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

Ladies and Gentlemen, welcome to the Cembra Half-year 2023 Results Conference Call and Live Webcast. I am [ Santino ] your Chorus Call operator. [Operator Instructions]. At this time, it's my pleasure to hand over to Mr. Holger Laubenthal, CEO. Please go ahead.

Operator, are we ready?

Please go ahead, sir.

Good morning, everyone. It's good to be here. We're with our CFO, Pascal Perritaz; Volker Gloe, our Chief Risk Officer; and Marcus Handel, Investor Relations. Myself, Holger Laubenthal. Good to be here. I look forward to walking you through the half year results for Cembra this morning, and then we'll take your questions. So on the first page, just the agenda. As usual, I will talk about the highlights. We'll have Pascal and Volker talk about financial results and loss performance, respectively. And then we'll have a quick outlook for you in terms of going forward. So let me start on this page here with the overview. Look, I'd say, overall solid performance in light of a challenging environment. We continue to grow the business. Net financing receivables up 2% or up 3% respectively, adjusted for CECL effect. Net revenues were up 1%. So as planned, we have been able to compensate for the funding interest rate increases through a mix of asset repricing and additional fees, particularly from the buy now pay later business. Net income came in at CHF 75 million, 17% below the first half last year. This is really predominantly due to the expected normalization of the loss performance as envisaged and investment into our transformation and strategic programs. Cost/income at 53%, again, predominantly due to the investments that I've just mentioned as well as the buy now pay later, Byjuno acquisition. And the loss performance, very pleased with the continued very strong performance here at 0.7%. We have previously discussed the normalization over time towards 1% or below. That delivers overall ROE year-to-date at 12.2% and strong Tier 1 capital at 17.6%. And move on to the next page on the markets and products. Again, you know this slide. We continue to see growth across the core markets. In personal loans, we have grown very selectively at about 1% with a strong focus on repricing. We'll have more on that for you later. Also, again, here too, pricing focus. But nice growth in net receivables, 3%, in line with the market with the share of just over 3 quarters in used cars. Cards, look, we're pleased with the trajectory and revenues in assets. As we've guided to you before, that's in line with our expectations. While the total number of cards is down 1%, our own brands and active partners yield data up 7%. And then buy now pay later, I think that's a great story. We're accelerating our delivery. On the back of the acquisition and successful integration, fees are up almost 200%. So overall, I'd say good performance across the core markets. Let me get to a few operational highlights here on this next page. So as mentioned, right, overall a resilient performance. Given the rate environment, we focus on selective growth, fees compensating for some of the interest -- net interest income challenges, as per previous discussions. Continued strong focus on pricing measures, as well as discipline, as you know from us in terms of risk funding and at the same time, advancing the strategic transformation. Talking about the 4 programs that we put in place in terms of our strategy and operational excellence, progressing with the core banking system, upgrades, planning to launch later this year. We're pleased to have concluded the data center consolidation. We came up with further enhancements in our mobile application for better customer service and experience, as well as efficiency. Business acceleration. We continue to charter transition. We now roughly transitioned about 30% of -- sorry, 60% of the previous Cumulus portfolio, and we'll have a bit more detail on that later. We also launched our instant onboarding solution for partners, which has been quite well received with partners in the stores. On new growth, I talked about CembraPay. I think the launch went very well, again, well received. We had mentioned to you previously, the TWINT cooperation. We're on track, and we'll have some updates for you later this summer on this in terms of that process. Culture, as you know, this underpins what we're looking to do in terms of organization readiness, making sure we have the right skills, capabilities at the right places. Simplification program and embedding cultural metrics as well to ensure success in this area as well. In addition to a bit of new employer branding with the new career website that we've launched. So overall, good progress. And now let me hand over to Pascal to take us through the financial results.

