SpareBank 1 Sør-Norge ASA (SB1NO) Q4 FY2025 Earnings Call Transcript & Summary

Good afternoon, everybody, and a warm welcome to this Fourth Quarter Presentation for the SpareBank 1 Sor-Norge Group. My name is Inge Reinertsen. I'm Group CEO of the bank. Together with me, Mr. Eirik Monsen, who is our CFO; and also Mr. Morten Forgaard, who is Head of Investor Relations. Together, we will give you a brief presentation of the yearly figures and also the fourth quarter, and then we will be open for questions from you. First, just a quick look at the macro conditions. Still Norway and the southern part of Norway, in particular, is a very prosperous area to do banking business. If you look at the PMIs, they are for all countries except from the [ other country ] above 50%, which states that the expectation is on the positive side. Unemployment remains low in the area of 2% for the country. And despite the ongoing global uncertainty, the activity remains on a high level for Norway as a country. 2 days ago, we announced the new group management of the bank. It is now approximately 18 months, since we had the merger in between SpareBank 1 SR-Bank and SpareBank 1 Norway. And during that period, we have maintained a high growth and high profitability, but now we take measures to make the organization even more effective. We have reduced the group management by approximately [ 50% ]. That leaves more decision power to fewer people in the group management and also that will have a positive impact of the total organizational chart. As a consequence of this, we have increased our ambition, when it comes to full-time employees from a reduction of 100 full-time employees up to 150. And also by doing this, we have increased our ambitions, when it comes to synergies from NOK 450 million up to NOK 550 million. And as shown on the chart in the lower section of this page, we have achieved approximately 1/3 of this ambition as of today. The synergies will be able to achieve from personnel synergies, operational synergies and funding synergies. And this clearly shows the value of doing a merger, and I can remind you that as of today, there are still 72 savings banks in Norway. So there should be a lot of potential for future mergers within the sector. And of course, as one of the most profitable and one of the largest of the savings bank, we should be able to play an important role in such further consolidation. Their financial targets stand at above 14% as a long-term target on return on equity. This quarter, we have updated as commented on already, the synergies up from NOK 450 million to NOK 550 million. And we have also reduced the cost-to-income long-term target from below 40% down to below 35%. By doing so, we feel confident that we are in a position of making the group even more cost effective. And of course, that should underpin our ambition of the 14% return on equity. Fourth quarter also means the decision from the Board of Directors regarding dividend, and we are happy to announce that we increased the dividend from NOK 8.5 as of last year up to NOK 12 this year. Also, we have established a share buyback program as a supplement to cash dividends, and this clearly shows our ambition on having strong capital discipline and also our ability to have profitable growth in combination with a strong cash and capital distribution. This NOK 12 is equal to a 71% payout ratio for the 2025 profit. As a modern savings bank, we are also a public limited liability company. That means that different from most other Norwegian savings bank, we have 100% of our equity listed on the Oslo Stock Exchange. The total dividend with NOK 12 is approximately NOK 4.5 billion. And 55% of that will be distributed to our regular shareholders. But as a savings bank, we have 7 foundations that altogether stands for 45% of the owner share of the bank. These banks -- excuse me, these foundations will receive NOK 2.0 billion in dividend, and they will turn around and contribute to the local communities with sports and culture activities. And this is kind of the modern savings bank tradition. We contribute to the society by giving top financial services at competitive pricing. And also as we come to the year-end and with a strong profitability, we give a large share of that back to the local communities through the 7 foundations. This map shows the 53 branches, which is the physical distribution power of the bank. We have also a state-of-the-art Internet or mobile banking. And in this what we call the physical and the digital landscape, we have access to approximately 75% of the Norwegian inhabitants. As shown on the map, we have a steady growth in all market areas, where we have listed in different countries on the left-hand side. And we are, of course, well positioned for both becoming more cost effective and also have a steady growth going forward. If we look at the main figures, we delivered a 12.8% return on equity for the full year 2025 as return after tax. If we exclude one-off effects arise from goodwill and merger cost, that is equal to a 14.1% return on equity. The cost to income ratio came in at 38%. And also, we have a very strong position, when it comes to our common equity Tier 1 capital ratio, which with 17.57% is 85 bps basis points above the requirements from the financial authorities. If we look at the fourth quarter results, which Eirik also will dig more into, the return on equity came in on 11.9% this quarter and the reason for being just a tad below 12.8% was a bit weaker financial result this quarter. Altogether, this leaves us with a bank with a very strong position, both on the distribution side and also on the cost side, and we believe this should be a very good position for further profitable growth. And with that, I hand the word over to Eirik, who will give you some more financial details. Please, Eirik.

