Aprila Bank ASA (APRILA) Q2 FY2025 Earnings Call Transcript & Summary

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

And I am Espen Engelberg, CFO of Aprila Bank.

Welcome to our second quarter presentation. So I will start by presenting the highlights of the quarter. Espen will present the key figures in more detail, and then I will conclude by presenting our top priorities and then updated guiding for 2025. We're not doing a live Q&A session this time. So if you have any questions during or after the presentation, please send them to [email protected], and we will respond in due course. The questions and our answers will be published on our Q&A website. First, a quick recap of Aprila. Aprila is a digital bank that provides credit to a large and underserved market of small- and medium-sized businesses. We've built a highly scalable banking platform that serves more than 5,500 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 7 years of history, these models have become very accurate. To the customer, Aprila represents speed, convenience and accessibility or as we say in our Norwegian tagline, [Foreign Language]. Now let's have a look at the numbers from the second quarter. We delivered yet another record-breaking quarterly pretax profit of nearly NOK 18 million in the second quarter. While part of this strong result is caused by seasonally lower personnel expenses in Q2, the performance still exceeds our internal forecast, reflecting strong underlying profitability. Return on equity came in at a strong 21.9% for the quarter and 16.5% on a trailing 12-month basis. This reflects our ongoing focus on operational efficiency and capital productivity. Lending growth for the quarter landed at a modest 4%, bringing our year-on-year growth to 17%. Total income increased 16% year-on-year and 5% in the quarter. Our capital position is very solid. At the end of June, the CET1 ratio stood at 31.4%, which is 9 percentage points above the overall capital requirement of 22.3%. We expect FSA to perform a new SREP this year, which we hope will result in a more appropriate Pillar 2 requirement. With that overview, I will now walk you through 5 high-level financial slides. And after that, I will hand over to Espen, who will take you through a more detailed analysis of the financials. At the end of the second quarter, gross lending had increased 17% year-on-year and 4% quarter-on-quarter. As mentioned in the Q1 presentation, we experienced a slowdown in lending activity in the beginning of the second quarter. This coincided with market uncertainty following the announcement of new tariffs by President Trump, which dampened business sentiment. When Norges Bank reduced the key policy rate by 25 basis points on June 18, lending demand rebounded sharply and drove a strong pickup in loan activity through July. Overall, we believe the soft patch in the beginning of the second quarter was largely a result of external macroeconomic headwinds rather than an underlying weakening of demand. As we get better at attracting and acquiring larger customers, we are seeing a gradual and controlled decline in our lending yield. In Q2, our lending yield came in at 25.3%, which is around 2 percentage points lower than Q2 last year. This is an expected development aligned with our strategic focus on scaling up with slightly larger ticket sizes while maintaining solid margins. Our liquidity portfolio continued to perform well, generating an annualized return of 5.1% during the quarter. This return remains attractive, especially given our conservative liquidity strategy. Funding costs stood at 4.8% and the spread between our funding cost and lending yield continues to underpin our profitability. The combination of our income-earning assets, the deposit balance and the yield levels I just presented translated into a total income of NOK 59.4 million in the second quarter. This represents an income growth of 16% year-on-year and 5% in the quarter. In terms of composition, our income remains dominated by net interest income, which accounted for NOK 52.1 million or 88% of total income in Q2. Now let's look at how this translates to profit and return on equity over time. So over the last 12 months, total income adjusted for one-offs in Q4 last year amounted to NOK 227 million. This represents a growth of 20% compared to the 12-month period that ended in the second quarter last year. In the chart in the middle, you can see that over the same period, the combined ratio of cost and losses relative to total income has declined from 81% to 76%. This highlights both disciplined cost control and stable credit quality and the improvement is a key driver of our profitability expansion. Our underlying pretax profit has increased from NOK 37 million at the end of Q2 last year to NOK 55 million at the end of Q2 this year. Correspondingly, our underlying return on equity has reached 17.9%, a number we believe will continue to improve going forward. The pace at which we can continue to improve ROE will be largely determined by how quickly we can grow our lending portfolio. We had a solid capital position at the end of the second quarter with a CET1 ratio of 31.4%. The increase from Q1 is caused by a reduced risk exposure amount for operational risk following the Norwegian implementation of CRR 3 in April. The bank's overall capital requirement is 22.3%. So although we think our capital requirements are too high, we still have a solid headroom for further growth, provided that we can continue to use retail classification. Without retail classification, our capital ratio would have been 26% at the end of Q2. We look forward to get more clarity on the topic. EBA's guidelines on proportionate retail diversification methods should have been published in July, but have not been issued yet. Now Espen, can you take us through the financials in more detail?

