Sparebank 1 SMN

OSE:MING

Earnings Call Transcript 2020-Q1

[Trond Barikmo]

And good afternoon or morning or evening depending on where you are, and welcome to the presentation of the first quarter results for SpareBank 1 SMN. We have brought 2 of the big guns from the senior management to present the latest and greatest from the central part of Norway and for SpareBank 1 SMN. These are the CFO, Kjell Fordal; and the Head of the Corporate Division, Vegard Helland. [Operator Instructions]. Also, a recording of this presentation will be available on our website when completed.So Kjell, if you'd like to start.

[Kjell Fordal]

Thank you, Trond, and over again, welcome to this presentation for our international investors. We have had this presentation late in the Friday afternoon due to the time zones we face in this situation. And this is the only form for jetlag we are allowed to have these times.There are challenging times and the figures we are going to present is very, very solid core operations, but the figures has an effect from the corona crisis and the drop in the oil price. So we see, we face higher loan losses and mark-to-market losses in the -- especially in the liquidity portfolio. On the other hand, we have a substantial profit from the Fremtind transaction.We have a return on equity of 5.7%. That's lower than our target, and it's lower that we have used to see over the last years. So we hope I come back with better figures soon. The CET1 is 16.3% and showing a very solid bank. And I think that is one of the good things. These days it's -- apart from the crisis we have seen before, that we are very solid, we are very well capitalized and we have a very sound funding structure. And that is, of course, very good to have in the beginning of a crisis. And I have seen some crisis in my career.As a savings bank, we are -- we think very fit handle our crisis. We have our strategy that is to be the leading financing house in our region and we are aiming to strengthen our position through this crisis. We stick to our strategies and we stick to our goals. We have a very important goal to be profitable. We have a target of 12%. We see that for 2020, it will be challenging to reach that, but the long-term financial ambition is retained.As I mentioned, we are financially sound, a CET ratio of 16.3%. It's well above our target of 15.4%, which includes also buffers that is going to come during this year and the management buffer. On the last quarter, we announced a target to keep the cost growth below 2% in the years to come. We now see that this as -- which seem to be a challenging target 3 months ago, we are now aiming to even have a lower cost growth. SpareBank 1 SMN has a wide range of product lines and is #1 in all of these lines in our area, which is a big asset for the bank.Some comments on the operational side and the effects we have of this oil crisis and especially the corona crisis. We have seen over the last month that the bank is operating very well from home and on a digital way to dealing with the customers, to develop the bank and keep the operation fit and fast. The other consequences, I will come back to through the different topics during the accounts.What we have seen during this period is an immense growth in the digitalization process. That is a process that has been going on for several years, but it has had a big leap forward over the last weeks. As we can see there that the -- today, 57% of the sales is performed in a digital way. And on the other hand, we are always present with the people to help the customers and be there for the customers on the different topics and the challenging times also for our customers.As a savings bank with a big ownership from the society, we're also able to use some of our profit to support the society and the region we are a part of. So we have put aside NOK 100 million to do as donations for the voluntary sector in a period that is challenging for all of the inhabitants in our region. And we see that this has been really appreciated. And that is a part of the bank's strategy to exploit the power in the ownership model. This strategy priorities was launched 3 months ago and is, of course, still valid because we plan to be a better bank and a stronger bank after this crisis.One of their priorities here is to the project One SMN where we will strengthen the group's market position and profitability, and to exploit the possibilities that lies in the wide range of products that we offer to the market. This program has been slightly delayed through the crisis, but we are now in a good pace of implementing and finding activities and tasks to do in order to improve the bank's profitability by at least NOK 300 million. So far, it's mostly cost cutting and the consequences of taking more -- to utilize more the possibilities that we have seen in the digitalization process. More to come on this topic.This quarterly figures is very much about credit. And one of the challenges we have seen is increased level of loan losses, which is usual for a crisis. And to present that, Vegard is going to go through the loan book and the credit risk assessments that has been taken. Please, Vegard.

