Morrow Bank AB (MOBA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Q3 2021 results call for Komplett Bank. My name is Oyvind Oanes, and I'm the CEO of Komplett Bank. And with me on this call today is Henning Fagerbakke, the bank's CFO. We're trying something slightly different this morning by having this call for the first time on Teams, but I trust everyone is okay with this format by now. As we will be conducting this call as a live call, we would ask you to respect a couple of easy-to-follow rules. So please wait with your questions until we open for the Q&A session after the actual presentation. And please respect the sort of normal Q&A format. Be brief and clear and respect the time of the others on the call. So before we jump into the actual numbers, I would like to take a brief moment to introduce myself as this is my first results call as the CEO of the bank. As you might know, I joined the bank on 1st of October. So I'm still pretty new to the business. However, I'm not new to the industry. As a matter of fact, I've spent most of my career working in retail banking and consumer banking. I started my career at GE Capital back when they ran the best or one of the best consumer finance businesses globally, where I had roles of increasing responsibility in the commercial area of the business across Norway, Switzerland and Russia. After 9 years working for GE, I went on to take an MD role at a larger Austrian bank and also had the opportunity to be part of starting up and leading the first multi-country direct bank in the CEE region based out of Austria. Following 8 years in Vienna, we moved back to Switzerland, where I first ran a Swiss fintech, and thereafter took the role as Group CEO of a larger global player in the consumer finance space. Having spent the last year during the pandemic, advising and consulting retail banks globally, I'm now very excited to return home to my native Norway after almost 19 years abroad and to take on the role as Komplett Bank's CEO as I believe the opportunities for this bank and this space are significant. If we now turn to the next page, Page 4, of the presentation. As we issued a rather detailed trading update last week in connection with the announcement of the portfolio sales, we thought we would take a slightly different spin on the actual presentation today. Let me still run you through some of the highlights of the quarter. The bank executed a set of strong actions to derisk the balance sheet by selling off NOK 1.4 billion of nonperforming loans, bringing the NPL ratio down from 22% to 9%. We also secured forward flow agreements for both Sweden and Finland and increased the loan loss provisions following a review of the entire loan book. The P&L impact of these actions has been taken in Q3, whilst the actual transfer of the NPLs, and hence the full balance sheet impact will take place in November. Isolated from the negative impact these actions we had on the quarterly results, we are very -- actually very happy with these actions and believe this was the right thing to do at this moment in time. So the value to grow the loan book in the quarter and saw an underlying growth of 3.2%, mainly driven by the refinancing product in Norway. However, we have reported a drop of 3.9% as a result of the loan book review that we talked about last week. Looking at profitability. We continue to see pressure on the margins and dropping yields across our products, resulting in a declining income line, even when we disregard the one-off effects in [indiscernible]. This is something we are concerned about, and I will come back to this a little later in this presentation. Despite the negative results in the quarter, the bank is still very solid with a CET1 ratio well above the regulatory minimum and also the internal targets. The CET1 ratio after completion of the NPL sales is estimated to be above 20%. I will come back with some further reflections as I said a little later, but will now hand over to Henning, who will walk you through the next few slides, reviewing the financial performance for the quarter in a bit more detail. Thank you. And Henning, please?

