Avanza Bank Holding AB (publ) (AZA) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Avanza Bank Holding Full Year Report 2019. Today, I'm pleased to present Rikard Josefson, CEO; and Birgitta Hagenfeldt, CFO. [Operator Instructions] Speakers, please begin.

Okay. Good morning, everybody. This is Rikard Josefson together with Birgitta presenting the results for 2019 and the fourth quarter. Thank you for listening in. Let's start by moving to Page 2, where you can see that during 2019, Avanza has grown 18% when it comes to net inflows. Customer growth was 10% and is in line with the record year of 2017. That means that we almost gain 140,000 new customers in Avanza and almost SEK 33 billion in net inflows. Of course, we had a good year when it comes to market climate with the stock exchange up almost 35%. Of the net inflows, as always almost, about 50% is from existing clients and 50% is from new clients. Notable for us is also that we have on the platform taking about 16% of the net inflows in the mutual funds market, which is, of course, a good sign that our strategy is working when it comes to growing the company when it comes to mutual funds. Let's move on to the next page. Looking at the activity, especially the Avanza clients had an active year on the stock exchange, and we have quarter-by-quarter increased our market share when it comes to number of transaction and has almost 14.5% of the transactions when it comes to the OMX Nasdaq. And in the turnover, we had a good year with increasing market shares in turnover, and we almost surpassed SEB as the largest player on the stock market when it comes to turnover. Interesting noting on the trading activity last year is that we did not have any crypto trading, cannabis trading or bitcoin trading. So it was no theme that was driving the Avanza clients to trading. It was more, more customers than ever trading, trading broadly in a lot of large capital or the caps company, which in my opinion, is a sign that was a quality here when it comes to trading activity and not any one-off events. Moving to the next slide. I also are quite happy that we have -- even though we have always had customer satisfaction as a priority and we have those satisfied clients, we dare to change our platform. We have an entire new start page, Avanza.se. My pages, we changed totally for our customers with good results. And that's a little bit like redoing somebody's living room, and it's always a challenge to do that and keep the customer satisfaction, which we were able to do. Also we took our first steps in open banking, and I especially like the fact that you can now see savings accounts with other banks. You can display your mortgage, the new mortgage rate on other banks to compare them with Avanza offers. And we can also look at Pepins, the crowdfunding sites holding. And you can also look at Lendify, peer-to-peer lending site, so you can get the better picture of your total financial situation on the Avanza platform. We also did a total rebuild of our fund pages with more information and especially pointing out much better sustainability data, which is becoming more and more important for our customer. We've seen a very large increased demand in sustainability investments. We have also include a lot of data on foreign stocks, which have been appreciated with the clients who are very much into the stock market. And we also during the year, launched Avanza Emerging Markets and Avanza USA just before Christmas, which is very suitable index fund for the one who will save here on the Avanza platform. And the start of these 2 new mutual funds has been quite promising. Emerging Markets is growing quite well, and Avanza USA has over 300 million in asset, and we launched it just before Christmas. Moving on to the next page. It's about the target fulfillment of 2019. Of course, we're very happy that we, for the 10th year in a row, has the most satisfied clients, which is a check in the box on that one. Employee engagement, that for me personally is equally as important as the customer satisfaction because I believe deep that employee engagement is the way that we keep our satisfaction high. We came in at 54, which is a very high number of a goal of 45. Market share, we have a goal of taking 10% of the market's growth in rolling 12 months of the net inflow to the market. As of the third quarter, we had 14.6%, and we'll come back to that when we talk about the new targets. And we are well on track to achieve the target of 1 million clients. And I always trust my CFO, who says that that would be on the 14th of February. We will see about that. Also for the first time in a few years, we also had an income growth of almost 14% and a cost growth of 10.6%, excluding fee and one-off write-down, which is the SEK 8.3 million. And the dividend is suggested to the Board to be SEK 2.30, which will be 79% of net profit, which is in line with our previous targets. All in all, it was a record year for Avanza. Taking the next page of our new targets, we have stated that we will raise the bar from 10% of the net inflows to 15%. And you could be a bit -- question about we have 14.6%, is 15% really high target? 