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's Q4 presentation. I will make some forward-looking statements today based on what we have seen so far and what we are aware of. As of today, we continue to be very optimistic about our business going forward. I'll start by giving you the highlights of the quarter. Kjetil will present the financials in more detail, and I'll conclude by presenting our priorities and guiding going forward. This presentation is recording from last week, so we will not have a Q&A session at the end, but we are available on our PCs waiting for your questions. So if you have any questions during or after the presentation, send them to [email protected], and we will address them in real time. Quick recap, Aprila Bank is 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 and self-service to continuously drive down cost to serve and increase scalability. And secondly, ever-improving machine learning models that allows us to become increasingly accurate in predicting outcomes and pricing risk, which again leads to losses relative to income steadily declining. At the end of Q4, we had 6,761 business lending customers. Our total income run rate was NOK 188 million. Our cost/income over the last 12 months was 59%, which is down 3 percentage points from last quarter. And last but not least, according to our customers, we have so far contributed to creating or preserving almost 4,300 jobs. 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. About 1.5% of Norwegian SMEs are customers of Aprila and these are a proportional representation of Norwegian businesses across geographies and industries. This accounting data show that the business environment continues to be challenging for small businesses. The average revenue growth over the last 12 months was nominally 1%, which is equivalent to a 4% contraction in real terms. From a small business perspective, we are still in the recession and have been for the last 5 quarters. The hardest hit sectors are IT with 18% contraction in real terms. Secondly, construction with 11% contraction in real term. And third, services with 1% contraction in real terms. There are sectors that are growing in this environment, particularly real estate with 5% real income growth. Others, which include restaurants, hotels and transportation with 4% growth in real terms and retail with 2% growth. Despite the SME recession, small businesses are again proving to be incredibly resilient. They managed to yet again improve their margins despite negative growth and rising prices. The average EBIT margin in Q4 was 10%, up from 7% last year. And the biggest improvements were in real estate with 11% margin improvement, retail with 6% margin improvement and services with 3% improvement. The IT sector had a 5% compression on average in EBIT margins. The capitalization is roughly stable at 28% equity over assets. IT has improved their capitalization, which offsets some of our concern in this sector. The biggest concern from a capitalization perspective is construction, which is now only at 17% average capitalization, and this is also where we are seeing the highest default rates currently. So how did Aprila doing in this challenging business environment. Q4 was the best quarter in our history with a net profit before and after tax of NOK 9.6 million. And this is the first time we are over NOK 8 million in net profit. The main driver of the improvement was total income, which grew by NOK 18 million from NOK 30 million to NOK 47 million whereas operating costs only grew by NOK 6 million over the last 12 months. So this gave us the results before loan loss improvement of NOK 12 million. The losses were only NOK 1 million or 10% higher than in Q4 last year despite lending balance being 35% higher. And this is because of the continued improvements in our machine learning models, which means that we get continuously better at selecting the right customers and pricing risk accurately. This results in higher credit quality and loan losses over time growing slower than income. Therefore, operating profit was NOK 11 million higher in this quarter than the same quarter last year. Growth is still strong but has slowed down. Gross lending grew by 5% in the quarter, 35% over the last 12 months, and total income grew by 14% in the quarter, 60% over the last 12 months. We are well capitalized as of now, but we'll conduct a private placement of up to NOK 43 million to cover expected lending growth going forward. Kjetil will talk more about this later. In Q4, we own more than 481 new credit line customers. This is approximately the same as Q2 and Q3 this year, but 9% lower than Q4 last year. There's 3 explanations for this. Number one is the more challenging business environment. This results in higher share of businesses not having sufficiently strong fundamentals like positive equity to qualify for loans even in Aprila and guarantors being less confident about vouching for the creditworthiness of their company through personal guarantee. Second, Aprila has become more selective through improved PD models, which leads to higher credit quality in our portfolio. And third, reduced focus on partner channels and prioritizing direct channels, aprila.no. Reason, we don't want the same to happen in business lending that has happened in consumer finance where aggregators and distributors have the majority of the power in the marketplace. The good news is that the number of direct channel customers is increasing every quarter compared to the same quarter previous year, and we expect this to continue. Our total income grew by 60% over the last 12 months. Spot factoring is a runoff product and is steadily declining towards 0. Our main focus is still credit line. Total income from credit line grew 67% over the last 4 quarters. And the other category on the chart, the light gray boxes is primarily the returns of our liquidity portfolio, which are increasing because money market yields have increased. And the growth in credit line is primarily driven by a number of customers, which has grown 39% over the last year. Interest rate margins are stable, but average size of credit lines are increasing, which is increasing total income per customer. The cost/income in Q4 was 58%, which is 14 percentage points lower than Q4 last year. And the trailing 12 months cost/income ratio did decline below 60%, which was our target for 2023. This page nicely illustrates our strategy and business model. We spend around 10% to 12% of total income on sales and marketing. This gives us continuous and strong growth in total income. We invest aggressively in automation and self-service driving down variable costs, the combination of rapidly growing income and declining variable costs means that we have a continuously falling cost/income ratio. And our machine learning models learn continuously from increasing data, which gives us continuously falling losses on share income. The combination of strong income growth and continuously improving cost and loss ratio gives us an accelerating bottom line growth. Speaking of growth, do you want to elaborate on our capital position, Kjetil?

