Aktia Pankki Oyj (AKTIA) Earnings Call Transcript & Summary

A very good and sunny morning, and welcome to follow Aktia's half-year results presentation to both you on-site and online. Aktia's Interim CEO, Juha Hammarén; together with CFO, Outi Henriksson will present the results. My name is Lotta Borgström, and I head Aktia's Investor Relations and Communications. Please write your questions on the commentary field on the website. The questions can be asked via the chat functionality already during the presentation, and they will be answered after the presentations. With these remarks, I'd like to give the floor to the CEO, Juha Hammarén. Please go ahead.

Good morning, everyone, and welcome to Aktia's second quarter 2023 results webcast also on my behalf. My name is Juha Hammarén, I'm the acting CEO of Aktia. As before, I will first go through the highlights of our second quarter, after which our CFO, Outi Henriksson, will walk you through our financials in more detail. Aktia's strong financial development continued during the second quarter of this year. Net interest income grew by 31% to EUR 33.8 million. The growth was supported by higher interest income due to the increase in interest rates. Net commission income decreased somewhat from the comparable period and was EUR 30.4 million. Our Life Insurance business continued its positive development. Net income from life insurance was EUR 5.7 million. But we have to keep in mind that due to the adoption of the IFRS 17 standard, the recalculated comparative figures for 2022 include considerable positive changes in market value. This makes the comparison between quarters significantly more difficult. When it comes to our comparable operating expenses, they were at the previous year's level and amounted to EUR 42.2 million. Our comparable operating profit decreased to EUR 26.5 million. Also here, we can see the impact of the IFRS 17 standard. The comparable operating profit in Q2 2022, according to the accounting standard that was used at the time was EUR 24.7 million. The quality of Aktia's loan book remained on the high level, and the average margin for the entire loan book continued its strong growth. Our credit losses provisions remained at a very moderate level at EUR 1.3 million. And then, a few words about our businesses. First, our banking business. In second quarter, the net interest income of the loan book continued its strong growth. As I said earlier, the quality of the loan book remained at a good level and the average margin for the entire loan book continued to increase. The positive demand for higher purchase and leasing financing in the corporate customer business continued. Also, the sales of factoring solutions has got off to a good start, and we will continue to focus on this. When it comes to the demand for the financing for new-build housing projects, the demand remained modest. The main reason there, there's lower housing market and general uncertainty on the market. Then, let's move on to our asset management business. In the second quarter, market environment continued to be unstable. Central banks continued their reference rate hikes and market expectations for lower interest rates moved further into the future. The equity market was somewhat divided in the second quarter. In Finland, the equity market was slow. While in the U.S. and Central Europe, the development was stronger. One of the highlights of our asset management business in the second quarter were the result of the Refinitiv Lipper Fund Awards. Aktia awards as the best European fixed house in the category for small fund houses. In June, the first closing of Article 9 Fund, SolarwWind 3, exceeded its target and amounted to more than EUR 160 million. SolarwWind 3 was launched together with Taaleri in the beginning of this year, and it strong supports the green transition in the energy economy. Net sales for Aktia's private banking in general had a strong development during the quarter. And then to our life insurance business. In the second quarter, the sales of our risk life insurance developed positively. At the same time, the sales of investment-linked insurance continued its stable performance. The result for investment activities, including insurance finance results and income from investment activities amounted to minus EUR 1.3 million during the second quarter. The solvency ratio decreased during the period, but was still a good level. And then a few words about sustainability at Aktia. During the second quarter, the main focus of our sustainability efforts was in social issues, like employee experience and the well-being of our personnel. In practice, this meant, for example, the updating of our HR strategy and HR-related policies as well as new benefits to our personnel. We also joined to see index that measures -- that compares the gender balance in organizations. Our first rating was 74, which is a very good starting point. In May, we announced cooperation with Kaarija to improve the financials skills of children and young people. We firmly believe that good financial know-how is an important civic skills that increase equality in society. Let's then see how we proceeded towards our ESG targets. One of our targets is to increase the share of ESG and sustainable funds that are classified as Article 8 or Article 9 according to the sustainable finance disclosure regulation. In the second quarter, the share of such funds remained approximately at the previous year's level and their share of all of our assets is now some 95%. Our people-related targets are tied to our performance in Siqni flame Index and our eNPS score. Our systematic work in reaching these targets still continues. The third target is to reach the -- at least the industry average ESG rating by the largest rating providers. At the moment, our ESG ratings are above industry average. And our net impact is positive according to the upright project assessment. Our last but not least target is to reduce the relative carbon footprint of our investment portfolios by 30% from the 2019 level. At the end of June this year, we were some 8.7% above our 2019 baseline. So to summarize, I'm very pleased with Aktia's performance in second quarter. Our business continued to develop according to our expectations. This give us a good starting point for the second half of this year. And with these words, I would like to invite Outi to go -- on the stage to go through our financial performance during Q2 and the first half of this year in more detail. Outi, the floor is yours.

