Aktia Pankki Oyj (AKTIA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to follow this Aktia Bank Plc Q4 results presentation. My name is Mikko Ayub, I am the CEO of Aktia Bank Plc. And together with me here today is Outi Henriksson, our CFO. I will first walk you through the highlights of our result. And after that, Outi will take you deeper into some numbers about the results. And as usual, then we are more than happy to answer any questions you may have. Our comparable operating profit for last year was EUR 65.2 million, which is down 25% from the previous year. This is obviously a disappointment, although understandable given the operating environment that we had last year. Interest income -- or rather net interest income during the fourth quarter was unchanged from the third quarter, like we indicated in our Q3 results presentation. Interest income from lending grew strongly towards the end of the year. However, higher financing and hedging costs weighed down on net interest income. We had strong new sales in asset management during the fourth quarter, particularly in private banking, although net subscriptions landed somewhat negative due to some institutional outflow. We managed to combat inflation in the fourth quarter, and our expenses were more or less at the same level during the fourth quarter as in previous quarters. Our model-based calibration of the expected credit loss model that we have, led to increase in provisions for potential future credit losses. This was booked in the fourth quarter. The underlying credit portfolio remains solid also during the fourth quarter. Looking forward to this year, we expect our comparable operating profit to be clearly higher than what it was last year. Regarding dividend, our Board of Directors proposed in line with our dividend policy to pay 60% of the profit in dividend, which in euro terms is EUR 0.43 per share. Now this picture tells you how last year was composed from the different quarters that we had. The operating environment. The market development had a different or differing effect on the different business areas that we had, which I will go more into detail on the way forward when looking at different business areas. However, before diving deeper into the business areas, I would like to share this picture with you. This shows the development of the 12-month Euribor interest rate. And although not at high levels as such, between 3% and 4%, the change that we saw during last year was dramatic and certainly unprecedented during the euro time that we have been living for now some 20-plus years. This, of course, affected our business in a couple of ways. Looking at banking business. In the fourth quarter, our new lending was up from that of the third quarter. However, it was lower than in some other previous quarters of the year. Mortgage demand continued to decrease and below during the fourth quarter. On the other hand, corporate demand remained strong. The trend of corporate securing their liquidity and having a broader network of banking relationships was visible also during the fourth quarter, and we were able to get good customer inflow on our corporate side. The average margin of the entire loan book continued to improve during the fourth quarter. Our corporate loan book average margin increased by some 10 basis points during the year. Like I said earlier, the credit quality of our portfolio was unchanged and remains solid. This is obviously something that we follow very closely. And I'm happy to state that at this point there is nothing that raises any particular concern for me in the credit portfolio. Turning into asset management. Fourth quarter was stable in the market, and hence, stable in the development of our assets under management, which were more or less at the same level than in the third quarter. Fourth quarter was the best quarter of the year for us in terms of new sales. However, we had some institutional outflow that ended the quarter in slightly negative net subscriptions. Looking in totality at the year, private banking and institutional customers net flow was clearly positive, some almost EUR 200 million plus. From international customers, we had some outflow during the year. The Sustainable Corporate Bond Fund Article 9 dark green fund that we launched last year, exceeded EUR 100 million in size during the fourth quarter. And I'm happy to share with you the information that this has become now the first non-emerging markets debt product that is being sold internationally or has gained investors internationally and we expect demand for this product to continue outside Finland also. 2023 will be the year where we complete the integration of Taaleri asset management acquisition that we made in 2021. Like we said, 2023 will be the year where we see the end of the integration projects being completed. It is, of course, a matter of definition when integration ends and when continuous development starts. We are on the very final phases of back-end system integration. This will enable us to shift focus fully to product development, concept development, growth, customer interaction, customer activity as the hands-on integration phase begins to be history. During last year and during the fourth quarter, we have worked closely with Taaleri on the new SolarWind #3 product that will be launched this year. The sales of that product will start already during the first quarter this year. Life insurance delivered solid performance during the fourth quarter. The sales of risk life insurance had stable growth, and last year was actually the fourth consecutive year of growth for risk life insurance products. Of course, the increase in interest rates had its toll on the market value of the investment portfolio of life insurance, like has been discussed also in previous results presentations during last year. I'm happy to let you know that our capitalization agreement new product Aktia Avara was launched late last year. That is a very flexible and very attractive product from the customer's point of view that is more suitable for customers or, should I say, more ahead of any product that our competitors have at the moment. We expect this product to draw attention and draw volumes during the year -- during 2023 and the way forward. That work was completed in the fourth quarter last year. We already had a few customers there, but the real volumes are expected to come in this year. That I'm very happy that we were able to launch as planned last year. Our work on sustainability was intense also last year from everything that was done during last year. I would like to pick a couple of points and share with you. The first is the update of our sustainability program that we made last year. With this updated sustainability program, we have that to better reflect the high ambition level that we have in Aktia. We also introduced interim targets for our climate strategy for investing, lending as well as our own operations. We have now goals for 2025 and 2030 being introduced last year. And like mentioned earlier, we had the sustainable corporate bond fund that was launched last year, and then other Article 9 fund was the bioindustry feeder fund that was for the cooperation product that we had with Taaleri Oyj. This is an area where I expect us to have also advancement during 2023 going forward. In case you are not familiar with this sustainable corporate bond fund that reached over EUR 100 million and attracted investors from abroad, please turn to our website and look for more details over there. And to conclude, I restate our longer-term financial targets with a comparable -- of 2025 with a comparable operating profit above EUR 120 million, a return on equity north of 12%, a cost-to-income ratio below 0.60 and a minimum of 1.5 percentage points over the regulatory requirements in our CET1 capital. At this point, I will hand over to our CFO, Outi Henriksson, to walk you through more details in our financial results, and then we will be happy to answer any questions you may have. Thank you. The floor is yours.

