And after that, both Outi and I will be more than happy to answer any questions you may have. Thank you, and welcome, Outi.

Thank you, Mikko. Good morning, everyone. [Foreign Language]. Let's then take a look at the financials in somewhat more detail. The operating profit for the third quarter was EUR 12.3 million. That is obviously not at the level where I would like it to be. However, we need to bear in mind that it's very much driven by the negative changes in the market values of the assets under management and in the life insurance company investment portfolio. The operating expenses were slightly above the level where they were last year, the same period; however, down from the previous quarters this year. So the direction is right. And the impairments of the credits and other commitments still at a very modest level. We will take a look at the details behind the income composition as well as other items in the P&L on the coming slides. If I start from the composition of the income side, the rising interest rates did have a positive impact on our net interest income on the lending side; however, offset to certain extent by higher financing costs and hedging costs. I will get back to that on the next slide. The market decline weighed down the market values of the asset under management and thus had impact on the net commission income. We need to bear in mind that we have seen quite heavy negative changes in the unrealized market values from the beginning of the year, approximately EUR 900 million first quarter, same thing second quarter and now EUR 400 million approximately on the third quarter. However, that was offset by, again, positive subscriptions now in the third quarter as well as we had then positive on the second quarter. However, that impact wasn't enough to offset the negative changes in the market values. Net income from life insurance decreased from the reference period, again, very heavily affected by the negative changes in the investment portfolio. We need to book those changes to the P&L directly according to the IFRS 9 standard. Then I do think this picture is of an interest and explains the development of the net interest income. As you can see from here, actually, the lending part of the business has grown very nicely from the second quarter to third quarter, EUR 22.1 million to EUR 26.7 million; however, then offset by the higher financing costs and, to some extent, hedging costs, as you can see from the picture. If I start from the cost of borrowing, that includes the covered bonds and deposits, we still do not pay interest on the normal savings and check-in accounts, then followed by the cost of senior debt and other, the pink part of the picture. The cost of senior financing have increased together with the higher interest rates and also widened margins. The cost of senior financing is now more expensive than it used to be. Then the third component in this picture, which is important to understand is the Central Bank financing, TLTRO. We have EUR 800 million of Central Bank financing, TLTRO, in our -- EUR 800 million in our balance sheet. And still in the first half of this year, we actually gained a 1% negative interest on that EUR 800 million turning the financing cost to kind of income, so to say. However, the special interest rate period ended in June and halved the positive impact. And that, together with the fact that the European Central Bank has increased the -- raised the steering rates and the financing is tied to those, the TLTRO Central Bank financing has become more expensive. It is actually the impact of that is 0 on the third quarter, so no gain, no expense. However, that will be now cost going forward starting from the fourth quarter. Then the net commission income mix here, the green part of the picture, that is very much now driven by the assets under management development. However, we need to bear in mind that approximately 1/3 of the net commission income comes from the banking side of the business and it's not directly asset under management-driven. If we then look at the underlying profit and take out specifically the unrealized changes plus the capital gain that we booked in the life insurance business in the second quarter, that was a real estate investment that we sold, actually, the underlying development has been relatively stable. Our expected credit losses are still at a very moderate level. Reservations for expected credit losses increased EUR 2.5 million in the third quarter and cumulatively have increased EUR 5 million, that is the P&L impact. And out of that EUR 5 million, EUR 3.1 million, as you can see in the picture, is loan book-related. We have not observed any major new risk concentrations still in our credit portfolio. Balance sheet total increased to EUR 11.9 billion, approximately EUR 200 million up from the beginning of the year. Nice growth in the lending part on the other side of the balance sheet, same thing goes for the deposits. No major structural changes in the balance sheet. The CET ratio was 10.6%, end of the third quarter, slightly up from the end of the second quarter, 0.2 percentage points. This small positive development was mainly driven by the decrease in risk-weighted assets, that was EUR 6 million in third quarter. However, from the beginning of the year, the risk-weighted assets have increased by EUR 143 million, and that growth has been driven by the growth in corporate loan book. The fair value reserve has been negatively affected by the steep rise in interest rates. So this has to do with the treasury's liquidity portfolio. And that, in turn, goes to equity and weakens the bank's CET1 capital. Cumulative impact has now been EUR 41 million. And that risk we now hedged, which shows in our hedging costs. However, during the third quarter, the decrease was here only EUR 2 million. Again, we have closed the interest rate risk in the portfolio. The debt capital market has been challenging in the third quarter. And not only the cost of financing has become more expensive, but also the availability of specifically senior financing has been at a different level than before, looking a bit better now in the beginning of fourth quarter again. Senior issuance margin levels have widened, nearly threefold during the 2022. If we were paying, shall we say, 40 to 60 basis points over the reference rate a year ago, now we are talking about 150 basis points range. We completed 4 senior preferred private placement transactions in the third quarter, volume approximately EUR 107 million, maturities ranging from 2 to 5 years. And we will continue to issue senior debt during the fourth quarter of the year to refinance the part that will also expire in the beginning of next year. Our liquidity continues to be at a solid good level. The LCR ratio was 183% at the end of third quarter. This is everything I had in my presentation today. Thank you for your attention. And now we are happy to answer the questions that you may have.

