Morrow Bank AB (MOBA) Earnings Call Transcript & Summary

Welcome to the Komplett Bank ASA Q3 2020 presentation. [Operator Instructions] I'm now pleased to present Mr. Jan Haglund, CEO. Please begin your meeting.

Good morning, and welcome to the presentation of Komplett Bank's results for Q3 2020. My name is Jan Haglund. I am the CEO of Komplett Bank. Together with me on this call, I have our CFO, Henning Fagerbakke, who will 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. Moving on to picture #4. We turned the corner in September and have returned to growth. We continue to see strong demand from creditworthy individuals for our flexible financing solutions. I expect us to continue growing from the fourth quarter and beyond. Credit performance. Moving on to credit performance. 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 quarter, we have continued to help customers through these trying times. The number of requests has decreased and per end of October, we have temporary arrangements in place with less than 0.5% of our customer base in terms of lending volumes. Maintaining a high focus on credit risk and collection performance is a requirement for sustainable and profitable growth. Needed a customer, the bank-more society benefits if credits are granted to persons that cannot repay. I am satisfied that our systematic measures to improve credit quality continues to yield results. This is the third consecutive quarter with lower default levels. Equally, I am pleased our increased focus on costs has borne fruit. Operational costs have decreased to NOK 91 million for the quarter, and our cost income ratio improved to 33.8%. In terms of the impact of COVID-19 going forward, there is no clear answer. We are in a good position to weather the potential impact of pandemic, given our profitability and flexibility. We monitor and track the situation closely, and have not seen any negative effect on credit quality so far. Overall, I am satisfied that we have strengthened our position in a challenging environment during the third quarter. We have a solid capital position with capacity for both growth and dividends going forward. Next picture. As mentioned, I am pleased that we returned to growth in September. For the full quarter, growth was minus NOK 62 million as we continuously ramped up our activity level and onboarding during the quarter. And moving on to loan losses. Over the past 2 years, Komplett Bank has systematically implemented measures to strengthen credit quality. I am satisfied to see that our efforts pay off. For the quarter, we came in at a stable loan loss level of 3.8%. Profit after tax came in at NOK 73 million. This represents a return on equity of 13.9%. I'm glad to highlight that both loan losses and cost efficiency improved in the quarter be declined in terms of income, but I expect income to increase going forward as we return to growth. We are a very well-capitalized bank and have significant excess capital. At our target capital ratio of 18%, which includes a 1% management buffer above the requirement, return on equity for the quarter would have been 17%. During the quarter, our CET1 ratio increased 22.2% compared to 21.8% 1 quarter ago, well above our 17% requirement. Next picture. As can be seen in the graph, we were more balanced in terms of growth compared to Q2, but we still declined by NOK 62 million for the full quarter. This is because we decreased our balance in July. We were neutral in terms of growth in August and positive in September. This is natural. We have, during the third quarter, step-by-step, ramp up our onboarding of new customers. I am very pleased to see that the new refinancing product that we have launched in Norway has good traction. New sales in October in Norway is on the highest level that we have seen for the past 24 months. The actions that we have taken in Sweden also have the desired effect, and we have good traction in the Swedish market. Finland continues to be demanding, given the temporary legislation as the interest rate cap and marketing restrictions makes it more challenging to reach new customers. We expect that the temporary legislation in Finland will be listed as planned in January, where we are taking actions to ensure that we can grow in Finland even if it remains. We will, of course, maintain our current high focus on credit risk and collection performance. We will continue to ramp up activity levels and further improve customer acquisition processes to ensure that we return to growth. Returning to growth is a strategic priority. We see continued high demand for flexible consumer financing solutions across our existing geographies. We have an attractive and competitive offering, and we continue to improve our customer acquisition processes. With our solid capital position, we are well positioned to grow and capture the demand in the market. My expectation is that we will grow by 5% to 10% in 2021. Next picture, credit losses. During Q3, we saw continued improvements in credit quality. For consumer loans Norway, consumer loans Finland and credit cards Norway, we had improvements in terms of volume sent to collection compared to the previous quarter. In our Swedish consumer loan portfolio, the volume sent to collection were stable compared to the previous quarter. Given COVID-19, we want to provide some additional insight into the underlying credit performance. In terms of volumes sent to collection, as can be seen in the graph on the