Sparebank 1 SMN

OSE:MING

Earnings Call Transcript 2020-Q2

[Trond Barikmo]

Hi, and welcome to the presentation of the first half and second quarter results of 2020 for SpareBank 1 SMN. My name is Trond. I work in Investor Relations, and I will try to guide you through this. With me to present the numbers, I have our CFO, Kjell Fordal; and our Head of Corporate Division, Vegard Helland, and they will get into the details shortly. But before we start, I'd like to say that you can ask any questions you like, either via chat online or via e-mail at [e-mail]. Thank you. Kjell, do you like to start?

[Kjell Fordal]

Thank you, Trond. Good afternoon. We start this presentation with a picture of our Lighthouse outside Trondheim. That is to symbolize that we are navigating very well in rough seas. The figures this time is much nicer than last time. And we have a profit of NOK 1 billion and a return on equity of 10.3%. For this quarter, the return on equity is 15%, which is much better than what we could fare when we met here in May. The effects of the COVID-19 situation has picked up more quickly than we expected. Controlled reopening of the society has brought increased activity, and unemployment is steeply reduced during the quarter. Vegard will later on come into the economy of the region and Norway in more detail. We deliver very good figures for this quarter, as I already has mentioned. And we see that the business model as a savings bank is working very well in rough times like this. But it's fair to say that it's still uncertainty in the coming times of development. We stick to the long-term financial ambitions. We want to deliver 12% return on equity. Today, we are at 10.3% in a difficult situation, and we work very hard in order to obtain those -- the goal, maybe not this year and maybe not next year, but we will be there. The bank is financially very sound. We have a capitalization of 17.2%, which is improvement since last quarter, and it's well above the goal of 15.4%. Efficiency is critical for a bank like us. We have -- we stated a target of 2% few months ago. And now we see that we are below that, and we expect that before the full year will be even lower than 2%. The strategy [indiscernible] increase the digitalization, be the head of the savings bank structure has worked a lot on those strategies. One of the cornerstones of our strategy is to have a high share of wallet for our customers. And we are very happy to see that our subsidiaries are improving very well, taking -- gaining market share, strengthening their position, and to a large degree, increase the profitability of the quarter in a period where you could fear that, that wouldn't be the situation. During this last quarter, the bank has worked very hard on a project called One SMN in order to enhance the long-term profitability of the banking group. That is dealing with distribution strategy, taking more success in the digitalization process to improve efficiency in the back office work, find a better way of being present in the market because we will still be present with people in the market. And we have identified efforts, which counts up for NOK 400 million, and that is what we will start implementing now. Digitalization is one of the things that is important. And we have seen lots of improvement in the last months since corona situation circles, both in internal processes and of course, most important in customer processes. More than 50% of the application for payment deferment is, for instance, as an example, processed digitally. We have the most popular telephone bank in -- it's not called that. It's called the mobile bank in Norway, and that also gained ground. As a first step, on the One SMN process, we have announced today a new management group, which signals that we are more business-oriented rather than back-office-oriented and that we put the business divisions as the most important cornerstones and that we bring 2 of the largest subsidiaries into the top management group, the real estate broker and the accounting services in order to obtain more cooperation between the different business units we have.And not surprisingly, we still think this is a very good investment, which has a long history of good return on the capital. We have a strong position. We grow on that strong position a good brand and very valuable underlying assets through ownership in the SpareBank Group alliance. We think this is a good investment. To go into some detail on the financials. We see this quarter, we have had very good sales in all business lines. When it comes to growth on balance items, when it comes to income, other incomes, we see that. We have strengthened the position. We have -- in this quarter, have a situation where we reduced, as other banks, the lending interest rates faster than we was able to reduce the funding. Cost has given a temporarily drop in the net interest margin. We have very good returns on the investments. That is, to a large extent, win back of the mark-to-market losses we had in the first quarter when we was in the middle of our financial crisis. And their losses are reduced since last quarter. But Vegard will later on,go into much detail on that. And as you see, 