Morrow Bank AB (MOBA) Earnings Call Transcript & Summary

Welcome to the presentation of the Q4 results for Komplett Bank. I say welcome also to the people on the webcast. With me today, I have Henning Fagerbakke, our CFO, who will help me go through the presentation. Before moving on to the presentation, I want to start by saying 2019 was a disruptive year for Komplett Bank. I regret the strain that both our shareholders and employees have been put through. I want to underline that I'm very proud of all the hard work and dedication that our employees have shown throughout the year. I'm also very satisfied with many of the improvements that we have implemented so far. In 2019, Komplett Bank proved that we are an organization that rapidly can overcome and adjust to new and evolving circumstances. Moving on to the report. Highlights of the quarter. Loan losses came in at NOK 222 million. Adjusted for additional provisions, the loan loss ratio was 5.6%. This increase is explained by 3 factors. We did additional provisions of NOK 105 million in the fourth quarter primarily related to LGD. We had the expiry of the forward flow contract. And we also saw an increase in the amount of customers going to default primarily in Norway. Net loans came in at NOK 8.5 billion. We grew by NOK 134 million. That is 2% compared to a quarter ago, 8% compared to a year ago. Profit after tax came in at minus NOK 15.4 million. Adjusted for the additional provisions, profit after tax was NOK 63 million. Return on equity was minus 3.4%. Adjusted for the additional provisions, return on equity was 13.4%. Total income came in at NOK 203 million, which was -- NOK 303 million, which was a 3% improvement compared to a year ago. Profit after tax for the full year was NOK 203 million. We are still a well-capitalized bank. We have a CET1 ratio of 21.3%. That is a decrease compared to the 22.5% that we saw a quarter ago. But we still continue to build capital quarter-on-quarter when adjusting for the additional provisions that we made. It is the Board's assessment that the company is currently not yet in a dividend position at present. Loan losses. We came in with loan losses of NOK 222 million. NOK 105 million of those were related to additional provisions that we made. We did a review of the collection performance of our portfolios in the quarter and decided to do additional provisions across the entire product portfolio, in sum, NOK 105 million. We also decided to decouple our assessment of LGD from the forward flow market. The underlying losses came in at NOK 117 million. Stage 1 and Stage 2 were stable. Stage 3, we saw an increase. This increase was due to 2 factors. One was the expiry of the forward flow contract. We have the forward flow contract for one of the months in Q4. If we would not have had the contract for any of the months, loan losses would have been NOK 10 million higher, approximately. The second reason is that we saw an increase in loans going to default, especially in Norway. I will come back to this shortly. We have implemented a number of actions starting already 1 year ago and continued throughout the year. It will take time before the full effects of these actions materialize. Therefore, I expect loan losses to remain high throughout 2020. Development per product portfolio, starting with loans in Norway. 45% of the loans being sent to collections in Norway in Q4 originated in 2018. As you know, we had high sales in 2018. Unfortunately, the customers onboarded during this time also exhibit worse performance. We were previously -- we implemented changes in our risk appetite a year ago in Norway and constrained the inflow. We were previously on a positive trend in Norway. That trend was reversed or rather we had a spike in collections in the 2 last months of the quarter. It's still too early to say whether there has been a shift in the trend from the positive trend that we were on to another trend, given that we have too few data points. One potential explanation could also be the debt register. But it's still too early to say whether the debt register is the driver or not. As I said, we've already taken a number of actions. This is our primary focus currently. And we're continuously working on adjusting the risk strategy and the scorecards and the cutoffs to improve the situation in Norway. For Loans Finland, the situation is balanced. We had an increase also in Loans Finland in terms of loans going to collections -- no, rather, the loans going to collections were stable in Finland. We had an increase in reservations due to growth in the market, which is natural, and we also had a temporary increase in Stage 2. That has normalized. We are implementing a new scorecard in Finland currently, which has a significant uplift compared to the previous scorecard. Other than that, Finland is business as usual. We do slight revisions on a continuous basis. For loans in Sweden, we launched loans in Sweden in 2018. We have an increase in provisions in Sweden primarily driven by growth. We also see that the early vintages onboarded in 2018 have worse performance than the new. That is to be expected. This is a new market. We have continuously adjusted our risk appetite in Sweden, adjusted our processes as well as our scorecards. And the Swedish portfolio is developing in line with expectations. On the right-hand side of this graph, you can see what I explained, that we have an increase in loans being more than 90 days overdue. You can also see the effect of the additional provisions that we made. So we have a coverage ratio currently of 61%. On the left-hand graph, you can see the spike in credit losses for this quarter on 5.6%. That's an uptick from 4% in the previous quarter. I expect us to remain on a high level during this year. This is our primary focus and this is what we're working on, on getting down. It's not going to be quick, but that's the primary objective of the year. Loan growth. As I mentioned initially, we came in at NOK 8.5 billion. We grew in Norway by NOK 134 million. We continue to decline in Norway, as you can see. That's due to our tightening of risk appetite 1 year ago. It's due to the new regulations and is also due to the fact that we still have not launched our refinancing product. The reason why we haven't launched the refinancing product is that we, in Q4, reprioritized resources to credit improvement initiatives. We will launch that product during the first half of the year. For loans in Finland and loans in Sweden, development is stable. It was expected that it would decrease in Q4 due to seasonality. But they are performing in line with our plans. Point-of-sales finance as well as credit cards, we have a seasonal positive effect, so we increased on both of those. With that, I leave the floor to Henning.

