Sparebank 1 SMN
OSE:MING
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Hi, and welcome to the third quarter presentation for SpareBank 1 SMN. My name is Trond, and I work in Investor Relations. With me today to give you the good news from the bank and the central part of Norway is our CFO, Kjell Fordal; the Executive Director of the Retail division, Nelly Maske; and our Chief Risk Officer, Ola Nerasen. Before we start, I'd just like to mention that you can ask questions during this presentation, either online on the chat or by e-mail to ir@smn.no. So Kjell, if you'd like to start?
Thank you, Trond. The fall has arrived, and we have chosen as a picture this time is the Nidaros Cathedral, which is showing the best sides of our bank with a great past and a glorious future. We have issued our third quarter figures this morning, and we are happy to say that this is, in our view, good figures. This -- it's hard times. It's a period of crisis. But a period of crisis is also when you can change and strengthen your position, and we certainly feel that, that has been the case for us. We have both strengthened our position financially and at least the reputation is improved as the neighborhood bank and the bank's leading financial house. This figure is showing fairly good financial results. We have strengthened the position through growth in all business areas of the bank, which is showing that we have done a good job and also the fact that the economy is working fairly well even under these situations. The negative aspect is certainly that we have increased loan losses, which I will comment on later. 10.4% return on equity is a good figure with loan losses of 50 basis points. NOK 1.5 billion in profit is also very good. And having undoubtedly capitalization with 17.6%, improved by 50 basis points since last quarter, is also a good situation under the circumstances. Our financial ambitions is still there. We are meeting the capitalization and the efficiency goals. And we are on the path to also reach our goal of 12% return on equity. As we launched last fall, we have 5 strategic priorities for this period towards our bicentennial in 3 years, which is to create One SMN; is to increase the digitalization; to take a part in the savings bank system; to integrate sustainability into the business; and to exploit the power of our ownership model. This time, we will focus certainly on the One SMN aspect. As a part of that, we have starting to focus more on the different business lines. And as you can see, the nonbanking operations is improving very much. And on the corporate side, you see that the accountancy business, the markets, Finans, which is leasing and car loans, is accounting for more than the corporate market division. Corporate market is hurt by the loan losses, which I will come back to. On the retail side, the figures is lower than last year. And that is due to changes in the interest rate throughout the year. We established last year, Fremtind insurance with a merger with the SpareBank 1 banks and DNB. And this company, nonlife insurance company, is on the path to reaching our goal to be the #1 company in this industry in Norway. And we also now start to see the financial gains from this important initiative. Vipps is also an example of our cooperation scheme and gives the banks the position to be in the midst of the digital ways of payments. Sustainability is a strategic topic for the bank. We have our Sustainalytics rating, which shows that the bank is low risk when it comes to ESG topics. But we have further ambitions for that to improve our ESG rating and the real activities on the ESG area. And it's especially on the environment side we see that we have a way to go. We still certainly feel and see that MING is an attractive investment we would like to offer. It's -- we are very high return on the equity on a very high capital base, efficient banking operations and a very wide income stream and a shareholder-friendly policy. We have a very strong position in our area, which we show with the very high growth figures. Very good brand. We are an owner of underlying assets outside SpareBank 1 system, and we are well positioned through consolidation if that should happen in Norwegian banking area. We will now go through the One SMN project, and I'm happy to introduce Nelly Maske, which is the Executive Director on Retail Banking and responsible for the project in the bank. Please, Nelly.
