Aprila Bank ASA (APRILA) Earnings Call Transcript & Summary

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

I'm Kjetil Barli, Co-Founder and CFO of Aprila Bank.

Welcome to Aprila Bank's Q3 presentation. I will make some forward-looking statements and updated guiding today based on what we have seen so far and what we are aware of as of today. The future still looks very bright for Aprila. I'll start by giving the highlights of the quarter. Kjetil will present the financials in more detail. Then I'll present our priorities and outlook going forward. And finally, we'll take your questions. We are live. So if you have any questions during the presentation, please send them to the e-mail address on this screen, [email protected] and we'll address them in the Q&A session at the end. Quick recap about Aprila. We're a digital bank providing credit to SMBs. What makes us distinctive are 2 things. Number one, aggressive and continuous investments in automation and self-service to continuously reduce cost to serve and increase scalability. And number two, ever-improving machine learning algorithms to accurately predict outcomes and price risk so that we can give loan offers in real time. At the end of Q3, we had 6,787 business lending customers. Our total income run rate at the end of the quarter was NOK 185 million. That number is a bit inflated. I'll get back to that later. Our cost income ratio over the last 12 months is 62%, which is a 3 percentage point decrease since last quarter. And last but not least, according to our customers, we have so far contributed to creating or preserving almost 4,000 jobs by providing strongly needed working capital to small businesses in Norway. Another thing that makes us distinctive is that we are integrated into all the major ERP systems in Norway. This gives us real-time access to the accounting data of our customers. Currently, 1.5% of Norwegian SMBs are customers of Aprila. And they are a proportional representation of Norwegian small- and medium-sized businesses across geographies and industries. The accounting data from these businesses shows us that the business environment is still challenging for small businesses. The revenue growth for the last 12 months was actually negative by 1%, which corresponds to a 4% contraction in real terms. The only exception is real estate companies that are actually booming with a 17% revenue increase, whereas the category others, which consists of restaurants, hotel, transportation is doing okay with 4% nominal growth, equivalent to 1% in real terms. But retail, construction and IT are all contracting and construction is the one that is contracting the hardest with 5% nominal terms, 8% in real terms, whereas IT and retail are both falling by 3% in nominal terms and 6% in real terms. However, small businesses are again proving to be incredibly resilient. They yet again managed to improve their margins in this challenging business environment despite negative growth and rising prices, and they have maintained their level of capitalization. From a small business perspective, we are in a recession and we have been for the last year. But due to IFRS 9, we have already taken upfront loan loss provisions for this, and we don't expect any increases in our loan losses going forward. So how did Aprila do in this challenging business environment? Q3 was our second best quarter in history with net profit before and after tax of NOK 7.7 million. This is NOK 11 million better than Q3 last year. And the reason is that total income grew by NOK 17 million over the last year, whereas operating costs only grew by NOK 7 million. So results before loan losses improved by NOK 10 million. And in addition, losses in Q3 this year were actually NOK 1 million lower than Q3 last year. And the reason why the losses were lower was because of continued improvement in our machine learning models. The biggest improvement in this quarter was that we have now -- are now able to more accurately predict the lifetime PD of the customer at the time of onboarding, which leads to reduced Stage 2 loan loss provisions. Growth is still strong. Gross lending grew by 7% in the quarter and 45% over the last 12 months. Total income grew by 12% in the quarter and 66% over the last 12 months, and we are capitalized for continued strong growth going forward. Our CET1 ratio was 33.7% at the end of the quarter versus the requirement of 21.5% from the end of 2023. Kjetil will talk more about this later. I'll give you a second to admire my beautiful Mondrian bar chart. What this shows is that in Q3, we onboarded 484 new credit line customers. This is the same as Q2, but lower than Q3 last year, where we onboard 489 customers. The small decline relative to last year is because we have shifted our focus towards direct channel. So direct channel is customers that are coming directly to aprila.no as the result of our own marketing and sales efforts as opposed to customers or applications that are coming through our partner channels. We are interested or we are not interested in building up a strong position for aggregators and marketing agents as has happened in consumer finance in Norway. And if we look at the customers coming through our direct channel, which you can see in the solid line rectangles on this bar chart. We see that this strategy of more increase on direct channel and marketing is working. In Q3 this year, we got -- of the 484 customers, 417 came directly through aprila.no, whereas in Q3 last year, only 350 customers came directly through aprila.no. Our total income grew by 66% over the last 12 months, spot factoring, the black bars here is a run of product and is steadily declining towards zero. Our main focus is still credit line. Total income from credit line grew 67% over the last 4 quarters. And the other category, the light gray bars is primarily the returns on our liquidity portfolio, which is elevated because money market yields are currently high and increasing. And the growth in credit line is primarily driven by a number of customers, which has grown 50% over the last year. Interest rate margins are stable, but average size of credit lines are increasing, which is increasing the total income per customer. Cost income in Q3 was 57%, which is 10 percentage points lower than Q3 last year. And if we look at the trailing 12-months cost income, is steadily declining towards 60% at the end of this year, which is our target for the full year 2023. In Q3, we had NOK 10.4 million in reported losses, of which NOK 8.6 million was loan loss provisions. This corresponds to 25% -- sorry, 21% of gross income from lending in the quarter, which is in line with our target of loan losses being less than 25% of gross income. This resulted in net interest margin after losses of 14.9%, which is close to our target of 15% net interest margin after losses. So to summarize Q3, strong profitability improvements driven by continued strong income growth and reduced losses, and we are still well capitalized for future growth? Do you want to elaborate on our capital position, Kjetil?