15% return equity for this quarter, of course, very much affected by the win back on the on the financial instruments. But year-to-date, it is 10%. And very happy to see that the CET1 is 17.2%. As I mentioned, one thing is to be aware of, and that is the drop in the net interest margin, which has to do with a very quick reduction in lending interest rates. But as we see during the quarter, we have improved the net interest margin. Again, so I can say that next quarter will be more like the first quarter. Commission is performing very well, and it's very happy to see that the real estate business is performing very well, lots of transaction, which is saying that something is working in the society and also that our investment bank operation has performed very well and has actually had the best quarter ever in this quarter. costs are, to a large degree, under control. Loan losses will come back to. And then you see, of course, the win back of the mark-to-market positions both in the related companies in the insurance companies in SpareBank 1 covered bond company and overall investment liquidity reserve. Very much of the profitability in the bank and the different segment is based on the fact that we have a strong market position. And that is, as you have seen from the strategy, we are very preoccupied by keeping this position and improve the market share. And we have seen that in this -- also in this quarter, we have been able to increase and to strengthen the market position. To be #1 player in the market makes it more profitable to be there, and it makes it more probably that the customer should choose you as their supplier of financial services. An important position in this is the loan growth and we shall come back to the deposit growth. And we see after several years of 10% annual growth, the growth over the last year has dropped somewhat, but now we see a growing pace of the loan growth, both in the mortgage market and in the corporate market. In the mortgage market, it's especially the deal we have made with the trade unions that is bringing the growth for us. And on the corporate side, it's a diversified growth in different segments, but predominantly from the smaller companies. Deposit -- the lending margin is increasing, even though we have dropped the interest rate during the quarter. And the reason for that is there's also have been a drop in the price -- in the NIBOR, in the interbank, offered rate. On deposits, we can see even stronger growth, 8.9% over the last 12 months. That is saying something about what's happening in the corona situation. There is less consumption, there is less traveling and so on. So that is more savings among the population when it comes to the retail deposits. Corporate deposits. You should think that when the population doesn't use their money, there is less for the shops. And to some extent, you will see that, but the composition of our corporate deposits with lots of local government has high growth also on that area. And the flip side of the lending margins is when the interbank offered rate drops, their interest rate level drops, you will have a shrinking margin on the deposits. Those things -- the lending margins and the deposit margins, we level out to some extent going forward, but that is some of the reason for the drop in interest rate -- in the net interest income. The bank and the group has a very diversified income stream. And we see here that there is a strong growth or there is a growth, not a strong growth, but there's a growth in all areas, which is important to have the continuous growth over time in order to build the balance here because much of this is customers, when you have them, you have them for a long time. There is a reduce in the state agency. That has to do with that we closed our operation in Oslo last year. And there is also a drop in commissions [indiscernible] which is, in effect net interest income, which has dropped due to the changes in interest rates, as I mentioned. Cost growth is 1% to 1.3%. We still think, however, even though the growth over the last 12 months is fairly good, that we have a potential here, and that's a big part of the projects I mentioned earlier on cost efficiency is critical for a bank like us. When it comes to funding, 3 months ago, we were worried for what should happen with the funding situation for the bank going into very, very tough climate. We saw increasing funding cost. And we prepared ourselves for very hard times. That was a wise thing to do. We now see that we are very liquid, even though the waves has come down to keep it in the maritime mode. It's important for us to be solid also when it comes to funding. And mentioning solidity or capitalization, we have our CET1 of 17.2%, our leverage ratio, 6.9, way about the goals we have, and we will keep it like that because it's very good to be solid in a situation where we have uncertain times. And that's important to say there is lots of uncertainty, and we are -- still have the guard up for meeting harder times if that come back. Then we will go into the local economy and the credit risk and the loan losses, which I haven't mentioned at all so far in my presentation. So Vegard, the floor is yours.

