Sparebank 1 SMN

OSE:MING

Earnings Call Transcript 2021-Q2

[Trond Barikmo]

Hi, and welcome to the second quarter presentation for SpareBank 1 SMN. Today, we have a little one-man show for you. But first, I'd just like to make a note that you can submit questions, and we'll try to address this at the end of the presentation. So it can either be done by chat or to [e-mail]. [e-mail]. So then the show starts with our CFO, Kjell Fordal.

[Kjell Fordal]

Thank you, Trond, and good afternoon. We start with a picture from the beautiful Norwegian mountainside in our region. We are very happy to deliver another strong quarter with our return on equity above 14% for the second time in a row. And it's a highly satisfactory result driven by a solid revenue development and cost control and, not to forget, low loan losses. This quarter is more quality in the figures than last quarter when we had some one-offs. We see that we have strong contribution from all parts of the organization, from product companies, from subsidiaries and from the divisions in the bank itself. Loan losses are substantially reduced. And as you can see from the previous quarters, we have been hit by rather high loan losses, but now we are back on a level that we certainly can live with and live very well with. The bank is very well-capitalized. We are -- we have capacity for profitable growth and for a good dividend payouts in the time to come. Figures. NOK 755 million this quarter after tax as opposed to NOK 719 million 12 months ago. But at that time, it hadn't very much been back from the situation due to the mark-to-market evaluations of the securities portfolio after the corona situation. Return on equity, 14.3%, is at a very high level. We see that the corona situation is coming to some kind of an end. The society is reopening, and we can see that the unemployment figures are back and the -- at the very low level that we are used to. And we also see that there is a healthy market for housing. Most of the industries we -- in our region is performing well. And as you can see, we have 58% loans to mortgages or to private customers and then a very well-diversified loan loss -- loan portfolio to different industries in our region. The personal banking consists of the banking operation for private customers, mainly mortgages and real estate brokerage. And we are very happy to see improvement in both areas and especially happy to see that there is high growth and high activity in the housing market, which gives loan growth and increased profitability in the real estate brokerage business. You can see the head of corporate banking is smiling and that, I think, is due to a significant drop in the level of loan losses, which I will come back to in some detail later on. But you also see that all the business line targeting corporate customers is performing very well. SpareBank 1 Markets, another very good quarter, not as good as the previous one, but certainly satisfactory. In accounting, company is also performing well, same with the finances -- SpareBank 1 Finans, which is the car funding and leasing company. Important part of our bank's business model is to own companies together with our friends in other banks and predominantly SpareBank 1 banks, and we have a very good return on this investment. The return on the investment is one part, with the other is the commission we get from the selling of the products. But here, you can see the SpareBank 1 group has a very, very strong profitability driven by nonlife insurance in Fremtind Forsikring, lower cost and very low damage levels and also improved profitability in the bank. We own 35% of SpareBank 1 BN Bank. We are doing a continuously turnaround to become even better when it comes to digitalization, which is the reason for our success in the market and our reduced cost level. We see that the level of sales that is done through digital means is improving. And we also see that the customers have proved that we are a very, very attractive bank. We do some investments in order to improve the profitability in the years to come. Together with all the other Norwegian banks, we are establishing a Nordic platform for payments through the Vipps. And also, as a smaller lever, together with some of the other SpareBank 1 banks, we are investing in mobility market to take part in car subscription as this market is transforming from self-ownership to subscription systems. As a partly community-owned bank, 40% of the bank is owned by the community, we are able to donation in order to underpin and support the region. We are a part of and we are -- this time, we are putting aside NOK 100 million to be there to help the society to reopen and support different topics in that respect. All of this, we think, is underpinning that SpareBank 1, MING, is an attractive investment with high return, strong position, good brand, underlying value as we see is realized in the SpareBank 1 license and a good position for consolidation in the banking industry. Profitable and solid. And as we can see, the reason for the increased profitability is, to a large extent, that the loan losses is at a much lower level. But still, these figures are delivered with ordinary loan losses. So there is very few one-offs that is influencing the figures this time. Growth is telling the story of whether we are attractive to the customers. And we have, for a long time, had a very strong growth story when it comes to mortgages or to loans to individuals, 7% over the last 12 months, 2.2% over the last 3 months, saying that we are attractive and that we have a concept that is accepted by the customers. The new tenants from last quarter and up to this quarter is that we also have a growth in the corporate sector, 9.9% over the last 12 months. We have had a history of lower growth in corporate sector due to capital regulations. But no, we are back again and are able to compete in this important part of the banking area. Margins are improved this quarter, and that is the reason for that we have improved market net interest income level. The improvement this quarter is due to lower funding costs in NIBOR 3 months is 20 basis points lower this quarter than last quarter, and we are able to have strong growth also with increased margins. It is expected that the interest rate level will increase from next month and going forward, which we feel is a positive happening for our net interest income in the years to come. Deposits growth, very strong as for all banks, I have to say, and that is a result of the corona situation. In the private market, it's very much a question of not having all the things to use the money for, which creates savings. And in the corporate sector, we see that there is good liquidity with the corporate customers, which is positive, of course, and that we have success in the market for public customers. We have today a deposit-to-loan ratio, 58%. It's not very many quarters since we were down at 50%. It's making a more robust and solid bank. When the market -- the interest rate is decreasing, NIBOR 3 months, we have a positive effect on the lending margins and a negative effect on the deposit margins, obviously. One of the strong sides of the bank -- strength of our bank is that we have a very, very high level of commission income. The commission -- the ordinary commission income is larger than the net interest income. And it's reflecting that we have a high level of down -- of cross-selling. Our customers have many other banks' products, which is good for the banks' profitability but also good for the satisfaction of the customers. One-stop shopping is an attractive concept. The biggest growth and so on is connected to estate agency, securities business and accounting services, but it's also important to see the continuously growth in guarantee and commission from insurance companies. As we learned earlier on, we have a high level of profitability from the insurance companies, but also we have a direct income as commission. Cost has been a big, big topic for very, very many years. And as you can see, we have a 0 growth in the parent company, saying that the continuously digitalization is taking effect. We have been through a project that is called One SMN in order to reduce the cost. And when we have a 0 growth in the cost and growing balance sheet and growing number of customers and an inflation, of course, here as everywhere, we have an improved efficiency of the bank.When it comes to the market, it's a reflection of the income level where there is a high level of variable salaries. So the decrease there has to do with a lower income this quarter than the previous quarter and, to some extent, the same applies to the other subsidiaries, its activity-based cost increase. It's a one-man show today, and that is the quality because we don't need to have our Head of Corporate to explain the loan losses because that is a much easier and -- story. The loan losses are NOK 39 million. Most of it is corporate. Half of that is still some offshore exposure loan losses. The other is different customers that hasn't performed too well. And you can see that the retail and SpareBank 1 Finans losses is very close to 0. There is -- and we see now I can maybe conclude that we will not have any significant corona-related loan losses through this crisis, and that is very good to have as an experience of a crisis like this. When it comes to the CET1 ratio, it's 18.3%. We have a target of 16.9%, which is including full countercyclical buffer and management prefer. And we today have a CET1 1.4% above that level, very well-capitalized. The dividend we are planning to pay out from 2020 in the fourth quarter this year is deducted from the capitalization itself. So we are very well-capitalized, have the ability to grow if we find -- which we, I think we will, find profitable projects to fund. And we're also able to stick to our dividend policy of paying out 50% of the profit for this year. And as we can see, the leverage ratio is showing that we're also measured in that way, have a very, very high capitalization these days. That was a brief walk-through of the figures. And then Trond, you can lead us through the questions.

