Aprila Bank ASA (APRILA) Earnings Call Transcript & Summary

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

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

Welcome to Aprila Bank's Q1 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 business going forward. I'll start by giving the highlights of the quarter, Kjetil will go into the financials in more detail, and I'll conclude by presenting our priorities and outlook for 2024. We are live from [ Nittedal ] today. So if you have any questions during or immediately after the presentation, please send them to the e-mail address on the screen, ir@aprila.no, and we'll address them at -- in the Q&A session at the end. Quick recap. Aprila Bank is a digital bank providing loans to a large and underserved market of small and medium businesses. What makes us distinctive are 2 things. Number one, aggressive and continuous investments in automation to continuously drive down cost to serve and reduce -- and increase scalability. This allows us to continuously reduce cost/income ratio over time. The second thing is ever-improving machine learning models that allows us to increasingly accurately predicts outcomes and price risk, which enables us to have a continuously reduced loss income ratio over time. At the end of Q1, we had 6,815 business lending customers. Our total income run rate was NOK 195 million, which is up from NOK 188 million in the previous quarter. Our cost/income ratio over the last 12 months is 55%, which is down 4 percentage points from the previous quarter. And last but not least, according to our customers, Aprila Bank has so far contributed to creating or preserving almost 4,600 jobs by providing sorely needed working capital to small businesses. And this is more needed than ever. Small businesses have been in a recession for the last 6 quarters, with flattish revenue development. But in this quarter, we actually saw a steep contraction, 9% in nominal terms and with over 4% inflation, that corresponds to a 13% contraction in real terms. And about 1.5% on our region businesses are already customers of Aprila and our customers are representative -- representation of Norwegian businesses across geographies and across industries. So this is what looks like for small businesses right now. We are integrated into all the major ERP systems in Norway, which gives us this unique and detailed insight into the financial performance of our customers and in Norwegian small businesses in general. The hardest hit sectors over the last year are retail and construction, which both declined more than 10% nominally and almost 20% in real terms. However, and I know I sound like a broken record saying this, small businesses are yet again proving to be incredibly resilient. Despite falling demand and increasing prices, they have yet again managed to improve their margins and have used these margins to strengthen their capitalization. So I'm not concerned that we're going to see a massive wave of bankruptcies going forward. So how did Aprila do in this business environment? Our customer growth was normal, 491 new credit line customers, but the average utilization in credit line dropped from 72% to 70%. And our interpretation is that this is due to the business environment, where customers are prioritizing profitability over growth opportunities. The result of this is that balance only grew 6% in the quarter and 29% over the last year. Total income only grew 3% in the quarter, but still at a healthy 44% over the last year. Overall, growth was not super impressive, but it is a result of our current focus. The focus for 2024 is to evolve our offering to serve larger businesses, gradually building up sales capacity in parallel. We made good progress in Q1, and I expect growth to start picking up towards the end of the year. Naturally, as a result of the business environment, we have seen default, more defaults this quarter, which has resulted in higher loan losses than the last quarters. In Q1, we had NOK 16.4 million in loan losses, which corresponds to a loss income ratio of 34%. The last 2 quarters, we only had 22% and 24% loss ratio, respectively. That being said, this is within normal quarterly volatility. We still expect loss ratio to decline over time, but with quarter-to-quarter variations. In sum, our net profit was NOK 5.2 million, which is lower than the last 3 quarters, but ahead of our internal budget. So I'm overall content with the corporate. We also conducted a private placement of NOK 43 million to cover expected lending growth going forward. And we received an assessment from the FSA with a Pillar 2 requirement of 5.4% and the Pillar 2 guidance of 1.5%. Kjetil will talk more about this later. In Q1, as I said, we onboarded 491 new credit line customers. This is slightly more than the last 3 quarters, but 6% less than we onboarded in Q1 last year. There are 3 reasons for this. Number one is the more challenging business environment, which means that the higher share of businesses don't have sufficiently strong fundamentals, like positive equity, to qualify for a loan even in Aprila, and also guarantors not being sufficiently confident to vouch for the credit worthiness of their business through personal guarantees. The second reason is that, as our PD models are becoming increasingly precise, we are becoming slightly more selective, which results in higher credit quality over time. And to illustrate both of the above points, in Q1 last year, our overall approval rate was 53%. In this quarter, we only had 45% approval rate. And the third reason why total customer growth is flat is our reduced focus on partner channels. We are prioritizing direct channels. And the reason for this is that we don't want the same thing to happen in business lending that has happened in consumer lending, where aggregators and distributors have the majority of the power in the marketplace. The good news is that the number of direct channel customers are increasing every quarter compared to the same quarter the previous year. In Q1 last year, we did a big marketing investment of NOK 6 million. This quarter, we spent less than NOK 5 million on marketing but still managed to get more direct channel customers than in Q1 last year, which is a good sign that our marketing effectiveness continues to increase. As I said, our total income grew by 44% over the last 12 months. Spot factoring is still [ around ] our product, and we have informed our customers and partners that we will no longer be supporting this product after this quarter this year. Our main focus right now is credit line. Total income from credit line grew 49% over the last 4 quarters. Of the total income category on this page, the light gray boxes on the left chart, is primarily the returns of our liquidity portfolio, which were a little bit compressed in Q1 due to increased interest rate expectations in the market. The growth in credit line is still primarily driven by a number of customers which grew 28% over the last year. Our interest rate margins are stable, but the average size of the credit line are increasing in line with our strategy, which is increasing total income per customer. As we are focusing more on larger loans, I expect average income per credit line customer to be the biggest growth contributor over the next couple of years. Cost/income in the quarter was 56%, which is 21 percentage points lower than Q1 last year. And if we look at the trailing 12-month cost/income ratio, this has been steadily declining for the last 2 years and ended up at 55% for the last 12 months. However, this will probably increase temporarily going forward as we're ramping up the organization to be able to offer larger loans to larger customers. Losses are a lot more volatile than cost/income ratio but are also on a downward trend despite the relatively high losses in Q1. Going forward, we expect approximately 1/3 of the quarterly losses to be outside the black band on this diagram, and it will be the same probability of being under the lowest black curve as over the highest black curve. So in the next 2 to 3 quarters, our loss ratio will typically be between 22% and 35% over time. We expect loss ratio to continue to decline and be between 23% and 28%, with an expectation of 25%. The result of total income growing, cost income declining and loss ratio declining over time is, of course, that our profitability continues to improve. However, we are currently discontinuing spot factoring, and investing heavily in developing products and processes to be able to serve larger loans to larger businesses. So I expect the profitability trend to be roughly flat for the next 3 quarters and then start climbing again in 2025. Kjetil, do you want to give an update on our capital situation and the SREP from FSA?