Thank you, Holger. And good morning, everyone. We report today a solid financial performance for the first 6 months. We are pleased with the asset and the revenue growth, largely in line with GDP, the strong growth performance and the continued resilience business performance. Let me explain. The net income in the first 6 months amounted to CHF 75.1 million. This is a decrease of 17% as you compare to the record results in the first 6 months last year. And as already mentioned by Holger on one side, due to the normalizations of the loss performance after COVID-19 pandemic, as we expected, and then the continued strategic investments in operational excellence. The net revenue increased by 1%, with commission and fees income compensating for lower net interest income. The net interest income declined by 3% to CHF 170.6 million and this is mainly due to the increase in interest expenses. I will comment in a few minutes. This lower net interest income was compensated by a 12% increase in commission and fees to CHF 82.4 million and this is mainly driven by growth in buy now pay later business. The buy now pay later, billing volumes more than doubled, both because of the consolidations of Byjuno and the organic growth of Swissbilling. As a result, the commission and fees income from BNPL business increased to CHF 19 million compared to CHF 6.5 million last year. The share of revenues generated from commission and fees amounted to 33% compared to 29% last year. The loss performance sit at 0.7%, and Volker will comment soon why this is strong. The operating expense increased by 10% to CHF 134.5 million, and this is driven by a mix of integrations and consolidations of Byjuno, and the investments related to the strategic initiatives, mainly our strategic program operational excellence. As a consequence, the cost/income ratio increased to 52%, and I will also comment bit later. Return on equity of 12.2%, and Tier 1 capital ratio of 17.6%. The increased interest expense were fully offset by additional income sources in the first 6 months of the year. As we guided in February, the net revenue increased by 1%. The CHF 18 million increase into interest expense reflect the change in interest rates environment since mid-2022, and additional funding required to support our receivable growth. At said in February, repricing measures is one of our priority this year. The year-on-year average pricing for new business, it means the average pricing of new business in the month of June this year compared to June 2022 increased by 140 bps for our auto and 130 bps or personal. As you can see on this page, there is a timing lag between the P&L impact of the repricing actions from the new business and the increased interest expense. Consequently, the net interest margin reduced from 5.5% to 5.1%. And this is expecting to stabilize at around 5.1% in 2023. Finally, the increase of interest rates cap in May 2023 which support the NIM stabilization. On the cards side, following successful launch of the credit card, Certo!, in June, the credit cards business delivered a resilient performance in the first 6 months of the year. With our strategic plan 2022-2026, we indicated that we expect cards assets and revenue to be at least in line with pre-COVID level, means 2019, from this year on. The achieved results for the first 6 months of 2023 are broadly in line with our expectation, set 2 years ago, with cards revenue of minus 1% to our 2019 revenue. We are pleased with the successful transitions of the Cumulus cards portfolio with about 60% migrated to the new cards offering Certo!. As of June 2023, our cards portfolio mix is around 50-50 business, B2C and B2B2C/co-branding partnership. We continue to successfully grow its portfolio of co-branding partner for credit cards by 7% in the first 6 months of the year. Operating expense, our total OpEx increased by 10% to CHF 134.5 million, as mentioned before. The personnel expense increased by 4%, and this is reflecting over the acquisitions of Byjuno with 44 additional employees, 14 employees integrated already as of late last year. And then this year, 30 employees based in Latvia and forming now our near short entity [ Cembra Technology ]. The general administrations expense amounted to CHF 64 million, and this is an increase of 18%, and this is related to the significant investment in strategic initiatives, and as mentioned before, the integration, consolidation of cost. The investment into strategic initiatives amounted to around CHF 11 million for the first 6 months of the year, OpEx and CapEx combined. And mainly for infrastructure, workplace and the core banking platform of our leasing business. Professional services increased by 26%. This is driven by higher temporary resources related as to the operational excellence strategic initiatives. The collection fees increased by 51% and is related to the Byjuno acquisitions and the aggregate outsourcing corporations in buy now pay later collections, as we communicated in September last year with the acquisitions of Byjuno. The cost of -- for postage and stationery decreased, and it's reflecting our continued effort to further digitize our processes. The retail expense reduced by 12%, and the depreciation and amortizations increased by 12%, and this is the result of the acquired intangible assets by Byjuno last year and the corresponding amortizations. As a consequence, mentioned before, cost/income ratio 53.2%. For '23 full year, we expect a stable cost/income ratio compared to 2022. With improvement in the second half of the year, mainly expected from a continued disciplined cost management, lower Byjuno integrations costs and initial benefits from our operational excellence. Now I would like to hand over to Volker for an update on the provisions for losses.

