SpareBank 1 Sør-Norge ASA (SB1NO) Earnings Call Transcript & Summary

[Audio Gap] a bank because we've been here for 185 years. We have a very strong position in Southern Norway. We are about to merge with SpareBank 1 Sørøst-Norge creating the, by far, largest savings bank in the Norwegian market and with a strong Norwegian ownership and incorporation. We will become a SIFI bank in third quarter of 2024. And we will -- we are -- unlike many of the other savings banks, we are a limited company with ordinary shares and one vote one share. We have a well-diversified portfolio and loan book and a good rating, and we also have a very clear ambition to be proactive into the transition to a more sustainable future. As mentioned -- to say Sor-Norge in English is pretty hard, so forgive me, I do that in -- with my Norwegian accent. We are going to merge with SpareBank 1 Sor-Norge. It will -- it's about half of our size. So it will be 2/3 SR-Bank and 1/3 Sor-Norge when we are merged. It will be a solid platform for future growth. And we have estimated potential synergies to NOK 2.5 billion in capital synergies and about NOK 150 million in cost synergies. And we also have an ambition to create income synergies in due course. We have shifted the date of the merger from the 1 July to 1 October, just due to the simple fact that the -- our technology partners had other projects with delivery in July and it -- which we had to postpone our merger date for that reason, and we've decided to do that on a quarter end. So it would be end of third quarter rather than end of second quarter. When merged, we will be about 65% of our portfolio would be in the Retail Market and 35% in the Corporate Market. The ratio for SR-Bank standalone today is about 60-40. And we will, as I indicated, become the third largest bank in the Norwegian market followed -- following DNB and Nordea. If you look at our loan book profile at present, you would see that from having a solid position with a very strong position in the Rogaland and in the Southwestern Norway, we have decided to diversify both geographically within Southern Norway as well as industry-wise in the portfolio. And a large part of our growth in 2023 was outside our -- outside of Rogaland, which is our home turf. But we grew by 7.5% in total, around NOK 19.5 billion and about 38% of the growth was outside -- was in the Oslo region and about 21% in the Rogaland and the rest well-spread across the rest of our market area. If we look at the results for the quarter, we reported a return on equity of 19.7%. If we exclude 2 one-off effects in the fourth quarter, one which is the sale of SR Markets to SpareBank 1 Markets amounting to NOK 421 million, and our share of the write-down of SpareBank 1 Group's position in Kredinor, which amounted -- our share was NOK 150 million. The return on equity would be -- would have been 16.1%. If we compare that with the -- or take that into account for the year overall, the reported ROE was 15.3% and the number without the one-off's was 14.4%. In the quarter, we generated NOK 1.8 billion in pretax profit, and we delivered, in total, the best result ever in SR-Bank's history, both for the quarter isolated, as well as for the year overall. The strong results, and now I'm talking about the year in total, were driven by growth both in the Retail Market and in our 2 Corporate Market, which is -- we have a division also for SME & Agriculture. As you see, we grew large corporates in -- by 10.2% and SME & Agriculture by 15.4%. We grew our retail business by 5.2%, and the credit growth in the Retail Market in 2023 was 3.4%. So we have a nice development compared to the market growth and taking, step-by-step, some market share. We have net reversals of loan loss provisions or impairments and which amounted to write -- or income on write-backs of NOK 232 million. Having said that, the underlying loan losses were at a normalized level, meaning between 15 and 18 basis points on the loan book. So we are now -- we're still having tailwinds from loan losses or impairments from 2020 and 2021 due to the pandemic and also the fall in the oil prices 3 -- about 4 years ago. If we look at the deposit growth, it was more modest at 0.7%. And if you look behind the numbers, the corporate -- large corporate market was a decline of close to 12%. That -- if we dig below that, it's due to a couple of municipality as clients of the bank, which we let go due to -- we couldn't follow on price. If we look at the underlying growth for all 3 segments in total, excluding that, it was a growth of 7.5%. We turned into the new year with a core capital ratio of 17.6%, which is 122 basis points above the regulatory requirement. When we become a SIFI bank or system critical back, I don't know what the term is in English, the requirement to -- core capital will increase by 1 percentage point. So we are well capable of meeting that requirement. And when we merge, we will also, as I said earlier, have significant synergies on the capital front. So we will be well capitalized also by the end of the year. The cost-to-income ratio for the year was 37.7% despite the fact that we also had some one-off costs in 2023, which I expect Inge to give you some details on in a moment. We have -- the board has proposed NOK 7.5 per share dividend for 2023. If we -- that number is not correct, is it? Is it 49.2%?

If you exclude the write-down...

Yes, that and -- yes. And including the one-offs, the dividend share is around 46%. With that, I'm handing you over to Inge, our CFO, to give you some more details on the figures.