Of course. So at the end of the fourth quarter, Aprila's CET1 ratio was 29.9%, which is well above the current requirement of 21.5%. We received FSA's preliminary assessment of our pillars, Pillar 2 requirements and Pillar 2 guidance on the 8th of February. FSAs preliminary numbers are 6% and 1.5%, respectively, and we have been given 3 weeks to respond. We have continued to use retail classification, and we look forward to see FSA's revised circular letter on the topic. And we believe that FSA will issue this circular letter during 2024 prior to EU's implementation of the new banking package, which is expected to apply from January 2025. Without retail classification, our capital ratio would have been 24.8% at the end of Q4. As Halvor mentioned, we are doing a private placement of up to 10% of current outstanding shares equal to NOK 43 million at the share price of NOK 6.50. The proceeds will be used to cover capital requirements following from the expected lending growth. The subscription period starts today and ends on Thursday this week. Now let's move on to the key figures from the quarter. Starting with the upper left chart, we had close to 6,800 unique customers at the end of the fourth quarter. And the soft development from the third quarter is a result of the NPL transaction as well as a continued ramp down of spot factoring. In the chart, in the middle of the top row, we see that gross lending reached NOK 909 million, up from NOK 865 million in the previous quarter. Adjusted for the divestment of the nonperforming loans portfolio of NOK 28 million, gross lending grew by NOK 72 million in the quarter. In the upper right chart, we see that total income amounted to NOK 47.5 million in the quarter, which implies a year-on-year growth of 60%. Cost/income, lower left chart, came in at 58%, 14 percentage points lower than the fourth quarter last year. Next chart, loan losses came in at an annualized 4.8% of gross lending. And finally, profit before and after tax came in at NOK 9.6 million, equivalent to an ROE of 18%. Looking closer at the credit line product, we ended the quarter with 4,819 credit line accounts, adding net 108 new accounts in the quarter. The number of net new credit line accounts is, of course, affected by the NPL divestment, where 152 accounts were offboarded in connection with the transaction. The average balance per account at the end of the quarter was $179,000, as shown in the lower left chart, and the average drawdown reached 210,000 as you can see in the lower right chart. Moving on to spot factoring. We purchased invoices with a total nominal value of NOK 111 million in the quarter compared to NOK 108 million in the previous quarter. Spot factoring accounted for 8% of gross income. And at the end of the quarter, we had around 2,500 open spot factoring accounts. Loan losses. We booked loan losses of NOK 10.5 million in the quarter, of which minus NOK 9.8 million in loan loss provisions and NOK 20.4 million in net realized losses. Without the NPL divestment, loan losses would have been NOK 11.1 million, of which NOK 9.7 million in loan loss provisions and NOK 1.4 million in net realized losses. The loan loss provisions were positively impacted by a retraining of the PD model, which resulted in a lower share of loans in Stage 2. Looking at the upper right chart, the days past due numbers improved in the quarter due to the NPL divestments. The ratio of overdue claims to total claims decreased from 15.6% to 15.3%. However, the share of loans that are 1 to 60 days past due has increased around 1 percentage points from the end of Q3 to the end of Q4. We are monitoring this closely, and we have not seen any further weakening in these numbers so far in 2024. At the end of January this year, the ratio of overdue claims to total claims was 15.2% compared to 15.3% at the end of 2023. Back to the numbers of -- for the fourth quarter. In the lower left chart, we see that loan losses in percent of gross income amounted to 19% in the quarter. And in the lower right chart, we see that loan losses measured in percent of gross loans came in at 4.8%. So that concludes the presentation of the key figures from the fourth quarter. And Halvor, over to you now for the rest of the presentation.

Thank you. We are beginning to reach saturation of how much we can grow in the segment's small loans to small businesses. We believe there is a significant opportunity in bigger loans, NOK 2 million to NOK 10 million towards slightly larger businesses with NOK 10 million to NOK 100 million in revenue. But this requires a different way of acquiring customers, changes to the product and changes to the process. Our top priority for 2024 is to make these changes to lay the foundation for accelerated growth going forward. We'll build up the sales engine targeting -- targeted towards larger businesses. We'll evolve our product in terms of collaterals and pricing to meet the needs in the segment for larger loans. And we'll develop the streamlined application process for the large loans so that we can handle these kinds of applications at scale. This takes time, so don't expect to see a big increase in balance growth over the next 2 quarters. But we have built some experience during 2023, and this is very encouraging. If we are successful, we should be able to increase our balance growth significantly over the next 1 to 2 years. So this is our top priority. In parallel, we continue to work on widening our competitive advantage in small business loans, and we continue with optimizing our business model in terms of risk-based pricing, automation and marketing to continue to improve profitability over time. In 2024, we are expecting moderate growth of approximately NOK 40 million in run rate income, which means our total income in 2024 will be a bit over NOK 200 million. Thus, we're only expecting to grow around 25% on the top line this year. This is much lower than we have grown historically. One of the reasons for this is that we're hoping to get completely out of spot factoring during 2024, which will reduce the run rate income by about NOK 15 million. In addition, we see that utilization among existing customers is a downward trend due to the challenging business environment, and we expect this to continue. Most of the growth will come from new credit line customers and we expect approximately half of the growth to come from larger customers. But I don't think we'll get the full effect in terms of accelerated income growth from larger customers before next year. Therefore, we have a moderate total growth ambition for 2024. We are gradually increasing headcount in sales, marketing, engineering, credit and finance to lay the foundation for accelerated growth going forward. So from a cost efficiency perspective, we're only going to see moderate improvements in 2024, targeting a cost to income ratio of 57%. In terms of customer growth, we plan to add net 900 customers this year, of which about 100 of them will be large customers with NOK 2-or-more million in limit. This concludes our presentation. As I mentioned in the beginning, we are in front of our computers waiting for your questions. If you still have any, please send them to the e-mail address on the screen, [email protected], and we will reply quickly. Looking forward to see you all again and report on our progress in our Q1 presentation on May 15. Have a great day.