NOBA Bank Group AB (publ) (NOBA) Earnings Call Transcript & Summary

Welcome to the presentation of our Q1 report. My name is Jacob Lundblad. I am the CEO. And with me today I have Patrick MacArthur, our CFO. Four overarching bullets about key events in the quarter. If we start with the financials, we see another good quarter with stable underlying financial development. Adjusted core operating profit of SEK 1.4 billion, up 21% year-on-year. We have a portfolio growth of 11%, and I'm happy to see that all segments are contributing, really showing the breadth of our growth strategy. We see stable underlying NIM at 8.2%. We have an adjusted cost/income ratio of 22%. As earlier communicated, cost growth is expected to remain somewhat above historic trend in coming quarters, however, without impact on medium-term outlook. We continue to see positive development of cost of risk coming in at 2.7% in the quarter. We now have 8 consecutive quarters with year-on-year improvement. Core RoTE of 24%, actually 27% if you look at capital employed, and we'll come back to financials. Patrick will give you more details in a short while. If we go back to the overarching bullet, we see that we are well positioned to navigate the ongoing geopolitical and market volatility. While macro outlook has become more uncertain, our outlook on credit losses remains solid with an expected high resilience in our customer base to potential worsening of the macro environment. We have completed the acquisition of DBT Capital. Integration is ongoing, where the first obvious step has been to eliminate DBT's former funding constraint with NOBA's scalable funding platform, obviously, a key enabler to scale up. We continue to deliver best-in-class customer service, and we are much appreciated by our customers, which is evident in the benchmarking we continuously do. If we then flip page and head into the segments, start with private loans. So given the uncertainty in the world and also alluding to the strength of our portfolio mentioned on the previous slide, I think it's worth mentioning who our customers are. On average, they are 49 years of age, 67% are homeowners. They earn in line with the national averages, and they are typically married. So the patterns we see here are a result of our approach to underwriting where stability factors are key. Also worth noting that the portfolio we have on our books today is originated over the last couple of years. So partly, it has sustained in recent years, macro shock, macro turmoil and partly, it has been originated in an environment with more normalized base rates. So very different from 2022, where the entry point was 10 years or so of 0% base rates. But I think it's fair to assume that the portfolio is quite resilient, and this is obviously the first defense towards adverse macro. In terms of the key takeaways, Private Loan portfolio now amounts to SEK 97 billion, 70% of our total lending, year-on-year growth of 11% in local currency. We continue to see strong demand in Sweden and Denmark, while Norway continues to be somewhat softer. Underlying quarter-on-quarter NIM is stable and cost of risk continues to develop positively despite some seasonal headwinds. Let's flip over to Credit Cards. The credit card portfolio now exceeds SEK 20 billion, which is a landmark, of course. This is 15% of our total lending portfolio. Year-on-year growth of 11% in local currencies. Quarter-on-quarter growth is seasonally softer, much as expected. We see solid growth across all markets. Underlying NIM trend is slightly positive. Cost of risk is stable and as expected, a clear tick down quarter-on-quarter given the one-off model update in Q4 that we talked about last time. Then let's flip over to Secured. So also the secured segment is now above SEK 20 billion worth of lending, also 15% of our total lending, year-on-year growth of 11% in local currencies. Quarter-on-quarter growth is stronger at 14% if you analyze it. We have seen a pickup in our mortgage offering, both in Sweden and Norway over the last 6 to 9 months. Strong growth in both Sweden and Norway, primarily driven by high demand on near prime. If we look at NIM, this is partly impacted by near-prime customers with lower NIM and lower risk, but also some temporary factors. Cost of risk at 0% quarter-on-quarter development very much in line -- or sorry, quarterly development very much in line with what we expect. And obviously, there might be fluctuations, but it's good to see the number we have. And lastly, we are working on expanding our equity release offering into Norway, and we're on track to launch next year. So with that, I'll hand over to you, Patrick, for financials.

