Morrow Bank AB (MOBA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the First Quarter Results Call for Morrow Bank. My name is Oyvind Oanes, I'm the CEO of the bank. And with me, as usual, is Eirik Holtedahl, the bank's CFO. And as always, we will go through a presentation before opening up for questions. And if you have a question, you can either send that to the IR mail address that you'll find on our web. You can post it in Teams here in the chat or you can hold up your hand, obviously, at the end when we get to the Q&A session, and we'll open up so you can pose your question. Now moving to the highlights of the quarter. We are happy to report a strong first quarter for the bank. We continued to see strong demand for our products across the region. And despite prudent approach to underwriting, we could grow our loan book to above NOK 12 billion in the quarter. Coupled with sustained margins, driven by multiple pricing actions over the past 18 months or so, we saw a solid income growth in the quarter of 3.4%. Costs in the quarter remained stable at around NOK 80 million, something that clearly proves that we now have established an efficient and scalable platform. And we can report an industry-leading cost/income ratio of 27% for the quarter. Loan loss ratio came in at 5.2% in the quarter, an improvement by 0.2 percentage points from last quarter, driven by tightened credit policy and stabilizing growth over the past 9 to 12 months. In sum, we can report a solid result for the quarter with pretax profits up 15%, NOK 58 million and returns now starting to improve with an ROE of 7.4%. Turning now to Page 4 of the presentation. I wanted to recap on the ambitions we stated a couple of years ago, when we laid out the turnout plan -- turnaround plan for the bank, and I'll review where we stand. There were essentially 2 underlying drivers that we had to significantly improve growth and cost efficiency. On growth, we set ourselves a target to grow the loan book by 50% by year-end 2024. And as you can see from the graph on the upper right-hand side of this page, we have delivered on this target almost a year ahead of plan, growing the loan book from NOK 8 billion to about NOK 12 billion. As for cost efficiency, we laid out a plan to drive the cost/income ratio from well above 50% to under 35% by Q4 2024. As you know, we have made significant progress on this plan and actually achieved our ambition a year ago. With a reported cost/income ratio of 27% this quarter, we demonstrated that we have built an efficient and scalable platform. These achievements give us great comfort around the future development of the bank. And if you turn to the next page, now on Page 5, you will see that we confirm our revised outlook for year-end 2025. We're on track to deliver on annual balance growth of around 10%, taking us to NOK 15 billion in the outlook. Continued focus on cost optimization will improve our cost efficiency further as we grow our business going forward while sustaining a stable cost base. We talked quite a bit about loan loss provisions at our last call. And as you can see from the KPIs reported today, we have bucked the trend and now seeing improvements in the loan loss ratio as new vintages starting to weigh in. We are therefore confident that we will see continued trend downwards towards the targeted levels of 4% to 4.5% in the outlook. Return on equity is ultimately an output of the other levers that we continue to work hard on improving. And we're happy to report that we're seeing improved returns in the quarter. Again, building confidence around our stated ambition of 10% to 12% returns in the outlook. I will now hand over to Eirik, who will review the financials for the quarter in a bit more detail.

