Aprila Bank ASA (APRILA) Earnings Call Transcript & Summary

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

And I'm Espen Engelberg, acting CFO at Aprila Bank.

Welcome to Aprila Bank's Fourth 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 guiding for 2025. We are live from [indiscernible] today, and we will have a Q&A session at the end of this presentation. So if you have any questions during or after the presentation, please 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 underserved market of small- and medium-sized businesses. We have built a highly scalable banking platform that serves more than 5,000 business customers today and is designed to serve a significantly larger customer base. We use our own proprietary credit models to predict outcomes and price risk. And now with around 6 years of history, these 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 fourth quarter. The lending growth in the fourth quarter was quite soft, 18% year-on-year and a decline of 4% in the quarter. The decline was caused by the NPL divestment in December. Adjusted for this transaction, gross lending grew by NOK 53 million in the quarter. Total income increased 11% year-on-year and declined 4% in the quarter. The decline was caused by the NPL divestment and some interest income one-offs, and I will revert to this later. Pre and post-tax profit came in at NOK 9 million. Loan losses amounted to NOK 11.7 million, a level we are very satisfied with. Return on equity was 12.2% in the quarter and 13.9% in 2024. Adjusted for one-offs in December, which I will revert to, pretax profit in Q4 was NOK 11.1 million and ROE was 15.1%. In December, the FSA effectively reduced our CET1 requirement by 2.7 percentage points from 19.4% to 16.7%. They have also said that they intend to perform a new SREP this year, which we appreciate, and we hope that the FSA will conclude with a lower Pillar 2 requirement after this year's process. So as mentioned on the previous slide, our CET1 requirement has been reduced by 2.7 percentage points from 19.4% to 16.7%. The reduction is a combination of a reduced Pillar 2 requirement from 5.4% to 4.8% and the change in the required capital composition. From now on, we no longer need to cover the entire Pillar 2 requirement with CET1 capital as shown in the chart on the left-hand side. The reduced requirement translates to a CET1 capital relief of NOK 25 million at year-end 2024. I'm not a fan of adjusted numbers. However, in the past 2 quarters, we have had one-offs that I believe we need to highlight in order for you to understand our underlying performance correctly. In December, we had 2 categories of one-offs that affected our total income shown on the left-hand side. In total, these one-offs amounted to NOK 2.5 million. Adjusted for this, our underlying total income was NOK 55.3 million. These one-offs also affected our pretax profit, of course. And when we adjust for the loan losses on the NPL portfolio that wouldn't have incurred if we had not sold the portfolio, the underlying pretax profit is NOK 2.2 million better than the reported NOK 8.9 million. The adjusted numbers imply a total income run rate of NOK 221 million in the quarter and a return on equity of 15.1%. Now let's try to put these one-offs aside and look at the actuals. Starting with the first key driver of income, gross lending. At the end of the fourth quarter, gross lending had grown 18% year-on-year and declined by 4% quarter-on-quarter. Adjusted for the NPL divestment, gross lending increased by NOK 53 million in the quarter, which is much softer than our ambitions. We believe that the main reason behind the soft growth is the effect of the current macroeconomic environment on our customers' credit appetite. In 2024, we completed a set of initiatives intended to accelerate growth. We increased the maximum credit limit from NOK 5 million to NOK 15 million in the second quarter. We launched company guarantees in the third quarter. We launched down payment loans in the fourth quarter. And during the year, we increased the sales team from 2 to 6 members. The numbers so far in 2025 indicate that we are on the right track. In January, gross lending grew by an all-time high NOK 55 million, more than 3x our growth pace in Q4. Over to the second key driver of income, yield. We delivered a lending yield of 26.4% in Q4 and 27.5% adjusted for one-offs. Going forward, we expect lending yield to trend downwards in a controlled manner caused by the shift towards larger customers with lower credit risk. Our liquidity portfolio delivered an annualized return of 4.2% in the 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 I just presented translated into a total income of NOK 53 million in the fourth quarter. This represents a growth of 11% year-on-year and a decline of 4% in the quarter. Adjusted for one-offs, total income amounted to NOK 55 million, a growth of 16% year-on-year and 0.4% in the quarter. Now let's look at how this translates to profit and return on equity. In 2024, total income adjusted for the Q4 one-offs amounted to NOK 210 million. This represents a growth of 31% compared to 2023. Over the same period, the sum of costs and losses relative to total income has declined from 86% in 2023 to 80% in 2024. In turn, this translates to our last 12 months underlying pretax profit increase from NOK 23 million in 2023 to NOK 42 million in 2024. This represents a return on equity of 15.4%, a number we believe will continue to improve going forward. How much depends, first and foremost, on how fast we grow. We had a solid capital position at the end of the fourth quarter with a CET1 ratio of 31.7%. As explained in detail, the bank's overall capital requirement is now 22.3% and the CET1 requirement is 16.7%. We have continued to use retail classification and look forward to see FSA's revised circular letter on the topic. Without retail classification, our capital ratio would have been 26.6% at the end of Q4. Now Espen, can you take us through the remaining part of the key figures from the fourth quarter?