Thank you, Jan. Okay. If you look at our total loan portfolio, we increased the net loans by 8%, mainly from Loans Sweden and Loans Finland as well as POS Finance, as Jan has just explained. As a result, we see continued diversification. Loans in Finland and Sweden now stands for 41% of the total loans compared to 28% in the fourth quarter 1 year back. I expect that we will continue to see the same trend going forward as well. In regards of the total income, we grew year-on-year by 2% to NOK 303 million compared to our previously all-time high in the fourth quarter of 2018. Total income was negatively impacted by a decrease in the net commissions and fees because of higher agent provisions basically but also as a result of broker costs in euro deposits in Germany. We also had higher commission costs related to the launch of credit cards in the new markets in Finland and Sweden. When you take a look at the number of customers, we had almost 270,000 customers at the end of the year. Mainly -- the growth is mainly in Q4 from POS Finance customers, which grew especially due to seasonality effects. As you know, the Black Friday and the Christmas shopping is contributing to that. And then the OpEx. Operating expenses decreased in the fourth quarter to NOK 99 million from NOK 106 million in the previous quarter. This decrease was driven largely by a drop in marketing activities in the fourth quarter, mainly due to seasonality but also to manage growth capacity. We expect to keep marketing expenses at a low level also in Q1. In the fourth quarter, we had approximately NOK 7 million in nonrecurring costs. As in the third quarter, these costs relate to external support related to the implementation work following the FSA report, investigating strategic opportunities and a provision for a supply agreements. We expect the nonrecurring cost to decrease in the next quarter. Profits were significantly impact by increased loan loss provisions and lower net commissions in the fourth quarter, which resulted in a net loss of NOK 15 million. Adjusting for the loan loss provisions, quarterly profit after tax was NOK 63 million, which corresponds to a return on equity of 14%. Not adjusted for the loan loss provisions, the return on equity was negative by 3.4%. For the full year 2019, the return on equity was 12%. If we take a look at our yields, we see stable yields in loans in the fourth quarter compared to the third quarter. Average yields in loans in Sweden and Finland are slightly lower than in the Norwegian market. And that brings down the total yields over time as these grow to become a larger portion of the total portfolio. Yields on credit cards decreased in the fourth quarter due to launch of the credit cards in Sweden and Finland. In addition to euro deposits, we recently launched a deposit product in Sweden in January this year. By entering the Swedish deposit market, we expect to be even more diversified. And that will contribute to even lower funding costs. Right now, the interest rates in Sweden are about half compared to Norway and even lower in Germany. Capital-wise, despite a disappointing quarterly results, we remain well capitalized. The CET1 ratio was 21.3%, down from 22.5%, mainly due to effects of the quarterly result but also as a fact that the calculation basis increased. Total ratio of 22.5% is below the target of 22.8%. But we expect to continue building organically and to close the gap within the first half of 2020. To improve our capital structure and the capital ratios, we will consider raising more additional capital. As you can see, we have not fully utilized the additional Tier 1 and Tier 2 capacity. So Jan, please take us through the strategy and outlook.