Thank you, Oyvind. We'll -- as Oyvind said, we will go deeper into the financials, and we'll start with the loan balance evolution. Next slide, please. There, you can see now on Slide 7, you can see the steady development of our loan balance, both through -- from the last quarter and also through the last year. From last quarter, we grew on a gross level, almost 4%, and for the year, 13%, which is a nice pace for the time being. Our growth is mainly deriving from Finland. There, we had an underlying that means when we strip out the effects of foreign exchange and potential write-offs of NOK 214 million. This is our largest market, and this is also where we grow the most. And the reason for this is that because this is where we see the highest returns, meaning the strongest margins and also that where we have the lowest capital requirements. I will come back to that later. In Sweden, we had a steady development of almost NOK 100 million in growth. Margins are not as strong as in Finland, but still attractive and capital requirements are almost at the Finish level. In Norway, we're actually shrinking the loan book a bit. This is -- we do have sales, but at the same time, churn in Norway is quite strong. So some of it is that our loan book shrinks. But this is a country -- market where we do focus on maintaining our margins, which we do, but the high capital requirements in Norway dictate that we will not invest so much in the country. Finally, on credit cards, we're seeing a nice progress in last quarter now of 5.5% or actually a 25% for the year. Going to the yield picture, you can see here that we continue our work on pricing and repricing our book and for both our product keep lending products, consumer loans and credit cards, the yield is jumping upwards. For the consumer loans, the increase is coming from repricing. Here, we have an effect from both Q4 repricing, which now has a full month effect plus the fact that we have introduced some further repricing this month -- this quarter. For the credit cards, the yield is also inching upwards. And this is here derived from the fact that we now have a larger portion of revolving clients in our book, which we consider to be an asset. Interestingly also is that now we can see that we bucked the trend on deposit rate increases. We peaked last quarter at 3.8%. And this quarter, we went down to 3.7%. If you look a bit forward here, we can see that on the lending side, we have probably taken out all the rate increases that are possible as there are probably not -- there will probably not be any more rate increases from the Central Bank. At the same time, we do expect to see a decrease in the market rates or particularly the Central Bank rates, probably starting in the euro area. And this is also where we have the largest funding cost. And from that perspective, we should be able to see a certain decrease in this funding rate for the deposits. Now if we combine the 2, the development in yield as well as the growth in loan balance, you can see that we have, again, a steady development in total income. We grew 3.4% over the quarter, and it's actually 26% year-on-year. This is doubled the loan balance growth of 13%, which is a result of us being able to increase our yields. We have also had a certain contribution from net commissions and fees were also that has given a certain lift. Throughout the quarter -- year now, we've had a overall quarterly growth in this -- on total income of 4.7%. Going forward, we expect that it will be the loan book growth that will drive the total income. The yields will, as we discussed on the last page, be stable. And also, we will have the fact coming back to that, that we have a portion of nonperforming loans in our book, and these will yield a lower return. Unless we managed to sell them, then the returns will be a bit higher. Now jumping to the picture where we relate income to cost. You can see that we have since the turnaround we've undertaken, managed to keep our cost level stable at NOK 80 million per quarter. This is despite that we have in the same period, increased our activities considerably namely by increasing our total income by 26% or loan book by 13% and also being subject to certain price inflation, which does affect our cost base. But nevertheless, we've been able to maintain the cost at the same nominal level throughout last year. Now if you combine that with the development in total income, you will see that we have a cost/income ratio, which has, for the last year decreased from 35% to 27%. And if you go 1 year back, meaning at the beginning of 2022, you will see that we have actually halved our cost/income ratio from 54% to 27%. Going forward, we can -- we're quite confident that we will be able to reach our target cost/income ratio of 26% by the fourth quarter of 2025. It actually only requires a 4% increase in total income if we keep our cost level stable. Now jumping to the loan loss picture. Again, this is a complex theme. But if we start with the graph on the left, you can see here that this is our loan book growth, gross loan balance and how it's divided into stages. And the stage distribution is quite stable over time here, particularly with respect to Stage 2. Stage 3 has increased, but that is due to the fact we have decided not to sell nonperforming loans as the markets for these products are currently not that attractive. As a consequence of that, we are retaining the nonperforming books -- loans on our book and therefore, they will take up a larger part of the gross loan balance. This is nevertheless offset by having a considerable provisioning for these so that the net effect of these is lowered, and also, we're taking away a large portion of the risk through that measure. And talking about provisioning level, that is the graph in the middle, you can see that we keep them at a steady and quite I would say, on a relative basis, quite high. I would like to particularly draw the attention to the Stage 3 provisioning, which is around 42%. This is, in our view, both prudent and quite high. And particularly, you need to take care into consideration that most of our nonperforming loans are young, meaning that they have been less than 180 days in collections. This is a consequence that is just recently we stopped selling the nonperforming loans. And with such a young collection portfolio, the recoverability is quite good and with a high provisioning level of 42%, we consider that there is little risk remaining on these. The provisioning level for Stage 1 and Stage 2 are quite stable, and they're actually just a function of the probability of reaching Stage 3 multiplied by the provisioning level in Stage 3. Finally, I would just like to add that we do have a certain macroeconomic buffer in our provisioning. This we have built up now over the last 1.5 years or so as a consequence of the uncertainty of the economic outlook. As the outlook is starting to improve now, while there is a possibility that we, over time, now can start to release some of that macroeconomic buffer. Now combining the development in loan balance and loss provisioning, you can see the loan loss figure, which is the graph on the right. Yes, it has increased for -- in the beginning of the year, and that was something we particularly pointed to in quarter 2 of last -- last year. But we're happy to see now that they now appear to be reaching the top. In normal terms, they only increased by NOK 3 million quarter-on-quarter, but the loan loss ratio declined now from 5.4% to 5.2%. And we consider that that we are actually that our measures that we've undertaken to tightening on our credit policies. And be ahead in our prudent and in our provisioning levels is now bearing fruits and that we will, therefore, probably reach the peak of the loan losses for the time being. Now going over to Slide 12, profitability. We're happy to see that we -- we're happy to see that the pretax profit grew by 15% versus the previous quarter. After tax was even more, but that was due to extra taxes in Q4. But the underlying development here is a healthy 15%. This improvement is, as you can notice from our previous slides, is driven by the income growth while we've been able to contain the operating cost and loan losses. And we consider that to be a testament for our successful turnaround of the bank so that we're able to steer the back in the direction we want. Going forward, we will maintain our profitabilities by -- to directing loan growth in the most attractive markets and maintaining cost base stable. And for the longer term, we deem that size, scale and stable margins are the best drivers to ensure a long-term solid development. As a last input from my side, I would just like to give you an update on the solidity and capital situation. If we start with the graph on your -- on the left-hand side, you can see that our capital ratio actually decreased a bit from 7.7 percentage points. This decrease is driven by growth in our risk-weighted balance of our risk-weighted assets. Then also the fact that of IFRS 9 phasing transition, this phasing transition will be fully completed in 2025, and there's only a small portion that remains on our book that remains to be undertaken now. At the same time, our capital requirements decreased over the quarter from 16.1% to 15.8%. And the reason for this is that the Finish loan book is weighing in and hence is driving down the average requirement. And with that, I would like to point your attention to the lower graph where you can see the capital requirements for the each market and also for the entire bank. And you can see here that Finland has lowest requirement of 13.5%, which is quite attractive compared to the requirements in Norway of 20.5%. And these are the obvious reasons for why we are focusing on growth in the Finnish and also the Swedish market because as Sweden is fairly close to Finland for the time being. I would like to note that the Finnish capital requirements will or have increased in the second quarter now by 1 percentage point as they have been adding a systemic risk buffer. But still, it's still the most attractive market. Overall, this will increase our capital requirement in Q2 by 0.5% approximately. With this situation going back to the first graph, you can see that we still have ample room between both the minimum requirement and our target, which is for the time being, 1% above CET1, where against reported of 19.3%. And with these words, I'll leave the floor to again to Oyvind.

