Aprila Bank ASA (APRILA) Earnings Call Transcript & Summary

I'm Halvor Lande, CEO of Aprila Bank.

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

Welcome to Aprila's Q2 presentation. [indiscernible] Okay. I'll just start by giving the presentation. There we go. So I will reiterate our guidance for 2024 today based on what we saw in Q2 and what we are aware as of today, we feel quite confident that we'll at least deliver on the 2024 guidance. Next page, I'll start by giving the highlights of the quarter. Kjetil will go through the financials in more details, and I'll conclude the presentation by presenting the status on our priorities and outlook for 2024. We are live from [ Nittedal ] today as you can understand. So if you have any questions during the presentation, please send them to the e-mail address on the screen, [email protected]. First, as usual, a quick recap of Aprila, we're a digital bank providing credit to a large and underserved market of small- and medium-sized businesses. There are 2 things that makes us distinctive. The first one is aggressive investments in automation and self-service to continuously drive down cost to serve and increase scalability. The result of this is that our cost as share of income, our cost-to-income ratio is continuously declining over time. And the second thing is ever-improving machine learning models that are becoming increasingly accurate in predicting outcomes and pricing risk. And the result of this is that our losses as share of income are also continuously declining over time. At the end of Q2, we had 6,302 business lending customers. That is a bit fewer than at the end of the second quarter, and the first quarter, and that's because we have now decommissioned spot factoring. However, we're still growing well on the credit line. And as a result, our total income run rate increased by NOK 10 million from this first quarter to NOK 205 million in the second quarter. Our cost income ratio is continuously declining. In the last 12 months, ending in Q2, our cost income ratio was 54%. And last but not least, according to our customers, so far we have contributed to creating or preserving 4,600 jobs among Norwegian small- and medium-sized businesses. Q2 was a very solid quarter. Our top priority for 2024 is to evolve our product offering in order to offer larger loans to larger businesses and build up an internal sales organization to target this customer segment. And this effort is already paying off. We had a record high lending growth of NOK 113 million in the second quarter. This corresponds to a 12% increase compared to the first quarter and a 33% increase since Q2 last year. Our total income grew by 5% in the quarter and 36% compared to the second quarter last year. In Q2, we only pay 2 months of salary. So our costs were NOK 3 million lower than in Q1, and our losses were also NOK 3 million lower than in Q1. And the combination of growing income, reducing costs and reducing losses led to an all-time high profit in the second quarter of NOK 14 million. NOK 14 million in profit corresponds to almost 21% return on equity. However, due to the artificially low cost in the second quarter and the fact that loan losses have a natural variability from quarter-to-quarter, I think it's more instructive to look at the return on equity over the last 12 months. And that was still above 15%, which places Aprila among the top-tier banks in the Nordics in terms of profitability. But what is really unique is the fact that we, in addition to this, are growing with 36% on the top line. And that combination of very high growth and very good profitability is, as far as I'm aware of, unprecedented in -- among the Nordic banks right now. And that to me is an indication that we have a very strong business model. The only problem with that business model is that it's very capital intensive. If we grow very, very fast over time, we are forced to raise more and more capital. However, with 15% return on equity, we can grow at 15% every year for [ eternity ] without having to raise more capital. Obviously, we want to grow a lot faster than 15%. Unfortunately, we did a capital raise in the first quarter, which means that we have now almost 40% more core equity than what we are required to have with our current lending balance, which means that we have plenty of room to grow faster than 15% going forward. In Q2, we have a record high number for the second quarter of credit line applications of 4,219 applications. However, due to the ongoing small business recession, the average credit quality of small businesses are deteriorating. As a result, we onboarded only a little more than 10% of the applications, 432 new credit line customers in the second quarter. So customer growth in Q2 was a bit soft. However, we are onboarding much on average, much larger customers now than we were before. Historically, our average credit line limit has been NOK 260,000. In Q2, our average credit line limit was over NOK 350,000. And as a result, we issued more than NOK 150 million in new credit line limit in the second quarter, and that is an all-time high for Aprila with a good margin. And that's the reason why balance is growing so fast is because of our focus on larger customers. As I mentioned, total income over the last 12 months grew at 36%. We have now decommissioned spot factoring. So this will -- spot factoring will no longer be a drag on our income growth going forward. And credit line is still growing at a healthy 40% per year. And the growth in credit line is a combination of both customer growth of 23% per year as well as growth in income per credit line customer of 14% per year. The income per credit line customer growth is driven by the fact that we are giving larger credit lines to larger customers. The cost to income ratio in Q2 was 46%, which is 1 percentage point lower than Q2 last year despite the fact that we have more than doubled our sales and marketing investments in the same quarter. So that's a good indication that our income is growing a lot faster than our cost base. And if we look at the trailing 12-month cost to income ratio that has been steadily declining for the last 2 years and ended up, as I said, at 54% at the end of the second quarter. Losses as share of income are a lot more volatile than cost income. But they are also on a downward trend, as you can see on this chart. In Q2, losses as share of income ended up at 26%, which is slightly below expectations, which is the orange line on this chart, but well within the expected natural variability, which is indicated by the 2 black lines on this chart. Going forward, we expect, on average, 2/3 of the quarterly losses going forward to be between the 2 black lines in -- on average, 1 out of every 6 quarters, our losses will be higher than the top black line and 1 out of 6 quarters, the losses will be lower than the bottom black line. But as you can see, the black lines are getting closer together as a result of loss volatility also declining in combination with lower losses. And we still have, yes, next page. And if we look at our -- when we have growing income, continuously declining cost to income ratio and continuously declining losses as share of income, that obviously translates into accelerating profits. In the last 12 months ending in the second quarter our total income was NOK 189 million. Cost as share of this was 54% and losses as share of this over the last 12 months was 27%. That adds up to 81%. The remaining 19% of the total income is NOK 37 million, which ends up on our bottom line, which is our accumulated profit over the last 12 months. And we still have plenty of room to grow faster than a return on equity of 15% on the top line going forward. Kjetil, do you want to elaborate on our capital position.

