Morrow Bank AB (MOBA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Second Quarter Results Call for Morrow Bank. My name is Oyvind Oanes, I'm the CEO of the bank. And with me here, as always, I have Eirik Holtedahl, the bank's CFO. And as usual, we will go through a presentation and then open up for questions at the end. [Operator Instructions] So with that, let's just jump straight into it. What we thought we would do this time is just recap a bit quickly on the key information about the bank. For those of you who are new to the [ case ], the bank was established in Norway as a niche bank some 10 years ago with focus on unsecured lending across the Nordics. By now, we have grown the loan book to about NOK 12.5 billion with around 75% of the exposure in Finland and in Sweden. Over the past couple of years, we have been through a significant turnaround with focus on building a future-proof and highly scalable platform. We are now clearly demonstrating the positive effects of this as we have seen in the past few quarters, and as we will be confirming as we go through the Q2 results over the next few pages. Turning then to the highlights for the quarter. We are happy to report a strong second quarter for the bank. We continue to see solid demand for our products. And despite a continued prudent approach to underwriting, we could grow our loan book by almost 2% in the quarter to NOK 12.5 billion. Coupled with sustained loan margins driven by multiple pricing actions over the past couple of years as we have talked about in previous calls, we saw a solid income growth in the quarter of 3.1%, i.e., growing the income faster than we grow the book. Costs in the quarter remained stable at around NOK 80 million, and we can report an industry-leading cost income ratio of 26% for the quarter. Loan losses came -- our loan loss ratio came in at 5.1% in the quarter, an improvement from last quarter driven by tightened credit policy and stabilizing growth over the past 12 months or so. As announced in the beginning of July, we agreed to acquire around NOK 700 million of Swedish performing loans from Qliro. This is expected to have a neutral effect on our KPIs this year and a positive contribution from next year onwards. And this is also something that clearly proves that we have established an efficient and scalable platform for growth, both organic and inorganic. In sum, we can report a solid result for the quarter with pretax profits up 16% to NOK 67 million and returns now starting to improve with an ROE for the quarter of 8.5%. Turning now to Page 5 of the presentation. I wanted to recap on the ambition we stated a couple of years ago when we laid out the turnaround plan for the bank and where we now stand. There were essentially 2 underlying drivers that we had to significantly improve, growth and cost efficiency. And on growth, we see -- we set ourselves a target to grow the loan book by 50% by year-end 2024, i.e., this year. And as you can see from the graph on the upper right side on this page, we have delivered on this target almost a year ahead of plan, growing the loan book from around NOK 8 billion to well above NOK 12 billion as we stand now. As for cost efficiency, we laid out a plan to drive the cost/income ratio down from levels above 50% when we started to under 35% by Q4 2024, i.e., by year-end this year. And as you know, we have made significant progress on this plan and actually achieved our ambitions more than a year ago. We reported cost/income ratio of 26% this quarter, we have demonstrated that we have built an efficient and scalable platform. And again, these achievements give us great confidence around the further development of the bank. Turning now to the next page. When it comes to the macroeconomic drivers for our type of business, we are also increasing confidence that the outlook is less uncertain and actually positive for the further development of the bank. Higher economic activity, GDP is set to drive consumption up and hence, also demand for the products we offer. Increasing unemployment could typically adversely impact our segment. However, the outlook shows a stable-to-declining trend on unemployment, limiting the credit risk for the segment. Ultimately, as inflation now is coming down, interest rates should follow and thereby improve disposable income for our customers as well as reducing the deposit funding rate for the bank. And here again, just a reminder, 75% of our book is outside of Norway, and more than 50% of our exposure is in euro, and we expect the euro rates to come down faster than the [ 2 ] other currencies. Now ultimately, summing that up, the strong and improving underlying performance that we have been reporting over the last many quarters and the improving macroeconomic outlook gives us great comfort when we look at our midterm targets. Strong demand and solid capital position support continued balanced growth of around 10% per year. Further cost efficiency driven by increased automation and scalability makes us well on track for beating the midterm target of a highly competitive cost/income ratio of 26%. And as we saw this quarter, loan losses continue to now trend down. Eirik will talk a bit more about that in a minute as newer loan vintages perform better. Return on equity is ultimately an output of all of the above, and we are happy to report another quarter with significant improvement. And we have line of sight on our targets when it comes to returns. As we are building a highly scalable platform, we also now -- we are also now in a position to consider various structural opportunities to accelerate the value creation. We demonstrated that with the acquisition of a portfolio of around NOK 700 million of Swedish loans back in July. As the illustration on this page shows, our returns could improve by around 2 percentage points to 12% to 14% with a NOK 5 billion higher loan balance. This is to illustrate the scalability of our platform. In other words, scale drives profitability. So we will continue to pursue similar opportunities should we find them attractive. We are often compared to our Swedish peers on various KPIs with a NOK 5 billion higher loan balance and a similar regulatory regime as that of Sweden or Finland, we could actually target return levels of up to 20%. And as we've talked about earlier, 75% of our loan balance exposure is now outside of Norway, and our growth focus continues to be on Sweden and Finland. It will, therefore, be natural for us to assess what the most efficient and strategically optimal structure for the bank could be in the midterm. With that, I will now hand over to Eirik to review the financials for the quarter in a bit more detail.