2019 was a year where the markets were in the Avanza favor. And that means that if you look back a few years, we've been around 11%. So raising the bar that over time have been 15% until 2025 feels quite ambitious. And that would imply that we will get close to 7% market share in the Swedish savings market, which, in fact, means that we will double the size of Avanza the next 5 coming years. And that means that in 5 years, we'll achieve something that has taken 20 years to achieve so far. We also changed our goal when it comes to profitability to look at return on equity in the line of 25% to 30%, which also implies that we will be very careful handling our balance sheet and also how we consume capital within Avanza. We also believe that the most important target for us is always customer satisfaction. So that will be in place for the next 5 years also. That will never -- we'll never lose sight of customer satisfaction in Avanza because over time, we know that's the most valuable asset that we have within the company. Employee engagement, 45, that is our target. It's a very high number, even though we surpassed it with 53, we believe if we can keep it over 45 year in and year out, we are very well aware of that we have the most motivated employees in the industry, which is, of course, a very important part of reaching our future targets. And that the dividend of at least 70% of net profits for the year will stay in place going forward. Also during the last couple of months, we worked a lot with the sustainability strategy and targets. And we have taken a new sustainability strategy within Avanza, which is in 3 parts: one is sustainable investments; the other is educate and challenge; and, of course, a sustainable organization. We want to increase share of capital in sustainable investments. We want to increase share of customers who save in sustainable alternatives. We will want to be the leading brand and the natural go-to place when it comes to sustainable investment. We want, over time, 50% of our customers be female. And of course, we want an organization with parity between women and men. And we want to become climate positive. We will have the climate compensate a bit to become climate positive. And a lot of this has to do with that we see an increasing demand from our customer to make sustainability investment. We made a lot of improvement last year and actually improvements during January to help and facilitate our customers to make sustainable investments. We believe very, very much that this is an extremely important thing for Avanza, for our employees and our customers to make sure that customers really get good data, good decision-making tools to ensure that given your choices of sustainability, Avanza can deliver good tools for you to sleep good at night where your money is working in this world. Going to the next slide. It's -- also we believe that we have a lot of indicators out there that shows continuous growth is possible. One, of course, is the low interest rates for the foreseeable future, which, of course, in some sense, will help asset values on a decent level. But we also see, especially with younger generation that savings is becoming a bit of fashion because with no inflation, the social system is a bit not as good as it was 20 years ago. A lot of people understand if you're going to be successful financially, you have to take care of your savings and make sure that if you want retirement, you have to make sure that you save money from early days to be able to live the life you want to live. And we also believe that the sustainable investment has also getting people who maybe have not been so much into savings understand that their pension money, their savings money can make a difference in the world, which is changing when it comes to climate crisis. Next page is a little bit that we will also like to stress the fact that we're in it for the long term. That means that we are investing, we are developing our platform, we are becoming a bit from being a net broker to savings platform to being a savings partner to our clients. That means that even though we truly understand that the markets will not always be as good as it was in 2019, we will have years that will be tougher, but we will keep on investing, keep on making sure that our customers always appreciate the ambitions that we have to give them a better future. And that means also that we believe that in tough times, the companies, that they have to be customer-oriented, invest in customer satisfaction will also -- and things turn around, be very largely a winner in that situation. And my last slide is always -- the success factors for Avanza is growth, customer satisfaction, strong innovation. Also questioning ourselves what we have done, is there ways of doing it better, which we always feel it is. And of course, for me, employee engagement is the key for further success going forward. With those words, I turn over to Birgitta.

