Morrow Bank AB (MOBA) Earnings Call Transcript & Summary

The Komplett Bank Q2 2021. [Operator Instructions] I'm now pleased to present the speakers. Please begin your meeting.

Good morning, and welcome to the presentation of Komplett Bank's results for second quarter 2021. My name is Eirik Holtedahl, and I'm the interim 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 have the chance to ask questions in the Q&A session. Komplett Bank is on track to reach a loan growth of around 5% in 2021. In the preceding quarter, we had a negative development in our loan book, but we are pleased to see that this trend has now been bucked, and our loan balances have been increasing. We have experienced growth in all geographies in Q2, and I'm happy to announce that we will next year be entering another market which will contribute further to growth and diversification. It is always important, and particularly so during growth, to keep a keen eye on credit risk and collection performance. These elements are paramount for achieving sustainable and profitable growth. And therefore, it is encouraging to see that our efforts to improve credit quality are reflected in a steady improvement in past due balances and lower volume sent to collection. We will look further into this on Slide 7. Finally, we have entered into a forward flow agreement for credit cards Norway, and based on the interest received, we have got an indication that the market is improving. We expect our profit for 2021 to be below those of 2020. Part of the reason for this is an income reduction due to yield pressure which is not fully compensated for by the growth in volume. This squeeze is coming from changing market conditions and regulation. But as we will explain greater in this presentation, we nevertheless expect to buck the income development trend going forward. Furthermore, we expect that the risk-adjusted returns over time will be stable. That being said, the bank paid out its first dividend in April this year and remains firmly capitalized for future growth and dividends with buffers and room for maneuver. In Q2, our net loans grew by NOK 261 million, including currency and forward flow effects, which represents a growth of almost 4% from last quarter. However, the aforementioned yield squeeze, combined with a reduction in the market value of our investment portfolio, led to a decrease in the total income compared to last quarter. Also, the operating expenses increased, something which Henning will elaborate on later. Moving on to loan losses, we are pleased to see that the development in our loan loss ratio improved with an annualized rate of 3.2% in the quarter, which is an improvement from last quarter's 3.8%. Profit after tax came in at NOK 50 million. This represents a return on equity of 9% when adjusting for dividends paid out this year. We remain a well-capitalized bank and have significant excess capital. At our target capital of 18%, which includes a 1% management buffer above the minimum statutory requirement, the return on equity would have been 12.6%. Our CET1 ratio came in at 22.3%, well above the 17% requirement. We have also set aside 50% of the profit for the quarter as foreseeable dividends, and these are consequently not included in the CET1 capital. Finally, we would like to emphasize that the bank has concluded its recruitment of a new permanent CEO, and Mr. Øyvind Oanes will assume this position on the 1st of October 2021. When we look at the net loan growth before adjusting for both currency effects and forward flow sales, we now see a promising picture. Overall, the net growth in the quarter exceeded NOK 300 billion (sic) [ NOK 300 million ], and the growth took place in all 3 countries. The largest contributors is sales of our refinancing product in Norway, where we have seen a healthy increase in demand of this product following enhancement and increased efforts on our side. Demand for our loan product in Finland and Sweden was also positive, as can be seen from the respective growth figures for these countries. As to credit cards and point-of-sales financing, we can note that the demand for these products is influenced both by seasonality as well as consequences from the pandemic. And hence, we consider the overall development to be reasonable. A weakening Norwegian kroner compared to the other currencies implied that currency fluctuations impacted our net loan growth negatively when adjusting for this effect. But combined with adjustments for forward flow, we nevertheless ended the quarter with a net loan growth of NOK 261 million or almost 4% as previously mentioned. Given the importance of credit risk for the bank, we would like to provide some additional insight into the underlying credit performance. The customer default situation in all 3 markets is either improving or stable. In terms of volumes sent to collection, as can be seen in the chart on the bottom left-hand side, we have stabilized this development in Q2 compared to Q1, which again was better than the previous quarters. And as can be seen in the table on the bottom right-hand side, we keep having improvements in past due balances across all days past due buckets. This development reflects high repayments in June, indicating that the liquidity situation of our customers remains strong. Overall, we consider the credit situation to be stable. With that backdrop, I hand the word to our CFO, Henning Fagerbakke, who will now provide further details on the financials.