Of course. So at the end of the second quarter, Aprila's CET1 ratio was 31.6%. The bank's overall capital requirement was 22.9%. 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 26.2% at the end of Q2. Now let's move on to the key figures from the quarter. Starting with the upper left chart, we had around 6,300 unique customers at the end of the second quarter. The soft development over the past year and the decline from the previous quarter is a result of a continued ramp down of spot factoring. Spot factoring was discontinued as of July 1st. In the chart in the middle of the top row, we see that gross lending increased NOK 113 million in the quarter, reaching close to NOK 1.1 billion at the end of the quarter. Gross lending on the credit line product reached NOK 1,052 million at the end of the quarter after adding NOK 123 million in new gross lending. In the upper right chart, we see that total income amounted to NOK 51 million in the quarter, which implies a year-on-year growth of 36%. Cost to income lower left chart, came in at 46%, primarily driven by lower salary expenses as employees receive holiday pay in June and the cost of holiday pay is booked in connection with salary payments in the remaining 11 months. Next chart, loan losses came in at an annualized 5.2% of gross lending, a solid improvement from Q1. And finally, profit before and after tax came in at NOK 14 million, equivalent to an annualized return of equity slightly above 20%. Looking slightly closer at the credit line product, we ended the quarter with 5,290 accounts, adding net 201 new accounts in the quarter. The average balance per account at the end of the quarter was NOK 199,000, as shown in the lower left chart. And the average drawdown reached NOK 229,000 as we can see in the lower right chart. Increased average balance per account is a result of our increased focus on attracting and acquiring larger customers. Moving on to spot factoring. We purchased invoices with a total nominal value of NOK 49 million in the quarter compared to NOK 79 million in the previous quarter. We purchased the last invoice on July 1, and the product is now in a winding down stage. We booked loan losses of NOK 13.3 million in the quarter, of which NOK 10.9 million in loan loss provisions and NOK 2.4 million in net realized losses. In the upper right chart, we see that we have experienced a very positive development in delinquency rates in the quarter. All non-default DPD groups have improved. Loans that are more than 90 days past due increased with 0.4 percentage points, which is a significant improvement compared to the past few quarters, and the positive trend has continued into the third quarter. So that concludes the presentations of the key figures from the second quarter. Halvor, over to you now for the remaining part of the presentation.

Thank you, Kjetil. Our top priority for 2024 is to build the foundation for accelerated growth by evolving our credit line to be able to offer larger loans to larger customers and building up an internal sales organization to target that customer segment. And I'm extremely pleased to see that although these are efforts that are underway, they're already giving real impact in terms of accelerated balance growth in the second quarter. So we're off to a very good start. In parallel, we are working on extending our competitive advantage and improving long-term profitability by continuous investments in automation, continuous improvements and development of our machine learning models and continuous optimization of our marketing efforts. In Aprila, we have used AI and machine learning as an integrated part of our business model from day 1, but that has primarily been for credit decisioning. With the very exciting advent of new large language model tools, we see a potential to use and leverage AI to an even greater extent than we have been so far. Where we see the greatest potential right as of today is to increase our capacity in engineering and customer operations. And we are very practically working on automating parts of the work that we're doing in AML and credit decisioning for larger customers. The cool thing about this is that this allows us to continue increasing our capacity significantly, thus allowing us to grow faster and serve more customers without having to hire a lot more employees. We have previously guided on a total income run rate at the end of the year of NOK 225 million, a cost income ratio for 2024, around 57%. And at least 5,700 credit line customers at the end of the year. We are tracking ahead of the plan that we made to create this guidance. So I feel very confident that we will at least deliver on this guidance. That concludes our presentation. If you still have any questions, please send them to [email protected].