Yes. Very good morning on my behalf as well. My name is Lotta Borgström. I head Aktia's Investor Relations and Group Communications. Please write in your comments or questions through the commentary filed on the website. So do we have any questions on site?

Yes, Matias Arola from Inderes. About your NII guidance, you guided in the report that the growth will be roughly on the same level as it was in the third quarter. And third quarter growth was something like 4%. So that doesn't seem to me really strong development if we compare that growth to your local Finnish peers. We have seen like in the third quarter, on average, roughly 15% NII growth in the Finnish banking sector. So could you please give us some more details? How is that so? And what is the reason behind that?

Maybe if I take it first, and then you can continue. Thanks, Matias. Like I said, there are a number of factors playing into the equation. One is lending growth, pricing, market development and so on. But I think a few factors to look into is that if we look at the loan book that we have and the interest rate development, then that plays in, I believe, pretty much well as it plays with our competitors. Mortgage loans are fixed into 12-month Euribor, corporate loans equally as with competitors. Now as I said, we have taken measures to protect our capital against adverse market movements. I feel it is important to protect our capital. I cannot comment on what other actors -- other competitors are doing in this field. Then the composition of funding is one factor to look at. Like Outi said in her presentation, one element that has significantly changed is the Central Bank monetary policy. And that affects together with the change of terms and conditions of the TLTRO program. So what is the relative share of this? As such, very cheap and attractive funding, but what is the relative change in this price then factors in, in how does growth materialize from that funding element. So here are a few directions to look at. Do you want to add something?

That was pretty much it. I would maybe add that, as we pointed out, we have now hedged the interest rate risk in the treasury's liquidity portfolio. So that cost will not increase in the same proportion as before, that's now having a positive impact. Same comments, the sources of financing in relation to the loan book, the amount of deposits, the amount of Central Bank financing, as pointed out, it's still a cost-effective way to finance the corporate lending amount -- covered bonds amount of senior financing, I think it comes from the kind of structural financing plus the hedging that we have been, I would assume, a little bit heavier on now on our third quarter. And we pointed out earlier already that this year, we will not see such a large positive impact coming from the higher interest rate, but we have repeated our guidance regarding the next year.

One more question about the NII. At the end of June, you said that the first 100 basis point increase in interest rates would improve the NII on annual level roughly by EUR 30 million. And as we know, interest rates have increased even further during the autumn, but if we -- and probably the effect is somewhat larger. But if we think that your estimate, what you gave us at the end of June, was that over-optimistic? Or how is that still valid estimate? Or how should we think that?

If I start from the fact that I think we pointed out also that the whole loan book, Mikko took that up also in his presentation, needs to be repriced. We still have housing loans that have close to 0 interest as they will be repriced maybe in January, maybe in April, maybe in May before the 12-month Euribor went positive last year. For the effect to take fully in place -- have the effect fully in place, we need to reprice the whole loan book, will be then next year, June, July. So that needs to be taken into account. When we came out with that guidance, obviously, we didn't see how steep the interest rate rise would be. But there is no change to change the guidance as such, but the bigger positive impact we will see next year.

