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

Good afternoon, everybody, and welcome to this presentation for SpareBank 1 Sør-Norge First Quarter 2025. My name is Inge Reinertsen, CEO of the SpareBank Group. Together with me, Mrs. Mona Storbrua, Mr. Morten Forgaard, and our newly appointed CFO, Mr. Eirik Børve Monsen. We will give you a brief presentation of the main figures and events for the first quarter. And also, as usual, we will be open for questions following that. If we look at the time line, it's been a busy year behind us. It will also be a busy year coming up. We have managed a theoretical merger in between the 2 banks as of October 1 last year. We are planning to do the technical integration of the 2 banks as we run them today in kind of 2 silos from the system side, that is planned to take place in September 2025. Also, we have merged our accounting companies and we are planning also to merge the real estate brokers during autumn this year. Everything has been according to plan so far, and we are doing a very thorough process of planning for the upcoming events later this year. Last quarter, we established a new long-term target with respect to return on equity of about 14%, underpinned by being cost effective, well diversified with a large extent of growth in other income and, of course, with the underlying customer growth in the Southern part of Norway, and by financial ambitions also on cost-to-income and solvency. And as I will show you later, we are well in line to achieve these targets, but still with a very important job in front of us with the NOK 300 million target in operational synergies. Running a very profitable banking group in the southern part of Norway, where the macro environment is benign, we have a strong position. Unemployment rate remains low within our market area. And though we have increased uncertainty with respect to market turbulence and the tariff war going on, we believe that both the Norwegian economy as such and the more regional economy in the southern part of Norway should be a benign environment for running a profitable bank for the upcoming period. We have become a much more well-diversified bank after the merger with our SpareBank 1 alliance friend, SpareBank 1 Sørøst-Norge. And this map shows us that we have approximately 50% of our portfolio in the Western part of the country and the remaining 50% in the Eastern part of the country. That gives us a well-diversified portfolio with respect to industries and geography. And we believe that we, during the last decade, have significantly reduced and eliminated what was, to some extent, the concentration risk due to the fact that we were a bank mainly for the Southwestern part of Norway up to 2015, where we began the transformation of becoming a bank for the Southern part of Norway. Looking at the figures for the first quarter, we delivered a return on equity of 13.5%. If we exclude the one-off effects from the merger and also the goodwill that arose due to the merger, that is to be compared with a 14% return on equity. Impairments low, 3 basis points in the quarter. NOK 23 million underpins that the credit quality of the portfolio is undoubtedly very strong. Cost-to-income ratio of 36.7%, we believe, shows a very effective bank, but also, of course, with the potential of the merger, we believe that we have a potential of becoming even more efficient in the upcoming year or 2. The merger is a lot of planning, is a lot of capacity within the organization for planning this. We have been very committed in ring-fencing the counselors to have business as usual towards our customer. And we are very satisfied with a credit growth of 6.5% during the last 12 months. Now the retail market stands for 7.3%. So that's now even the segment with the highest growth, and that also shows our strong distribution power and the position within the region with the combination of all our branches and state-of-the-art Internet banking. The capital position is also undoubtedly strong, standing on 18.3% common equity Tier 1 ratio. If we look at our main goals and ambitions, we have the long-term target of beyond 14% return on equity, delivering 13.5%, well above -- on the capital ratio side. As of July 1, the risk weights will be increased for the retail segment by approximately 80 basis points, but also we will have a relief from the CRR3, and also hopefully that the FSA will grant the application of moving the portfolio from Southeastern Norway to our IRB advanced platform and the total effect of this should be fairly neutral. So this shows a very strong capital position, which can be used as either a platform for profitable growth that underpins the 14% return on equity target or, of course, it could give a good distribution to our owners. Cost-to-income ratio, already commented on, and this gives us healthy earnings per share of NOK 4.4 per share for the first quarter. Now our CFO, Eirik Børve Monsen, will give you a few comments and some of the other important issues or topics within our P&L, and I will hand the word over to him.