bottom left-hand side, we have a positive trend. When comparing Q3 2020 with 2019, sent-to-collection levels in 2020 are considerably lower and this is a third consecutive quarter with significant improvements. As can be seen in the table on the bottom right-hand side, we have improvements in past due balances across reminder cycles. This is primarily driven by improved performance in Norway. The situation in both Finland and Sweden is stable in September compared to the average for the past 6 months. Overall, there has been no deterioration in credit quality in Q3, but rather continued improvements. We are now partly into Q4, and we see that credit quality in October continues to be on par with September. Next picture. Komplett Bank has an efficient and robust business model. We have high net interest margin, strong profit for loan losses, a flexible cost base and a solid capital position. To illustrate the strength of our position with an 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. Furthermore, our customer base consists of 290,000 customers, employing all sectors of the economy spread across the Nordics. We are not exposed to one single industry. Given our diverse customer base and our profitability, solidity and flexibility, we can weather the potential impact of the COVID-19 pandemic. And 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 financial details, let's start with the income side. The total income in the quarter is down 9% year-on-year and also slightly down from the previous quarter. Interest income and provision income are declining in the quarter as the net loans have declined throughout the last quarters. Also a more prudent liquidity strategy during the pandemic has further affected the income. Also we did not grow net loans for the full third quarter. We had an increase in a number of customers. This was driven by deposits in Sweden and POS Finance, and we are now about 290,000 customers across all products. Note that we are on a turning point in Q3, as Jan mentioned, and that we expect net loan growth to drive total income going forward. So over to the cost details on the next slide. The operational expenses in the quarter are down from NOK 100 million in Q2 to NOK 91 million in Q3, mainly driven by decreased administrative expenses and other expenses. As mentioned in the previous quarterly presentations, we plan to increase spend on projects aimed for strengthening our risk and collection capabilities in the first half of 2020. As these projects now are largely completed, we see a decrease in consulting cost, which is the main driver behind the positive development in Q3. As a result, the cost income ratio, excluding marketing, improved to 31.5% from 33.2% in Q2. Going forward, improving the operational performance continues to be our priority, and we see potential to further improve cost efficiency from where we stand today. Next slide, please. On this slide, we present metrics related to the bank's loan losses. On the left-hand side, we see an improvement over time in coverage ratios across all stages. The main driver for this is increased loss given default, which resulted in increased coverage ratio in stage 3 compared to the previous quarter. The loan loss ratio of 3.8% has been stable all 3 quarters of 2020. We are satisfied that underlying credit performance improves and that we see our initiatives yield positive results. For the coming quarters, we will continue to maintain current high focus on credit risk and collection performance. So moving into the breakdown on 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. And stage 3 and other in total have decreased compared to the last quarter due to the positive development in defaulted loans. In Q3, we made quarterly model parameter updates resulting NOK 4 million loss effect. Parts of the macro provisions made in the first half of 2020 have been included in increased [ LGD ]. Still, there is more than NOK 50 million of additional macro-related loss reservation in our books related to COVID-19. Importantly, we saw an improvement in credit quality in the quarter, both in terms of loans being overdue as well as loans going into default. Next slide, please. Profit after tax was NOK 73 million in Q3, down from NOK 77 million in Q2. While the income decreases due to lower net loans, lower operational expenses and losses contributed positively this quarter. Return on equity is 14% in the quarter, down from 16% in Q2. As the bank's current capital base leaves room for both dividends and significant growth, it is worth mentioning that equity at our target level of 18% CET1 would have yielded a return on equity above 17% in the quarter. That brings us to the capital situation on the next slide. Our CET1 ratio is 22.2% in Q3, up from 21.8% in the second quarter. We continue to have significant headroom to both the capital requirement of 17% and our target, which includes 1% point management buffer. Our financial performance year-to-date and the forecasted capital position indicates dividend capacity of 30% to 50% based on the 2020 results, whilst reserving capital for growth. However, dividends are depending on the Board's recommendation, the general assembly and regulatory guidelines. Concluding the financial review, we are pleased with the progress so far in 2020. And that we move into Q4 with solid profitability and a very strong capital position. With that, Jan will now take us through the bank's outlook and summary.