Thank you, Oyvind. So first, let's start with the net loans development. Net loans in the quarter are down due to increased loan loss provisions and effects on the NPL sales. Adjusted for these effects, currency and portfolio sales in the quarter, net loans increased by 3.2% compared to the previous quarter. We see good traction in the refinancing market for loans in Norway also this quarter, an increase by NOK 309 million in total. In Finland, there is a slight decrease in loans this quarter. However, we experienced higher activity now in October as the temporary interest cap regulation has been lifted. Loans in Sweden are stable and grow by NOK 77 million compared to Q2. If you look back some quarters, it has been challenging market condition in regards to growing net loans. In both Norway and Finland, stricter regulations have been implemented as well as consumer spending has been prudent and increased savings during the pandemic. So then the income side of the financials. Reported total income in the quarter is down due to the effects of the portfolio sales and loss loan provisions. Adjusted for these effects, the underlying total income is NOK 230 million, a decrease of 4.3% in the quarter. Looking back, the yield has decreased from 2019. And as you can see in the graph, yield decrease in Norway is due to the increase share of new sales to refinancing customers as these have lower interest rates as well as expected lower credit risk. The competition in the market is still strong, and the pandemic had reduced demand on loans, as well as the regulatory changes in both Norway and Finland has -- have affected yield. As mentioned in Finland, the temporary interest capital regulation has been lifted, which will have a positive impact on the yield going forward. We also decided to increase interest rates for parts of the existing loan customers in Norway by somewhat below 1 percentage point and will be effective from mid-Q4. Then the OpEx. The operational expenses for Q3 are down to NOK 105 million, a decrease of 2.7% compared to the previous quarter. Even if the personnel expenses increased in the quarter due to an extraordinary contractual payment, our initiatives from the cost program materialized in the quarter, which is the reason of the decrease in total OpEx. And going forward, we expect the OpEx to further decrease in Q4. On the next slide, we see some details on the loan losses. The model parameter updates in this quarter is due to the NPL sale and the review of the portfolio review and result in a total loss of NOK 309 million, which NOK 256 million is related to the NPL sale and the review. The underlying losses in stage 1, 2 and 3 are stable compared to the previous quarter. Volume sent to collection in the quarter has also declined over time. As you can see, it is now 38% compared to the volume sent collection in Q4 '19. This is an improvement due to lower PDs, probability of default in the portfolio as we are making continuously adjustments in the credit scoring models based on more and precise behavioral data. The one-off sales now in Q4 is more than 70% of the balances originated in 2019 or earlier. That brings us to the credit risk slide. The portfolio sale of NOK 1.4 billion in Q4 is derisking our portfolio significantly. The share NPL decreased from 22% to 9% based on the Q3 balances. As you know, sale NPLs on forward flow in all our markets, we expect the share of NPL to further decrease. Considering the changes in credit risk parameters, we expect the loan losses to be largely on par with 2020-2021 between 3% and 4%. Now I'll give the word back to Mr. Oanes, and he will give you the summary and the key takeaways from our Q3 review.

Thank you, Henning. And if we now turn to Page 12 of the presentation. You will see that, as pointed out already, the bank has seen a downward trend in profitability over the -- over quite a few quarters now. There is definitely an element of declining demand in the market and a more prudent underwriting approach during the pandemic impacting these numbers. But the trend is something that we are concerned about and we'll be focused on improving going forward. Even with the changing dynamics in this space in which we operate, we strongly believe that we were able to produce a solid double-digit ROE figure going forward. However, actions are required across the business. And if you turn to the next page, Page 13, we are already in process of establishing a road map for this and have started to identify and action the main areas for improvement and as well as identifying where we can take action now. Essentially, these actions will be around 2 major streams: one, improving the profitability and performance of all existing products in all our markets, looking at how we get more volume and margin and making sure that we have the right focus and allocation of resources and capital; two, improving efficiency, where we will be working on optimizing our processes and structures, targeting to bring our cost base down. In parallel, we're kicking off a strategy process that will look at the more sort of mid- to long-term opportunities for the bank. And we plan to talk more about that in our Q4 call next year in February. In other words, there's a lot of work ahead of us, but I believe we have a strong basis in place, which is demonstrated on the next page. I'm now on Page 14, where I actually want to just reiterate the fact that we have now de-risked our balance sheet significantly, reduced the -- following the recent transactions and that we have now forward flow agreements in place in all our markets of operation. Together with the fact that the bank has a solid capital position with a total capital ratio well above 23%, and a CET1 ratio above 20% following the transactions, this gives us the necessary comfort when we now embark on setting the stage for the further evolution of the bank. So thanks for listening, and we will now open up for questions. [Operator Instructions]

Okay. We have a question here from [ Lars Kokewrights ].

I'm a little surprised with the high loss. During the coronavirus, you set aside some extra buffer to handle pretty serious condition. And then now just a few months later, we get a report that you lose NOK 410 million. That's about 2 years results. And I also read that Bank Norwegian just sold its portfolio with a plus and has sold several portfolios previously with about 0 effect. So I'm a little concerned with how you do the provisioning here with such a big loss and the timing of it just after the previous leader has gone. I would like some comments. And also, I would like to see some corrected result on these effects. Now we have just some slides where you show the upper side of the result, not the corrected for this NOK 410 million. I don't feel in your slides there that they are reflected in how they previously have affected the results. Just -- you just show what is on the upside of everything. So what is the correct results in the previous years? If you correct for this, that will be nice to have also. So a lot of questions there. Summarized, the first, what have been done wrong with the provisions? And that's the first one. And the second, more data on how the previous results should have been. So we get more what is effects and what's the history here. I feel that the previous results now are all wrong with this report. So that's my 2 main questions.

