Aktia Pankki Oyj (AKTIA) Earnings Call Transcript & Summary

A very good morning, and welcome to follow Aktia's Q3 results presentation, both on-site and online. Aktia's CEO, Juha Hammaren; and CFO, Outi Henriksson, will soon present the results. My name is Anne-Mari Smolander, and I represent Aktia's Communications and Investor Relations. [Operator Instructions] So let's move on to the presentations. Juha Hammaren, the stage is yours.

Thanks. Good morning, everyone, and welcome to Aktia's Third Quarter 2023 Results Webcast also on my behalf. My name is Juha Hammaren, I'm a CEO of Aktia. As before, I will go through the highlights of our third quarter after which, our CFO, Outi Henriksson, will walk you through our financials in more detail. Aktia's strong financial development continued during the third quarter of this year. Net interest income grew by 64% and amounted to EUR 39.5 million. Net commission income was on the previous year's level. Net subscriptions decreased by EUR 279 million. Net income from life insurance amounted to EUR 5.1 million. Despite the high inflation, we were able to keep our expenses almost on the previous year's level. Comparable operating profit grew by 3% and amounted to EUR 32 million. Credit loss provisions remained at a very moderate level and were minus EUR 2.3 million. And then a few words about our businesses. First, our Banking business. Our Banking business developed strongly in the third quarter. Despite a tough market, our loan book increased. This was mainly driven by corporate lending. At the same time, demand for housing loans remained low also during the third quarter. Net interest income from our Banking business grew driven by higher interest rates and good margin development. The quality of our loan portfolio remained good and the average margin for the entire loan portfolio increased. When it comes to our corporate customer business, demand for higher purchase and leasing financing remained at a good level. In our private customer business, the sales of Finnair Visa credit cards continued to develop well. Then let's move to our asset management business. Considering the volatile market environment, our asset management business developed as expected in the third quarter. During the quarter, general banks continued to rise reference rates. However, the market consensus predicts that the rate cycle is near its peak now. The performance of the stock market was very weak in Finland, the rest of Europe and the U.S. In the third quarter, our net sales to domestic institutional investors and Private Banking customers did well. At the same time, some international investors made redemptions from our well-performing fixed income funds. As a result, the overall net sales for the third quarter remained negative. The market environment also affected our asset under management, which decreased slightly from the previous quarter and amounted to EUR 13.3 billion. And finally, our Life Insurance business. Taking into account the market situation. Also, our Life Insurance business performed well in the third quarter. The sales of risk life insurance developed well, and the sales of investment linked insurance products remained stable. The result from investment activities amounted to EUR 1 million. Our solvency ratio decreased slightly during the quarter, but remained on a good level. Then a few words about our sustainability work. Our goal is to enable sustainable prosperity for our customers. At the same time, we want to provide meaningful work for our skilled employees and take care of our people. We also want to be a reliable partner and developed our operations. And our goal is to become carbon-neutral. As a part of this work, we offer services that have a positive impact on the environment and the increase our customers' knowledge about sustainability. In September, we joined a new investor initiative called Nature Action 100. It is the first global investor initiative that address to crisis of loss of nature and biodiversity. We have also investigated our own funds, dependence on natural capital and ecosystem services and reported on the impact on biodiversity. The work will continue in the future as well. Let's see then how we proceeded towards our ESG targets during the third quarter. In the third quarter, the share of sustainable funds in our portfolio remained about the same level than in the end of 2022. The share of all our assets is now about 95%. Our second target is to reach 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 third ESG target is to reduce the relative carbon footprint of our investment portfolios by 30% from the 2019 level. In the end of September, we were some 6.5% below our 2019 baseline level. And finally, a few words about our strategy. Our strategic priorities are to provide an excellent customer experience, win in wealth management and grow among customers who are willing to increase their wealth. Providing an excellent customer experience is one of the cornerstones of our strategy. During 2023, we have invested significantly in developing our customer experience. This means, among other things, shortening the waiting times for the telephone services, large-scale rollout of the electronic identification application and providing high-quality service to our customers in both domestic languages. We are developing our customer service so that customers can be sure that they can reach with us when they need help. Aktia has been creating wealth and well-being for 200 years. We are proud of our loyal customers and long-term customer relationships. We are doing everything in our power to ensure that we will serve our customers for the next 200 years as well. So all in all, I'm very pleased with Aktia's performance in the third quarter. All 3 business areas succeeded well in their sales and our customer base increased. We are in a good position as we enter the last weeks of this year. With these words, I would like to invite Outi on the stage to go through our financial performance in more detail. Outi, the floor is yours.