Thank you, Mikko, and good morning on my behalf as well. [Foreign Language] I apologize if my voice is a bit down. I'm still recovering from the flu. So let's see how this goes. We have a challenging and volatile market conditions behind us and that we can also see in Aktia's financial results. The negative value changes that we saw in the market last year, specifically in the first, second and third quarter, had major impact specifically on our asset management business, assets that we managed, where the values of those were decreased by over EUR 2 billion, directly affecting the net commission income. The same market changes also had major impact on the net income from life insurance. Our total operating income in the first quarter was slightly up from the fourth quarter last year, however, affected by the issues that I just mentioned. Total operating expenses slightly above last year level. There, we need to bear in mind that in the fourth quarter, we announced that we have formed a joint venture with CGI to run the IT operations, core banking systems. Obviously, some advisory costs were related to those arrangements, making the operating expenses also somewhat higher. Impairments of credits and other commitments, as Mikko pointed out already, they were now on a higher level than previously. However, a majority of that came from the fact that we updated our ECL, expected credit loss, model parameters. That is a regulatory requirement. However, we have not seen any major change in the underlying quality of the credit portfolio. So let's take a look at the details in a minute. However, we are already in February, so a few words about the outlook for this year before we go into the 2022 details. Our comparable operating profit, as expected, we expect to be clearly higher than in 2022. This improvement is mainly driven by the increase in net interest income -- and I'll go through where it comes from in a short while -- but we have seen very good growth in lending, that is the income that we get from the loan book from housing loans and corporate loans. We expect the net commission income to be slightly better than last year. We need to bear in mind that we start the year 2023 with clearly lower asset under management level that we started year 2022. So we are really targeting now on improving the net subscriptions. They need to increase. At the same time, we are obviously hoping to get some tailwind this year to see the positive value changes in the asset under management. And life insurance business is expected to develop stably from the beginning of the year. We will start reporting our life insurance numbers under the IFRS 17 standard. Operating expenses are expected to remain at the same level as in 2022 despite heavy inflation that we have started to see. And provisions for potential credit losses, same thing, we don't expect to see any major change there compared to year 2022. And here you see the composition of the comparable operating income. As you can see there, the net interest income has been flat throughout the year. And that was something we already communicated together with the second quarter results. That was just after the Euribor has turned positive after being negative for a long time. I will get into the details on the following slide. Net commission income decreased from the beginning of the year for the reason that I already mentioned, our asset under management were affected by over EUR 2 billion of negative value changes. Then the rollercoaster piece there, that is the net income from life insurance. We have seen major negative value changes there in the beginning of the year, first, second and third quarter. Those changes were relatively flat on the fourth quarter. And then on the second quarter, there you see the capital gain, EUR 11 million, that we booked from the real estate investment. And on the fourth quarter, we released -- there was a partial extra release of the interest rate reserve. That reserve we have been accumulating under the times where the interest rates were very low or negative to make sure that we covered the -- with technical -- with profit technical provisions that we have, [indiscernible], for those who are not familiar with the terminology. And here's the composition of the group net interest income. I think this is a very interesting picture of what is developing. If you look at the green piece, that is the interest income from lending. And there is a major increase between the third and fourth quarter, as you can see, from EUR 26.7 million to EUR 39.1 million. That development is also expected to continue now in 2023. However, at the same time, as you can see, our financing costs have increased and they have actually increased somewhat -- with somewhat faster pace than the income from lending. Reason being that our market-based financing is tied to 6 months Euribor, that is covered bonds, and 3 months Euribor, that is