Yes, Kjetil. Thank you. Starting with the upper left chart, we had 5,234 unique customers at the end of the quarter. Moving to the middle chart on the top row, gross lending decreased NOK 39 million, bringing total gross lending to NOK 1,072 billion. In the upper right chart, total income for the quarter amounted to NOK 52.8 million, representing a year-on-year growth of 11%. Kjetil has already covered the one-offs and the decline from the previous quarter. Looking at the lower left chart, the cost/income ratio came in at 61%, which is 3 percentage points higher than Q4 last year. Next, loan losses came in at annualized 4.3% of gross lending. And finally, profit before and after tax came in at NOK 8.9 million, equal to an annualized return on equity at 12.2%. Looking closer at the credit line product, we ended the quarter with 5,034 accounts. In December, we sold 475 accounts. So on an adjusted basis, we added net 87 new accounts during the quarter. Moving to the lower left chart, the average balance per account at the quarter end was NOK 207,000, while the average drawdown reached NOK 247,000, as shown in the lower right chart. These figures reflects our continued focus on attracting larger customers, and we expect them to increase steadily over time. In January 2025, we raised the maximum credit limit from NOK 15 million to NOK 25 million, supporting our strategy to grow average balances and drawdowns moving forward. And looking closer at our newest product offering, down payment loan, we launched October 31, and we ended the quarter with 74 accounts. The average balance per account at the end of the quarter was NOK 278,000, and most of the customer selects a 5-year down payment plan. And I must say it has been a strong start for the product, and we have observed several key trends. Increased activity, the overall numbers of application has increased compared to the same period last year. Credit line and down payment loans serve different needs and the demand is relatively evenly distributed. Most customers know which product they need, only a small percentage apply for both products. Down payment loans are, on average, larger than credit line loans. And our portfolio shows a good diversity, but we observed that down payment loans application are more common in industries such as transportation, construction and real estate, whereas credit line applications are more common in service industries. And we booked loan losses of NOK 11.7 million in the quarter, of which negative NOK 56.7 million in loan loss provision and NOK 68.5 million in net realized losses caused by the nonperforming loan divestment. In the upper right chart, we see that the overall ratio of overdue claims to total claims decreased from 15.4% to 9.2% in the quarter. And we do have a healthy loan book now. That concludes the presentation of the key figures from the fourth quarter. Kjetil, over to you for the final part of the presentation.

Thank you, Espen. So I will now outline our priorities for 2025 and present our updated guiding. Our top priority in 2025 is to accelerate growth. We will continue to improve our offering to larger customers. We intend to streamline our sales processes, and we will continue to optimize our loan origination model, the model that decides what customers to approve, how much they can borrow and at what price. The #2 priority is to strengthen competitive advantage. Our key focus under this priority is to enhance the automation of core customer processes, such as onboarding, renewals and requests for limit or loan increases. In addition, we will continue to optimize our credit models and to streamline the customer experience. On the #3 priority to improve long-term profitability, we will continue to automate internal processes, focusing on frequent tasks that are performed manually today, where we can free up capacity through automation. And we will continue to improve the accuracy of our marketing spend. When it comes to our guiding for 2024, we just missed the mark on total income run rate, NOK 221 million versus NOK 225 million. Cost income came in at 55% as expected. On the number of customer accounts, we missed our guiding by 91 customers, ending the year with around 5,500 accounts when adjusting for the 475 sold accounts. For 2025, we expect to deliver a total income run rate at year-end of NOK 260 million to NOK 270 million, a cost income of 52% and 6,000 customer accounts on credit line and down payment loan at year-end. So this concludes the prepared part of the presentation. Now let's welcome our Q&A host and Chief Product and Tech Officer, Israr Khan, to the table.

