Aktia Pankki Oyj (AKTIA) Earnings Call Transcript & Summary

Very good morning, and welcome to follow Aktia's Q4 Result Presentation. Aktia's CEO, Juha Hammaren; and CFO, Outi Henriksson, will soon walk you through the results. My name is Anne-Mari Smolander, and I'm from Aktia's Communications and Investor Relations. If you are following us online, you are free to write your questions in the comment field on the website. And those, of course, you hear on a site, you can post questions as well. We will answer the questions after the presentations. So let's move on. Juha, welcome on stage.

Good morning, everyone, and welcome to Aktia's fourth quarter and full year 2023 webcast also on my behalf. My name is Juha Hammaren and I'm the CEO of Aktia. As before, I will go through the highlights of our last quarter, after which, our CFO, Outi Henriksson, will walk you through our financials in more detail. Aktia's strong performance continued also during the last quarter of the year. We delivered record results, thanks to our excellent net interest income. Good margin development together with the rise in interest rates were the main reasons for the positive development of our net interest income. In the fourth quarter, our assets under management returned to the growth path. Also, our net commission income from asset management was solid. This development was supported by changes in the market values. In private banking, net subscriptions remained positive, but at the group level, they were offset by redemptions in the institutional side. I'm satisfied that despite high inflation, we managed to keep our costs well under control. Maintaining the good quality of our loan book is one of our key principles. This was once again proven in the last quarter as our credit losses remained at a moderate level. Then let's move to our businesses. First, our banking business. In the third quarter, our corporate lending continued to grow, while demand on the housing loan side was still low. As said, the quality of the loan book remained good and the average margin for the entire loan book continued to improve. In the corporate customer business, the demand for higher purchase and leasing financing remained strong. Overall, the corporate customer business grew very strongly in 2023. During the year, more than 3,500 new corporate customers joined Aktia. In the private customer business, the Finnair cooperation proceeded well. We got over 30,000 new private customers in 2023. Then let's move on to our asset management business. The development of the equity market especially in Finland was disappointing in early 2023, but the trend turned in the fourth quarter. Short market rates, and especially the 12 months Euribor turned downwards in the fourth quarter. This was because central banks are expected to cut key interest rates in 2024. Our net sales to domestic institutional investors and private banking customers were clearly positive in 2023. However, international investors made redemptions from our well-performing fixed income funds. Net commission income from asset management slightly increased in the final quarter compared to the same period in 2022. And then our life insurance business. Sales of our risk life insurance policies continued to develop well during the last quarter. At the same time, sales of our investment-linked insurance policies remained stable. The result from investment activities amounted to minus EUR 1.1 million in the fourth quarter. Our solvency ratio decreased slightly during the last quarter, but remained a good level. And then a few words about sustainability. In the third quarter, we continued to prepare for the implementation of EU's sustainable finance regulation. We also launched a new green market for clients to support the demand for the energy efficiency housing. We also continued our work in the advisor committee of ASCOR to promote better transparency for sovereign issuers. This work will continue in 2024. And then let's take a look at our sustainability-related KPIs. In the fourth quarter, the share of sustainable funds in our portfolio remained at the same level than in Q3, but decreased slightly from the end of the 2022. The share is now some 95% of our funds. Our people-related targets are based on the development of the Siqni Flame Index and SHE Index and eNPS. Regarding these, we are on the right track. Our last target is to reach at least the industry average ESG rating by the largest rating providers. At the moment, our ratings are above industry average. So to summarize, the fourth quarter of 2023 was excellent for Aktia. All 3 of our business areas, banking, asset management and life insurance developed well. The highlight of the year was a significant increase in the number of customers. This is something we should all be proud of. 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 good morning, [ Huomenta Godmorgon ], and welcome to Aktia's fourth quarter and full year results presentation. As Juha pointed out, we had a very good year last year. The comparable operating profit totaled EUR 108.4 million. Comparing that to what we reported after 2022, the profit almost or the result almost doubled. But as I mentioned before, we have restated our life insurance company numbers according to the IFRS 17 standard that was taken into use in the beginning of 2023, and that has a substantial impact on the comparison figures. Both numbers are shown here. But again, I would encourage you to take a look at the segment level results as the impact that is coming from conversion affecting only life insurance business numbers. Fourth quarter comparable operating profit was EUR 26.3 million. It is slightly under third quarter results. I'll get back to that one. I was personally very pleased with the fourth quarter. So no worries there. Then the financial summary in the profit and loss format. I would like to take up from here maybe the full year net interest income, EUR 144 million compared to EUR 99 million a year before. We will take a look at the details behind the development as well. I'm still pretty happy about the operating expenses, although they are somewhat higher than the previous year, we need to bear in mind that we