Yes, of course. So at the end of the third quarter, Aprila CET1 ratio was 33.7%, which is well above the bank's capital requirement of 21.5% at year-end, given that Pillar 2 requirement remains at 4%. If you wonder why the ratio has increased in the third quarter when it has been declining for all the other periods in the chart on the left-hand side. The reason is that we have done an interim audit on the third quarter numbers. And with an interim audit and an approval from FSA, we can include the interim year-to-date profit in the calculation of common equity Tier 1 capital. We do not have the FSA approval yet since we received the auditor's endorsement yesterday. But we believe that including the year-to-date profit in the CET1 capital is the most correct representation, our CET1 ratio at the end Q3. Speaking of FSA, we expect them to determine a revised Pillar 2 requirement for Aprila before year-end. We have continued to use retail classification, and we look forward to see FSA's revised circular letter on the topic, which we believe that they will issue during 2024 prior to EU's implementation of the new banking package, which is expected to apply in EU from January 2025. Without retail classification, our capital ratio would have been 27.4% at the end of Q3. And now let's move on to the key figures for the quarter. Starting with the upper left chart, we had close to 6,800 unique customers at the end of the third quarter. The soft development from the second quarter is primarily due to off-boarding of spot factoring accounts. In the chart in the middle of the top row, we see that gross lending reached NOK 865 million, up from NOK 811 million at the end of Q2. In the upper right chart, we see that total income amounted to NOK 41.9 million in the quarter, which implies a year-on-year growth of 66%. Cost income, lower left chart, came in at 57%, 10 percentage points lower than third quarter last year. Next chart, loan losses came in at an annualized 5% of gross lending. And finally, profit before and after tax came in at NOK 7.7 million equivalent to a 15% annualized return on equity. Looking closer at the credit line product. We ended the quarter with 4,711 credit line accounts, adding net 329 new accounts in the quarter and close to 1,500 accounts over the past year. 86% of the customer accounts had a drawdown at the end of the quarter. The average balance per account was NOK 172,000 and the average drawdown reached NOK 201,000 at the end of the quarter. Moving on to spot factoring and purchased invoices with a total nominal value of NOK 108 million in the quarter compared to NOK 129 million in the previous quarter. Spot factoring accounted for 9% of gross income in the quarter. And at the end of the quarter, we had 2,699 open spot factoring accounts. Some more details on loan losses. We booked loan losses of NOK 10.4 million in the quarter, of which NOK 8.6 million in loan loss provisions and NOK 1.8 million in net realized losses. The loan loss provisions were positively impacted by the implementation of an improved PD model. For those of you who are interested in the details, we have included those in Note 3 in the interim report. Looking at the upper right chart, the days past June numbers weakened in the quarter. The ratio overdue claims to total claims increased from 13.5% to 15.6%. The ratio has improved after the end of the quarter and declined to 14.8% at the end of October. And on November 2, as Halvor mentioned, we sold NOK 28 million of gross loans and NPL portfolio equivalent to 3 percentage points of the lending book. So the ratio is currently around 12%, which is in line with the level at the end of Q1 this year. In the lower left chart, we see that loan losses in percent of gross income amounted to 21% in the quarter. And in the lower right chart, we see that loan losses measured in percent of gross lending came in at 5%. So that concludes the presentation of the key figures from the third quarter. Over to you now, Halvor, for the rest of the presentation.

