Morrow Bank AB (MOBA) Earnings Call Transcript & Summary

Welcome to the Komplett Bank Q4 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 Q4 2020. Please turn to Slide #3. My name is Jan Haglund, and 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. Next picture. We have returned to growth. We continue to see strong demand from creditworthy individuals for our flexible financing solutions. I expect that to continue growing in 2021 and beyond, and our target loan growth of 5% to 10% in 2021 remains. 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 our customers through these trying times. The number of requests has decreased. We have temporary arrangements in place with 0.4% 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. Neither the customer, the bank nor society benefits if credits are granted to persons that cannot service their loans. I am satisfied that our efforts to improve credit quality are reflected in the underlying performance in past due balances and default levels. 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 the pandemic, given our profitability and flexibility. We monitor and track the situation closely and have not seen any negative effects on credit quality so far. Overall, I am satisfied that we have strengthened our position in a challenging environment during the fourth quarter, we have a solid capital position with capacity for both growth and dividends going forward. Next picture, please. I am pleased that we returned to growth in Q4. For the full quarter, growth was NOK 20 million as we continuously ramped up our activity level and onboarding during the quarter. Excluding currency and forward flow effect, we grew by NOK 240 million in the quarter. Moving on to loan losses. Our underlying loan loss level was stable at 4%, comparable to the previous quarters in 2020. Our reported loan loss level, which is impacted by positive model and parameter changes, was 3.3%. Profit after tax came in at NOK 66 million. This represents a return on equity of 12.7%. We are a very well capitalized bank and have significant excess capital. For the year, we came in at a profit after tax of NOK 263 million, an increase by 30% compared to last year. At our target capital ratio of 18%, which includes a 1% buffer above the requirement, return on equity for 2020 would be 18%, excluding the additional COVID-19-related reservations made. We declined in terms of income in the quarter due to nonrecurring effects, but I expect income to increase going forward as we have returned to growth. During the quarter, our CET1 ratio increased to 22.9% compared to 22.2% 1 quarter ago, well above our 17% requirement. Including Q4 profits, our CET1 ratio was 23.6%. During the quarter, we have also had a change in ownership. KISTEFOS has increased their holding by purchasing the shares previously held by Karnika. KISTEFOS currently holds 24% of the bank. Karnika has directly and indirectly been an owner of the bank since its inception. I want to thank Karnika for their contribution and support during this period. At the same time, I also welcome KISTEFOS as our new largest shareholder. I am confident that KISTEFOS, given the extensive experience from investing in the banking sector, will contribute to the successful development of the bank in the years to come. Another event taking place after the quarter is that I have resigned as CEO. I have accepted the offer to become the Group CEO of Enter Card. I will remain at Komplett Bank as CEO during my resignation period. There is broad alignment in the Board and the management team in terms of our strategic direction. I expect that Komplett Bank will continue to grow successfully going forward. I want to take this opportunity to thank the employees, the Board and the owners of complete bank. I have been working at the bank since 2015, and it has been a privilege. Next picture. As can be seen in the graph, we returned to growth in the quarter and grew by NOK 20 million. Excluding currency effects and forward flow, growth was NOK 240 million. I am very pleased to see that the new refinancing product that we have launched in Norway has good traction. 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 grew in Finland by NOK 63 million during the quarter, excluding currency effects. While maintaining our high focus on credit risk and collection performance, we will continue to improve customer acquisition processes to ensure growth. This quarter, it was especially Sweden that contributed. Going forward, I expect our development to be more balanced across geographies. We see continued high demand for flexible consumer financing solutions and prioritize to grow where we see the best returns. We have an attractive and competitive offering. With our solid capital position, we are well positioned to capture the demand in the market. Next, picture. Given COVID-19, we want to provide some additional insight into the underlying credit performance. In terms of volumes going into default, as can be seen in the graph in the bottom left-hand side, we had a marginal increase in Q4 compared to Q3. The improvement compared to 1 year ago, however, is significant. We had 41% lower volumes being sent to collection in Q4 2020 compared to Q4 2019. As can be seen in the table on the bottom right-hand side, we have improvements in past due balances across reminder cycles in December. This is primarily driven by improved performance in Norway. The situation in both Finland and Sweden is stable in December compared to the average of the last 6 months. Overall, there has been no deterioration in credit quality in Q4. We are now partly into Q1, and we see that the underlying credit quality in January continues to be on par with Q4. 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 on the next slide. The total income in the quarter is down from the previous quarter, mainly as a result of nonrecurring effects of NOK 16 million. The underlying yields have declined over time, partly offset by a positive development in funding costs. We do see a potential in lowering the funding cost going forward as we had a more prudent liquidity strategy in the beginning of the pandemic. Although we had a stable net loans in the quarter, the increase in number of customers. This was driven by POS Finance due to seasonality, specifically the Black Week and Christmas shopping, and we are now about 325,000 customers across all the products. Given the target of 5% to 10% growth in net loans in 2021, we expect a positive development in the total income going forward. So over to the cost details on the next slide. The operational expenses in the quarter are up from NOK 91 million in Q3 to NOK 99 million in Q4. Changes to accounting practices is part of the increase, while higher sales activity in Q4 also impacted cost levels. As Q3 was affected by lower