[Vegard Helland, Executive Vice President of Business]

Thank you, Kjell. By the end of the first quarter, we had shock in the Norwegian and international economy related to the corona crisis and related to the sweeping measures that was taken by the Norwegian government to stop the spread of the virus. The society was closed down, and we experienced increased uncertainty among all our customers, both individuals and of course, corporates. The unemployment rates rose to levels that we haven't seen since the second world war. And I believe that all bank managers in Norway expected the bankruptcy rates to increase to unknown levels. Luckily, they didn't. The implementation of several relief packages by the Norwegian government has helped the businesses through this crisis. The situation in the Norwegian economy by the end of the second quarter is much better than we expected it to be by the end of the first quarter, but the uncertainty is still high. The bank, SpareBank 1 SMN, has 70% of the loan book related to housing and mortgages. Early in the crisis, we said that we thought that this crisis would have 3 phases. First, we will have the shock, then we would have the normalization and then we will have the growth. We saw a shock definitely from the March and maybe up to Easter. From Easter and to May, we saw a kind of normalization. I think the turnaround levels were about 90% for houses, which we have for sale. And from June and July, we have seen a growth both in the turnover rates, but also in the house prices, most likely driven by reduction of the Norwegian interest rates.We also see that we have a significant reduction of the unemployment rate falling from 9.1% by the end of the first quarter and to levels between 3.9% and 4.2% for Trøndelag and Møre og Romsdal. The unemployment rate is lower in the bank's market area. That's the Norwegian average. So that's a strength for us operating a bank here in the middle of Norway. When it comes to the corporate market, we see that the impact from the corona crisis is different between the major industries. Retail shopping really had a hit under the close down, but the numbers look better today. Tourism, restaurants, hotels, bars, travel agencies will still face uncertainty while fishery and aquaculture has been performing well also during the crisis. We are aware that the crisis may impact construction and commercial real estate market, but we have not identified problems yet.We put those industries on negative outlook, and we will continue to monitor the economic development within these industries. As a major player in the bank market here in Middle Norway, we have put effort in analyzing the impact of the corona crisis in this market. In this area, there are 38,000 companies. Our analysis shows that about 4,000 of these companies are strong or heavily impacted by the corona crisis. These companies are within tourism, hotels, restaurants and bars. Through this analysis, we have also concluded that the exposure in SMN is relatively small related to these industries. I think we, by the end of the first quarter, said that we had a loan exposure, which was approximately NOK 750 million related to companies who are heavily impacted by the crisis. This is less than 0.5% of the loan book in SMN.During the first phase of the crisis, we experienced a massive growth in payment holidays and application for postponed installments, both in the retail market and in the corporate portfolio. These payment holidays was both proactive and reactive. We invited many of our customers to search for or apply for a payment holiday to reduce the fare, many of them have to their personal economy or for their business. During the second quarter, we have moved the numbers of payment holidays back to the levels we have had before the corona crisis. That means a normalization for both retail and the corporate customers. As you can see, we were -- we had up to 750 postponed payments related to private customers each week in March. And we can also see for customers within the corporate segment. that we had 600 payment deferments in March and April, while June had 54. So we are actually back to almost a normal situation. When it comes to the total credit risk, we are of the opinion that we have a robust loan portfolio even when we are in a crisis. Almost 70% is related to retail banking, wage earners and mortgages. 10% is related to agriculture, where the corona crisis has a very low impact. And as I said earlier, only 0.5% is related to industries that are strongly impacted by the corona crisis. And 2.5% is related to the low oil price, and that's the offshore portfolio. We also see that we have a growth in corporate lending. When it comes to the lending growth within the corporate segment, it's diversified between different industries and different geographies. We are very aware of building concentration these days when it comes to industries, geography or even to individual names of customers. So we are trying to hold the risk at concentration down to normal levels. When it comes to the offshore portfolio, this has been a challenge for us since 2014. Almost 2.5% of the total loan book is related to the offshore portfolio. This industry has been in a crisis since 2014, and we are still experiencing oversupply in the market. Despite this oversupply, we also experienced that a lot of our customers got long-term contract by the end of 2019 and also in the first quarter of 2020, especially within the PSV segment, which constitutes almost 35% of the portfolio. Subsea is now 45% of the total portfolio. Many of these ships are operating on long-term contracts, and it's important to keep in mind that this portfolio also is used against offshore wind and renewables and not only oil and gas. Still, due to the low utilization and low rates in the spot market, we are taking down our estimates for future cash flow, and we are also booking losses this quarter related to this portfolio. When it comes to the total losses, we booked NOK 170 million in the second quarter. This is down from NOK 308 million in the first quarter, a reduction of NOK 138 million. For the first half of 2020, the total loan losses is NOK 478 million, representing the increased risk in the market. The main part of these losses are related to 1 single exposure, which we booked in the first quarter, and of course, the offshore portfolio, which I just mentioned. So if we look into these numbers, we see that the numbers are going down. The levels are lower now in the second quarter than in the first quarter. We have a loss on 1 individual exposure in Q1, which was at NOK 160 million, and we do not expect further write-downs from this exposure. From offshore, we have NOK 167 million, representing the changed estimates for cash flow through lower utilization and lower rates for the offshore ships.We are also experiencing increased payment defaults in Q2, mainly from retail customers and related to and mortgages and car financing. This is secured loans, and we do not expect increased loan losses because of the increased payment defaults we are facing in the second quarter. As a conclusion on the credit risk, we are very comfortable with the credit risk in our portfolio. 70% is against mortgages and private individuals, 30% is related to a well-diversified portfolio within the corporate segment. The corona crisis has increased the risk, but the situation by the end of Q2 is much better than we expected by the end of the first quarter. The relief packages from the Norwegian government are still in place. And of course, we will continue to monitor the market and take all necessary actions to help our customers through this crisis. Then I will hand the pager back to Trond, who will take the questions. Please, Trond?

