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

Welcome to the Avanza Bank Holding Interim Report January through July 2022. [Operator Instructions] Today, I am pleased to present Rikard Josefson, CEO; and Anna Casselblad, CFO. Please begin your meeting.

Okay. Well, welcome everybody who is listening in. I will start with a business update, as usual, highlighting the quarter and what's happened during the quarter. But let me start with saying that there has been a total change of scenery comparing the first half year end '22 compared to 2020 and 2021, which were years when we doubled the size of the company. It has been very challenging for our customers who have seen their assets falling down a lot in value. And of course, that also affects Avanza as a company. But I think you have to bear in mind that we have seen the worst market since the 1930s. It was 90 years ago, a 6-month period was this bad when it comes to asset prices. In combination with inflation, that's the highest in 30 years. And just this morning, the Swedish inflation for June came in at 8.5%. We have seen positive interest rates now up to 75 basis points and interest rates, on the positive side, we haven't seen for 7 years. And I think our customers are experiencing challenging times also due to the fact that inflation increases cost of living for people. And at the same time, for many, many years, we can see disposable income going down, and that is not very common for especially the younger generation. And that, of course, could have a negative effect on the ability to keep the savings going. But at the same time, the growth that we had in '20 and '21, we always said that we have lifted our lowest level within the company. And just one mark on that is that if you compare Q2 2019, we tripled the results of the company during Q2 this year even though these challenging times that we are living in. So all in all, I think the quarter and the first 6 months is pretty good actually for Avanza, given that the tailwind that we had in 2020 and 2021 has became a total wind going on the opposite direction. If you also look a bit to underline the fact that we have lifted the company when it comes to performance and looking at turnover in brokerage-generating securities per trading day, of course, we are lower than '21 and lower than '20. But on this graph, you can see that we are way over the figures that we have in 2019. And we remind that 2019 was the best year ever so far for Avanza when it comes to brokerage income and activity levels. So once again, underlying the fact that our lowest performance have increased quite substantially, I think this shows even though the number of commission-generating customers declined during the quarter, number of clients owning equities is actually increasing, which also is a good assurance that the future, when things go around, looks quite positively. Net inflows is SEK 25 billion for the first 6 months, down 53% year-on-year. And of course, we always know that our existing clients have money on the sideline waiting to be invested and a lot of customers have been very not so active during the first 6 months and especially in the second quarter. Before this year, we had in the fall of '21, over 500,000 daily active users of the platform and that has dropped to 375,000. So that also underlines the fact that when you have red numbers in your mobile app, you don't log in as much as you usually do when you see nice blue figures. At the same time, our customers are seeking information. During the first half year, we have 5 million views on our blogs. 2.5 million people are listening to our financial reports. And in the quarter, we got SEK 8 billion in net inflows, which adds up to SEK 25 billion. So also, I would like to underline the fact that 30% of the mutual fund capital is also now invested in our new -- our own mutual fund company, which shows that the things we have done with that company, the funds that we have launched the last couple of years has a positive effect. The savings capital is down to SEK 653 billion and that was SEK 806 million at the end of last year. So of course, our customers are taking a hard hit when it comes to the asset values. Looking at the transaction and the market share of transaction, we have dropped a bit, and that's mainly due to the fact that a lot of the retail buyers who stands for a lot of activity has been much more selective when to trade and they trade a lot less. And at the same time, we can see that the foreign institution is the ones who are gaining market shares and they are not in the retail part of the market, so to speak. During the quarter, we had launched our new back office system, which was one of the larger projects we have undertaken in Avanza and we migrated over to the new system during Easter and everything went well. And I think our staff has done a magnificent job of making sure that our customers were not affected during this big shift that we've actually done. We haven't launched any larger new products or services, but we have improved many small things, especially on the mutual fund side, to make it easier for our customer to consume the mutual fund part of the platform. And we have also applied for a science-based target initiative for net 0 emissions, and that's also the highest ambition level you can have. So that is also something that feels quite comfortable that we are in the forefront, when it comes to sustainability positioning the company. Looking at the more long-term perspective, I still think that one thing we cannot forget is that the structural reasons for saving is still there. You need a buffer, you need money to move away from home, you need to save for pension. We also know that we are -- the next decade, we'll see a large wealth transformation from the old generation to the young generation and we know that the average age of a client of Avanza is 38 and the average of the Swedish citizens is 48. So our young customer base is a big asset for us going forward. And we also have seen during the quarter that our customer satisfaction or NPS score is well above 50, so the customer satisfaction is still there, even though the customer might be disappointed on the development of the savings. And during the last 12 months, you can also see that the churn has gone down to 1.4%, which is also, in my opinion, good news. We have a target to have 10% market share in 2025. It will not be a straight line, but I'm still convinced that we will achieve that, and that will also end up in '25 with a much larger Avanza than we are today. As always, the employees of Avanza is the key success factor in combination that we are never satisfied with what we are doing. We think we can improve everything that we do. And just during the quarter, we had our first hackathon rainy days with Avanza when -- I feel very comfortable when I saw the addition of the new ideas of improvements, features and things we will do for our customers going forward. And our goal is always to be the best tool to improve your personal economy, and I think we are improving that tool for our clients every day and we will keep on doing so. Having said that, I will turn over to Anna.