Thank you, Kjetil. Thank you to both of you for well presentation. I just have some reflections before we start. I think it's interesting to see how we are able to deliver on the guidance with such a small margins, even though we missed with a few millions on certain parameters and maybe 90 customers below. It's amazing how we're able to actually model out something 12 months ahead and deliver based on my perspective, so close to it. So let's start with some questions, some interesting questions. We have a question here which is probably to you, Kjetil, and that is when will we start paying dividends?

Well, that's a good question. We also received that before. But simply put, we will start paying a dividend when we're no longer able to grow faster than our return on equity. And if we keep all ratios constant, our capital ratio will also remain constant if we grow in the same pace as our return on equity. So for example, our return on equity in 2024 was 13.9%. So if our loan book and our income also had grown with 13.9%, our capital ratios would have been -- have remained constant in a slightly simplified world. So we believe that our return on equity will increase somewhat over time. So let's say, 20% in the medium term. So if we grow faster than 20% over an extended period of time, we will need to raise additional capital. If we grow slower than 20% over an extended period of time, we can start paying dividends.

Okay. And basically, Aprila is a growth case. And as long as it makes sense to use those funds to further accelerate our growth, we will do so.

Exactly.

Okay. Thank you, Kjetil. I have a question to you, Espen. And that's related to something we said previously in our last quarterly presentation, and that was that the interest rates on the down payment loans are a bit lower than on credit line. But how does this actually affect our profitability? Care to comment?

We did say that in the last presentation. And everything else equal, we do offer lower interest rate on down payment loans. However, under IFRS 9, we have to recognize loan loss provision when we issue a new loan. And that's based on 3 key factors. It's probability of default, loss given default and exposure at default. A key difference between our products is exposure at default. Since down payment loans have a payment plan, the outstanding balance will decrease over time and the exposure at default will be lower, leading to a lower loan loss provision.

Exactly.

And from a profitability perspective, a lower loan loss provision help offset the lower interest income. And that's one of the reasons why we can offer lower interest rates on down payment loans.

And then -- so since the exposure at default is lower on down payment loans, even though we have lower interest rates, the profitability is equal to or somewhat close to credit line. It brings the profitability closer to the credit line. Okay. You had a comment on the slide that you presented saying that we see actually a difference in what product the customers choose. They already know that they want down payment loans or a credit line. And I think on the slide, it said that, for instance, business services typically choose a credit line, while more asset-heavy sectors choose down payment loans. And that resonates quite well with me. If you're running a CapEx-light company, you don't probably need a down payment loan. While if you're investing in transportation which was one of the sectors you mentioned, you probably want the down payment loan, maybe offset relative to the time you need to have the asset in the balance?

Yes. It's as expected, and they serve different needs to products.

Okay. Perfect. Thank you, Espen. Kjetil, another question here. In Q4, we had NOK 53 million in increased lending which is a bit soft, and that's accounting for the offset as well. However, in January alone, you mentioned that we already have an increase of NOK 55 million. So that's quite aggressive. Do you mind sharing some insights on why this is happening now?

Of course. So we believe it's a result of last year's efforts to build the foundation for accelerated growth, first and foremost, related to the focus on attracting larger customers and the increased sales force. So we onboarded quite a lot of large customers during the second half of 2024. And now they are starting to draw on their credit limits.

Exactly. And I guess it's also a consequence of sales force focusing on larger tickets, and they have typically a longer lead time as well before they actually become customers and draw up on funds?

Absolutely.

Okay. Thank you. There's another question for you, I guess, Kjetil, and that's related to our CET1 requirements. You mentioned that we have gotten a lower CET1 requirements and that we have relief of NOK 25 million. But what does that actually mean from a real-world perspective?

Well, with CET1 relief of NOK 25 million, all else being equal, it means that we can increase our lending balance with around NOK 125 million, so 5x without any need of new capital, which in turn means that we can increase our return on equity or we can, of course, also give the customers better returns or a combination of the 2.

Exactly. And one can just imagine what could happen if our requirements were significantly lower.

Yes. You can imagine that.

We can imagine. I see there's some questions coming in regarding that topic. We'll revert to those quite soon. We have some other questions here. This one is actually to you, Espen. And we see that the macro and in general, both in Europe as well as in the U.S. interest rates, they have been trending quite down. However, Norway has been holding back. But given everything the same, most likely we will have an interest rate cut in March. How does an interest rate cut from the Central Bank in Norway affect Aprila Bank?