Thank you, Rikard, and we will start with financial overview. The revenues for the quarter were all-time high. And the revenues for the full year were also all-time high and increased by 14%. The main driver was the NII, but we also see -- saw increase in comp commissions and brokerage income. Other income were flat. The operating expenses for the full year increased by 10.6%, which means that we have reached our target of increasing revenues more than the costs. In the table, you can see that the operating expenses increased by 6%, but this is including the fee in our insurance company in the Q4 of '18 of SEK 35 million but also a one-off write-down of lease assets, which I will come back to later. Our operating profit increased all-time high as well. Mainly driver, again, of course, the NII. The operating margin consequently increased to 44%. Income per savings capital was down 1 basis point mainly due to our savings capital actually increasing by 36% during the year. Costs per savings capital also decreased by 1 basis point to 19. And as you know, we have a long-term goal to reach 16 basis points. As Rikard mentioned, we have now a new target regarding return on equity. That should be between 25% and 30%. And for 2019, we reached 27%. And the earnings per share was SEK 2.94. So the all-time-high revenues in the quarter, which increased by 5%, and year-on-year, the revenues increased by 23%. Brokerage income was slightly down compared to Q3 mainly due to 4.5 less trading days. The brokerage per turnover decreased, which is -- and the reason for that is mainly the largest share of transactions were made in the higher fee classes such as fixed fee, private banking and pro. The brokerage per day though increased, and the turnover per day increased as well. And we could see that we had all-time high number of commission-generating customers. Compared to the same quarter last year, the brokerage income increased by 11%. Fund commissions increased quarter-on-quarter mainly due to higher fund capital. But the income per savings capital decreased to 32 basis points, which is a reason where -- you can see that our customers are having a higher proportion of index funds. Year-on-year, fund commissions increased by 24%. The NII also increased in the quarter mainly due to higher volumes in our own lending products. Quarter -- if you compare the NII with the same quarter last year, we almost doubled the NOI. And of course, the record high that we had in January '19 is the reason for that, but also lending -- increased lending volumes. Other income, you can see that the corporate finance were higher in the quarter mainly as the -- it's seasonally low in Q3. If you compare to Q4 '18, the corporate finance was higher as well, and we could see that the revenues from markets and FX-related income were flat. The revenues for the full year increased by 14%. And of course, the NII, which increased by 70%, was the main driver, where we had a better return on the surplus liquidity as the repo rate were raised in January of '19. But also as a consequence, the STIBOR increased. You could see that the costs for surplus liquidity was turned to positive yield from March '19. All else equal and without taking any changes in customer behavior into account, a 1 percentage point change in the interest rate from here with today's volume would affect full year net interest income by around SEK 300 million. About 2 weeks ago, we expect to increase the repo rate once again with 25 basis points to 0. This raise will affect our mortgage with 20 basis points, which wasn't the case a year ago since we had a score in our mortgage products by of minus 20 basis points. Brokerage increased due to higher commission-generating notes, higher commission-generating turnover and higher brokerage turnover. And as I said earlier, we had all-time high number of commission-generating customers. The fund commissions increased as the average fund volumes increased by 18%. The income per fund capital decreased by 2 basis points to 33. And again, the reason was a higher proportion of index funds. Other income was flat even though we can see that the Avanza Markets revenues and Corporate Finance were higher. But at the same time, the costs for payment services and mortgage applications also increased. Operating expenses increased quarter-on-quarter. And the underlying increase is in higher personnel costs, which is seasonally low in Q3. By the end of '19, we signed a new lease agreement for our 2 offices here in Stockholm -- or rather to the 1 office in Stockholm, which means that we -- by the fall this year, we'll be able to move again all our employees under the same roofs. This had an effect, though, on the depreciation, which increased due to a write-down of SEK 8 million for -- on leased asset. And this is for the risk of having unused spaces in the office that we leave from October this year. Another effect of this new lease agreement is that we, in 2020, also will have a one-off cost of around 1 -- SEK 11 million, and this is partly due to us having double rent from June to September but also of course, direct costs connected with the moving of our employees. The full year costs increased by 10%, which we saw was in line with the budget of 10.5%. And this is excluding the one-off items of the write-down on leased assets but also the administrative fee that we had in Q4 '18. The underlying cost growth was personnel costs and the increased development capacity. But we also had higher costs for IT and IT licenses. Our long-term cost guidance remains at 9% to 12%, and we have estimated the cost growth for 2020 to be around 10%. This is not including the one-off costs in Q4 '19 nor the higher costs for '20 regarding the new lease agreement. We still have a good capitalization with a capital ratio of 17.7% to be compared with the requirement of 15.8%, which includes all our external and internal buffers as well as the Pillar 2 requirement. Our risk exposure amount increased during the quarter, mainly due to higher operational risk exposure amounts. And this is due to -- that is calculated based on the 3-year revenues. And in Q4, the '19 revenues were included instead of the '16 revenues. We also had higher credit risk exposure amount connected to the increase in mortgage and margin lending. Our LCR ratio increased during the quarter due to -- we're having deposits in our Central Bank, which we will continue to have. And as we had said before, Avanza's need of capital is very strongly connected to the LR ratio, which will -- a requirement will come into place in June '21 of 3%. Increasing deposits is very negative for our LR ratio, and therefore, we are internally discussing and monitoring the size of buffer we need to the LR requirement in order to comply in all market conditions but also as we grow. Therefore, the Board of Directors has proposed the dividend of SEK 2.30 per share; in total, SEK 354 million, which is a payout ratio of 79%, in line with our goal to have at least 70% of the net result to be paid out to our investors. And Rikard, with that, I think we can open for questions.