Thank you, Rikard, and hi, everyone. We've had the first worst half year for the stock market in 90 years. But still, we report a very strong result, almost triple compared to pre-pandemic levels. The last 2 years' strong growth has definitely taken us to a higher level and being able to show these results under these severe market conditions is a very good sign of strength, which is not a privilege of all growth companies these days. The net profit for the quarter, however, decreased by 33%, mainly due to lower trading activity and higher costs. Still, net profit ended up at SEK 296 million, which is higher than all quarterly profit except the pandemic years. Looking at the first half year's net profit, this is even 26% higher than the first half year 2020. Operating expenses came in 9% higher than in Q1 and 24% higher than in the first half year 2021. Our previously communicated cost guidance of SEK 1.050 billion to SEK 1.070 billion stands. But of course, we are revising our business plan and priorities for the autumn and forward to make sure we focus on the right things when we get the best outcomes as always and that we use our resources wisely in this environment. At the same time, when market environment turns, the last years have proven that the superior user experience is an important competitive advantage. We report a continued strong operating margin of well above 50%. Return on equity was 26% for the first quarter and 32% for the first half year. This is below our long-term target of at least 35% and affected by the worst market environment seen for almost a century. The market environment we saw in the end of Q1 have continued. The even higher volatility in Q1 hasn't changed our customer's hesitance to trade, and we still see a lot of customers sitting on their hands, not knowing what to do. We also saw the broad index falling nearly 16% in the quarter. This has affected both brokerage- and currency-related income. Continued decline in stock markets affected the fund capital, which was down further with 11%. And fund commissions declined by 9%. Income per SEK of fund capital was basically unchanged at 31 bps in the quarter, although the share of index funds was on an all-time level, close to 40%. Net inflow to funds in the quarter was nearly SEK 1 billion. NII increased substantially compared to Q1 due to higher market rates and the raised policy rate with 25 bps from the beginning of May. This increased the return on surplus liquidity in the internally financed lending portfolio. Last week, the Riksbank raised the quality rate with another 50 basis points and Avanza's interest rate sensitivity is high with about SEK 550 million for another 100 bps increase. The calculation is based on the volumes and rates at the end of the quarter. All other assumptions are unchanged, which also implies that no interest rates on deposits are included. Other income decreased mainly explained by lower income from Avanza markets where we saw lower activity and lower average AUM. Corporate transaction activity is still more or less on hold and we only participated in a few transactions in the quarter. Costs for payment services commissions decreased because of lower customer activity. Coming back to brokerage, income declined by 34%, in line with brokerage-generating volumes. Although income per turnover krona was slightly higher at 10.5 basis points. There were 3.5 fewer trading days. Costs increased by 9%, mainly due to increased other costs. This is a result of higher IT expenses, some of them related to the new back office systems. Personnel costs increased as well explained by more employees. In the quarter, the new back office system was implemented, as Rikard mentioned before. And for me, we have started to amortize it over 5 years. Going forward, it will be around SEK 6 million per quarter, split between amortization and prepaid expenses. Due to decline in stock markets, savings capital decreased by 12% to SEK 653 billion. This affected the cost to savings capital ratio, which increased to 16 bps. For the half year period, cost of savings capital ratio was 14% -- 14 bps, which is above our target of maximum 12 bps over time. And as mentioned before, our cost target could be and has been affected by the market value fluctuations in the savings capital and should be seen over time. But with that said, and let's just state it, we will make an overview of the business plan and our priorities going forward to once again make sure we use the costs wisely in this changed macro environment. High cost efficiency is a high priority for us and an important competitive advantage which makes us resilient in various market conditions. Lower trading activity and fund capital fixed income to savings capital ratio which decreased with 4 bps to 35 bps. The capital position is still strong. The leverage ratio, the tiers of our capital, was at 4.4% at the end of June, which is down from 4.8% at year-end and slightly down from Q1 and that is the result of the market conditions and customers having higher portion of liquidity. The leverage ratio requirement is 3%. But as said, in the autumn, we are expecting to get our additional bank specific Pillar 2 guidance from the Swedish FSA. And considering an additional 0.9%, as a couple of sector colleagues have already gotten, the position is still strong. And with that said, our return target of 3.8 will need to be revised as well. To strengthen the leverage ratio and to optimize the capital structure, we are planning to issue additional Tier 1 capital and we will get back with more information later. To conclude and to add to Rikard's comments also from a financial perspective, Avanza is very well positioned for the future. Despite the last half year's market turbulence, we see no actual credit losses in our margin lending portfolio. Also, the mortgage lending is of high quality, with 50% LTV requirement in addition to the SEK 3 million of savings capital on the platform offered to the private banking customers. Capitalization is, as I just said, also strong. And although activity has slowed down, we are waiting on a high level. And in addition to the last year's strong growth, we are also starting to see the effect of the higher policy rates. In the current market environment where growth has slowed, we are still showing strong results and this is not all companies' privileged. Here, Avanza's scalable business model, together with strong customer focus and cost control, are important advantages and makes us resilient in different market conditions. And that's all for me. Would you like to...