Thank you, Juha. Good morning on my behalf as well. [Foreign Language]. Let's then take a look at the financials in more detail. Here we go. Also very pleased with the second quarter financial result. Solid development that started in the beginning of the year has continued, driven by the good development in -- of net interest income, coming back to that in a minute. The comparable operating profit was EUR 26.5 million in the second quarter. We reported EUR 24.7 million last year. Second quarter, we need to bear in mind that, that actually includes EUR 11 million of capital gains from life insurance business. That was a real estate investment that we sold, take that away from the EUR 24.7 million and the growth is very, very good. Those numbers were reported under the old accounting standard, that is the IFRS 4. As Juha pointed out, we have now restated from the beginning of -- we have also restated the comparison figures for 2022. And that means that now what -- you see here EUR 49.7 million in the second quarter, is driven by that change in accounting practice. Again, from of the fact that when the interest rate started to sharply rise, the present values of the future cash flows or the contract that we are discounting to the present value were lower than -- turned the result more positive. That was the kind of oversimplified explanation, but that is behind the change. Let's then take a look at where did the good result came from. Here's the financial summary in the P&L format. First quarter NII -- second quarter NII, up from the comparison period, 31%. And if we look at the first half, 6 months of the year, 29%. Net commission income relatively flat, getting back to that as well. And the development in the life insurance business was very solid as well, despite the comparison. Operating expenses, flat and the reservations for the credit losses remained actually very -- at a very modest level. As said, the growth came mainly from the net interest income. Here, you can see the quarterly development from the second quarter 2022 to second quarter this year. Some improvement in the NII from the first quarter. I'm getting back to that in a minute. However, as I said, over 30% from the beginning of the last year. The net commission income at EUR 30.4 million, slightly up or approximately the same level as in the first quarter. However, somewhat down from comparison year, due to the fact that the assets under management, AuM, is now much lower in the beginning of the year. That change last year was driven by the very large negative value changes in the values of the investments in the AuM. Then a few words about the expenses. They were relatively flat. As you can guess, it is not an easy task to keep the cost flat. Under the current inflation that is having an impact on all the purchased services. However, we are trying to achieve our targets of having the cost base flat, but it has become little bit more difficult now. The increase in the IT expenses relates to both inflation that I mentioned, as well as the starting phase expenses related to the outsourcing that we did in the end of last year. Personnel costs somewhat up, mainly driven by the recruitments done in the end of 2022. The development has been more flat now this year, or actually, there is a slight downward trend. And here's the waterfall picture or the bridge between the comparable operating profit from the first half to first half -- first half last year to this year first half. They are on the very left-hand side. You can see what we reported as comparable operating profit last year. That was EUR 38 million. Now restated to EUR 85.3 million. The components there, as you can see, the large black block, that is the impact that is coming from the life insurance business, IFRS 17. There you see the capital gain as well taken away. However, as you can see, the actuarially calculated result, that is [Foreign Language], that was actually positive. The growth comes from the NII. Other piece is relatively flat, so no major change there. This is my favorite picture. Let's see when we go forward after the third and fourth quarter, whether the bars fit on the slide. That depends on the interest rate development. However, I like the picture. It very well shows what happens with the NII. If I start from lending, that is the green part of the bar, very nice growth there. That is driven by, obviously, higher interest rates. Almost the whole loan book is tied to a 12 months Euribor. And now we have repriced -- or the interest rate fixing has happened to the entire loan book under the time where the interest rates have been positive. So that being one contributor. As important is that the margin development has been good, both on the household side and the corporate side. That is something that we do ourselves that, together with the higher interest rates and the -- kind of the loan book going through the interest rate fixing have improved our lending. Higher interest rate obviously have an impact on the market-based financing costs, and that has to do with the covered bonds and senior debt. And there, you can see the