Thank you, Eirik. So let's look into the income side of the financials. The total income in the quarter is down compared with the previous quarter due to lower yield and negative return on investment, with the largest impact coming from the latter. Komplett Bank's invested assets amount to just over NOK 3 billion and comprises deposits with credited institutions and liquid securities. Due to the conservative risk profile, volatility is relatively limited overall. And in this quarter, an expectation of slower global recovering from the pandemic led to a negative return of NOK 0.5 million, while the return was positive by NOK 7 million in the previous quarter. Regarding the yield, this was the second quarter in a row that our new refinancing product contributed with solid new sales, and this product is naturally offered at lower yield than the rest of the portfolio. Note that we expect new sales to have stable margins the next quarters as the last quarter, so this effect will be waning. At the same time, we see effects of the temporary interest cap in Finland, where new loans have lower yields than the ones that are churning. This cap with most -- cap will most likely be lifted by the end of September, but we cannot rule out that other restrictions may be implemented. For the next quarters, we expect further loan growth and lower funding costs to contribute positively to our income. Made effective from July, the interest rate on deposits in Norway was decreased by 35 basis points. Our customer base has been relatively stable over the last 3 quarters, around 330,000 across all products. Then over to the costs on the next slide. The operational expenses in the quarter are NOK 108 million, up from NOK 98 million in Q1. While we continue to invest in growth and solidity, not all of our efficiency measures have been realized yet. And this combination makes our OpEx higher in Q2. Annual wage adjustments and new hires increased personnel costs by NOK 3.5 million compared to Q1, and marketing costs increased by NOK 2 million, reflecting higher sales. Also, a major ongoing data analytics project, which we expect to improve our processes and profitability, has increased the administration cost by NOK 2 million in the quarter. The quarterly cost income ratio was 45%, up from 38% in Q1 due to both increased costs and lower income in the quarter. Improving the operational performance is a priority. We have implemented several cost initiatives resulting in cost savings of NOK 9 million in the last 12 months, and we expect another NOK 6.5 million cost savings in the second half of 2021. Based on our current plan, the operational expenses will be lower in Q3 and Q4 compared to Q2 as already initiated efficiency measures are realized. We are also looking at our efficiency and cost beyond the coming quarters and are committed to implementing additional initiatives to improve. So moving into the breakdown of the loan losses on the next slide. Solid new sales in the quarter increased losses in stage 1. Losses in stage 2 decreased as a result of improved credit quality and higher level of repayments in the quarter. Stage 3, when including the effects of forward flow, is down in the quarter compared to Q1, driven by decreased volume and new defaults mentioned earlier in the presentation. Model parameter updates in the quarter increased loss reservation by NOK 5 million, mainly as a result of change in estimates in PDs. 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 ratios in stage 3 in the first quarter. However, the coverage ratio has strengthened in Q2 due to lower volume of so-called late payers. The loan loss ratio in the quarter was 3.2%, improved from previous quarters. We are satisfied that the underlying credit performance is better and that our initiatives to improve credit quality continue to yield positive results. However, we also see the high repayments in June is contributing positive to lower loans losses, which we don't expect to continue in the next quarters. So while we maintain current focus on credit risk and collection performance to improve long term, we do not read too much into the improvement short term. Then over to the returns on the next slide. Profit after tax was NOK 50 million in Q2, down from NOK 63 million in Q1. Decline in yield, negative return on investments and increased OpEx are the drivers behind the development from previous quarter. We still expect to reach a growth within the previously communicated range for 2021. However, in the low end, our adjusted estimates indicate 2021 profit below 2020. This is also a reflection of the fact that most of our new sales so far this year has come from a refinance product in Norway, which is a product with lower yields than our other products, and that repayments have been higher. Return on equity is 9.3% in the quarter, down from 12% in Q1. The bank's current capital base is solid and leaves room for both significant growth and dividends. For 2021, the bank allocates 50% of profit to foreseeable dividend. That brings us to the capital position on the next slide. Our CET1 ratio is 22.3% in Q1, down from 22.5% in the first quarter and well above our current target which includes 1 percentage point management buffer. In May, we bought back NOK 45 million (sic) [ NOK 42 million ] in Tier 2 capital, which is the reason for the decline in total capital ratio. Our financial performance over time and the forecasted capital position indicates dividend capacity of 30% to 50%, whilst reserving capital for growth. As mentioned, throughout 2021, 50% of profit will be allocated to foreseeable dividend paid out in 2022. With that, Eirik will now take us through the bank's outlook and summary.