So thank you, Jacob. I will start off with a financial overview, and then I will move through the line items in more detail on the following pages. I will start off by saying that this has been a quarter with quite significant FX movements, which does have an impact on some of the reported headline ratios. And therefore, we are also providing some additional constant currency information in this quarter. We will also provide some specific bridges as we go into the more detailed slides. And now moving into actual financials and starting off on the top with the loan book. We have another quarter of good loan book growth with year-over-year growth of 11% in constant currency and 12% reported. And positively, all other segments are contributing well and delivering above 10% growth. Now moving on to the P&L. In the quarter, we have reported NIM of 8.0% and NII growth of 8%. These are, however, both impacted by FX movements and in the case of NIM also day count as Q1 is a short quarter. The NIM adjusted for FX and day count was 8.2%. It's at the same level as Q4 on a like-for-like basis. And year-over-year NII growth, we have a reported growth of 8%. However, in constant currency, it was 11%, so very much in line with loan book growth. Moving on to net fee and commission income. We continue to see positive development. However, individual quarters have some fluctuations as there are some variable components in our key contracts. In Q1, we saw a slight growth versus Q4, but it was slightly down year-over-year. Q1 '25, however, has some benefits from strong variable components of a high base for comparison. And summarizing the top line, we had total operating income of SEK 2.9 billion, which was reported growth of 8%. However, there is a negative FX impact here and in constant currency growth rate was 11%, so in line with NII growth. Then moving on to OpEx. We had a reported cost income ratio of 23% and cost growth of 12% in the quarter. This is, however, impacted by the addition of DBT and ex DBT, the cost-income ratio was flat year-over-year at 22% and a growth of 10%. Credit losses, we continue to see a very strong trend here as we continue to see the risk of the portfolio coming down and at a cost of risk of 2.7% in the quarter, which is now the eighth straight quarter of falling cost of risk year-over-year. All in all, this gives us a core operating profit of SEK 1.4 billion, which is up 21% year-over-year. However, when we move down to profit after tax, we have an impact from the unusually high tax rate in the quarter, where we had a tax rate of 25% versus 22% in 2025. The backdrop for this, and we described it in more detail on Page 7 of the interim report, is the tax account of currency translation effect of intragroup funding into the branch, which can lead to some volatility between P&L and OCI tax. This has no impact on actual taxes paid, capital or cash, but given significant NOK appreciation in the quarter, it led to some volatility in the reported tax rate in P&L. The impact of this translation effect on P&L tax in Q1 was SEK 40 million, which was fully offset by a reverse booking in OCI tax. And excluding this, the tax rate would have been 21.6%. The core profit for shareholders was SEK 970 million, which was a growth of 34%. However, return on capital employed, excluding accrued dividends was 27%. These were both negatively impacted by circa 1 percentage points by the unusually high taxes in the quarter of 25% and 28% at normal tax rate. Lastly, on CET1, we had a ratio of 13.3%, which is well within our communicated target range of 13% to 15%. This is down Q4, which is driven by the acquisition of DBT and the FX appreciation in the quarter. So I will now move on to loan growth. As mentioned, all our segments contribute well to our growth rate of 11.5% year-over-year with all delivering 11% growth. Looking at the quarter growth rate, these are a bit lower, and this is expected as growth in Q1 is seasonally slower, in particular in the Credit Cards segment. And then I'll comment briefly on the segment. In Private Loans, we are seeing very solid growth in Sweden and Denmark, while Norway similar as in the last 2 quarters is growing more slowly, and we are in the process of implementing actions here that we think can impact the growth levels positively. Credit Cards, strong growth across all markets. Germany is growing the fastest, but from a low base. And in secured, growth is mainly driven by the mortgage segment and in particular, demand from near prime, while the growth in equity release is slower. And I'll now move on to the next page, NIM or net interest income. And as mentioned in the summary page, we have some impact on the reported headline numbers here. Starting off with NIM. In the bottom corner, we provide a bridge for underlying NIM ex FX and day count impact, where our reported NIM was 8.02%, day count with Q1 being 90 days versus 91.35 average. And then in addition, we have the effect of actual average FX rates being lower than the 2-point average, euro actual average being 1.7% lower than the 2-point average. And 0.6% lower than the actual average than the 2-point average. And this takes us to an underlying NIM of 8.22%. If we do Q4 on the same basis to adjust for FX and for day count, then it is 8.25%. So very much a stable NIM quarter-quarter. I would also mention that the quarter's NIM had some minor negative impact of delayed pass-through from increased rates as they came so late in the quarter. There wasn't any pass-through to customers on the asset side, but it has some minor impact on the funding cost. Then commenting on the NII. The actual NII for the quarter was SEK 2.7 billion, which was a reported year-over-year growth of 8%. This was, however, also impacted by FX with a constant currency growth of 11%. While period end FX rates were slightly up year-over-year, the average for the period was meaningfully down versus Q1 '25 with average euro rate down by 5% and NOK down by 2%. And now I move on to operating expenses. As mentioned, we had a cost income ratio of 23% in the quarter and 12% cost growth. This is, however, impacted by the acquisition of DBT and the adjusted net cost income ratio was 22% and growth of 10%. As previously communicated, we continue to see growth a bit above our historic trend level in the near term. But having said that, we expect to be able to accelerate cost take out towards the later part of the year, and we remain committed to our target of below 20% in the medium term. Moving on to credit losses, please. As communicated, we continue to see very positive development here with falling credit risk levels throughout the portfolio and positive underlying portfolio trends. As we presented in our Q4 report, the macro outlook has become more uncertain. But as we look out, we believe that our customer base is very well positioned to sustain potential negative effects here. We continue to see potential further cost of risk reductions in the medium term. However, given macro volatility, we may see some quarterly volatility given forward-looking nature of this year. Moving on to capital. We maintain a strong CET1 position of 13.3%, which is well within our set target range of 13% to 15%, and we will continue to be disciplined with capital allocation and distribution of excess capital.