No. Thank you very much, Anna. I think we just will open up for questions for everybody. So fire away.

[Operator Instructions] And our first question comes from the line of Patrik Brattelius of ABG.

Okay. My first question is you mentioned this a little bit on the call here, Anna, but if you could please elaborate a little bit help us understand a little bit more how we should think about your long-term cost growth, the coming 1 to 2 years out here, given that the cost to savings capital ratio is such -- is so dependent on the customer inflow and the market development. Historically, your costs have increased at least 10% per year the last couple of years. So how should we think the 1, 2 years out from here, please?

Well, I think I can answer the question. I think that, of course, we are taking a lot of impression on the current situation and we will do our business planning in the fall looking into 2023. But -- and of course, the macro environment will have an impact how we view cost going forward, but I would like to come back to that.

Okay. And then if we see the activity on the platform is coming down quite quickly with falling brokerage income and FX income as a consequence. Is there anything you can do to mitigate this? You see from your perspective, for example, how are you thinking about raising prices?

No, we're not thinking about raising prices. That's not part of our DNA. I think you just have to sweat it out, so to speak, because I mean we stand by our clients in good times and we stand by them in bad times. And I think we don't want to encourage people to do things and trade things they don't understand, whatever it could be. So I think the buffer that we have when it comes to lower activity and things turn around, is, of course, the NII, which will have a very positive effect. If we get policy rate of 150 basis points, it's quite a lot of money that we will get top line, bottom line and that is our buffer in tough times. So that's my answer to that. I think if a company like Avanza, the volatility in brokerage income is part of the business and you just have to live with it.

Okay. I see. And picking up on your NII answer there, it was up strongly here in Q2 following the repo rate hike. Is there any lag effect here that we didn't see fully come through in the second quarter that we can expect coming in the third quarter from the first repo rate hike? Or is it the full effect the...

It takes around 3 months before we get the full effect of repo hike -- rate increase. And the 25 basis points were in beginning of May, so we did not have the full effect of the first 25 basis points in Q2.

Yes. Can you put an absolute number on that for us, how much you expect that to help?

No.

No, I don't have that number. As we said that when the repo rate or the policy rate reaches 1%, that is about SEK 550 million more income top line, bottom line on a rolling 12-month basis. And it takes for every increase in the repo rate around 3 months for it to fully impact the top line.

Okay. Got it. And then as a last question, I saw that in the statistics that you published that the brokerage income per commission-generating note was down significantly, and you write that the internal transaction has been deducted. Could you elaborate a little bit how this would have developed if it didn't include the deducted internal transactions, please?

Sorry, could you take that again, please?

From the statistics that you published, you write in Note A there that the internal transactions have been deducted. So if you take the commission income over the broker-generating notes, it's on all-time low and it fall quite sharply compared to Q1. Could you elaborate how this number would have looked if you didn't do this deduction of internal transaction. Do you have that data?

Yes. When it comes to -- internal transactions is not something that generates money, so it -- but we've also said it's because we merged contract notes to a larger extent in the new system. But I mean, the income per commission note is also part of the size of the transactions, which when we saw in Q1 when people were selling off -- when they were started -- when they sell off transactions -- well, the transactions were often larger. But when they start buying again, it's normally -- well, less -- the size is normally smaller. So I would say that is one part of it. But we don't internally look as much as income per trade. We more look at the income per turn over krona.

Okay. So -- okay, larger transactions than made your...

When customers move out of a position, they sell everything. And when want to go into an equity they like, they usually have the thing that they buy it over time in smaller portions.

Our next question comes from the line of Jacob Hesslevik of SEB.

Rikard and Anna, if we go back to expenses, I mean, you guide for SEK 1,050 million to SEK 1,070 million for this year and I guess this number includes the 4% salary revision you mentioned in the report. But my first question is like when during the year do you actually have your salary negotiations? Is it during the autumn and then goes into effect January 1? Or is it made during the winter month in Q1 and then retroactively applied?