Thank you, Juha, and welcome on my behalf as well to follow the third quarter financial results release. We have a strong quarter behind us. The comparable operating profit was at a record level, EUR 32 million. If we look at the performance last year, the comparison period, we reported under the reporting standards that were valid last year. We reported EUR 12.3 million operating profit from third quarter. However, as you all know, we have restated our comparison figures to be under IFRS 17 and that had a major impact on the Life Insurance business figures. And you can see both comparisons now on the slide, according to the numbers that we released last year and then the restated numbers under the IFRS 17. Looking at the year-to-date performance, EUR 82 million year-to-date after 9 months. Last year, after 9 months, we reported EUR 50.6 million. And here, we can also see the restated numbers that are obviously clearly higher. We can be very pleased with this development. A few words about the P&L, profit and loss statement. A few things that I would like to take up from here. First of all, good development on the income side. We will come back to details behind that development. Positive was also the fact that we had our cost base relatively flat under the kind of environment that we have now, very high inflation that we can see specifically on the IT side of the cost as well as some increase in the personnel costs. What I'm really pleased about also is the fact that the impairments of credits and other commitments, the reservations for the credit losses remained at a very, very modest level, EUR 2.3 million in the third quarter and EUR 4.5 million year-to-date. And then one more thing that I would like to take up here is the cost income ratio that was 0.54 as you may remember, in our long-term financial targets, we have stated that the target is to be under 0.6 and now we are at 0.54. Looking at the income side, obviously, the driver behind the good development is the net interest income. We see very strong growth there. However, the net commission income development that we hope to be a little bit more positive this year was relatively flat, but we can be quite pleased about it. The market has been really difficult. So achieving a flat development is -- I do think it's a pretty good achievement. Part of the net commission income comes from a banking side as well. And there, obviously, the demand for the housing loan is quite frozen, has an impact on the commission income as well. And then the income from Life Insurance, that is a bit of a volatile part of this one and is affected again by the restated figures under the IFRS 17. The NII was driven obviously by a higher interest rate that we have also seen positive margin development there. The growth that we saw in the loan book came from very modest growth we saw came from the corporate side of the business. And here is the composition of the group net interest income. Important here is obviously that the income side grows faster than the financing costs and that you can see in the picture, a very good development there between the quarters. Income from lending, EUR 84.7 million, strong growth from second quarter. Obviously, at the same time, the financing costs that are mainly tied to the market rates, they have increased as well as well as the cost of central bank financing that is the TLTRO part here, we have paid back a large portion of the TLTRO this year or actually it has expired. So we have EUR 250 million left of EUR 800 million that we had before. Then the net commission income mix majority comes from the mutual funds, assets management and securities brokerage AUM. Assets under management development has been relatively flat, slightly negative. No tailwind from the market that all the market has been very, very difficult having effect both on the kind of equity funds and the fixed income funds. So -- and the net subscriptions somewhat negative in the third quarter, positive in the beginning of the year, though. So what has been really important is that we have launched some structured products this year in every quarter and that has also helped the net commission income. Those launches have been very successful. Despite high inflation that I already mentioned, we have been able to keep the costs relatively flat. Some increase in personnel cost, that is mainly driven by the collective agreement-related raises and some raise in the variable pay. Obviously, the results this year are much better than last year that affects the variable pay to some extent. Growing IT expenses driven by the high inflation and the fact that we outsourced our certain parts of the IT business or IT operations in November 2022 and that actually moved some of the costs from personnel cost to IT costs. Depreciation is flat and then some improvement or savings on the operating expenses making the development compared to last year, very flat, we can be pleased about that one. Then again, here, we look at the comparable operating profit development in the business segments that we have there. Obviously, the biggest growth comes from the Banking segment driven by the NIA, the growth in the asset management business comes from the NII as well. We have the Private Banking business as part of asset management segment. And there you can see also NII growth. The development in Life Insurance business as well, if you look at the underlying development. And there, we have actually gone through the kind of real estate investment portfolio and booked some unrealized value adjustments, negative ones in the third quarter. However, the performance was fine despite that. And the blue piece there is the minus from the operations of central functions. Those items there are mainly related to the net interest income, those parts that are left in treasury P&L. Very happy about the fact that the quality of the credit portfolio remains solid. The LTV is at a very healthy level. Obviously, this market environment is challenging and we hope to keep this very, very well under control. We have been quite conservative in our lending, which helps us, obviously, in kind of a environment that we see here now. P&L impact of the increases in the credit loss provisions, EUR 2.3 million in the third quarter, EUR 4.5 million year-to-date. Balance sheet totaled approximately EUR 12 billion. No major changes in the third quarter, some changes, as you can see in the picture from year-end 2022. The deposit balance has decreased by approximately EUR 0.5 billion. That development actually came mainly from the first quarter. That was some time investment deposits from the corporate side that we knew going to expire in the end of the first quarter. So no surprises here. Some movement from current accounts to obviously, to the investment accounts with higher interest. So all of that has developed according to what we expected. Liabilities to central banks have decreased, as I already mentioned, from EUR 800 million to EUR 250 million and that funding has been mainly replaced by senior financing. That increase you can see there in the debt securities issued. Capital adequacy, CET1 ratio, 11.0% and 3.2 percentage points over the regulatory requirement. The bullets referred to the changes from the beginning of the year, some dividend that we included from -- the dividend that was paid by the Life Insurance business to the parent company, EUR 6 million. And we also here deduct the dividend from own funds according to the dividend policy maximum, which is the 80% dividend payment. So at the time when the Board decides what is -- it will be suggesting to the AGM regarding the dividend, then we adjust if needed. Funding activities, the market sentiment has somewhat improved from second quarter. We have done a few senior preferred private placement transactions in the third quarter, EUR 90 million in total maturities ranging from 2 to 15 years also in the longer end and these were executed in euros and Swedish kronas. And again, we paid back part of the TLTRO or actually there was a redemption of it. And then the liquidity, worth mentioning liquidity is still at a very, very good level. The liquidity coverage ratio LCR was 220 percentage at the end of third quarter. No changes in the outlook. The comparable operating profit is expected to be clearly higher than the EUR 65.2 million reported in 2022. Well, we already have EUR 82 million. So that's quite obvious. We haven't changed as said, the guidance. However, we have adjusted the bullet points under a bit. We do not expect the net commission income to be above last year level. We expect it to be at the same level or somewhat under the last year level. And the financial targets are still the same as before, so no change yet there. We are obviously updating our long-term plans, long-term financial modeling right now together with the budgeting. So let's say, when we get back to this one. Thank you very much, and we are now happy to answer any questions that you may have.

