Aprila Bank ASA (APRILA) Earnings Call Transcript & Summary

Hello, everybody. I'm Halvor Lande, CEO of Aprila Bank.

And I'm Kjetil Barli, CFO of Aprila Bank.

Welcome to Aprila Bank Q4 presentation. We will present some forward-looking statements today. They are based on what we have seen so far and what we are aware of as of today. And based on that information, we are still very bullish about our business going forward. I'll start by giving you the highlights of the quarter. Kjetil here will go through the financials in more detail. And I'll end with presenting our priorities for 2023 and also our guiding for 2023. If you have any questions during the presentation, please send them to the email address on the screen, [email protected], and we'll address them in the Q&A session at the end. As usual, a quick recap of Aprila Bank. We're a digital bank providing credit to a large and underserved market of small and medium-sized businesses. What makes us distinctive is aggressive investments in automation to continuously drive down cost to serve and increase scalability of our business model. And secondly, ever-improving machine learning algorithms that allows us to predict increasingly and more accurately the risk of individual businesses, so we can offer loans in real time. And over the last few months, we have even started disbursing loans in real time. We're currently automatically disbursing 5% of the loans that are being approved and aim to increase this going forward. But this is, of course, only for the customer with the lowest risks, both from an AML perspective and credit perspective. As of the end of the year, we have 6,171 business customers. Our total income run rate was NOK 128 million. Historically we have reported gross income run rate. But we are changing the total income because it's a more important number. Total income is what we actually live off. It's gross income minus direct variable costs such as interest payments to our deposit customers and commissions to our partners. Our gross income run rate right now, by the way, is around NOK 160 million. Our cost income for 2022, last 12 months, is 72%. Historically here, we also used a different metric, gross margin before loan losses. Now that our fixed costs are less than 60% of our income, we believe that it's more relevant to use cost income. This is also what other banks are using. And the cost in this ratio includes all costs such as salaries, marketing, vendors and even depreciations. In 2022, our total cost was NOK 69 million. Our total income was NOK 96 million and 72% is just the ratio between those 2 numbers. And last but not least, according to our customers, so far we have contributed to creating or preserving more than 3,000 jobs among our 6,000 business customers. There is a lot of talk about the challenging business environment, both in Norway and globally right now. We also see that among our customers. Their average -- they were able to grow their average revenues by 3% from Q4 2021 to Q4 2022. But 3% is actually less than the inflation for the same period, which was 6%. So there is a small contraction. However, the good news is that our customers, these small businesses, are incredibly adaptable. They're managing to control their costs, and they've actually succeeded in improving their margins from an average 6% to an average 7% in this challenging business environment. So they're doing still well. The 2 industries that have not been able to improve their margins is construction and IT and communication. Construction still have okay margin and are still growing. ICT, IT and communication is the one that's struggling the most with slight negative margins and slight negative growth. However, they have been able to significantly improve their capitalization in the period. So all in all, due to the adaptability and robustness of our business customers, we don't expect a large wave of bankruptcies going forward. Our operating profit for Q4 was negative NOK 1.4 million, and this was primarily due to the fact that we spent almost NOK 5 million on marketing in general and brand building in particular. The reason we spent so much on brand building was that we found out that only 5% of small businesses had heard about Aprila Bank. And like personal customers, business customers, many business customers are skeptical about entering into a customer relationship with a bank that they have never heard about. And we are very happy with the results from this marketing push. We had a record of 525 new credit line customers onboarded in the quarter versus a previous record of 489. Our gross lending grew 13% in the quarter to NOK 673 million, and our total income grew 18% in the quarter to approximately NOK 30 million. We have also completed the capital raise with Visma and our 2 largest shareholders, meaning that we are well capitalized for future strong growth. As I mentioned, we spent NOK 4.8 million on marketing in Q4. This -- of the 525 new customers, 371 of them were through our own channels, aprila.no. And of those 371 million, 333, we believe, came as a direct result of our marketing activities. We estimate the customer lifetime value of these 333 customers to NOK 12.9 million, meaning that marketing generated over NOK 8 million in net value and had the return on marketing investments of 168% in the quarter. So we believe that the marketing money were well spent. Our total income grew by 81% over the last 12 months. Spot factoring or invoice sales has been a run-off product ever since Visma gave the original announcement that they were going to do it themselves. And we are currently working closely together with Visma to decide if we're going to start reinvesting in spot factoring or if we're going to focus on another working capital product for distribution within ERP systems. We'll make the final decision on this during Q2. But so far, our current top priority product is still credit line and credit line is still growing at more than 100% on an annual basis. And the growth in credit line is now primarily driven by customer growth, which sees no signs of slowing down. Our costs in Q4 did grow faster than income in Q4. But as I said, this is because of the big marketing push that we did in Q4, and that is continuing into Q1. However, as I mentioned earlier, this marketing spent created NOK 13 million in new value, so I'm comfortable with our spend development. That being said, cost income will go dramatically down from current levels. Cost income measured on a quarterly basis, as we saw on the last page, is volatile because Q1 and Q4 are typically big marketing quarters for us. And in Q2, we only pay 2 months of salary. But if we look at cost income on a trailing 12-months basis, this will be -- this will continuously decline. And we expect cost income for 2023 to be around 60%, meaning that this graph will continue and show around 60% cost income trailing at the Q4 presentation for 2023. We realized NOK 600,000 in losses in Q4, and we increased our loan loss provisions with NOK 9.1 million. So we had NOK 9.6 million in booked losses, which corresponds to 27% of gross revenues in the quarter. And this brings our net interest margin after losses back up to 13.1% in Q4 and 13.3% in 2022 overall. The 15% net interest margin after losses is a stretch goal, I agree. But even if we're only able to keep delivering 13%, we will have -- we have a marginal return on equity contribution of 65%, which is incredible capital economics. And this page nicely illustrates our strategy and business model. We're spending approximately 12% of our total income on marketing, including brand building. And since our total income then grows, this means that we have accelerating growth in total income, at least in nominal terms. Then we are investing continuously and aggressively in automation and self-service, driving down variable costs. The combination of rapidly growing income and declining variable costs means that our cost income is falling continuously as I explained. And then the fact that our machine learning models are continuously improving and getting more and more data to learn from means that our losses as share of income is also declining continuously. Of course there will be quarter-to-quarter variations, but they will be falling on an annual basis. For 2022, our losses were 37% of total income, not to be confused with 31% of gross income, as I showed in the previous page. The combination of nominally accelerating growth, continuously improving cost and loss ratio means that our bottom line will also continuously accelerate on a nominal basis. And just to illustrate where this is going, in 2 years' time, 2025, I expect our total income to be well over 300%. I expect our cost-to-income ratio to be around 30%, same with the losses to income ratio, giving a net margin of around 40% and net profit of well over NOK 120 million. And how are we doing on capitalization, Kjetil?