We have this conversation with our employees in the beginning of the year and the new salaries are implemented from first of January.

Okay. Okay. Okay. But do you think salary inflation then can be reduced for next year? I mean we have 7% inflation at the moment. But on the other hand, I mean, we have seen many fintechs and start-ups in Stockholm who is actually currently reducing its workforce, meaning the supply of IT people must have increased. And then I mean salary expectations on future and current employees should be reduced somewhat. Or is it more complex than this?

I think it's a little bit more complex than that. I think you're totally right and I think that hopefully we will find it easier to find good engineers during the autumn just because some companies are laying off people and a lot of people want to work in a company that's profitable and can give you job security. On the other hand, even if this is happening, the best talent in tech are very, very sought for so they can put quite high demands. And the best tech people that we have is, of course, also sought after by other companies. So that could also play out that the salary increases could be higher. So it's going to be very interesting during the autumn to follow the union and employers negotiation where we in Sweden call, where the mark will land, because, of course, we cannot, in Sweden or in Avanza compensate employees fully for the inflation. So I think there's a lot of uncertainty in this and we have to carefully look at our plans for 2023 to understand how -- what the number will be next year.

Yes, that makes sense. But what has historical salary revision then been? Is 4% a good indication?

I think it has been around 4%.

3%, 4%...

Yes, 3%, 4%.

Okay. Perfect. And then one last question from my part is, I mean, is there a ratio between how the deposit and the liquidity portfolio develop? Or how does that dynamic actually work?

What do you mean?

I mean we can follow the deposits in your monthly statistics which is send out, but we can only see the liquidity portfolio in your quarterly reports. So I'm just wondering how much -- let's say, you get SEK 1 billion in deposits, how much is put into your liquidity portfolio? Is it always 50%? Or is it depends on other external factors? Or what's the dynamic there?

Depends on the lending portfolio -- development in the lending portfolio, I would say. Yes, so if you take like the liquidity ended up from the lending portfolio and then you have more or less the bond portfolio is around the SEK 30 billion.

Our next question comes from the line of Nicolas McBeath of DNB.

So first, question on NII growth and your sensitivity. So if we take your guidance sensitivity of SEK 550 million for a 1 percentage point higher Riksbank rate, that would suggest around SEK 34 million higher NII for 1 rate increase per quarter and that's about how much your NII increased in the quarter versus Q1. So I was wondering if given your comments that the impact wasn't fully reflected in the second quarter's NII, were there anything else impacting the NII in particular apart from that and obviously some positive contribution from higher volumes? So any further comments to make on the NII growth in Q2, please.

But as we said, the impact was from the beginning of May. So we had almost 2 months this quarter affected by the higher interest rate.

Yes. So that's why I think it was a bit surprising to see that big an uptick in the NII quarter-on-quarter.

Yes. But it also depends on like when the bond portfolio, when the rates are reset. So -- so it's hard to say if we have any predictions on that. And I would say also had a lag effect from -- when rates -- increasing STIBOR from Q1 as well.

Right. Then a question on net inflows. So if you could please help us understand the drivers behind the inflow decline. Your net inflow halved versus Q1 in the second quarter. So is it less gross inflows or are people taking out money? And any comments whether there are particular segments which are now saving significantly less? And you obviously have much more detailed data that helps you understand how the net inflows behave. So it would be interesting to hear if you -- how sensitive do you think your net inflows are to interest rates and mortgage rates for the households? And do you think there is a risk that we could see actually net outflows in the coming quarters as we get further increases to household mortgage rates following the continued rate hikes by the Riksbank?

I think it's an excellent question that I think a lot about, quite honestly, Nicolas. I think it's -- when we see outflows, let's start with that, usually -- and we track outflows, we can see that most of the outflow goes to consumption or real estate investments for the normal clients. When it comes to private banking we, from time to time, can have larger outflows but that's usually money going into private equity investments. So that's how we view it. But also, of course, and I think it's a bit early days to understand how the households will act, because in my personal opinion is that most people will, in the autumn, when they realize that inflation is 8%, that food is more expensive, interest rates are coming up, and after summer people -- during the summer, people just want to enjoy it and don't really want to care about their personal finances. So I think there could be absolutely an effect that we could see, marginal outflows for people just handling the personal finances. And at the same time, we know that when the markets are down, our larger clients and existing clients tend to not put in new money on the platform and new customers deposit money on the platform. When the markets are up, all the clients always put in a lot of money on the platform to invest in. So there's a lot of money on the sidelines, so to speak, that pour at their old traditional bank. So I'm absolutely concerned when it comes to the net inflows due to the fact that the household will have tough times during the autumn. But at the same time, what we have seen so far, we have about SEK 1.6 billion in net inflows that is more or less automatically generated. That is down SEK 100 million from quarter 1 due to the fact that people are turning on the brakes, so to speak, when it comes to savings due to the fact that disposable income is coming down. So I think there's a lot of different factors into this but it's something that concerns me because also, we have another SEK 300 million in pension premiums that will not be affected so much about the macro environment. And I think it's a bit over SEK 300 million. So you can say it's SEK 1.9 billion in net inflows every month now. And I think the sensitive part is that is how people will manage the monthly savings. I think we're going to see customers who are saying, let's say, SEK 2,000 a month will have to go down to save SEK 1,000 because they need that extra SEK 1,000 to pay the bills. But it's very, very difficult to predict that, but it's something we're looking at carefully and try to understand how our customers can do and also help our customers not to stop saving even though they have to save lower amounts due to the environment we are living in.