senior debt. And that, obviously, has a shorter cycle to renew than the income from lending that is primarily tied to the 12-month Euribor. If you look at our loan book, just half of it, slightly under even, has been now re-priced or there has been interest rate fixing under the terms, where the interest rates Euribor has been positive. So there's still another half that will be now re-priced under the first half of this year. At the same time, we do not expect the financing costs increase at the same time. So we will see a positive trend, assuming that the market conditions stay favorable. There you can also see the impact of Central Bank financing. That is the light gray piece. If you look at the second quarter of 2022, we still had a negative interest on the Central Bank financing, making that a positive item in the picture. However, there you can see now the minus EUR 2.7 million cost in fourth quarter. And that comes from the fact that the Central Bank financing is tied to the ECB, European Central Bank's steering rate. Here's the net commission income mix. As you can see, that is dominated by the net commission income from mutual funds and asset management. And exactly that piece is affected by the major value changes that we talked about already earlier. We have the sources of net commission income as well, and they have been quite stable, as you can see. Here's a waterfall picture of the development between year 2021 and 2022. So what has happened between those 2 years? We have taken here out some major change that are partially market-driven, and then more operational pieces. And there, you can see the major change between the 2 years, minus EUR 23.3 million coming from the unrealized value changes in the life insurance investment portfolio. Those changes were actually positive in 2021. They were negative in 2022. So the total between the 2 years is very large. There, you can also see the difference of the capital gains between the 2 years, EUR 9 million plus. Actuarially calculated results, nicely on plus. And then net interest income, slightly up. Net commission income, slightly down. Operating expenses, somewhat higher than in 2021. There, you need to bear in mind that we had Taaleri expenses with us only for 8 months in comparison year 2021 instead of 12 months in 2022. Our quality of the credit portfolio remains solid, as pointed out already earlier. The P&L impact for the -- profit and loss impact for the whole year, minus EUR 10.2 million, including now the EUR 4 million that is coming from the expected credit loss model parameters update that we booked in the fourth quarter. The total assets have grown from the beginning of the year, EUR 11.6 billion to EUR 12.4 billion at the end of the year. And there, you can see where it comes from. It comes from the increase in loan book lending to the public and public sector entities. And on the other side of the balance sheet, we see a growth that we have in deposits. No major other changes there. Our CET ratio was 10.8% at the end of the year. That is slightly up from the third quarter, 0.2 percentage points, and 3.1 percentage points above the regulatory requirement. Our risk-weighted assets increased by EUR 47 million in the fourth quarter and EUR 190 million from the beginning of the year, and that is driven by the growth in loan book, primarily corporate lending. The fair value received increased by EUR 1 million in the fourth quarter. That was negatively affected in the beginning of the year. That change came from the liquidity portfolio of the treasury that was tied to a fixed rate. Now it's in a folding rate. However, those hedges that we did are now on plus and the kind of position has been protected or hedged. And the life insurance company paid in total EUR 35 million of dividends to the parent company during the year. The mood in the debt capital markets improved significantly on the fourth quarter. Third quarter was really, really difficult. Spread levels remained still wide, but there were activity -- there was activity in the market on the fourth quarter already. During the fourth quarter, we have completed 7 senior preferred private placement transactions and 2 senior non-preferred transactions, volumes slightly under EUR 300 million, maturities ranging from 1 to 8 years. Looking at 2023 first half, the refinancing of the EUR 500 million covered bond will now take place on the first half, most likely in the second quarter. And we are also looking at possibly issue limited volume additional Tier 1. And actually, we have started to pay back the TLTRO Central Bank financing already, EUR 250 million actually next week. So that will be reduced then from EUR 800 million to EUR 650 million. Liquidity, still at a very, very high level, a very good level. LCR ratio, liquidity coverage ratio, was 183% at the end of Q4. That was my part. And Mikko and myself, we are happy to take questions that you may have.

