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

Ladies and gentlemen, welcome. Welcome to the Cembra Full Year 2022 Results Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Holger Laubenthal, CEO; Mr. Pascal Perritaz, CFO; and Mr. Volker Gloe, CRO of Cembra Money Bank. Please go ahead, gentlemen.

Thank you, operator, and good morning, everyone. It's great to be here and yes, indeed with CFO, Pascal Perritaz; and Chief Risk Officer, Volker Gloe. Look forward to walking you briefly through the presentation and then take your questions as just alluded to. So as usual in terms of agenda, I'll briefly walk through the highlights for the year, will then have Pascal take over for the financial results together with Volker on the loss performance and then we go into an outlook afterwards and take your questions. So Page 3, the full year performance starting with this overview. I think it's in line with the update we've given you in the fall in line with the Byjuno acquisition and I think demonstrated strong performance in line with the committed targets that we've given you and that we've provided during the Strategy Update and as we went through the year. Net income has come in at CHF 169 million, up 5%. Continued revenue growth as well. We're pleased with that given the cards transition program, which we'll talk about a bit more later on. Net financing receivables up 5% as well. We're particularly excited that all businesses contributed to growth this past year. Stable cost-income ratio so we've absorbed the investments that we also talked about into transformation as well as the Certo! cards family program launch and the transition. And then continued strong loss performance, which overall leading to a quite robust and in line with guidance ROE figures. Of course again strong capital position. And against this performance, we're proposing a dividend increase to CHF 3.95 per share. Next page on the markets, again you recognize this page. Again we've had growth across the board, which we're quite pleased with. Personal loans 4% up really focused on profitable growth. We talked to you about the price increases that we swiftly went to implement. Auto, like the business, pretty much in line with the market and again here too quite strong pricing action that we implemented once the SMB rates increased as well. Cards solid market share transaction, volumes up 5%. In buy now pay later, we're excited about this strong growth both organically as well as with the acquisition as we continue to build our strategy in this attractive segment. So overall, strong execution and resilient performance across the board as we enter this post-pandemic world. On the next page, just let me give you some highlights for '22 in the context of our strategy. So in terms of our core, pleased with the continued delivery of our credit factory. Cost and risk discipline are key and that's been going well last year as previously. And in line with this discipline, we also tackled, as I mentioned, repricing actions quite actively since last summer. Our commitment to ESG remains strong and we're pleased that it's being recognized. Operational excellence, we launched a credit card app as we committed to. We started upgrading our underlying infrastructure. The MVP testing solution for the auto platform is out. And so overall, this program is tracking well. It's just under about 1/4 of the investments made and initial benefits starting to come in. Business acceleration, as I mentioned, very pleased with the organic and profitable growth across the portfolio. The launch of the Certo! B2C cards proposition and transition has gone very well. As we speak today, we've migrated about half of the cards across from the previous Cumulus portfolio into the new Certo! proposition. New growth I mentioned, both organic growth and the Byjuno acquisition. That's going great and the integration as well, as we discussed with you in October, is tracking to plan. Last not least, I think strong progress on culture. The leadership team's in place. We strengthened capabilities across the value chain and we're excited that we've been recognized -- that we've renewed the certification of a Great Place to Work survey. So a good testament also from our teams and associates. So in summary, tracking well along the delivery of our strategy. So let me hand over to Pascal for the financial results.