had very high inflation. We had labor union agreements related pay raises and so forth. So keeping the cost under control is obviously our priority, and we can also see it in the improving cost income ratio, not here as the 2022 is restated, but the development has been towards the right direction. I'm also very pleased about the impairments of the credits and other commitments. Our loan book is in good shape. So EUR 7 million that went through the P&L. I think it's a very modest level, and we can be happy with it as well. Total operating income was stable compared to third quarter. And if you look at the different parts of the income side, as I said, I'll get back to the NII on the following page, the composition of the net interest income. Net commission income has been relatively flat. The beginning of the market wasn't easy for us, and we have seen some redemptions, as Juha pointed out earlier. However, the market sentiment was better in the fourth quarter, and that helped also the assets under management, which obviously then has an impact on the net commission income on the asset management side specifically. Then a few words about the net interest income. If I start with the lending income from income that we get in, it was still growing in the fourth quarter, quite a healthy growth that we see here from EUR 84.7 million to EUR 91.8 million. So the growth is still there. The housing loan book didn't grow last year. That was actually declining slightly. The housing loan market is very frozen, as we all know. However, we've been able to grow the corporate loan book last year. It's the fact that the lending is higher than on the third quarter and fourth quarter and so forth is not only as a result of the higher interest rate. What we have done and succeeded with is the very healthy margin development, both on the housing loan side or private customers, I would say, and the corporate side. So pleased with the margin development as well. Then going to the fact why was fourth quarter NII slightly under third quarter NII. If you first look at the funding side, both market-based funding and the deposit funding have become slightly more expensive. We have seen a shift from interest-free accounts, like current accounts towards the investment accounts. And at the same time, the average interest that we pay on the investment accounts has raised, we have been actually successful in the market. We have been very competitive with our offering, and that is a very healthy development, but it's obviously somewhat higher cost of funding that is coming from the deposit side. Then, as I have told before, we swap our market-based funding to 3 and 6 months Euribor, senior financing to 3 months and cover bonds to 6 months. Specifically now in the beginning of the year, the 12-month Euribor has started to come down. The 3 months and 6 months Euribor, they are still at near 4% level. Obviously, this has happened at the decline of the 12 months Euribor in the beginning of the year. But the cost of funding, the reference rate for cost of funding are closer to the reference rate that is tied to a majority of our lending. So that has an impact on the fourth quarter versus third quarter a bit. And then we have some hedges that have some negative impact on the fourth quarter numbers. But again, I would say that the main reason is the slightly more expensive funding cost. However, those who have read already our outlook for 2023, we are still believing in higher NII in 2024 versus 2023. So maybe that tells a story that we still believe in higher NII in the coming quarters. Net commission income mix. Majority of our net commission income is coming from the asset management and then there, the assets under management, mutual funds, asset management and securities brokerage. However, we need to bear in mind that somewhat under half of the net commission income comes from the banking side, loan provisions, card provisions and other fees, so that is important source of commission income as well. Again, the assets under management, certain part of the business in terms of net subscription went really well. However, we have also seen redemptions on the international institutions side. And again, fourth quarter from market point of view was good. However, at the beginning of the year wasn't so. Despite the fact that the fourth quarter expenses were somewhat higher than in the third quarter, I would say that our comparable operating expenses are under control and moving to the right direction. Looking at now the fourth quarter this year over the last year versus fourth quarter 2022, personnel costs were slightly higher this year. However, if you look at the development of the base salaries, the underlying trend is actually pointed downwards. But we need to bear in mind that, well, we have a very good year behind us. So the variable pay costs are somewhat higher in the fourth quarter and last year reservations. And at the same time, also, we have seen labor union agreement related raises in 2023 that had an impact on the payroll costs. And then we had the kind of a EUR 1 million pool that we promised to pay to our personnel and plus the site cost. So we are paying EUR 1 million to the personnel, and those costs have been accrued in operational costs in the third and fourth quarter having an impact that is a onetime nature. So that explains the personnel costs. again, underlying trend is pointing to the right direction. IT expenses somewhat higher. We have invested in IT. We need to do it to improve the customer experience, to catch up with certain things that we need to fix also from the regulatory point of view. And there, actually, we do have also some cost of a onetime nature. Regarding the outsourcing arrangements that we did in the fourth quarter of 2023, there are some [ stay-on ] type of arrangements that we now paid on the fourth quarter related to the outsourcing activities that we did earlier. Other operating expenses under last year levels, we have cost efficiency programs ongoing and they start to show up in the numbers as well. Comparable operating profit improving in all business segments. I'm not going to repeat what I just said, but obviously, the net interest