Morrow Bank AB (MOBA) Earnings Call Transcript & Summary

Welcome to the Komplett Bank ASA Q2 2020 Presentation. [Operator Instructions] As a reminder, this call is being recorded. I'm now pleased to present Mr. Jan Haglund, CEO; and Mr. Henning Fagerbakke, CFO. Please begin.

Good morning, and welcome to the Presentation of Komplett Bank's Results for Q2 2020. Moving to Slide 3. My name is Jan Haglund. I am the CEO of Komplett Bank. Together with me today, I have our CFO, Henning Fagerbakke, to deliver the specifics on the financials in this presentation. After the presentation, you will all have a chance to ask questions in the Q&A session. Next page. Our priorities to safeguard the health of our employees and their families and to help our customers through these trying times remain. During Q2, almost everyone in the company have been working out of their homes. I am proud of how all of our dedicated employees have adjusted to the situation over the past months, maintaining their energy and drive both in serving our customers and improving our operations. In the initial stage of the pandemic, we had an increase in the number of requests from customers with short-term challenges in servicing their loans. During the summer, the number of requests has decreased. Whether this is a summer effect or a positive shift in trend, it's too early to say. As per end of July, we have temporary arrangements in place with less than 1% of our customer base, measured in terms of lending volume. Requests have mainly been received from Norway and Finland and only a handful from Sweden. As you may recall, we had an improvement in default levels in Q1 compared to Q4. This trend has continued. Default levels in Q2 are even lower than in Q1. June was the best month so far this year, driven mainly by Norway. In Finland and Sweden, we saw stable to slight improvement in performance in Q2 compared to Q1. This positive trend has continued also into July. We have increased our sales again starting from the middle of June. However, we continue to be prudent in terms of risk selection also going forward. Based on my current knowledge, I expect us to be relatively balanced in terms of net growth in Q3 and to return to growth again starting in Q4. I want to underline that I am glad that Komplett Bank has a highly diversified consumer credit portfolio. Our customer base consists of 280,000 customers employed in all sectors of the economy spread across the Nordics. We are not exposed to one single industry. In terms of the impact of COVID-19 going forward, there is no clear answer. We monitor and track the situation closely. We have not seen any negative effects of COVID-19 on credit quality so far. We continue to focus on our core business during the pandemic, and we have increased attention on monitoring and managing for risk in working and collection processes. Next picture. Already before COVID-19, we were prudent in terms of risk level on new sales. During the second quarter, we reduced our risk levels on new lending even further. As a consequence, net loans decreased by NOK 278 million, excluding currency effects. Over the past 18 months, Komplett Bank has systematically implemented measures to strengthen credit quality. We have had a gradual improvement in credit quality during 2019 with the exception of Q4. I am satisfied to see that our efforts paid off and that the positive trend continues. For the quarter, we came in at a loan loss level of 3.8%. Excluding the NOK 14 million macro-related adjustments made, our loan loss level was 3.2%. Profit after tax improved compared to the previous quarter to NOK 77 million, driven by lower loan losses. This represents a return on equity of 16.1%. We are a very well-capitalized bank and have significant excess capital. At our target capital ratio, return on equity for the quarter would have been 19%. The successful NOK 200 million AT1 placement in June provides us with flexibility and enables us to become more capital-efficient over time and to reach our target capital level. During the quarter, our CET1 ratio increased 21.8% compared to 20.9% 1 quarter ago, well above our 17% requirement. Next picture. During Q2, we saw continued improvement in credit quality. For consumer loans Norway, consumer loans Sweden and credit cards Norway, we saw improvements in terms of volume center collection compared to the previous quarter. In our Finnish consumer loan portfolio, the volume center collection were stable compared to the previous quarter. We have significant improvements in June across all reminder cycles in Norway and some improvements in Sweden. The development is balanced in Finland. Overall, there has been no deterioration in credit quality in Q2, but rather continued improvements. The positive trend continued into Q3. Credit quality in July is on par or slightly better than June in all our main loan portfolios. Next picture. The bank has an efficient and robust business model. To illustrate the strength of our position with a very extreme scenario, we have the capacity to, over time, withstand more than 2.5x our current underlying loan losses without falling below our CET1 capital requirement. Given our high net interest margin, our strong profit before loan losses, our flexible cost base and our solid capital position, we have the profitability, solidity and flexibility to weather the impact of the COVID-19 pandemic. With that, I give the word to our CFO, Henning Fagerbakke, who will give us the details on the financials.