Yes. Thank you very much, Pascal. For the first half of '23, we report a loss provision of CHF 25.1 million, translated into a loss rate. It stands for 0.7%. And with the 0.7% loss rate, we are clearly under the longer-term average and also in line with our midterm targets. In a comparison with the first half of '22, the loss ratio is 0.2 percentage points higher. Here, I just want to reiterate that last year's loss performance was still influenced by some individual items that relate back to the COVID-19 pandemic. If one would exclude these items from last year's number, the development into the current year would be, obviously, less pronounced as the pure absolute number might suggest. A similar picture as for loss provisions is observed on portfolio quality metrics, illustrated here with the 30+ delinquencies and NPL ratios. 30+ delinquencies stood at 2.0% and NPL at 0.7% at the end of the first half. This is also in line with longer-term levels, but slightly up compared to prior year. We have been very consistent in our credit risk taking and aim to maintain our prudent approach here also in the current and more uncertain macroeconomic environment. We continually and cautiously monitor the credit worthiness and payment patterns of our customers in the portfolio to make sure that we can react quickly in case the macroeconomic situation would lead to any adverse trends. Based on the reported numbers for the first half, we observed a very solid portfolio quality. And consequently, we currently continue to expect to meet our midterm targets of a loss rate of less or equal than 1%, and one might still foresee a further gradual move or gradual convergence to that level. And with that, I hand it then back to Pascal.

Thank you, Volker. On the balance sheet, as you know, we adopted the U.S. GAAP current expected credit loss accounting standard in the first half of the year 2023. And as a result of these implementations, the allowance for losses in the balance sheet increased by CHF 64 million on the asset side, as you can see, as expected, also. With a reduction in equity on the liabilities' side of the balance sheet, with no day one or no impact day one on the profit and loss. The total net financing receivables amounted to CHF 6.6 billion. This is an increase of 2%. If you adjust for the effect of the adoption of CECL, as mentioned before, the underlying growth amounted to 3%. The funding increased largely in line with the growth in financing receivables. And finally, although the shareholder equity decreased by CHF 96 million, the decrease is attributable to the dividend payment in April of CHF 116 million, and it was partially offset, though, with the net income for the first 6 months. In addition, we -- as mentioned before, we had the adoptions of the CECL standard resulted in an increase of CHF 54 million in retail earnings. Net financing receivables. In the personal loan business, the financing receivable increased by 1% to CHF 2.4 billion. This was driven by solid volume performance with increase in market demand. Interest income in personal loans increased by 2% to CHF 82.5 million with a yield of 6.6%. The net financing receivable in auto lease increased by 3%. This was driven by strong volume performance, mainly due to vehicles price development. The interest income increased by 11% to CHF 71.8 million with a yield of CHF 4.7 million. We see that the timely repricing on the auto business has already a material impact on the net revenue and on the yield. Finally, net financing receivables in cards declined by 3%, and this was driven by lower activities on the remaining Cumulus portfolio, offset by continued successful Certo! migrations. Interest income in the cards business declined by 4% to CHF 42.1 million with a yield of 8%. Funding. The balanced and diversified funding portfolio increased by 3% to CHF 6.34 billion with a funding mix, 51% deposit, 49% non-deposit. The deposit base decreased from CHF 3.5 billion to CHF 3.25 billion at the end of June. And this is primarily due to a 14% decrease in institutional deposits and a 6% increase in retail deposit. The non-deposit debt increased by 18%. In May 2023, we paid back CHF 250 million unsecured bond in January, and in May, we issued 2 unsecured bond of CHF 235 million and CHF 210 million. And in May 2023, we entered into an auto lease asset backed note of CHF 275 million. The weighted average duration increased to 2.5% from 2.1% at year-end. The end of period funding cost amounted to 1.25%. And the average funding cost in the first half of the year amounted to 0.97 or 97 bps compared to 50 bps in 2022 financial year. We remain very well capitalized with a strong Q1 capital ratio of 17.6%. We expect the capital ratio to be slightly above 17% at year-end, including effects from the adoption of the U.S. GAAP reporting for regulatory reporting. The company maintains its financial targets until 2026, including a dividend of at least CHF 3.95 for 2023 and growing thereafter based on earnings growth. With that, I hand over to you, Holger.