Thank you, Inge. The first quarter is a challenging quarter for bank with 2 less interest days and also we have less capitalization from deposits. Despite that, we are very happy to see that we have increased net income in the quarter compared to the fourth quarter. We also have a strong contribution from financial investments, positive value increase from both the commercial paper and bond investments, but also from the basisswaps in the quarter. We have reduced operating costs with NOK 93 million in the first quarter compared to the fourth quarter, both due to reduced merger costs in the first quarter, but also due to reduced personnel costs in the quarter. And as already mentioned, we have low impairments this quarter, 3 basis points, or NOK 23 million due to low direct losses and also a reduction on the model-based impairments. Due to positive development on the macro side, both the market and credit risk is improved in the first quarter. As already mentioned, good lending growth in the quarter, 6.5% growth now last 12 months. We also have increase in deposit volume, but the deposit volume is inflated by reduction in treasury deposits in the period. If you take out the treasury deposits reduction, you have an increase of 5.8% decrease in the deposit volumes over the last 12 months. Average NIBOR in the quarter is reduced by 15 basis points, and that explains the change in the lending margin and the deposit margin in the quarter. And we are very happy to see that we are able to not only stabilize, but also quite increase the net interest margin with 2 basis points in this quarter compared to the fourth quarter. So we stop there and take some questions.

I believe we can leave it to the audience to ask questions. Thank you, Eirik. So please just raise your hand and unmute and we will do our best to answer. We see the first hand from Håkon Astrup.

Two questions for me. I can start with the first one. It's a bit high level, but you have now a new brand name for some time. Can you talk a little bit about how that has impacted your growth and perception among your customers in your old, say, home markets? Looking, for instance, at Rogaland, it seems that you are, say, losing some market share there on the growth side, just looking at the slide you presented earlier with the growth in the different regions.

Yes. Thank you for your question, Håkon. We have, for many years, kind of had 2 names, the super brand, SpareBank 1, which is familiar and well known, and also SR-Bank. I believe if you ask a customer on the street in Stavanger, what is the name of the bank, you would have had different answers. Somebody says SR-Bank, somebody says SpareBank 1, but they will both be thinking of the same bank. So what could be a potential name confusion, in fact, isn't because the position with the super brand is kind of a continuous journey with respect to how the bank has kind of achieved or appears in the local community. What we expect now from Rogaland is increasing housing prices, because the price per square meter is approximately 50% of what is the cost in Oslo. Also, the square meter price is very low compared to the cost of building new homes. So we strongly believe that increased activity in the region and these matters should increase the volume within Rogaland, and it's also underpinned by the fact that the applications for kind of what we call finance certificate and also the application for new loans has increased significantly during the first quarter. So it's kind of building a positive stock of what we expect will be increased lending in the following quarters.

Perfect. And the second question on the margin side and on lending. So do you see any, say, differences in your different regions where in terms of margin pressure, for instance, Oslo, many banks trying to get volume there and perhaps in Rogaland, you have some more help from higher house prices. But do you see any regional differences? Or is it more or less the same across the different geographies?

It's more or less the same across the geography. We have pretty fierce competition in all our countries where we have the physical presence. It's, to some extent, the smaller, more to say, municipality banks and also at the same time, DNB and the larger Nordic banks. Of course, implementation of CRR3 gives a bit more headroom on the capital side for the standard banks. It is a question whether they will increase distribution to owners or they will try to put the capital into work. But so far, it hasn't changed the kind of competitive landscape to a major extent. But as shown on the map, the 15 basis point reduction in NIBOR, we have increased the lending margin by 9 basis points, but also the deposit margin has decreased by 118 basis points. So there is some pressure on the margin on the interest rates towards the customer. But at the same time, the reduced NIBOR has reduced the cost of funding from our market funding. And with NIBOR slowly declining, it is margin positive to have a low deposit-to-loan ratio, because you automatically have reduced the cost of fund from your market funding. So that's also one of the explanations why we present an increased net interest income line, different from many of the other banks, which have been reporting, because although we have 2 fewer interest days, which accounts for approximately NOK 15 million, and we also have the capitalization of the noninterest-bearing deposit rates by year-end that also subtract NOK 30 million, we still deliver an increase in the net interest income, which is, to my observation, slightly stronger than what our peers have presented this quarter. Thank you for your questions, Håkon. I believe I also saw the hand of Thomas Svendsen. Please, Thomas.