Thank you very much, Eirik, for that detailed review. So let me try and summarize the key takeaways from today's presentation. We have grown the loan book to above NOK 12 billion and grown income by 3.4% to close to NOK 300 million for the quarter. Cost efficiency is now at very competitive levels with cost/income ratio of 27%, proving the scalability of the platform. As for loan loss provisions, we see encouraging signs of improvement in the quarter and loan loss ratio coming down to 5.2% as a result of newer vintages weighing in. All in all, a very solid quarter that gives us good comfort on the outlook. With a solid Q1, Morrow Bank continues to demonstrate that it can grow and improve on all levers that ultimately will strengthen its returns. We have delivered our strongest quarter in 3 years and the targeted work to turn the business around is now also starting to show on the return levels. We have line of sight on ROE levels in the 10% to 12% range and in line with previous guiding. For illustration purposes, and as we're often compared to our Swedish peers, we could have targeted return levels of 15% to 18% with a similar regulatory regime. We have worked hard to pursue opportunities that can drive further value creation for the bank in the long run. That concludes our presentation, and we'll now open up for questions. And again, you can either raise your hand and Henning will make sure that he opens up so that you can raise your question directly. You can post your question in the Teams chat or sending us an e-mail to the IR email address.

Yes. The first question comes from Vega [ Toble. ]

I just wanted to -- if you could repeat your reasoning on the margin side. As I understood from your presentation, you have conducted some repricing on the loan side, which should increase the loan yield in Q2 as well. But at the same time, expect as the well development Q-on-Q. Is that connected to the increased NPL share? Or could you just repeat the reasoning?

What I'm saying is that there probably will be a small increase in the yields on performing loans in Q2, but most of the increases have now taken away, and we have not undertaken that many increases in Q1. The reason for the Q1 increase is the full quarter effect from previous quarter as well as the one from -- that we undertook in Q1. In Q2, you will see that our NPLs are starting to weigh in. And if you look at the overall yield, not on performing yield, the NPLs will also start to affect the overall yield. And as they have a larger share of the book, they will then start to weigh in and will eventually start to drag it down the overall yield. But we haven't -- I mean -- I don't have the fine figures in my mind here right now, but there will be -- in overall, there will probably be a flattish development in Q2 for the overall yield.

Also questions in the chat that I will read out. The first one is in Norwegian [Foreign Language]

[Foreign Language] So the question is whether we have received a new or stricter capital requirement, I guess, from the regulator. That's question number one. And the answer to that is simply, no. We are still awaiting the NS rep from the regulator, and we'll obviously notify the market once we get that. When do we expect to be in a position to pay dividends? It's noted that we have a policy. And yes, we do have a policy, the bank has actually paid a dividend previously. This is obviously a question is a bit difficult to answer here. While we are working midterm, long term, obviously, to be in a position to also pay dividends going forward. Whether we'll pay the dividends for 2024 in a year's time is obviously something that the Board and ultimately, the general assembly will discuss. But obviously, our mid- to long-term target is to get into a position to pay dividends.

There is another question in Norwegian [Foreign Language]

I understand why that question is asked. The question was what is the nominal amount that we've set aside for macro provisions. Eirik talked a little bit about that in his review. I don't know if we're comfortable to sort of disclose that amount in detail here. Eirik, you might want to say something about the levels of it rather.

No, we're having roughly 8% round level of provisioning -- extra provisioning of it. But we're not at this time going out with a nominal kroner amount.

There are no more questions in the chats.

[Operator Instructions] And obviously, we -- we have an IR contact e-mail address online. You're obviously welcome at any time to send us your question. We're also happy to take calls if you would want to do that on a later stage. All right. I think if there are no more questions on the call, I think it's just for us to say thank you again for calling in this morning. I hope you have enjoyed this presentation. We certainly have with these strong numbers. So we'll just leave it at that and I wish you a good day and we'll catch up again in August on the Q2 presentation. Thank you, and goodbye.