And now I welcome Israr Khan, who is our Chief Product and Technology Officer and also one of the co-founders of Aprila. Israr, do you have any questions for us?

Yes. First of all, thank you, Halvor, for the introduction and also Kjetil for the presentation. It was very well executed one. I have some questions here. And the first one is that we've mentioned that there's a slowdown in customer growth due to the fact that the SME recession. Do we see any changes to this trend moving forward?

I think we might be starting to see a positive development, and that is primarily illustrated in what Kjetil talked about. The fact that our DPD delinquencies are improving in the second quarter. To me, that's an indication that the worst of the SME recession might be behind us. And that's a good thing because that's been -- this recession has been going on for 1.5 years.

And a follow-up on that question. Do you see any differences in the market segments that we are entering. So we have started entering the larger tickets or larger segments, and we already catered the small ones. Do you have any comments?

Yes. I think based on what we see so far, -- it looks like the slightly larger, medium-sized businesses are less affected by the recession than the smaller businesses, which have been our bread and butter...

One of the things that I noted was that our ticket sizes have increased a lot, just some rough figures is almost 40% larger now. And we've previously communicated that we will focus on large engagements. And the question is that now that we can offer loans up to NOK 50 million, could you share some more information about the progress about how the reception has been in this slightly larger segments?

Yes. So it's actually been, I think, a great positive surprise to see how well this effort is already playing out. Historically, the larger ticket sizes of NOK 1 million and up, we're less than 30% of our balance growth from quarter-to-quarter. In the second quarter, they were close -- that was close to 60% of our balance growth. So it's a market shift. That being said, even though we want to focus on larger tickets, we still intend to focus on smaller businesses because that's -- those are the ones that are struggling the most and where the lack of working capital is the biggest pain and issue in terms of Norwegian productivity growth. But we want to do that in parallel with also focusing on slightly larger businesses.

A follow-up on that question then. Why do larger companies or companies with larger tickets find Aprila's offering attractive?

So there are several reasons. The most quoted reason is that it's just extremely fast and frictionless. You can get the NOK 10 million credit line in less than a week, which is -- and in some cases, just a couple of days, which is significantly faster than traditional banks. The second reason is that we do have a higher approval rate for these kind of loans than compared to traditional banks. So basically a medium-sized business has a bigger probability of getting a loan if they come to Aprila than a traditional bank. The third reason is that most of these businesses already have existing financing from their main bank, but they want to have more working capital and they're not getting it from their main bank. With our models, we can typically offer additional capital compared to what they already have. So for businesses that need additional financing, that's an important reason. And the fourth reason is that for businesses that want to have a credit line that they use for short-term financing and seasonal liquidity variations, it's actually much cheaper to have a credit line with Aprila than a traditional bank, although our interest rates typically are higher. And the reason is that we have 0 in setup fee. We don't have any limit fees like [indiscernible]. So if you're not drawing up the credit line to max and keeping it there the whole time, it's typically a lot more cost-effective to have a credit line of the build.

Exactly. So -- and also resonates well with the saying that even in the larger segment, time to decision, which we obviously excel in is quite important, while in the smaller segment, maybe time to money is even more important. Okay. Thank you. Kjetil, I have a question for you. One of the figures that I and probably some of our investors as well, probably annotated is that our balance is increasing rapidly. However, if you look at the income growth, it hasn't kept pace. And why is that? Somewhat speculative is because we're having lower yields or lower interest rates? Any comments?

Well, our yield is slightly lower in Q2 than in Q1. But the main reason is that income growth always lags behind balanced growth. And the reason for that is because balance is measured at the end of the quarter and income is measured over the entire period or quarter.

So we get the balance increase day 1 and then the income trails follows.

Yes. And typically, if you get much of the balance growth at the end of the quarter, you will get the full effect of the balance growth in the next quarter or the next period.

All right. Thank you, Kjetil. And then another follow-up in regards to income as well. The cost to income ratio has been steadily declining and is now at an all-time low of 54%, which is very positive. So aside from loan loss provisions, which is a natural part of running a bank, do you foresee any changes in either costs or investments that can jeopardize or change this declining trend?

No, I don't. But we are guiding on a slightly higher cost to income ratio for the full 2024 than we had at the end of Q2 trailing 12 months. But in the long run, I am very confident that our cost to income ratio will continue to decline. And in fact, I actually think that our Aprila cost income -- for Aprila cost to income will become one of our key competitive advantages, particularly compared to the incumbent banks. And that's -- and the reason behind that is the scalability of our business model. We have a very high degree of automation and probably will have a higher degree of automation than most other lenders.