Thank you, Oyvind. As always, it's the balance that drives the bank. And here, you can see, we have another quarter of an increase in the gross loan balance. It was 1.9% or 12.3% year-on-year. We are actually a bit hampered this quarter by the FX because the euro versus Norwegian kroner depreciated in value between the end of the first quarter and the end of the second quarter. That has now reversed since then, but this has impacted our second quarter somewhat. But the underlying trend is there, it's a continued strong demand for consumer financing, and we're actively growing in the markets that we -- where we get the highest returns, and that is Finland and Sweden. And the reason for that is that the risk-adjusted margins in both countries are the most attractive. And additionally, there are lower capital requirements, hence, the profitability, as I mentioned before, or the returns in these 2 markets are the highest. And that's why we allocate our growth there and which you can also see on the development on this -- on development of our loan balance. And finally, you can see that the underlying growth was actually 4% in Finland and 3% in Sweden. Now that we're adding in the Swedish portfolio that Oyvind has mentioned, our Swedish loan book will obviously improve. And we have a good line of sight to reach our NOK 15 billion target by the end of next year. Going on to the margins. You can see that things are now stabilizing. Credit card rates came a little bit down. This is due to seasonality and also a larger NPL portion of the loan book weighing in. So there was a small dip. But again, this is only -- this is less than 10% of our loan balance. The consumer loans were virtually flat, and the same were also deposits. In the deposits we expect to go down as the interest rates are coming down. This is particularly -- and it's important to remember here that 3/4 of our deposits are in non-Norwegian currencies, meaning euro and Swedish kroners. And for there, as Oyvind also has mentioned, the expectations for a rate decrease are more imminent than for the Norwegian kroner. So in all, we expect that there should be at least a stable net yield, if not an improvement going forward. On the total income side, we grew again this quarter by 3%. There were some one-offs on the net in commissions and fees in the quarter, which actually added NOK 7 million compared to -- or NOK 6.8 million compared to last quarter, which actually drove a bit of the increase. But again, here, the decrease in the euro rate also decreased our net income in -- measured in Norwegian kroner. So hence, the growth from the first to the second quarter is not that substantial. We expect that to improve now in the next quarter -- in the third quarter as the euro has rebounded as you're probably all aware of. Again here, on the cost side, we are seeing that the last 3 quarters have been virtually flat at NOK 80 million, whereas the bank is continuing to grow. And this, as we are talking about, this is demonstrating the scalability of our bank now. When we will be adding the Swedish portfolio, that is not going to have a measurable impact, so to say, on the cost level. And hence, it's also showing that the scalability is there. And also it's leaving us open for other opportunities if they should arise. There is also a further increase or decrease potential in the cost side as there are more IT transformations going to be concluded, which will lead to more efficiencies and also eventually then cost savings in several areas. And from that perspective, as Oyvind said, we had a target of 26% in cost/income by the end of '25, and we're already there. And then there is a potential for further improvements. This is also despite that we have been going through a period of higher inflation, which is now abating. But still, we have been able to keep the cost level where we are. On the loan losses, we are fairly -- where we're confident that we have actually peaked the rates, as you said, in -- as you can see in the fourth quarter last year. The loan loss level was virtually flat at NOK 158 million compared to -- which is the same as the previous quarter. But as our loan balance grew, we were now down in the loan loss ratio from 5.2% to 5.1%. This is not a very large improvement, but the trend is clear. And also the line of sight when we're looking into the third quarter is that we should be below the 5% mark this quarter, i.e., by the end of the third quarter. The reason for this improvement is basically that we are more -- now stabilizing our loan book, and we are -- and we also have the growth in our loan book, and we've also done several measures on the risk side in order to improve and reduce the loan loss there, and these are now bearing fruit. Combining all these factors, you can see that we had a healthy development in our profitability in this quarter. We went from NOK 58 million to NOK 67 million in pretax or NOK 44 million to NOK 51 million after tax. And as Oyvind mentioned, our return on equity is increasing. We're presenting the return on target equity, which is now at 9.7%. And again, we are within line of sight to reaching our goal of 10% to 12%. We're also hoping that we will see some reductions in the Norwegian capital requirements. If they -- if Norway implements the Basel IV provisions, along with the rest of the EU on the 1st of January next year. Going to the solidity side, you can see that -- actually that our capital situation has improved over the quarter. First, our profit growth was largely on loan balance growth, and hence, our capital ratio has increased by 20 percentage -- 20 basis points from 22.8% to 23%. At the same time, we received the SREP from the Norwegian regulator. And there, we had a reduction from 6.5% to 5.4% in the Pillar 2 requirements. We still have to add some buffers or some guidance on top of that. So essentially, our targets remain stable. But in all, our capital situation is actually improving from one quarter to the other. And this development is actually providing us more headroom for growth as well as maintaining stable buffers. And with that, I will leave the word to Oyvind, who will conclude this presentation.