Well, at the end of 2022, our CET1 ratio was 36.3%, which is well above the current capital requirement of 19.5%. We expect the Norwegian FSA to determine a revised Pillar 2 buffer for Aprila during 2023. And as mentioned, when we presented the financial results for the third quarter, we have been informed by the FSA through their final report from the on-site inspection held in 2022, that they will get back to us with a letter on retail classification. We have not received this letter yet, and we have decided to apply retail classification at year-end 2022. Without retail classification, our capital ratio would have been 6 percentage points lower. Now let's move on to the key figures for the third quarter. At the end of the quarter, we had 6,190 unique customers and the gross lending balance was NOK 673 million. In the upper right chart, we see that total income has amounted to NOK 29.7 million in the quarter, which implies a year-over-year growth of more than 80% -- 81%, as Halvor mentioned. Cost income in the lower left chart came in at 72%. Cost income was high in Q4 and will be high in Q1 due to high marketing spend. And as Halvor mentioned, we spent NOK 4.8 million on marketing in Q4 and plan to spend even more in Q1. Next chart, loan losses came in as expected at 6.1% of gross loans. And finally, profit after tax came in at minus NOK 1.4 million, which was in line with our expectations. In 2022, we added more than 1,400 new credit line customers, ending the year with 3,660 accounts. 86% of the customer accounts had a drawdown at the end of the quarter. The average balance per account reached 167,000 and the average drawdown reached 195,000. Spot factoring, we stopped onboarding on new spot factoring accounts from Visma 1 year ago, in February last year. So the churn has now resulted in a negative growth in new accounts over the past year. We purchased invoices with a total nominal value of NOK 157 million in the quarter compared to NOK 139 million in the third quarter. Spot factoring accounted for 16% of gross income in the quarter. And although volumes are declining on this product, the product profitability is very strong with a gross margin close to 50%. We have a close and ongoing dialogue with Visma on the future of this product, and we'll decide what to do by June this year. Loan losses, we booked loan losses of NOK 9.6 million in the quarter, of which NOK 9.1 million were loan loss provisions and NOK 0.6 million were net realized losses. In the upper right chart, we see a seemingly negative development in days past due. However, the 1 to 30-day bucket, which is not included in the chart, has improved. So if you look at the performing part of the loan book, it has been very stable at 88% over the past year and 12% done in DPD 1 plus. Loan losses measured in percent of gross income were 27% in the quarter. And at the end of the quarter, the ratio of loan loss allowances to gross loans was 9%. So I think that was the most important figures for the fourth quarter, Halvor. So I'll yield the stage back to you now.