cost of borrowing that is deposits and covered bonds. We use them to finance the lending. There you can see some increase in the cost of covered bonds and also our cost of deposits, obviously. And then the senior financing, the orange part, that is also increasing together with the higher interest rate. Senior financing we use also to finance lending as well as to support our liquidity position in treasury. And the TLTRO, that's the central bank financing. Interesting interest cost for that, some increase there as well, despite that we paid back a part of that financing in the beginning of the year. The central bank financing is tied to the ECB steering rate. Net commission income mix, majority coming from the net income from mutual funds and asset management that the securities progress. There some decline throughout the quarters, again, has to do with the AuM development. Very positively, the net subscriptions have been plus the whole first half of the year, this year. However, we saw heavy negative changes in the market values last year having an impact on that. Then looking at this year and net commission income from lending, relatively flat. However, compared to last year, somewhat down as the kind of housing loan market is quite dead, affecting the volumes and obviously affecting then the commission income from that part of the business in banking as well. Then looking at the operating profit improvement. Comes mainly from the banking, as you can guess, also some improvement in the asset management. We do have private banking in the asset management. And although the net commission income has not grown yet. There's a bit of NII also in the capital asset management segment as a result of private banking customers. They do have income from lending as well. The light blue part is the centralized functions that is the piece of -- share of costs that we actually do leave in the central functions and do not allocate to the cost. However, the major impact comes from the fact that we don't allocate all the hedging costs to the business units, and that piece is actually now in the treasury results, affecting the kind of results of the centralized functions. Our quality of the credit portfolio remains very solid. Very pleased with the fact that we -- the credit loss provisions increased only by EUR 1.3 million. Looking at the P&L in the second quarter. So continues to be under control really well. Our loan-to-value ratio is at a very healthy level, 41%, and this low-risk level provides obviously a solid -- gives a picture of solid quality of the credits in Aktia's loan book. And here is the balance sheet. Total assets, EUR 12.3 billion. No major change or dramatic changes in the second quarter, some change from the beginning of the year. The deposits somewhat lower. That change happened already in the first quarter of the year, and that was expected that I went through, when we published the first quarter results. There, on the deposit side, some shift from current accounts to obviously, interest-bearing accounts, which is something that we expect and all good. So nothing dramatic here. Capital adequacy, CET1 ratio 3.2 percentage points above the regulatory requirement, slightly up from year-end. There risk-weighted assets, some increase, EUR 72 million, mainly -- actually, that is coming from the corporate to corporate lending. Some other factors affecting the CET1 is that we -- the life insurance company paid a EUR 6 million dividend. We have taken away from equity the reserve for dividends according to the maximum amount according to our dividend policy that is 80% of the profit of the net income, and then some positive increase in fair value fund. We have again been quite active in funding. On the funding side, market stabilized a bit towards the end of second quarter. We refinanced our EUR 0.5 billion, EUR 500 million covered bond in May. That we did very successfully. We issued 4-year transaction pricing reoffer spread plus 17 basis points. Very, very nice level, and the order book was heavily oversubscribed. And we got a well-diversified, high-quality investor base through that. Other transactions to senior preferred private transactions. We continue to be active on that front going forward. And worth mentioning also that our liquidity is still at a very high level, very good level LCR, liquidity coverage ratio being at 221% at the end of June. Outlook, no change there. When it comes to the outlook itself, comparable operating profit is expected to be clearly higher than last year. That is -- we can obviously see, EUR 50 million operating profit after 2 months. Last year it was EUR 65.2 million. And what we have changed here is actually that we have slightly modified the bullet regarding the operating expenses due to the high inflation, mainly and the start-up expenses. That has to do with the kind of outsourcing. We do expect the operating expenses to be at the same level or slightly above last year level. Financial targets remain the same as they have now been no change there. And we are happy to answer the questions that you may have. Thank you very much.

