Morrow Bank AB (MOBA) Earnings Call Transcript & Summary

[Audio Gap] Higher interest-bearing balance combined with several actions to increase yield on both front and back book helped grow the total income line with a strong 17% in the quarter. We continued to execute on structural cost-out initiatives that will bring our cost base down over time. In addition to further rightsizing actions, bringing the FTE level down by around 40% year-on-year, we made decisions to exit POS Finance, as it is no longer meeting the expectation -- expected returns; as well as to write-down a significant part of our past IT investments as we are making good progress on our IT transformation road map. You will have seen that we announced an IT write-down of NOK 91 million in mid-January. The write-down, combined with a few additional one-offs related to the restructuring, influenced reported OpEx line as well as the profit after tax for the quarter, as can be seen on this page. However, based on the great progress being made now across the strategic initiatives, we are confident that we will be able to deliver a strong 2023, targeting to grow our loan book by around 20% and bringing the cost-income ratio down to around 30%, both ahead of our communicated 2024 ambitions. Now turning to Page 4 of the presentation. This is a page that we have used before, you've seen before, but I believe that it makes sense to quickly recap on our strategy and ambitions. This is a 3-year turnaround strategy. And we continue to follow the plan we laid out a year ago, with the aim to reposition the bank for growth, and as already mentioned, we are well underway with the execution. We have not revised our 2024 ambitions yet, but as I alluded to on the previous page, we are tracking ahead of plan as both balanced growth as well as cost -- on both balance growth as well as on cost efficiency. Turning now to the next page, and I'm now on Page 5 of the presentation. At the beginning of 2022, we also communicated a set of initiatives that we would focus on throughout the year. I am happy to report that we have made significant progress and delivered on all of them. Following the sale of most of the bank's NPLs, we now have a clean balance sheet with an NPL ratio below 3%. The teams have delivered on a wide range of actions tuning our products and processes. And we have managed to restart the growth engine of the bank, resulting in a loan book growth of around 30% in the second half of the year. As a matter of fact, January sales this year was 4x higher than January sales last year. On the costs side, as already mentioned, we delivered multiple restructuring actions resulting in an FTE reduction by around 40% year-on-year; and initiated several further initiatives, including outsourcing of noncore activities and moving to smaller offices. As we look ahead, we will have full focus on further simplification of our IT platform. And the transfer to a more future-proof setup is now in execution. Ultimately we target to bring the cost of IT down by around 40% over time. I would also like to mention that, based on the good progress made, we have decided to rebrand the bank and will be trading under a new name from May this year. We will talk more about our targets for 2023 in -- a little later in the presentation, but as you can clearly see from the graph to the right, we believe that we have turned the corner on both growth and efficiency. Turning now to Page 6 and before handing it over to Eirik, let me just quickly say a couple of things around our view on the market dynamics. The Nordic markets have proven to be rather stable and resilient during times of global macroeconomic uncertainty. Despite the current challenges, we continue to see strong demand from creditworthy customers and have yet to see any issues with credit quality. We believe and have also experienced that the higher general interest rate levels will open up the possibility to increase interest spreads over time. All in all and based on the macroeconomic indicators on this page, we remain positive on the outlook for our segment. And with that, I will now hand it over to Eirik.