And that's a very nice. Thank you, Kjetil. And that's a very nice follow-up on that. However, we had our own slide on artificial intelligence in this presentation. And AI is unavoidable topic these days. And as you mentioned, Aprila has been an AI player, a native AI player from day 1, utilizing machine learning to do credit risk assessment based on our own models, based on proprietary data. And now the rise of generative AI and LLMs is coming. Can you tell us a bit more about how do Aprila and can Aprila, utilize these technologies going forward?

Yes. No, these technologies are incredibly exciting. So the way we are using it right now is, as I mentioned, to automate the writing of AML documentations. We're still making the decisions with humans, but a lot of the groundwork on writing it up is now being automated with large language models. And on the credit side, for larger customers where we're not integrated into the accounting systems, we typically have to ask for the latest account statements if it's large loans, we also asked for a budget. And historically, we have manually read through and interpreted on the quality control of that. And LLMs are actually very effective at automating a large part of that job. If the trend -- if the improvements in AI are continuing at the same rate they have for the last 2 years, I think they will over time, be able to automate more than 90% of what we're currently doing in Aprila. I think that's probably true for traditional banks as well, but traditional banks will never be able to let go of 90% of the workforce. We're not -- we don't have to do that because we can increase our number of customers with a factor of 10 or a factor of 100 and using AI to deliver the capacity we need to serve that, which I think is incredibly exciting looking forward.

Yes, I agree. So basically, you're also saying that in a near distant future, OpenAI Sora can replace the 3 of us during this presentation. And I guess that's probably also one of the things in regards to reducing or improving the cost to income ratio is exactly the use of more AI in operational processes. We're probably in a very good spot to take advantage of that. A recurring question and a hot topic amongst both Aprila as well as our investors has been the entry into new markets and then in regards to international expansion. That is a 2-legged question, both for taking new customer segments in new markets as well as probably trying to chase more regulatory beneficial concession or a banking license. Any updates on that topic, Halvor and Kjetil .

Yes. So we're still working on growing our market share in Norway. And our goal is to have a defensible #1 position in the Norwegian SME lending market, and there is plenty of room to grow here yet. So that's our current focus, and it's probably going to be our focus for at least the next 2 years. That being said, we are, of course, thinking about what is our next country going to be. And right now, the most -- the areas where I've been thinking most about lately is actually in Germany, which is the biggest market in Norway and has developed their digital maturity so that they are starting to become ready for our business model. Another incredibly exciting market is the U.S., particularly Texas, which is growing very fast and actually have relatively low intensity of competition compared to the other states in the U.S. on the SME lending side. So that's another interesting potential market for the future.

Interesting that you mentioned Texas, by the way. There are several famous companies moving over to Texas from a [Technical Difficulty], but that's an interesting topic. Okay. Thank you. I have another question, and then we also have a few questions that I would like to summarize from the audience as well. And then new products, new offering, new segments, what is Aprila doing on that topic these days.

Yes. So we are working on a new product within the same space, but we haven't finally decided on the time line for that product yet. So not ready to talk about that now.

All right. Here's another question from a long-term investor of us. And first of all, he would like to congratulate us for yet another record quarter. Thank you, [ Adil ]. And his question is, given that the credit models are proving themselves and that the onboarding process is best-in-class, thank you, are you seeing any interest around the tech from other players in neighborhood countries?

Yes. And the answer to that is yes. But our decision has been to keep focusing on our core business. And I think that's a good decision because as you can see, it is now becoming very, very scalable, very profitable and still growing fast. And I think that's in large part a result of the fact that we have been able to focus.

And I guess also definition of a very good strategy is also being able to see what you need to say no to and you're going to...

We learned that the hard way.

Yes, we did. I have another question here also. It's from [indiscernible]. And he would like to know a bit more about new and future competition from similar players, if any, and especially if we see anything from Swedish players.

Yes. So we haven't seen any new competition this quarter. We have -- I would say, we have a fairly competitive situation with -- in the small business and medium-sized lending business market, and I think our main competitors right now are Kredd from Sweden and Instabank here in Norway. However, the market is much, much bigger than the 3 of us can actually fully serve together. So I don't think it's a problem. It's more and good thing for Norwegian small- and medium-sized businesses that is now alternatives and a healthy competition. In terms of new competition, we're not aware of any incoming entrants. I don't think Norway is the most attractive market to go into for an international player because of the relatively small market size and also the fact that since our digital maturity in Norway is probably higher than any other market, it's actually pretty difficult to come from a more traditional market and try to compete in this market. So I'm not super concerned about a lot of new competition going forward. And I think the existing competition is very healthy.

Okay. Thank you, Halvor. Seems like questions are now running out. So seems like we have managed to build a solid, sustainable, high-growth business, building it brick by brick and seems like that -- even in these high pace growth and all cost environment. So I think we can conclude with that.

Thank you.

Thank you.