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 our Q1 presentation. We will present some forward-looking statements today. They are based on what we have seen and what we are aware of as of now. And based on that information, we're still very bullish about Aprila going forward. I'll start by giving the highlights of the quarter. Kjetil will go into the financials in more detail. I'll present our priorities and outlook going forward and we will answer your questions. This presentation is not live. We did not manage to book the studio in time. So we recorded this presentation, Thursday last week. That means we will not do a live Q&A session at the end. But right now, we're sitting in front of our computers waiting for your questions. So if you have any questions during the presentation, send them to ir@aprila.no and we'll get back to you in real time. A quick recap. We're a digital bank, providing loans to small- and medium-sized businesses. What makes us distinctive is continuous and aggressive focus on automation to continuously drive down cost to serve and increase scalability and ever-improving machine learning algorithms to predict outcomes and price risk in real time so that we can offer customers loans in seconds. At the end of Q1, we had 6,554 business lending customers, which was up from 6,171 at the end of Q4. Our total income run rate was NOK 158 million, up from NOK 128 million at the end of 2022. And our cost income over the last 12 months is 69%, which is a 3 percentage point improvement or reduction since 2022. And last but not least, according to our customers, so far, we have contributed to creating or preserving almost 3,400 jobs. If we look at the macro picture, the business environment is still challenging for small businesses. Our customers only had 1% revenue growth in nominal terms from Q1 last year, 2022 to Q1 this year, which actually corresponds to a 5% contraction in real terms. And retail -- the retail sector, even as negative growth in nominal terms. However, small businesses are again proving to be incredibly resilient. They managed to maintain their margins despite flat growth and rising prices and they have improved their capitalization. From a small business perspective, we're actually now in a recession with 2 quarters in a row with contracting revenues. But due to IFRS 9, we have already taken loan loss provisions upfront, and we don't expect any increase in losses going forward. Our operating profit in Q1 was minus NOK 2 million. This was primarily driven by the fact that we spent NOK 6 million in marketing in the quarter and the marketing spend was primarily in brand building. We are satisfied with the results. We onboarded 521 new credit line customers in the quarter. Our gross lending grew 71% from Q1 last year to almost NOK 750 million. And our total income grew 89% from Q1 last year to NOK 34 million in the quarter. We're well capitalized for future growth. Our CET-1 ratio is 35% versus the capital requirement of 20%. As I mentioned, in the first quarter, we spent an unprecedented NOK 6 million in marketing compared to just over NOK 3 million last year. If you look at the chart here, we only managed to onboard 39 more credit line customers than we did in the same quarter last year. But we are actually very happy with the growth. We had to increase our prices quite a lot due to rising interest rates and a more -- and higher loan loss provisions due to the more challenging business environment. This environment also created lower demand for loans among small businesses in Norway. The competition has increased. That is good news. It means that there are more actors who are now trying to address the SME funding gap in Norway, but it does make our job harder. And despite all this, we actually managed to increase the number of customers that we got as a result of our own marketing through aprila.no from 302 to 425. And we don't pay commissions on the customers that we get directly as a result of our own marketing. So this will improve our gross margins going forward. The estimated customer lifetime value of these 425 customers was NOK 21 million. Compare that to the marketing spend of NOK 6 million, and you see that we created a net value of NOK 15 million from our marketing activities in the quarter or -- which gives a 250% return on our marketing investment in the quarter, which is extraordinary. And most of the marketing investment was in brand building, which typically doesn't translate into short-term application volumes and customers. But drives long-term application volumes up and customer acquisition costs going forward down. So we are very happy with the quarter. Our total income grew by 89% from Q1 last year to this quarter. Spot factoring has been a runoff product ever since Visma made the original announcement that they were going to do factoring themselves. Now we have merged with Visma Finance, but the focus together with Visma now is making the integration with credit line even closer. And 2 weeks ago, they reached a new milestone in that integration. So credit line is now very tightly integrated into Tripletex, meaning that Tripletex users can get a credit line offer from Aprila in just 15 seconds. And we're already seeing the result of this in terms of increasing application volumes from Tripletex. In parallel, we have decided to continue spot factoring. We are now making improvements to the product. We're still onboarding spot factoring customers in Fiken and might open up for new spot factoring customers in Visma in the future. But our current focus is on credit line and credit line is still growing at over 100% on an annual basis. Another thing that's growing fast is -- was our cost in Q1. I've already explained the big marketing part, but even excluding marketing, our total cost was NOK 20 million in Q1 compared to NOK 15 million in Q1 last year. This increase is driven by the fact that we have merged with Visma Finance and gotten 2 new FTEs from there. We've also hired more engineers and adjusted salaries for everybody. Going forward, costs will grow much slower than income as opposed to what happened from Q4 to Q1. And if you look at the trailing 12-month period, our cost/income is still continuously declining 69% for the last 4 quarters ending in Q1, and we are on track to achieving 60% cost/income for the year 2023. Our loan loss provisions in Q1 was NOK 8.9 million, plus NOK 1 million in realized losses. So finally, our losses were less than 25% of our gross income in the quarter and our net interest rate margin after losses was very close to our long-term target of 15%. Kjetil, do you want to talk about our capital situation?

