SpareBank 1 Sør-Norge ASA (SB1NO) Q3 FY2025 Earnings Call Transcript & Summary

Good afternoon, everybody, and a warm welcome to this third quarter presentation from the SpareBank 1 Sor-Norge Group. My name is Inge Reinertsen. I'm Group CEO of the company. Together with me, Mr. Eirik Borve Monsen, who is Group CFO; and also Mr. Morten Forgaard, who is Head of Investor Relations. We will give you a brief presentation of the highlights of the third quarter, and then we will hand over the word to you if you have any questions. So to begin with our financial targets, we have a long-term ambition of delivering at least 14% return on equity. This has been a target for a few quarters now. But what is new this quarter is that we have increased the operational synergies from our merger with the other bank from NOK 300 million up to NOK 450 million. Also due to the very strong common equity Tier 1 ratio, we have increased our dividend policy that former was about 50% to at least 50% in cash. And also, if we flip to the next page, Morten, we have established a share buyback program as a supplement to paying cash dividends, and that would potentially come in addition to a solid cash dividend. This has been a very interesting and nice year from the SpareBank 1 Sor-Norge Group. We have successfully merged both our accounting companies and our real estate broker. And as of September this year, we also had a very successful technical merger in the parenting bank. That means that we transferred approximately 350,000 customers and really a lot of data from the other bank to the platform of the former SpareBank 1 SR-Bank. This technical merger put us in a position of working even more with realization of synergies. We have a lot of processes on harmonization of products and work processes. And by this, we should be able to increase efficiency and competitiveness even further and also, of course, deliver on the new ambition of the NOK 450 million of synergies. If we look at the environment surrounding us and our market area, we have a benign environment for running a profitable bank. We have a low unemployment rate that has remained low for a long time, both in the regions and in Norway as a country. And if we look at our business survey, as you will see in all the relevant regions, the score is above 50, which means that there are more optimists than pessimists, and this should be a good environment for running a profitable bank. Also, if we look further into the oil companies, many would -- might expect the oil price of $65 to be challenging, but the Norwegian oil companies, they have adapted to a lower oil price by significantly reducing cost and still the investments on the Norwegian continental shelf remain at a high level. However, we have significantly decreased our exposure to the oil sector, which now accounts for approximately only 2% of our total portfolio. But this sector, which, of course, is still important to Norwegian economy, is also optimistic when it comes to activity, which, of course, is positive to us as a bank. If we look at our total portfolio now, approximately 50% of that is in the western part of Norway with the counties, Vestland and Rogaland. The other 50%, Agder, Oslo, Akershus and also Telemark, Vestfold and Buskerud; and other stands for the other 50%. This means that the old Telemark and Rogaland from Stavanger, we have become really a bank for the southern part of Norway with much more diversification with respect to geography, less concentrated in certain industries. And altogether, we have become a very much diversified bank. With the 50 branches, we have a very strong distribution network, also taking into consideration that we, together with the other SpareBank 1 banks, we have a state-of-the-art Internet banking services. That means that we are very well equipped for running a very efficient bank and also with a very high customer satisfaction due to the combination of our physical presence and state-of-the-art Internet services. If we look at the main figures, we delivered a 13% return on equity this quarter, taking into consideration one-off costs related to the merger, which should be the last quarter with significant costs related to the merger and also goodwill that arise from the merger, the 13% can be compared to a 14% return on equity. Still impairments are low, 12 basis points this quarter, a tad higher than previous quarter, but a very strong underlying credit quality. The lending growth remains high in the retail market, where the total growth in the market is around 4% and where our growth is at 6.1%. However, a bit lower growth in the large corporate market. But if you combine the corporate market and the SME and agriculture, it is approximately 1.0% annual growth. Very large growth on the deposit side. This is, of course, positive to our deposit-to-loan ratio. However, it has actually put some pressure on the interest margin as we have had some excess funding capital during the last 2 quarters. Very high cost efficiency with a low cost-to-income ratio of 37%. And as I mentioned, as the background for the more -- the increased dividend policy, our capital -- common equity Tier 1 capital ratio stands at 18.5%, which is 1.0 percentage points above the requirement. Also with some positive migration when it comes to the requirements that will arise in the fourth quarter, we are very well positioned for a profitable organic lending growth and also a very strong capital distribution to our owners through the cash dividend and also a potential share buyback program. And with those highlights, I will hand over to Mr. Eirik Borve Monsen, who will give us some more details on the figures. Eirik?

Thank you. In the third quarter this year, we have a pretax profit of NOK 2.12 billion, which is an increase of NOK 70 million from previous quarter and an increase of NOK 280 million from third quarter last year. And just remind you that in the third quarter last year, we had a one-off gain related to the merger between [indiscernible] which amounted to NOK 577 million. When it comes to net interest income, we have one more interest day in the third quarter compared to the second quarter. Adjusted for that, we have more or less flat and stable development on the net interest income from the second to the third quarter. Increased volume that increases the net interest income, but that's more or less neutralized by a small reduction in the interest margin, explained by high excess liquidity in the quarter and also a negative effect -- equity effect on declining interest curve. When it comes to commission and other income, we have a decline from the second quarter to the third quarter of NOK 80 million. This is explained or more than explained by the real estate agents and the accounting business, which have a natural seasonality low -- what do you call it?

Low season, yes.

