Cembra Money Bank AG (CMBN) Earnings Call Transcript & Summary

Okay. Good afternoon. Thank you for joining us. My name is Benjamin Goy. I'm very much looking forward to welcome Cembra today at our conference. We have Robert Oudmayer, he's the Chief Executive Officer; and Pascal Perritaz, Chief Financial Officer, with us today. The audience might be now familiar with the format. This will be a fireside chat, and you can ask questions via the webcast. Nevertheless, I will kick off the question session maybe with an observation.

Cembra has strongly outperformed European banks since the IPO 7 years ago. So maybe you can give just a brief outline what makes Cembra really different as compared to the European banking landscape.

Yes. Thank you, Benjamin, and good afternoon, everybody. My name is Robert Oudmayer. I'm here together with Pascal Perritaz. I will take the first question, and we then take questions, we divide the questions a bit between the 2 of us. But I'd like to say a few words why are we different in the European banking landscape. I think there are few things that make a difference. First of all, Switzerland is probably different than most other countries in Europe. It's a resilient country with different dynamics than Europe. And Cembra is only active in Switzerland. So we have strong market positions in our markets, auto loan and lease, personal loans and credit cards. If you have a long-term view on us, if you look at the quality of the assets, it's very high quality and it's proven since 15 years. So even if you go back to 2008, 2009, the quality of the assets is from high quality. If you look at us, our funding is completely diversified. So we don't -- we're not the typical mortgage bank with deposits. We have a completely diversified funding, strongly capitalized. We are very focused. I think we're very focused on everything what we do. We're very disciplined. Just to give you 1 example. Our cost-to-income ratio has been for many, many years below 45%. What makes us different is, I think, since the IPO, we've delivered on all the targets, and we have a very resilient business, a well-performing resilient business. And even for 2020, we expect a resilient business performance. So we are in a relatively good shape, and the bank is probably a bit different than other European banks.

Okay. Perfect. That's a good introduction. And then you already touched upon, to some extent, I guess, topic of the day and moment is basically around loan losses. So maybe you can speak a bit about your loan loss experience, potential payment delays you have seen from clients so far. And Robert, you touched on your performance in the global financial crisis. So maybe any case study from that time you can use to give us a bit more comfort? How it looks -- might look?

Yes. Thank you. I would like -- before I talk about today, I would just reflect quickly on 2008, 2009. I was here in 2009. I was running the business already in 2009. So I have firsthand experience there. And if you look at the situation in 2008, 2009 and now, it's not the same situation, but they're quite -- it looks like there are quite some similarities, at least it looks like there are quite some similarities. If you look at the unemployment in 2009, it was 3.7%. We think we go to 3.9% this year, 4.1% next year. So this is the overall expectation from the Swiss government is that it's similar in -- as in, in '09 and '10. If you look at the GDP change, it was minus 2.2% in 2009. We will have a larger minus in this year, but also a stronger recovery next year. So the recovery in 2010 was 3%. We expect 5% recovery for 2021. So basically, I'm not saying it's the same, but I mean there are some similarities in them. If you look at the asset quality of Cembra, our 30-plus as a benchmark was about 2.4%, 2.3%, 2.2%-- 2.4%, 2.2% in '09, '10. And basically, '08, '09 and '10 were relatively stable. We saw a deterioration by 20 basis points, which is almost nothing. Today, we are at 2% 30-plus at the end of Q1 '20. We were at 1.9% in the fourth quarter in '19. So basically, very stable. So the first quarter, even a month after corona, we didn't see any impact or any influence on the 30-plus. Look at the NPLs in 2008, 2009, 0.6% and flat. Today, 0.7% and flat. So there are quite some similarities. I think it depends how long this is going to take. So what you see in Switzerland is that the economy is starting up again. We see quite some recoveries already on a few things. So we are in good shape. I don't think we will have a huge deterioration in the second quarter. I can't talk for the whole year because I don't know where we are going. But so far, we have seen pretty similar pattern in 2008 and 2009. And then the question probably is more interesting. What did we did -- what did we do in 2008, 2009? And what do we do now? And do we do anything different? Well, the answer is basically, no, we don't do anything different. What you normally do in this kind of crisis is you, first off, you collect -- so you basically increase your collection capacity, so your early collections. We immediately moved 10 people to early collection, additionally, 1st of March. You change your collection strategies, you look at segmentations, you look at hardship tools, you do contact strategies. You basically strict -- you give stricter rules on your underwriting policies. So the exposed sectors like big tickets and commercial, you're going to be strict underwriting. You look at your scoring models and you give less authorization and delegation to the field. You centralize more underwriting. Those things we did in 2008, 2009. We did similar things in 2020, basically at the end of February. So I don't know where we are going. It's probably depending on the length of optimization. But so far, we see a resilient business model. We also are not in CECL. CECL is going to impact us in 2023. So we don't have to book up the reserves immediately. So basically, we see that the asset quality is still very strong in Cembra. And so far, we see a very resilient performance on the loan losses.