And that's exactly what we have seen. It's the inflow that has, well, come down rather than outflows that have increased. So outflows is about the same.

Okay. And with that in mind, you -- I mean you're still targeting to grow your market share to 10% in the Swedish savings market. I think now it's around 7%. I mean do you think this inflow trend is enough for you to bring up your increase in market share to that level by 2025? Or do you have any other measures you see that you could take to bring our market share to that level? Because I guess at the current pace, it looks like you're not really adding enough inflows to reach that level. Any thoughts on that?

I think if we will have this kind of bear market from now until 2025, I think getting 10% will be challenging, I have to agree to that. But I have a slight hope that the market will not go down 30% every 6 months up to 2025 and the savings will be somewhere down the road back in fashion. But then I think also if we have SEK 25 billion in net inflows, we don't have the statistics for Q2 yet, it's also the growth of the savings market, because the savings market the last 10 years have grown around 8%, and that is going to be very interesting to see if that goes down substantially. Because if it goes down substantially, even a smaller growth than we expected could still make us gain market shares. So I think there's a little early days in this kind of environment to have an opinion about that, more than that if we have this kind of bear market for 3 or 4 years going to 2025, I think it would be difficult.

Yes. So then it sounds like implicit in your assumptions is that as long as the stock market stabilizes or improves, that should bring back or help you recover your net inflows even if rates keep increasing. So you think that the stock market is a more important driver for net inflows rather than rates because rates are hardly coming down in the foreseeable future as it looks like.

Absolutely. But I think the stock market is the trigger for people getting interested in the savings again when they see the mutual funds going up in value or the equity is going up in value. So I think over the years, it's always that the interest is low when the stock market goes down and interest is high when the stock market goes up.

Okay. And then final question and a follow-up question on cost and cost efficiency. So what drivers in the foreseeable future do you see that you think could help you bring down your cost of savings capital below your target of 12 basis points? I know it's not a short-term target but, yes, I mean what kind of -- how much patience do you have being well above 12 basis points? You mentioned you take the changed macro into account for your new business plan. Have you identified any parts of your cost base where you see potential to take out costs without substantial consequences on your customer experience or growth ambitions?

I think that's something we have to come back to maybe on the Q3 because we, of course, are looking at the macro environment. And if the world will look like this for '23 and '24, of course, we are taking into consideration the effects that, that will have and what we can do. But I think you should remember that over 70% of our costs are staff-related, so it's all about the number of employees and how many we have hired and so forth. But at the time being, we still think that we have hired more people this year, we have increased our development capacity, we are in it for the long term and -- but of course, we will be careful when we plan for '23.

Our next question comes from the line of Enrico Bolzoni of JPMorgan.

Starting again one on cost, just to clarify, I'm sure I understood well, when you say that you spent about 20 -- I think it's SEK 28 million for the back office system and some of that has been expensed, can you just clarify how much of that has been expensed in 1H? And I presume some of that went into the other costs. And related to that, you were mentioning you're going to have about SEK 6 million per quarter split between amortized and expense. How much of that actually will be expensed and therefore we're going to see in the other cost line? So this is my first question. The second question was on the trading activity. Just noticed that. So the average turnover was about SEK 25,000 which is quite low relative to history. And usually, low turnover means quite high yield. While is that -- the yield was actually pretty low because it was about 10.7 bps. So I just wanted to know what -- if you can just provide any color there. And linked to that, also, the FX yield came down quite a bit. So in the context of changing FX rates, how does that impact your FX yield on foreign transaction? That is my second question. And then maybe one final question on NII. Can you just confirm whether you still plan to pass it on to consumers in a similar fashion. So clearly, the liquidity portfolio is going to be impacted directly, but then how much of that, considering that the Bank of Sweden is raising quite fast, you're going to pass out to customers immediately in terms of mortgages and lending?