Thank you, Outi. Thank you, Juha. And now let's move over to questions. Do we have any questions on-site?

Sorry about that. Sauli Vilen from Inderes. So about your financial targets, I mean, yes, you still have years to go, so to speak, with them. But I mean, you gave those out when we have had a zero rate environment basically. And at least some of your peers have actually updated their financial targets based on that. So what is your -- do you see any need to update the targets due to the fact that we are in a drastically different market now?

That's actually a very good question. We do go through the kind of -- or have the strategy process ongoing, and we are looking at the long-term financial target as we go now in the autumn. Actually, when we published the guidance, we -- the sources of growth were somewhat different from what they are now. We were expecting the kind of -- the growth to come mainly from the asset management side of the business, so the net commission income. Now that has been flat or slightly declining due to the AuM, while the NII is much, much higher. So yes, we need to take a look at that, and we will get back to -- if there's need to change the guidance itself as such. The composition of the kind of long-term financial targets have obviously changed drastically. So that's a fair question.

Then about the AuM, you are still struggling with the institutional sales. If I look at the UI and domestic institutions, you are still having negative net subscriptions there on both sides, having -- past 12 months. So what do you see is the main reason behind that? Is it your product mix? Or are you -- is it more of a new sales thing or...?

No, I wouldn't say that the -- we are struggling with the sales. I would say that the development that we see there on the international and institutional side, mainly based on our understanding comes from the fact that certain investors have kind of arranged their portfolios and type of products such as EMD, the way it has decreased. So it comes mainly from that. While look at the sales, sales side is quite all right. But actually, it's the kind of outflows that we see from the EMD right now, and that has to do with the market environment. On the other hand, the other channels are actually performing really well. So we see the money inflows as well, specifically on the private banking and domestic institution side. But yes, that I would say is the reason.

And then finally, about the IT expenses. So obviously, you are kind of struggling with the high -- very high cost inflation there. Can you shed some more light how much of this very high inflation is due to the fact that you have the start-up or ramp-up costs, whatever -- like, but they are -- which kind of are one-offs, you could maybe say? And then how much is actual real IT cost inflation, which is like the sticky one, so to speak?

Actually, when we did the outsourcing end of last year, there is approximately 0.5 year kind of a start-up period or the first year is a little bit heavier in terms of cost when we kind of start the cooperation with the joint venture. So that is a separate and that is not affected by the inflation at all. So that is an arrangement that is kind of -- inflation is covered there. Then the other side, I mean, all the services that we are purchasing, whether they are IT or so forth, it's really, really hard. I mean contractually, there is an opportunity to increase prices, and that we do see now. We are fighting against it. And we have actually a systematic approach that is the combined efforts with the IT and finance department to go through everything on the IT side from contracts to the license purchases and all of that. So we are really working on that part, and that is -- remains in our focus this -- end of this year, and it's also one of the important focus areas next year to have the costs under control and hopefully do what we can to tackle inflation and do things also more effectively. But the kind of outsourcing itself is not affected by the inflation.

Then we have a question from Sauli's colleague, Matias Arola from Inderes as well. He continues with the UI theme. Net sales of UI funds have been weak recently, as Sauli here stated as well. I assume that this is partly related to the increased interest rates. How do you see the sales outlook for these products for the coming quarters?

Well, let's hope that the -- kind of how the market stabilizes now a bit. The interest rate development over the past weeks have been a little bit more stable. I assume that, that will have a positive impact in general. It's not just the kind of fixed income fund, but hopefully, also the equity side. So if the situation stabilizes, I do see that it will have a positive impact on the fixed income side, specifically. So hope that we see more inflows coming from the -- to the EMD as well. The market has been very unstable, as we all know, and market very volatile. So that's it.