Low season in the third quarter. When it comes to financial investments, we have an increase of NOK 70 million from the second to the third quarter, explained by an increase in fair value of the certificate and bond portfolio and also increase in the fair value of the derivatives, including the basisswaps. Operating expenses, I will come back to on the next slide. When it comes to impairments, as Inge already mentioned, we have NOK 150 million in impairments in this quarter. 88% of this is on the specific loans. Year-to-date, we have NOK 250 million in impairment, which amounts to 8 basis points. If you then move to operating expenses. We are happy with the development of the operating expenses in this quarter. As you see on the upper right side in the mother bank or parent bank, we have a decline of NOK 12 million in the operating expenses from the second to the third quarter. And you also see on the lower right-hand side that we have only NOK 2 million increase in the operating expenses from the third quarter last year to the third quarter this year. This shows that we have good cost control, and it also shows that we now are starting to see the synergy effects also in the P&L. And if you move to the next slide. As already mentioned, we increased the synergy ambition from NOK 300 million to NOK 450 million, an increase of 50% or NOK 150 million. Of this NOK 150 million, NOK 100 million is related to the operational synergies. We see that we are able to take out more effect from standardization of the bank products. And we have NOK 50 million related to the funding synergy that we see that we are able to take out even more reduction in funding, and this is also related to the CP program or certificate program that we are now starting in Europe. When it comes to personal synergies, we are on track to reducing FTEs with 100 by the end of next year. And we will continue to work to deliver on these goals in the quarters to come. Just mentioned that we have had a successful technical merger. And with this, we also now have completed the total merger costs of the NOK 400 million, which we have guided on. So this is also now behind us when we end the third quarter. We're also ending the quarter with a solid CET1 capital ratio of 18.5% with a good margin to the requirement -- minimum requirement of 17.53%. And in connection with this year's SREP process, we also expect by year-end to have a reduction in the Pillar 2 guidance from 1.25% down to 1% and also the Pillar 2 premium from 1.35% down to 1.13%. And based on this, we believe that we are well positioned for profitable growth and a strong capital distribution.

Thank you. And with these highlights, we believe that we are well positioned for a profitable growth. And of course, there are still some uncertainty in the more international space. But so far, Norwegian economy and regional economies have performed well and also the position of the bank to have profitable growth should be undoubtedly strong. So with these concluding remarks, we will hand the word over to you. If you have any questions, please just raise your hand and Mr. Trond Inge will give you the word. Please.

Trond, you don't see any raised hands from your side?

No, I don't. So there's still a chance that...

Here is a question from Thomas Svendsen.

Yes, Thomas Svendsen.

On market shares -- gaining market shares, what are your thoughts in the corporate segment there for opportunity to gain market shares over the next 2 to 3 years?

We are definitely very well positioned with both the position as a bank and also our jointly owned investment banking company, SB 1 Markets that now has become a Nordic company. We should be well positioned for benefiting from each other's positions. And we believe that the growth in the corporate sector also will pick up again. And if not, we are, of course, in a position where we can reduce cost even further if it's necessary to kind of take down the capacity with respect to full-time employees. Thank you, Thomas. Anyone else, please? Yes, has a question from Herman Zahl. Please, Herman.

The capital position seems to be a bit stronger than expected this quarter. So just given your new and updated Pillar 2 requirements by year-end, what's sort of your desired capital level? Do you seek to have a buffer on top of the 17.6% long-term target?

Of course, in these capital requirements, there are a lot of buffers, and you might also discuss how much buffer should you have on the buffers. But I believe, over time, a buffer of approximately 50 basis points, 0.5% would be kind of convenient over time. And this should, of course, position us very well with what we -- where we stand today and the change of the requirement to have both a strong capital distribution with respect to cash and potential buybacks. And also with the question from Thomas, we should also be well positioned for taking growth if that's possible. But we will remain very disciplined when it comes to capital and will not kind of take any growth that is not profitable with respect to pricing and risk reward. So capital discipline stands very high in our bank.

Okay. And then just on the -- since you state the ROE target is a long-term target, should we interpret that as into 2028 when you have fully implemented all the cost synergies?

We have -- formally, we have said to the market that we need 2025 and 2026 to come up to a full run rate with respect to taking out synergies. And the long-term ambition of the 14% should also be kind of viewed in correspondence with this. So as we -- where we stand today, the ambition and interpretation of that would be kind of 2027 -- yes, discussing the ambition.

Okay. And then just finally, referring to some of the comments given earlier today about no growth in large corporates, do you feel like -- is it some of the volumes going to the bond market that you would like to have yourself? Or have you been too constraining on yourself in hindsight?

That is one of the explanation. The kind of the reduction here is not a cause that we have kind of lost volumes to other banks. But of course, the access of capital in the bond market and the pricing is favorable for some of our companies. So that is also one of the explanations why we have some lending volume that goes out of our books. But however, we are a large owner of the SB 1 markets, and this is kind of a natural flow where companies in some phases, they seek into bank financings, and in other phases, they seek into the bond market. And what is important is that we are well equipped to support our customers whether they choose the bank -- the lending market or the bond market as the alliance as such. So we don't try to put any kind of limitations on our customers. If this is the right for our customers to do, then they choose the bond market, and we will also assist them with issuing debt in the bond market. Thank you, Herman. Anyone else with questions? It seems like you are happy. I don't see any more hands. Trond, do you see, any more hands?

No, I don't. So I think we just conclude.

No. Okay, then I believe we can conclude this session. At any time, if you have any follow-up questions, you find our contact details at the end of the presentation, and we'll be happy to assist you any time. So thank you very much for taking your time, and have a good day. Thank you.