We'll take it backwards and start with the last question. What we have communicated is that when it comes to our lending products, on the mortgage side, we pass on 100% to our clients for the rate increases. When it comes to margin lending, when we calculate the SEK 550 million, we have passed on 50% of the increase to our customers. And we also plan not to pay any interest on accounts to our customers up to 150 basis points but that, also, of course, with the disclaimer depends on what the competition does. So that's my answer to that. When it comes to FX, I can take that question also, I would say that what you have seen during the quarter is more trading for markets by Private Banking and Pro customers and some of them have discounts when it comes to FX. So that's the reason for that because the large chunk of retail clients have been more inactive during the quarter and more of the trading, relatively speaking, has been from Pro clients and Private Banking clients. And Anna, you will take the...

Yes. We -- you can read in report, we had a total of SEK 153 million when it comes to the new back office system, whereas SEK 28 million had been expensed, SEK 10 million this year and SEK 18 million last year. And as you said, we have capitalized as a prepayment around SEK 60 million the rest and SEK 65 million as an intangible asset and that would be around SEK 6 million per quarter split between the amortization and prepaid expenses.

And sorry, may I follow up briefly on costs again. I appreciate that you say that you're clearly going to evaluate the macro towards the end of the year. But can at last -- can we at least get a sense of what can be the potential direction of cost because your previous guidance up to -- not a long time ago was, in the long term, 10% to 12% growth. So I'm just curious to understand, if the macro environment remains adverse, does it mean that you can actually cut some costs, so you have some flexibility on the downside? Or conversely, if inflation stays very high, it means that potentially you're going to have way more pressure on wages, for example, and therefore, they might grow a bit faster. I'm just curious to understand basically in terms of directionality, is it going to be potentially higher or is it going to be potentially lower depending on the macro?

No, I think when it comes to wage inflation, we had a previous question about that, that I hope you heard, I think it's a very tricky situation. We'll see how the unions will act during the fall and how much. I can just look at Germany where inflation is 8%. And I think they landed their agreements around 4%. We will see what will happen in Sweden. That's a tricky question. When it comes to cost increase this year, I'd like to remind you that one of the reason our costs increase this year is that we did have a backlog when we have to hire more people during 2021 due to the fact that we grow so much. And even though we have much more clients, they still call our call center and our customer service. So those number of calls has not gone down. Yes, the market has gone down so we need still those resources. And then we had some adding people to back office and so forth. So part of the cost increase for 2022 is taking care of backlogs from '21. Of course, that kind of cost increase, you will not see going forward in 2023. And of course, I don't believe that we will need to add so many people in the next year or so. But once again, we are going into business planning session during the fall. We will have discussions with the Board. And of course, we will carefully evaluate the macro system. But I also like to underline the fact that we don't want to lower our capacity of innovation and improvements on the platform because we still think that we can improve everything we do for our clients. And companies they're working on improvements, focus on the clients when times are tough, usually become huge winner when things are turning around to the better. And that philosophy I still stand for. But then, of course, if we will have a bear market, goes down another 30% from this level and so forth, of course, we will evaluate what the options are. But as always, coming back to that later in the year.

Our next question comes from the line of Maths Liljedahl of SEB.

A lot of questions. But just to follow up and I noticed that margin lending decreased. Obviously, that's quite natural considering the equity market. But I'm trying to understand how important is margin lending for the NII sensitivity? I.e., what margin do it take to STIBOR? And is that STIBOR-linked? Or how should I think about margin lending going forward here?

We cannot disclose the margin, but customers can pay from 0 up to...

5 point -- yes.

6%.

Yes. We don't disclose the margin on it, but you could say that it's not linked to STIBOR or any rate. So that's what you call the general interest rate environment is taken into consideration when we price that product for our customers.

But it's significantly higher than a normal loan, I would assume rather.

Absolutely. If we -- I mean, it's not a secret that our funding costs are -- since you don't pay for deposits are basically zero for the interest rates, and that's the trick with it. And we have customers paying from -- I think we still have, you can loan for 0%, 10% of your portfolio, but then you have interest rates up to 5.9%, depending on the leverage that you want to use. So the lower leverage, the better price. So that's a mix of things.

So a decrease of margin lending could have an impact on the NII sensitivity at least?

Absolutely. If the margin lending would significantly go down, that will have a negative effect of the NII. But I would say, just to comment on that, Maths, is that it has been quite stable during the first half of the year. And that has been, in my view, I thought that some customers would be more careful with leveraging their portfolios given the environment but it has been on stable volumes.

Our next question comes from the line of Robin Rane of Kepler Cheuvreux.

Yes. So if I read what you said there in the beginning of the presentation. The -- so this quarter has been really challenging. You've seen customer activity going down. And I guess the main -- the main difference to income versus the same quarter last year is from net brokerage income and together with FX. So -- and then looking at the return on equity, it's 26%, well below your target. From your point of view, as the quarter has been as challenging, would you say it looks like a tough quarter in terms of customer activity? Or is there any risk that this will continue? That would be my first question.