My name is Lotta Borgstrom. I head Aktia's Investor Relations and Communications. Let's move over to questions. Do we have some questions here on site?

Sauli Vilen from Inderes. What kind of change are you trying to achieve by changing the Head of Wealth Management business? Obviously, you are trying to achieve something with that move.

I don't think we are driving anything different as such. What we are doing is that we are completing the integration in 2023 for those parts that it is not integrated or not completed so far. We are then able to shift capacity from, should I say, hands-on integration work into development work of products into development of concepts, customer interaction, customer productivity. And hence, start running the business from an agenda that does not require sort of an agenda that is transaction-based or acquisition based where there is a lot of practical things that needs to be done. So I believe this is something that we would do regardless of who is the captain on boat, so to say, in asset management.

Then on the EMD new sales. I mean now when the interest rates have risen, you can get lucrative yields basically from everywhere. So does that -- have you seen that would have like made EMD debt looking not so lucrative as basically you can get nice yields from government bonds or high yield, et cetera? So have you seen this kind of shift in the market?

No, not really. I think the fact that interest rates have become positive and -- should I say, business is normal, and whatever normal means in today's terms, but that has brought more attention to interest rates generally. And emerging market products, let that be debt or equity products, have their place in allocations as per today and also on the way forward. So I have not observed any sort of fundamental change because of interest rates being back to normal. I think it's -- in terms of risk and in terms of its place in an investment portfolio, it is a product of its own or an allocation of its own as such and should not be compared to, say, European government bonds, for example.

And then finally, on the M&A side. As you said, the Taaleri transaction is -- you're close to the finish line, so to speak. On that front, there has been a lot of moving parts again in the Finnish asset management field. Can you remind us what is your stance or appetite towards the M&A when we move to the '23?

On the M&A side, we have a, should I say, curious approach, an open mind. But in running our strategy to become a wealth manager bank as such, we do not build on the need to have M&A activity or to have add-ons or bolt-ons. But obviously, from purely a professional interest, we are following in what's happening in the market.

Matias Arola from Inderes. About your cost guidance, you're guiding the cost base to be flat in '23. Do you take into account the general cost inflation in that guidance? And could you please elaborate a little bit more about the cost development, as you have completed these restructurings about your IT systems and so on?