Thank you, Henning. With the launch of deposits in Sweden earlier this year, we have now completed the short- to midterm product road map for Komplett Bank. We do not plan to do additional product or geographical launches during this year. We have the footprint that we need in order to get the growth that we desire. The focus for this year is to improve the situation with credit losses and create a positive trend for credit losses. This will be done by reviewing the application processes, the risk strategy, the risk policies and the scorecards. In addition, we also see opportunities to increase collections from the existing customers by improving our invoicing and collection processes as well as our bill payment functionality. The second priority for the year is to enhance our operational performance. We need to continue to develop our services to our customers to become even better. So we are reviewing key customer touch points as well as products to improve our services even further. We also will strengthen our data and analytical capabilities even further. Lastly, we will ensure a continued robust capital and financial position and place ourselves in a dividend position for 2020. This will be done by raising additional Tier 1 and Tier 2 capital to optimize the balance sheet but also to manage growth, profitability and capital allocation across the markets where we are present. Financial targets. We have 3 financial targets: capital adequacy, return on equity and dividends. In terms of capital adequacy, we have a capital adequacy, a CET1 ratio of 21.3%. That is 2 percentage points above our target. We have significant headroom to issue additional Tier 1 and Tier 2 capital, so we are well capitalized. Return on equity, we have a target to be above 20% return on equity over time. Given the developments in credit losses, I do not expect us to meet this target in 2020. Regarding dividends, it is currently the Board's assessment that the company is not yet in a dividend position. Before I close and open up for questions, I have one final remark. We have experienced an increase in credit losses during this year -- or during Q4 primarily driven by loans in Norway. This is our first and foremost priority during 2020. In 2019, Komplett Bank proved with the challenges on the regulatory side that we can rapidly adjust to and overcome new and evolving circumstances. I have no hesitation that we, by relentlessly focusing on profitability and risk management, will be in a significantly stronger position 1 year from now. Thank you. Questions?

Håkon Astrup from DNB Markets. Two questions on asset quality. First, what have you learned from the challenges that you had on asset quality? Will it, for instance, in the future be less aggressive when taking on short-term growth? Or was this just due to the changed condition and therefore difficult for you to see? And also question number two, how big is this 2018 vintage in Norway? And how much loans do you have from that on your book today?

Yes. Starting with the first question: Have we learned something? Absolutely. We were more aggressive in terms of growth in 2018. We took on larger tickets than we had done historically. At the same time, we changed our product, given the new regulations. And all of that combined has an impact on the loss levels. So yes, we have learned. We will be more prudent going forward in terms of the risk selection. Regarding the size of the portfolio, I think it is around NOK 1.2 billion.

And how much of that NOK 1.2 billion has gone into default now?

That number, I do not have in my head. I know when I looked at all the vintages, 45% of what we sent originated from that vintage. But I don't have the number of how much on that vintage that went into collection.

But you grew a lot in the first half of 2018. And usually, the saying has been 12 to 18 months, you see a peak in default.

Yes.

Is that still valid? And what have you seen in January?

In terms of the January numbers, I mean the January numbers look better than November and December. I do not want to overplay that too much though. We have a short period now, where November and December was worse than historic performance, January was better. I can't say currently if there has been a shift in trend. And therefore, I want to wait until the first quarter to actually have a better assessment, given the few data points that we have available.

Okay. But you sold NOK 140 million in the forward flow agreement in 1 month in Q4?

No. It's actually like we had the forward flow agreement for October. But we send the cases with them in the next month. So the cases we sold in October, we send in November. Therefore, that is a little bit misplaced. You have a delay between the financial effect actually of the selling and the sending of the cases.

Okay. So you have 2 months, NOK 140 million is 2 months of sending it in?

Yes.

And the P&L effect, is that 2 months as well?

No. The P&L effect is 1 month.

Okay.

That's what I said that we expect an additional -- if we would not have had a contract at all for the quarter, we would have expected an additional NOK 10 million -- just under NOK 10 million.

Okay. So our best kind of assessment now on underlying loss ratio is 5.6% in Q4 and then a bit reversal in Stage 2 in Finland, but not a lot to talk about and then some higher underlying losses due to forward flow 1 month less in Norway.