Well, for Aprila, it's quite straightforward. Our funding cost on deposit will go down while we do not have any loans that are linked to any reference rates. So in times when the policy rates go down, in general, that means higher margins for niche banks like Aprila. So we just have to wait until March to see what the Central Bank has to do.

Yes. So basically, the spread between our funding cost and the interest that we charge, it increases, which is favorable for us, yes. Okay. Thank you, Espen. There's another question here for you, Espen, actually. In the last presentation, we were discussing cost/income ratio. And I think you mentioned that we're not only going to improve our cost-income ratio, but we are aiming for becoming world-class leaders in cost/income ratio. But in Q4, it increased. What happened?

We have set the bar high, but our goal of achieving a world-class cost/income ratio is still standing. In the quarter, the cost/income ratio was affected by the loan book that generates interest income and the sale of the NPL portfolio. On the cost side, we did have some higher costs in the quarter, mainly due to marketing campaign during the launch of down payment loans. But if we look at 2024 as a whole, we delivered a cost/income ratio of 54.58%, and we were guiding for 55%.

So we delivered on what we guided. And that sort of trickles back to just how sometimes -- how we're able to hit some of these figures almost to the decimal point. Okay. But there's one question, I think you touched a bit upon it. These NPL sales, they sort of -- they are a bit tricky. Conceptually, it's easy, but they do some weird things to our key figures. Can you explain what actually happens with our figures when we sell a portfolio?

Yes, it's not that straightforward. But as a bank, we must recognize ongoing interest based on the loans carrying amount. That means that we continue to book interest income after the loan has defaulted. We also book loan losses. But in general, NPL portfolio has a positive pretax profit effect when it's on our books. So when we sell NPL portfolio, our pretax profit decline. Rate declines.

The rate declines. So basically, even though it's a nonperforming portfolio, from a technical perspective, it's generating income and it's generating a pretax profit in general...

In general, yes.

But when we divest or sell it, that goes away?

Yes, correct.

Okay. Let's take a look at some of the other questions that are here. I think we have to address the question about redomiciliation. When is Aprila going to move? I see there are several here. Are we also considering becoming a Swedish or Finnish bank? I think, Kjetil, you will have to talk a bit about redomiciliation?

Yes. So over the past few years, several Norwegian banks have been acquired by foreign banks, mostly Swedish. Over the past months, we've seen Norwegian banks starting to move their license. And so some banks have done it with one bank and other banks are in the process of moving their license. So -- and we have also started a process to assess whether we should move our license and if so, to what jurisdiction. And we will revert with more information once we have something to convey.

Yes. So basically, what you're now saying is that we have now actually started the process of reviewing?

Yes, that's correct.

Okay. And I think that's probably all we can talk about on that topic for now. Let's take a look at some of the other questions here. What is the strategy for increasing shareholder values on par with other smaller banks like [indiscernible], Insta and so on? I think this is another way of also probably asking why the shareholder price is not moving because you already talked about the dividends. Kjetil, comment on this question?

Yes. Well, I can try to comment on this question there. I can try to answer it by sort of looking at some potential positive share price triggers. And so we have -- for the past 2.5 years, there has been uncertainty related to retail classification. I think we are about to get more clarity on that. There was an EBA consultation that ended Wednesday this week. We expect that FSA will issue a revised circular letter on the topic quite soon now. And if they adopt EBA's guidelines, Aprila can continue to use retail classification. So that might and should be a positive trigger for the share price.

And we really don't have any more visibility in that process. So it's sort of...

No more visibility other than that FSA has said that they will issue this revised circular letter once the consultation is completed. But the time for that is approaching. Second point I could mention is improved macro. We've all seen the headlines over the past year or so pointing to new the bankruptcy records in Norway. We've also seen that the number of new businesses is at a record low, hasn't been this low since the global financial year 2009. And statistics Norway's credit indicator is also the C2 in English or code 2 in Norwegian is at its lowest level in 15 years, measuring 12-month growth in lending to nonfinancial corporations. So several things are pointing to that we are in sort of SMB recession. Once that changes and the macro becomes a positive driver, I guess that could also be a positive driver for the share price. And then the third point I could mention is international expansion. Our ambition has always been to become a large European SMB bank. And we have started the bank in Norway, a very small country. And I believe once we start lending in a much bigger market, we will achieve higher growth rates. I'm quite confident on that. So once we sort of start on our international expansion process, I'm quite -- I guess that could also be a positive share price trigger.