Yes. Sauli Vilen from Inderes. About costs, I mean, we have seen inflation coming down fairly rapidly. So when you look at that going forward from here, do you see the inflation pressures easing or cost pressure overall decreasing on your side?

Very good question. As we are just modeling the kind of long-term development of the cost base as well, we do not anticipate the inflation in our own plans to continue at the current levels. What we have seen this year has been totally exceptional specifically, if you look at the IT cost, the license costs related to IT and so forth. So I expect that to come down to more normalized level, a little bit longer term, certainly.

Then recently, you made some reorganization in your wealth management business. Can you shed some more light what you actually are doing there? And what you try to achieve through these changes you are going through?

Yes. The intention is to simplify the operations structure and make the kind of customer interface also better. As we wrote in the announcement, there are certain areas after the Taaleri wealth management integration that needs further streamlining and we are tackling it now. So that is to kind of stream value operations inside the asset management business unit. And hopefully, that helps the processes and the customer experience as well.

Then on the asset management sales, considering the fact that you're -- we haven't talked this before here, but I mean your current product offering fits really well in this market since the -- well, the credit side is booming at the moment. So considering this, your net flows are kind of subdued, when you look at some of your peers, which are selling much more. So I mean, do you have any plans or initiatives to tackle this to improve the net sales on the wealth management side?

Obviously, that is the aim. And we do still believe that the net subscriptions will turn into growth. Funds have been performing well. And the redemptions that we have seen have come from the institutional side, mainly international institutions. So we expect the market to be a bit more favorable also to the kind of offering that we have in external fixed income funds. And hopefully, the equity market will become a little bit more attractive also. So there, we have seen our funds suffer. So I would say that we still trust that we are very competitive on the EMD side and the fixed income side. And then we have launched restructured products. We look at the offering all the time to be able to develop it, but the development will be done based on the demand that we see in the market and possible new product launches will then be driven by the demand that we see in the market.

Then finally, on the financial target, yes, you mentioned that you will maybe revise them. Should we expect more broader strategy update? Or is it just fixing the targets based on the fact that we are not in the 0 interest rate environment anymore?

Let's see. I mean, we have a new CEO starting next year. So maybe we'll wait for the kind of a larger strategy update. The current strategy is very valid still. So I think that right now, the question is more like maybe looking at '27-'28 and see specifically the composition of the income side, as I think you, Sauli, asked before, like the composition is properly changed. Yes, if you look at back till 2021, what the composition of the income side, net interest income versus net commission income, it has changed. However, the targets are still valid. It's just that the sources of income are a little bit different. And right now it's obviously very interesting to see how the interest develop, looking at the forward curves and so forth. There's been quite a bit of movement there. So it's not going to be an easy test to model the NII now, but, yes, we're looking at it.