Thank you. So we have not yet seen any increase in competition in our segment, but we are pretty sure it will come sooner or later, especially once we start to deliver solid and accelerating profits. Therefore our top priority for the first half of 2023 is to widen our competitive advantage with full focus on automation, streamlining and simplification and continued improvements in our machine learning models. This will also improve our scalability so that we're ready to take on more growth while keeping costs under control. But even given the 2 priorities above, I'm still confident that we'll deliver a decent profit for 2023 and being positioned for accelerating profit margins going forward. In terms of our guiding, we expect our total income run rate to be over NOK 170 million at the end of the year and above NOK 135 million at the end of this quarter. As I mentioned earlier, we expect our cost income for 2023 to be around 60% and falling down to 70% trailing last 12 months by the end of this quarter. And we expect to have around 5,000 credit line customers, which credit line is still our top priority product, 5,000 by the end of the year and around 4,000 by the end of this quarter. So again, we're ready to take your questions. Send them on the email address shown on the screen. So let's move over to Per Christian for the Q&A.

Halvor, DNB has discontinued the distribution agreement, where DNB distributes Aprila credit line to DNB customers. How important was this agreement for the growth in Aprila?

So I will start by saying, we're very happy about the partnership that we have with DNB. We believe that it was extremely beneficial from a brand building and reputation point of view. But your question in terms of growth contribution, it was quite marginal. About 2% of our lending balance is from DNB customers that we got through the DNB collaboration.

And we will continue to serve those customers.

Yes. absolutely.

DNB state the intention was to learn. They're very clear about that. And now that they have learned enough, will -- is it likely that they can become a competitor of Aprila?

So when we entered into the agreement, both DNB and we were extremely conscious about DNB not getting the opportunity to learn anything about our technology or machine learning models or anything like that. And we obviously kept that at the forefront through the partnership. So I'm not concerned that they will copy our technology and start offering lots and lots of small businesses. And I think the main learning for DNB was that if you start -- if you offer loan to really small businesses, you actually have to do pretty intensive marketing in order to sell it. And it's not according to DNB policy to market loans. So I'm not too concerned about competition from DNB going forward.

We have a question here from [ Herman Sal ] Equity Research at Pareto Securities. You probably, Kjetil, could you please shed some light on your staffing plans going forward and repeat the number of employees at Q3 and then Q4 end?

Yes. Of course, end of Q3 last year, we were 26 FTEs, end of Q4 last year, we were 29 FTEs. So we added 3 FTEs in the quarter.

And any newly hired so far this year. That was the next question.

Yes. So during 2023, we expect to add 7 new FTEs. We will end in 2023 with 36 and 4 of these new FTEs joined this quarter. During Q1, we had 4 new FTEs, so will be 33 at the end of the quarter. And then we'll add 3 more over the next 3 quarters.

And these are developers?

Yes. It's product and tech, it's the department where most of these new headcounts or employees have started. We will also add one resource on credit, one resource on decision science. And we also got to FTEs from Visma Finance Former Head of Legal and business developer in the product and tech deal.

Probably even technology management.

And the next question is, how should we think about the necessary marketing spend to maintain your growth rate in 2023, given that you attribute many onboarding Q4 to the increased marketing spend?

As I mentioned in the presentation, our growth will be relatively stable share, probably declining a little bit of our total income. So our marketing spend will be a relatively stable share of our total income. But in relative terms, the total income slowly declining. So all in all, that means that we're going to spend a little bit more, probably on marketing in 2023, but lower as share of total income, which will lead to – should lead to increased or accelerate nominal growth of new credit land customers.

I think it’s fair to add, Herman, that the marketing spend in Q4 and Q1 is mainly on brand building. So longer term, not necessarily all attributable directly to the number of customers onboarded in Q4. It will have an effect going forward and also affect money spent on conversions on digital marketing very positively as we go forward. So this is a longer investment.

Yes. It will lead to lower customer acquisition costs in the long term.

Yes. Thank you.

And also worth mentioning that it's actually a very good environment to the marketing right now because we get very good prices.