Thank you, Eirik. Before summing up the key takeaways from today's presentation. Let me just spend a minute on this slide, reflecting on our performance on what we have been judging as the most important KPIs for us over the past couple of years and compare that to the key peers in our segment. And as you can see on the left-hand side of this slide, we have delivered the highest growth rate with 31%, well above the peer group. And our relentless focus on cost and efficiency has positioned us as industry-leading when looking at cost/income ratio of the reported 26% for this quarter, and there's more to go on that KPI. Yet, we are unfortunately trading at the lower end of valuation multiples with price/book below 0.6. We will obviously do our best and continue to work hard to deliver solid and improving returns that should boost value creation going forward. Now to sum up today's presentation, we have delivered yet another solid quarter, growing the lending book and growing the income line, improving cost efficiency and demonstrating platform scalability, confirming the positive trend downwards on loan losses, and ultimately delivering improved returns with a return on target equity of 9.7% as well as demonstrating the value creation upside potential ahead of us. So with that, we will open up for questions. [Operator Instructions]

That's right. And Jan Erik Gjerland, you're the first one.

I have a couple of questions, if I may. The first one is on growth. You mentioned this NOK 700 million acquisition you have done. Is this going to be on top of the NOK 15 billion you sort of seek to have by the end of 2025 or is this included in those NOK 15 [ million ] roughly?

Thanks for the question, Jan Erik. What we will do most likely is when we get to the Q3 report presentation at the -- I think it's the 31st of October, we will release our Q3 report, we will have better line of sight of how we potentially also then adjust our guidance. The guidance we have confirmed today is basically without the effect of additional inorganic growth.

Okay. Perfect. Very clear. When it comes to deposits, are you already -- have been looking at your offer rate for euros, but have you already lowered it with the recent downtick this summer. So what do you really pay now for the euro payment?

We are present in several markets when it comes to the euro payment. We're using a platform. And hence, we are present in Germany, Netherlands, Ireland, Austria, and we will also be adding France and Spain. And by that -- by being present in all these markets, we will be able to differentiate and play those markets in order to lower the rates. And the euro rates that we're offering is somewhere between 3% and 3.2% depending on the market. And we -- and to answer your question, we still have some reductions ahead of us. We have also been keeping our -- maintaining our rates a bit higher because we will need to fund the Swedish portfolio that we're acquiring. But there's a clear potential for a downside here over the next -- quite rapidly.

Good. You mentioned on the cost side, which is impressive with keeping it at NOK 80 million with some potential into '25. Will you keep that as a secret until next quarter as well? Or how should we run and think about the cost there? Is that just to mitigate sort of the inflation you sort of also probably see. Or -- and that we can keep it around NOK 80 million in the quarter?