Okay. Understood. Maybe in that context, if I may, normally, when you think about consumer finance, in particular, this conference is normally hosted in New York, there can be significant defaults. But obviously, you mentioned that Switzerland is a bit different in that context. So could you share some details around Swiss social security system and specific COVID-19-related support measures by the Swiss government that might help to dampen any potential negative impacts here?

I'll ask Pascal to comment a bit on this one.

Yes. So happy to do so, Benjamin. So Switzerland has a very strong social security system. And actually, the most 2 relevant benefits in the context of COVID are certainly as the mandatory health insurance and the employment -- unemployment insurance. So if you take the unemployment insurance, it's aiming at compensating for loss of income model and provide benefits in the context of loss of employment, but also in the context of short-time working. And this is what we have seen with a lot of support from the government over the last couple of weeks. It's basically supporting the operations of the unemployment insurance and to be sure that ultimately the company receives their insurance compensations in due times. Ultimately, all of this is a mandatory coverage in Switzerland, and all employees are covered up to 80% of the insurance income. I think this is something -- a strong security system. And obviously, this unemployment insurance has also helped to basically ensure that at the end -- the customer can pay their bills at the end of the month. On the support from the government, in March 2020, so the government announced a program for granted credit loans with federal guarantees, mainly for small and mid-sized enterprise. And this program was developed in cooperation between the federal government and the banks and provide companies, those which are affected by, really, consequences of the coronavirus. It provides bridge loans up to 10% of their turnover and/or a maximum up to CHF 20 million and covered also 100% secured by the government for the first CHF 500,000. The government invest a lot in this program up to CHF 40 billion. We applied for the participation in this program as well. But what we also saw is that, actually, this program is mainly done for the customers to go straight to the house bank. This is why ultimately we didn't book the -- we didn't book the kind of COVID relief funds in Cembra. We also have seen a lot of additional economic measures from the government to support ultimately the economy. So I would say, in total, a very strong security system in Switzerland with the unemployment insurance as well as the additional granting of loans for SMEs company. I want just to finish by saying that we think there is a lot of trust in the government in Switzerland and how they deal with the situations of COVID and also, ultimately, the mitigation actions, which has been triggered by the government to address the issues and concerns from the populations and companies.

Okay. Understood. Is it then maybe fair to summarize that, even so maybe GDP might be worse this year as compared to the last crisis, unemployment, you said, should be broadly in line with the past, but also that government support is more outsized and much more meaningful than 10, 12 years ago?

Yes. I think if you look at unemployment, I think you need to look at the Swiss factor here. Now I mean, today, 3.5% unemployment rate, and we expect it to go to 4.1%, which is high for Swiss standards because we were 2.3% about a year ago. But 4% unemployment now -- it's true that we have a lot of support from the Swiss government, but 4% unemployment is still probably the lowest in Europe.

So you're confident of starting point and outlook. Maybe coming to your auto loan exposures. Again, I guess, in the U.S., this is a different -- typically a bit of a different risk profile, but maybe you can share some background on your auto loan exposures and the resilience of the portfolio.