Great. Thanks, Pascal. So as we move into the outlook, just a quick look here at our scorecard. We shared this with you in February, and as mentioned during the presentation, I think overall solid progress. Few things work in progress in operational excellence. We're continuing towards the launch of leading platform later this year. That shifted a bit versus the initial expectations we shared 1.5 years ago, but we do look to launch this later this year, as we said. In terms of the other key things for the rest of the year that we have on the right-hand side of the page here. Again, we shared this in February, looking to roll out the new Workplace 365, initial decommissioning of systems. On the business acceleration and new growth side, the continued cards migration, spend stimulation, activation on that portfolio as well as looking to work with our existing and potential new partners. We discussed the enhancements of the mobile app, which we continuously have new releases for efficiency, self-service and better usage for customers. Buy now pay later, quite pleased with the progress, looking to conclude that integration later this year. And then culture transformation, look, we're proud to be, again, amongst the Great Place to Work and a continued focus here on embedding our values in talent assessment, talent development and that underpin our transformation with culture scorecards and metrics. In conclusion, on the next page, in terms of the outlook, again, I think the agenda for the rest of the year is clear. We expect continued resilient business performance, clearly delivering our key milestones: repricing, Certo! cards transition, and transformation with a continued focus on benefits realization as well as the conclusion of the Byjuno, buy now pay later integration. What this means in terms of performance? As we said in the past, net revenue, at least in line with GDP, stable cost/income ratio versus last year at 51%. And loss performance, you've seen we're doing well. You can expect the same going forward. Given some of the headwinds we discussed in terms of lack of asset repricing and phasing of the transformation benefits, we expect to be at the lower end of the ROE target range for this year of 13% to 14%. Some of these headwinds will likely extend to some degree to 2024, as we should see some challenges on hitting the ROE target of 15% next year. However, we maintain our financial targets through 2026, including the dividend, as you see them on the right-hand side. So with that, thanks for your attention and for listening, and I look forward to taking your questions now.

[Operator Instructions] The first question comes from the line of Nemes Mate with UBS.

I have 3 of them. The first one is on Slide 8. And I just wanted to confirm what Pascal mentioned, the 130 bps increase in pricing in personal loans and 140 bps in auto loans, could you just confirm that is essentially, you're saying that front book yield is going up by around 130 basis points. And that's as of June, so that was not necessarily the case in the first 4 to 5 months in the year. And in this context, I was wondering if you could talk about the market dynamics in personal loans as well. You grew receivables by about 1%. The market did plus 5%. So I'm just wondering, is that due to your focus on repricing, maybe also selective repricing before the rate cap moved higher and also keeping loss rate below historical levels, or is there any clear reason for that? So that's the first one. The second one is on the 15% ROE target for next year. You mentioned that this might be challenging to reach. Could you elaborate a little bit on where exactly you see the key risk to reaching this target? Is that volume development, is that funding costs or this is mainly related to risks around the credit card transition where you're seeing perhaps some slippage in fees?

Thanks for the questions, Mate. So let me just -- Pascal, perhaps you start with the numbers on the pricing, and then I take the market dynamics as well as the outlook question.

So yes, Mate, you are right, although this is on the new business. And this is basically comparing the June pricing versus the June last year. So that means, as you said, as all of that, obviously, the pricing increase was lower the month before. So again, as always comparing the June last year with June as of this year, one month of vintage during that period. Second one?

