SpareBank 1 Sør-Norge ASA (SB1NO) Q2 FY2025 Earnings Call Transcript & Summary

Hello, everybody, and welcome to the second quarter presentation from the SpareBank 1 Sør-Norge Group. My name is Inge Reinertsen. I am CEO of the bank. And together with me, CFO, Eirik Børve Monsen; and Morten Forgaard, Øyvind Knoph Askeland from the Communication and IR department. We will give you a brief presentation of the highlights for the second quarter, and I will start with that, and then Eirik will follow up with some more topics covered. And then it will be open for questions at the end of the presentation. The bank, we are aiming at being a strong challenger in the Norwegian banking market. Of course, the merger with our Alliance friends, SpareBank 1 Sørøst Norge, has been very important to us. And the theoretical merger was October 1 last year, and this September, the technical integration of the two banks will be fulfilled. Also, we will have the merger in between real estate brokers later this quarter. Everything is going according to plan and we are well prepared for the full technical. Up to now, we have kind of run the two banks in two separate silos when it comes to the systems side. But from September, we will be fully integrated also on the technical side. Our long-term return on equity target is to be beyond 14%. Of course, going through a merger is a challenging phase where we have some additional costs fulfilling merger. But in the next 2 years, entering into 2027, the long-term ambition is to be beyond 14%. That will be underpinned by cost effective and being capital effective, strong position within other income. The position within the Alliance is important to our cost efficiency. And also we have become a very well diversified bank with respect to industries and geography. Our four targets in addition to the 14% return on equity is to have a capital ratio beyond 17.55%; cost-income ratio lower than 40%; approximately 50% at least dividend share, and we have identified at least NOK 300 million in yearly operational synergies. If we look at the PMIs in our region, it looks quite positive with the Rogaland county as the most optimistic, but as you can see on the right-hand side, with all market areas above the 50%, which is the neutral level. The unemployment rate remains low both within the entire Norwegian economy and with what is our main market area, and it should all underpin or kind of show us that this should be a benign environment for running a profitable bank. If we look at our portfolio, we have become very much more diversified through the last years both with the organic growth within the Oslo area, but also, of course, with the merger, which added a little less than NOK 100 billion in the three counties, Telemark, Vestfold and Buskerud Altogether now, approximately 50% of our portfolio is in the Western part of Norway and 50% is in the Eastern part of Norway. With the combination of very strong digital solutions and our local presence with our branches, we have a very strong distribution power, and we have had a growth now stronger than the market growth for quite a period. And we should be able to benefit from this with having this strong distribution and, at the same time, making the organization more effective through the realization of the identified synergies. If we look at the main figures. We delivered 12.9% return on equity for the second quarter isolated. If we exclude the one-off effects on the cost side and also the goodwill that arise from the merger, the underlying return on equity is actually at 14.9%. The credit quality is very good, underpinned by the 8 basis point of loan losses equal to NOK 76 million. And as you can see, the growth is strong both on the lending side and the deposit side. In the Retail Market, the total growth of the Corporate Market and the SME and Agriculture is approximately 0 this quarter. But the 12-month growth in the Retail Market is 7%, and also for the quarter isolated, the growth stood at 1.9% within the Retail Market. The cost-to-income ratio is below 40% but of, course, is also influenced by the one-off cost mentioned. The capital ratio is very strong at 18.6%. And the Board of Directors have also announced that we are planning for establishing a share buyback program in addition to paying cash dividend. So on every main measure, we have a strong position and we should be very well positioned for taking advantage of the merger for the upcoming period. I believe that concludes on the main figures. Then Eirik will take us through a few more topics and then we will be open for questions. So please, Eirik.