[Trond Barikmo]

Hello. Thank you, Kjell. We do have some questions from our viewers. First one goes on growth. It's been a growth story this quarter. How do you expect that going forward in -- start with lending.

[Kjell Fordal]

Yes. We have a positive view on the market. We see that there is high growth in the mortgage market. We see that our concept is working and that we are able to continue with this growth, 7% to 10%, that we have had over the last years. When it comes to corporate lending, we see that we have improved our ability to compete. We have capital. We have a very good funding sources. So we also have a positive view. I wouldn't want to put any figures to it, but we have a positive view going forward.

[Trond Barikmo]

Good, thank you. And deposits. Can you -- I guess it's hard to maintain the growth in the corporate market.

[Kjell Fordal]

Yes.

[Trond Barikmo]

But your expectations.

[Kjell Fordal]

It's -- deposits, it's a different story. We have very high growth through this period of capital or money, excess capacity for the individuals. It is expected that the growth will be slightly slower going forward, certainly. Much of the excess cash in the corporates, it's -- probably they will be used to something, but we have our market share, and that's important for us.

[Trond Barikmo]

Good. Margins, very much related to that.

[Kjell Fordal]

Yes. No, we -- as I mentioned in my speech here, we are very focused on having a concept that is so that the customers will like to pay a high healthy margins, have a good concept. We see that an increased interest rate level will make it possible to increase this, especially the deposit margins and also the return on the equity itself. So it's generally a positive view on that, even though that is, of course, different to say -- difficult to say.

[Trond Barikmo]

Good. Costs. Do you think you can maintain the zero-growth cost in the parent bank?

[Kjell Fordal]

We have been through a project for improving the efficiency in the bank and we have still some of the measures planned for to be implemented. So we plan for that, a low growth at least in the quarters to come.

[Trond Barikmo]

Good. Then we'll finish on a -- that used to be a very hot topic, losses, very low levels this quarter. There's a pre-oil-price-crisis levels. Do you expect that to continue?

[Kjell Fordal]

We expect that in the coming quarters, we'll have low loan losses. We will not come back to the levels we were. And I don't think I'm able to quantify it more than that, but it -- we certainly believe that this is a new level.

[Trond Barikmo]

So you're targeting still growing, higher margins, low losses and 0 cost growth?

[Kjell Fordal]

Yes.

[Trond Barikmo]

It's a good prospect. Thank you all for watching. We'll see you again in 3 months.

[Kjell Fordal]

Thank you.