Morrow Bank AB (MOBA) Earnings Call Transcript & Summary

Welcome to the Komplett Bank Q1 2021 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 result for Q1 2021. Moving on to Picture 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, we will all have a chance to ask questions in the Q&A session. Picture 4. We are on track to reach our target loan growth of 5% to 10% for the year. In the initial part of the quarter, we had negative growth, driven primarily by high amortizations. However, we had good development in terms of growth in both March and April, and including April, we have positive growth for the year. Moving on to credit performance. 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 glad that our efforts to improve credit quality are reflected in the continued improvement in past due balances and lower volume sent to collection. We will look further into this on Slide 7. In terms of dividends, I am satisfied that we paid out our first ever dividend in the quarter. We have a solid capital position with capacity for both growth and dividends going forward. Picture 5, please. Moving on to Picture #5. For Q1, growth was minus NOK 62 million, excluding currency and forward flow effects, but the trend was positive in March and April, as mentioned. Moving on to loan losses. Our loan loss level improved, and we ended at 3.8%, comparable to the levels that we saw throughout 2020. Profit after tax came in at NOK 63 million. This represents a return on equity of 12% when adjusting for dividends. 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 would be 14.3%. Our CET1 ratio came in at 22.5%, well above our 17% requirement. We have decided to set aside 50% of the profits for the quarter as foreseeable dividends, and this is, therefore, not included in the CET1 ratio. Moving on to Picture #6. Net loan growth was impacted by currency fluctuations in the quarter. Adjusted for currency and forward flow, the net loan growth was minus NOK 62 million. The main reasons are that our customers, due to COVID-19, have more excess liquidity and amortized on their loans to a greater extent, and that demand for credit has been lower as people save more and spend less. We expect an increase in demand once we are through the pandemic. We have seen an improvement in growth in recent months, especially in Norway, driven by the refinancing product, but also in Finland. Including April, our net loan growth is positive, excluding currency and forward flow effects. We maintain our target to deliver on our 5% to 10% growth ambition for the year. Picture 7. Given the COVID-19 situation, 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 chart on the bottom left-hand side, we had continued improvement in Q1. The improvement compared to 1 year ago is significant, with 50% lower volumes being sent to collection in Q1 2021 compared to Q4 2019. As can be seen in the table on the bottom right-hand side, we have improvements in past due balances both for 1 to 30 days overdue as well as 90 to 120 days overdue. For 30 to 60 and 60 to 90 days overdue, the situation is balanced compared to the average of the last 6 months. Overall, there has been no deterioration in credit quality in Q1. We are now partly into Q2, and we see that the underlying credit quality in April continues to be on par with Q1. With that, I give the word to our CFO, Henning Fagerbakke, who will give us the details on the financials.