Thank you, Inge. And we have a profit after tax of NOK 1.668 billion in the second quarter. And despite having good growth on the lending side in the quarter, we see that the net interest income is stable and have a stable development from Q1 to Q2. That's mainly explained by two factors. We have a lower LIBOR fixing to our corporate customers on average in Q2 compared to Q1. In addition, we have had, as already shown, high deposit volumes -- received high deposit volumes in Q2, and we have not been able to deploy this capital 100% during the quarter. That also reflects that we have a very strong liquidity situation at the end of the second quarter with an LCR above 200%, which is substantially above our minimum requirement. We see that we have a very good development on commissions and other income. That's mainly explained -- the growth from Q1 is mainly explained by the real estate business, real estate broker business, where we also get help from the new companies acquired in Oslo and Bergen. But in general, there is a very high activity on the real estate broker side, which also reflect part of the growth in the private lending volume. On the financial income from financial investments, we had a very strong Q1 where we saw a very good positive development on the basis swap valuation and also the certificate and bond valuation. Part of that is reduced in the second quarter, but that's almost fully offset by, in the second quarter, receiving high dividends on SpareBank 1 Boligkreditt and Næringskreditt and also from SpareBank Rogaland and also receiving a good result from SpareBank 1 Gruppen in the second quarter. Operating expenses, as already mentioned, we have two large one-off items in the second quarter. We have the Tietoevry cost, which we have taken in the second quarter, of NOK 74 million. And in addition, we have a merger cost of NOK 68 million included in the Q2 operating expenses. Adjusting for those two one-off items, we see that we have a stable or a 0% growth on operating expenses from Q1 to Q2. So we have a good control on the operating expenses. And from Q2 last year to Q2 this year, we have an increase of 3%. As already mentioned, low impairment losses, NOK 76 million or 8 basis points. We have individual losses of NOK 103 million in the quarter. And then we have a revision of the model-based provisions of NOK 26 million, and the revision of the NOK 26 million is explained by improved credit quality. Let me move over to the cost slide. And as already mentioned, we have two large one-off items, as shown on this slide, of NOK 74 million and NOK 68 million, the Tietoevry cost and also the merger cost. And then as you look on the upper right-hand side, we have a 0% growth on the operating expenses in the mother company. The largest item on this is the improvement on administration expenses, which is explained by reduced consulting costs and also reduced other losses. And on the lower right-hand side, you see we have an increase of 3% in the operating cost from second quarter last year to the second quarter this year. And the main explanation is the personnel cost, as shown here, an increase of NOK 31 million. 2/3 of this is explained by a salary increase and 1/3 is explained by some more people employed in Q2 and Q3 last year, so the 2 last quarters before the merger. Then we move on to the synergies. And as we said, after Q1, we will from this quarter report on the synergies, the realized synergies going forward. On the capital synergies, the message is unchanged from Q1. And the same on the operational synergies, expectation is NOK 300 million annually by end of '27. And we also, as earlier, have divided the operating synergies into these three items. The personnel synergies is to take out the 100 full-time employees by end of next year. And in addition, we have the cost and income synergies, which is a mix of many things, including taking out valuation tax and a lot of other costs, including also merging the product portfolios of the two banks. And then the funding cost is expected, the improved funding on the Sørøst portfolio going forward. On the right-hand side, we also show the personnel synergy, the development showed as full-time employees. And we are on track with this synergies takeout. At the next very important milestone is the technical merger in the end of this quarter, Q3. We can go to the next -- yes, one more. And on the capital ratio side, we have a CET capital ratio of 18.63% at the end of the quarter and a minimum requirement of 17.55%. We have, during Q2, implemented new CRR3 regulations. And we expect in Q3 to have this uplift on the floor of the mortgage loans from 20% to 25%. In addition, we also expect the A-IRB approval of the Southeast portfolio in Q3. And as we said, after Q1, we expect the net effect of these three items to be close to 0 or neutral for the bank. After this year's SREP process, we also expect the minimum requirement on the CET1 capital ratio to be reduced from 17.55% to 17.08% at the end of this year. And based on what we have said in this presentation, we are confident that we are well positioned for profitable growth and a strong capital distribution. And as Inge said, we have now also from the Board got the goal to start to work on a share buyback program.

Thank you, Eirik. I believe that concludes the highlights from the second quarter. And then you are welcome to ask questions just by raising your hand. So please, everybody.

Please, Fredrik, your question first.

I just had a question about the buybacks. Is this something -- is this about reducing the capital ratios? Or is it something you're going to do forward in addition to dividends?

It is something that we will have as a tool available for the management and the Board of Directors. And of course, this will not be in -- there will be the cash dividend, and that will be a strong dividend in itself. But to optimize the capital equation at all time to also make sure that we don't have excess capital which is unemployed, we would like to have both the possibility of paying an additional dividend and also share buyback program just to optimize the total capital situation.

