Aprila Bank ASA (APRILA) Earnings Call Transcript & Summary

Hello, everyone. I am Kjetil Barli, acting CEO of Aprila Bank.

And I am Espen Engelberg, acting CFO of Aprila Bank.

Welcome to Aprila Bank's Third Quarter Presentation. I will start by presenting the highlights of the quarter. Espen will present the financials in more detail and I will conclude by presenting our top priorities and an updated guiding. We are live from [ Nidan ] today, and we will have a Q&A session at the end of the presentation. So if you have any questions during or after the presentation, please send them to [email protected] or post them in the webcast chat, and we will address them in the Q&A session. First, a quick recap on Aprila. Aprila is a digital bank that provides credit to a large and unserved market of small- and medium-sized businesses. We have built a highly scalable banking platform that serves 5,500 business customers today and is designed to serve a significantly larger customer base. We use our own proprietary technology to predict outcomes and price risk. And now with around 6 years of history, these credit models have become very accurate. To the customer, Aprila represents speed, convenience and simplicity or as we say, in our Norwegian tagline, [Foreign Language]. Now let's have a look at the numbers from the third quarter. The lending growth in the third quarter was quite soft, 29% year-on-year and 3% in the quarter. Total income growth was slightly stronger, 32% year-on-year and 8% in the quarter. On the last day of October, we launched a new product, downpayment loan. I will get back to that on the next slide. Pre and post-tax profit came in at NOK 9 million. The bottom line was negatively affected by a NOK 2.7 million provision related to severance pay. Loan losses came in at NOK 15.6 million, of which NOK 13.5 million were loan loss provisions. Return on equity was 13% in the quarter and 15.2% over the last 12 months. Without the NOK 2.7 million one-off, ROE would have been 16.8% in the quarter. Our capital position is solid. At the end of the quarter, CET1 ratio was 31.2%. Aprila's overall capital requirement is currently 22.9%. Two weeks ago, we launched our second direct credit product, downpayment loan. Time flies and 5 years have already passed since we launched credit line, which was our first direct credit product. In my book, direct credit in the context of providing credit directly to the customer without intermediaries has 2 core products. So with downpayment loan, we go from having an incomplete product portfolio to having a complete product portfolio. In customer surveys, downpayment loan has always been the #1 choice among our customers when we have asked them what other products we should offer. Where a credit line, first and foremost, is meant to cover short-term liquidity needs, a down payment loan is better suited to finance longer-term investments. And now our customers can choose the product that suits their needs the best. Since the launch, we have seen a solid uptick in application volumes, and we are very curious and excited to see how this translates to customer and balance growth over the next few months. Now let's get back to the most important numbers from the third quarter. Starting with the first key driver of income, gross lending. At the end of the third quarter, gross lending had grown 29% year-on-year and 3% in the quarter. This is much softer than the growth we experienced in the second quarter and we believe that the main reason behind the soft growth is the effect of the current macroeconomic environment on our customers' credit appetite. Since we discontinued spot factoring this summer and the spot factoring balance is in decline, growth in credit line is better than the growth of the total lending book, 36% year-on-year and 4% in the quarter. Our focus on building a foundation for accelerated growth continues. And over the past few months, we have increased the maximum credit limit from NOK 5 million to NOK 15 million in June. We have tripled the sales team from 2 FTEs in May to 6 FTEs from September. And as already covered in detail, we launched the downpayment loan 2 weeks ago. Over to the second key driver of income, yield. With a controlled and gradual reduction of the credit risk in the lending book caused by the discontinuation of spot factoring and larger customers, the lending yield trends slightly downwards from 27.2% in Q2 to 26.7% in Q3. Our liquidity portfolio delivered an annualized return of 6.1% in the third quarter and funding costs stood at 4.9%. The interest rate on deposits was not changed in the quarter. The combination of our income-earning assets, the deposit balance and the yield levels are just presented, translated into a total income of NOK 55 million in the third quarter. This represents a growth of 32% year-on-year and 8% in the quarter. 87% of total income is net interest income, 7% is net commission income and the remaining 6% was net gains on financial instruments. Now let's look at how this translates into profit and return on equity. Over the past 12 months, total income has amounted to NOK 202 million. This represents a growth of 42% when compared to the 12-month period ending in Q3 last year. Over the same period, the sum of costs and losses relative to total income has declined from 91% at the end of Q3 last year to 80% at the end of Q3 this year. In turn, this translates into a last 12 months pretax profit increase from NOK 12 million at the end of Q3 last year to NOK 38 million at the end of Q3 this year and NOK 41 million if we exclude the one-off. This represents a return on equity of 16%, a number we believe will continue to improve going forward. And how much depends, first and foremost, on how fast we grow. As mentioned in the beginning, we had a solid capital position at the end of the third quarter with a CET1 ratio of 31.2%. The bank's overall capital requirement is 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 25.7% at the end of the quarter. Now Espen, can you take us through the remaining key figures from the third quarter?