And Matias Arola continues, could you say something about your interest rate hedges and rate sensitivity? For example, what is your NII sensitivity if rates decrease or increase 100 basis points?

That we haven't commented. We obviously model that development internally. And the question is then how much risk -- interest rate risk do we leave open and how much we hedge. Most of the risk is obviously hedged. So sensitivity, I cannot really comment on. But almost the entire deposit base is kind of fixed rate. However, the financing we have hedged. So again, we do model it and we have reduced the sensitivity to the changes specifically last year, but I would not like to comment on the exact amount.

And then Antti Saari, from OP continues with the same theme. Actually, have you increased interest rate hedges? And should we expect NII to continue to increase in the coming quarters?

Interest rate hedges, no, we haven't increased them. We are following the situation. And as said, the majority of the growth in NII is coming from the fact that there has been now a turnaround in the loan book. So all the housing loans have been now repriced. And that continues. I mean, we still have housing loans that were repriced in the third quarter. The interest rates at 12-months Euribor was 2.5%, 3%. So obviously, now 4%. They will be repriced, having positive impact. At the same time, obviously, the financing costs do follow, but more slowly, as you were able to see in the slide that I showed. So again, we do believe that we see positive development going forward in our NII if the kind of interest rate forward curve will stay approximately at the level where it has been.

Then we have Andreas Hakansson from Danske Bank. I try to understand Slide 15. I think that was your favorite one, Outi, yes, about the composition of the group net interest income.

Let me see. Yes.

We can take it here in the presentation as well. Wait a second.

This one.

Yes, there we go. It seems like the NII is driven by higher margins on loans, but is it not really your deposit margin that has increased? So first question, if we measure lending rate compared to Euribor, what has the margins done then?

If you compare Euribor to?

If we measure lending rates compared to Euribor, lending rates, what has the margins done then? And also, he continues, what rate are you paying on your transaction accounts? And are there plans to raise rates on transaction accounts?

If I understood the question right, regarding the lending, the margins have improved together with the interest rate fixing on loans, both on the corporate side and the household side. So that has an impact. Obviously, that margin we cannot change as we go. The margin stays the same for the entire housing loan book. So there is no change in the contracts that we have initially done, if I understood the question correctly. What comes to the deposits as a source of funding, we do not pay any interest on current accounts right now, not either on the kind of a savings account. As we have communicated, actually, we focus on being a very competitive rate on the kind of fixed-term investment accounts. And there we have been very competitive, and we do recommend our customers actually to use them to invest and -- invest extra excess liquidity that customer may have and use the kind of current accounts just to pay invoices and so forth. So obviously, we do see shift from current accounts towards fixed-term investment accounts. But right now, we do not pay any interest on the current accounts, and that's been the choice that we have also communicated to the market, and I do think that if not all, but other banks follow that in Finland as well.

Then lastly, we have a question from a private person. How is the tech integration status with Taaleri Wealth Aktia platform going? Any plans for updating the recent one to new options via cloud solutions?

Can you [ repeat ] the...?

Yes, how is the tech integration status with Taaleri Wealth?

Yes. The tech integration proceeds as planned. It's not entirely ready. However, again, no more comments regarding that. I cannot really comment on the technical part of that. But yes, we have made good progress with the integration.

Again, the second question was, if we have any plans for updating the recent platform to new options via cloud solutions?

That I cannot answer. I need to ask the asset management team.

Can we later? If corporate answers to that question.

Yes, we can come back to that. If the person who has stated questions can please contact us at [email protected]. Then lastly, a question from Andreas Hakansson. We see some countries penalizing banks for not paying rates on transaction accounts. Any such noise in Finland?

Not that I have heard so far, I would say. As I pointed out, I do think that the current accounts should be actually used to -- for the kind of daily payment traffic and so forth and any excess liquidity should be invested in type of accounts that are meant to be investment accounts. So from that point of view, I don't really see why -- that should happen actually if the current accounts are used for the purpose that they're used.

No more questions here.

Thank you for your attention, and have a very nice rest of the week.

Thanks from my side too.