[Operator Instructions] Our first question is from Nicolas McBeath from DNB Markets.

Yes. So first of all, if you could comment any further on the impact on the rate hike. How much of that was already reflected in Q4? And how much delta do you expect from the rate hike to come -- to benefit the Q1 NII versus the Q4?

Well, we could see that the STIBOR increased already during the end of '19. So in some sense, I would say that the rate hike will have pretty strong effect from the start. But of course, we have still the portfolio -- with bond portfolio that we have, still, of course, have to roll out at a lower rate. So probably not a full effect during this quarter -- or from the start of the quarter.

Okay. And then if you could also specify how much you expect your resolution funds to drop in 2020 versus 2019 in nominal terms?

Well, actually, that is hard to answer because it depends on our balance sheet. As you know, it's based on the balance sheet. It depends on how much deposits our customers have. And with the growing savings capital, I would say, even if the percentage or the fee for -- resolution fee is actually going down, it's hard to say how much in nominal value the resolution fee will actually decrease. But they had lowered the percentage from 9 basis points to 5.

Okay. But can you then help, please, by giving us the number that you -- or the amount you paid in 2019 resolution fund fee?

Well, I don't have that figure on my -- let me -- I can get back to you later on in this call.

Okay. Never mind. And then another question, if you could elaborate a bit why -- for the reason why you're leaving your previous revenue to growth target that you targeted before to grow revenues quicker than costs. Is it because you no longer believe that is achievable? Or is there any other reasoning behind that?

We strongly believe that that's achievable. And of course, internally, we will absolutely drive for increasing revenue more than costs. But we also believe that the last couple of years, especially 2017, we had an -- very high increase in costs for investing for the future. And now we are back to the guidance of 9% to 12%. And then we believe that the return on equity will be very -- a very good guidance for us to drive profitability within the company.

Okay. And then if I could just ask a question on that target, or the ROE target, 20% to 30%. I mean if we look in H2 '19, the ROE was around 30%, and that was before the full effects from the rate hike played out. So presumably, you have some profitability tailwinds also going into 2020. So with that in mind, why don't you target a ROE above 30%? Is there something else impacting your ROE outlook? Do you see significantly high capital base going forward or something else?

Well, of course, we -- since the LR ratio is coming into place, we foresee that our capital requirements will probably increase. But also growing -- doubling Avanza during 5 years and doing the same thing that we have done for 20 years, and continue to have a return on equity between 25% and 30%, I think that is still a very strong number.

Okay. Could you comment on that capital increase that you see? I mean you're already noncompliant, but what kind of leverage ratio do you see that you would need to be in order to feel, I mean happy and satisfied with the volatility that you mentioned on the deposit basis, of course?

Well, as I mentioned, this is what we're monitoring and discussing internally. So we haven't decided, but I would say that somewhere around 3.5%. But this is not only for the consolidated situation that you see here, but it's also for our bank solo. So we had to take both those in consideration, and we have to monitoring it during this year to see how much it fluctuates depending on our customers' behaviors. And getting back to you, Nicolas, regarding the resolution fee, we had -- we paid SEK 34 million for both resolution fee and for the guarantee for deposits.

And the split between those 2? Do you...

And I would say it's about 50%-50%, I would say, during '19. So about SEK 15 million to SEK 16 million, something like that.

And our next question is from Peter Kessiakoff from SEB.

So a question on the new targets or one of them being the market shares of the Swedish savings market, where you almost aim to double your market share. I mean looking at the kind of inflows, what kind of assumptions do you have in terms of how much inflows you need to deliver? And how much it needs to increase from today's level in order to reach that market share?

As we stated, we have an ambition to take 15% of the net inflow in the market growth when it comes to the Swedish savings market.

[indiscernible] increasing the part of the net inflow from today's level to 15% in 5 years.

Okay. So -- but do I understand it correctly then that, in principle, just maintaining or improving kind of the net inflows a bit from today's level is what you, in essence, believe is necessary in order to achieve your targets?

Yes. We have to do that. I think you -- if you look at it a little bit like I said before, it's more or less implies, as Birgitta said, that we will double the savings capital in the next 5 years.

Yes. When -- I think I have asked these questions during a few quarters actually. But going back maybe a year ago, you launched this tool where it's very simple for someone who has the savings elsewhere to move their savings on to your platform. We haven't necessarily seen any improved or any material increase in the inflows for you since that tool was launched. But have you -- are you seeing any kind of increased use of that tool or people? Or are you considering more marketing on that given that I would have assumed and believe that a tool like that is one that should enable you to increase the share of wallet amongst your clients?

Absolutely. But I think you have to look at it like we had almost SEK 33 billion in net inflows. And of course, this tool that we created during the last spring is part of the puzzle for having a great year when it comes to net inflows.