Yes. Thank you, Kjetil. I will gladly do so. Starting with the upper left chart, we had 5,548 unique customers at the end of the third quarter. Spot factoring was discontinued July 1, so the decline from the previous quarter is an expected result. In the chart in the middle of the top row, we see that gross lending increased NOK 32 million in the quarter, surpassing NOK 1.1 billion at the end of the quarter. Gross lending on the credit line product grew NOK 46 million in the quarter. In the upper right chart, we see that the total income amounted to NOK 55.1 million in the quarter, which implies a year-on-year growth of 32%. Cost income in the lower left chart came in at 55%, 2 percentages lower than the third quarter last year. Next chart, loan losses came in at annualized 5.7% of gross lending. And finally, profit before and after tax came in at NOK 9.2 million, equal to an annualized return on equity at 13%. Looking closer at the credit line product, we ended the quarter with 5,422 accounts, adding net 132 new accounts in the quarter. The average balance per account at the end of the quarter was NOK 203,000 as shown in the lower left chart and the average drawdown reached NOK 235,000, as we can see in the lower right chart. The continued increased average balance per account is a result of our focus on attracting and acquiring larger customers where we, among other things, increased maximum credit limit from NOK 5 million to NOK 15 million in June. We booked loan losses of NOK 15.6 million in the quarter, of which NOK 13.5 million in loan loss provision and NOK 2 million in net realized losses. In the upper right chart, we see that the overall ratio of overdue claims to total claims increased from 15% to 15.3%. Loans that are more than 90 days past due increased 0.9 percentage points. And in all other groups, we have a positive development. That concludes the presentation of the key figures from the third quarter. Kjetil, over to you for the next part of the presentation.

Thank you, Espen. So I will reiterate our priorities for 2024 and present an updated guiding for the year. Our top priority in 2024 has been and still is to build a foundation for accelerated growth. We have improved our offering to larger customers by increasing the maximum credit limit, opening up for multiple guarantors and by introducing company guarantees. We have built an internal sales capacity to target these larger customers and we have launched down payment loan. The #2 priority is to strengthen competitive advantage. We've done several improvements to our machine learning models during the course of the year. We have also launched a completely new and exhaustive model that finds the optimal price for each loan. On the #3 priority, improve long-term profitability, we have automated 5 external reports, representing a total of 25 annual report submissions. We are developing new features based on large language models, which will reduce the manual workload in the AML team. And we are working on a new solution to reduce cognitive load in the credit team. In terms of guiding, we have changed our guiding on cost income from 57% to 55%. We have managed to keep our costs under control. So on this metric, we will deliver better than we set out to do. When it comes to the number of credit line accounts, we have reduced the number from more than 5,700 customers at year-end to around 5,600 customers. Please note that this number does not take into account the effect of a potential divestment of nonperforming loans. However, we keep the guiding on the total income run rate and believe that we will deliver a better bottom line than we forecasted at the beginning of the year. So this concludes the prepared part of our presentation. If you still have any questions, please send them to [email protected] or post them in the chat, and we will address them now.

Thank you, Espen and Kjetil for crisp presentation. And first and foremost, Espen, congratulations with the position as the acting CFO.

Thank you.

And obviously, to you, Kjetil, for the position as acting CEO.

Thank you, Israr.

I think one of the questions many people in the market might ask themselves is now that we have a new CEO in Aprila Bank, what kind of changes do you see yourself applying to already communicated goals or to the company? Do you care to comment on that?