Thank you, Øyvind. We're now proceeding to Slide 8. As you have heard earlier in this presentation, we're definitely happy to confirm that our growth momentum has continued in Q4, where we again increased our loan balance by 14% or close to NOK 1.2 billion in nominal terms. We foresee to continue our growth in 2023, although at a somewhat lower pace, aiming at striking a balance between growth and solidity. And we foresee to end the year with a loan balance approaching NOK 12 billion. The growth has taken place in all 3 of our markets, with Finland and Sweden now outpacing Norway. We are attributing this to both a benign market development; and also to enhanced sales processes that improve conversions, as you can see described on the slide; and not the least, a larger sales effort, including a considerable investment upfront in loan losses which we will touch on later, from our side. We now turn to Slide 9. On the yield picture, we see that we are largely maintaining the yield on our lending products. There is a slight decrease in the loan yield as the effects of the competitive situation are being felt and new loans offered at a lower rate are weighing in. That being said, we foresee to increase the overall yield during the year to reflect the development in the market conditions. The same will happen for credit cards, as we also expect increasing yields due to higher interest rates; and a shift towards a more revolving-type cardholder base, where the yield will, of course, be higher than for the nonrevolvers that do not pay any interest. The deposit accounts are expected to follow market conditions. The average yield for the 3 countries in which we are present was 1.7% in Q4, and we expect this rate to increase to more than 3% during the year. It should also be noted that there is a lag in the timing of interest rate increases for loans versus deposits, as there is a mandatory notice period for loans in Norway and Finland of 6 weeks and 2 months, respectively, but over time, these differences will catch up. And we now turn to Slide 10. Then as a result of the loan growth and yield pictures, we see that the total income has improved by 17% over the last quarter. In addition, we have also benefited from a boost driven by net commissions and fees as well as a gain in financial instruments. Looking forward, towards the end of 2023, we see that we will be having a total income potentially approaching NOK 270 million driven both by the expected loan balance increase of around 20% for the year as well as for the higher yields. Turning to Slide 11. As we previously have communicated, we have undertaken a considerable write-down of capitalized IT investments this -- in the quarter. This came as a result of having undertaken a review of our IT strategy and plans going forward, which are now taking effect. Also we have recorded around NOK 2 million of costs for a capitalized office rental lease contract that we write-down, as we will be moving to more efficient and less-costly premises during 2023. In addition, we do have some other one-offs in relation to this turnaround that include nonrecurring administrative costs as well as costs related to personnel restructuring. In all, the operating expenses came in at around NOK 202 million, of which NOK 105 million were related to the [ once-said write-offs ]. Looking forward, we see that, at the end of the quarter, we expect to have "end of the year" operating expenses of around NOK 80 million. The reduction is -- in OpEx is derived from costs out in relation to personnel and the other changes that we're doing. We also expect that the costs of IT ownership should decrease by around 40% over the year due to further efficiencies. Given the considerable one-offs incurred, the cost-income ratio of 92% for the quarter is not really meaningful. However, when adjusting the ratio for one-offs, we see that -- the [ underlying ] rate of 45%, down from 50% last quarter. And we foresee that, at the last quarter of the year, 2023 should arrive at less than 30%. Now on to Slide 12. As we have discussed in the past, we are using the accounting standard IFRS 9 to determine the valuation of our financial assets. And it helps also determine our loan losses. This standard is requiring us to record upfront 12 months of expected loan losses, and with our considerable growth rates, we then have to absorb a substantial cost. In addition, we have recorded NOK 14 million of loan losses related to older unperforming cases that we now had decided to also write off. In all, our loan loss ratio for Q4 came in at 5.4% when disregarding these later -- latter loan loss cases. Furthermore, if we disregard the stage 1 allowance of NOK 32 million for the quarter, which may be considered representative for our provisioning related to growth, we can see that the underlying loan loss ratio for the quarter is actually 4.0%, which we consider to be a nominal -- normal level for our business and the segments in which we are present. Looking forward, when our loan balance is increased, growth is [ lulling somewhat off ] and new loans make up a relatively smaller part of our loan book, we'll see that the loan loss ratio will be around 4.5%. And the losses in normal terms for the quarter will be at roughly today's level, but then we will also have a larger loan balance on which we'll earn a higher income. Finally, we do consider our loan balance to be sound. We sell most of our delinquent loans, after 90 days, on forward flow contracts so that less than 3% of the loan balance is nonperforming. And our stage 3 coverage ratio is now 62%. Hence, the forthcoming impact of the so-called backstop legislation will not materially affect our capital situation. We now move on to Slide 13. And if we sum up the previous slides and the particularly given -- particularly given the impact of the write-downs, we see that the quarter obviously ended deep in the reds with a loss of NOK 82 million after tax, but this was an exceptional quarter. And we foresee, going forward, to again be in the blacks. By the end of this year, we expect to have a quarterly income exceeding NOK 40 million. The graph on the right depicts this development, where the key contributors obviously are improvements in total income and, needless to say, operating expenses. We now move to Slide 14. Our capital situation remains commensurate to our business. As our loan balance growth in the quarter surpassed the capital generating rate, our capital ratio then decreased. Please also note that the write-down in the quarter of immaterial assets did not impact our capital ratio. These had already been deducted from the CET1 capital. And going forward, we will strike a balance among growth, solidity and capital structure so as to optimize these. And with these words, I now leave the floor to Øyvind.

