Aktia Pankki Oyj (AKTIA) Earnings Call Transcript & Summary

A very good morning, and welcome to follow Aktia's Q1 results event, both online and on site. My name is Lotta Borgström. I head Aktia's Investor Relations and Communications. [Operator Instructions] We will take the questions after the presentations that today are held by Aktia Interim CEO, Juha Hammarén; and CFO, Outi Henriksson. Let's move on to the presentations. Juha, please go ahead.

Thank you, Lotta. Good morning, everyone, and welcome to Aktia's Q1 2023 Results Webcast. My name is Juha Hammarén, and I'm the acting CEO of Aktia. I will first go through the headlines of our first quarter. And after that, our CFO, Outi Henriksson, will walk you through our financials in more detail. The first quarter of 2023 was strong for Aktia. This pleases me especially after the challenging previous year. Net interest income grew by 27%, which is mainly explained by higher interest income due to the increase of interest rates. Provisions for potential credit losses were very moderate during the first quarter, and the quality of Aktia's loan book remained good. Due to the general market uncertainty, the housing market remained rather silent. But in Corporate Customer business, lending continued to increase. The average margin for the entire loan book continued to rise. The net commission income development was stable during the beginning of the year and close to last year's level. Asset under management at EUR 13.8 million. There was a great interest in structured products in particular, and their sales reached record levels, which increased the net commission income. In cooperation with Taaleri, Aktia launched the Article 9 fund SolarWind III at the beginning of the year. This strongly supports the green transition in the energy economy. Sales have started well, and the fund is an important complement to our range of responsibility investment products. Our determined work to improve the customer experience also began to bear fruit. Customer satisfaction in private banking improved significantly. Our Life Insurance business remains stable and the sales of the risk life insurances in particular continued to grow. However, net income from Life Insurance was below the previous year's comparative figures. Adjusted according to the IFRS 17 accounting standard, which were exceptionally high due to the rise in interest rates at the beginning of 2022, this makes comparisons more difficult. The IFRS 17 reporting standard was introduced on 1st January 2023, which greatly affected the reporting and comparative figures of Aktia's Life Insurance business. It should also be noted that in order to increase transparency, Aktia now, for the first time, reports Asset Management and Life Insurance as separate independent segments, not as one combined entity. The cost development in the past quarter was moderate, but the high inflation was particularly reflected in the increased IT costs, which mainly consisted of services purchased. Aktia's comparable operating profit in the first quarter amounted to EUR 23.6 million, which due to the new calculation of the net income from life insurance was notably lower compared to the reference period. However, the transaction to the IFRS 17 reporting standard makes the comparison significantly more difficult. The comparable operating profit during the reference period last year according to the accounting standard used at the time amounted to EUR 13.3 million. I'm very pleased with Aktia's strong first quarter. All income categories developed in line with our expectations, which gives us a good premise for the year ahead. The quality of Aktia's loan book has also remained stable. However, the general economic uncertainty continues, and there is no immediate relief in fact. We want to help our customers think further in their finances, also in economically more challenging times. Now our business areas. First, our banking business. The net interest income of the loan book developed very positively in the first quarter, and the quality of the loan book remained good. Also, the average margin for the entire loan book continued to grow. When it comes to housing loans at general housing loans, a general market uncertainty and calm housing loans market continued to reduce their demand. In consumer financing, the quarter was strong, and sales of Finnair Visa credit card remained at a good level. Also, the demand for deposits was strong among investors and depositors. Sales over current structured investment product reached record levels. In our Corporate Customer business, lending continued to increase as planned. And the quarter was particularly strong in higher purchase and leasing. Then let's move to our asset management business. The market environment clearly improved during the beginning of the year. Despite continued market fluctuations, interest rates continued to rise, which put pressure on the market value of fixed income and housing funds. The problems in the international banking sector had no significant impact on the development of the value of funds managed by Aktia. Our net subscriptions continued to increase and amount to EUR 133 million (sic) [ EUR 131 million ] during the first quarter. The international sales of Aktia's funds also progressed while in the first subscriptions in our UI funds were made in Spain. At the end of February, Aktia launched the Article 9 Fund, SolarWind III, in cooperation with Taaleri. The fund strongly supports the green transition in the energy economy. Customer satisfaction in private banking increased significantly. We were even more active towards our client than usually, which resulted in improved client satisfaction. And then our new reporting business segment, Life Insurance. Sales of risk life insurance developed well during the first quarter. Also, the sales of investment-linked insurance continued to develop positively. This was despite the challenging situation in the investment market, which drives investor segment. The result from the financing business amounted to EUR 2 million. Our solvency decreased from the year-end, but improved somewhat from the comparable period last year. Then a few words about sustainability at Aktia. Our vision is to be a leading wealth manager bank. In 2022, we updated our sustainability program, which is now guiding our sustainability work. The high-level ambition of the program is to enable sustainable prosperity, provide meaningful work for skilled employees, ensure a reliable and transparent operations and work towards carbon neutrality. In first quarter, we finalized our green and sustainability linked loan framework and already granted our first sustainability linked loan base on this framework. 96% of Aktia funds are either ESG funds or sustainable funds classified as Article 8/9 according to the sustainable finance disclosure regulation. Aktia's ESG ratings from the largest rating providers are about industry average, and Aktia's net impact is positive according to the Upright project assessment. We are also on the right path toward our carbon emissions reduction targets within our investment portfolios. And now Outi, the floor is yours.