If I may add to that, as we said in the second quarter results presentation, the effect from the end July level in 100 basis points, like you correctly point to, can be up to EUR 30 million. That holds. That is mathematics, relatively simple, but important to keep in mind that a number of factors do play into the equation. And we stated that, that's a steady state, like Outi said. So 2024 is actually the first calendar year to have a steady state on that. I think if you -- and the question is now why our NII development differs from that. That was your first question, and you started with that. I think you -- if one goes a little back in time, you will note that, compared to competitors, we have, in the 0 interest rate environment, performed relatively better because we were hedged for downwards or negative interest rates. And now, as I said, we have readjusted our hedges during the year so that we protect our capital also for upgoing interest rates, or for upgoing interest rates as it is. So it is from the hedges and the funding structure, not so much the loan book, if at all. As I said, mortgage loans, you go to any competitor, it's priced in the same way, corporate loans, it's priced in the same way. So that's not the fact. It's the funding structure and the fact that we protected our capital both for going -- downwards going interest rates, and we benefited against competitors. We have now protected our capital for upward going interest rates. And hence, we benefit from the positive effect of upgoing interest rates with a delay compared to competitors.

I would maybe like to point out, Mikko said this already, but we need to carefully monitor now the impact of this economic downturn in quality of lending. So it might be also a decision or it might be a wise decision to be a little bit careful with the growth, not at least at the cost of risk.

Sauli Vilen from Inderes. A couple of questions. One, kind of a housekeeping question, but about the asset management fee mix. If -- the old Taaleri Wealth Management, they had kind of a lot performance fees on their books and well, Aktia usually hasn't had that much. So have you calculated how much is the asset management fee decline coming from pure performance fees on the old Taaleri Wealth Management side?

A couple of million euros that we booked last year compared to this year, and they don't exist this year.

Yes. Okay. Okay, great. Then kind of maybe a more philosophical question in the asset management side. But I mean the last almost a decade has been like a parade march for alternatives basically. And the traditional asset management has been -- at least the bond side has been difficult, obviously, for investors and asset managers. Obviously, we have now seen kind of a dramatic change, at least on the bond side, for the first time in -- well, a long time, you can actually get decent risk-reward and bonds, et cetera. So when this all dust settles, et cetera, can you -- do you see that we actually can witness like renaissance of the traditional asset management side, which would obviously benefit you more than peers since you are not in the alternative side so much?

I can take that, and thanks, Sauli. I think you are on to something here, and that is one reason also why we -- as I said, we sort of have strengthened our institutional sales, and we have no intention to give up in that segment because you are quite right so that when we get a bit deeper or further into the cycle, interest rates and bonds, as an asset class for investments, are going to be quite different than what they have been for the last 2, 3, 4 years. I think it will not necessarily come at a cost for alternatives if one puts aside those alternatives where the strategy has been very much dependent on cheap funding or free funding. So that's passed. And if the strategy has been sort of leveraged or built on that, then there might be challenges. But generally, I don't believe that, that is over as such. But fixed income may come into the picture in a different fashion. Is it going to be early next year, late next year or so? Your guess is as good as mine.

Then, finally, about the overall Finnish economy, Outi kind of touched this a little bit earlier when you said about the credit losses. But what do you see at the moment in the Finnish economy? How is the -- I guess the question is how fast the economy is actually deteriorating? What do you see?

Yes. If I take that, I can start from saying that, like you see in our numbers, materialized credit losses or reservations have not gone up during the third quarter. What we do see, to some extent, is that retail customers have been net sellers of their investments, meaning that they are drawing upon funds that they have saved, good, that's how it kind of should be on a rainy day, you have something to draw upon. But there we have seen a trend for households to sort of draw down on investments and apparently, obviously, use some of those funds. We have seen the behavioral change in the housing market, we can confirm that, what all of us can read in the media. We see that in our business and in our numbers. On the corporate customer side, we see that part of the good demand that we see in corporate customers is that our competitors or at least some of our competitors have slowed down. And hence, customers are looking for alternative sources for a banking partner. That's why we feel customer selection is extremely important that we do not get customers to Aktia for the wrong reasons. But seriously distressed corporates in large numbers, we don't see it quite right now. Will we see it going forward? I would be surprised if we do not see more corporates in financially challenging situations compared to the COVID-19 situation because I do not sense that society is ready to put up to support corporates in the same way and to the same extent as it did in 2020 spring summer.