[Vegard Helland, Executive Vice President of Business]

Thank you, Kjell. As you all know, at the 12th of March, the Norwegian government introduced a series of measures in the hope of stopping the spread of the coronavirus. These are the strongest and most sweeping measures Norway has seen in this time. And of course, this led to a shock in the economy. And for the bank, it increased the credit risk.If we start to look at the housing market. I think we will see 3 phases in the crisis. First, we saw the shock, which started at the 12th of March and maybe lasted up to Easter; then we have the contraction, which is ongoing; and hopefully, we will see a normalization. During the contraction period, we have seen that the house prices has increased by 1.2%. That's the same as the average house pricing in Central Norway. And we're also seeing that the sales are approximately at 85% to 90% of the normal market in Trondheim. So since Easter, we have seen a kind of normalization.As many of you are aware of, we have seen a significant increase in the unemployment rate over the last months. Still, the country of Trøndelag and Møre og Romsdal still have a lower unemployment rate than the average in Norway. The unemployment rate has increased from 2% in Norway and is now about 10% at the moment. In late April and early May, we have seen that the unemployment rate in Trøndelag has a sharp decline. And we believe that the unemployment rate will continue to fall in line with the opening of the society.When it comes to retail banking, we are of the opinion that the middle part of Norway and Trondheim, Trøndelag is a part where it is safe to do business. More than 50% of our retail customers are employed in the public sector. And we also have a private sector, which is well diversified among a lot of industries and most of the companies are SMEs.If I look at the numbers for the mortgage customers in the bank, we see that the largest employers are the municipality of Trondheim. We have the central hospital in Trondheim. We have the Trøndelag county. We have the large research institution SINTEF and we also had the university. I think this is a safe place to be financing houses.Over the first phase, which I called the shock, we experienced a massive growth in application for postponed installments. These payment holidays was both proactive and reactive from the bank. We invited a lot of our customers to search for payment holiday to reduce the fear that many of them had for their personal economy. Now, we are back at the same levels that we had before the crisis. So this is normal-ing.For the corporate market, we choose to reorganize the organization to handle the crisis. We took 10 to 12 million out of the most skilled and experienced people in the bank. We established a task force, which have a purpose to support their colleagues and the advisers in the bank as well as the customers. Everything is about how to handle the crisis. As you might know, the Norwegian government has introduced several relief packages to avoid bankruptcies among the Norwegian businesses.The first relief package are guaranteed loans to SMEs, where the risk distribution between Norwegian government and the bank is 90% versus 10%. SpareBank 1 SMN share of this guaranteed loans package is NOK 1.5 billion. At the moment, the utilization is around 12%. So we have a lot of state guarantee or guaranteed loans to offer to our customers.The second relief package is the cash support package, which will cover up to 90% of the fixed cost for companies who are temporarily closed down by the government. We believe that these relief packages will help a lot of companies through this crisis.Early in the crisis, we made an analysis where we placed the different industries in different categories related to the impact of the crisis. Today, we see that many industries or sectors are moving to the right from strong impact from the crisis to moderate or mild. The first time we did this analysis, we had an exposure at approximately NOK 1 billion related to companies that are strongly impacted by the crisis. Today, this volume or this exposure is approximately NOK 750 million. Most of it is related to hotels and tourist industry. It is important to keep in mind that NOK 750 million is 1.5% of the corporate portfolio and less than 0.5% of the total lending in the bank. So we think at the moment, this is possible to handle.If we look at the postponed installments from the corporate customers, we see the same situation as we had for the retail customers. Many borrowers have been granted payment deferment for 3 months. We have been proactive and willing to grant this 3-month postponement. But I guess the requirements will be more strict if the same customers apply for more than 3 months when the next installments are falling due.If we look at the total loan book in the bank, we think we have a robust portfolio. When it comes to credit risk, we are of the opinion that having 70% related to retail banking will reduce the risk. Most of this 70% is related to mortgages and our loan, which is granted to wage earners. 10% of the portfolio is related to agriculture. And within that industry, we haven't seen any signs of crisis from the coronavirus. So the impact is pretty low. At the moment, we see that approximately 5% of the industries are related to industries that are impacted by the corona crisis or affected by the low oil price.And if we move on and look into the offshore portfolio, we have had this portfolio for several years. This is a portfolio that has been facing challenges since 2014. And actually, the second half of 2019 and the first quarter of 2020, many of these customers got long -- got new long-term contracts for their ships. At the moment, we are financing 61 ships, and the average contract coverage is approximately 12 months.We have also seen that some of these vessels now are utilized within renewables and offshore wind, which is lowering this risk, of course. But we have been booked -- we are booked NOK 42 million in losses in Q1. Of course, there is a risk within this portfolio. And the main risk is cancellation of contracts. I guess we will provide further losses in the offshore portfolio, but we don't believe the numbers to be very much higher than the average for the past years.When it comes to the total loans for this quarter, they are booked with NOK 308 million. We see that retail losses are approximately NOK 44 million, and we see that the losses within the corporate sector is almost NOK 260 million. Within subsidiaries, we have losses at NOK 7 million. The total losses are 0.73% of gross lending. And that is reflecting the crisis that we see related to the coronavirus. We hope these losses are front-loaded, but at the moment, the uncertainty is rather high.If we look closer to the losses, which is booked in Q1, we see have almost NOK 200 million in stage 3 individual losses. And we have almost NOK 100 million in stage 1 and stage 2 losses, which is due to revision of the assumption in the loss model because of the uncertainty that I have spoken about already.We have also seen that we have increased payment default in the first quarter. This is mainly from retail customers. This is non-corona-related. And we just have to work close with those individuals who have these loans to reduce the number of payments that are default with 90 days as at Q1.Then I will hand over the page to Kjell, who will give us a further presentation of the financials. Thank you.