Thank you, Inge. Starting with the net interest income. The fourth quarter is the first quarter, where we have the full effect of the Central Bank reduction in interest rate in June. We also have partly the effect of the reduction in interest rate in September, which result in a reduced margin or reduced net interest income on the margin side. This is partly compensated by continued growth in the lending growth and also by reduced funding costs explained by entering into the certificate market in Europe. So in total, we have a stable development in net interest income from the third quarter to the fourth quarter. When it comes to lending growth, starting with retail market, we continue to have a good development and good lending growth, 6% over the last 12 months compared to 4.8% in the retail household market in general, continuing to take market share and also a positive development on the deposit side with a 9.7% growth over the last 12 months compared to 8.3% in the market in general. When it comes to the corporate market, we have a 12-month growth of minus 1.7% adjusted for currency, the growth is minus 1.0%. We see that the customers are still holding back on investments. We see tough competition from other banks. And we also see that larger customers, some of the larger customers also use the bond market. The bond market, as you know, have been very good in 2025, and we also get our share of that through our ownership in SB1 markets. On the development -- sorry, on the deposit side, we also have -- we have a very good growth over the last 12 months of 16.4%. Some of these deposits are -- what we call it, municipality deposits. But adjusted for municipality deposits, we still have a 12% deposit growth on the corporate market side over the last 12 months. We are very happy with the development on commission and other income during 2025, especially with insurance savings and the real estate agency. You see a slightly reduced income on the real estate agency from the third quarter to the fourth quarter. That's 100% seasonal effect explanation. When you look at the fourth quarter '24 against '25, we have a reduction on the payment facilities, and this does explained as we have explained for the previous quarters in '25, it's a change in the commission model on the credit cards with Kredittbanken. And some -- partly of this is compensated by an increased revenue share from Kredittbanken. We also have a slightly reduced income from the accounting firm in the fourth quarter compared to '24. Looking at the accounting firm for the whole 2025, we see also a good development compared to '24. Net income on financial investments from the third quarter to the fourth quarter, the reduction is more or less 100% explained by a reduction in derivatives. It's the basis swaps explains half of this reduction in derivatives and the other half is explained by other IFRS 9 effects. When you look at fourth quarter year-on-year, we have a good increase in income from other ownerships, explained by increased revenue from the group and also from SB1 market. And as already said, we have increased our synergy target to -- with NOK 100 million to NOK 550 million. Of the NOK 100 million in increase, NOK 70 million is allocated to personnel synergies, and it's explained by now the ambition of taking out 100 FTEs is now increased to 150 FTEs. And the other NOK 30 million is allocated to funding synergies. We see that we are able to take out even more savings, when going into the European certificate market on the funding side. And we are on track with the synergy takeout. This is proved by also now have taken out 61 of the first 100 FTEs by the end of 2025. And we will continue to report on the synergy takeouts in the coming quarters. Operating expenses, third quarter to fourth quarter, we have an increase if you adjust for the merger costs. This is explained by seasonal effects. But if you look at fourth quarter development year-on-year, you start to see signs of the synergy effects also in the P&L. If you look at the personnel expense, it's almost a 0 increase from the fourth quarter in '24 to the fourth quarter in '25. We have impairments of NOK 127 million in the fourth quarter. Of this, NOK 130 million is in individual impairments related to some few corporate engagements, which have come to conclusion in the fourth quarter, slightly higher than previous quarters. But looking at the year as a total, we have NOK 352 million in impairments, which is 9 basis points, which we consider as being below a normal year. And there are no signs of any indications of changes in trends or negative trends, when it comes to impairments going forward. And we have a good solid capital ratio of 17.57%, a buffer of 85 basis points down to the minimum requirement. And we have, during the fourth quarter, implemented revised IRB models for the corporate market, which result is that the temporary Pillar 2 requirement has been removed. We also see by implementing these models, we have a slight reduction in the capital ratio and the net effect of this is neutral, close to 0. And we also, as we said in the third quarter, last summer's SREP process have resulted in a reduced Pillar 2 premium requirement and also the Pillar 2 guidance has been reduced. The net effect of this is 47 basis points. So with that, we are well positioned for profitable growth and a strong capital distribution in the time to come.