Okay, thank you, Eirik. And now turning to Page 16 of the presentation. Before moving on to Q&As, let me try to summarize the key takeaways of our presentation this morning. As we laid out our repositioning strategy a year ago, we addressed 2 main drivers that we had to focus on turning around: growth and cost. 1 year into the execution of the 3-year plan, we are seeing that both KPRs -- 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. In sum, we are on track with building scale and efficiency. And we are therefore now confident with communicating our key targets for 2023 as follows: loan balance growth of 20%, cost-income ratio of around 30% and a return on target equity of around 10%. Thanks for listening. And we will now open up for questions. [Operator Instructions] If you would like to ask your question in Norwegian, that's obviously also perfectly okay.

Okay, we received a couple of questions in the chat. Let's start with one of them. It's in Norwegian, so I will say it in Norwegian; and Eirik and Øyvind will answer in -- yes, in English probably. [Foreign Language].

I -- yes, I will try and answer that. I -- the question was what we expect to save by exiting the brand royalty agreement with Komplett Group and rebranding. For this year, we expect to actually see a saving in total. So what we pay in royalty minus what the rebranding would cost. And obviously, going forward, we will not be paying the royalty. This is a double-digit-million krone amount that we have been paying over the past few years, so that will be a saving. Having said that, I would also like to, I think, just say that we have been very happy, the bank has been very happy with the -- with a cooperation on brand and on the POS product with Komplett Group, but things change. Things evolve. And POS product is not longer a strategic product for the bank, and as I said, we are moving fast ahead on our strategic repositioning. And that gives room and naturally prompts a new name for the new bank, so to speak.

So one more question. [Foreign Language].

Okay. So let me just try and, for the English speakers, repeat that. So the question was what is the expected savings from -- on the IT costs side in 2023. Now 2023 will be a bit of a transition year as well for IT. We have terminated a few contracts. And some of you might know that we have been running on 2 core banking systems. We're going from 2 to 1. We're exiting that agreement a little later in the year and a few other things that comes out during the year as well, so you'd see the costs of IT come down quite a bit. The target, however, of taking the overall sort of cost of ownership of IT down by 40% is a target that we have for the period after the transition to -- out of the old and into the new, so to speak, have been completed. So that's more a target for '24 and beyond.

And there is a question for Eirik. [Foreign Language].

In -- thank you for the question. In the report, it says that there is a negative return of NOK 0.07 per share. It should be positive. Both yes and no: The -- it's correct [ here ] that the profit after tax for the year was positive by NOK 0.9 million. However, this profit also includes the AT1 interest, which needs to be paid out to the AT1 share bondholders. And if you deduct this interest payment, the return to the shareholders actually become negative, as it's stated there.

Question four. [Foreign Language]

That's a good question. Thank you. It's related to the one-off costs that we have taken over the last couple of years related to the restructuring. And maybe starting with the last part of that question before the -- or, first, the restructuring costs for all the organizational restructuring in 2022 has been charged to the 2022 P&L. And We are not expecting any further large cleanups of balance sheet items in 2023 and beyond. As you clearly stated, we have -- we focused first on cleaning up the NPLs, which we did in 2 rounds, the bigger one in Q4 '21, as you might remember; another one in May last year. And that has brought our NPL ratio down to under 3%, so there's not much more sort of NPLs to be taken off our balance sheet. In terms of the restructuring, as I said, we've taken the costs of that, the ballpark of -- actually all of it in -- of the actions we executed in '22 -- into '22 financials. Going forward, there is -- we expect no further surprises on the cleanup. We continue to improve processes, improve systems, but we don't foresee any larger one-off costs related to that going forward.

And the last question from [ Hatletveit ] is [Foreign Language]?

