Morrow Bank AB (MOBA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Third Quarter Results call for Komplett Bank. My name is Oyvind Oanes. I'm the CEO of the bank. And with me on this call is Eirik Holtedahl, the bank's CFO. As usual, we'll be going through a presentation before opening up for questions. And if you want to send us a question, you can also do so by sending it to [email protected]. Turning now to Page 2 of the presentation, starting with a short review of the key highlights of the quarter. I'm happy to report that we have had a strong quarter, confirming that we have restarted the growth engine with record sales volume across the 3 markets and a loan book growth of 14% in the quarter. We're also starting to see that we're able to take out cost of the operation with a reduction of 9% quarter-over-quarter, and there will be more to come as we move forward. As market rates increase and given the significant growth we have had to adjust our deposit rates, putting some pressure on the margins. But we have already taken multiple actions to also reprice the back book albeit with some lag due to regulatory requirements around notifying the customers. The strong growth has also forced us to significantly increase the required loan loss provisions in the quarter. This is just how IFRS 9 works, which again has technically impacted the bottom line results for the quarter versus Q2. As we look forward, we expect growth to continue, and we will be also having strong focus on executing on the significant cost potential that we have identified. All in all, we are happy and feel comfortable coming out of the quarter that we're on track to deliver on our 2024 ambitions. Turning now to Page 4 of the presentation. We wanted to give you an update on how we are progressing across the strategic initiatives we laid out at the beginning of the year. As I already mentioned, we delivered record sales performance in the quarter. This is a result of all the work that has been done to improve throughput of the sales [ funnel ]. And combined with better scorecards and test and learn capabilities, we're now seeing conversion up by 2 to 3x versus what we saw back in January. In Q3, we delivered the bank's first outsourcing project, and we're now fully operational with front office being handled through a third party. Combined with several other smaller initiatives, this will deliver an annualized cost saving of NOK 20 million to NOK 25 million from Q1 next year. On technology, we have made big steps forward on the road map to streamline and simplify the structure. We're now executing on a plan that will see us reduce the number of systems and dependencies of more than 40% and thereby reduce the annual cost run rate of IT by NOK 30 million to NOK 35 million once the initiatives have been delivered. In sum, we're progressing on plan to deliver the defined strategic initiatives. Turning now to the next page, Page 5. Before handing it over to Eirik to review the financials for the quarter in a bit more detail, let me just take a minute to recap on the repositioning strategy we laid out at the beginning of the year. We have a solid base to start from with a sizable loan book of NOK 8 billion now, a clean balance sheet and a strong capital position. Additionally, the bank has developed strong credit risk and analytics capabilities, and we are seeing that the throughput initiatives are yielding results with strong growth whilst focusing on balancing the risk return equation. We're now executing on both process automation and tech simplification and are seeing that our cost base is coming down. More work to do here, obviously, but we are on track. Hence, our midterm goals remain in line with what we communicated in our previous quarterly reports to grow the loan book by 50%, reduce cost to income to below 35% and deliver a return on target equity of 12% to 15% in the long run. Now over to Eirik.