Thank you, Juha. Good morning, everyone. Welcome to Aktia's first quarter webcast. Before we go into the financial statements and the results, a few words about the changes that we have done in this segment reporting. Two major changes there. As Juha already mentioned, we took into use IFRS 17 reporting standard in Life Insurance business in the beginning of the year, which means that we have also restated entire 2022 according to IFRS. Had a major change on the comparison figures as you have probably noted already. We published the comparison figures this week on Monday. So what happened was we restated the entire balance sheet of the Life Insurance business in the end of 2021, beginning of 2022, also year-end. And then that was still at the time when the interest rates were very low. What happened after that, the interest rates started to raise sharply, which had a very positive impact to the results of the Life Insurance business through the fact that we discount our future cash flows to the present moment using now higher interest rates, and that goes through the P&L to the results. So that changed the picture quite a bit. Another change that happened together with that was that we moved part of the costs from operating expenses to adjust the net income from Life Insurance business according to the standard requirements. So the structure of the P&L has changed also a bit. Another change, which adds the transparency to our reporting is that we now, as Juha pointed out also, report our Asset Management segment as split between the Asset Management itself and the Life Insurance business. So it's now a little bit easier to follow the development of that segment going forward. Those comparison figures we have also published in the beginning of this week. But let's get into the results then. Here, you can see the impact on the left-hand side of the picture, we see a development of the operating profit. from year 2019 to 2022, according to the standard as was still valid until the end of 2022. So we reported EUR 65.2 million operating profit last year. First quarter under the reporting standard that we used EUR 13.3 million. So compared to what we reported a year ago after the first quarter, we now reported EUR 23.6 million, that is a little bit over EUR 10 million -- approximately EUR 10 million higher results than a year ago. However, after the restatement, having put in the Life Insurance and that way also the group numbers is the comparison sees -- it actually looks totally different from what we reported last year. And here's the financial summary in the P&L format. I would like to point out just a few things here. The growth driving the profit improvement comes mainly from the net interest income, plus 27% from last year being EUR 31.8 million. This is something that we communicated also last year that you will see the turn now -- you see the churn. Positive impact to both income from lending as well as obviously had an impact on the market-based financing costs as well. I'll get back to that in a minute. Net commission income, relatively flat. There you need to bear in mind that when we started year 2022, the assets under management were clearly higher. We had a tough market last year. We saw major negative value changes in the assets under management. We also saw quite a bit of volatility in the Life Insurance company results. Let's hope that this year becomes a little bit more stable. However, I'm pretty satisfied with the level of net commission income, given that we are starting this year from much lower assets under management than last year. Net income from Life Insurance. Solid performance in the first quarter, really hard comparison, as I said, due to the changes in the way we report our numbers. I'll get back to the other parts of the P&L. As said, EUR 23.6 million, very pleased with the results. Outlook 2023. We fine-tuned our outlook a bit when we published the comparison figures, a small refinement referring to what we have reported before. We are expecting 2023 operating profit to be clearly higher than what we reported last year. That is EUR 65.2 million. And obviously, the growth is mainly driven by the nice growth in net interest income. We expect that to be significantly higher than in 2022. Net commission income, we expect to see an improvement there as well. Let's hope that the market gives a little bit of tailwind this year. However, even without that, we do expect to see improvement there as well. Same thing goes for the Life Insurance business. Operating expenses, we expect to be approximately at the same level as 2022, tough call. You all know what the inflation is, has an impact on our costs, specifically IT side, other costs, there is some high pressure. So we need to fight against that a bit. So let's see what we do our best to keep the costs flat. And credit loss provisions are expected to be approximately at the same level as 2022. Market is what it is and some development we expect to see there towards the end of the year. However, looking at the first quarter, very, very modest increase in reservation after what we have done there. And here then the waterfall picture of the development of the first quarter operating profit. There on the very left-hand side, you see what we reported last year, as said, EUR 13.3 million. And then the restated number, the growth between. The first quarter 2022 and first quarter 2023 is driven by the improvement in net interest income. Other blocks there, as you can see, relatively flat. Major change in the -- coming from the impact of the Life Insurance adjustment. Strong growth in net interest income. This is the income side of the business. Comparable operating income was EUR 70.3 million. Positive impact from rising interest rates. However, you need to