Yes. This is a question that [indiscernible] is, "Surprised to see another NOK 14 million in additional write-offs after the cleanup you did in 2021." And if we have now made sufficient provisions. Yes, we have gone through this through our loan book, and we wanted to be on the cautious side and hence then also additional write-downs. And as far as we're concerned, we don't -- we're not aware of any other further surprises, so to say, so basically we expect our loan book to be clean and that we have sufficient provisioning in place.

Jan Erik Gjerland has raised his hand, and he is now -- his mic is now open.

[ We have had ] some good questions, so I have just one left, and that is the yield improvement of 100 basis points. How should we read that? Is that actually something you have put into your new loans and -- that you have sort of increased or through not only Norway and Finland but also Sweden? I think you have a different kind of setup in Sweden, so could you shed some more light into how we should read the 100 basis points increase in yield versus your deposit costs? Is it so that this is 100 basis points above the deposit costs? Or how should we really [ interpret ] the levels?

These levels are reflecting the market rate development. And -- well, thank you for the question. These levels are reflecting the market rate development. And as we expect that the underlying rates will increase further -- and as you know, there is a lag, particularly in Finland and Norway, related to loans. We will be -- we foresee that we will be increasing our loan book throughout the year just as a reflection of this market rate increase, so it is in a way moving in parallel with the deposit rate increase. So in a way, we're covering our increased funding costs.

And maybe just to add to that. I mean this is not just something we plan to do. This is something we have actually done quite a number of times already in the -- particularly in the third and fourth quarter of last year. And we planned several rate adjustments both on back book and front book as we go forward, so we are quite confident that we will be able to actually take interest rate up on our back book also when market rates increase in general in the market.

Okay, so it means that the NIM should probably not move that fast upwards. It's more about your lending growth being good and then have a supporting NIM to that. Is that what we should expect?

The NIM is what we're trying to protect. I think, in the short term, you will obviously see that the interest expense go up a little faster than the interest income due to that lag that Eirik just described. We have to give notice to customers in Finland, actually 2 months notice, when we adjust rates, but over time, we are expecting that we can actually widen the spread also on NIM when interest rates in general come up in the market and stabilize on a higher level.

Perfect. On the lending side, you said that January was 4x better than something I couldn't get a hold of, but you see the growth in Norway was 9% Q-on-Q, in Norway; 18% and 20% in Finland and Sweden. Is the general February outlook better in Finland and Sweden than in Norway? Or how should we look at your sort of future outlook for the NOK 12 billion headline, which you show us, by the end of the year?

That is a good comment and a question. I mean what I've said was that our January sales levels this year was 4x better than January sales level 1 year ago. So we generated 4x as much volume in January this year than last year, just kind of a -- call it, a proof that things have improved significantly over the year. Now as we look forward towards sort of the NOK 12 billion target, this year, you will see us focus more on Finland. The yields and spreads are better. We're funding that, obviously, in euros from Germany. That is still a better deal than the funding in Norway and Sweden. And the yields -- or the interest rate level is also a little higher in Finland, so you will see us grow more in Finland this year than what we, you would see for Norway and Sweden.

And just finally then, the loan loss levels of 4.5%, is that what we should sort of peg into our models rather than the 3% to 3.5% which I think consensus and us have today?

That is a more accurate number, we believe, when things normalize, 3.3 to -- no. Sorry. 4.3% to 4.5-ish. And again what we look at, we think, is potentially more important than just that number, so see that in relation to the NIM as we just discussed. So we're trying to balance NIM and the loan loss number so that we come to a good return, risk-adjusted return, if you like, over time. And based on where we see the interest rates go, we also believe that a 4.3%, 4.5% is an okay level to be at in the midterm.

Kristian Falnes has raised his hand. Kristian Falnes, can you hear us? No, okay. Okay, there is one question in the chat. Will you still offer a credit card with a reward program after the rebranding?

Thanks for the question. Yes, we will.

No more questions in the chat, neither on the e-mail.

Give it a few more seconds, if anyone wants to send us a question. Or raise your hand. If there are no more questions, I'll take it. Then again thanks for listening in this morning. I hope this was helpful. We will be seeing you again in a quarter's time. If you have any questions in the meantime, feel free to send us your questions, comments on [email protected]. And we will do our best to come back to you as fast as possible. Thank you, and have a good day.