Morrow Bank AB (MOBA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the third quarter results call for Morrow Bank. My name is Oyvind Oanes. I'm the CEO of the bank. And as always, I have with me Eirik Holtedahl, the bank's CFO. We will, as usual, go through a short presentation on the results and then open up for questions at the end. But if you have a question in the meantime, you can also send us your question on [email protected], and we will read out that question when we get to the Q&A session. Turning now to Page 2 of the presentation. We wanted to start with a short overview of the bank. Obviously, a recap for some of you. Morrow bank is a fully centralized and well-diversified consumer finance company with a well-balanced portfolio across the 3 countries of operation. In the meantime, Finland has grown to become our largest market with more than 40% of the loan book. This is a result of our focus on allocating capital to what is also the most profitable market in the region at the moment. Now looking at the main KPIs. The bank has delivered a very strong performance year-on-year. We're looking at a loan balance growth of 35 -- 34% income growth of 40% whilst cost has been reduced by 19% year-on-year. This is resulting in a -- actually a doubling of the bottom line result looking at result versus Q3 last year. Now zooming in on Q3 on Page 3, we continue to deliver a solid overall performance with strong cost and credit risk control. The balance growth in local currencies came in at 5%, in line with previous quarter and with our expectations. Despite continued increase of interest expense, we were able to maintain a stable margin of around 9%, driven by successful repricing of the loan book. We maintained our focus on cost and efficiency and managed to drive the cost base further down, delivering a strong cost/income ratio of 29% in the quarter. Loan loss ratio came in at 5% for the quarter. This is slightly up from Q2, driven mainly by loan loss provisions for the current macroeconomic picture. In sum, we delivered a solid and relatively stable bottom line of NOK 36 million, again, in line with expectations and our previous guiding. On the next page, Page 4, you will see that we have delivered on all the key initiatives that we laid out as part of our strategic turnaround plan at the beginning of last year. This includes product optimization with focus on simplifying the product suite, improving throughput and driving balanced growth. Through better analytics capabilities, we have also been able to better segment and target customers and protecting margin as a result of this. Taking a structural approach to cost reductions has enabled us to drive our cost base down by more than 20% in the period, whilst improving significantly our operational efficiency. And we are now well advanced on our IT transformation that will significantly increase the scalability of the platform in the midterm. And again, having implemented all these strategic initiatives of the turnaround plan is ultimately enabling us to continue to deliver solid results over the past few quarters and also going forward. Now before handing it over to Eirik to review the financials for the quarter in more detail, let me say a couple of words about the market on which we operate. Firstly, we remain positive on the Nordic market overall and believe it will continue to be an attractive space for consumer finance. Secondly, looking at the macroeconomic picture and the key indicators for our type of business, we see that the outlook is improving in the medium term. In addition to expecting growth in demand, we see that unemployment levels remain stable -- on stable levels and inflation will come down. This is also indicating that interest rates should be peaking; all positive drivers for our type of bank. Now over to Eirik.