Well, I would say that if we still have the macro environment and we don't see that the stock market is moving upwards or even if it moves downwards, my short-term prediction is that the challenges will be in Q3 like we had in Q2, because we are so inhabited by the macro environment, that's my prediction.

And if we would imagine stable equity markets, do you think that the activity would be better then? Or do you need a rebound in market in order to have better activity...

I think that if we get the market with slightly upwards prices on equities, generally speaking, with a normal volatility in the market, I think that would have a positive effect that the retail customer will get coming back with confidence to invest again.

All right. Good. And then on the interest rate sensitivity. So should the sensitivities based on the current balances. But how do you see -- and you assume no changes to deposit rates, how so far after the 2 Riksbank rate hikes that we have seen, have you seen any dynamics of competition in the deposit markets that you can make any conclusion from or such?

No. I think our deposits are quite sticky because we have Savings Account+ with our 6 partners, so that means that a customer can actually have Avanza experience and get interest rates on the cash. And most of our liquidity is in tax wrappers, where there's a negative effect to take out and put in money all the time. And most of our clients view that liquidity more as money on the sideline. But the interesting thing in your question, I would say, is that if people would start using a lot of the liquidity because the confidence in the stock market goes up, our liquidity could actually go down, but then our brokerage income would go up or our mutual fund fees will go up, the people have invested that liquidity in other products. So I think you have to bear that in mind also.

All right. And then just a detailed question. Other net commission income was, I think, SEK 19 million in Q2. In Q2 '21, it was minus SEK 5 million. What -- so that's almost SEK 25 million, SEK 24 million difference? What's driving that, please?

On other income, I would say that payment services commissions is one part that is lower when the activity goes down. I mean, in that time, we incurred common costs. And then, of course, I mean, the external mortgages has gone up. Savings Account+ has gone up. So income has also increased.

All right. So it's a mixed bag then.

Yes.

And our next question comes from the line of Maria Semikhatova of Citibank.

A couple of questions. First on customer activity and then second on deposits, following up on the previous question. On customer activity, do you see any difference in behavior of, let's say, old cohorts of customers or new customers that you acquired in the last couple of years in this quarter? And then you mentioned in your report that you're seeing less number of customers trading, but at the same time, more customers owning equities. Can you provide a bit more color what portion of your clients own equities now and how that compares, let's say, to pre-pandemic levels? That would be my first one and then a follow-up on deposits.

I would say, and we have seen this before, that generally speaking, more unexperienced customers tend to sit more on their hands when the market is like this. And Private Banking, the more experienced customers tend to be -- still be active in reallocating the portfolios. And I think that number of clients increase owning equities, I just think that a lot of people might also have been thinking and not making so many buys but they think they're buying the dip, so to speak. So they liked 2 or 3 companies in Q1 and Q2, they bought them and they used to buy to hold long-term investments and not buying and selling that often. I think that's the reason why we are growing number of equity clients.

And on the share of customers that own equities, let's say, relative to historical levels?

It's on an all-time high level, I would say, with the disclaimer I'm not absolutely sure, because we have over 1 million clients owning equities and over 1 million clients invested in mutual funds.

Okay. Understood. And then on deposits, I just wanted to clarify, I understand that this offer of savings+ would allow customers to actually get the benefit of higher rates. But at the same time, this means that this money is placed with third parties and that would not contribute to your liquidity portfolio. So do you see the risk that there will be a transfer of customer deposits to external accounts if rates continue to go up and markets don't really improve from here?

I think the customers who have money on Savings Account+, they have it because they want to save in cash, so to speak. So I think that money will stay there. But I think coming back to that, a lot of the customers' deposits are in tax wrappers and they are more viewed as money on the sideline. So I think that they will stay there until the customer gets confidence enough to invest them in mutual funds or equities.

But there is no penalty from a tax perspective if you actually take out cash from the tax wrapper account.

Yes, there is a negative tax effect if you put in and out money of tax wrappers back and forward when it comes to taxation. So that's why you are reluctant to do that and using it as a current account basically. That's not wisely from a tax perspective. So the money you put in, you should keep there and then invest it when you think the timing is right.

Okay. Understood. And the majority of the balance sheet deposits, they are linked to tax wrapper or special savings.

Yes.

Yes.

And the next question is from Jacob Kruse at Autonomous.

Could ask, given the more cyclically challenging revenue outlook, does that change your thinking around more structural growth initiatives? Or I'm thinking in particular going into different regions or anything like that? Or is that completely unchanged from the back of this. Yes.

Okay. Continue. Okay. I would say that, as I said before, at the moment, we don't have any plans to go on the road and go somewhere else in Avanza. We have that discussion, as I always said, with the Board once a year, and then we conclude that there is so much growth left in Sweden and that has not changed.