Yes. Thank you, Kjetil. I will gladly do so. Starting with the upper left chart, we had just below 5,550 unique customers at the end of the quarter. Moving to the middle chart on the top row, gross lending increased NOK 47 million. This brings total gross lending above NOK 1.25 billion. In the upper right chart, total income for the quarter amounted to NOK 59.4 million, representing a year-on-year growth of 16%. Looking at the lower left chart, the cost/income ratio came in at 43%, which is 3 percentage points lower than Q2 last year. As Kjetil has mentioned, in June, we had holiday pay and personnel expenses are naturally lower as they were in Q2 last year. Next, loan losses came in at annualized 5.3% of gross lending. And finally, profit before and after tax came in at all-time high of NOK 17.5 million, equal to an annualized return on equity of 21.9%. Overall, the quarter demonstrated the strength of our business model, steady profitability, income growth and resilience even in a period of controlled and modest lending growth. We have not yet reduced the interest rate on our deposit product following Norges Bank 25 basis point rate cut. We do expect the deposit rate to gradually decrease over time in line with interest rate cuts, which should contribute to improving margins. Looking closer at our main product, credit line, we ended the quarter with 5,166 accounts. We added net 80 new accounts during the quarter. Moving to the lower left chart, the average balance per account at quarter end was NOK 230,000, while the average drawdown reached NOK 273,000 as shown in the lower right chart. And we are not only attracting new customers, but also growing with the ones we already serve. As our customers expand, many are increasing their credit lines, allowing us to support their next stage of growth. At the same time, we are continuing to focus on attracting new larger customers. Looking closer at down payment loans, which has been in our product offering for 3 quarters now, we ended the quarter with 272 accounts as we added 69 net new accounts in the second quarter. The average balance per account at the end of the quarter was NOK 233,000, and most customers selects a 5-year down payment plan. As shown in the chart on the right, our gross loan exposure across industries indicates a healthy level of diversification in this product. And we have observed that the growing number of customers would benefit more from a credit line than from a traditional down payment loan. To address this, we have made minor adjustment in our onboarding process, making it easier for customers to identify which product best suits their needs. We booked loan losses of NOK 16.6 million in the quarter, of which NOK 12 million in loan loss provision and NOK 4.6 million in net realized losses. In the upper right chart, we see that the overall ratio of overdue claims to total claims increased from 11.5% to 12.4% in the quarter, and we do still have a healthy loan book. That concludes the presentation of the key figures from the second quarter. Kjetil, over to you for the final part of the presentation.

thank you, Espen. So I will now present our key priorities and our updated guiding for 2025. Our top priority in 2025 is to accelerate our profitable growth. We aim to achieve this by improving our offering to larger customers, streamlining our sales processes and by optimizing loan origination. Halfway into 2025, we have delivered on this priority with an all-time high nominal gross lending growth of NOK 190 million compared to NOK 169 million last year. The number 2 priority is to strengthen competitive advantage. Our key focus under this priority is to increase the automation of core customer processes and to continuously evolve our credit models and the customer experience. An example of progress on this priority is that 56% of customer chats were resolved by AI in Q2 versus 0% 1 year ago. And the number keeps improving. So this is an example of an initiative that increases automation in core customer processes and enhances customer experience as our response time improves. On the number 3 priority to further strengthen long-term profitability and capital efficiency, we focus on automating internal processes to reduce cost to serve. Over the past few months, we have also focused on redomiciliation, whether we should move our headquarter and license to another jurisdiction with lower capital requirements. We have now shortlisted 2 countries, and we aim to conclude this assessment during the fall. And now to the guiding. We have adjusted our guiding on total income run rate and the number of customer accounts at year-end. We're now aiming for NOK 260 million in total income run rate instead of NOK 260 million to NOK 270 million and 5,800 customer accounts rather than 6,000. The cost income guiding remains the same. The adjustments we have made are based on the performance in the second quarter and do not reflect a weaker outlook for the second half of the year. So that wraps up our presentation of Aprila Bank's quarterly results. If you have any follow-up questions, please don't hesitate to reach out to us on the provided e-mail address. Thank you for joining us today. We appreciate your time and interest and look forward to keeping you updated next quarter. Until then, take care, and have a great day.