Yes, of course. So at the end of Q1, Aprila CET-1 ratio was 35.1%, which is well above the current overall capital requirement of 20%. We expect FSA to determine a revised Pillar 2 requirement for Aprila during 2023. It is likely that the revised Pillar 2 requirement will impact the Bank's overall capital requirement. When it comes to retail classification, FSA mentioned in the report from last year's inspection that they would address this topic with us through a letter. We have not received this letter yet, so we have continued to use retail classification. Our understanding is that FSA intends to revise their guidelines on retail classification this year. As part of this process, Aprila has, along with other banks, been requested to provide additional information on this topic by the end of August. We intend to comply with this request, of course, and will provide FSA with the requested information. Without retail classification, our capital ratio would have been 28.6% at the end of the quarter. And this is a level which still provides headroom for further growth. Now let's proceed to the key figures for the first quarter. At the end of the quarter, we had close to 6,600 unique customers and a gross lending balance of very close to NOK 750 million. In the upper right chart, we see that total income amounted to NOK 33.9 million in the quarter, which implies a year-on-year growth of 89%. Cost/income, lower left chart, came in at 77% in the quarter. And it was high in Q1 due to 3 factors, as Halvor mentioned, brand building expenses, new FTEs and adjusted salaries. Loan losses next chart came in at an annualized 5.6% to gross loans, positively affected by the improved default definition. And finally, profit after tax amounted to minus NOK 2 million, which was better than we expected. Now let's look at the numbers for the credit line product. We have added around 1,400 new credit line accounts over the past 12 months, surpassing 4,000 accounts in the quarter and ending the quarter with 4,055 accounts. 87% of the customer accounts had a drawdown at the end of the quarter. The average balance per account reached NOK 170,000 and the average drawdown reached NOK 196,000. Moving on to spot factoring. We purchased invoices with a total nominal value of NOK 140 million in the quarter compared to NOK 157 million in the previous quarter. Those of you who follow these presentations regularly know that we stopped onboarding of new spot factoring accounts from Visma early 2022. So the churn has resulted in a negative growth in new accounts over the past year. We do not expect to resume onboarding of new spot factoring accounts in Visma in the near future and in the partnership with Visma, as Halvor mentioned, we currently focus on the credit line product. Spot factoring accounted for 12% of gross income in the quarter. And at the end of the quarter, we had 3,162 open spot factoring accounts. Some more details on loan losses. We booked loan losses of NOK 9.9 million in the quarter, of which NOK 8.9 million in loan loss provisions and NOK 1 million in net realized losses. Looking at the upper right chart, we see that the days past due numbers improved during the quarter. The ratio overdue claims to total claims decreased from 12.5% to 12.2%. And once the NPL divestment is finalized, the bucket of claims, more than 90 days past due will decrease. And speaking of that transaction, we have now agreed on the terms with the buyer. And in our opinion, there are only a few technicalities that remain before the agreement can be signed and the deal can be closed. The ratio of loan losses to gross income in the lower left chart was 24% in the quarter. And at the end of the quarter, the ratio of loan loss allowances to gross loans was 9.4%, as you can see from the lower right chart. So that concludes the presentation of the key figures from the first quarter. So Halvor, over to you now for the next part of the presentation.

Thank you, Kjetil. As I mentioned, we now see increasing competition in this space for lending to small businesses in Norway, which is great news. That really solves one of the big problems in the Norwegian economy, which is SME funding gap. We are #1 in this market, and we want to stay #1. So the focus is still to continue widening our competitive advantage compared to the other lenders. And the way we're doing that is continued full focus on automation, streamlining and simplification and continued investments in an improvement of our machine learning models. This also improves our scalability, so we're ready to take on more growth going forward while keeping costs under control. We fully expect to deliver a decent profit for 2023 and be in position for accelerating profits going forward. We're keeping our guidance of more than NOK 170 million in total income run rate at the end of the year and 60% cost income for 2023. But we are now even more comfortable that we actually will achieve this and outperform it. When it comes to our guidance for the second quarter, the NOK 160 million plus in total income run rate guiding for Q2 might seem a bit conservative, but this is due to the fact that our total income run rate in Q1 was impacted by some positive one-off effects. The underlying run rate total income, excluding this one-off effect, was around NOK 147 million. So more than NOK 160 million in run rate at the end of Q2 is an indication that we believe that we'll have good underlying growth in Q2 as well. So all in all, 2023 looks like it's going to be a very good year for Aprila. Reminder, we're not really here right now. So if you have any questions, send them to our e-mail address, and we will get back to you as quickly as possible. Thank you so much for watching this recording. Thank you for your interest in Aprila and then closing the SME funding gap, and have a great day.