Thank you, Holger, and good morning, everyone. We report today a strong financial performance for 2022 and we are pleased with both assets and revenue growth and net income results with all businesses contributing to this profitable growth. Let me explain first focus on the P&L and then in few minutes more on the balance sheet. You heard already that from Holger net income increased by 5% to CHF 169.3 million or CHF 5.77 per share. As a result, the return on equity came in at 13.7%, at the upper half of the guided ROE range for 2022. The total net revenues increased by 4% to CHF 508.9 million in 2022 driven by commission fees. The net interest income remained stable with increase in the interest expense from the change in interest rate environment offset by higher interest income. The commission and fees income increased by 17% mainly driven by higher income from credit card fee post-COVID normalizations and growth in the buy now pay later business. For the buy now pay later and other fee income amounted to CHF 19.5 million, a plus 58% increase and this includes CHF 4.2 million revenues from the Byjuno acquisition, which was completed on November 1, 2022 and consolidated from that date. The share of net revenues generated from commission and fees increased to 30%. The loss performance remained very strong at 0.6%. My colleague Volker, Chief Risk Officer, will further comment soon. And the cost-income ratio remained stable at 50.6%, in line with our guidance. The next page reports the profitability by source. The return on financing receivables or actually net margin further improved and achieved 2.6% in 2022. The increase is driven by higher credit card commissions and BNPL fees partially offset by 0.1 percentage point reduction in the net interest margin. So on the next page let's talk about the net interest margin, respectively the net revenues movement by breaking down the first and the second half of the year 2022. At H1 2022, as already reported in summer last year, the interest income reduced by CHF 2 million driven by lower yield due to the business mix impact and competition and this was partially offset by lower interest expense mainly due to lower funding maturities. In addition, at H1 we benefited from increased commission and fees mainly due to the post-COVID normalizations. For the second half of the year, the drop in interest income was reversed and increased by CHF 5 million driven largely by timely repricing measures on new business since mid of the year 2022 and this increase in interest income was largely offset by the increase in H1 interest expense. So said differently, the net interest margin remained flat, as you can see, between H1 and H2 and we offset the increase of average funding cost with additional interest income. For 2023 similar to the second half of the year, our plan is to offset further increase in interest expense with additional income source mainly from repricing measures. Slightly negative duration gap will contribute to defending the net interest margin. Credit cards, credit card commissions. Let's talk about all this. We are pleased with the migrations of the transitions portfolio. Our credit card family Certo! was launched in July 2022 and is now the backbone for our business to consumer segment. At year-end 38% of the overall card issue and the overall card issue will mean all of the B2B partners, Certo! portfolio, transitions portfolio; so the 38% of the overall card issues came from our B2C segment and we already migrated half of the transitions portfolio as mentioned by Holger. We increased both our interest income and commission and fees for the full year as well as the second half of the year, which means that the new propositions is well used and we are retaining the targeted customer segments as expected. On that basis, I'm pleased to confirm that the card guidance we gave for 2023 with at least card assets and card revenues in line with pre-COVID level will be achieved. Let's talk now about the operating expense. So the operating expense increased by 5% with cost-income ratio of 50.6% stable as guided. The personnel expense increased by 2% with number of full-time equivalents or FTE employees flat before the acquisition of Byjuno. The increase was driven by salary inflations and increase in incentive compensations. We had 12 employees from Byjuno acquisition already integrated at year-end and we will have around 30 FTEs based in nearshore office in Riga to be integrated in these figures in the second quarter 2023 expected. The general and administrative expense increased by 7% to CHF 122 million and this is mainly due to the investment in strategic initiatives, operational excellence and the launch of the Certo! as a proposition. So let's talk about these 2 items. Operational excellence: we announced during our Investor Day in December 2021 that we launched this program to further drive efficiencies and scalability in our operating model and ultimately contribute materially to the improvement of our net margin over the strategic cycle. In order to deliver annual saving of CHF 30 million by 2026, we are investing CHF 55 million in operational excellence. In 2022 we spent CHF 13 million or 24% of this multiyear investment program OpEx and CapEx combined and generated first annual benefits of around CHF 2 million. We launched new credit card propositions, applications to strengthen the customer relationship and increase efficiencies. The company as a data center has been consolidated and moved and the foundation for cloud infrastructure was established. The new IT platform for leasing business is being tested and the first release will be launched in 2023. Regarding the card migrations and cost, we invested around CHF 9 million for the entire product cycle implementation, development, customer card replacement and marketing associated to product promotions. So you can see these extraordinary items and movements impacting the expense line; profit and services, marketing, postage and statutory and IT. For 2023, we expect a stable cost-income ratio with continued investments in operational excellence in line with our strategic plan. I hand over now to Volker for an update on the loss development.