[Kjell Fordal]

Thank you, Vegard. I will end this session by going through some more details from the financial information of this quarter. As I mentioned earlier, the return on equity is at a lower level than what we like to see, and as this slide show is that the main reason for that, it increased loan losses. But the general picture is this a bank that has been and will be profitable on a very solid basis.The figures on a quarterly basis shows a very strong net interest income due to high growth and a positive margin development. High commission income, which is at a very high level for our bank, thanks to good work in all business lines of the bank. Flattish cost development highly increased loan losses, which gives us up post loan losses level of NOK 256 million. And then you see the gain from the Fremtind transaction, which is the last part of the transaction that was started the first quarter in 2019.With the substantial liquidity reserves the bank keep in order to be financially solid and have a good liquidity position. Here, we see that there has been an increase in credit spreads, which has caused a loan loss. But it's fair to say that this loss is something that will come back in due time. And in the related companies, we have effects from the same, the liquidity reserve in the cover bond company and the asset -- the financial results in the insurance company is also hurt by the crisis.The bank's growth has been fairly good. We have, over the last 12 months have a growth in mortgages of 7.6%. 2% for the last quarter, showing that we keep up the good pace. And the market growth, the C2 figure is 4.9%. So we take market share. We gained market share. And today, the share of retail lending, predominantly mortgages, is 69% and 31% is our diversified portfolio of SMEs. The growth on the corporate side is 2.7%.Margins is very important for the profitability of the bank. And we can see here there is an increase in margin over the last quarter, more or less a technical reason for that. There has been a drop in the NIBOR interest rate for March, and the changes in interest rates hasn't happened yet as the end of first quarter. But we have decided to reduce the mortgage rates to up to 0.85% as from 5th of April. And today, we issued a statement saying that we -- due to the latest decrease in the national bank interest rate to lower the mortgage rate up to another 40 basis points. So altogether, we have reduced the mortgage rates by 1.25 basis points.When it comes to deposits, there is a very high growth. And that is, we think is that the depositors tend to go to do the high street banks in a crisis situation. And also the fact that the savings is increasing in a period like this, even though this is a very early stage in the crisis. Here, we see the opposite side of the margin development of -- on the loans, there is a drop in margins, of course, due to a drop in the benchmark rate, which is the 3-month NIBOR that is used here.The one effect of the decreasing interest rates that we have seen after this quarter is that we will have a lower return on the equity as such. But it's our judgment that these changes we have done in the mortgages and in the deposit rate is a very well balanced decrease in interest. And that we have not a very big problem in reaching the negative interest levels, which is new for us, of course.This bank has its -- one of its great advantages is to have a very broad spectrum of product issuing delivered to our customers. And we have a high level of other income than net interest income. And we see that this has also grown over the last period, especially in the accountancy services and on the payment transmission income.We have a very good liquidity position. We have very [ satisfactory ] access to capital market funding. We have a high level of LCR, NSFR going into the crisis and which has been very favorable for the bank to be in that position. And as I mentioned earlier on, it's very different from the crisis we have seen in earlier times, and give stability and the ability for the bank's management to steer the bank in a good way.The cost situation is fairly good. We have a 1.8% growth -- in this quarter, we have 1.8% higher cost level than 12 months ago, which is inside the new target of 2%. We are not satisfied with the growth of the cost in the parent bank, and we have, as I mentioned in the One SMN program, planning for measures to keep this positive cost development. Capitalization. The bank has a CET1 of 16.3%. The target is 15.4%. There is a decrease in the capital level over this quarter, which has to do with some balanced effects due to the crisis and not from the growth in the underlying business. So we think that will be settled in the coming quarters. And capitalization has been improving for many years and which we take very much advantage in a situation like this.As the crisis developed through March, we was -- we decided that we should change the distribution of profits from a payout ratio of 53.5% to 41.2%, and reduced the paid out dividend from NOK 6.50 to NOK 5. The reason for that is that there is challenging times, so we have to do a trade-off with interest of the equity owners, with the interest of the social capital that also needed a donation. And also the fact that the bank is indisputable solid, and the revised distribution reflects a good balance between these interests, and it has been well received by the different stakeholders.Last quarter, we presented this slide that say why invest in SpareBank 1 SMN and MING as a share. And we think it's nice to be able to repeat this slide because the bank has high return over time in a solid capitalization. We have an efficient banking operation. We have a very strong position. We are able to grow and gain market share. We have our diversified customer portfolio and income base, good brand, substantial underlying assets to the ownership in and outside the SpareBank 1 alliance. So -- and we are well positioned to strengthen our position in the years to come, even though there are challenging times for the time being.Then we are going to allow for some questions. So Trond and Vegard, please come to the stage.

