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

Hello, and welcome to the Avanza Bank Holding Interim Report January to June 2020. [Operator Instructions] Today, I'm pleased to present Rikard Josefson, CEO; and Birgitta Hagenfeldt, CFO. Please begin with your meeting.

Okay. Thank you for joining in, everybody. This is Rikard Josefson speaking. I will start with a business update, and then I will turn to Birgitta for the numbers. I would like to start to express that I hope you all are well and your families are well in this turbulent time. I think I said that at the last quarter, but nothing much has changed in respect to that. If you go to the first slide, #2, of course, the second quarter continued with a very good customer increase. We added 53,000 new customers during the quarter. And to get a perspective on that, that means that we have added the same amount of new customers for the first 6 months as we did for the full year in 2019, and quarter-by-quarter, we have 68%. Looking at the type of customers we gain in the first quarter, it's very much in line with how our customer base looks like. It's about 60% male, 40% female, which is also in line with how the customer -- reflects the customer base. Going to the next slide, the quarter also showed SEK 19.4 billion in growth when it comes to net inflows. That means that for the year, we have grown SEK 41.3 billion. And last year, for the full 12 months, we grew SEK 32.6 billion. This should be a reminder that 2019 growth in net inflow was the highest ever for Avanza, so we have achieved more than we did for the best year ever given the numbers. And looking at Q2-to-Q2, it's about 134%. It's a little bit down compared to the first quarter, but I would say that it's -- the March in the first quarter was an exceptional month, of course. So we are quite happy with that number. Also, which is important in the long term is that our asset under management is now close to SEK 445 billion, which is also good news for the future because, as I often said, the AUM number in itself creates good things in our P&L. Also that is important to note in the first quarter is that in March, we had in the end of the first quarter, we had net outflows from our mutual fund business. But in the second quarter, it turned around to SEK 7.4 billion in net inflows in mutual funds, which is core important given the strategy that we have in creating more recurring income. For the quarter, about half of the net inflows came from existing clients and half came from new clients. And given the first 6 months, 54 -- 56% is from existing clients and 44% from new clients. Looking at the next picture, which is a very important picture for me when you look at matrix, it's about the growth in the Swedish savings market. This is the Q1 figures that was released in the beginning of May. But the note to make is that we gained 26.2% of the market growth when it comes to savings in Sweden in the first quarter. And if you look at the rolling 12-month basis, we're now gaining 17.8% of the market growth. And of course, that's very important for us because that implies that we are gaining market share, we are getting a much larger part of the total market, which is, of course, in the growth scenario that we want to achieve, a very important factor. Going to the next slide, which is also an important slide for us, it's also about market shares. And that's the number of transaction on the left side of the slide. You can see that from Q4 2018, we'll be gaining market share in a number of transaction, and we also gained more market share in the end of the -- in Q2 in this year, which also implies that we are gaining market share. Our competitors are more or less flat. So we are the ones gaining market share and growing a lot when it comes to number of transactions, which, of course, is part of the explanation for our strong brokerage income. If you look at turnover, we are now by a substantial margin the #1 when it comes to the Swedish Stock Exchange, which is, of course, also important for us because that also implies that we get good prices on NASDAQ for our clients, and that's also a very scalable question. And I'd also like to point out that given the first quarter, and I think Birgitta will come back to that, it's important to say that we are growing our income on a very high level. Our cost growth is totally in line with our plans that we have guided for. So I think the quarter and the first 6 months is a statement that the scalability in the company really is there. We lowered our cost on savings capital by 2 basis points and increased the income per savings capital by 19 basis points. So we believe that we are growing the scalability. And if you look at the next slide, impacts from the COVID-19, it's interesting to note that our leadership index is up in an internal survey. The motivation and engagement for our employee is on 75, and that's the absolutely highest level ever for Avanza. So it seems like even if we work in a very distributed way at the moment, it seems that we're still keeping our culture, keeping close to each other and really focusing on the success factors being there for our clients. We have also seen marginal effect on the pension business because, at the same time, a lot of corporates having problem in the crisis. There are some corporates with a few who pose us a little bit paying in the pension premiums because they need the liquidity for other reasons. And that is, of course, something we help them with, and we also help in keeping their health insurance even if they don't pay the pension premiums. And of course, the big question is what will happen after the volatility goes down and what is the new normal? My absolute conviction now is that we have raised the bar substantially for Avanza. So even if weather turns worse, we will perform at a much higher level. And the fact for that is, of course, if you look at number of clients, asset under management, more clients than ever creating brokerage income or trading income in different ways, we believe that, that solid customer base will be there for us going forward. So we are very optimistic about the future. If you take the next slide, you can see the launches we had made in the quarter. In the first quarter, we were a bit careful of launching too many things. As we discussed on the last quarter, we invested in hardware and to keep the platform running in a good way, which we have done, and we also have seen the effect, the very, very good performance on the platform when it comes to stability. We did our first branded actively managed fund in a unique cooperation with TIN Fonder, and that is an extreme success factor for us. It has, after 3 weeks, 45,000 new clients and SEK 700 million in asset under management in that fund alone. And the fund will be niche fund focused on 40 to 60 equities in tech and health care and sustainability, and it's above my expectation that, that has taken off so well as it did in just 3 weeks. And also, it's a managed fund that we have decent revenue on because we make 55 basis points in income on this fund. So that's also a very good sign. And also, we launched a sustainability stamp where our customers, from their own preference, could sort out mutual funds that is in line with their personal preference when it comes to sustainability, because one of the hard things on sustainability is that it means different things for different people, and our client can since they tailor-made it for themselves. And also, we announced that we will start with stock lending. We'll give our customers in -- endowment insurance, a little bit better return, and that will go live in the end of August, beginning of September. Okay. And also, of course, the success factor is always to keep focusing on growth, customer satisfaction and strong innovation. I'd like to point out, as I said in the comments in the report, that we had our rainy days or innovation days digital, and that was not a big surprise. But I was extremely satisfied with the number of new ideas for product services and improvements that the staff and the fantastic people at Avanza managed to do in a digital way. And I think some of the things we saw on that event will actually go live during the year. And also, before I turn over to Birgitta, I would also like to -- during the quarter, we recruited Birgitta's replacement -- or successor is a better word in Anna Casselblad, who is currently the Head of Compliance in Avanza and is also, prior to that, 7 years' experience with PwC in working with financial institutions. And I think Anna will have the combination of understanding, which is almost -- more and more important, the regulatory environment, which we work in, and also the experience from accounting and balance sheet management. Having said that, it's also very, very strong for us, in my opinion, that we have been able to recruit somebody internally because we had an external recruitment consultancy working with us, and we had very many people outside Avanza who was very suitable for the position. But when it ended up, our internal candidate came out on top. And I also believe that's also important to our culture that we develop people internally who can take steps within the organization and also take steps into top management. And with those words, I will pass on to Birgitta.