[Trond Barikmo]

Thank you, gentlemen. We do have some questions from our viewers. So if you, gents, can please join me here on stage. First question would be on loan growth. What are your expectations for the second half?

[Kjell Fordal]

Well, we expected lower loan growth when we entered the corona crisis. Today, we would say that we are at about the pace we have today. That is our expectation. But there is lots of uncertainty in that figure as well.

[Trond Barikmo]

Okay. So with uncertainties. Let's talk about loan losses for the second half.

[Vegard Helland, Executive Vice President of Business]

For the second half, okay. We haven't given any guiding for the second half. But I think we said by the end of first quarter that we thought the losses for the first half would be higher than the second. And we still believe that. But as I have said earlier, the uncertainty is high today.

[Trond Barikmo]

Okay. Thank you. A couple of questions on the income and income mix. What was the contribution from the deposit rates in the third quarter?

[Kjell Fordal]

In the second quarter.

[Trond Barikmo]

What are your expectations for the third quarter?

[Kjell Fordal]

The third quarter, yes Yes. Our expectation for the third quarter is that we will have improving net interest income. And the reason for that is that during the second quarter, we reduced the lending interest rate, the lending rates much faster than the deposit rates and the general funding cost. So we have a positive view on the third quarter when it comes to net interest margin.

[Trond Barikmo]

Thank you. Any changes that are made to the IRB model to increase capital by 0.5%.

[Kjell Fordal]

No, the model is the same. There has been some adjustments to specific customers how that is dealt within the calculation.

[Trond Barikmo]

Okay. And then we have one last one. It's about One SMN's efficiencies. How do you expect to reach the number of NOK 400 million?

[Kjell Fordal]

It's during the project which we have used lots of effort in the third quarter and also into third quarter. We have identified improvement in the profitability of the bank of NOK 400 million. NOK 200 million is expected to be improved income in better pricing models, in growth in especially profitable segments and so on. And NOK 200 million is cost reductions or improving efficiency. In the distribution, having more digital service other customers, it's turning every stone in the bank, it's IT cost, it's all general costs, digitalization, more efficient back-office functions. And an important part of this is within the One SMN is to do more on a common basis between the business lines, the daughter companies and the banking operations.

[Trond Barikmo]

Good answer. Thank you. That concludes our presentation for today. Thank you for watching, and welcome back in 3 months. Thank you.