Thank you. Then let's move on to the questions online. First, some questions from Antti Saari at OP. First question about the NII sensitivity. You are not giving a new guidance for NII sensitivity on interest rates, which probably means that the figure given in Q2 is still valid. That was EUR 30 million per 1 percentage point increase in rates. In this context, is it reasonable to expect that NII increases by EUR 90 million if rates go to 3%? Anything you would like to add on this?

Thanks for the question. And I was just about to correct what you said. What we did say in August -- early August, so after the Q2 result, was that 100 basis points increase in interest rates from the July level or end July level can be up to EUR 30 million. We did not state that one should linearly calculate this. So I think that answers the question.

And following question from Antti. Net subscriptions were EUR 95 million in Q3. However, according to mutual fund reports of [indiscernible], net inflow in September were EUR 554 million. What's behind this? And is this real increase in client money or just some changes in calculations?

If we look at -- if we think of the report that [indiscernible] is publishing, that carries only a part of our assets under management, so that can be, for example, rebalancing between portfolios that are covered in that report and not covered in that report. Can there be some other structural or fundamental reason? I think we need to look into that. Yes, but that's the first thought that comes to my mind as that report covers only one part of our product universe.

Let's come back to this. Following question, what is the reason behind declined RWA, risk-weighted assets?

The corporate loan book has grown, so has the -- the housing loan side has been more stable. It's just what has been expired versus what has come to replace it. So nothing beyond business as usual.

And last question from Antti Saari. Have you made new interest rate hedges during Q3?

We did hedge the last piece of the -- our liquidity portfolio.

Then 2 questions from Andreas Hakansson, Danske Bank. Some questions. Media was reporting about your plans to reduce FTEs by some 70 and you talk about more details in a few weeks. Just to check, was this planned part of the 2025 plan already? Or is this new savings?

Andreas, to correct, we have not announced a plan to cut our FTE by 70. We have said that the negotiations that we have ongoing with labor unions can affect jobs up to 70, of which new positions can be opened at around 30. The precise number will be specified as a result of these negotiations. Was this covered in the 2025 scenario? Not this specific negotiation round that we are now going at the end of 2022, but in the 2025 scenario or the projection when it was made in time, we did have an understanding -- a longer-term view of the cost base that we expect to have going forward and the job profiles that we expect to have going forward. And in that sense, this is a realization of that, but there was no point estimate as such.

And second question from Andreas Hakansson. You talked about you being first paying a rate on savings accounts and you talk about higher funding costs. Is it therefore yourself that is driving the funding cost up? Do you have plans to pay rates also in transaction accounts?

I think I, to some extent, mentioned that in my presentation, we do not pay interest on the normal savings account, neither on the transaction or checking accounts or whatever you want to call them. We launched the campaign as the first bank in Finland to pay interest on a fixed term investment. However, that doesn't cover the whole deposit stock that we have. So it's a relatively small cost still in our deposit book.

I think it's fair to say that, with this campaign, we got in about EUR 90 million and compared to our total funding, it is quite marginal. In what comes to our intention to pay interest rate on deposits, whatever the shape or form, we will follow market practice there and optimize. So I don't expect us to materially deviate from what is to be expected of the market and competitors.

Next question. Could you please give a status update on the integration of Taaleri Wealth Management business?

I can take that. The final stages of the integration are to be wrapped up now in year shift. I mentioned the project of a new life insurance wrapper, a unit-linked product that will be launched now towards the end of the year for our bankers at year shift. We will merge their systems, their customer systems and sales, follow-up systems so that from a banker and a customer perspective, they will no longer be a Taaleri customer or a Aktia customer. And we will, so to say, close integration-related projects as they are coming to an end, and they are delivering now at year-end and go to continuous improvement. It doesn't mean that we would not have a good number of initiatives and projects going on in asset management also on the way forward. But that would be the case also without the acquisition of Taaleri Wealth Management, and I believe we all, in different companies and different industries, have ongoing projects. So we will go more into a maintenance and continuous development mode at year end.

No more questions online. Thank you.

Thank you very much, and have a great weekend. Same, all the best.