Yes. You have 2 things to look at there. One is the forward flow contract that I talked about with the NOK 10 million effect. And the other one is that we had a peak in loan losses in November and December. And those 2 -- the peak, it is really a little bit early for me to see if we have had a trend shift. We were on a positive trend, as you know, towards 2019. That was reversed, and it's too early for me to say if that is an actual reversal of a trend or if we have an outlier in terms of data points.

And when these kind of -- you've changed the LGD, you said that was based on your collection performance. But when someone goes into default, do you check the debt register before assessing what provision levels you're going to take?

No. We've done the assessment based on IFRS 9. So basically, we looked at the collection -- the flows of income we have from collections. We have discounted those flows and have a net present value calculation. This assessment has been done in conjunction with our auditor. And it's our best assessment at the time.

Okay. And then two more, if that's okay. On NCI, on your current net commission income, you stated that it's NOK 7 million now. You said it was something related to credit card. Is the NOK 7 million representative for what we are to expect going forward?

Yes. You will -- yes, you can expect that NOK 7 million is more or less a running cost -- the running net commission and fees going forward.

Okay. And lastly, on the kind of -- in sum here, the lending growth in 2020. I mean it's clear that credit quality is the priority. Can you give us a ballpark-ish of kind of what to expect in 2020 when it comes to growth?

My expectation -- I mean we grew by approximately 6% year-on-year if you annualize the numbers that we had in the last quarter. If you look at the full year last year, we grew by 8%. I think that is a relevant range, given that we want to place ourselves in a dividend position. If we issue additional Tier 1 and Tier 2, we might choose to increase this pace of growth. But that is sort of the range that we're currently aiming on. But there will be deviations to this quarter-on-quarter, depending on the growth that we choose to take on.

And then versus kind of the 6% in Q4, then you will have lower growth in POS and Norway will not fall as much once you get the refinancing product. That's kind of the sum of it. Okay.

If you have potential for T1 and T2 to cover any growth in loans, does that mean that your excess CET1 is for loan losses?

No, it's actually...

You're not paying it out as dividend, that's what I'm asking.

Well, currently, we have a total capital ratio of 22.5%. We have a CET1 ratio of 20 point -- 21.3%. As Henning pointed out, we have currently only utilized on AT1 0.5% of a potential 1.5%. And we've currently only utilized for Tier 2 0.7% of the 2%. So we have the opportunity to issue an additional 2.3% here if we so choose. But we also have a plan that will take us to a positive dividend position without issuing additional Tier 1 and Tier 2 capital. This is something that we're currently reviewing.

So what do you need to -- for the CET to be able to pay dividends?

We need the total capital to increase to a sufficient -- what you say, a sufficient margin so we feel that dividends is the right choice to do.

And what's that number?

I don't have that number. It's a matter for the Board to assess 1 year from now.

What is your best estimate?

I can't give you the best estimate. It's not my question. It's a question for the Board.

Because you say that it's -- was it 19-point-something, right -- 19.3% is the number that you need to manage?

Yes. As long as we have filled up the AT1 and Tier 2. Then we can go down...

You do have good capital...

I'm sorry?

You have more than enough capital to grow. But you don't want to pay out the excess capital.

We have -- currently, we have a total capital position of 22.5%. We have a target of 22.8%. There is a negative gap that we need to fill. And that can be done either by issuing additional Tier 1 or Tier 2 capital or by growing our CET1, by actually having a growth in loan book lower than our return on equity.

Yes. It says 22.5% and you can grow it by 1.5% in T1, T2. So that's more than enough to take you beyond 22.8%.

Yes.

What are you going to do with that excess capital? If you're not paying it out, what are you going to do with it?

Well, I expect us to pay dividends in 2020, i.e., based on the 2020 results.

So you're going to have lots of losses in 2020?

No. That's not what I'm saying. I'm expecting us to have a positive capital position to enable us to pay dividends in 2020.

You have a positive capital position today. And you don't want to pay dividends. Why would you do it in 2020?

Well, we don't have a positive capital position today because we have a requirement of 21.8%. We're currently at 22.5%. We don't want to go too close. We have a management buffer that we need to respect, which we have also in conjunction with the FSA. We're currently below that management buffer. And it would not be prudent at this current stage to pay our dividends.