Thank you, Pascal. We report a loss provision for the year 2022 of CHF 40.9 million translated into loss rate systems for 0.6% so about the same level as last year. As highlighted already in the release of the half year earnings, there were some individual items that we could benefit from in 2022 although they actually linked back to prior periods such as a release of a COVID related environmental reserve or also a rather conservative view on the collectibility of certain assets that we have during the pandemic and that we could recover on now in 2022. An exact quantification of that would be difficult. But I think a normalized number would probably rather be around 0.7% to 0.8%, which we can still deem to be a very strong loss performance. Also asset quality remained robust in 2022. The NPL ratio came in at 0.7%, 30-plus delinquencies at 2%. So on 30-plus delinquencies, we see a slight uptick compared to the prior year and there are 2 drivers that I want to highlight. On the one hand, it can be attributed to the expected post-COVID normalization that we have been mentioning already in the H1 earnings release. It means that after opening up some of our credit policies in '21, we also re-entered segments within above average credit risk and that starts maturing now in '22. The second argument that I would like to bring is the growth in the buy now pay later business including the consideration of the Byjuno acquisition in the numbers here. This leads to a slightly worsening 30-plus metric, hence buy now pay later has an above average delinquency and this is just by the nature of the BNPL business model. It's a model that generates its income rather from volumes than on customer receivables meaning that transactional customers are paying back their outstandings very fast so the book turns very fast. So 1 might argue to what extent actually receivable based metrics like delinquencies or even loss rates are sensible for buy now pay later business. But for completeness reasons, it is included in the 30-plus delinquency metric here and leads to a slightly higher value at the end of '22. One other item that I would like to mention here and also that will be clear, it does not impact U.S. GAAP numbers for '22, is the implementation of CECL. As communicated before, the current expected credit loss or CECL model for the calculation of allowances under U.S. GAAP became effective in the beginning of '23. The day 1 impact that affects the opening balance of '23 is calculated at CHF 67 million, which is fully in line with the range that we have been communicating before. We said always between CHF 50 million and CHF 70 million. So 1 more comment about the outlook on 2023. So when we look into the expectations for the current year and considering both what we saw in 2022, but also the macro predictions for the current year; we should see a continued solid risk performance where the loss rates continues to gradually normalize to the level of prior years and in line with previously communicated midterm targets. And with that, I hand it back to Pascal who will guide us through the balance sheet.

Thank you, Volker. So balance sheet. The total net financing receivables at the end of the year amounted to CHF 6.5 billion or 5% increase. Other assets increased by 46% or CHF 157 million and does include on 1 side CHF 33 million as a goodwill related to the Byjuno acquisition's day 1 impact and CHF 97 million as investment securities, other labels for sales and repo eligible in the context of our treasury management. Funding increased by 8% at end of 2022 largely in line with the growth in financing receivables and the liquid assets. The shareholder equity increased by 6% after Cembra paid a dividend of CHF 113 million in April 2022. Next page is on the financing receivables by businesses. So P loan growth continued in the second half of the year and increased by 4% for the full year to CHF 2.4 billion. As a result of lower opening balance of net financing receivables compared to 2021 and the continued competitive environment, interest income in the personal loans business decreased by 4% to CHF 163 million with a yield of 6.8%. The net financing receivables in auto lease and loan increased by 6% to CHF 3 billion in the reporting period and interest income edged up a little by 2% to CHF 133 million, yield 4.6% stable. In the credit card business, the net financing receivables rose by 1% to CHF 1 billion. Interest income in the cards business rose by 5% to CHF 89.1 million with yield at 8.5%. Funding: overall the funding mix remained at largely stable 57% deposit, 43% nondeposit. The average funding cost in 2022 amounted to 50 bps compared to 2021 45 bps and the period-end funding cost increased to 79 bps. The durations reduced and with the expected interest rate hikes in 2022, our institutional investors tended to invest in shorter tenures. And the weighted average durations amount now to 2.1. 2.1 is slightly higher than the behavior last year duration so that we keep a slightly negative duration gap. LCR is at a healthy level 336%. What we see is that the volatility of the figure is lower since the absolute figures in the high quality liquid assets as well as in the short liabilities are higher. NSFR is lower as the toward sales maturities 2023 drops below 1 year and it's expected as well to reverse in 2023 also in the context of the placement of our transactions we had in January, CHF 235 million unsecured bond at a tenure of 6.5 years. Capital: we remain at a very well capitalized strong Tier 1 capital ratio of 17.8%. In 2022, as announced already, we implemented the current expected credit loss for statutory reporting as well, which had a oneoff impact on the Tier 1 ratio of 0.7 percentage points and this is in line with the indications we gave of 0.6 percentage points to 0.9 percentage points. The impact of Byjuno acquisition on the Tier 1 capital ratio was 0.5% and we also benefit for temporary regulatory exceptions for quantitative regulatory supervision for the buy now pay later. Obviously as there is the revised FINMA Basel III standards configuration concluded, but the final version is not issued yet. But we expect also over time starting in 2024 an impact of this new standard at worst between 0.5% to 1% of the Tier 1 issue. The shareholder equity ultimately increased by 6% after the dividend payout from last year. And given all this robust financial performance, the Board of Directors will propose a CHF 3.95 per share dividend or a 68% payout ratio at the next general meeting on 21st April 2023 translating into a 3% or CHF 0.10 increase compared to last year. With that, I hand over to you, Holger.