Okay. I just thought or hoped that inflows would be higher given that it's been largely unchanged the last 3 years. But then my last question, you mentioned that you want to be climate positive. Have you said any -- I'm not sure if I missed it, but did you say any year when you aim to achieve that?

Well, we do the climate analysis. So we tend to -- or we expect to compensate for the part that we -- the emissions that we have. So we haven't really -- I mean that's for every year, which is from -- yes, from 2020.

Okay. So in principle, you are there already now. Okay. Understood. That was -- those were my questions.

[Operator Instructions] Our next question is from Maths Liljedahl from Handelsbanken.

Yes. On the cost here, the SEK 11 million, for consolidating the offices, when do you expect that? Will it be Q3? Q4? Or even spread between them? And do we expect any future cost savings in terms of doing this?

Well, as I said, we will have double rent for the period of June until September. So of course, a large part of that SEK 11 million will come during that period. But then we have a lot of costs moving from here to that in order to make the office -- being able to move into the offices, we say, to invest in them and so forth. So I would say, the main part of that would come during Q2 and Q3 probably. When it comes to -- I mean we are moving from Verkstadsgatan to Regeringsgatan. And we are -- we have made a new agreement for another 6 years to stay here -- or 5 years to stay here at Regeringsgatan. So of course, I would say that the rents will probably -- will be a little bit higher in total. But then again, we have signed a 5-year agreement. So -- and as you probably know, the rents in Stockholm has increased enormously during the last years.

And our next question is from [ Ermin Kirk ] from Carnegie.

So first question was more with the time line for your financial targets. How come you've chosen 2025 instead of, say, 2023? Will you kind of have any midterm targets to steer the organizational power up on or were in the near term, so to speak?

I think it is mainly because we are a long-term -- we view our business very long term, and we like to have a 5-year target of going at. And then we also like the fact that we -- when we did our long-term targets, concluded that we would double the company within 5 years. But of course, we will keep close eyes so that we are delivering on that plan. But I think both you and me understand it will not be exactly a straight line to doubling because the market condition was varied during the 5 years. So we believe it's a way of guiding a long-term view of how we believe we can develop this company.

Okay. And then on your targets, you have the cost-to-savings ratio target of reaching 16 basis points. Could you give us any flavor of how fast you think you could sort of achieve that on a more consistent basis? I know you've done it in single quarters. And also if you have any view on the income-to-savings ratio for the more long term.

Well, when it comes to the cost to savings capital, as you know, it depends on the savings capital. And that, of course, depends on the market. So I mean impossible for me to say when that will come into place from a consistent period. And as the market is growing now, we probably will reach that in a few years. And -- but then again, if the market drops markedly, then that would have a negative effect, of course, on that ratio. And to answer what's going to happen to the revenues per savings capital, it's as hard as saying anything about the cost, of course, because I mean it's also dependent on both the savings capital, which is dependent on the market, but also if our customers' behavior is depending on market -- different market conditions. But as you know, we are trying to make sure that there are investments and savings products for our customers in all weather, so to speak. So hopefully, if the stock market falls, there will be other interesting new savings products on our platform.

[Operator Instructions] Our next question is from Patrik Brattelius from ABG.

I had a question regarding the cost guidance. In 2019, we saw a lot of the cost growth came in the latter half of the year. How should we think regarding a new cost guidance in 2020? Will we see the same pattern? Or will it be more evenly split throughout the year?

I would say that it's more evenly spread over the year this year.

Okay. And the second question is regarding Stabelo. We saw it grew approximately SEK 650 million in the fourth quarter here. What are your ambitions for 2020? How should we think of the growth? Are you satisfied with this growth? Or is this where you are aiming to grow more long term?

We never disclose how we look at our growth rate, but I would put it like this, we are satisfied with the growth when it comes to the Stabelo volumes. It could have been more. It could have been less. So I truly believe it's an okay number that we're going in Stabelo. At the same time, looking at the mortgage market, we see intense competition, which we have been part of starting that competition. So it's very difficult to predict where it will go. We can also clearly see that mortgages is becoming more and more commodity, where price is becoming more and more relevant, and we will see how it goes. But Stabelo is developing according to our plans and is given an okay.

Okay. Because we could see that Stabelo raised its list price a little bit lower than the -- than many of the large cap banks. Have you seen more inflow on the back of this?

I think you have to ask Stabelo about that. That we never answer a question when it comes to pricing and that kind of flows. That we have to call Stabelo and talk to them. We're just a distributor from that perspective.

And as there are no further questions at this time, I will hand the word back to the speakers for any final comments.

Okay. Thank you for listening in, and have a fantastic Tuesday.

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.