Of course. So at the end of the first quarter, Aprila's CET1 ratio was 34.8%, The CET1 capital increased during the quarter as a result of a private placement raising NOK 43 million. We have received FSA's final SREP assessment and the bank's new overall capital requirement is 22.9%. On top of the OCR, FSA expects Aprila to maintain a buffer of 1.5%. So the bank will, in effect, be required to maintain a total capital ratio above 24.4%. The final requirement is 6 basis points lower than the draft requirement that we received in February and communicated in connection with the presentation of Q4 '23. We have continued to use retail classification, and we look forward to see FSA's revised circular letter on the topic. Without retail classification, our capital ratio would have been 28.8% at the end of Q1. Now let's move on to the key figures from the quarter. Starting with the upper left chart, we had around 6,800 unique customers at the end of the fourth quarter -- first quarter. The soft development from the previous quarter is a result of a continued ramp-down of spot factoring. In the chart in the middle of the top row, we see that gross lending reached NOK 966 million, up from NOK 909 million in the previous quarter. Gross lending on the credit line product reached NOK 929 million at the end of the quarter after adding NOK 66 million in new gross lending. In the upper right chart, we see that total income amounted to NOK 48.7 million this quarter, which implies a year-on-year growth of 44%. Cost to income, lower left chart, came in at 56%. As Halvor mentioned, 21 percentage points lower than the first quarter last year. Next chart, loan losses came in at an annualized 7% of gross lending. This is higher than the past few quarters and caused by a larger-than-normal share of our lending balance going into default. I will get back to this later in the presentation. And finally, profit before and after tax came in at NOK 5.2 million, equivalent to 9% annualized return on equity. Looking slightly closer at the credit line product. We surpassed 5,000 credit line accounts in the quarter and ended the quarter with 5,089 accounts, adding net 217 new accounts in the quarter. The average balance per account at the end of the quarter was 183,000 as shown in the lower left chart, and the average drawdown reached 211,000 as we can see in the lower right chart. So the average loan size is still quite small, but it is continuously increasing. Moving on to spot factoring, we purchased invoices with a total nominal value of NOK 79 million in the quarter compared to NOK 111 million in the previous quarter. Spot factoring accounted for 5% of gross income in the quarter. And at the end of the quarter, we had around 2,300 open spot factoring accounts. We booked loan losses of NOK 16.4 million in the quarter, of which NOK 14.9 million in loan loss provisions and NOK 1.6 million in net realized losses. As you can see, this is higher than what we have seen in the past few quarters. The high loan loss provisions were, first and foremost, driven by defaults among the larger-than-normal share of our lending book. This is also reflected in the upper right chart where we see that loans that are more than 90 days past due, which by definition are default, increased from 7.7% at the end of Q4 to 10% at the end of Q1. On the positive side, we see that the 2 buckets containing loans that are less than 60 days past due have improved. This is an indication that things are not getting worse in near term. In fact, in April, we saw a significant improvement in delinquency rates and ended the month with overdue loans at 14.6% of the lending book compared to 16.4% at the end of March. So things look much better today than it did at the end of the quarter. So that concludes the presentation of the key figures from the first quarter. Halvor, over to you now for the remaining part of the presentation.