Thank you, Henning. Moving to Page 17, financial targets. We have 3 financial targets: capital adequacy, return on equity and dividends. In terms of capital adequacy, we have a CET1 target of 18%. At the end of the quarter, we had a CET1 ratio of 22.2%, 4.2 percentage points above our target level and 5.2 percentage points above the regulatory requirements. Return on equity. Our target is to achieve a return on equity of 20% over time. In Q2, we had a return on equity of 13.9%, below our target. We are a very well-capitalized bank and have significant excess capital, and our target capital ratio return on equity for the quarter would be 17%. Our target of 20% return on equity over time remains. My expectation is that we will come in at a return on equity around 15% for this year, excluding the additional COVID-related reservations made. Dividends. Our policy regarding dividends remain unchanged. While maintaining our solidity is a priority, which has become even more important during -- due to COVID-19, we will distribute capital not deployed for growth as dividends. Given our solid profitability and strong capital base, we are well positioned both for growth as well as dividends going forward. Next picture, growth. Growth is a strategic priority. We will ensure that we return to growth by continuing to ramp up activity levels and further improving customer acquisition processes. My expectation is that we will grow by 5% to 10% in 2021. Credit quality. We continue to focus on our core business during the pandemic, managing and improving our risk, invoicing and collection capability. We will maintain our high focus on credit quality and continue to improve our data and analytics capability. Our third priority is to continue to strengthen our operational performance. We will do this by enhancing all key customer touch points, products and related services. We will increase our focus on costs and efficiency going forward. The last but not least priority that we have defined is to ensure a continued robust financial position and dividend capacity. Based on the current situation, my expectation is that we have the capacity to pay out 30% to 50% of 2020 net profit in dividend in 2021. A decision on dividends is, of course, a matter for the Board and general assembly, and dependent on decisions by regulatory authorities to allow banks to issue dividends in the current circumstances given COVID-19. We continue to focus on our core business during the pandemic. During Q3, we have delivered on all of our priorities. We returned to growth at the end of the quarter, credit performance improved, operational costs decreased, and we are in a position where we have capacity for both growth and dividends. 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 of our operations and financials have so far been limited. I am satisfied to see that the efforts we have made during the past 24 months, improved credit quality has effect and that the positive trend continues. Our profitability, solidity and flexibility combined with our culture and ability to rapidly adjust to new circumstances is what makes the bank unique. It provides us with a robust platform to build from, and I am confident that we, by maintaining focus on serving our customers, will continue to strengthen our competitive position going forward. Thank you. Operator, can you please open for questions?

[Operator Instructions] And as there are no questions on the phone, I will hand it back to the speakers.

Okay. We have a few questions that we received in writing. Henning, maybe you should answer the first one. It's on Nils Christian Øyen at SpareBank 1 Markets. You rise that high, the substantial liquidity portfolio seems to be a drag on net interest income. Is it possible to reduce the size of the portfolio going forward?

Sure. I can answer that question. Right now, we are on a high level of liquidity and mainly because of 2 reasons. First of all, we decided to increase excess liquidity in the beginning of the pandemic because of the uncertain circumstances. However, during the pandemic, we have not seen material impact or other material changes that increased withdrawals during these times. The other reason for the increased liquidity is that we launched deposits in Sweden and ramped up volumes quite fast during the Q3. We have now stabilized deposits in Sweden and plan to decrease excess liquidity going forward, as we say, to optimize pending cost. And we see that during the pandemic, interest levels in all deposit markets have decreased. And we have decreased the interest rate. For instance, in Norway from 195 percentage in the beginning of the pandemic, and now we are on 1% sharp. So yes, we are planning to decrease excess liquidity to optimize spending costs going forward, Nils.