activity due to summer holiday as well as the $1 million tax contribution from the tax authorities, we expected to see the increase in OpEx in Q4. For the full year 2020, cost income was 35.2%, improved from 37.6% in 2019. Going forward, improving the operational performance continues to be a priority, and we have initiated measures from mid-2020 to increase cost efficiency on ongoing business. For instance, we negotiate terms in all of our material supply contracts, decreased use of external consultants and the need of new hires go through a more thorough process of acceptance. We see a potential of cost-to-income ratios below 30% over time, and the ongoing initiatives are step 1 to get there. So moving into the breakdown of the loan losses on the next slide. Higher sales activity in this quarter increased losses in Stage 1. Losses in Stage 2 fell as a result of better credit quality, and we had a similar improvement as in the previous quarter. Stage 3, when including the effects of our flow, is also stable compared to Q3. In the beginning of the pandemic, we made additional loss reservations as a result of negative outlook and uncertainty in macro indicators. During 2020, we have not seen any material negative effect on our credit performance. Given the more positive development in macro indicators from the beginning of the pandemic, we decided to reverse parts of the COVID-19 loss reservations towards the end of 2020. As the pandemic is not over yet, we kept the majority of the additional loss reservations in the books at end of Q4. 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. As mentioned on the previous slide, we made changes to the loss model, resulting in lower coverage ratios in Q4 compared to Q3. Adjusted for model parameter updates and changes in macroeconomic reservations, the loan loss ratio was 4%, and the level has been relatively stable throughout 2020. We are satisfied that the underlying credit performance is stable, and that our initiatives to improve credit quality continue to yield positive results. For the coming quarters, we will maintain our current high focus on credit risk and collection performance. Over to the next slide, please. Profit after tax was NOK 66 million in Q4, down from NOK 73 million in Q3. For the full year 2020, profitability increased to NOK 263 million, improved from NOK 203 million in 2019. Based on our net loan growth target of 5% to 10% in 2021 and increased cost focus, we have a clear ambition of growing earnings in 2021 versus 2020. Further, we expect to increase the run rate in earnings as we move into 2022 as we see ample room to continue this growth trajectory with additional support from increased operational leverage. Return on equity is 13% in the quarter, down from 14% in Q3. The bank's current capital base is solid and leaves room for both significant growth and dividends. It is worth mentioning that targeted level of 18% CET1 would have yielded a return on equity of 18% for the full year 2020, adjusted for the additional macro reservations made due to the pandemic. That brings us to the capital situation on the next slide. Our CET1 ratio is 22.9% in Q4, up from 22.2% in the third quarter. Including the profit after tax for Q4, our CET1 ratio is 23.6%, and our total capital ratio is 27.2%. We continue to have significant headroom to bode the capital requirement at 70%, and our target, which includes a 1 percentage point management buffer. Our financial performance in 2020 and the forecasted capital position indicated dividend capacity of 30% to 50%, 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 positive development on growth in 2020 as we move into 2021 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 on to Picture #16. 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 320,000 customers who Value and use our products. We are currently active in Norway, Sweden and Finland with a consumer low credit card and point of sales products. Komplett Bank's strategy is to grow geographically and product-wise. This provides diversification and economies of scale, reduces business and concentration risk and increases the returns to our owners. We are currently reviewing an expansion outside our current footprint. Of course, the Board of Directors and the management team are committed to the ambition to establish presence in additional geographic markets, alternatively new product segments in current markets during 2022. The reason for taking such a step is to enable the bank to grow at our desired pace over time. Our target for this year is to grow our net loans by 5% to 10%, and a geographic and product-wise expansion will enable a sustainable annual growth of 10% in the long term. Next picture. We have 3 long-term 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 22.9%, 4.9 percentage points above our target level. Including Q4 2020 profit, our CET1 ratio is 23.6%, 5.6 percentage points above our target level. Return on equity. Our target is to achieve a return on equity of 20% over time. In Q4, we had a return on equity of 12.7%, 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 year would be 18%, excluding the additional macro-related reservations made. In terms of profit after tax, we expect an improvement in 2021 and 2022 compared to 2020. As we have significant excess capital, we do not expect to reach 20% return on equity in 2021. However, 20% return on equity is our long-term target. 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. Given our solid profitability and strong capital base, we are well positioned both for growth as well as dividends going forward. Next picture. Growth is a strategic priority for Komplett Bank. We will ensure to continue delivering growth by maintaining activity levels, while also improving customer acquisition processes. We continue to focus on our core business during the pandemic, managing and improving our risk, invoicing and collection processes. We will maintain our high focus on credit quality and continue to improve our data and analytics capabilities. 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 maintain our focus on cost and efficiency and expect the results of our efforts to gradually materialize during 2021. Lastly, we will 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 profits in dividends in 2021. A decision on dividend is, of course, a matter for the Board and General Assembly and dependent on decisions by regulatory authorities in the current circumstances, given COVID-19. 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 have so far been limited. I am satisfied to see that the efforts we have made during the past 24 months improve credit quality has reflect and has a positive trend in underlying credit quality has continued throughout 2020. 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 up for questions.