Of course. So our financial ambition remains unchanged and that is to deliver a total income of NOK 3 billion by 2033. We made this ambition last year and along the way, deliver the sum of total income growth and ROE above 50% every year. So that's the ambition. I think we will just miss it this year but I believe we will reach it in the coming years.

Okay. Then a question to you, Espen. You've been an integrated part of the downpayment loans team. Now we had the product out in the market for a few weeks. Do you care to share some insights on the reception and how customers are giving us feedback on it?

Yes. We have finally launched the downpayment loans. The initial interest has been good. We have received a solid amount of applications. And the feedback from the onboarded customers have been very good. So it will be interesting to follow the performance over the next quarter but I am confident that we have launched a product that the customer wants.

And if you were to sort of very high level, describe the differences between the products, what would that be?

Well, there are three main differences. First, it's obviously a repayment plan. Second, the interest rates are slightly lower. And third, the loan sizes are slightly bigger.

Okay. So a great reception initially. And eventually, we will see, hopefully, very good statistics in large volumes on this product.

Absolutely.

Okay. I have a question to you, Kjetil. I think you mentioned that we are now product portfolio complete previously in the presentation. Does that mean that we will not do any more product development or feature development? Care to comment that?

That's a good question coming from the Chief Product and Technology Officer.

Obviously.

So I believe that we now have the two basic products that we need to serve our customers in our niche, which we call direct credit. That being said, we will, of course, develop the products further, and we will add new features, of course. And we might also use the products in different context than what we do today.

Okay. An example of that might be new kinds of collaterals, pledges to penetrate new market segments with the same products?

Yes. So that's an example of new features to the products, yes.

And we've talked a lot about larger customers and tickets and also features like new collateralizations for taking these markets and we are moving towards more and more larger customers. Does that mean that we are either losing focus on the smaller ones or focusing more on the larger ones? Care to comment?

Of course. So we definitely focus on getting better at serving larger customers. That does not mean that we forget about the smaller customers. Customers with an initial credit limit of less than NOK 2 million still represents 98.5% of our total exposure and customers with a lending balance, less than NOK 1 million, still accounts for more than 2/3 of our lending balance. And we should also remember that our customers also grow. So when we get better at serving the somewhat larger customers, we can continue to serve our smaller customers when they grow larger.

Exactly. When they become medium-sized businesses instead of the small ones when they first initially approach to us. Okay. And on the topic of acquiring customers, Kjetil, on one of the slides, you mentioned that we have increased our sales capacity significantly. I think you mentioned we went from 2 to 6 FTEs. When will we start seeing benefits from this initiative? Or are we already seeing benefits from it now?

I would say that we're already seeing the benefits and great value. As we mentioned, we've gone from 2 FTEs in sales in May to 6 FTEs in sales from September. So it's still early days, but the sales team actually closed deals representing a total credit limit of NOK 50 million in the third quarter. And already halfway into the fourth quarter, they have closed deals representing a total credit limit of NOK 60 million. So the pace is really picking up.

Still a very young team, but we have managed to gain quite some good results already.

Absolutely.

Okay. And then a question regarding pretax profit to you, Kjetil. The trailing 12 months pretax profit, the same period last year was around NOK 12 million. And if you look at where we are now, we are on NOK 38 million or NOK 41 million, if you disregard the one-off severance pay. Can you give me your estimates for 2024 as a whole?

Yes. Yes, I can. At the beginning of the year, we forecasted a pretax profit of NOK 30 million, and I believe I mentioned that in one of the quarterly presentations earlier this year. And at the end of Q3, our year-to-date pretax profit was NOK 28 million. And based on the current trading, I believe that we will beat our forecast of NOK 30 million and deliver pretax profit close to NOK 40 million this year.

Okay. Amazing. Thank you, Kjetil. Then Espen, a question to you. It's regarding churn. So on Slide 14 and 15, we can see that we have a drop in customers -- number of customers. And some of it is related to the planned decommissioning of invoice sales customers. We can also see that we off-boarded 287 customers in total. Can you share some insights on why are these customers on-boarded or why do they want to off-board -- sorry, off-board?

Yes, of course. I can give the top three reasons. One of them is that customer off-board because they default; the second is that the customers do not meet the criterias in our 12-month renewal process; and the third is voluntarily off-boarding from customers who do not need the product anymore.