Yes. I can -- well, if we just start with the second question first because that's the easy -- the most easy part. And you're right, we have not shown the impact of the losses we are taking this quarter and presented it as a quarterly effect on a historically basis. So you're right that the NOK 410 million is not a Q3 really. The thing is it's a thing that we should probably have taken before Q3. And -- but we don't have the numbers there and sorry for that. But you're right, the Q3 numbers are affected by NOK 410 million. And to your first question, we did not see this coming before we ended Q3 and concluded on the new estimate for the loan loss provisions as we had a discussion with the third-party collection companies who were willing to buy our portfolios. And as we have said earlier also that the portfolio we are selling is from 2019 and earlier, most of them. And we see good traction in credit risk after 2019. The PDs are decreasing and the volume sent collection is decreasing. That is good. So we have more data. We will still collect data from the portfolio we are selling. So we are having more and precise data to do the correct provisions going forward.

Okay. But my main concern still remains that such a big loss can come this suddenly, especially when your competitor, Bank Norwegian, has sold several portfolios with about none, what is it, result on the P&L. So I would like to get more info how your models are changed that we can really trust your provisions now because 2 years' result, is that really, really should give the impact? So it doesn't give me a big confidence that your provisions are correct for the future either if I don't get more info that can, what should I say, confirm that you're on the right way. That's my biggest concern.

Yes. Maybe I can just chip in here, and I'm sure maybe we can also take off-line discussion on more details. But from my perspective, the bank has done what they believe was correct given the information and the data they have. Over the past few years, they've become better, more accurate. They've had more data as they've had more vintages developed. And yes, they might have been a bit too optimistic on the expected recovery and repayments of -- especially stage 3 loans. But we're making that correction now based on internal, let's say, more data -- internal knowledge, more data, better models as well as, obviously, when you go out in the market and get quotes and prices, that's a good benchmark for the sort of the value of your portfolio. And you must remember, over the last year, 1.5 years, during the pandemic, there wasn't really a market for NPL. So you didn't really have that external benchmark, and that has come back now. So I think that's also something to, I guess, have in mind. And you referred to Bank Norwegian or other banks in this industry as well. We take different approaches. Some banks have a model where they write off earlier and more and sell off more. This bank has had an approach where they hold on to some of the sort of delinquent and defaulted loans for longer because they've seen that they have been able to recover and still make some money on that. But now with that extra data and with finally having some benchmarks again from the sort of market for NPLs, we have seen that those models have been too optimistic. And yes, so I just wanted to add that to the discussion.

Okay. I just mentioned Bank Norwegian because they are maybe a good benchmark for best practice. That's what I think.

They have done absolutely a lot of right things and we respect what they are doing, absolutely. Do we have a next question?

I can't see others.

[Operator Instructions]

We have Truls here. Let's -- yes, we have Truls Roysland.

Yes. Can we -- the thing that kind of surprised me the most here was calculate too this interest rate, that you had such a large write-down of that. How will you do that going forward? Like if you have -- you calculate the interest rate that you don't get on defaulted loans. At what stage, I thought kind of if that's a lot higher than actual cash flow that you would write it down after maybe 1 or 2 quarters. But here, it seemed to be accumulated over several years. Can you give a bit of flavor on that?

Yes. And that is due to IFRS 9 accounting. So we are calculating interest income related to the Stage 3 loans based on net value. So when the LGDs are increasing, the net value is lower, and we are then calculating less interest income for these stage 3 loans. And this is how the IFRS 9 is set up and how we need to follow for accounting purposes.

I understand that. But I mean if the cash flow is considerably lower than the calculated interest, won't you then at some point kind of do a write-off? I mean other banks have kind of -- some have consistently the difference between the calculated rate and the actual cash flow, they've written off. Isn't that a prudent way to kind of do it if...

That can be a prudent way to do it. And also, as Oyvind said, we will have a stricter write-off policy going forward. And that may be the difference between the banks in the niche -- in this branch, the write-off policy, how strict they are and then how much interest they are calculating or the net value of the portfolio. So the write-off policy is essential for what you're saying there, and we will be stricter going forward, yes.

And at the same time, as I said earlier, we do now have forward flow agreements in place for all our products across the market. So obviously, going forward, everything that enters stage 3 will go into forward flow. And that will then be used also as input to the overall picture.

Okay. Can I do another question?

Sure.

You mentioned that like the margins they are obviously very important for profitability. And you mentioned that you will focus on improving margins. Can you give a bit of -- I mean the whole market is seeing a bit of yield compression. What are kind of your target ways of increasing the margin? How will you do it? And do you actually think that it's possible?