income driving the development mainly affecting the banking business. However, also shows up in the private banking business in net interest income there. And then if you ask why is the group functions and eliminations going more negative? Actually, we do leave some of the hedging costs in treasury. So certain part of the financing cost has to do with our internal pricing structure, [ touch ] pricing funding structure, we leave them in the Treasury and they show up there, including the Central Bank financing costs, the TLTRO. The quality of the credit portfolio remains solid. As I said earlier, EUR 7 million went through P&L. So the changes that we saw through our models and individuals, credits still happy with this development, given the market conditions and what has happened to the interest rate and so forth, our loan-to-value, 42% is very healthy. And the increase in the loan book in stage 3 mainly relates to the fact that our card business has increased considerably. And we don't actually carry the risk there over 90 days. So we sell everything is overdue over 90 days forward. But that is the development behind the stage 3. We are very happy with the customers we have got through the credit card business and the cross-selling has started. So the clientele that we get from there is something that we are pleased with. Balance sheet total, approximately EUR 12 billion. No major changes here, lending to the public that Juha showed already a picture, some growth there, again, driven by the corporate side, housing loans, housing loan market frozen, deposits somewhat under the level of beginning of the year. That was also expected with high interest rate, high cost of living and so forth. People are amortizing their housing loans and so forth, maybe some movement also from interest-free accounts to fixed income funds and so forth. So no worries there very much expected. And as I said, the Central Bank financing that was back in '22, beginning of '23, still EUR 800 million and now we are down to EUR 250 million, and that will disappear from the balance sheet towards the end of the year. Capital adequacy. Our CET1 ratio was 3.6 percentage points above the regulatory requirement, improved somewhat from the end of third quarter. But there, we need to bear in mind and according to our dividend policy, we pay out 60% to 80% of profit net income in form of dividends. And before the Board has decided what they're going to share to AGM, we need to deduct 80% from equity in capital adequacy calculations now the kind of Board has made a decision and proposes EUR 0.70 per share, which is, by the way, the record-high dividend. And now the deduction has been made according to the 60%, the EUR 0.70 represents 60% of the profit in total, that is approximately EUR 51 million that we have now deducted from own funds in capital adequacy calculations. Some increase in risk-weighted assets, by the way, in the fourth quarter, as pointed out here, and that comes from the increase in the corporate loan book plus some model changes that we have done in the risk control. Market sentiment, what comes to funding was more positive now on the fourth quarter. Long-term interest rates fell quite significantly. Everybody is now also waiting for the ECB actions. So let's see what happens with that one. During fourth quarter, we completed 4 senior preferred placement transactions, approximately EUR 162 million, maturities ranging from 2 to 7 years. In addition to the euro private placement transactions, we had some [ tractions ] in Norwegian crown. Liquidity is at a very good level. Still, this is important. The LCR ratio was 221% at the end of fourth quarter. And finally, the outlook. We do expect our comparable operating profit to be somewhat higher than in 2023. We reported EUR 108.4 million. To reach that, we do believe that we can still grow our net interest income despite the fact that the interest rates are declining. We need to bear in mind that quite a large portion of the housing loan book is tied to 12 months Euribor. When the interest rate fixing happens, then you kind of fix the interest rates at that point. So the current interest rate level carries us quite well forward, we have quite a substantial portion of our housing loans that are outstanding now in interest rate fixing in the second quarter. So that is one thing. And then at a certain point, when we get a little bit clearer direction from ECB regarding the shorter Euribor, obviously, that has an impact on our funding cost then as they are tied to 3 and 6 months Euribor. We are looking forward to see positive net subscriptions in 2024 and hopefully supported by some tailwind from the market, some positive market sentiment, so that could then help on top of the fact that we do expect the net subscriptions to be on a plus side. Same goes for the Life Insurance business, steady development at the sales side has worked well last year and that we expect to continue. Operating expenses. As said, we have efficiency programs ongoing. We expect them to be approximately at the same level despite ongoing inflation, a little bit calmer now maybe on that side. IT expenses somewhat higher. We need to invest to improve our product offering. We need to improve our customer experience and then do some catch-up on the regulatory investment side. So that still requires investments. And we believe and we hope that the impairments and provisions for credit losses remain at a modest level. There, we do believe that we see some increase given the current market environment. And then financial targets 2025, I think I promised that we will get back to this at a certain point, beginning of 2024, 2025 is not really long-term financial target anymore as we are approaching 2025 quite fast. However, we have decided that we get back to this one as our new CEO will now start in June. Obviously, we have started to update our long-term figures, and we are modeling and so forth. So the work is pretty much done according to the current strategy, but we will wait for Aleksi Lehtonen to start, and then we'll get back to the updated financial targets. That was my part. Thank you very much, and very happy to answer the questions that you may have.