Thank you, Rikard. And as always, we start with a financial overview. And as Rikard said, customer activity has continued in the quarter, and revenues are still on record high levels. Even though we saw some decline from Q1, the revenues for the half year period are almost doubled from last year. Operating expenses increased compared to Q1, mainly due to higher personnel costs caused by a high number of employees, and depreciation was also higher. Operating profit decreased slightly compared to Q1, but more than tripled compared to the first half year '19. Consequently, the operating margin for the quarter decreased slightly to 63%. Income to savings capital for the half year period was up 19 basis points to 52, whereas cost to savings capital decreased by 2 basis points to 18. It clearly, as Rikard mentioned, demonstrates the scalability of Avanza's business model, where revenues are doubled while costs are still according to guidance. Due to the continued high revenues in the quarter, return on equity for Q2 was 56%, and our earnings per share, SEK 1.83. As said, revenues in the quarter were still on record levels, up 85% compared to last year. Net brokerage income more than doubled compared to Q2 last year but decreased slightly compared to Q1 as a result of 4.5 fewer trading days in the quarter. Trading activity was still very high, where commission-generating turnover only decreased by 1.6%, and the number of commission-generating notes has increased slightly. Brokerage income per SEK of turnover was stable at 10.8 basis points but decreased from 10 bps last year -- or increased from 10 bps last year. This is a result of higher share of brokerage income being generated in lower brokerage fee classes. The number of commission-generating customers are still on very high levels. Fund commissions decreased compared to last quarter due to declined fund capital in March. It was a result of both value decline and outflows. Income per SEK of fund capital rose slightly in Q2 as the share of index and fixed income funds decreased. In Q2, we also saw a net inflow of SEK 7.4 billion in funds. At the same time, as stock market increased, it has taken us back to the fund capital level we were during Q4. Compared to Q2 last year, fund commissions have increased due to higher average fund capital. Income per SEK of fund capital decreased marginally compared to Q2 last year. NII increased quarter-on-quarter mainly as a result of higher return on surplus liquidity and a larger bond portfolio. The surplus liquidity is managed overnight and through investments in primarily covered bonds with an average interest duration of 3 months linked to STIBOR. Customers' liquidity is still at historically high level, and most of this increased surplus liquidity compared to more normal level is invested in short-term instruments. The reason is to remain prepared when customers begin investing more again and in anticipation of a new normal. Higher mortgage volume also contributed slightly to the increased NII, while income from margin lending decreased slightly due to a lower average lending volume. Compared to Q2 last year, NII increased by 65% mainly due to a better return on the surplus liquidity as the repo rate was raised to 25 bps in January 2020, but also due to larger volumes. Higher lending volume also contributed positively. Other income is also very much affected by customers' high activity, where FX income even increased from the high level last quarter. This was a result of increase in trading in foreign equities, whereas trading in foreign funds actually decreased. Income from Avanza Markets decreased slightly from the record level last quarter. Revenues from Corporate Finance was affected by the market uncertainty and therefore post corporate transactions, which resulted in lower income in the quarter. On the cost side of other commissions, we saw higher payment commissions in the quarter, which is also a result of high customer activity. Altogether, all of these has resulted in a decreased other income quarter-on-quarter of 9%. Compared to Q2 last year, however, the high activity led to more than double other income. Looking at the costs. Operating expenses increased by 4% compared to Q1. Marketing, which normally is higher at the beginning of the year, decreased, while depreciation and personnel costs rose. This is a result of higher IT investments and higher number of employees. Other expenses were essentially unchanged. The higher costs compared to Q2 last year is mainly due to more employees and mainly as a result of high -- of expanded development capacity. Other expenses and depreciation also increased, while marketing costs were slightly lower. Our cost guidance of 12% for the full year as well as the communicated long-term cost growth of 9% to 12% remain unchanged. Something that cannot be seen in this graph but nevertheless worth mentioning, despite the turbulence in the market the last half year, we had no credit losses. This shows the low risk in the balance sheet and that collateral and advanced processes are working the way they should even in uncertain and volatile market conditions. However, in the quarter, the macro variables in Avanza's IFRS 9 models were updated, and this resulted in a higher provision for expected credit losses, which affected the results for second quarter with SEK 5 million. The tax rate in the first half year increased as a higher share of revenues we generated in the bank, where the ordinary corporate tax rate applies, in contrast with the insurance company, where most revenues are taxed according to the laws for life insurance company. For 2020, the effective tax rate is estimated at around 15%. Capitalization is strong, with a total capital ratio of 17.1% to compare with the requirements of almost 14%, including all buffers as well as Pillar 2 requirements. The decline since March is due to a higher risk exposure amount, while at the same time, the capital base is unchanged since the financial statement hasn't been audited. The leverage ratio was positively affected by customers' lower liquidity in the quarter. A regulatory requirement for the leverage ratio of 3% will be introduced as of June next year. We are still discussing what level of the ratio, including an internal buffer, we would need, taking the volatility in deposits into account. This will be communicated in connection with the preliminary financial statements in January. Avanza's leverage ratio can be improved through increased Tier 1 capital, which can be achieved by lower dividend ratio or by issuing additional Tier 1 capital. We can also improve the leverage ratio by reducing the balance sheet and off-balance sheet commitment. Please note that none of these balance sheet activities have been made so far as there is no requirement at this point. And with that, Rikard, I think we can open up for questions.