So another question to the net interest income. As you pointed out, it deviated from peers. And I guess you have benefited more than peers from the 15 basis points decline in average NIBOR during the quarter. So now the NIBOR has rebounded again, so could you quantify this in kroner, how much this gain was, sort of a semi or nonrecurring item there?

We don't kind of disclose the accurate number on that. But as you mentioned, increasing NIBOR during the 14 rate hikes from the Norwegian Central Bank, that gave, to some extent, headwind on the margin side due to our obligation to give 8 weeks advance notice before we are able to increase the interest rate. So we believe that a high interest rate is kind of in favor of having stable margins. But at the same time, as NIBOR slowly declines, we are in kind of a good position for handling that, because it automatically reduces our cost of funding. So we believe we have a pretty good hedge on this.

Yes. The reason I'm asking is that it has come up again in Q2. So just to try to...

Yes, we don't have kind of forward pointing figures on that. And probably with kind of the expectation of what will happen to the interest rate, probably it will decrease even though we have an increase in the short term. And we fix our funding evenly distributed throughout the year. So the funding fixed during the first quarter will also have a positive impact in the second quarter, even though we experience that NIBOR picks up some basis points again.

Okay. Understood. And just the final question there on NII on this Slide 12 on the increased lending margins there. Is that due to time lag? Or is that price increases?

I believe it shows our ability to kind of do a proper pricing. Also, we have taken measures on kind of integrating both portfolios. That means having the same pricing policy on the portfolio from the former SpareBank 1 Southeast. And also, I believe this shows our ability to kind of utilize every event for increasing margins. Thank you very much for your questions, Thomas. Anybody else, please just raise your hand. I don't see any more hands. Hand is up over there. Herman Zahl, please.

Just back to what you just said on you have combined the portfolios and repricing according to a common credit policy. Do you think there's any more -- now that you have integrated the portfolios, do you think there's any more upside to repricing, especially on the corporate side in the former SOON portfolio?

I don't believe on kind of the collective side. But of course, every renewal, every increase of lending, we try to utilize to increase the margin, and that comes with both the [indiscernible] portfolio and the former Southeast portfolio. At all time, it's a question of our ability to really kind of address risk and to price this risk with the margins. And our kind of path to the 14% return on equity also includes our ability to address credit risk within the corporate portfolio, both within the SME division and the large corporate division, to strengthen the margin and kind of the risk reward on each engagement.

Okay. That's understood. And just on the deposit side within large corporate, it seems like there is an improvement quarter-on-quarter. But over time, you have been fairly close to NIBOR. Are there any mix effects during the quarter we should be aware of? Or what's sort of your expectations longer term on the profitability on large corporate deposits?

A large share of that portfolio is deposits from municipalities. And every new contract with municipalities has a duration of usually 3 years with options for extension 1 or 2 years. So at all time, we look at kind of our willingness to pay according to what is the alternative cost of market funding. This shows a positive trend with a few basis points. And of course, we don't want to pay more than we need to on these deposits as they are shown fairly well priced from a customers' point of view with close to NIBOR. But also, you will have some kind of natural variation around a mean level. So you shouldn't automatically expect a further 5 basis point increase in the upcoming quarter, I believe. Thank you very much, Herman, for your questions. Then I don't see any more hands. So then I will just thank you all for joining this presentation. And at any time if you have any follow-up questions to ask, don't hesitate to contact our Investor Relations department, and we will be happy to assist you on questions. So thank you very much and have a good afternoon, everybody.

Goodbye.