Yes, I'll take that. Look, first of all, I think you need to understand the Swiss context from auto loans and leases. We have basically -- the majority of our cars is used cars, but younger used cars, about 2, 3 years old. We normally give a 3-year lease on a used car. So the total age of car age plus lease is normally 5, 6, 7 years. And afterwards, the car normally is exported to Eastern Europe. So it's not a model where you keep on -- where you finance 10-year-old cars with 5-year leases because I think this is basically creating a bill anyway. Then the other thing is we do a lease, then the dealer signs a buyback agreement. And the dealer signs a buyback agreement at a residual value. And the residual value is normally about 25% lower than the fair market value. So the dealer likes to buy the car back because he can sell the car at a profit. And this is a model that is completely normal in the Swiss market. So there's no residual value risk on auto. 99% of the cars go back to the dealer. If the dealer is not there anymore, we are very happy to take the car because we make the profit. And also, the dealer use sometimes the profit to basically sell the customer a new car. So it's a completely different magnitude of auto leases and loans, I think, than in the other markets. Auto is our best book normally. So we have approval rates between 80% and 90%. We have delinquency rates and loss rates, the lowest in our book. And the loss rate on auto is normally around 50 basis points, just to give you a data point here. So how are we doing this year on auto? The market is under pressure now. This is like everywhere in Europe. So if you look at the new car registrations at the end of March, minus 23%. A disastrous month in April, minus 76% -- 67%, sorry. And totally, after 4 months, is the market 35% down. It's recovering slowly, but the market is impacted like almost any other country in Europe. If you look at us, 2/3 of our volume is coming from used cars. So we are much less exposed to new cars than most of the captives here. We have no brand concentration, and we are basically the leader in used cars. The used car market is much less exposed and much less down than the new car market because a lot of people moved to used cars because there's fast delivery. They don't have to wait long for the cars. And it's also probably cheaper cars that they can buy. So the volumes are lower. The interesting thing is that, which you normally see in a crisis like this, and I'm an old guy in consumer finance, I'm 28 years in consumer finance, this isn't my first crisis. What you normally see is you get lower volumes in the crisis, but also you get much lower attrition levels. That means that the assets are relatively stable in the crisis at least for the first 6 to 12 months. We see the pattern also in this crisis, so we got lower volumes. Yes, they're relatively stable. If you look at the end of Q1, yes, the assets were down 1% versus end of last year, 1%. Volume was more down, I can tell you, than 1%. So this also works with p loans, but that's a different discussion. But normally, the assets are relatively stable. Also, think about our contracts are 3 to 4 years on book. So if you manage risk well, and we manage risk well, then your income stream on auto is pretty resilient. What we've seen in Switzerland is that the car dealers reopened their doors 11th of May. So there's a lot of business moving back. I think Q2 is still going to be a different -- difficult quarter, but Q3 will be much better. We see a lot of activity. We see a lot of applications coming in as well. We expect a quite resilient performance. We don't expect a lot of increases in losses and also not on revenue. So auto is probably the portfolio that is the most resilient piece of the business, I would say.

Thank you for the background here. Maybe shifting gears a bit and coming to cashgate, the acquisition you announced last year. Could you give us an update here on the -- how integration is progressing?

Yes. I give it to Pascal.

Yes. Thank you. So we are very pleased with the progress we are making with the integration of cashgate. cashgate was material acquisition for Cembra, ultimately, as we increased our asset base by around 30% or even more. CHF 1.5 billion of assets ultimately. So it was quite significant. So first, on the financial side, we had bridge facilities of CHF 1.6 billion when we completed -- when we announced the deal and completed it. And everything has been paid down in the meantime, in record time, and we have secured long-term funding. So very happy on the financial side. On the people side, so we had all the people from cashgate moved to Cembra with new pensions, new employment contracts starting on March 1. So here, again, as on the people side, we have seen a good progress, integrated in our organizations. And also from a culture standpoint, is a good fit. On the business side, we had auto and personal loan business as a agent. We had the integration of business with originations on the one system already early this year. We are finalizing the consolidations of the branches on the personal loan business. We had 1- or 2-month delays in the context of COVID, but we are very pleased with the progress we are making on the business integrations. And last but not least, I think this is where, I would say, that there is still some work to be done and we are also pleased with the progress. This is around the carve-out. So with the acquisition and the completions, we had a 12-month transitions agreement with the seller of the company, where we received some services from them. And obviously, this needs to be carved out. And also from an IT standpoint, we expect to have this -- most of these work streams finalized by mid of the year. So for now, no surprise, and we are pleased with the cashgate integrations.