Thanks, Oyvind. As you have heard earlier in this presentation, we're quite excited to report that we're now seeing a strong growth and the record setting growth that is with a loan balance increase of close to 14% or NOK 1 billion over the previous quarters. Hence, in terms of net loans, we're now at the level where we were at before completing the large one-off NPL sale at the end of last year. And what is encouraging to see is that this growth is actually taking place in all 3 of our markets with roughly the same amount in each. We are attributing this growth to both a benign market development, but actually, most importantly, to enhance sales processes that improve conversion, as you can see described on this slide. And not the least, a larger sales effort and a considerable investment in upfront loan losses from our side. Now on to Slide 8. Jumping over to the yield picture, we're happy to report that overall, we still maintain the yield on all our main products as well as the credit cards and POS. The competition does remain strong. And as a result, we see that there is a downward pressure on the yield on our new sales. However, we do nevertheless managed to sustain the average yield on all our loans in all markets as can be seen on the graphs on the picture. And the credit card rates have actually increased, which is attributable to higher revolving rates at the -- after the [ summer ] spending. That being said, the average rate on our client deposits has increased during the quarter as we had increased the rates on our deposit product in line with market development. This trend is continuing into Q4 and probably will do so into next year as well. This will squeeze our interest margin somewhat, but we will also lift the rates on our loans to alleviate this narrowing gap. That being said, they will expect to be a certain time line before recovering this gap, which is due to both the market and legal conditions. Our interest income did increase with NOK 12.5 million compared to Q2, which is driven by the larger loan balance. It should, however, be noted that most of the loan balance growth took place in September and thus was interest bearing for a short period -- for only a short period in Q3. This was, at the same time, offset by higher interest expenses due to the deposit rate increases. Also, Q2 was marked by a high one-offs, mainly relating to insurance cost repayments. And as a consequence, the total increase -- the total income in the quarter decreased compared to the previous quarter, but we would like to stress that the underlying development for the reasons mentioned above is going in the right direction. Now going to Slide 9. Starting in late 2021 and continuing throughout 2022, we have been working on reducing our cost base. We are, therefore, happy to now see that these measures are bearing fruit as evidenced by the numbers on the graph on this slide as our cost base is decreasing to NOK 94 million. Compared to Q2, the overall reduction is close to NOK 10 million. This is driven by lower expenses, but there is also a certain amount of CapEx that is capitalized, reflecting investments in the new operational platform that we're developing. We should see further development in Q1 2023 when the additional effects of the restructuring will materialize. Overall, this decrease is foreseen to amount to somewhere between NOK 20 million to NOK 25 million from its peak in early 2022. Also, we have identified initiatives on the IT side that should imply further annualized savings in the range of NOK 30 million to NOK 35 million at the end of 2024. Additionally, we're working on other messages that should bring our cost base in the near to mid -- in the near to midterm. The cost-to-income ratio is also decreasing, but is somewhat adversely affected due to the lags in total income, as mentioned on the previous slide. However, the expected future growth in total income and lowering of the cost base will improve this ratio going forward. Now on to Slide 10. The last quarter has -- as previously shown, exhibited a record high growth of NOK 1 billion or 14% of our loan balance. The accounting standard, IFRS 9 is, however, requiring us to record 1 year's expected credit losses at loan origination. In Layman's terms, this means that we have to set aside 1 year of loan losses when we issue a new loan, even though the loans obviously are in good standing. This is not a new requirement, but given the growth that we're now experiencing, it obviously comes at a cost, which we need to take upfront. I would here also like to stress that these are expected losses for future defaults that we have not seen yet. Consequently, the additional net increase for new loans, which so far are classified as so-called [indiscernible] loans i.e., loans in good standing was NOK 31 million for the quarter and reflects the said loan loss provisions for our growth. And this amount is, by and large, the same as the increase in loan losses compared to Q2. Hence, our loan loss ratio has increased in the quarter as a consequence of our growth and not a worsening of our portfolio. And this will continue when we grow our loan balance at a high pace. And also when some of the new loans migrate to Stage 2 and eventually Stage 3, in other words, delinquency. We would nevertheless like to emphasize that our portfolio quality remains stable with ample coverage across all stages. Now on to Slide 11. As explained on our previous slides, we had a slight reduction in total income, a healthy reduction in costs, but a clear increase in total loan loss provisions as we are investing in further growth. Consequently, we see that the earnings after tax landed at NOK 18 million for the quarter. We would like here to reiterate that the key contributing factor to this is a recording of the 12-month expected credit losses. Over time, we expect that this will improve as we lift our loan balance towards our 50% growth goal, we shift the yield upwards, the OpEx is coming down and the loan losses start to level out. In other words, we consider this growth to get an investment to achieve the desired scale with ensuing returns for our business. On to Slide 12. As our loan balance growth has surpassed the capital generating rate, our capital ratio has, as a consequence, decreased. Nevertheless, we remain comfortably above the minimum requirements both an internal and external ones and still have ample room to invest in further growth, and we will continue to use this room going forward. Please note that the CET1 requirement has increased this quarter as a consequence of an increase in the countercyclical buffer in Q3 in Sweden. This increase will be offset by lower systemic risk buffer in Q4, bringing down the CET1 requirement down again to below 17% by year-end. And with these words, I'll leave the floor to Oyvind.

Okay. So let me try to summarize the key takeaways from the presentation today before moving to Q&As. As we laid out our repositioning strategy at the beginning of the year, we addressed 2 main drivers that we have to focus on turning around growth and cost. Three quarters into the execution of the 3-year plan, we are seeing that both KPIs are now definitely moving in the right direction with significant growth of 14% in the quarter and costs coming down as this graph clearly illustrates. Additionally, we have significantly reduced the risk on the balance sheet over the period. So in sum, we're on track with building scale and efficiency and deliver on our midterm ambitions. Now thanks for listening. And we will now open up for questions. [Operator Instructions] I will leave this page on. I think that is the page that kind of says it all and sums it up well for the third quarter. [Operator Instructions]

Yes. So we received e-mails from you. The first question is how is the credit quality in Q3 new sales compared to what you saw in new sales in first half?