Yes, thanks, Pascal. Look, I think, Mate, you were on the right track in terms of the market dynamics, right? There is growth in the market. But look, we want to stay true to our principles here, right? We do want to grow profitably. We do not want to grow share at the expense of margin. And so we've been very selective in terms of where we grow both from a pricing, but also from an overall -- let's say, a loss and risk management perspective. And so that's what you're seeing here. I think, again, we're quite thoughtful about these dynamics in terms of that situation. Your last question about the ROE target. Look, I think it's really around these couple of headwinds that I alluded to, right? I mean one is the -- somewhat of the lag of the repricing coming in. The good news here is right, we have increased prices. We continue to work on that as we stand today. And depending on the interest rate development, the markets will continue doing that going forward, right? So we've been quite clear and assertive in that. And so we will see the benefits coming through. But there is a bit of a lag that's going to drag as well a bit into '24. And then as we alluded to with the shifting of some of the benefits on the transformation, a lot of the projects are going right to plan. Some of them are versus the initial strategy we put together in '21 shifting a bit back and so the benefits will come. But again, a bit of a timing lag here. That's really the key items that we see, Mate.

The next question comes from the line of Regli Daniel with Credit Suisse.

First, 4 questions, if I may. So first, on credit cards. Secondly, on the net interest margins, then the third on costs, and then fourth on -- a little bit of follow-up on Mate's question on the return on equity target. So first on credit cards. Can you maybe give me some more color on the trends we have seen in H1 2023? Obviously, credit card commissions are down. Can you maybe elaborate a bit on how this kind of fits with seeing record passenger numbers on airport, Zurich and so on? I would have expected credit card commissions to have been rather up than down given the normalization of the whole COVID and traveling behavior. Then secondly, on net interest margins, you said there will be -- we have seen this compression to 5.1% and then you should see a stable net interest margin of 5.1% during 2023. And from when on can we expect kind of a recovery coming from this price increases you're talking about? And to where would this recovery go? Should we go back to kind of 5.5% or will we see something in the middle of where we stand now and maybe the point we started? And then quickly on the one-off costs, can you maybe just quantify a little bit more specifically what exactly was the operational excellence spend? And what was the integration costs or what was the kind of the nonrecurring part of the operating expense line? And then last but not least, on the return on equity target. You, obviously, kind of softened a bit the guidance on return on equity. And I was just wondering what was the unexpected part that you kind of lower a bit the guidance, both for this and for next year.

Daniel, thanks for the questions. So let me take the first one, and then Pascal, the net interest margin and the one-off costs, and I'll come back on the ROE afterwards. So look, I think a couple of things on cards, Daniel, right? I mean firstly, as we've said, what we're seeing in terms of the numbers, as we had also articulated 1.5 years ago, is that we are broadly in line with the expectations around assets and revenues. And so I think that's -- that gives us some comfort that what we've done, what we've implemented and how we've delivered on the transition is going to -- towards these expectations. Secondly, right, a subpoint to that, right, the migration at 60% where we stand today or -- and we continue to work this by way, right? Again, we said we want to retain more than half. We're clearly, firmly in that territory. And we're also seeing the assets quite stable with interest income increasing, right? And so again, I think a lot of the work in that sense is paying off and confirming our expectations. Now in terms of fees, it's true there's pressure relative to previous year. Look, to some extent, right, we've always said on the transition of the portfolio, we want to retain the majority of the customers, and we are focusing on profitability, and that gets us in line with expectations. But clearly, there are also some that use different cards or use it differently than in the past. So this is where our activities that we're driving today and going forward come in, right, which means continued transition, continued migration. We've got activities that are ongoing in terms of driving activity on the cards, spend stimulation, working with existing partners. And also -- as you know, we always have a pipeline of potential new partners that we're working on. So that's how I would talk about the cards story at this point. And let me just hand over to Pascal for the following 2 questions.