Great. Then I would move on towards credit cards. In your statement in April, you disclosed that they were down in the transaction volumes by 17% in March. Yes, can you maybe tell us a bit about how this developed now in April or more recently and then how this impacts your income?

Yes. I mean credit cards is the tougher part for us in the business because -- now if you look at customer behavior, people are just cautious. People don't spend a lot of money and people don't spend international any money at the moment. So what you typically see in credit cards that you see quite some cross-border spends on credit cards on holidays, on flights, on cross-border shopping. That has basically stopped in March and April, and that impacts us, of course, as well. So the volumes were quite impacted in March, April because of the spend. On the other hand, we should also see, on the whole retail world, there's a big push now from cash to cards, so NFC -- so basically, use your card, don't use notes anymore. And every retailer -- I don't know how is that in the U.S., but every retailer in Europe is now saying, "Please pay with card if you can." Also, the near-field communications showed contactless payment has been increased from CHF 40 to CHF 80. So you see the domestic volume is coming nicely back. Also, Switzerland reopened again basically at the 11th of May, all the stores are open, so we see the volumes coming back. International volume is not coming back at the moment. So we have to see when this is coming back. I think it will be better in the second half of the year. It will not be, in my view, at the same level as it was before. It will probably take quite a while before it's there. So this will have indirect impact on the P&L because we have less fee income. If you look at the credit card stream, there are basically 2 fee -- 2 ways of income there. The fee income, which is the interchange. There's an impact. And basically, on the revolve rate, there we don't see an impact. So people still revolve. They revolve even a little bit more. So the interest income on credit card is going to be -- probably going to be in line, but there will be effect this year on the credit card fee income.

Okay. And then also wondering about your partnerships in credit cards. And any additional potential you see here? I think this has been a good driver in the past, but...

Yes. Look, we are very positive about credit cards. And I think, temporarily, downturn of the international spend is not going to change our view on credit cards. We have been having double-digit growth for about 15 years now. We still see a lot of applications coming in. We've announced end of last year a cooperation with Migros Bank. This is the first bank customer we have. So we normally have retail customers, also bank customer. It opens a whole new market for us. The first card is going to be live in Q4 this year. I think this has a huge potential. I think we're looking for more retail partners. We have now almost 1 million cards out. I don't see the growth slowing down on credit cards on the longer term. So we are very positive on credit cards. There's still a lot to grow there. If you compare the credit card market share versus other markets, we are 14% in credit cards, where we are 44% in personal loans and 24% in auto. So there's enough to grow in credit cards. So we're looking basically at a different model, which is also attracting banks and the service provider for the banks, but also looking for more retail partners. And then we have the partnership with Migros, which is the largest retailer in Switzerland, where we are already since 15 years their preferred partner, and where we see still good growth. So we remain very positive about credit cards and growth that we can see there.

Understood. So certainly positive on the structural side of the credit cards, but also on looking from a cyclical perspective, on which part of your loan portfolio are you most positive for a quick pickup as kind of lockdowns ease, yes, personal, auto or credit cards? Maybe you can share some thoughts here.

Yes. Look, the -- in auto, we see already the pickup in applications coming. So auto is picking up quickly. But I said already, on personal loans and in auto, the portfolio is going to be relatively stable this year, at least that's my estimation. So I don't think we're losing a lot of asset. We lose a little bit, but not a lot. So the downside on auto and p loans is relatively limited. Credit cards has more impact because the fee income of the international spend is not there. So -- but also, I think this is where the pickup will be the quickest because if people start spending again and start traveling again, there you will see pickup. We see already in Switzerland quite a nice pickup. So the volumes are almost back to normal, I would say, on domestic side. When the borders are opening -- and the first signs of borders opening are there for the next week, so 15th of June, the borders will open, there will be holiday potential in Greece, in Spain. So I think there will be a part of the summer holiday that will be there. And then probably people start to book holidays and spend money again. So I'm not saying it's on the same level as it was before, but I think the pickups will be also in credit cards in the second half of the year. So basically, the cards have the most impact. And depending on the pickup there, we see probably quite some nice recovery.