Thank you, Jan. So let's go on with looking into the income side of the financials. The total income in the quarter is slightly up compared over the previous quarter. A lower loan book and fewer interest days in the first quarter is offset by positive nonrecurring effects. We have seen underlying loan yields declining over time as well as improvement in funding costs. We do see a potential in lowering the funding cost even more. And as an example, we recently decided to decrease interest rates on deposits in Norway by 35 basis points. Also, the positive sales trends the 2 last months is expected to continue and contribute to increased income in the coming quarters. The number of customers is now just below 330,000 across all products, a slight increase from Q4. Then over to the costs on the next slide. The operational expenses in the quarter are NOK 98 million, down from NOK 99 million in Q4. Administration costs decreased in the quarter and personnel and other costs are stable. The quarterly cost/income ratio was 38.4%, down from 39% in Q4. Improving the operational performance continues to be our priority. And in the medium to long term, we do see a potential of achieving a cost/income ratio below 30%. We have implemented several cost initiatives so far to move in that direction. But growth and operating leverage will also be critical for reaching such levels. So moving over to the breakdown of the loan losses on the next slide. Higher amortizations this quarter decreased losses in stage 1. Losses in stage 2 increased as a result of changes made to the credit risk parameters last quarter. Stage 3, when including the effects of forward flow, is slightly below Q4, driven by decreased volume on new default. In the beginning of the pandemic, we made additional loss reservations as a result of negative outlook and uncertainty in macro indicators. During 2020 and so far in 2021, we have not seen any negative effects on our credit performance. We see a positive development in macro indicators quarter-by-quarter and made changes to the last model, resulting in a NOK 4 million positive effect in Q1. On the next 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. A new definition of default has been implemented from 2021, which decreases coverage ratio in stage 3 in the first quarter. For comparison reasons and changed methodology, we'd have given about 42% coverage ratio in stage 3 at the end of Q1. Adjusted for model parameter updates and changes in macroeconomic reservations, the loan loss ratio was 3.8%, and the level has been relatively stable last prior quarters. We are satisfied that the underlying credit performance is stable and that our initiatives' improved credit quality continue to yield positive result. For the coming quarters, we will maintain our current high focus on credit risk and collection performance. Then over to the returns on next slide. Profit after tax was NOK 63 million in Q1, down from NOK 66 million in Q4. Based on our loan growth target of 5% to 10% in 2021 and increased cost focus, we have a clear ambition of growing earnings this year versus 2020. Further, we expect to increase that run rate in earnings as we move into 2022, as we see ample room to continue this growth trajectory with additional support from increased operating leverage. Return on equity is 12% in the quarter, down from 13% in Q4. The bank's current capital base is solid and leaves room for both significant growth and dividend. For 2021, the bank allocates 50% of profit to foreseeable dividends. That brings us to the capital position on the next slide. Our CET1 ratio is 22.5% in Q1, down from 22.7% in the fourth quarter. The main driver for the decrease is a result of allocation of foreseeable dividends in 2021 and 2022. We continue to have significant headroom to both the capital requirement at 17% and our target which includes a 1 percentage point management buffer. Our financial performance over time and the forecasted capital position indicate dividend capacity of 30% to 50% whilst reserving capital for growth. I'm glad that we, in April, paid out our first dividend ever. And we expected the macro situation to allow additional dividends later this year. As mentioned throughout 2021, 50% of profits will be allocated to foreseeable dividends paid out in 2022. Concluding the financial review, we are pleased with positive developments on growth in March and April and that we move into Q2 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 the next slide. 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 22.5%, 4.5 percentage points above our target level. Return on equity. Our target is to achieve a return on equity of 20% over time. In Q1, we had a return on equity of 12%, 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 be 14.3%. Going forward, the bank will continue to optimize its capital structure. In terms of profit after tax, we expect an improvement in 2021 and '22 compared to 2020. We do not expect to reach 20% return on equity this year. Continued focus on credit quality, growth and increased cost efficiency will enable us to reach our 20% target over time. 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. We have set aside 50% of the profits for the quarter as foreseeable dividends. Given our solid profitability and strong capital base, we are well positioned to deliver both growth and dividends going forward. Next picture. Growth is a strategic priority for Komplett Bank. Our target is to grow by 5% to 10% in 2021, and we will achieve this by further improving our customer acquisition processes. 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. Both 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. 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. Before going into the Q&A, I have one final comment. Although COVID-19 has presented us with an unprecedented challenge, Komplett Bank has been able to rapidly adjust, and the impact on our operations and financials has so far been limited. I am satisfied to see that the efforts we have made during the past years to improve credit quality has effect and that the positive trend in underlying credit quality continues. This is my last quarterly report as CEO of Komplett Bank. There is broad alignment in the Board and the management team in terms of the strategic direction of the bank. 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 Komplett Bank. I have been working at the bank since 2015, and it has been a privilege. Thank you. Operator, can you please open for questions?

[Operator Instructions] And the first question comes from the line of Jan Erik Gjerland from ABG.

Yes. It's Jan Erik from ABG. Firstly, on growth, you have sort of turned, it will sound like, in April, which means that you are on a growing path for 2021. Is it so that you have now grown from 1st of January until April with a positive momentum? Or is it a year-over-year trend, which you see as a positive? That's my first question. And then if you can shed some light into the yield development on the different products in different markets, that will also be very helpful.