Okay. If I start, Sauli Vilen from Inderes. About the inflation, what kind of cost pressures or cost inflation were all you see at the moment and how you see the trend going forward? Obviously, the trend is going down, but I guess is it like crushing down or slightly going down?

No, first of all, if I start from the personnel costs, we will see some labor union related increases till this year. They've been agreed. So that will have some impact. We have tried to tackle the inflation with the IT, the outsourcing agreements that we have done actually protect us somewhat towards the inflation, which is good. And obviously, then it's the general efficiency, but for example, rental costs and so forth, we have seen increases this year, and we see some pressure, but it should ease up from year 2023. So that's why we do believe that we can keep the costs flat with some increase in IT.

Do you need to make any extra measures in order to maintain the flat when we see the current cost pressure trend. So I mean, are all the efficiency measures already. like being done, so to speak?

Yes, they are ongoing. And if we say it's flat, actually, then we need to do kind of corresponding cuts on the other side to cut the kind of the inflation impact. As said, I think the pressure is very much on the IT side. And then the consultancy costs and so forth, we have kind of gone through everything there and try to find efficiencies in our operations from that point of view as well, and I do think that we have progressed quite well.

Then on the asset management side, your new Head of Asset Management started just recently, should we expect like an update on the asset management before the bigger strategy update at the group level? Or are they like bundled in? So if you also do some changes in the asset management strategy, they would come out in, well, at the same time with the group.

Yes. I mean, Kati just started. So I don't want to put any pressure on her to give any major comments regarding the change strategy. So maybe we'll get back to this one together with the first quarter results presentation, but we'll let her take a look at the product offering and so forth and make conclusions. But right now, there is no pressure to change the strategy and so forth. Our product offering is competitive and good. And we need to be effective with selling. And hopefully, the market conditions are supporting the growth. But we'll get back to that after Kati has been with us a little bit longer time.

Then if I may continue on the asset management side, I mean let's start with how happy are you with the new sales of the asset management in '23 overall?

I'm actually quite pleased with the Private Banking and domestic institutions. They were on plus, the market conditions in the beginning of the year were not easy. And the redemptions that we've seen on the international institution side, obviously, they were quite heavily on minus, but it's partially driven by the fact that actually the [ EMD ] has performed quite well. So partially, I believe, invested in other asset classes, cannot comment on our customers' actions, but that is something that we believe and I do believe will improve now in 2024.

Then finally, about possibility of the buybacks. I mean obviously, you have basically stated that dividends are the way to go with your group. But I mean you're trading roughly at par with NAV and NAV and in that looking through that perspective, it actually would make sense maybe to use also buybacks as a tool to reward shareholders. So is this a topic you have discussed internally? Or is it like completely off the table, even though the Board has given the authority to do that, I guess.

Yes. Well, obviously, nothing is out of the table completely. This is just one of the kind of tools or actions that obviously is discussed, but no decisions. Obviously, on that side, otherwise, we would have leaked some, like I disclosed it. So no actions, but obviously, I hear what you're saying. Are there other questions?

Okay. We have a couple of questions online. Let's start with Antti Saari at OP Bank asking. When are you planning to publish your new financial targets?

I think I answered to that one as well after our new CEO has started. Again, we have done a lot of modeling, obviously already in-house, but we would like him to take a look at the kind of obviously, the strategic targets and the financial targets. So that is on pipeline, as I said, 2025 is getting very close. So yes, we are modeling right now until 2028 internally.

Okay. And then the next one, you just mentioned in the report that you are planning to start basic IT system project early 2024. And I think this refers to life insurance company. Could you tell more about this and how much it will cost?

Sure. If it's about life insurance business, life insurance company kind of, it's something that we need to do. It's a mandatory, it's a kind of regulatory issue. We need to renew our base insurance system there. It is costly. First of all, I am not going to disclose a number. We have started the project. And obviously, in the beginning, we activate the costs for the investment. So it won't have impact on our depreciation now in the coming year as it's a big project that takes a while to get ready. But maybe in 2 to 3 years, it will have some impact on life insurance company depreciations when the investment is taken into use. But it's a sizable investment, and that is something that we need to do.

Okay. And then the next one. Could you give us estimates about effects of becoming Basel IV to your CET1 capitalization?