Actually, we have seen a steady improvement over quite some time. I mean, all the way back from pre 2022. And this trend has continued in 2022 and also now into third quarter. So effectively, we are seeing that the credit quality of such has increased. But as mentioned earlier, with the high growth we're having, we still have a larger loan loss amount.

We have another one. What are the most important risks to your 2024 ambition?

Good question. Now obviously, as you see on this page, our ambitions remain the same as we communicated in the last quarters as well, to grow the loan balance by more than 50% from that starting point, to bring down cost income ratio below 35% and eventually improve the profitability of the bank with an ROE or return on target equity that is 12% to 15%. And I think as we have demonstrated also a bit in the last quarter, but definitely now in third quarter, where we're on the track to deliver on the cost targets, 14% growth in the quarter in Q3. And also, as you can see also from the slide here, we are starting to also move the cost base in the right direction. Now ultimately, the ROE target is obviously an output of us focusing on delivering the strategic initiatives, which we are on track on doing. I think the potential risk in some of these targets are external risks. Risks that we can't fully control ourselves, whether that is market growth -- market -- the macro environment that we operate in, or obviously, what happened in the interest rate environment, whether we will see continued pressure on margins or as we believe we will be able to actually pass on some of that interest rate to customers and actually see yields and margins improve over time. So again, if I summarize what is the largest risk now sort of -- these are early still in the transformation plan. I would say it's potentially timing, sort of how quickly are we able to execute, how comfort on that based on Q3 and the sort of external environment that we can't fully control ourselves.

And we get the final question we have received on email. Have you got any early signals on how demand will be impacted by increasing loan interest rates?

Well, as pretty much everybody is reading now throughout most of 2022 is that interest rates are going upwards, and that is also applying to our clients. We've seen from our side, we sold first that we had to increase our deposit rates in order to remain relevant to -- for a product offering and maintain the funding base. And the -- bank, we need to maintain margins. So we have introduced interest rate increase for our loan product. And this will probably have to follow the expected increase in deposit products. We have not seen any real reaction to this increase. I think that this has been expected from our clients because they have followed in the user where that interest rates are going up and also realize that this will apply to their loans. So, so far, there is no real impact from those increases in terms of client reactions.

Any further questions, email, chat, anyone want to raise their hand? Okay. So if there are no further questions -- was there a -- I think I saw some question in the chat. Yes.

We got 1 more question. What's your plan with POS? How many employees work with this product? Is this product profitable when you have a Komplett distribution platform?

Yes, let's say, again, a good question. So thanks for that. We're working very closely -- very closely with Komplett Group as a strategic partner and have discussions with them on product development and how we continue to improve our offering jointly with Komplett. The current product that we work on, we actually work on several products with Komplett. But that past product is still a product that is attractive for the customers. Margins, I must admit margins on that product has come down over the years. Other products are definitely also coming up as alternatives for customers in the checkout. So that's something that we're constantly evaluating how to improve the product and how to potentially reposition other products over time in the checkout. But Komplett Group remains a good partner, and we have a strong relationship and continued discussions on how to improve our working relationships with them going forward.

We got another one in the chat. When do you expect to pay out dividends? And when do you expect ROE to come over 10%?

Our dividend policy to say it is that we will pay out excess capital that we have, which is not needed for growth. Right now, we are seeing good growth. We also have excess capital. So this will be a decision that is coming up for next year when we decide on how to allocate the 2022 profits. The ROE to come up over 10%. We have a target that by the end of 2024, we should deliver an ROE, which is in the range of 12% to 15%. And that means that we are -- as Oyvind said earlier, we are going for this target. We are on a good way, and that means that the ROE should by then also exceed 10%.

We'll give people a little more time. If anyone else has a question in the chat or want to raise their hand? Nothing more coming through. Well, in that case, I guess we would just like again to thank you for calling in this morning. I hope this was helpful. Obviously, should you want to talk to us, ask us some questions offline, you're obviously welcome to do so. If not, we'll see you at the next report, the next call for Q4 in February next year. Thank you very much, and have a good day.