But do you still think that the prospect for lots of growth left in Sweden, that, that's as intact as it was, let's say, 6 months ago?

Well, I wouldn't change the fundamental strategy of the company because we had a bear market that's worst for 90 years, the first 6 months. I think we have to look a couple of quarters ahead and see how this will play out with inflation, war and everything that's going on in the world. So I think it's just staying put, taking care of our clients at the moment, that's the priority #1, and improving what we do for them in Sweden and grow the company in Sweden.

Yes. And can I just follow up on the previous question around the new and old clients. Could you quantify at all how, let's say, for example, on inflows, how they have shifted on the clients you took on in the last 2 years relative to the inflows from the client you had prior to the pandemic...

I don't have that data, but you could generally say that when the markets are bad like they have been this year, new clients tend to stand for more of the net inflows than old clients. When the markets are good, old clients tend to stand for more of the net inflow than new clients.

Okay. But -- okay. But you're not seeing that the people who came on board relatively recently, that, that was kind of -- that they were more following a trend that are now basically giving up for this whole retail trading activity.

If you look at net inflow last year, it was 50-50. And if you look at net inflows for Q2, it was 48% from new customers. I mean it's in that neighborhood still.

Yes. But at the same time, what important is new customers who came in the last 2 years and made money and now losing money, are they giving up? I wouldn't say they are giving up, but I would say they have lowered their activity. And to put it a bit, that many customers who have had short-term position had turned them into long-term position and say, I'm going to keep this and see what happens, especially if you're a younger client.

Our next question comes from the line of Andreas Hakansson of Danske Bank.

We're going through most areas. I just want to check a bit on NII again. Rikard, when you say that you don't expect to pay any rates on your liquidity for the first 150 bps. Is it as simple as that? So I take the SEK 550 million sensitivity to 100 bps and it's SEK 825 million for 150 bps?

Yes, given that the structure of the deposits are the same as it was at the end of Q2.

Yes, sure. Sure. That was the first question.

Take into account that it takes 3 months to reset it and it will be on rolling 12-month basis. So that calculation would be correct.

And on that 3 months, I just understand, if I look at 3 months STIBOR, I mean it would have been around 40 bps on average in Q2. And we're now going into Q3 at 100 bps. And I guess we're going to be at a higher level further down the quarter. So is it 3 months STIBOR? Is it a repo rate that's actually driving your NII?

It's 3 months STIBOR on the bond portfolio. Yes, I would say it's both. When it comes to the bond portfolio, it's STIBOR.

So the effect is going to be earlier than what we think if we just look at the central bank rates, right?

Yes, since STIBOR gets up a little bit before the effect of the repo rate or the policy rate.

And we have one further question in the queue, that's from the line of Panayiotis Ellinas of Morgan Stanley.

So on the fund business, despite all the cyclical headwinds, it seems that there is also a structural shift into index funds, now counts around 40% of your total fund capital. And at the same time, our bond's own funds account for 32%. That's up from 28% a year ago. So what are the drivers there? And how shall we think of the margin erosion, given the shift to margin index funds and at the same time, the high penetration of Avanza own funds? That's my first question. And then the second one is on just to follow on costs. The first half costs are about 50% of the middle of the full year guidance. I mean historically, second half costs are higher than the first half. So do you see any flexibility on the cost base? And -- or do you expect any cost efficiencies to come through in the second half of the year following the investments you did so far?

What was the first question? The mutual funds. I think that we have -- my prediction is that when the markets are tough, people seems to be difficult to choose actively managed funds that you think will do the job for you. So then you lost faith in all the asset management and you go index. We saw a shift in '20 and '21 for more actively managed funds when the market was going up. So I think that correlation is still there. And I think that's the reason for people going into index, because they don't know what to invest in so then they choose an index product. So that's my answer to that. While we have grown our own mutual fund company, I would say it's -- we have launched the last couple of years our own actively managed mutual funds have been very popular. We lowered the price for our auto funds that has been quite popular. So I think it's product development, great marketing and great risk relative return to our customers so that becoming more and more popular. So the people in our mutual fund company has done a fantastic job.

Yes. Just to follow up on the margins. Do you expect some erosion there, given the change in the...

No, I think if this continues with this bear market, I could anticipate that the part which will be indexed could be even higher. And that could mean that the 31 basis points could be a lower number. But your guess is as good as mine because that is all -- that's all about what the customers' preferences are. And now it seems to be a lot of preference for towards index that we have seen in the ongoing markets before.

Thank you. And as there are no further questions at this time, I'll hand the floor back to our speakers for the closing comments.

Okay. Thank you all for listening in, and I wish you all a very, very nice summer and take care of yourselves. Thank you.

Thank you. Bye. Bye.