So we get a lot of sponsoring on NRK for a very good price.

Yes.

How do you see product yields, how to see product yields going forward? How are you adjusting to the increasing competition for deposit funding? And what were you paying on average for deposits at Q4 end?

Okay. I can answer that. How are we adjusting? We have increased our yield in proportionately according to the interest rate hikes that we have seen in 2022. So we expect the yield to -- on our net lending to increase around 3 percentage points during 2023. So will sort of catch up on the past interest rate increases. And that's on that in terms of our funding cost. That was the question, the funding cost in Q4?

Yes. And what were you paying on average for deposits at Q4 end?

Yes. We're paying 3.08% on deposits now to all customers. That's the same deposit rate for all customers. So 3.08%. And the last question was, if we have done something for the…

How are you adjusting to the increase in competition for deposit funding, that's just by raising rate?

Yes. We've actually -- we have -- to be fair, we haven't done too much there. We're currently offering, I think, the second-best interest rates on accounts that you can use freely. That's how we did. We're fortunate enough to have quite high lending products. So for the -- as of now, we have -- we keep our interest rate at a competitive level.

We're basically a big driver of the competition for deposits.

Sometimes we have to be…

With our rather high lending rates, it does not lead to an immediate margin squeeze, just increasing the deposit…

No. And we have increased our price list now. And it's going quite well, actually, I would say. So we're quite confident that we can catch up with the interest level increases that have -- that we have seen through 2022 and then probably we'll see during the first half of 2023.

One more question from Pareto Equity Research from Vegard Toverud. Costs seem to be guided at NOK 100 million by year-end '23. What drives the increase from the current level of NOK 85 million?

Well, marketing is one. We also have added FTEs 6 new -- other 7 new FTEs during 2023. And we also have adjusted the salaries somewhat for existing employees. That are the 3 main drivers of the cost in 2023.

There's a question from [indiscernible]. Who do you consider your largest competitors? And yes, there's more questions, but start with that one.

So we consider our largest competitor nonconsumption because most small businesses don't use loans or apply for loans because they are not aware that it's possible to get loans as a small business. And therefore they are instead living hand to mouth. And so that's exactly one of the big reasons we're spending so much on brand building and marketing to basically educate the market that now it is possible. And in most cases, is actually a very good idea to increase your working capital because it allows you to take opportunities, handle liquidity issues and basically grow faster and be more competitive.

His next question is, how are the increased rates affecting the net interest margin going forward? I guess you already answered that Kjetil that has been accounted for. How are your customers handling higher interest rates?

So the good news on that is that -- even though we have high interest rates, our typical loans are a much smaller share of the income of a small business customer than the loans of large companies relative to their revenues or the loans of consumers relative to their income. So it's not a major -- that's not a major contribution.

On average…

On Average. And Eric has a final question. Any plans for issuing new equity again?

We have no plans at the moment. Whether we will raise additional capital depends on our growth base, of course, as it does for all banks. And we currently have a very good headroom for further growth with 36.3% in CET1 ratio versus the current regulatory requirement of 19.5%.

I'll take some of my questions while I'm waiting for more questions to come in. Halvor, Visma invested in Aprila in December. How is this corporation proceeding?

It's going very well. We're still -- still in love.

Thank you.

And as I mentioned in the presentation, working very closely together with customer research service, introduced to really find out what type of working capital product would be most attractive for distribution and use within inside online accounting systems. And that's still ongoing. We're expecting to decide on that during the second quarter.

I'll add a couple of questions that I know that Vegard Toverud at Pareto will send us later if he hasn't yet. Kjetil what's the status on retail classification for the portfolio?

The latest?

Latest status on the retail classification?

Well, as I mentioned in the presentation, we used retail classification at the year-end 2022. We will consider to change in 2023. But at the moment, we have decided to continue to use it.

And the second question, you have previously mentioned NPL portfolio and nonperforming loan portfolio that you are considering by investing?

Yes.

What's the status on that?

Well, it hasn't been solved yet. It has taken longer than anticipated, but we still expect to sell portfolio of nonperforming loans. And I do hope and think that we will close the transaction during this quarter.

Halvor, how are the application volumes looking so far this year?

I'm glad you're asking for yourself. They are basically all-time high. So looking very good coming into 2023.

So with all that marketing spend and that's a very good tailwind…

Is paying off well.

It's looking good. Okay. We haven't received any more questions now. Should we call it the day or should I have a -- take one more question?

Let's call it the day. It's already 10 to 11.

Okay. Thank you very much.

Thank you.