Thank you, Jan. So looking into the net loans in the quarter on the next slide. We continue to be prudent on risk selection in Q2. Adjusted for currency, net loans decreased by NOK 278 million, as shown in the table, down to the right. Actual net loan growth was down NOK 418 million in Q2, of which NOK 140 million is driven by currency flotation. In the Norwegian market, we launched a new refinancing product in the beginning of Q2, which we believe will strengthen our competitive position in this market. The last 2 quarters have been extraordinary, as we've chosen to mitigate increased macro risk by reducing new sales. However, we do see room to grow in all our markets. And we will continuously evaluate credit quality when managing growth going forward. As Jan mentioned, we increased our sales activity in June and aim for growth again from the fourth quarter this year. Over to the next slide, please. Looking at the total income in the quarter, we are down 3% year-on-year and slightly down from the previous quarter. Net interest income is the main driver behind the decline from Q1 as we have reduced new sales in the 2 first quarters of 2020. Also, a stronger liquidity situation has decreased the net interest margin. Number of customers is stable compared to Q1, about 280,000 across all products. So over to the cost slide. The operational expenses in the quarter are NOK 100 million, up from NOK 97 million in the previous quarter, mainly driven by increased administrative expenses and marketing. As mentioned in Q1 presentation, we planned for increased spending in projects aimed for strengthening our risk and collection capabilities as this is in line with our priorities for 2020. Some of the projects have been completed by now, and we expect administrative expenses to decrease to Q1 level for the third quarter. Improving the operational performance continues to be a priority. And given the macroeconomic uncertainty, we are focusing more on efficiency and cost. The cost/income ratio, excluded marketing, increased to 33.3% from 31.9% in Q1. Please turn to the next slide. Even though we have an improvement in credit losses in the quarter, there is an increase in share of past due more than 90 days. The main reason for this is low new sales and no portfolio sales in 2020 so far. We have a coverage ratio of 58% at the end of the quarter, decreased from 61% in Q1. We are satisfied that the underlying credit performance improved compared to Q1. The loan loss ratio of 3.8% includes an additional macro loss provision of NOK 14 million, as described on the next slide. We see positive results of initiatives which have been taken, and we will continue to focus on reducing credit losses. So moving into the breakdown of the loan losses on the next slide. Losses in stage 1 declined due to reduced new sales. Stage 2 fell as a result of better credit quality. While stage 3 and other in total were on a similar level as in the previous 2 quarters. In Q2, we adjusted the macro estimates resulting in a NOK 14 million additional loan loss provision. On the other hand, probability of default has been trending positive. And the total effect of parameters update in the quarter summarized to NOK 8 million. We had a very good quarter in terms of credit losses in Q2. And without the additional macro reservations, our credit losses would have decreased from 3.8% to 3.2%. As credit losses may increase due to COVID-19, we decided to be prudent and make the additional reservations. Given that these are reservations for potential future losses, we will be able to release the additional macro provisions when the outlook improves. Next slide, please. Profit after tax was NOK 77 million in Q2, up from NOK 46 million in Q2, including the NOK 50 million additional loan loss provision made then. Return on equity is 16% in the quarter, down from 18% in the previous quarter. At the back half, a very solid capital base, it is worth mentioning that equity at targeted level of 18% CET1 would have given a return on equity above 19% in the quarter. That is slightly below our financial target of 20%. Then over to the capital position on the next slide. Our CET1 ratio is 21.8% in Q2, improved from 20.9% in the first quarter. We continue to have significant headroom to both the capital requirements and our target, which includes a 1% management buffer. Total capital ratio of 25.3% in the quarter is driven by a successful AT1 issue of NOK 200 million in June. Except from this placement in June, our existing AT1 and AT2 have first call date in February next year. Concluding this financial review. We are pleased with 2 quarters of improvement so far in 2020, and we move into Q3 with solid profitability and a very strong capital position. With that, I'll leave to you, Jan. Please take us through the summary and outlook.

Thank you, Henning. Moving to Picture #17. Komplett Bank has a proven track record of offering attractive and convenient financing in the Nordics. We have, since 2014, built a customer base of 280,000 customers who value and use our product. Currently, we have access to the market that we need based on our short- to mid-term growth ambitions. Short term, our growth ambitions needs to be balanced versus the effects of COVID-19. We have during June increased our onboarding of new customers again, but we continue to be prudent in terms of risk selection. I expect that to be more balanced in terms of growth in Q3 compared to Q2 and that we start growing again towards the end of the year. Yes, we are in the middle of a pandemic. However, it is important to remember that the bank has an efficient and robust business model. Our diversified customer base and product portfolio provides stability. Next picture. Our main priority for the year are to reduce credit losses, strengthen operational performance and ensure a continued robust financial position and dividend capacity. During the quarter, we have delivered on all 3 by continuing to improve our underlying credit quality by the launch of the refinance product in the Norwegian market and by the successful issue in June of NOK 200 million in additional Tier 1 capital. Next picture. We have 3 financial targets: capital adequacy, return on equity and dividends. In terms of capital adequacy, we had a CET1 target of 18%. At the end of the quarter, we had a CET1 ratio of 21.8%, well above our target level and 4.8 percentage points above the regulatory requirement. Return on equity. Our target is to achieve an ROE of 20% over time. In Q2, we had an ROE of 16.1%, below our target. We are a very well-capitalized bank and have significant excess capital. At our target capital ratio, return on equity for the quarter would have been above 19%. With the successful NOK 200 million AT1 placement in June, we have the flexibility to become more capital-efficient over time and to reach our target capital level. Our target of 20% ROE over time remains. I do not expect us to meet this target for 2020. This is not a guiding, but my expectation is that we will be between 15% to 20% for the year, excluding the additional macroeconomic provisions made. Dividends. Our policy regarding dividends remain unchanged. While maintaining our solidity is a priority, which has become even more important due to COVID-19, we will distribute capital not deployed for growth as dividends. With our strong capital base, we are well positioned both for growth as well as dividends going forward. Next page. Before going into the Q&A, I have one final comment. Although COVID-19 has presented us with an unprecedented global challenge, Komplett Bank has been able to rapidly adjust, and the impact on our operations and financials so far has been limited. I am satisfied to see that the efforts we have made during the past 18 months to improve credit quality has effect and that the positive trend continues. Our profitability, solidity and flexibility give us a robust platform to build from by maintaining focus on serving our customers and executing on our strategic priorities. I am confident that we will continue to strengthen our competitive position going forward. Thank you. Operator, can you please open up for questions?