Got it. And then a bit more detailed question regarding the ones that actually default. We did sell a portfolio last year as communicated to the market or previously this year. Do we have any plans for selling more of the portfolio down the line?

Yes, we did sell our portfolio one year ago and that is something we're continuing to evaluate if we should do again. So we are looking at it.

A question to you, Kjetil. On Slide 8, I think you mentioned that the balance growth is quite soft. I think was the term that you used or very soft, either one. And you mentioned that this is due to the macro environments that we are in now. However, I do have to ask, do we see any changes to the competitive landscape, which is also affecting the balance growth?

A good question, Israr. We are seeing increased competition. But as far as I know, we're not losing a lot of customers to the competition. So the main reason behind our soft balance growth is the current macroeconomic environments and the effect of that on our customers' credit appetite. At least that's what we believe.

Thank you, Kjetil. Then a question to you, Espen. It's regarding return to equity and also cost income. So if you look at Slide 10, we can see that we have an 8% increase in income compared to Q2. However, the cost income ratio is barely nudging. Why is that so?

That's a good catch. One reason while cost-to-income ratio is relatively high in Q3, it's the one-off provision related to the severance pay. Without this, our cost income ratio would have been 50.1%. That is almost 7% lower than Q3 last year. And in addition, we have some more costs now after stacking up the sales department to support balanced growth. But going forward, I expect cost-income ratio to trend downwards as income outpaced costs.

And obviously, comparing to the previous quarter, the previous quarter was artificially low due to vacation pay. So it's more relevant to compare our cost-income ratio this quarter with last year or the quarter before, so Q1 then.

Yes. Exactly.

But you mentioned 50.1%, 50% cost-to-income ratio. Is that good or bad?

Well, 50% is not good compared to other banks, but we are building a scalable bank. And we believe we can be world leaders on the cost/income ratio. And that will benefit our customers to receive the best terms possible and the highest return on equity to our shareholders.

Okay. I like that. We can be the world's best world leader in cost income ratio. Okay, amazing. Thank you Espen. A question to you then, Kjetil, regarding return on equity -- or actually to both of you, both Espen and Kjetil, and that is that you mentioned that we had a return on equity of 13% and if we disregard a one-off severance pay, it would be 16.8%. So Espen, how do you see the trend going further here?

Well, it's the same trend here as income continues to outpace costs. But the return on equity is also highly dependent on loan losses, where we also have a positive development. So going forward, I expect continued improvement of the return on equity.

And Kjetil, I have another question for you. It's actually regarding -- let's dub this question, the exodus of Norwegian niche banks. And that has been a recurring topic in Aprila and from our investors and is definitely a recurring topic in media as well as amongst politicians. And we can see that niche banks are moving both operations as well as their banking license to more, call it, regulatory favorable environment to other countries. And where are we in Aprila on that topic?

A good question and timely. We have no immediate plans to move our license but it is definitely a frequently discussed topic. When it comes to operations outside of Norway, international expansion has always been a part of our plan. But we want to make sure that we are sufficiently prepared when we push the button. And I think we are ready quite soon, but both if and when it's up to the Board to decide.

Okay. Then I do have to ask a follow-up question. What would it actually mean if we, in Aprila, were to move our banking license to a more favorable country like Sweden or other places in Europe, can you explain that to me?

Of course. So it's, first and foremost, a question of capital requirements. So if you compare Aprila's overall capital requirement, in Norway with our Swedish peers capital requirements in Norway. Our requirement is around 60% higher when we look at the overall capital requirement. If you look at CET1 requirement, our requirement is 80% higher than our Swedish peers in Norway. Outside of Norway, that difference will translate to 20% to 30%. And if we were to get a license from another European country, that difference will vanish. And that will, of course, be very beneficial both for our customers and our shareholders.

So higher return on equity and be able to deliver lower prices to the customer amongst other benefits?

Yes.

Okay amazing. Thank you Kjetil. Another question to you, Kjetil, it's about visibility in the capital markets. We used to have coverage by Pareto previously but the analysts moved over to new ventures over there. And some of our investors do wonder if we would benefit by being more visible in the capital market or perhaps even be listed on a different venue than the Norwegian OTC. What's your thought and comments there?