The second question that we have is also from Nils Christian Øyen. The question is, on the possible 5% to 10% growth in 2021, would that be mainly driven by Norway or equally distributed throughout the Nordic region? I think that -- I'll take the answer on that one. I think that the growth will come from primarily -- based on what we currently know, I think it will be based on all 3 markets. I think in Norway, we have reached a turning point with the launch of the refinancing product. However, we also have a fall flow contract in Norway, which will hamper growth slightly in that market, whereas Sweden, I expect to continue growing at the current pace. And for Finland, it's a little bit dependent on what's happening on the regulatory side. The plan was for the interest rate cap to be renewed on January 1. That is still our main scenario. But there is always, of course, a risk that will be prolonged. And that is -- it's not the interest rate cap as such, but also the marketing regulations, which makes it a little bit more difficult to reach new customers in Finland. If it is removed as planned, I believe that Finland will be a strong contributor. If it is not, it will be less growth in Finland and more in the other 2 markets. But we will balance growth to reach this target because we believe that we have chances to grow in all 3, but it's a little bit on where we will choose to allocate our focus on equity. The third question that we have is Jan Erik Gjerland from ABG. And how easy is it now to grow in each of your markets? How much forward flow do you expect to sell in Q4? The first question -- the first part of that question, I believe I answered when answering Nils Christian Øyen's question. In terms of the second question, I believe -- my guesstimate is that we will sell approximately NOK 75 million, NOK 75 million to NOK 100 million potentially in forward flow in Q4. Yes, that's my best guess at this time. And I understand that you need that to do your growth expectation, Jan. The third question that we have is again from Nils Christian Øyen at Sparebank 1 Markets. Here, the question is, the mentioned potential to reduce cost ratios on Slide 11. Is it mainly related to income or cost reductions? And here, I should say that it is balanced. It is both income as well as costs. I think over time, improving cost income ratios will be mostly driven by income. That is where we create value for our shareholders long-term and also where we create increased leverage on a very flexible cost base. However, I do believe that we have opportunities short term also to address the absolute side of the costs, which we have shown in this quarter. But the long-term efficiency potential is by becoming larger at the same cost base. The next question is from Jan. And the question is, why is the dividend capacity so conservative, 30% to 50% of net interest income -- no, net income. Based on currency CET1 ratio of 22.2%, you should have NOK 400 million or more, and the target CET1 -- sorry, the question is cut off. More than the target CET1, which, in my opinion, would allow above NOK 200 million in dividends, around 75%, even if you are conservative to allow 5% to 10% growth. Yes, it is true, as Jan says, that even if we grow by 5% to 10%, we could deliver more than 30% to 50% in dividends for next year. It is -- however, we need to take a long-term perspective and find a level that we believe can be stable over time and also balance that versus our long-term growth expectations, and that is how we have reduced the level of 30% to 50%. But if you would look at one single year or on a more short-term perspective, yes, we could have increased that level further, but we have chosen not to do so. And that's basically based on our own view on what we want to do and grow how much we want to grow going forward. The next question I have is from Jan Erik Gjerland at ABG. One, do you expect to issue loans at a higher rate going forward than those you have in each market? And two, what kind of offers do you have now on the deposits? I can take the first part of that question and then Henning, you will take the deposit rate. In terms of the loans, if we issue those higher interest rates now than we did in the past, I would say that, no, we do not. In Norway, we have a greater focus on refinancing in the current market. That means that the loans on average are larger. The probability default is lower and hence, also the absolute return is lower. However, the risk-adjusted return is still good, but they are issued at a lower rate than the average, which you would issue to a new customer. And that is natural, given that you refinance an old debt. In Finland, it is dependent, I would say, on the status of the interest rate cap. If the interest rate cap remains, then, of course, we will issue loans at a lower interest rate. If it is removed, I expect the rate to stabilize to approximately the same level where we were previous to the cap. In Sweden, I don't think that we will decrease further than what we -- where we are currently. Potentially, we will do some modification. I don't expect to do any major changes in Sweden though. Henning, could you please answer the question on deposit interest rates?

Sure. Of course. In Norway, we have a deposit interest rate at 1% at this time. And as I also said, we have reduced the interest rate in Norway quite much from the beginning of the pandemic from 195. In Sweden, we launched deposit products at 1%, and we decreased the interest rate in Sweden to 85 bps, 0.85% no lately. And in Germany, where we spend the euro deposits, we are at 70 bps, 0.70% -- 0.17% to the customers, and we also pay a provision to raise in our partner for deposition in Germany. So 1% in Norway, 0.85% in Sweden and 0.17 percentage in Germany.