This is [ Kasper ] from Inderes. Especially other operating expenses were quite low in this quarter. What was behind this development?

No, general cost efficiencies to start with. And obviously, last year, we were planning the outsourcing of the IT, it had some impact on the expense side. But in general terms, it's just kind of a efficiency improvement, try to save where it is possible. So specifically, if you look at the third quarter, as you all know, the quarters are not fully comparable with each other. The first one is typically a little bit heavier than the other ones due to the fact that we booked the stability fees in the first quarter. However, the general cost efficiency, I would say, is somewhat improved. Nothing major onetime things there.

Okay. Just to be sure, was Taaleri SolarWind III Fund included in Q3 assets under management?

How much was it?

Was it included already?

Yes, it was. That was launched in the -- the SolarWind was launched in the second quarter. So that is all in the numbers. And then we have the new product, the equity-backed -- the equity-guaranteed product in the third quarter that was launched in the third one. So they are in.

All right. How do you expect your loan loss provisions to develop in Q3 -- Q4, I mean?

Well, the market is demanding. As we all know, and we are monitoring the situation very carefully. We have actually put quite a bit of effort on the kind of early phase problem-solving if we see type of problems. I do think that if looking at the market, it's not going to be easier than what it has been so far. As said, we don't see any major negative development in our loan book, but I wouldn't be surprised if we see some increase in the coming quarters over there. But we are, as I said, trying to manage it all at -- already at early phase so that it doesn't develop further. So interesting to see. I mean this is, I guess, something that all of the banks look at right now.

Okay. My last question is about the net interest income. Do you expect your net interest income to further increase in Q4 or what about next year?

We haven't given any guidance regarding next year and I'm not going to give it right now. However, there are a lot of components that are affecting the NII. It's the kind of a shape of a forward curve and level of the interest rates. It is the hedges that we have. It is the demand in the loan book. I mean, it's been quite frozen looking at the housing loan market. Do we see some improvement in the beginning of the year in terms of demand on the housing loan side, I don't think so. The corporate side has been good for us. So there are kind of a lot of components there inside the NII, the whole funding structure, the portion of the deposits as the total funding of the bank. So I don't believe that we are going to see type of peaks that we have seen this year in terms of NII development, looking at all of the banks. But I think the market expects that the NII development stables -- will be more stable now going forward. But assuming that the development of the rate follows the forward curve, it still looks very good.

Okay. Then we have 2 questions waiting online. This is Antti Saari at OP asking. The first one. Asset management has been the spearhead of your growth strategy. But now you have lost 16% of assets under management since Taaleri transaction and you are now reducing personnel in asset management. Is your strategy beginning to lean more towards traditional banking, which is again very profitable after rate hikes? If not, what are the actions to start winning in asset management again?

I can take this answer. Like Outi told before, just now we are not changing our strategy. We have our strategy and we are working with it. The second is that we are just now working with our working model there in the Private Banking and in that area, that we are going to right direction.

Yes. If I add to that, we are according to our strategy focusing on asset management. We will be looking at the product offering, what kind of funds or products can we offer to our customers on top of what we already have. And again, the market hasn't been very favorable for type of products that we have, despite the fact that the funds have performed really well. So we do believe that the demand will be there and the net subscriptions will turn positive again, supporting the growth of the AUM, hopefully, we get some tailwind for the market as well. So those 2 things combined, I do believe in the growth again next year.

And then the second one. Is it still reasonable to expect net interest income to grow in the coming quarters? Could you tell anything about your interest rate hedging policy to understand how much these will help once rates turn down?

I already partially answered to the question [ answered ] by Inderes. We'll not give any guidance regarding next year NII. As I said, not going to estimate the impact of the hedges. Obviously, it depends also on how the interest rates develop. So yes, I mean, I feel confident about the NII development still assuming that the kind of the market assumptions that we have are correct and our market assumptions are based on the kind of forward curves and what we know about the kind of structure of the funding. The part that we cannot hedge really is the customer behavior in terms of deposits. But there, I'm quite happy with the development. As I said, there hasn't been any major, major change in the level of deposits. And obviously, we are focusing on getting more deposit funding in to be able to hopefully replace maybe some part of the senior financing. We'll see. But yes, that's the answer right now. I will not specify kind of the exact impact that is coming from the hedges that we have in our liquidity portfolio, neither the ones that we have sold to our customers and hedged ourselves.

And no more questions online.

If no more questions, I would like to thank everybody that have been following the presentation online and wish you a very pleasant rest of the week. Thank you very much.