bear in mind that the margin development has been also very good. On the banking side, the household market is quite frozen right now. However, demand is there on the corporate lending side. But we have seen a positive development, both on household and corporate side, what comes to the margin development. Before we look at the net interest income composition, a few words about the interest rate development. In this picture, I have the development of 12 months Euribor. That is the basis for most of the housing loans that we have. Then we have the 6-month Euribor, 3-month Euribor in the picture as well. That is the cost for funding or cost of market-based funding with swap over covered bonds to 6 months Euribor, senior debt to 3 months Euribor. As you can see also here, the curves are getting closer to each other towards the end of our first quarter being a little bit wider last year. Then in the picture, we also see the cost of Central Bank financing, the TLTRO, that is tied to the ECB steering rate. We were still on the minus side in the beginning of last year. However, gradually, the ECB has raised the steering rate and the cost of Central Bank financing follows that. So that piece of financing has become also more expensive. And then obviously, as a source of funding, we have also deposits as a very important component. And here's the picture. As you can see, it develops -- it has changed quite a bit from last year. I don't know if after few quarters, there's enough space on the slide to see the both components, the income and cost side. On the top of the axis, we have lending, so income side. And then under the axis, we have the cost of borrowing, which is then deposits, covered bonds and senior debt. Also the TLTRO loan Central Bank Financing has become a cost for us. It still had a positive impact on the numbers a year ago when we reported first quarter results. And here is the net commission income mix. Just to point out here that majority of our net commission income comes from the asset management side, mutual funds, asset management and to some extent, securities provision, a smaller part coming from other sources. However, there is a substantial part of the net commission income that comes from the banking business. Nice growth there, for example, in the card provisions. This picture is the quarterly development of the comparable operating profit. We see there improvement both in banking business and asset management business as well. Banking business, obviously, specifically driven by the higher NII. As Juha pointed out earlier, the quality of the credit portfolio remains solid and very, very modest development there. Actually, the reservations for the credit losses were slightly on plus in the first quarter. Our loan-to-value, LTV, is at a very good, should I say, low level, 43%, which is good, and the solid quality of our loan book in Aktia's loan book -- the solid quality of Aktia's loan book helps with this one as well. A few words about the balance sheet, had totaled EUR 12.1 billion. No major changes on the lending side. A little bit of growth there. But as I pointed out earlier, the market has been quite frozen when it comes to the housing loans. And then as we are quite conservative in our lending, we haven't actually increased the risk of credit losses while taking in the volume or increasing market share. So it's been also a conscious decision to kind of have a solid, almost no growth in the loan book. On the liability side, our deposits have decreased approximately EUR 350 million from year-end. That is something that we expected. I need to point out that the deposit base has grown throughout the entire year 2022. And at the year-end 2022, we had some fixed-term larger deposits that we knew are not going to be there in the end of first quarter. So maybe some money from the savings accounts have also moved to a fixed income product. So that was something that we expected. Then labilities to Central Bank, they have decreased. We have repaid EUR 250 million of Central Bank financing now in the first quarter. We still have EUR 550 million left. A few words about the capital adequacy. Our CET1 ratio was 3.3 percentage points above the requirement. 11.1% means plus 0.2 percentage points from the year-end. Risk-weighted assets relatively flat, increased only by EUR 2 million. The funded fair value increased also modestly by EUR 2 million, having positive impact, and the life insurance company paid EUR 6 million of dividend to the parent company, which improves then the banking business' CET1 or bank group. A few words about the funding activities then. The market sentiment has been quite negative, specifically in the end of the first quarter. That has been obviously driven by what you have been able to read in the media as well, the nervousness coming from the Silicon Valley banks and likes. We have anyway been quite active. We have completed 12 senior preferred private placement transactions. And what we have on the table right now is also the EUR 500 million covered bond redeeming in May 2023. So that is something we are working on right now. We still consider issuing some AT1. The market has been quite frozen, and also very expensive when it comes to the additional Tier 1. Let's see if we go forward with that as well. It depends on the market sentiment, obviously. And then as mentioned, we paid back EUR 250 million of TLTRO. Liquidity, that's been in media a lot, and our liquidity has been at a very good level from the beginning of the year, and our LCR was 188% at the end of first quarter 2023. So we can be happy about that as well. I'm going to finish my part now just reminding about our financial targets 2025, they are unchanged. And I'm now with Juha happy to answer the questions that you may have.