Thank you, Oyvind. I will now go a little bit more deeper into the performance -- the financial performance of our bank. And to start with the loan balance, you can see that in this quarter, we had a steady growth. The nominal increase was 2%, but the underlying growth was actually 5% when you measure it in local currencies, and you exclude the effect of NPL sales. For Finland, we had a strong development. This is our best market with the best yields and also where the returns are the best as the capital requirements for finished loans are actually lower. Norway was steady. It was a slight decrease, but we focused on maintaining margins. Whereas Sweden, we had a slight positive development. And also we aim there at retaining margins. Credit cards is actually doing quite well, almost 6% increase in the quarter, and this is also a product which in the past has shown to give the highest returns. Now for the point-of-sales finance, as you know, we ended the contract with Komplett in April this year and stopped sales at that point. And since then, the portfolio has been in a rundown scenario, and this is also an effect for this quarter when we lowered the loan balance by 22%. Jumping on to the margins and there's no news that the overall market rates are increasing, and this is impacting all of our products. To start with the deposits, you can see that the average deposit rate has increased upwards a bit during the quarter. We're offering -- we have to follow on this because we both want to retain our existing clients as well as attract new clients in order to get liquidity for both new loans and maintaining liquidity cushions. That being said, although we have to pay more for our deposit accounts, we're also happy to see that we can actually push this increase over on our loan products. And we've also had an increase in the month for overall increase in the rates for this quarter. By these measures, we're also maintaining our margins. There is some time lag, as always, when repricing the loan book due to notification requirements in Finland and Norway. In the future, we do expect that the rates will at least for the first quarter, keep -- this quarter -- fourth quarter keep pushing upwards. But eventually, in the longer term, we see that there could be a possibility of widening the margins when the overall rates are then again going down. Looking at the total income picture, we can see one of stability. The increase in interest income was NOK 15 million, which was just slightly outweighed by the interest expense of NOK 16.5 million. This effect was, however, neutralized by that we have had a little bit increase in the gain on financial instruments. Hence, these 2 components meant that had a zero-sum effect. Furthermore, if you look at in Q2, we had a one-off income of NOK 5 million. If you adjust for that one-off you can see that the total income in Q2 and Q3 were more or less identical. And if you look a bit further forward in Q4, we do expect that we will roughly be keeping at the same levels, perhaps slightly increase a bit. On the cost side, we've had quite a bit of development. And as Oyvind also talked about earlier, this is where we've seen the strongest direct effect of our turnaround efforts that we've had in the last -- over the last 1.5 years. Our loan loss ratio is now down below 30%, which is quite competitive. We -- and in the Q3, as you can see, it landed at 29%. Our nominal costs went down from NOK 83 million to NOK 77 million. And again, this is the result of our initiatives to improve cost efficiency and our cost base has actually since Q1 2022 despite a 50% increase in our loan balance, we have in nominal terms, reduced our cost base by more than 20%. Looking a bit forward, we do expect to see some improvements. We foresee that we will maintain a ratio below 30%. And over time, the cost of IT ownership will decrease and we will continuously focus to -- on optimization and further implementing further efficiencies. Now on the loan loss side, we see a picture of where we have a slight increase. We went up by 20 basis points from 4.8% to 5% in this quarter. This increase is actually driven by higher provision levels resulting from the growth in the last 12 to 18 months, but also model-based developments, which says that we need to make our provisions a little bit higher. It's important to note that these are just provisions, they're not actually incurred losses yet. They're just an indication of what may come. We -- and the -- and as a consequence, we also would like to mention that we have indeed tightened our credit policies in the quarter. We are now more restrictive as to which clients we let in. And in parallel, we're working on strengthening our collection processes in order to improve the performance of loans once they have become delinquent. And as always, we keep a tight eye on monitoring the development of credit risk and adjust models accordingly. And from that perspective, if we do look forward, in the medium term, we will see that our loan loss ratios eventually will go down to 4.5 -- around 4.5% over time. However, we will remain in the 5% range for the near term. Now adding up these effects of total income, cost efficiency as well as loan loss, we see that the quarter ended at NOK 36 million. Now if you take into account that there was a NOK 5 million one-off in quarter 2, this implies that actually Q3 and Q2 were at the very close level. The performance in Q3 derived from, as we said here, a stable total income, further cost improvements, which have also been offset by somewhat higher loan loss provisions. The return on equity was 6% in the quarter, but that is also caused by a quite high capital base, which I will come to in the next slide. Looking forward into the next quarter, we expect that we will have a stable level where we should be in the same range as we have been in this quarter as well as the last quarters. Now finally, a look at our solidity position. As you can see here, the capital ratios have been very stable from one quarter to the next. In Q2, we had a quite large -- we -- or in the first half of 2023, we undertook 2 capital increases as well as issued a hybrid loan. And during Q3, we have been able to maintain our capital ratios as the profit generation has been in line with the loan balance growth. And we expect, and therefore, we have a solid position. We're actually probably among the best capitalized Nordic consumer finance banks. And this gives us both the headroom to support growth and deliver on our business plan in the near-to-medium term. And for that purpose, we don't see a need to undertake capital increases in the near future. And with that, I'll leave the word to Oyvind.