Can I add one question?

Yes, please.

How far down do you want to go on the capital side? And have you -- can you say something about the size of a potential buyback?

No. We haven't decided on that yet. This is to inform the market that we are taking the necessary steps. It will, of course, imply an approval from the general assembly and also we will need an application to the FSA. We want this tool in order to kind of more seamlessly adapt the capital to, of course, the capital requirements. We should not go below the capital requirements. But as Eirik have mentioned, we expect both the requirement to be reduced by year-end, and that should give us a strong ability to distribute to owners.

Do you have any target headroom for the capital requirements?

No. It's kind of -- we shouldn't go below the 17.08%, and we haven't decided how many basis points on top of that. But of course, we will have also a cushion on these levels to make sure that we at all time are beyond capital requirements. But of course, in every quarter, there can be incidents kind of having an influence on this. So we should, of course, have some space on top of the 17.08%. Thank you. Then I think it's Roy Tilley this time.

Can you hear me?

Yes, we can. Please.

A couple of questions. Just a quick follow-up on Fredrik's question there. So in terms of the buybacks, you will have to wait for the AGM next year for approval? Or could you do it earlier? Or will you wait until next year to ask the AGM?

We definitely expect it to kind of be in place quicker than a year from now. But as I commented on, there will be some kind of lead time here to have this in place. So this is just to give the message that we are taking the necessary action to have this in place and, of course, as quickly as possible.

Okay. And one more question on capital. The temporary Pillar 2 requirement, is there any update on that process? And when will we know if that goes away or when you will get IRB model approvals?

Yes. That is partly the approval on the models, and also it is the approval of being able to take the former Southeast portfolio into SR-Bank or Sør-Norge now, IRB system. This is still pending with the FSA. And it's kind of difficult for me to give too explicit guiding on when since it's dependent on the FSA's approval. But at least, we expect the approval of the Sørøst or Southeast Norway's portfolio, that is expected within the third quarter.

Can I do one more? Or...

Yes, please.

Just a quick on the large corporate growth in the quarter. It was a bit slower than we had expected. Just looking at the figures, it seems to be shipping and commercial real estate in the quarter which was a bit below last quarter. Is that just a couple of larger customers repaying? Or is there anything else in those figures?

Yes. We are, of course, very committed in delivering the 14% return equity target. So that means that we are very focused on the growth should be additive. And also if we have engagement, which we don't kind of regard as sufficient when it comes to profitability, we will let them go. But also, I believe, the 0 growth also mirrors what has been a quarter with very much kind of unsecurity with the tariffs and what has been going on outside Norway. And we've had several periods with also negative growth on the corporate side. So I'm not worried. I believe that growth will pick up again. Thank you, Roy. Thank you. Then it's Herman Zahl, please.

I just have a question on the Pillar 2 guidance and requirement you received during the quarter and specifically on the 1% margin expectations that you received. We just know it's lower than your sort of closest peer. So just wondering if you received any specific reasoning from the FSA on why that was lowered in your case. That's the first question.

I believe going from old SR-Bank and becoming even more diversified, also the merger with Sørøst was with a bank with 80% retail and 20% corporate, so altogether the new bank is even more diversified in all aspects, both with corporate versus retail and with respect to geography and also with respect to industry. And we kind of have received some benefit from that on the Pillar 2 guidance. That was kind of not among what we kind of -- the calculated synergies on the capital side within the bank, but is kind of a positive effect and a recognition, I believe, from the FSA that this is a very well-diversified bank.

Okay. Understood. And just on the buybacks, is that something you have received a lot of feedback from your shareholders, that they prefer some buybacks instead of, let's say, ordinary cash extra dividends?

Yes. Speaking to our shareholders, which are approximately 25,000, of course, you have different opinions. It's kind of dependent whether you are a native Norwegian or you're an international investor, whether you're a private person or corporate. So we must kind of underline that this is our action to have this tool available. And of course, we will make careful consideration of how to use it and how much we will distribute as an ordinary dividend, perhaps extraordinary dividend or share buyback. And we should not conclude on that topic as of today. But we, of course, will use the different tools to optimize the total return for our shareholders. Thank you, Herman. The next line is Simen Aas.