Thank you, Outi. Thank you, Juha. Then let's move on to the questions. I assume we might have some questions here inside.

Antti Saari, OP Group. Firstly, as mentioned several times, now in IFRS 17, you are forced to book unrealized losses and gains that actually doesn't affect your cash flow. Are you planning to change your dividend policy because of this?

There is no plan to change the dividend policy, not in the group, neither in the Life Insurance company itself that is paying us, as mentioned, dividend to the parent as well.

Okay. Even though that your reported earnings could fluctuate quite heavily because of this life insurance calculation?

Actually true. There is volatility, but we have now also our hedged -- interest rate risk is more hedged than we had last year. So the impact that we saw in the comparison figures that we reported earlier this week, actually, it was also driven by the fact, not only the higher interest rate, by the fact that we had a more open interest rate risk position that we have now hedged. So actually, what we have done now, that limits the impact that is coming from the movement of interest rates, up or down, so that reduces the volatility.

Okay. Then second question regarding the mentioned Aurinkotuuli III Fund, which is a new one. And it's mentioned that it started quite well. Could you give us any figures how much you have now collected and what kind of targets you have few quarters ahead?

Cannot comment on the targets, but that will show in our second quarter -- or start to show in our second quarter numbers.

Okay. And last question from my side. The deposits, as mentioned, they have declined quite visibly. Have you seen any flow from your accounts to another bank? Is this one explanation why your deposit is declining?

No. That we haven't seen. As I said, there's some movement from accounts to, for example, fixed income products and then some fixed term corporate deposits that we knew are going to kind of expire before the end of first quarter. So no reason at all to worry there. As I said, the entire '22 was positive. So we saw the deposit base increasing. So as said, liquidity and all of that is in very good shape.

Sauli Vilen from Inderes. About the market environment on the asset management side, I mean you state that the market environment has clearly improved. That's actually not what all the players or the competitors has been said kind of opposite actually. So can you open up more like how you see the asset management market environment at the moment?

Well, it's been quite nervous still in the first quarter. So I have to say that I'm pleased about the fact that we have had inflows, a little bit of positive market changes as well. But I do think that there is, again, interest in the fixed income fund. So let's hope that the situation stabilizes, that we have a good feeling about the year and the year has started well, at least in those products that we are offering, like the alternatives and the fixed income.

About the fixed income, obviously, it makes sense that the fixed income is -- it interests investors at the moment. Obviously, it's an attractive asset class once again. But is it mainly focused on the institution side who are interested? Is it also like also the retail side?