Yes. Absolutely.

[Operator Instructions] Our first question comes from Patrik Brattelius, ABG.

My first question is regarding the extraordinary cost of SEK 11 million that you write about in the report for 2020. When is it expected to arrive? Is everything is going to come in Q3? Or how is that going to be divided throughout the quarters?

It's a very difficult question because it's very connected to -- of hiring people and when they can start. So I would say, hopefully, as soon as possible, because that means we get new talent on board, but I would say it will be both Q3 and Q4.

Okay. And my other question is regarding the securities lending that you announced earlier, a few weeks ago. As of now, it's only possible for capital and [ for checking ]. But how does the possibility look to make that bigger and also include Acxiom, [ Fond Conto ] and ISK in the future?

It's not possible. Well, it could be possible. Let's put it this way. We're starting with the endowment insurance, and then we're going to see how it goes. We make sure the processes work, and then there is possibility to scale it up in different types of accounts, and we will come back to that when we take those decisions. We want to take it step by step to make sure that everything works fine.

[Operator Instructions] Our next question comes from Nicolas McBeath, DNB.

So first question, about profitability. So this was another quarter with a very high profitability, operating margin at 63% so above your long-term target. So I was wondering if this brings you closer to the point where you think your profitability is too high to be aligned with your customer promise, and yes, if it gives you more incentives to look into giving more back to the customers through either cost increases or price reductions.