Thank you, Henning. For the remainder of this year, our foremost priority is to focus on sustainable growth. We will achieve this by enhancing and pushing further our current product portfolio. This is known territory, and we have competence here. And as the pandemic abates, we should expect an additional boost. Of equal importance is ensuring that we have found credit underwriting. Our target is to optimize the risk reward picture, so that we can enable profitable growth without sacrificing the credit risk side. We're now implementing additional tools to achieve and improve this end, and this will contribute to ensuring our growth ambitions. Operational excellence is vital to maintaining both a good user experience and effective operation as well as achieving cost savings. And finally, we will maintain a robust financial position, enabling both growth and dividends. 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 more than 300,000 customers who value and use our products. We are currently active in Norway, Sweden and Finland with consumer loans, credit cards and point-of-sales finance. Komplett Bank strategy is to grow geographically and/or product-wise. This will provide diversification and economies of scale, reduce business and concentration risks and increase the returns to our owners over time. We have selected now our next country in which we see an opportunity and have also initiated a project for launch next year. We will start by offering consumer loans, as this is a product in which we have competence and, based on experience, will be the one that provides the largest and nominal growth and fastest financial breakeven. So when we combine our priorities for 2021, expectations for market development and looking into 2022, we foresee the following the development of our key drivers. We will increase our total income by growing our loan book. Yes, there is a pressure on our yield, but we foresee to more than compensate this by growing our loan base. This will be achieved by growth in our existing markets and products, and we expect that we also get a boost as the pandemic wanes as well as from entering the new market. The cost/income ratio will improve, driven both by a relatively improving cost base as well as an increased income base. We plan to achieve this as a consequence of our ongoing cost reduction project, benefits from economies scales as well as a growing balance sheet, as we described above. We will maintain a keen eye on our credit quality. We will do this by improving our credit risk management capabilities, driven particularly by investments in systems for analytics with ensuing improvements in credit decisioning. From a macro perspective, the overall situation should improve, and we consider that the situation should be at least be stable. Additionally, entering a new country will entail some higher initial loan losses. Thus on the balance, we expect a stable loan loss ratio development. In terms of return on equity, we should see an improvement going forward, as the above-mentioned effect with respect to income and costs will translate into an improved bottom line, and a more efficient capital allocation will also provide support in the same direction. Combining the development of these elements, we foresee, therefore, that we will remain in a position to maintain dividend capabilities of distributing 30% to 50% over prior year's income. And this brings us back to our 3 financial targets. We are aiming at a capital adequacy of 18%, a return of equity of 20%, and excess capital that is not deployed for growth and solidity will be paid out as dividends. We therefore uphold these as our long-term ambitions for these targets. Thank you, operator. Can you please open for questions?

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

Okay. There are no questions on the web either, so thank you so much -- well, just a moment, there is one question now. And the question is, why is the personnel cost that high this quarter? Is this temporary, or is this a new level? Well, first of all, as part of the cost initiatives, we implemented a strict new hire policy. However, during the quarter, in some areas, we needed to make select hires to support our ambitions, and the total number of FTEs had therefore increased in the quarter. We don't expect this to be the case for Q3 and Q4. So this is, well, a new level. Well, now we expect that to be more or less stable or decrease in the coming periods.

And to your question, if everything is being run from Norway, yes, we have one central location here in Lysaker just outside of Oslo.

Well, that's all of the questions we have received. So thank you so much, and have a nice day.

This concludes -- thank you all for attending. You may now disconnect your lines.