Thank you, Kjetil. So in terms of priorities going forward, our focus remains unchanged. Number 1 is to widening our competitive advantage, which means full focus on automation, streamlining and simplification and continuous improvements of our machine learning models. This also improves our scalability, so we are ready to take on more growth. On the growth side, we are ramping up sales to accelerate the growth of larger credit line customers. Our long-term ambition is still that sales is going to be an as important contributor to growth as marketing. And we're building our sales team in the self-financing way so that we can continue to improve profitability also in the short term going forward, and we see this is already working. We have been doing active sales now for the last 2 months and we already see a significant improvement to growth. In terms of guiding at the Q2 presentation, we gave a guiding of NOK 165 million in total income run rate for Q3. And NOK 170 million by the end of the year. Our actual run rate at the end of Q3 ended up at NOK 185 million, way ahead of our guiding. This run rate is artificially inflated as I mentioned, due to the fact that it is based on the total income for the last month in the quarter, September. And in September, we had very strong returns in our liquidity portfolio. And in September is also when our interest income accrues on our own, the positive accounts in DNB. So if we adjust for those 2 effects, a more realistic run rate estimate at the end of Q3 was NOK 173 million, which is still above but more in line with our guiding. We did sell our NPL portfolio at the 2nd of November, as Kjetil mentioned. This will also contribute to a small drop of a couple of million kroner in total run rate income. So if we adjust for this as well, our run rate income at the start of Q4 is NOK 170 million, but growing, and we now expect it to be over NOK 180 million at the end of Q4. This means that we have lifted our end year total run rate income guiding by NOK 10 million since the Q2 presentation. Regarding for cost income and credit line accounts by year-end is unchanged. This concludes our presentation. We are still live. So if you have any -- if you still have any questions, send them to the e-mail address on the screen. And then Kjetil and I will move towards [indiscernible] in the lounge area to address your questions. Thank you.

Very solid numbers. Halvor, we have received a wonderful e-mail from our long-time shareholder [indiscernible], asking now that the future looks bright, will Aprila continue paying dividends?

Well, our mission is to solve the -- or address as large part as possible of the SMB funding gap in Europe, which is around EUR 450 billion.

Per year?

Yes. So that's -- we're not going to be able to do that alone, but we want to make a big impact, which means that we need to continue growing strongly for many, many years in the future. And that means that -- it's too early to start talking about dividends now. I don't think we're going to be paying dividends in the coming decade.

And just to add to Halvor's answer there. I agree with [indiscernible] that the future looks bright for Aprila, and it looks bright both in terms of growth and in terms of return on equity. And as far as my judgment goes, I think Aprila should keep the profits for the near- to mid-term in order to grow. We do see that -- we think we will grow double digits for several years ahead. And -- but once our growth drops down to single-digit growth numbers, I'm quite confident that Aprila will start paying dividend. But I think that's some years in the future. And at that time, we will have a very solid dividend capacity. And in addition, there might be a possibility to receive steady cash flow from Aprila issued financial instruments. Before that, we do want to optimize our capital structure going forward, potentially by issuing an addition Tier 1 bond in the near-to mid-term, which will give a possibility to receive a steady cash flow from affiliated financial instruments.

Good. We have a question from Vegard in Pareto. What's behind the revision of the NPL portfolio, both on the gain and the additional cost debt estimate.

Well, the first estimate was incorrect based on the misunderstanding internally. And the new number is correct. We know that now we have booked the numbers. So most importantly, we booked -- we sold the portfolio above book value. But we also incurred around NOK 1 million in expenses, which we will book during the fourth quarter. So that estimate is we will have a book again of NOK 500,000 on the lending book and then NOK 1 million with the expenses. So the net profit effect is minus NOK 500,000 in Q4.

In Q4. Okay. Very good. And again, from Vegard, growth was higher than you anticipated in the quarter. Why is that? Are there trends we should expect going forward?