[Trond Barikmo]

Thank you very much, Kjell and Vegard for that. We do have some questions from the audience. First one is on net interest. What's the effect on the net interest of today's rate cut?

[Kjell Fordal]

For this -- today's rate cut and the cut we have seen over the last 2 months. The effect is, as I mentioned, is that we will have a reduce on the -- reduction in the return on the equity. But we think that the margin as such will be balanced. We will have no negative effect on that.

[Trond Barikmo]

Okay. Thank you. And then next question. What's your expectation for mortgage lending growth this year?

[Kjell Fordal]

Yes, there is a very large degree of uncertainty. And very much, I think, through all of this question of what's going to happen has to do to how fast do the economy come back, the activity come back. And of course, on the mortgage -- or the housing market, which is, of course, very important. We think there will be a lower growth going forward, but we still stick to the aim of growing more than the market, which we have done for the last 10 years.

[Trond Barikmo]

So the same strategy for the corporate segment?

[Kjell Fordal]

Yes. Among SMEs that are not impacted by the crisis, we want to grow. Yes.

[Trond Barikmo]

Excellent. Loan losses were quite high this quarter. What are the expectations for the coming quarters?

[Kjell Fordal]

As I said, I hope that the loan losses are front-loaded. But of course, we see a lot of uncertainty at the moment. So we haven't given any guiding on losses. But we hope and believe that the losses in the first quarter is higher than the losses we will see in the rest of the quarters in 2020. But of course, the uncertainty is high.

[Trond Barikmo]

Okay. Thank you. And then there's an increase in the nonperforming. What kind of credits causes this increase?

[Kjell Fordal]

First, it's caused by retail customers that has more than 90 days of missing payments. It's not that big so we have to work with the individuals, I think. And as I also said, it's not corona-related. So we hope it's possible to work it down.

[Trond Barikmo]

Okay. So mainly in the retail segment.

[Vegard Helland, Executive Vice President of Business]

Yes.

[Trond Barikmo]

So you mentioned corona. How is the -- how would that income that -- how are the corona situation affecting other income and income from the subsidiaries?

[Kjell Fordal]

It depends from business line to business line. So far, we have seen very, very little impact on the accounting services. There is more work there in the year-end period, and they are helping customers to apply for the government support vehicles. It's been very exciting to see what will be the development in the housing market and the market's operations. But so far, very little impact.

[Trond Barikmo]

Okay. And then one final question relating to costs. Can it be below 2%? What measures are taken? Are we expecting any restructuring costs relating to this project?

[Kjell Fordal]

No, I will not announce any restructuring cost at this time. But -- and we haven't even finalized the analysis for where we'll have the cost reductions. But cost has a very, very high priority for the time being.

[Trond Barikmo]

All right. Thank you. Then there are no more questions. So thank you all for watching. And we'll hope to see you soon. Thank you.