Thank you, Kjetil. The outlook for the year is unchanged, but I will repeat it and give an update of the progress towards the guidance. As we see from the quarterly number of new credit line customers, we may have reached saturation or how fast we can grow in the segment, small loans to small businesses. However, we believe there is a significant opportunity in larger loans, NOK 2 million to NOK 10 million towards slightly larger businesses with NOK 10 billion to NOK 100 million revenue. But this requires a different way of acquiring comers, 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. That includes building up a sales engine targeted towards larger businesses, evolve our product offering in terms of collateral and pricing to meet the needs in the segment for larger loans, and develop a streamlined application process for large loans so that we can handle these give applications at scale. All of these initiatives are progressing well according to plan. However, it is a big change and requires time, so don't expect to see a big increase in balance growth over the next 2 quarters. But we have early signs of results that are very encouraging. If we are successful, we should be able to increase our balance growth significantly over the next year. In parallel, we continue to work on widening our competitive advantage in small business loans and optimizing our business model in terms of risk-based pricing, automation and marketing, to continue to improve profitability over time. Our guiding for 2024 is unchanged. To repeat, in 2024, we're expecting moderate growth of approximately NOK 40 million in run rate income, which means that 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 in 2024. This is much slower than what we have grown historically. And the reason is that we're shutting down spot factoring in this quarter and investing heavily in laying the foundation for accelerated growth in the future. We are gradually increasing headcount in sales, marketing, engineering and credit to get in position to grow fast and scalable in the larger loan segment. So from a cost efficiency perspective, we're only going to see moderate improvements in 2024 compared to 2023, targeting a cost/income ratio for the full year of 57%. In terms of customer growth, we plan to add net 900 customers this year, of which approximately 100 large customers with NOK 2 million or more in credit limit. In Q1, we added net 270 credit line customers, so ahead of plan overall; and net 11 large customers, which is slightly behind the full year plan. So far into the year, the large customers already comprise 28% of the balance growth, and we hope this ratio will increase to 50% during the year. That concludes the presentation.

[Operator Instructions] Per Christian, have we received any questions?

Yes, we have. I'll let Kjetil read. Well, I'll ask you first, how do you see the competitive landscape developing this year?

Yes. So for the small business segment and small loans, we still see an increasing competition which is -- especially from Kredd and Instabank, which is actually great news for small businesses because it really increases the availability of working capital. So we are actually happy about that, even though it doesn't -- not necessarily good for us, but good for the economy. But when it comes to the segment for what we call larger businesses, which are actually still small, NOK 10 million to NOK 100 million, NOK 2 million to NOK 10 million loans, we don't see any increased competition or activity. More in the other direction, the traditional banks seem to be more hesitant about lending out. So -- and this market is much bigger. And the total funding gap for small- and medium-sized businesses in Norway is probably around NOK 30 billion. So there is plenty of opportunity for us to grow still.

Good news. Very good news. Okay, Kjetil, Vegard from Pareto asks, "There seems to be some differences in the equity requirement to meet the Pillar 2 requirements, will we be able to meet this?"

With additional Tier 1 and Tier 2 capital or only CET1? Well, our requirement needs to be met only with CET1 capital. That differs from other banks. Normally, you can cover 56.25% of the requirements with CET1 and the remaining part with Tier 1 and Tier 2. But for our part, we need to cover the full Pillar 2 requirement with common equity Tier 1 capital.

As of now.

As of now.