Thank you, Eirik. And just to comment briefly on the outlook, we feel that we are well positioned, as Eirik said, to take the place as one of the top ranked banks, when it comes to financial deliverance. We have, of course, some uncertainty related to trade policy and the geopolitical tension, but the Norwegian economy and our position within this prosperous country is undoubtedly very solid. And with that optimism, I believe it's time to hand over the word to you. So please just raise your hand and feel free to ask questions, and we will do our very best to provide you with answers. So please, everybody.

Okay. Please, Simen Aas come with your question.

Yes. I just have one question, and it's on dividends, just to get a feel for how you think about the dividends and buybacks going forward with NOK 12 share very strong. Should we expect you to see nominal increasing dividends and then do buybacks on top? Or are you willing to let the dividend drop down reflecting maybe a lower NII this year and everything, making it rough to match the EPS that you delivered in '25. So that is my question.

Yes. Thank you, Simen, for your question. We don't give kind of any explicit guiding on that. Our dividend policy says at least 50% in cash dividend. But of course, we have to take into consideration what will be the profitability, the growth that we will have for the upcoming periods. And also, of course, the Board of Directors, if they want to have another buyback program, they will, of course, also take into consideration the pricing of the shares. So we haven't kind of made any decisions as of today of how we will kind of combine the different tools. But of course, we are very committed that we will have a strong cash dividend as kind of the foundation of our distribution to our owners.

Okay. So we should think that the dividend always will come first and then you do buybacks, if the capital allows for it. Am I right in reading it? Yes.

Yes, absolutely. What comes first is, of course, a dividend to our owners in cash.

And we also have a question from [ Pierre ], please.

A few questions on my side. The first is on your improved cost/income ratio target from 40% to 35%. What makes you more confident in terms of cost efficiencies on the FTEs or is there a stronger automation or other elements. The second question is on the evolution of base rates. The Norge's bank mentioned that they were contemplating something like 1 or 2 cuts this year. We've seen that the last inflation rates were still high. What is -- what do you have in your plans, 1 to 2 cuts or perhaps even no cut at all for the year? And the third question is on your issuance plans. I'm credit analyst, that's why on the issuance plan. I have seen that there's a [ NOK 37 billion ] of debt maturing this year. But is it possible to perhaps more precision or more details on your expectations for 2026?

Thank you for your questions, Pierre. I will try to answer the first question, when it comes to the ambition of a 35% cost-to-income ratio. As you mentioned yourself, it will be a combination of reducing full-time employees, increased automization, taking IA even more into kind of the production and the customer processes. And of course, we have some payable costs that we should be able to reduce as result of the merger. And being a large bank, being a SIFI bank, we have very good access to the international funding market. We should also be able to optimize the duration and the sources of funding. So having a 35% ambition is not something that is kind of easily achieved, but we feel that this is kind of the right point to aim at to underpin, what we believe is necessary to achieve the 14% return on equity. So it will be a combination of many factors that should make us able to achieve the target. And perhaps on the second question, Morten.

Yes. Now we don't have our Head of Treasury represented here. But my understanding is that we, for 2026, probably will aim for doing a couple of bonds and also using more of the CP program, which we established in late 2025. So that will be the main goal. And we also have S&P maturing this year. So we'll consider refinance that bond. So I think that's the 3 main markets we will enter into in 2026. And of course, depending on the market, there will be NOK issuance or euros.

And on the base rate outlook?

Yes. The base rate -- thank you, Pierre, for reminding us. The last figures that we had on the inflation was on the high side. So as of today, people also discussed that perhaps there will be no rate cuts at all. Actually, to participate this evening on the yearly speech from the Central -- the head of the Central Bank. So it will be interesting to hear out her take on the situation. And perhaps there will be no rate cuts at all, but we kind of whether it will be a rate cut or not, it doesn't kind of change our way of kind of running the business as such. So we work on kind of our efficiency measures and of course, also delivering the best services to our customers, and we will be able to make kind of a profitable growth whether the central rate cuts -- excuse me, Central Bank cut rates or not.

And then we also have a question from Herman from Pareto.

Did I understand you correctly that the impact from the new -- from the IRB models did offset the 50 bps reduction in temporary requirement?

Yes, that's correct.

Okay. And then just did you have -- just trying to bridge the capital CET capital. Did you have any sort of positives from the temporary tax differences you booked -- you had 50 basis points drag some years ago. Did that go in your direction this time at the year-end?

Yes. We had a slight effect on that, but nothing material. So I think from the positive side, is a bit more -- less on the goodwill sides and also a bit lower growth than anticipated. I think that was the main drivers.