Thank you, Eirik. Now before summarizing the key messages from today's call. We wanted to quickly show you how we now stack up against our peers in the region on a few important KPIs based on -- this is based on Q2 numbers. And as you can clearly see from this slide, all the hard work that we have put in over the past couple of years has enabled us now to be very competitively placed on both growth, where we actually have been the fastest-growing niche bank in the region over the last year. We -- as we talked about on the call already, we maintain and are able to protect strong margins, actually the second best of all the peers across the region. And we have -- we're continuously moving up the ladder on being one of the more efficient banks in the region now with a cost-income ratio here in Q2 of 30.8%. Had we put in the last numbers, you would have seen the '20 (sic) [ '23 ] numbers we reported 29% for Q3. So all in all, we're pretty proud of the work that we have done on the turnaround. This has given solid results as we've seen through the presentation, but also stacks us extremely well when we then compare to our peers across the region. Now the last page we have today, a summary page of what we talked about throughout this call this morning. Again, let me just summarize, Q3 was another quarter with a solid overall performance, underpinned by an underlying growth of 5%, stable margins, continued cost optimization and credit risk control. Based on the results of the strategic turnaround, we believe that the bank is well positioned to deliver improved returns in the midterm and therefore, maintain our medium-term targets as laid out on this page. That's all we have in terms of presentation. Thank you for listening. We will now open up for questions. Some of you might have submitted some questions already by e-mail. [ Henning ] as usual, is the orchestrator here of questions and can read out the questions, but if you also want to raise a question on the line, you just raise your hand and we will open up your lines so that you can -- so that you can ask your question.

Yes, there's a question from [indiscernible]. You can now open your microphone and ask your question.

I have a question regarding your funding. What are the geographicals for lift in deposits? How much is in Germany and what is typical interest rate there.

We are funding -- thank you for your question. We are funding ourselves in the currencies in which we make our loans. And the -- and we try to, over time, to match the overall levels in each currency. And -- but that may from time to time vary a bit, meaning that one market -- we may be more funded in 1 market than in the other and for the time being, we're slightly more funded in the euros in Germany, which we used to lend out in Finland. The current rate there is around 3.2% for the time being.

There is a question in the chat. How do you think the implementation of the debt register in Finland will affect your business?

Thank you for the question. Let me try and answer that. I mean, we were obviously aware of the debt register coming in next spring and working hard on being compliant with that, obviously. We continue to think that Finland is a large and growing market, obviously, with more data being both reported and being able or available to us. We do think we can be even more targeted in terms of our credit underwriting and pricing to customers once more data is available. So we do actually welcome the new registry and believe that, that would actually just give a lift to our industry in Finland.

There's also a question from [indiscernible] . How do you see growth going forward?

Thank you. That is a fairly general question. But let me try maybe and answer that. And as you can see on the slide here, the -- we have a -- we've communicated a sort of stable growth in the 10% a year space. We had a 5% underlying growth in the third quarter as reported. We continue to control growth. If we look back a couple of years, the most important thing for us was to restart our growth engine and get control over that, which we have demonstrated that we managed to do. At the moment, we take a more sort of controlled view to growth balancing, obviously, as we always do, but even more so now, yields as interest rates have come up a bit in the market, credit risk. So it's very much about profitable growth. So I think you can expect a plus/minus 10% annualized. But the most important thing for us is profitable growth. Making sure that we grow our book at the margins that we need and have control over the credit risk.

We have also received some questions to our mailbox. First question is, I see from the report that the loan loss ratio is slightly up this quarter. How do you -- and how did the underlying credit quality develop in the period?

Actually, the underlying credit quality is quite stable. Yes, we did have some increases in our loan loss ratios for the quarter. But this was basically based on increased provisions. Now, what are driving these provisions. Well, first of all, we increased our macroeconomic provisions, then that is coming, nothing to do with the actual observed performance of our portfolio but just thinking in how the macroeconomic indicators in the near to midterm would develop versus a baseline. And based on that, we took -- we therefore increased our provisions for macroeconomic buffers somewhat and hence, that also affected the loan cost. Secondly, it's also important to note is that we've had quite a strong growth over the last 12 to 18 months. And as you may be aware, in the early stages of a vintage cohort or vintage age, that means as long as how long the client has been on book, there is a higher loan loss levels. And for the time being, these new loans are actually consisting of more than half our total loan portfolios. And with them, there is a slightly higher loan loss ratios due to the fact that they are unused, and that will -- is actually impacting our current loan loss ratios, and will also continue to do that to some extent in the next quarter or two. But back again, that so far, we haven't really seen any particular negative development which is also underlined by the macroeconomic parameters that Oyvind showed that unemployment is stable, that income is expected to go up. But what we have seen is also that the interest rate is higher, but so far, this has not really given us an indication that performance of our clients has worsened.