Well, our main focus, of course, is to build and run the bank. But -- and we lost the analyst coverage from Pareto and they moved on to Pareto Bank. And we would love to have someone initiating coverage again. When it comes to listing, I believe that Aprila will be publicly listed one day. Banking is a very capital-intensive business and capital is normally cheaper when you're publicly listed. But we have no immediate plans on becoming publicly listed as of now.

Okay. Thank you, Kjetil. Then in regards to digitalization and cost income as well, the use of AI is obviously important, and Aprila has been AI first from the start. And if you could comment what we are doing on the AI side today in Aprila, what would that be?

Of course. So we use machine learning which is defined as a subset of AI. And we have used that for many years now to train our credit models and we will soon start using LLMs to reduce the manual workload in AML team. And of course, we use it now to improve the efficiency in everyday tasks such as software development.

Yes. And if you were to sum up where you see the benefits in the future -- in the short term for Aprila, where would that be?

Well, one area that we are looking into is customer communication. So that's an obvious area. I also believe we can use AI even more to increase the speed of software development and also to reduce the manual workload in all functions in the bank.

Okay. Thank you, Kjetil. So [ Jan Erik ] has a question here as well. And the question is, what kind of yield do we offer downpayment loans versus unsecured? I think the question is probably what kind of yield do we have on downpayment loans versus credit line. So if we take that first, care to comment?

Yes, of course. So as of now, the downpayment loan yield is around 4 percentage points lower than the credit line yield based on our estimates. And based on all our historical customers, not the current portfolio, but all the historical customer balances.

Yes. And second part of this question is are the downpayment loans all guaranteed? And then I think the proper term is the personal guarantee or are they collateral or backed up with other kinds of securities, collaterals?

Well, today, there can be different forms of security. We started out in the first week. We only had a personal guarantee and then within a week, your team launched what we call complex flow, which means that we can also take several guarantors, which is more than one personal guarantee, which we call multiple guarantors and we can also take company guarantees. So that applies now for both the credit line and for the downpayment loan. And we are looking into new types of collateral as well.

Yes. So basically, it's a mix of different kinds of collaterals.

The most used is a personal guarantee from one person.

Yes. Correct. Let's see, let's give it a few more seconds to see if there are any more questions that are coming in. I find it quite astonishing being here now for almost 8 years and what we managed to build from nothing. It is quite, call it, both rewarding but also a bit humbling standing here these days.

I agree. There is a new question.

Okay. [ Hammal ] has another question. Can we talk about how we see the competition -- this is an interesting question. The competition in the deposit funding market going forward. So let's take that part first.

So that's a very good question, [ Hammal ]. We have kept our deposit products very simple. We're trying to run the bank as efficiently as possible and that also applies to the finance team. So we have made it really simple. We only have one source of funding and that's one deposit product for private individuals with one interest rate and yes, one set of terms. So -- but it's definitely something that we're going to look into to save some basis points on funding, which gets -- it's more important now going forward than it has been with -- we have been in a market with almost zero competition and very high yields for a long period. And now we are approaching some of the larger customers. And yes, so...

There might be changes down the line, but currently.

Yes. Currently, we are just running on the bond deposit products that we have.

Follows our tagline, but just on the other side. So we have [Foreign Language] no other thoughts, no other things. Easy to understand, automated and it just works. Okay. I think the part 2 of the question here is that if we're doing any product adjustments to improve the funding cost that we have, and I think you sort of have we mentioned the answer to that, but can you elaborate?

Yes. We haven't done it yet, but it's something that we will look into down the line.

Okay. We can give it a few more seconds to see if there's any other questions coming in here. And I think we can take the last one, and that is we have had many goals for 2024 and initiatives. And if you were to sum up 2024 so far, how would you sum it up?

Well, so if we focus on our #1 priority to build a foundation for accelerated growth, we launched multiple guarantors in the first half of the year. We launched an exhaustive optimization model for loan origination in the second quarter. We increased the maximum credit limit on credit line from NOK 5 million to NOK 15 million in June. We launched company guarantees in the third quarter, downpayment loan in October, and we have tripled the sales team from 2 to 6 FTEs, and they have started to deliver a great value.

So no means [indiscernible] indeed. I think we can conclude with that. Thank you.