All right. Wrapping up by looking at performance versus financial targets. So loan book growing at 11% in local currencies, 12% reported versus the 10% target, positive to see again that all segments are contributing and further the supplement of DBT, of course. Cost-to-income ratio of 23% or 22% when adjusting for DBT, and we remain committed to our 20% target medium term. Core RoTE of 24% or 27% when adjusting for a group dividend. And additionally, we have the negative effect of the unusual high tax rate of 1%. So that takes us to 28%. And lastly, capital position remains strong. So with that, I think we close the presentation and open up for Q&A.

[Operator Instructions] Our first question comes from the line of Patrik Brattelius of ABG.

Can you hear me?

Yes.

Perfect. Yes. A few questions from my side. Let's start off on credit quality. It has continued to improve, what did you show 8 straight quarters in a row. Now you flag for potentially even lower credit loss levels in the medium term. To what extent do you believe this is driven by structurally better underwriting versus a more supportive macro environment, if I start off there?

I mean a more supportive macro environment, I think it's difficult to talk about that. But obviously, even though we see clouds on the horizon in the macro and it's very difficult to foresee what will happen. I think the overarching message from us is that we are at a very different turning point today versus 2022 when we saw a very rapid shock with base rates increasing 4 percentage points over a 16-month period, and we had a decade of 0% interest rates. So in terms of healthy financials out there, I think the individuals, the society as a whole is a lot more healthier today. And again, I mean, our book to the extent it has lived through, that's still bad, which was tough where people had to adjust their economies, their financials and source them and to an extent, they have been originated more recently, but also in a different scenario where money costs money. So I think that's quite helpful actually, which makes the portfolio a lot more resilient, obviously, and partially tested already. So even though we would see base rates or inflation and base rates increase going forward, we don't foresee that, that will have a big impact. And then I mean, have we improved our underwriting? Well, for sure, I hope so. And that's essentially what we do here every day. So yes, I think our underwriting standards are better, and we evolve and we learn, of course.

And then on the same topic and in the connection to the same message with this increased volatility potentially the coming quarters, could you elaborate a little bit what would be considered a normal swing effect in terms of basis points in quarter?

That, I would say, clearly, I mean, it fairly forward-looking in particularly in Stage 1. And it's absolutely possible for ECL, Stage 1 ECL to switch 0.1%, 0.2% due to kind of just macro updates on it and outlook update. So I would say that we have a stable macro and a very clear trend, Stage 1 has very clear trend. I think next few quarters, we may see a little bit more volatility in Stage 1. And I mean we have Stage 1 around 1.5% now. So kind of a 0.15% movement either direction can probably happen on Stage 1.