Okay. And just on the cost, since you are sort of more forward leaning with your new cost/income target and since you are sort of clearly the largest bank in the Alliance, do you feel like your view on cost efficiency is shared across the Alliance? And could you just share some thoughts on, if there are any disagreements or you feel like you are carrying too much of the total cost burden? It's quite hard from the outside to follow the development internally in the Alliance and with SpareBank and et cetera.

Yes. Thank you for your question, Herman. When it comes to the ambitions, we don't have any kind of discussions in between the 12 banks. This is up to each bank to decide. And of course, the cost/income ratio also is influenced by the kind of ambition, when it comes to net commission and other income and how you kind of assemble the individual bank. When it comes to what we do jointly in the SpareBank 1 with Utvikling, of course, we have our kind of methodology to share the cost in between the banks. It's very important to pinpoint that this is very kind of beneficial to all of us. And we also have elements with respect to economies of scale in the meaning that a share of the total cost is shared by each bank as a participant in this cooperation. So that leaves economies of scale to us as the larger banks. So one discussion is how we share the cost. But what we are all very committed in is how to reduce the total cost, how to reduce time to market, how to reduce kind of cost from having joint priorities of what we should invest in. And of course, being 12 participants, that could be costly if every of the 12 participants will have kind of their hand on the steering wheel, so to say. So we also have a model, where increasingly degree, the larger banks, we kind of take the lead in developing different projects within the Alliance to reduce the cost of coordination. So this is kind of an ongoing discussion, and we try to make the cooperation relevant for each of the 12 banks, whether you are a small bank or you are the largest bank as we are. So it is something that is very beneficial to all of us. But as I said, we didn't have a discussion on our 35% target with the other banks because still the cost arising from our joint operations accounts for less than 10% of our total cost. So that means they're becoming even more cost effective, it's always a question on what you do in each of the 12 banks. But of course, also the shared cost from our joint activities contribute to the total cost, but in a lesser degree.

Okay. Can I just follow up? So just to -- if I interpreted you correctly, do you feel like the cost focus in the Alliance has sort of accelerated or become more important for the Alliance as a whole? And do the larger banks now, as you say, have a greater control or more influence on some of the processes and leading those processes, although the cost -- the economic cost sharing is still similar?

Yes. The kind of -- what to say it in English, all banks, we are kind of more concerned or we are more focused on the cost. So we have had very kind of good discussions on how to become more effective. And with respect to kind of the influence from the larger banks, we don't have kind of a voting system. Usually, we reach a consensus of what to prioritize. But of course, the larger banks, we have more people with the competence you need because developing IT systems and so on is a combination of kind of pure IT competence with banking competence. And of course, the larger banks, we have more resources, when it comes to people. So that means that we in a higher degree now also take the lead in these positions and projects, if you understand.

Yes. [indiscernible] from Nordea.

Yes. 2 questions related to the capital. There was a significant reduction from Q3 to Q4 in CET1 ratio. Is it possible to have the bridge between Q3 and Q4 to understand the different elements that leads to this quarterly reduction? And I know that part of it is RWAs. There was a significant rise in RWAs related to the move to IRB leasing and corporate. On IRB and leasing, the move from standard approach to IRB approach, what are the justification for this year was imposed by the Central Bank. Is it an objective of SpareBank 1 Sor-Norge has an refined view on your loan portfolio? Because generally, when banks move from standardized approach to IRB with a target to reduce RWA is not the contrary.

When it comes to the RWAs on the IRB side, it's 2 separate discussions with the FSA. So the first is that we have been discussing the corporate portfolio for a couple of years. And now we finally agreed with them what the RWA should be. So we implemented the new model in the fourth quarter. And separately, we have applied for IRB on the leasing. So going from the standard approach to IRB. So sort of the leasing part offset the negative part from -- on the corporate side. In addition, we -- when we implemented the new model, then we released 0.5 on the capital market requirement side. So the effect in total is sort of neutral. Making the bridge from third quarter to fourth quarter, we have 3 main drivers. The first is this implementation of the corporate model and the leasing. So that's one of the parts. The other part is increased dividend. We have from 50 to 70, 71 dividend. So that's around 50 basis points. And the last point is the buyback on the shares. We introduced that in the fourth quarter, but then we offset the whole amount in fourth quarter. So that's approximately 40 basis points. So that's the total of these 3 elements is the basis of the change from Q3 to Q4.

Thank you very much. Do we see any more hands, Morten?

No.

No. We don't. Thank you very much for your participation. And if you have any further questions, you will find our contact details at the back of the presentation. So thank you very much for taking your time and wishing you all a good day. Thank you from Oslo.