Sure. As said, we are expecting the cost base to be flat, and that assumption includes the impact that is coming from inflation. So we need to fight against the inflation to keep the costs flat. The arrangement that we have with CGI, the joint venture, actually, in the very beginning of the arrangement, that doesn't bring us cost savings as such. Actually, that is moving costs from personnel cost to the IT cost. It's brings stability and other things. However, later on, we will see some positive impact, as we indicated when we released the transaction or released the information about the transaction. Yes, the pressure is high. I mean if you look at all of the service providers that we are buying services from, there's a pressure to increase prices and so forth. Same goes for the labor union related increases that we expect to see to some extent this year. So that would mean that we actually reduced the cost base in 2022 to kind of cover the impact of the inflation. But we have several programs internally ongoing, and I do believe that, that is doable.

Then a question from Andreas Hakansson with Danske Bank. In your NII guidance, could you help us with how you see the different components from Page 16 developing, that is the composition of the group net interest income?

Sure. As I pointed out -- I assume that is the split of the net interest income. The green piece, net interest income from lending is growing. We saw quite strong indications of that already in December. As end of fourth quarter, there was the bunch of housing loans that were re-priced actually in November, and that impact we saw already in December. And we expect that to continue given that the interest rates follow the kind of expectations that we have. So the lending piece is growing heavily. At the same time, the funding costs are now more stable. Now I'm talking about covered bonds and senior financing. Those financing follow -- those financing -- that financing follows a shorter cycle. And there, we have seen the re-pricing already, WHILE, as I said, half of the housing loan book has not been re-priced. The TLTRO loan, again, following the ECB steering rate. And together with increases there, the cost of TLTRO increases to some extent. But again, the relation now between the income from lending and cost of market-based financing is improving, and we see first sign of it already in December, and what I know about, the beginning of the year. Then obviously, the deposits as source of funding have been more and more important now, and we are also focusing on that piece as a source of funding for us.

Hakansson continues. Fees in the asset management were down 7.5% quarter-on-quarter while assets under management was broadly flat. What drove this?

That -- is the question regarding the development from third quarter to fourth quarter?

Yes.

There is some seasonality also in that. It is not a fixed percentage that we get from assets under management. And as the assets under management has continued to go down -- there was actually quite a large negative value changes in the end of third quarter that weighted down the assets under management, and that in turn had an impact then on the fourth quarter asset under management levels.

And still one question from Andreas Hakansson. You show on Page 16, that's still the composition of the group net interest income, that the NII has increased from lending, but it is not really from deposit margins. I mean lending margins would be relatively unchanged and volume growth limited.

I didn't fully get the question, sorry. Can you repeat?

Yes. You show on Page 16 that the NII has increased from lending, but it is not really from deposit margins. I mean lending margins would be relatively unchanged and volume growth limited.

Yes, the volume growth has been limited on the fourth quarter. However, the interest rate has risen. And as said, a larger portion of the housing loans have been re-priced on the fourth quarter than in the third quarter. That is one thing. The second thing is the margin improvement that we have seen in our lending. That was something that Mikko went through already earlier. Deposits, we are not paying interest as a funding source. We are not paying interest on kind of a Avista accounts. We are paying interest on fixed-term accounts. So those type of funding sources are not still a major cost for us.

Then one question from Antti Saari at OP. You gave an estimate for NII sensitivity to market rates in Q2 report. Is this still valid?

That is still valid.

Then one question from [ Carolina Yaskari ] about corporate banking and services to SMEs. Is Aktia planning on introducing new digital tools for SMEs through different transaction banking products? And is also Aktia planning on additional cooperation in order to achieve this?

I can take that. Are we planning on additional cooperation in development and introducing our digital tools? I'm not sure is there anything on the drawing board right now. But the general thinking that we have is obviously that if somebody is doing something already in a good fashion, then why should we need to do it ourselves rather if we can through partnerships achieve and reach the solution. Then I think that should be at least investigated. Do we have something specific for corporate customers? That I am not able to comment at this point or I don't know that at this point. But what we do -- what is our ambition is that through digital tools, let that be mobile or web-based or browser-based tools, we do want to increase the degree of self-service so that we can, on one hand, provide a better experience to customers and, on the other hand, then, of course, also have production costs in control.

No more questions.

Thank you.

Thank you. And have a good weekend.