Thank you, Benedicte. If we look at the income statement, we have a profit after tax for this quarter of NOK 1.5 billion. We have a 7.5% quarter-on-quarter increase in the net interest income. And if we look at the full year on the net interest income, we have an increase of 36%, which is equal to approximately NOK 1.6 billion. Also, we have a steady growth on the net commission and other income, which ended on NOK 1.939 billion, and that is an increase of approximately 9.5% year-to-year. So our business model is very robust. We have a steady growth on the lending side and also on the net commission and other income. If we look at the net income on financial investments, this quarter was, of course, heavily impacted by the 2 one-offs which stood for NOK 270 million if you subtract the loss on Kredinor from gain from SR Markets, which leaves us on approximately NOK 200 million financial investment line, which is according to what we call as [indiscernible] level. The impairment on loans this quarter ended on a net reversal of NOK 91 million, and that is even with an increase of NOK 89 million in the IFRS 9 collective impairment. So that means that we have a net reversal of NOK 180 million on an individual basis. Of course, growing the bank, making a platform for profitable growth also has an impact on the cost side. As you can see, we have a significant increase on the cost. However, if we look at the parent bank, it has increased by NOK 389 million for the full year, and you compare that to the net interest income and net commission, which altogether grew by NOK 1.8 billion, we have had a significant positive contribution to the cost income ratio. We have added some cost on anti-money laundering, sustainability and so on, but we have also significantly increased our distribution power and that together with the upcoming merger of -- with SpareBank 1 Sørøst-Norge makes a very strong platform for profitable growth in the upcoming year, although we expect the growth in the Norwegian market as such to be lower than what we have had for many years. But also we expect now that the interest rate is on peak and the market expects a few rate reductions from the Central Bank during the second half of 2024. So altogether, we expect the macro environment to be favorable for running a profitable bank. And our position has been further strengthened both by the organic growth and now also the significant inorganic growth with the upcoming merger. I believe that concludes the main figures. So then, it's open for you to ask questions, and we will do our very best to answer.

So please just raise your hand and I see the first one up now is Håkon Astrup from DNB Markets.

So 2 questions from me. First one on capital. Because if we look at your buffer now versus the fully phased-in requirement, it's actually lower now than when you raised equity last quarter. So I was just wondering that if the growth continues to be strong and profitable, could we expect or could another equity should be a possibility?

No, I will definitely say that, that is not an issue. The reason why the common equity Tier 1 ratio is a tad below what might have been expected is that we've had a one-off this quarter due to tax-related issue, where we have a temporary difference in between the financial statement and the tax profit that leaves us with -- and now I have to look at what -- if you know what that's called in English, we have a kind of -- the tax expense or the payable tax for the upcoming year is fairly high. And this temporary difference in between the financial accounts and the tax accounts is something that will be reversed in an upcoming year or two. And it is actually where the Norwegian government has come to party. Unfortunately, this asset also increases the risk-weighted assets. That means that we have put -- have to put capital behind even if it's kind of a zero risk counterpart. And that has subtracted 55 basis points of our common equity Tier 1 ratio this quarter.

Yes. And the amount in question, Hakon, is about NOK 2.5 billion and this is due to hedging on derivatives. So over the life span of the derivatives, it will go back to zero, right? So it's a differential that will come back to zero. But right now, we have to put an asset of NOK 2.5 billion and 250% risk weight against that tax liability.

Perfect. But just to understand the techno or how this works, so if the Norwegian krone continues to depreciate against the euro and dollar, maybe can it be a risk that this tax asset may actually increase and you get a further negative impact on your capital position?

Would you like to answer that, Morten?

Yes. I think it's not only the Norwegian krone, it's also the -- so it's also depending on where the rates goes. So it's a bit difficult to say yes or no to your question. I think now we had losses on all our -- or not losses, but in the taxation towards the -- because in the accounting, you have, this is a zero effect. But now we had losses on the internal swaps, the externals and also on the rates and for that to happen again is very unlikely, but you couldn't rule it out. But most likely, this will go back to zero, and we will have a reduction on the [ ROA ], but it's very difficult to say.

Perfect. So it's a lot of technicalities but then no equity issue.

Yes. And bottom line, we should be able to fund the fund with our profitability, a steady growth going forward without adding any new equity, that is...

And the other effect that you might have, I explained a little bit, Inge, is the one from selling SpareBank 1 Markets, which has also positive -- had a negative effect on the capital as well, which might be just explained for the sake of understanding the numbers or the movement in that number.

Yes, because the profit that we have on selling SR-Bank Markets to SpareBank 1 Markets adds NOK 421 million of the net income on financial investments. However, we reinvest that in becoming the second largest owner in SpareBank 1 Markets. So we don't have any capital release that actually we have a capital hit because of the goodwill position within SpareBank 1 Markets. So actually, that has also subtracted basis points on the common equity Tier 1 ratio as of the fourth quarter. So in the movement in common equity Tier 1 ratio, this quarter is not kind of representative when it comes to kind of the impact of the organic growth in itself.

Perfect. My last question on expenses. So you report now close to 20% growth year-over-year in costs. And going forward, at least, I don't think that revenue trends will be as beneficial as we have seen over the last 2 years. So how do you see your cost line developing into next year taking that into account?

If you look at the cost growth, it will definitely come down on a lower percentage. We have had significant kind of investments now in what has increased the fixed cost base. However, now we prepare for the merger, where we, of course, are aiming at reducing the full-time employees. So we will be very restrictive now on hiring new people as a preparation for the upcoming merger. And of course, we have identified synergies on the cost side with the 2 banks, which, of course, is to be during the merger. So we will definitely grow the cost base on a lower pace. And at the same time, we are well positioned with respect to organic growth and increase revenues. Okay. I don't see any more hands. And thank you very much for participating. And everybody, if you have any follow-up questions, don't hesitate to contact us. We're available, and we'll be happy to have more in-depth conversation if you have any topics. So thank you all for participating, and have a good day.

Thank you very much.