I will answer the same way I did last quarter, Nicolas, that it's too early days. We had the corona crisis, and everything is going very special since February, March. And we're now in the middle of July. I would like to see -- and then the big question is what is that, what does the new normal look like? So we will address that question. It's a good question so I respect it. But we will address it when we see some kind of stabilization or normality in the marketplace.

Okay. And then if you could say something about the trading so far in Q3. It seems like the stock market activity broadly has cooled down a bit so far in July. Does this trend also apply for amount of customers? Or are they still trading as actively as in Q2?

We can see that we still see, without getting down into details. But of course, we see -- we are gaining market share, which we have, proven with the number of transactions and the stock turnover. So of course, even if volumes in trading is down, we still have a healthy situation. So we are absolutely positive about the trading activities so far.

Yes. But have you seen any decline so far in July? Could you say something about that, if you compare to the activity levels in Q2?

I would say not really. Of course, it's different from day to day, but we haven't seen it going down that materially. No.

Okay. And then final question about the new fund you launched in the second quarter, the first actively managed fund in your own franchise, so around World Tech by TIN. I was wondering if this reflects a strategic change that you want to focus more on active fund management, or is this more of a one-off product launch?

I would say that it's partly one-off product launch because if we're going to say something that is actively managed, the combination between Avanza and TIN was like a marriage made in heaven, and it's difficult to find those. But I wouldn't rule it out that if we came across similar opportunities, we could capture them. But that's not a statement, that's a strategy.

Our next question comes from Jens Hallén, Carnegie.

Firstly, just a clarification, see how much you want to elaborate on it. But can you say that you -- if nothing else, you think that you raised the bar now for Avanza, do you mean that you think that the saving -- or the revenue per savings capital has been raised or simply that you've had a huge inflow of new customers and savings capital, so that the capital increase would be driving the -- sort of the bar higher?

Absolutely. I think the AUM increase, which is at record levels, the number of clients and the activity in that client base for me strongly implies that even though we would go into, let's say, a boring market, low volatility, low turnover, we will still perform on a much higher level than previous years when the market has been down. So that's what I mean by we are raising the bar. Then how much have we raised the bar, I think that's impossible because that is about what the new normal is. But I will put it this way, the worst day in the future will be a lot better than the worst day in the past.

Okay. That makes sense. Yes, on that -- so given that -- I mean the customer has been highly active now, and I guess a lot of people are working from home, and you have more time to do that. Why do you believe that the customers will be more active also in the future when everyone starts going back to the office and, I guess, living their normal lives?

The normal life, whatever that is. I would say just a couple of reasons. One is that this COVID-19 crisis is a bit different when it comes to savings and other crisis because almost everybody knows somebody who is laid off, lost their job, came into difficulties. So the reality is that more people than ever realize to take care of your personal finances and have a buffer and make sure that you invest your money wisely will not go away because the COVID-19 crisis goes away. And also people see the benefits of saving money and having these buffers and the long-term goals. So I think that savings will be in session for the foreseeable future, because, as you know, Jens, the social security system the last 30 years in Sweden has not been becoming better. It's becoming worse when it comes to what happens when you're sick, when you're unemployed and so forth. And those realities is right up there now and being treated by the customers as something they have to take care of. And I have to make sure that me and my family have savings so that we can -- don't have to move our house if one of the people get unemployed or what happens if I'm laid off, don't have a job for a few months. So I think it's a lot of serious underlying trends that will be beneficial for savings. And that will not go away with the virus. That will still be in place. And also on the more fun side of it, I also think that a lot of people, when you see the activity in our customer base, have realized that it's also a bit of interesting to take care of your finances. It's a bit rewarding knowing what you are doing and allocating your money and savings, and that will also, in my opinion, not totally go away because the virus goes away. So I think the structural trends that's been there for many years but arrived a little bit on the surface during the crisis that will still be there and will be beneficial for the clients who will have a better personal finances. And of course, the effects of that, if we do our job right, is that is beneficial for Avanza.

Okay. Then maybe also, my final question was on sort of structural changes. We now have been -- the cost cap of moving pension savings would be -- all the comments have come in, I think, to the government. I guess we're still looking for 1st of January 2021 for some kind of implementation. Have you got any updates or any new views on what you expect that will bring to Avanza?

We expect the politicians to deliver on what they have promised. And if they don't do that, they betray the Swedish population, and I will be very, very upset if that happens.

There appears to be no more questions. So I hand back to the speakers for any other remarks.

None. Thank you very much. In this very strange time, I hope you will have a great summer, and stay healthy and your families stay healthy, and we will see you after the summer vacation. Take care.

Bye-bye.

Bye-bye.

This now concludes our conference call. Thank you all for attending. You may now disconnect the line.