Yes. So we try to be conservative on our guidance because we like to try to under promise and over deliver. And I think the -- or the biggest positive surprise in terms of the guiding, in addition to what I mentioned, the strong returns on our liquidity portfolio, which was not anticipated is our growth in larger customers, which is coming as a result of our ramping up sales, direct sales. So that's showing a very promising start and hopefully, we'll continue to be an even stronger growth contributor going forward.

Very good. And a question from another long-term shareholder, [ Adil ]. First of all, congratulations. He's asking what the NPL portfolio that Vegard also asked but he is also asking, is this now a part of the regular operations where we continue selling portfolios going forward?

Well, that's something that we are considering. Right now, our understanding is that the market for selling NPL portfolios is not at its best. So -- but we expect to enter into a forward floor agreement at some in the future, but not in the immediate near-term future.

And -- but also selling remaining NPL portfolio before we enter into floor agreement is probably something that we're going to do at some point.

Yes. Yes, that's the most probable development that we will do when more portfolio sell and then enter into for floor agreement.

So we're sort of getting better at this as well.

Yes, we will get better at this.

The last NOK 1 million in cost was that you mentioned there was expenses with that one time for legal advice, et cetera, what's the sort of expenses behind the NOK 1 million?

That's expenses that have accrued on the different customer accounts that we sold. And when we draw the collection case from the collection agency, we have to pay that cost that the debtor should have paid.

And we have to pay that to the collection agency.

All right. Okay. So that's the main part?

Yes.

Very good. Halvor, what's -- there's also marketing spend in the next quarters?

So even though our brand recognition is increasing, I think it was 13% last time we mentioned. We are still not a household name among small businesses in Norway. So we are going to continue to increase our marketing spend in line with our total income growth. From a seasonal perspective, the biggest demand and interest regarding working capital and loans is in Q4 and Q1. So that's where we allocate most of our marketing budget, which means that this quarter and first quarter next year, we are going to do significant marketing investments, which will impact our short-term P&L negatively, obviously. But as I've talked about before, our returns on marketing investments are phenomenal. And we believe they will continue to be and also contribute to accelerate growth going forward.

And in relation to that, how is the competitive landscape developing?

So the notable development over the last quarter is that Instabank has entered into the market with I think, very successful launch of their B2B lending product and NOK 35 million balance growth in the first quarter, which I think is impressive. They are focusing on a slightly larger segment than our main segment. Their average loan size was NOK 800,000, whereas our average loan size is NOK 170,000. But all in all, I think it's great news that more players and banks are entering into this market. The SME funding up in Norway is around NOK 30 billion. So there is plenty of unmet needs out there, plenty of room to grow for us and for others. And from our perspective, still very, very much a blue ocean market.

Very good. Kjetil, when you read newspapers, you get the impression that there is a very large increase in bankruptcies. Do you notice an increase in defaults?

No, not really. The default rates on our credit line customer base has been quite stable, around 1% from February this year and until October, which is the last month that where we have the dataset. It's been between 0.9% and 1.2%, and the last month was 1.2%. So it's a slight increase but still quite close to the average of slightly more than 1% on a monthly basis. So no signs on any in the declining or increasing default rates in our customer portfolio.

Kjetil, again, on November 6, you issued a trading update related to non-deal investor meetings. Anyone might be forgiven for assuming you're contemplating a capital raise?

Yes. Well, we're not at the moment. We -- ABG called us and asked if we would like to do a non-deal roadshow. We said yes, and we did that last week. We're also probably doing some investor meetings in Sweden next week. So nothing more than a non-deal roadshow, non-deal investor meetings.

I'm just spreading the good word.

Yes, exactly.

Halvor, what's the current run rate profitability if we stopped marketing spend and stopped hiring right now?

So as I mentioned, that's not an option since the SME funding we have still EUR 450 billion. But if we say that, okay, we're happy with the size we're at now and just stopped marketing and stopped hiring, over the next 12 months, our -- we would have a profit of NOK 52 million approximately. So that's the profitability level that we're currently at. Of course, we are not happy with that level with those numbers. We want to be much, much, much bigger. So that's why we continue to invest in marketing.

Very good. I haven't received any more questions. So I guess everyone is happy. So we call it quits.

Yes.

Thank you very much.

Thank you.