Yes. I'll take that one. In terms of growth, in the beginning of the year, we had -- I mean, January was lower than expected, both in terms of amortizations as well as sales. Whereas we've seen demand pick up throughout the quarter, which means that when you're including March and April, we've had a positive trend in terms of the sales, which means that we are positive for the year currently. And when I'm saying positive for the year, it's compared to how we entered the year in January. So we did have lower growth in the beginning as we were negative in the first 2 months, and thereafter, it has picked up. I hope that answers your questions, Jan Erik. In terms of margins, one of the things that we have done is to look at the pricing of our products, especially in Finland, for example, with the rate cap. It's still not decided what would happen with the rate cap. But it is my assessment, based on the information I have, that it will be removed after September, which will have a positive effect once again on yields. And then also, we've had yield pressure in Norway after the new regulation was entered in 2019. So those are the main drivers in terms of the yield.

You have a very impressive Swedish growth, I can see. Do you know where you get it, or if you get it at decent risks? Could you just shed some light into that? Because you have sort of shown that for the last 2 quarters now, which has been sort of a positive growth side. So how is the Swedish yield that you accomplished?

I will say that it is comparable to the Norwegian and Finnish yields. In Sweden, it has always been a more competitive market with more banks operating in that market. In terms of the growth in Sweden, I should say that one of the main reasons why we grow more in Sweden compared to Norway and Finland is not that we sell more. It is that our installment base is lower in Sweden. So I think our growth is relatively evenly distributed. And even now, I think Norway -- in Norway, we do have more sales than in Sweden. But as amortizations are lower and that we have a lower base in Sweden, that results in growth.

Just to clarify then finally on the growth side. Is it so that you say that sales -- new gross sales looks very promising in March and April, but still, people are repaying faster than probably what we have seen in the past. So is it so that the net-net is positive? Or is it so that the net new sales looks very good, and that is what we expect for 5% to 10%, and then we don't know what amortization would be after a year has gone by? So is it so that the net is 5% to 10%? Or is it the new sales -- gross new sales, which is 5% to 10%?

The gross book should grow by 5% to 10% when we say growth. In terms of the amortizations, it is not a new trend. What we can say is that -- I looked at the numbers yesterday, and in 20 -- 2004, there was a sharp increase in amortizations rather at the NPL at the pandemic. That has continued as people do not spend as much money. They are at home. They have more excess liquidity, and they use that to repay their loans, which is sound and rational economic behavior. I do believe that, that part when we enter the fall and the vaccinations have taken effect, I think that we will see demand growing up again, which means that, that trend will shift once again, where customers will start investing and spending money and not saving as much. So that will be a contributor to the growth. I do believe that currently, with the run rate we have, we will manage the 5% to 10% when looking at the numbers in terms of sales. But that is what I should say on the gross level when you're comparing what was the lending book when we entered the year and what will the lending book when we leave the year. And our target is to have that 5% to 10% figure.

I see. Perfect. Then I just want to thank you for your years at Komplett Bank. And to be a transparent and open CEO, that's very, very helpful to us analysts. So just thank you for your honesty, and good luck with your next efforts. Thank you, Jan.

Thank you very much, Jan Erik. Much appreciated.

We have no further questions at this time. Please go ahead, speakers.

Yes.

Okay. We do have 2 more questions online. Should I ask -- yes, I can ask the questions, and you can probably answer, Jan. First one is, what do you expect with regard to yields loan margins in Norway going forward, stabilize or trend lower? What about the market?

I expect loan yields in Norway to stabilize. I think they are relatively stable in Sweden. In Finland, I do expect them to increase once the rate cap has been lifted.

And also, we have a question from Vegard Toverud in Pareto. First one is, what's the total amortization in Q1?

I don't have that number on the top of my head, but maybe we can have that -- have a look at that.

Yes.

Maybe we can get back to Vegard on that one.

Yes. The second question is, is the positive growth year-to-date included forward flow and ForEx effects?

No. When we say that we have positive growth, I mean, we had a significant impact of currencies this quarter. So when I say that we have positive growth, it is measured in fixed currencies because that is how we set our targets. We cannot do anything about currency movements, but we can affect in terms of what we do on the underlying performance. So if the underlying performance at fixed currency is where we say that we will grow by 5% to 10% and not currency adjusted. We do have growth, including forward flow effects.