And my last question is on the Secured segment, which showed, it looks like, the strongest growth FX adjusted year-over-year. Can you talk about any impact from the new mortgage regulation in Sweden, if this has had any effect? And we have now seen this regulation coming to force. Are you expecting this to impact the growth rate in the coming quarters? And do you believe that you can sustain a level above 10% in this segment? Because in connection to the IPO, I got the feeling that, that segment is expected to grow slightly slower than personal loans and credit cards.

I think we've had a catch-up effect here where we had very low growth '24 and early '25 and then kind of a catch-up effect through '25 and now early into '26. I mean it's 14% growth individually in Q1. I mean our message is that we expect all 3 products to contribute to our 10% growth target at around that level. So secure, we don't expect it to be the standout growth driver, but we also don't expect it to be a drag on growth.

And any impact from the regulation?

Secured, no not at all, I would say. But I mean on the totality, it clearly helps affordability.

It's positive on private loans clearly that we communicated. Amortization requirements have gone down by 1%, which is all else equal. And then on the private loan side or on the secured side, I mean LTV 9% on purchase, 80% on refinance, our business is around half and half. So yes, it's kind of neutral.

Our next question comes from the line of Emil Jonsson of DNB Carnegie.

I'll start off by asking the lower net interest margin in secured from going towards more near-prime customers. Could you explain the reasoning behind this? I mean, in my mind, it shouldn't lead to that much lower cost of risk since cost of risk is already pretty close to 0, right? Or is there a lack of sort of more profitable, less prime customers to lend to? And any color on that would be helpful.

Yes. Well, if you look at prime, prime, you would see 0% credit losses. And if you look at more tailored mortgages, you would see some credit losses. And in the near prime segment, yes, of course, credit losses are expected to be lower. I mean it's not binary.

I mean, we serve large -- it's not that we select one specific segment. We serve the whole market, and there are slightly different margins across the markets, and they are in the sense that in risk-adjusted margins that lower risk segments have slightly lower risk-adjusted margins. But it's about -- we service a wide segment in the secured, with our secured products, and that is our intention to continue. And clearly, I think the near prime market that is very much a purchase market and the purchase market has picked up. So we kind of see that natural that we see -- have seen a higher proportion of near prime recently.

All right. And on the net commissions, you mentioned volatility between the quarters. If we assume that the underlying growth is continuing about as it has historically and with volatility presumably being a tailwind going into Q2 along with some positive seasonality. Would you say it's a reasonable expectation then to expect net commissions to hit a new record high in Q2? Or how should we think about this line item going forward in the sort of near to midterm?

I think -- I mean clearly, we had extremely strong growth in '25. I think it was around 30%. So that's kind of -- we obviously not going to see the same type of growth in '26. But I think what we want to see in the NCI is that it grows a bit faster than the loan book. So that is what we want to see in NCI going forward. And then that will be individual quarters growing 2%, 3% and individual quarters, more in the high teens. And that is the way it's going to look because we have these variable components, which means that if we look at the longer term, we see the clear trends. But individual quarters, we will see this type of fluctuations.

All right. I would also like to ask, NOBA sticks out among peers when it comes to the size of the FX-driven revaluation effects in other comprehensive income. In Q2, it happened to be positive. But since the start of 2023, this has sort of eaten up about 20% of net profits. This seems to me like an exposure that you would prefer not to have given the choice. So are there any plans to bring down this exposure of valuation effect?

No, that is -- so it's the Bank Norwegian acquisition. So the translation effect comes from the Bank of Norwegian acquisition. And the way it works is that we hedge the CET1 in Bank Norwegian, where the goodwill is unhedged. So it's revaluation of the goodwill on Bank Norwegian that drives that effect. And that's not something that we are going to in OCI. So that's not something that -- it doesn't impact capital. It doesn't impact cash. It will continue and will going up and down depending on how NOK moves.

All right. Okay. That makes sense. And just one final question on the 30% return on tangible target. Could you maybe elaborate on what levers you expect to drive return on tangible from the current 24% to 30%? I can see it going there on individual quarters with some seasonality tailwinds. But on a full year basis, in my mind, it would require either an unreal level of cost efficiency or other factors that are sort of outside of your control, like higher risk-adjusted margins in the market or capital requirements coming down, which levers do you expect to be most relevant here in order to reach the 30% target?