Not yet. We are working on it. We do not have a clear enough picture of the impact of the Basel IV. So I wouldn't like to give an estimate before. I'm having little bit more certainty what will be the outcome. But yes, the work is ongoing, obviously.

Okay. And then you haven't given too much information regarding your interest rate hedges, which makes it more difficult to estimate the impact of becoming interest rate cuts to your net interest income. Information about interest rate sensitivity to NII would be appreciated. Okay?

Yes, I understand that it would be very useful to get the impact of the hedges. I'm not going to disclose it. It's a long topic we can discuss about it like a couple of hours now. There are different type of hedges. We don't have a trading book to start with. So we are just hedging the risk. Obviously, it hasn't been easy with the recent, again, ECB communication and the movement of the interest rates to kind of take a stand on where it is exactly going, we have model now NII, we are combining the forward rate curve to our balance sheet assumptions. So we are modeling both the balance sheet and then update the forward curve. And based on that, we have an interest rate hedging policy, and that gives us some flexibility to kind of decide what is the kind of level of hedging that we do. It does not have a major, major impact on the NII, maybe some impact negative or positive. But again, I'm not going to open that one as it's a complicated matter and we have different type of hedges to protect our NII. But again, our guidance for next year is that the NII is we expect it to be higher than 2023. So from that point of view, I do believe that the hedges that we have done are supporting that.

And then there is one more question from Antti Saari and then a couple of others as well. In the guidance, you stated that net interest income will grow slightly in 2024. But what about actual quarterly NII? Are we already past the peak?

I think I partially answered to the question. As I said, one thing is that, that is supporting the NII is that the housing loan book is mainly tied to the 12 months Euribor, which means that it carries over until the point when the interest rate fixing, annual interest rate fixing happens. And that is one thing unless everybody starts to amortize their loans very fast. Then the other thing is, obviously, when do the 3 months and 6 months Euribor start going down, would be helpful to get some communication from the ECB in terms of when do the interest rate cuts happen. They should start to go down as well. So that helps the market-based funding. So I would say that there's a good chance that we can keep the NII at least flat looking at the current levels, but obviously, that is tied to the market rates. And we cannot hedge the customer behavior. That is the thing that you cannot really hedge almost everything else you can hedge. And that has to do with the deposits. How big of a portion of our NII, our funding is in deposits and how well we succeed to keep our customer deposits in the development has been okay so far.

Then we have a couple of questions from [ Casper Melas ] at Inderes. I think you pretty much answered this one, but maybe you have something to add. Why was your net interest income below last quarter's level?

I think I answered to that one, actually, it was a funding cost added into the cost of deposit market-based funding and some impact that is coming that came from hedges.

Okay. And the next one. Is it reasonable to assume that the average interest rate on customer loans will still rise in the next quarters, while deposit rates should stay more or less stable.

No. Well, it partially depends on the kind of structure of the loan book. Obviously, the margins on the corporate side and some other credits and housing loans are higher. So it's a bit of a mix of the product mix question. The housing loan margins are already at a very competitive level. So you cannot go really down much from current levels. So maybe that's my answer.

Okay. How do you expect your credit volumes to develop this year?

Credit volumes related to the general growth in loan book or I cannot really answer to the question directly. What type of credits are we talking about?

Okay. We move on to the next question. Is the EUR 1.1 million cost related to the reorganization included in personnel costs? Do you expect additional expenses in the upcoming quarters?

Anything that is considered of a onetime from the point of view that it is not continuing, that has to do with kind of a restructuring and so forth that is booked under the kind of comparable operating profit. But as I said, there are certain costs also in the fourth quarter that are of onetime in nature but are considered as a kind of ongoing business and they are in the ongoing business costs and cannot really comment on 2024, whether there's going to be some onetime costs, but those costs that are considered onetime and reported under the comparable operating profit, they have to do with the restructuring and the fact that you have a cost and you don't have a corresponding income on the other side.

I have 2 more questions here. What was included in the EUR 1.1 million impairment losses on intangible assets?

That was a project that was partially discontinued that's coming from the IT side.

Okay. And could you remind why IT costs are much higher in fourth quarter than in other quarters?

No. Well, that has to do with the fact that we discussed, as I said, there's some onetime arrangements related to the outsourcing and then just somewhat higher. It was a bit of a kind of phasing timing issue. However, I do think that the IT costs were quite well under control. And I do believe that we see some increase in 2024, as we pointed out in our guidance. But again, in the fourth quarter, we had also some onetime elements in the running costs.

No more questions here.

Thank you very much for the audience here and everybody who has been following us online and have a very good rest of the day. Thank you very much.