Excellent. Thanks, Pascal. So as we move into the outlook, actually let me just briefly share our scorecard how we've done in '22 on the key initiatives that we presented to you about a year ago. So you recognize perhaps the left side of this page in terms of these initiatives. And so I'd say overall strong progress. I think the key initiatives in operational excellence we briefly talked about I think well underway. Business acceleration, the main point for us and for me and you may recall this from about 1.5 years ago that it was important for me that we return this business to growth. We get the right energy on the commercial side, the right propositions for our customers and we've been able to do that and so we're quite pleased with that in terms of this growth and obviously a lot of these initiatives have contributed to that. That said, some areas here are also work in progress. Leasing platform, the test version is out and we're looking at a rollout for this year. Co-brand partners, we did launch a new relationship with SPAR. We're also quite happy we extended a number of key relationships with Conforama and FNAC and others. But this is of course ongoing as we've always said and we want to do more in this space, continue to do more in this space going forward. On the cards transition, we talked about this. We're very pleased with the progress to-date and more to come as we come into '23. Buy now pay later, very excited about I think we've laid a great foundation for delivering against our ambition here over the strategic cycle. And we also briefly spoke about culture, the new organization in place and a Great Place to Work recertification. So on the right side and again these are aligned with delivering against the 2022 to 2026 strategy on the right side, the initiatives for this year. Clearly on the operational excellence side, ensuring readiness for cloud setup and the SaaS solutions on the core banking side. Importantly, we'll start decommissioning some legacy systems, it's obviously a key driver for efficiency going forward. Business acceleration, we want to drive more product diversification, personal loans, the leasing platform rollout we talked about and really continue to push the transition on the card side and leverage Certo! for new to bank customers as well. Buy now pay later, concluding the operational integration so we can continue to focus on growing that business that we're quite excited about. So in conclusion on the next page in terms of the outlook. As we've proven over the last years, I think the resilient business model that continues to deliver and so we expect the same going forward in spite of some of the market challenges that we've alluded to. Clearly for us on a high level, we continue to be focused on executing on our strategy that includes also pricing measures and cards transition, delivering on operational excellence and transformation and then expanding our buy now pay later and invoice payment presence in the country. In terms of performance, you can expect continued resilience going forward. Net revenues at least growing in line with GDP. As always, discipline on cost and risk and as such, we're reiterating our ROE expectations for the year. As for the targets through 2026, you can see them on the right and there's no change here so that's the same that again we presented in December 2021. So this concludes the formal part of the presentation and we look forward to your questions now.

[Operator Instructions] The first question comes from Daniel Regli from Credit Suisse.

I have actually 6 questions, if I may. First, maybe quickly on your outlook for 2023. You say that you expect a net revenue growth of at least in line with the Swiss GDP and in the appendix slides you also state that the Swiss GDP growth is about 1%. This sounds actually a bit conservative to me given we potentially could see a continued normalization in traveling activity and so on. So can you maybe elaborate a bit more what drives you to kind of -- or what are the moving parts here if we look 2023 versus 2022? Then the second question is obviously on the Certo! credit card program. You say that you have migrated about 50% of the previous credit cardholders. Can you give a bit -- based on your experience and your research you probably did, can you give a bit of an expectation how we will continue from here or what is your expected final retention rate in terms of number of credit cards and/or revenues? And then on buy now pay later, obviously we have seen a strong year-on-year increase even after deducting the Byjuno effect. Were there any special factors in this or is this kind of the new level we should expect going forward? Then 1 question on net interest margin, particularly on interest expenses. Can you talk a bit about your interest rate sensitivity particularly on the interest expense and what kind of interest expense uplift do you expect from the current rate situation? And then the second last question is on costs. Obviously you had a lot of special expenses included in 2022 related to the operational excellence program and the launch of the Certo! program. Can you quantify a bit what part of the cost line you expect to be rather oneoff in nature? And then the last question on credit card commissions, can you also here talk a bit about more what would have been the credit card commissions excluding the rebates and promotions you did on the launch of the new credit card program?