So basically been partly answered already, but I think just to clarify. You said that you're happy about the liquidity position currently and obviously driven by the strong deposit growth, as you mentioned. And along with this trend, the corporate growth basically have been flat over the past couple of quarters and also negative in this quarter. So do you expect to deploy this capital during the second half of this year? Or you feel that the corporations are more in a wait-and-see mode?

We believe that the growth will pick up again. But -- and of course, having a kind of excess funding, of course, we will kind of eliminate that with respect how much market funding we have. But since we have a quite extensive growth this quarter, we haven't kind of been able to fully put this deposit funding to work in the second quarter isolated. But of course, we don't want to have -- the LCR stands, I believe, more than at 209%. And that is far above our target, which is more in the area of 130% to 150%. So we are kind of overliquid at the moment.

Yes. But is it fair to assume that you will try to deploy this if possible during the second half maybe, and so growth might pick up, yes?

Actually, yes, as you can see on the 2025 bar, we have quite a lot of funding coming to maturity also for the rest of 2025. So of course, we will kind of adapt to what we have in deposits on how much market funding we will raise later this year.

Yes. That's very clear. And then maybe on the personal customer side now. With the rate cut announced in June and coming through for most of the larger banks, at least in late August, have you started to see any negative effects on the NII side here already in Q2? Or do you expect this effect to be more prominent in Q3 and Q4 this year?

The rate reduction will take place August 24, so that means kind of midway in the third quarter for the existing customers. So of course, the surprising rate cut increased activity within the retail market. But I'm very happy to see that even with the kind of the disturbance that arise from this, we have a growth of NOK 5 billion this quarter. So our position within the market should be undoubtedly strong. And at all time, we kind of experience the fierce competition in between the banks. And that also kind of just make us even more sure that being cost effective is very important, whether we have headwind or tailwind on the margin side arising from the fierce competition.

Okay. So you haven't seen any initial effects on the new volumes coming in at obviously maybe in a somewhat lower margin? Or no big effects yet is sort of what I'm fishing for here. So we should expect a more prominent effect in Q3 and Q4 is what I'm asking, and I think that's probably what you're saying.

Yes. And also, of course, we haven't automatically reduced the interest rate by 25 basis points to all customers. We kind of make those adjustments individually or looking at kind of the total profitability. So of course, we are doing our very best to maintain the margin even with the rate reduction from the central bank. Thank you. Any more questions?

Yes. We have one from Thomas Svendsen.

Thomas, please?

So back to the capital issue again. So should we think that the dividend you gave for accounting year 2024 as sort of a base for future dividends before you consider share buybacks? That's the first one.

We always try to keep dividend either stable or growing within our capital kind of position and our vision of at least 50% of the yearly profit distribution. So I believe that is kind of a fair rationale, that we will not go down on a regular dividend to buy back shares. That will be something that comes in addition to a decent or strong capital and cash dividend.

And would it also be fair to assume that you even will intend to try to grow it in the nominal terms year-by-year, this dividend?

Usually, arising from a 50% distribution also means that we hold back 50% of the yearly profit. And of course, holding profit back should also give, all other equal, an increased earnings per share and thereby increasing the dividend. So it is fair to say that kind of in an unchanged condition, as a shareholder, you should expect the cash dividend to grow year-by-year.

Okay. Understood. And the second question on the -- or actually on the deposit side. If you try to look away from possible interest rate declines, et cetera, but just look at savings deposits among households and SMEs, where do you see margins are heading now? Do you see increased competition? Is it stable competition? How much should we expect margins on these savings accounts to go down, let's say, the next couple of quarters?

I believe we should -- kind of the main speculations here to you, as analysts, what we always prepare for is that we will have margin pressure because of the fierce competition. And the kind of the best way to protect yourself is becoming more effective. I would kind of comment on the market conditions as stable, but that is not a guarantee for how the kind of competition will evolve. So we always prepare ourselves for margin compression but, at the same time, becoming more effective. We should be able to maintain what is our ambition when it comes to the total return on equity to shareholders. Thank you, Thomas. And I don't think there's any more questions. So okay, thank you, everybody, for joining this conference, and we wish you all a good day. And thank you very much for participating. Bye-bye.