Thank you, Henning. The next question is from Jan Erik Gjerland at ABG. M&A, what is your latest thought on the topic? Here, I previously communicated that. I mean we, as a bank, we remain confident in our position with our footprint across the Nordics is attractive. We have a solid capital position. I think that provides great opportunities for our shareholders because organic growth. We see opportunities to grow organically where we currently stand. But there are, of course, obvious financial and strategic reasons to become part of a greater entity within the Nordics. This isn't our main focus. But of course, we are very willing to participate in case such an opportunity would arise if the transaction creates value for our shareholders. The short to midterm effects of COVID-19 have not changed our perspective in this matter. Next question comes from [ Terril Sterle ] at Sparebank 1 Markets. What are your long-term growth expectations? It's a follow-up question to the question on conservative payout ratio. Well, I would say that next year, as we are in the middle of the pandemic still, and there is uncertainty, we have said that we want to grow by 5% to 10%. Long term, my ambition would be to grow around 10%. I believe that is possible within the footprint we have. And I believe that we also have shown historically that we can create new business areas if needed, if we want to reach that growth. So if the growth is not available within our current markets, we will find ways to create means for that growth by actually increasing our footprint, if needed. And then lastly, ABG. Jan Erik Gjerland has a question where, they say that many smaller players has given up on dividends given the reaction from the FSA. And does that have anything to do with our view on the 50% dividend payout ratio that we previously commented. I should clarify, we have no plans whatsoever to pay out dividends based on 2019 results. That train has passed. We have been -- we hear what the authorities are saying, and there are no such plans at all. Whereas what I'm talking about now is the dividends based on 2020 results. Also in this question, we will listen to what the authorities say. And if there are recommendations not to pay out dividends, those will be adhered to. In terms of the 50% payout ratio, there are many perspectives to be balanced. One of these perspectives is, of course, growth versus dividend. The other one is, of course, also having a long-term robust capital position. I also noticed that the FSA is not keen on paying out excessive dividends, and this is also something that paints into the picture. And this is the reason why we are balancing on 30% to 50%. And then I have a question from Vegard. Can you help me bridge the stage communication on Page 7 in the presentation, the increasing stage 3 development, Page 13 in the report? Let's have a look. I'll have to bring up the presentation myself to see what he is referring to. Page 7. Page 7, I do believe that you're talking about then the past due balances that we're seeing as well as our sent to collection stages, and you want that compared to Page 13. Increase in stage 3. Yes. Looking first, going back to page -- starting on Page 3 -- 13. I do believe that when you're saying the increasing stage 3 development, Page 13, we actually have a decrease in the stage 3 compared to the last quarter. The last quarter, we had NOK 101.7 million in stage 3 and other. And in this quarter, we have NOK 85.4 million. And these are basically the cases that we sent to collection, and this reflects that we have sent less cases to collection this quarter than we did in the previous quarter. Moving to Page 7. If you look at the bottom left-hand graph, there you have sort of the driver for why we have a decrease from NOK 101 million to NOK 85 million. It is that we have actually sent less cases to collection. So we do have cases sent to collection, even though we have an improvement in absolute terms and in relative terms in terms of how much we send. But that represents the fact that we have an improvement in stage 3 for this quarter. In terms of the table on the right-hand side, that's just looking at the remainder buckets currently how does it look in September compared to the average of the last 6 months. And here, you can see that there are slight improvements. One of the improvements you can see in the 90 to 120 days bucket is that it's decreased, and that's also reflecting the fact why we have an improvement in the sent to collection cases. Based on what we currently see in this graph, we don't expect there to be a deterioration in Q4. This indicates that there might be a slight improvement still, but I wouldn't go so far. I would rather say that I expect Q4 to be stable compared to Q3 levels because we're still early on in this quarter. And then the second one relates to insurance fees. With the reason for the lower insurance fees in Q3, will this pick up again? Henning, will you answer that, please?

Sure. When it comes to insurance products, we offer that as a part of the onboarding process. And as you have been told now during this quarterly presentation and the quarterly presentation in Q2 as well, we have lower new sales in these quarters, and that makes sense to the lower insurance income. However, there is also a change in the product that we have a lower conversion rate on new sales also. So it's a combination of 2 things: lower conversion rates and lower sales. And you also have a question, will this pick up again? Well, it will -- for the part that concerns the new sales, yes, it will pick up again. But the conversion rates, I'm not sure if we will see the same conversion rates going forward that we have been seeing in the past couple of years. So well, it's hard to say that we know for sure that new sales will affect insurance products when we ramp up new sales.

Good. I believe that was the last question. Is there any other questions in the webcast? Okay. Then I thank you all for attending the Q3 presentation of Komplett Bank, and I wish you a great continuation of your weeks. Thank you.

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.