Just to follow up on the capital position. So why haven't you issued any AT1 and T2 capital? Is it because it's too expensive or...

No. Actually, we have had a very positive CET1 ratio and a growth in CET1. Then we made a revision of the loss model of over NOK 105 million. And that took us below our total capital target. We're currently reviewing the issuing of AT1 and Tier 2 capital.

So that may come quite soon actually?

Maybe. At least before the next year's dividend.

And just on marketing costs, marketing costs have come down quite meaningfully. Is Q4 the right levels going forward? Or should we look at more 2019 in total?

I think you should look more to Q4 than to 2019. We have decreased our growth ambitions. We don't need to spend the money to get the customers we want. Therefore, we are expecting low to moderate marketing expenses in the first quarter.

Just on other expenses that you had spent more than NOK 27 million on other consultants in 2019. Can you give some guidance on what level do you expect for 2020 and also what the level on other operating expenses, what you see in 2020?

Yes. We have had approximately NOK 50 million of additional costs this year relating to the FSA report, NOK 18 million of those are a fine that we paid this summer and the remainder is consulting costs. That's, to a large extent, the number that you're looking at. So what I'm saying is that our results for the year is NOK 203 million. I would expect that those costs would not return. In addition, I'm not expecting to do the type of revisions of LGD that we did in the fourth quarter. But regarding the consulting cost that you point out, that's mostly related to the work with the FSA report as well as the investigation of strategic opportunities. I would expect the FSA report to completely disappear going forward.

So there's one question from online. It says the Norwegian FSA wrote that they were going to do reviews of IFRS 9 loan loss modeling in Norwegian consumer banks. And have they done a review?

Yes. We had a visit by the Norwegian FSA this spring. We were 1 of 9 banks who took part in that revision. We were the smallest bank. DNB was the largest bank. We received that report in December. We are currently responding to that report. That report will be submitted by the 28th of February, so yes.

Could you elaborate a little bit more on the report and the potential effects?

We are currently responding to the report. The contents of the report related to the IFRS 9 provisioning and related to the notes that you're making in the annual report and to other areas. I'm sure these reports will be made public when the FSA has received our response and then went through it together with the other banks. I know that the reports were relatively similar across the banks that received them.

Was that one of the reasons for the LGD review?

No, it's not.

Was that one of the reasons for the LGD review you did this quarter?

No. It's not a primary driver for the LGD review. The reason for the LGD review that we did was that we have historically connected our loss given default to the market for forward flow agreements. In Q1, we sold a small portfolio at almost -- I should say that that market has materially changed during this year. In Q1, we sold a portfolio at almost all-time-high levels. In Q2, we recognized that the market had changed. So we made an additional provision, as you recall. In Q3, we had a couple of offers in line with that provision we had made. So based on discussions with our auditor, we did no changes in LGD. But in Q4, when we were to sign an agreement, those prices have materially changed. Therefore, we decided to decouple our assessment of LGD from the forward flow market. We have historically had that since 2017, that we looked at the prices on the forward flow contracts as well as the secondary markets for NPL portfolios in assessing our LGD. Now instead, we reversed the approach and looked at our own collection income, discounted in that and said, "Okay, what is our value?" So that's the primary driver for the change we made.

Just a quick follow-up on that. The price changes on the forward flow, we've all heard everyone's talking about the prices coming down. Is that due to less demand for China NPLs? Or is it due to a change during the year in actual collection on the portfolio? Like what was the feedback from your partner on the...

I think the primary feedback is regulatory uncertainty in terms of those that we discussed within Q3. There is coming in new regulations, both on the Norwegian basis and on a European basis. And there's uncertainty regarding the regulatory landscape. And therefore, that is used to price the portfolios down.

Is that referring to the NPL backstop?

That's one of the reasons. But you also have the new regulation that came out and was published in Q4 in Norway. That was also another one.

Didn't that just mainly impact very small claims?

Yes, it did. But in Q3, when we had these discussions or in the beginning of the quarter, that was still not known.

One final question came in online. Intangible assets are NOK 143 million. Can you explain what this is?

Well, intangible assets are related to systems that we are developing internally. So that's hours from consultants and our own employees.

Okay. Thank you very much for today.