[Operator Instructions] Our first question comes from Erik Gjerland, ABG.

It's Jan Gjerland from ABG. I have just 2 questions on the strategic side. Previously, you have talked about the strategic situation and things around your position. What is your sort of the plan for the bank going forward? This is a stand-alone bank, growing it and issuing a dividend. Is that the main sort of way going forward? Or has your plans for strategic changes sort of been -- is that behind us, so to speak? So that's my first question.

Okay. Beginning with your first question, I would say that, I mean, we remain confident that our position with the footprint we have across the Nordics, our returns on our capital position, they provide great opportunities for our shareholders. So organic growth remains our track -- main track going forward. However, we do see the obvious financial and strategic rationale for consolidation in the Nordics. This is not the main focus. We are in a favorable position to take part in such consolidation should the opportunity arise. And if we find that such a transaction creates value for our shareholders, we are, of course, willing to participate. And the short to midterm effects of COVID-19 has not changed our perspective on this factor. In terms of creating value, I would say that the primary value driver is growth if you look at the medium to long term. Near term, we have been a little bit more cautious on growth, but we see good opportunities to return to growth. We have already started opening up, as I said, in June. We remain prudent, but we will continuously open up, and I expect us to return to growth again in Q4. Does that answer your question, Jan Erik?

Yes, Jan. Great. Just for the second question on the European Central Bank have this sort of provision rules from all loans applied after April 2019, if I recall correctly. So you have to write off all of the loans after 3 years loans [ scrapped ] after that date. How do you look at your sort of situation currently and your coverage ratio on those new loans? Do you need to set aside more on those than you sort of have done in the past for all of your other loans? Or is this just sort of business as usual for a consumer bank like yourself?

I think it's -- you're talking about the NPL backstop there?

Yes, exactly.

Yes. And that will gradually come into effect. It will lead -- it will not impact our results, but it will need -- we will need to reserve more for credit for defaulted loans. That will gradually phase in, and that's included in our plan.

Okay. So what kind of phase -- if you have a coverage rate today, what did you say? 60? Do you need to have that higher than going forward? Is that what you expect?

If you're looking at the coverage ratio as is, I mean, the coverage ratio is basically how much we have reserved in total divided by defaulted loans. Over time, if the defaulted loans increase, yes, there would be an increase in the coverage ratio. We are -- we have a well -- we are well covered today, but it might be that the coverage rate might increase in the future, but you also then have to also consider the opportunities to offload stage 3 loans by actually entering into forward flow contracts and selling portfolios, decreasing that coverage ratio. This market, I mean, this is still a way off. So this market has not yet -- I mean, I think there will be a change to the market in terms of this, in terms of more banks selling defaulted loans going forward. And I think that market will be there, and it might have long-term impacts on coverage ratios, yes. But that is included in our long-term plans as well.

Okay. Just one follow-up then on your growth. You said that you will be sort of flattish into the third quarter from second quarter, if I understood you correctly, and then more growth into Q4. Could you shed some light into which areas you want to grow? Do you expect Norway, Finland and Sweden to be the main driver of that growth or equal growth? Or how should we read you?

I think -- I mean we have proactively during the spring implemented a number of risk-reducing measures. As you know, over the past 21 months, we have worked actively on credit losses. During the spring, with COVID-19, we became even more prudent. We have released a few of those limitations, but we still retain a number of them. And I think that we will continuously relax those measures that we have taken, which will increase the growth. It's basically us saying no to customers currently, which is declining -- which is explaining why we are not growing. We have the ability to return to growth when we so desire.

So what sort of -- what is the main change in your credit policy which sort of would make the driver then? Which [ criterias ] are you then giving easier than on your [ new role ]?

Well, you can say it's basically 3 items. First of all, we have changed the risk cutoff, accepting lower-risk customers, declining medium-risk customers and high-risk customers. That's one factor. Looking at those scorecards, now when we have more visibility on the situation and looking at the cutoffs that we have implemented, that's one action we can take. We have also declined larger loans in some markets to certain segments, i.e., not offering tickets over a certain size, that also limits growth substantially. And the third one is that we have become more prudent on top-ups for existing customers. We have implemented additional risk measures there.

[Operator Instructions] Okay. There appears to be no further questions. So I'll hand back to your speakers.

Okay. Thank you very much for listening into Komplett Bank's Q2 results. I look forward to seeing you once again when we come back to the Q3 results. Thank you.