Yes. I mean that's a very good question, and I think there's quite some dynamic in that. Margin, there's obviously 2 ways of looking at margin: margin as a percentage and margin as absolute -- in an absolute amount, i.e., interest income. And I do think we need to look at both. I mean if we manage to drive more volume, we'll get more NOK margin, if you like, in terms of our income. If we manage to do something with our pricing, which we do think we have a possibility to do, we will get more yield or more net interest margin. And we will be working on both, and I do think both is possible. I've been here for a short moment, but having sort of dug into some of the products and some of the segments, I do think there is an opportunity to get more price in certain products in certain segments. And I do absolutely think that we can get more volume. So I think we're attacking that from 2 angles, both from an absolute amount angle, more volume, as well as a pricing angle and more yield. Hope that was helpful.

Yes, very. And then if there's no other, I'll just want to do one final, kind of a bit broader here. There's a lot of banks now targeting kind of refinancing in mortgage loans. You bake it into your mortgage. Latest is kind of success at falling loans in Norway for years, and then it goes up now because we launched this product. How much volumes are these guys taking from the market? And what are your view? Will this be allowed to continue? Do you plan to enter the same market? Or do you think it will be stopped by the regulators?

Yes, another good question. And it's not that easy to give sort of concrete answers. We're obviously following the space very closely and looking at what other banks in our industry are doing and the success they're having with that product. That's clear. And I think what we can say is, as I alluded to a little earlier, we're going into more of a strategic review now, which we'll look at sort of what are the biggest opportunities and how will we allocate our capital and resources going forward. And that will take a look at how we improve on our existing products, but it will also obviously look at are there other segments, products that we can enter into. How much of this product is eating into some of the other products as a refinance product? Difficult to say. I don't have a good answer to that. It's probably something we would have to figure out ourselves as well as part of this process. But it is an interesting product, that is for sure and definitely something that we will look at. I'm not saying we will be entering into the same product, but it's definitely some of the options that we will be looking at. The question is, what about timing? It's been in the market now. There's been quite a lot of volume. How will this grow into the future? And what are the restrictions potentially? And that's obviously going to be part of our assessment process.

And very -- I mean if the regulators don't want it, the best way to kind of kill that product would be to increase the risk-weighted assets. To your understanding of kind of the regulators, can they do that?

I mean we haven't obviously had yet a discussion with the regulator on that specific product, but it's something we're watching carefully. And as part of a strategic review of the opportunities and products out there, the whole regulatory aspect, as in where do we think the regulator might go here, will be part of that. But yes, I mean, the regulator could obviously come in and change the rules of the game. They've done that multiple times in the past. So a good point and something we will take with us into the process.

Okay. If -- you can stop me if you want, but if I'm allowed, I would want to ask 2 more questions quickly.

I thought you said the last was the last, but okay. Go ahead.

Okay. The first one is on the point of sales, we've -- data has disappointed since the IPO when our suspect -- or we have been suspecting that there's quite a lot of costs associated with that, but we haven't really got a clear answer as to how much. Now you're kind of a new guy. Can you give any more flavor on the point-of-sale product? How much cost is associated with it?

Yes. I have gone through some of the data on this product. You're not the first one who is asking sort of questions, what are the unit economics on this product. And I've seen some of the analysis. And the current conclusion is clearly that based on the right cost allocations, et cetera, this is still a profitable product for the bank. So that's -- and we're happy with the partnership that we have with Komplett on this product. But then apart from that, I can only refer back to sort of the strategic review. As we look forward on profitability, efficiency, et cetera, we will look at all our products. And we will also look at POS and assess how that can be expanded or what is the future of that type of product in the market. So -- but currently, it is a product that functions well. It is on a unit economics basis profitable, and the partnership and cooperation with Komplett is fully functional and positive.

Okay. And then the very last, I promise, is based on kind of the things you've said today guiding on loan losses and your new volume, what is like a rough guesstimate of return on equity in 2022?

I think we're saying that we want to secure a solid double-digit ROE going forward. As you would have seen, we ticked a little up in Q3. And I think that's the guiding. I think we haven't changed anything on our sort of long-term aspiration around ROE. But the road to that is, for sure, a little -- it's not just around the corner. But I think with the fact that we now have gone through the transactions on the NPLs, we still have a solid capital position. I think we do have multiple actions, both short-term and a little longer term, that will turn profitability around. And when profitability turns around and we have de-risked the balance sheet and we can get some efficiencies and cost out, the ROE should be ticking in the right direction. Any further questions?

No.

No more hands at the moment?

I can't see.

Okay. So we're not seeing any more hands in Teams. So if there are no further questions, I'd like to just thank you on behalf of both Henning and myself for taking the time to listen to us this morning and asking good questions. And we'll see you next time. Have a good day. Thank you.

Goodbye.