[Operator Instructions] There seems to be no questions from the phone lines at this time. I'll hand back to our speakers to see if we had any questions from the webcast.

Yes. There are 2 questions from the webcast. I think Henning, you are best placed to answer the 2 questions.

Sure. I can read them first. Why hasn't the Board of Directors recommended a dividend connection with the Q4 report as its standard practice as we have seen among both traditional and niche banks recently? I will say that we have seen lately the FSA's publishment of the view of the dividend topic lately. As I say, we'll base their follow-up of banks, which will distribute dividend the first 9 months in 2021 on the Ministry of Finance Statement, which is limited to the 30% of the total profit of '19 and '20 altogether. Of course, we will look into this dividend capacity based on the '19 and '20 results. And as you might have read in the publishment from the FSA, they want the bank to have a close dialogue with them to make sure that we do the right decision and have the right stress tested as a evidence for dividends being paid out the first 9 months. So of course, we will start a dialogue with the FSA as fast as possible to make sure that we can have possibilities of dividends or buyback. I just want to add one thing. We have not given any dividend earlier years. So that's, well, practices in the branch might be that this will be part of the Q4 presentation, but we have not given any dividend so far. We have one more question. The capital adequacy seems to not be optimal, does looks like not optimal as of Q4 2020. Why is the reason for this? And that is right. We have a very solid capital adequacy as of Q4. 22.9% in CET1, it's a lot compared to the requirement of 17%. As you also might remember, we issued a NOK 300 million, NOK 81 million in June. We are calling the other NOK 81 million issue now in February. We are planning to refinance the 2 issue now in February. That being said, we are well capitalized, giving room for both dividends and buybacks and also setting capital for growth. So we are in a good position, we believe, to have growth and dividend capacity based on the capital adequacy right now.

Is there are any other questions being registered?

Currently not so far on the phone. [Operator Instructions] No, it seems there's no questions from the phone lines at this time.

Okay. Then I say thank you to all the listeners to this webcast, and take care in the current circumstances. And let's just hope that we get out of the pandemic as quickly as possible. I think everyone is a little bit tired of everything happening, but I'm pleased to see that the bank remains solid during these circumstances, and that we continue to deliver good results. Thank you very much.