And there is a follow-up question from Vega. Could you repeat your euro funding cost? Was it 3%?

No, 3.2%.

That's what we pay for deposits in Germany.

Christian [indiscernible] has a question in the chat. Can you elaborate on the market for defaulted loans? Do you see prices coming down?

Yes, that's actually a very good question. Listen, we -- in our business model, we will always assess and evaluate this market, this is a sort of an integrated part of our business model to work with external debt collectors as well as purchaser of nonperforming loans. For those of you who follow that market a bit as well, you would have seen that their refinancing costs have come up. And that obviously will impact the -- that industry for some time. So we will always then assess whether pricing on whether that is our forward flow agreements or potential spot sales is attractive. We don't have to sell nonperforming loans. We can keep some of that on our own book, continue to work with external agencies for the collection. So yes, there will probably be some deterioration of prices due to the purchasers increased refinancing costs. But so far, what is more important to us when we look at their recovery rates and the performance on recovery, that actually looks pretty good. So that actually indicates that we could decide if the prices come down too much to actually not sell the loan, keep it on our own book. We have lots of space. We've taken down NPL ratio on our balance sheet to below 3% which is some of the lowest in the market. So there's some space to hold some of the NPLs on our own book and continue to work on the so-called 3PC with these agencies so that they collect. That could make sense as long as also the recovery rate seems to be fairly untouched.

Another question to our mailbox. Your return on target equity was around 7% in Q3. And your medium target is above 12%. What are the key drivers to get there?

Yes. Thank you. That is obviously the main question that we're working hard on every day. And as you can see on this slide, the target is indeed there to get about 12%. We think we need to be more competitive also in the capital market. Now the drivers are along the whole P&L as we talked about previous calls and throughout this call as well. We need to continue to grow, and we're working on a controlled growth. We need to continue to keep or improve our margins over time. We need to work on cost income ratio. Now that is already fairly good, but we continue to drive that down. And as credit levels or loan loss ratios, we believe will stabilize back to around 4.5 level. These are all the drivers that ultimately will give you the output. ROE is an output of what we do on growth, what we continue to do on pricing and margins what we continue to work hard on around cost and controlling credit risk. But ultimately, it is a scale gap. So we do need to continue to grow and continue to become more scalable, more efficient and ultimately, if you do the math, the returns will come. Any further questions on the line, in the chat or on e-mail?

No emails. Not in the chat either.

Okay. As always, feel free to also contact us on [email protected] or directly either Eirik or myself, you have probably our contact details. And we can follow up for those of you who want that. And then I guess, it only remains to say, thank you very much for calling in. Henning raises his hand, as always a last-minute question. We'll obviously take that?

The question is from [indiscernible] in chat. What is the current interest rate on your hybrid capital and [ are you ] at some point, looking to pay this back? Also, what was the reason for the reduction in Tier 2 capital from Q4 2020 to Q1 2021.

The interest rate that we're paying on our hybrid capital is based on 2 components. First of all, it's the underlying rate, and that is the 3-month LIBOR rate, which is around 4% these days, which obviously was a lot lower some time ago. On top of that, we do have a margin which we have to pay, which reflects both Morrow Bank as well as the market interest for these products and the characteristics of this product. And this margin is around 7% to 8% currently. As to the reduction in Tier 1 capital from -- you said from 2020?

Q4 2020 to Q1 2021.

It's quite a long time ago, I need to look into the actual numbers, but I believe that it could be that some of these have counterterm. These loans have the Tier 2 capital, they have a limited term. They have a 5 plus 5-year duration -- means that we have the right to call them after 5 years, which we usually do, although they have a 10-year term. And then at that point, we do renew them. So I need to look back in -- from 2020, but it could have been that one has matured and for that reason, the rate had come down. It could also be because our risk-weighted balance has increased. I think actually that is probably the more reasonable answer for that.

Okay. Thanks for that question.

Other questions coming in.

Other questions before we round off. Again, thank you for calling in, listening. We're available offline for those of you who want that. And yes, I think we'll just say, again, thank you, and have a good day, and see you next time.

Thank you.