So reducing uncertainty, international expansion and also positive macro triggers that will affect us positively. And initially, you also mentioned the dividends. But in which other ways do Aprila increase shareholder value? So it's dividends and it's removing uncertainty, growth, other ways?

Of course, so it's what we do every day. Our ambition is to grow as fast as possible and with high return on equity as possible. And our profitability is quite good, and it's improving. Our growth was too soft in the second half of 2024. So we're not satisfied with that. But also, as we have mentioned, the growth so far in 2025 is tremendous. So I think we are on the right track.

Thank you, Kjetil. The second -- there's another question here regarding ownership. I think we can address it, Kjetil and Espen. The question is basically -- so this is actually a bit related to how the Norwegian FSA governs the ownership structure in Norwegian banks. Basically, no grouping of owners or single owners can own more than 25% of the bank. And basically, what that means is that when we launched Aprila, the founding team had to divest or emit 75% of the ownership of the bank. Thus, we were left with 25%. And I think the question here is how are we ensuring that key players in the bank are sufficiently incentivized?

Yes. I think that what he means. And that's a good question. So we have run the bank now for several years without any proper bonus program. But we actually -- we developed a new bonus plan in the second half of 2024 and the Board adopted it in December. We presented it to the staff in January, and it was very well received. And I believe that will help to -- quite a lot to incentivize employees in the same way as -- so they are now incentivized in the same way as shareholders and sort of the key measures that decides the size of the bonus are 2 things. It's our total income growth and it's our return on equity.

Exactly. So we're actually completely in line with our shareholders?

Yes.

And this is also something that's heavily regulated from -- by the FSA?

Yes. As everything.

As everything. So that sort of also puts some constraints on what we can do and cannot do. I actually read an article, I think it was in The Economist for 2 or 3 months ago that the U.K. after they left the EU has gone quite progressive in regards to bonuses and stock option programs for the finance industry. But that is regulated heavily in EU and also obviously in Norway. So there's another question here about the main priorities for 2025, which is growth. Now our guiding says 6,000 clients at year-end for both CL and DL. And the question is that's only an increase of 500 from the year-end or 9%. Does that sound aggressive? I think this is one of things...

So this slide can be somewhat confusing, right, because we're trying to show what we actually delivered relative to what we said we would deliver. So the number says 5,509, I think. And -- but that's adjusted for the NPL divestment, right? So if you look in the footnote, I think the number there is 5,109. So we actually need to grow from 5,100 customers to 6,000 customers, which is close to 20%, which I believe is solid growth in terms of number of customers. And please also remember that we are constantly increasing the average balance, and we are attracting and acquiring larger and larger customers. So a growth of closer to 1,000 customers with a higher average balance could be quite good.

Yes, that's quite aggressive. And I think this trickles a bit back to the question about the NPL sales as well that we had to you, Espen, that it does some -- not an odd thing to our figures, but it creates some extra dimensions that we need to account for and also display. And going forward, on the next quarterly presentation, we will sort of start with clean slates and hopefully have less confusion. But I agree that an increase of 9% is not aggressive, but we are not there. We are on 20% and that's in terms of customer growth. And in regards to balance growth, well, we are focusing on larger tickets as well. I hope that was a good answer to that question. We have another question regarding interest rate sensitivity on the loans that we have. And that's a good question given interest rates are also declining in Europe and Norway. Do we have to do anything about our interest rates? Do customers react to higher or lower interest rate? How is the sensitivity in general?

So we've done several. We looked at that a lot. And for the smaller customers, there's not a very high degree of interest rate sensitivity. The most important thing for the smaller customers is the size of the limit or the loan. When looking at larger customers, interest rate sensitivity becomes a much more relevant topic. And we are constantly optimizing our pricing in the segment for the larger customers.

Okay. Thank you, Kjetil. I think there's a follow-up question here from [indiscernible], and that is related to our acceptancy rate. I'm not sure if we actually do disclose our acceptancy rates in general, but Espen and Kjetil, you care to comment?

Well, I think now that we have gotten some more competition compared to what we have before, I think we could -- I think we'd rather not comment on the metrics when it comes to our approval rates and the customers take-up rate.

Yes. Okay. I don't see any other questions here, so I can see -- well, I think we can conclude with that. All right. Until next time.

Thank you for attending.

Thank you.

Thank you.