Yes, thank you. On the net interest margins, as you have seen, so there is this timing lag between the P&L impact of the repricing actions, which have already been implemented and the increased interest expense. And as a result, although, as I showed before, the net interest margin reduced from 5.5% to 5.1%. So first, for 2023, as I mentioned, although we expect this to be stabilized because of the measures already implemented. And we would expect the net interest margin to slightly increase, again, although in the mid-term. And by the way, although if you look at our overall strategic plan and what we communicated, that we were expecting some reductions in our overall strategic plan of the net interest margin. So this is why today as we can confirm and confirm again as our midterm financial targets. On the OpEx, so first as related to the integration of Byjuno, so when we did the acquisitions, and we announced that we reported integrations of around CHF 4 million to CHF 5 million to be spent between 2022 and 2023. So the first one is I want to confirm again this number. It's around CHF 4 million to CHF 5 million. And we spent OpEx, although, we spent around CHF 2 million for the first 6 months of the year. In terms of integration -- or not in terms of integration, in terms of strategic investments, I mentioned before, we have spent OpEx and CapEx around CHF 11 million for the first 6 months. I reported last year around CHF 13 million spent. So if you take CHF 13 million last year, plus CHF 11 million, rounded around CHF 25 million already spent as of strategic initiatives, OpEx, CapEx, out of the overall CHF 55 million strategic funding investments or funding for strategic investments announced. And so CHF 25 million out of CHF 55 million already spent after 18 months. And out of the CHF 11 million I mentioned for this year, usually, as we would expect, although, OpEx, CapEx around 60% OpEx and around 40% CapEx for these kind of initiatives.

Thanks, Pascal. So let me take over again on the ROE point. So look Daniel, I mean, I think it's -- so again, 2 key things, right? It's the lag and the repricing. And look, we'll have to see where the interest rate increase by the National Bank and resulting funding plays out, right? It's likely in a sense that we're peaking at some point, but it's also, as I think we all know, anybody's guess, right? I think what's important to note is that we have increased prices. We are increasing prices. I think we have proven that we are assertive, we're delivering on this. And so wherever that takes us from a market perspective going forward, we'll continue to do so. But again, given some of this lag, this is not purely periodic, right, there's some spillover into next year, and that creates part of the challenge for the ROE. And then the other piece, like I said, we laid out a pretty granular plan, right, that we communicated to you guys in December of '21 in terms of the programs that we're driving. We're delivering on these as we've said today, right, whether that's the mobile first app, whether that's data center move, a lot of the network consolidation and those programs, you will recall, and also the transformation of the core banking system. The phasing of some of this, the core bank system as an example, is a bit delayed versus what we had initially planned. And so again, those 2 things, I think, create some of the challenges that we're seeing. But again, we're confirming the targets that we set, and we're working on delivering against them.

Can I ask 2 quick follow-ups, if I may. So quickly on this 60% migration, means this 60% of previous micro customers have already ordered and got and then used the new Certo! card, is this a correct interpretation of this? And secondly, just a little bit about the client behavior. So you were talking about clients have changed the usage of their cards, so are they using the cards less often or don't you see the recovery in the kind of traveling part of the commission income or still...

Let me -- thanks for the follow-up. Let me just take this. Look, you're right with the migration, right? The 60% of the customers have been migrated. So they have a card and they're using the card. And as I said, we will continue this migration. But as we've also said, right, we focused on the most profitable segments to start with, which is why, again, you're also seeing at the 60%, we're confirming the guidance that we had provided in terms of 2019 asset and revenue levels. And the fact that the assets are sticky, I think underlines and confirms that hypothesis that we've worked on with our migration program. We'll continue to drive that. And so, I expect that number to continue to increase, but at a somewhat lower pace going forward. Look, client behavior, I mean, look, there's -- if you're at 60%, then there's 40% on the other side, right? And they're partially still in the portfolio. We continue to work on these clients. But the proposition there is a bit different, right? They may -- some of them may be on a Migros, maybe in other programs. So it's not as easy to -- I'd say, there's still -- this is on a case-by-case basis, Daniel. What we are seeing that of the customers that we are retaining, as I said, the behavior is broadly as we want it to be, right? This is -- hence, the stickiness of the assets in that respect.

The next question comes from Venditti Andreas with Vontobel.