Daniel, so good set of questions. Let me take the first 3 and then Pascal I'll hand over for the other 3 for you. So outlook on growth, indeed the forecasts are sort of 0.7%, 0.8% depending on who you ask and SECO is predicting just under 1%. And you're right in that sense, we deliberately said at least that rate. We also want to be realistic and reasonable though. There's a lot of volatility in the markets. We've previously guided in the strategy 2021 December in line with GDP. Now if GDP comes in at sort of a lower point, then clearly we want to be at least at that point and try to exceed that. That's the thought here. Certo!, about 50%. I mean firstly, we're quite pleased with the progress that we've achieved here. I think we talked a lot about the transition program that we put in place, talked lot about the CRM campaign, the data segmentation, the targeted approaches in terms of customer communication and conversion; and so I think we're quite pleased that that's paid off. We've previously guided on retaining at least half of that portfolio so clearly you should not expect us to stop here. On the contrary, we'll keep working this. We've also guided in terms of credit card performance overall that we wanted performance to come back to pre-COVID levels. And so all of these things remain intact. And I think ultimately, Dan, over time I think we also plan to acquire new customers through the Certo! card as to other programs. And so at some point, I think delineation becomes a little more fuzzy in a sense. But you should clearly expect us to continue to work on this transition for sure. Buy now pay later, you're right I mean we've had a strong year in that space. We put this out as one of our strategic growth directions about a year ago and we continue to be excited about it. I think both the organic growth in Swiss billing has been strong as well as the combination with Byjuno. I think that really positions us well going forward. I would say a bit like what we said in October. We've given guidance on this to be CHF 10 million to CHF 20 million of net income by 2026. Where we sit today, I'd say we feel very comfortable that we'll hit that and that's the perspective. Pascal, the other 3 on interest rate sensitivity, cost side and card commissions, you want to take those?

Regarding the net interest margin and ultimately the interest expense so we reported an end of period funding cost of 79 bps. So probably a reasonable assumption is an average net funding cost of around 1% in 2023, but it's obviously very, very depending on how the capital market though will develop. And clearly we also expect to offset this increase in interest expense with additional income mainly from the repricing as we mentioned. Next question is on the cost. So for 2022 we had around, I mentioned before, CHF 13 million OpEx/CapEx related to operational excellence. OpEx is in the range of CHF 9 million to CHF 10 million. We then have a basically CHF 9 million related as all to the cards. Ultimately we are guiding more on the cost-income side, we expect still to be stable cost income also in 2023 in line with our strategic guidance and clearly to start to see the first benefits out of these investments, particularly in 2024 with the clear objectives by the end of the strategic cycle 2026 to be below the 40% or 39%. Finally, on the credit card commissions. We don't disclose ultimately all the details on all the royalty cost, but our approach is very clear. We have set the guidance. We want at least to deliver the card revenue from pre-COVID level of 2019. So we are also building our propositions, our basically the sales incentives on that basis. And as I said before, I'm pleased to confirm the guidance set for the cards business for 2023.

Can I quickly follow up on 3 points. First, when you say 1% higher interest expense, does this mean like 1 percentage point higher cost of financing or like 1% higher interest expense on an absolute level?

Yes. I would expect basically an average funding cost. Net funding cost for this year of around 1% so you have to compare against the 50 bps we had. And clearly it's in the context of, as I said, it's highly depending on our capital markets. But our goals -- our plan, as we said, is always to offset an increase with additional revenues.

Okay. And then secondly, quickly again on the revenue guidance for 2023. Can you maybe just qualitatively give me some kind of bridge? Obviously we see higher or we expect to see higher credit card transaction income, but obviously also higher interest expense. What are other moving parts if we look into 2023 and compare it with 2022 where will be positive and where will be negative changes to the 2022 numbers?

Daniel, thanks for the question. I think on a high level, we've had good growth across the portfolio last year and clearly also our ambition there shouldn't change. We continue to want to grow the business and that, by the way, accounts for all product lines so no exceptions there. We've had a good bounce back in fees and commissions as Pascal talked about in detail. And yes, I would say the GDP forecast is clearly at the lower end. So again that's why we said at least and that's where we stand on that.

[Operator Instructions] Gentlemen, so far there are no more questions.

Good. Okay. So then let me just very briefly wrap up. Again thanks, everyone, for dialing in and for being available. It was a pleasure this morning. You'll obviously have plenty of opportunities to follow up in the next days, you know where to find us. I think from our side just to recap. Sound business performance to continue to build on. We're quite pleased with the cards transition, with the products and the transformation; pleased with our ability to show growth across the business. I think we're poised to deliver on our strategic plan and the commitments, strong resilient business model again proven out. And so thanks for your time this morning and we look forward to more conversations coming up soon. Thank you.

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