I think as a rule of thumb, I think you could assume that cost will stay stable. As Eirik mentioned, we are working on a few more actions to automate a few more things, et cetera. So cost could come a little down. But of course, there are -- there's inflation. There's -- that's still sort of biting us a bit on costs. So we are absorbing that. But ultimately, I think the cost level that you're seeing now is the right one, could come a little down, but not materially from where we've managed to get to by now.

Great. Finally on loan losses, if I may. The speed of the lowering of the loan loss provision or your expectations there, will that sort of be -- will that impact your total yield so that you sort of are seeking lower-risk loans. So you sort of going to see lower margins going forward. And then, of course, you will then potentially have a lower loan loss level. So in sum, you can probably still improve your risk margin as you can point to. But is that the sort of effect you're looking for? Or is it something else we should be sort of thinking about?

I can start, and then maybe, Eirik, you can chip in. But we have been tightening the risk criteria, the underwriting policies, et cetera, cutoffs and scorecards, et cetera, for about a year now. And as you've seen, the margins on new volume is keeping up. So obviously, in theory, what you're saying sort of makes sense, you probably need to charge lower interest to get lower risk. But what we have managed to do so far is to find a sweet spot where we've actually been able to keep cost fairly -- or the price of our products fairly stable, while risk is coming down. So the risk-adjusted margin should improve and then it improves by sort of trying to defend the price. Ultimately, the price out to the customer might come down. We hope that our funding [ product ] costs will come down further, so the spreads improve. And that coupled then with risk levels coming down should improve our risk-adjusted margins. And you're right, ultimately, it's not necessarily the interest rate margin, it's the risk-adjusted margin that counts.

Could I have a fifth, if I may. Just on the regime you're thinking about Lea Bank, your peer in Norway has sort of been given or granted the concession to move to Sweden. What's your thinking and still your plans ahead? Is that still on your drawing table? Or is that something you're really thinking hard on?

We are thinking hard on it. And obviously, the fact that Lea managed to do this, and we congratulate them with that. It doesn't make this less relevant for us to look at. It is as our peer Lea has talked about as well on their calls, it's not a super straightforward process. It requires quite a lot of work. And if we ultimately decide to do a similar thing, we need to make sure that we've done our homework before we get there. So we're still discussing with our Board and looking at various opportunities around this. So I assume that we will be talking more about that as we go forward in the next couple of quarters.

Next up is [ Legato Bruen ].

I wonder if you could provide some more detail on the portfolio and how that will work into the accounts. So my understanding, and please correct me if I'm wrong, is that you're acquiring just this portfolio without any liabilities at all. And you are guiding then on a neutral effect for this year. So I assume that the costs then are the 2% provision or what you would call it that you referred to in your press release. So I wondered if you could confirm those views and further how this will impact your loan loss provisions? Will there be an impact to the stage 1 provisions or any other potential impacts in Q3 and in Q4.

The portfolio that we're buying is a performing portfolio, meaning that there are no collection cases and it's -- they're always -- they're all performing or paying clients. So those EUR 700 million will be, of course, added to our loan balance. We're not taking on any liabilities, as you said. And the provision or more precisely the premium, that was technically added to the loan balance and then amortized over the expected life of the loans. As to the impact on the financials, when we take these loans on book, we will need to make a stage 1 and stage 2 provision for them as per the IFRS accounting rules. So there will be immediate effect from that. But that is -- but then also we will have some 4 months of interest income deriving from this, which will then counter these first loan losses that we have to record. And so on that basis, we're saying that for 2024, the effect will be 0. And of course, just back to the premium, that one has a very marginal impact.

So the way we should think about the premium end is that they won't have any direct cost impact but more amortization in line with what you do for agent costs, et cetera.

Correct.

You should think of it as how agent commission on our organic growth is handled. Any further questions from anyone, anything in the chat or e-mail, Henning.

No e-mails and no chat.

Give it 10 seconds more. If anyone has a question, please raise your hand. If not, we will simply say thank you very much for calling in this morning. If you have any questions or want to have a discussion with us after the call, obviously, feel free to reach out to us. We're happy to talk about the results. If not, we'll hear each other again at the end of October. Thank you very much, and have a nice day.

Thank you. Bye.