And the last question from Vegard is, when will the deposit rate reduction come into effect? And what have you estimated the impact could be? Well, I can answer that one. We made recent changes to interest rates on deposits in Norway, made effective from late June this year. In Norway, there is a 2-month notice requirement. And I expect the change in interest rate will decrease the interest expenses by approximately NOK 2 million in Q2 as a result of lower volumes and between NOK 4 million to NOK 6 million in Q3 affected by both lower volumes and lower rates. The interest rate reduction went from 0.85% to 0.50% approximately.

Good. Any other questions?

No further question on the line.

Okay. Then I thank you for listening in to the Q1 report for Komplett Bank.

We actually have a follow-up question from the line of Jan Erik Gjerland from ABG.

Yes. Just one follow-up on the cost side. How -- where are you actually going to -- or how could you actually lower some of your cost base? Is it from the personnel side? Or is it from the other cost side? You mentioned that some of the effects will come from the cost base, not only from the income side, then you look at the cost efficiency in cost/income ratio versus...

Well, I can say that all of the OpEx items are open to reduce in some way. But we have started to focus on a thorough review of vendor contracts going through the prices from the major ones first. And we see that some of the contracts are being renegotiated right now, and we will have upside embedded prices. We have spent and will spend less on consultants. And we also have a new hire policy that is much more stricter than before. So those are the 3 main areas we're looking at right now. But we do not expect the effects come in for, well, the second half of 2022 -- 2021, sorry. And we have seen some reduction so far, but the main reduction will come later this year, I believe.

Okay. Just finally then on the NPL ratios. Is it frank to say that since your growth is so low, it's not rare that the inflow to new NPLs are lower and that you have also improved quality in your book? Is it just because the growth is sort of staggering? Or is it really what you see on the line that this is a changing behavior from your clients?

I think if you go back to Slide #7, you will find the answer to that. I mean, we have been working on the risk side actively since 2019 or rather the very end of 2018. We are currently sending about half the volume that we did in Q4 2019 to collections, and that's a sign of better credit quality, which means that we are taking on low-risk customers, which also then affect the inflow to collection. That is a trend that I do expect will continue. In addition, we are working actively with our collection companies, which means that we have a champion challenger operation. So we have multiple collection companies in each country, and we balance volumes towards the best-performing collection companies, which makes -- gives them an incentive to collect better. And if they collect better, that also decreases the NPL ratio. It is more difficult, however, to impact what is already at collections rather than impacting what is flowing into collections. And therefore, the impact on the flow is a lot bigger.

So the hard work you did in '18, '19 and took down the growth at the time is now really paying off in lower loan losses going forward. Is that what you're saying? Or is there a level around 3.5% to 4%, what we should expect going forward as well?

I think that you -- we have been at this level for the past 5 quarters. I think you should expect that this level will be remaining. However, I do expect us to send less and less to collections. We do have improving performance. And as you say, it is the work that we did throughout, especially 2019, but also into this year, reviewing and building new scorecards, reviewing collection processes, reviewing our budget models and our application policies. That actually is reflected in the lower volume sent to collection.

Could you just [indiscernible] as on the remainder on the forward flow agreement? How long does it actually last? Is it for the remaining of the year? Or is it expiring during the autumn?

We signed the new forward flow agreement, and it will last, I think, until March next year. However, it has a 6 months delay, which means that we send the cases -- we sell the cases 6 months after they end up in collection, which means that we will have effect until September 2022.

Okay. So it's no halt in that during the second half of this year. So it will just continue with approximately this level of selling every quarter.

Yes. And as you will have noticed, I think the volumes, if you look at it, has decreased in terms of how much we have sold. If you look at the -- yes, and that's also a reflection of our credit quality, that as less people go into collection, we sell less volumes. And in the last month -- last quarter, we sold NOK 37 million. And our ambition is absolutely to decrease that number even further. Thank you, Jan Erik. Any other questions before we close the call?

No further question at this time.

Okay. Thank you very much for listening in. I hope you have an excellent weekend, and talk to you later. Thank you. Bye-bye.