Understood. Moving to funding. Robert, you touched on it in your introductory remarks of your diversified funding. Maybe you can give a bit more color around your funding strategy and, yes, the mix of deposits and wholesale funding, how this could potentially change going forward.

That's a question for Pascal.

Thank you. So following the acquisitions we did with cashgate and the repayment of bridge facilities, we have a very well-diversified and balanced funding portfolio. We have 67% deposits and 43% go in debt, short-term, long-term debt. Looking from a strategy standpoint, there is -- we don't expect a big shift, big movement, slightly as the increase in deposits, probably depending on the market situations. So we feel really comfortable with the current funding that we have in place. And also, I want to mention that we also had the review of the rating agencies, the annual review. And the rating of A- was reaffirmed by S&P a couple of weeks.

Great. And then coming to costs. Yes, maybe you can share some thoughts about your approach towards cost management in general? And now specifically, maybe with a bit shorter income expectations, as you mentioned, out of credit cards and so on?

Look, over the last couple of years, we have been always very disciplined with our cost management, ultimately, which is reflected in a very attractive cost/income ratio as well, run rate around 45%. Of course, with COVID, we have taken some measure to align the expense. We have also the revenues -- and some drop in the revenues in card. I think it is important to mention that the integrations and -- the cashgate integration and strategic investments were not -- are not impacted for now by COVID situations. And obviously, on a more tactical side, given the drop in revenues, we introduced some measures like hiring freeze or review of temporary contracts or reduce discretionary marketing spend and/or limit of our external consulting. I think this is, I would say, almost business as usual. If we -- if you see your revenue going down, you just align as all your expense base.

Okay. And when I -- before I come to my last topic, I can only remind people of the webcast option for asking questions. But yes, now I will move on to dividend capital. You really are one of the few, if not only -- if not one -- the only bank to pay the full 2019 dividends so far. So maybe you can give us an update here on your capital and capital return policy in that context?

Yes. I'm happy to take that one. I think everybody wants to take that one because it is a good story. But look, Cembra is very well capitalized and has a strong liquidity. We had a very good year in 2019, and we expect quite resilient year for 2020. So basically, there is no need for us to postpone or suspend dividend. So that's why we paid it out because we can do this. Even if you look at FINMA, the regulator, where they had quite some discussion with the bigger banks, they didn't -- there was no discussion with FINMA around this one. So they didn't even ask us to not pay it. So I think if you are in our position, you can pay out the dividend, you should just do it. We did. And we expect, again, a resilient year in 2020. If you look at the capital return policy, so our midterm target is a 17% Tier 1, which is above what basically -- what FINMA requires us to be. And we have to -- intend to return excess capital above 90%. So basically, if the excess capital or the Tier 1 comes above 90%, we return the excess capital either in share buybacks or special dividends. We had a special dividend once a couple of years ago. Honestly, it sounds maybe a bit strange, but I hope we don't have to pay a special dividend because then we can invest in growth. And I think growth is what we want. So you won't see this business growing 20% a year. But now if you look at the organic growth outside acquisitions for the last 5 years, we were 5% organic growth for the last 3 years on average. I think if we can do this, if we can keep on the growth in there, we don't have to return excess capital, we invest in growth and we get more profitable. So I think that's what we basically want.

Sounds good. Yes. So conscious of time, and also it's getting late in Switzerland, thank you very much for your insight, Robert and Pascal. And yes, hopefully, next year, we can host you in person again. And thank you very much.

Yes. Thank you. Maybe one or two words to close it, though. It's a bit of a strange format, but I think it works quite well. So thank you for asking all the questions. We are adapting to new realities in Cembra. We are, I think, in a good shape. We are, in my view, a bit of a different bank than the most banks you see in Europe. We are aware of the situation. We are moving on, and we're looking already at the next phase. I think we have been through all the things that every company went through like safety of employees, working from home, and now we are looking already at the new normal. So I think, in my view, we're coming strong out of this crisis than we got into this one, and we're looking forward to the future. So thank you very much.

Sounds good. Thank you very much. Bye.

Bye-bye.