Thank you, Kjell. The One SMN project is a profit improvement program set up to strengthen our market position and to demonstrate that we are a coherent and effective group for customers, employees and shareholders. The program aim to strengthen our competitive advantage in a market with strong competition and to deliver a profit improvement of a total of NOK 400 million before tax. More efficient sales channels and cross-selling will increase revenues by acquiring more new customers and increase the share of wallet on existing customer base. Our customers will experience better and broader service offerings and adapt different -- adapted to different segments. A more coherent group will reduce costs through more efficient distribution, a fewer branches, efficient support functions and a total of 100 fewer full-time equivalents. And also operating costs and IT costs will be reduced. A digitalized everyday life brings with it both challenges and opportunities. As the region's largest financial group, we adapt and develop to meet these changes in the best possible ways for our customers. A strong local presence remains at the center stage of our strategy. So 17 finance centers are being established, featuring strong specialist units and a complete service offering assembled in each location. We believe that strong customer relationship, highly skilled employees and knowledge of the local markets, combined with the best digital solutions will be the recipe for -- to deliver excellent customer experience in the future. We have high ambitions in developing new business and to distribute products and services across our business lines. Our promise to businesses is our joint ambition to make the SpareBank 1 banks known as the best banks for small- and medium-sized businesses. Intelligent use of data, technology and automation has a strong focus, giving our customers more time devoted to their core business. New services based on close integration of banking and accounting systems is a top priority, and new services will be launched soon. And yet, we are just at the very beginning of a very exciting journey, building the region's leading financial group. Thank you. And I will now introduce Kjell.
Yes, thank you. I am playing different roles here today. So now I'm on my homegrown as CFO. The figures for this quarter is NOK 519 million in profits and 10.5% return on equity, which is, in our view, is a very, very good figure especially when you take into account the fact that we do this on a very, very high CET1 or capital base and the fact that we delivered these figures with 52 basis points in loan losses. Over the last years, we have experienced very high growth in volumes in all business areas and increased margins on this. We have had 23% growth over 2 years on an increase in cost of only 10%. That has to do with making the bank more efficient and investing in more capacity in the subsidiaries. Some comments on each business unit. We see that Retail Banking, which Nelly is heading, has increased -- strong increase in number of customers. And as we will come back to, there were also growth in volumes. Corporate Banking, same story, 15,000 customers in this area and a fairly strong growth. The loan losses has damaged the results for this quarter, but we are sure that this area will come back. Our accounting business, SpareBank 1 Regnskapshuset, is continuing to improve profitability through growth in volumes and increased margins. We have 10,000 customers in this area, which accounts for 25% of the market. Real estate brokerage increased in number of homes that is sold and an increase in profitability. After a few years with lower profitability, they are back on path and have a market share of 36% in this region. SpareBank 1 Finans is a company supporting the bank and some other banks with products like leasing and car financing. Huge growth and an increase in profitability that is following the growth. SpareBank 1 Markets is an operation that has suffered from low profitability for some time. But now we are on a path for very high profitability. And it's especially impressive that we are able to deliver this growth in income and in profit through a period of some crisis. Growth figures is, to a large degree, showing how the bank is working. And if you see the mortgages growth, we see that is 8.7%, which is an increased growth. We have experienced a very high growth for many years. But through this last year and even through this crisis period, we see a high growth. To a large degree, this can be explained by a deal that we are the main cooperating bank with the trade unions in Norway. So this shows that we do something right in offering the loans, and it also shows that there is underlying growth in the market. The K2 (sic) [ C2 ] figures for the last 12 months is 4.6%, and we growing -- we are growing by 8.7%. As a new development, I have to say, is that we also experienced growth in the corporate market. Changes in environment and competitive situation has given us more ability to grow in this area, and we expect that to also be the fact going forward. Interest margins or in this case, lending margins, is improving. We have experienced a steep drop in the Norwegian interbank offered rate as a consequence of the national banks decrease in the base rate. And we see that through this period, we have been able to increase the margins on the lending side, both on mortgages and on corporate loans. Corporate loans is, to a large extent, margin loans. And so there has been a significant repricing of the loan book. Deposits is growing very fast. That is reflecting the situation through this corona period and the stop in traveling and so on. So there is lots of cash in the individuals economy. And this also shows that the bank is the bank that the customers like to have the money in. When it -- it's nice to see that also the corporates is increasing their liquid positions, which we think is reflecting that our area is not very hard hit by crisis due to the COVID-19 situation. The flip side of the increased lending margin is the savings margins. Due to that interest rate level is at such a low level, we are not able to reduce the interest rates here below 0. And therefore, we have a significant lower margin on the deposits. But as a total, there is a positive, when you add up both the increased interest margin and the decreased deposit margins and the decrease in the funding cost, there's altogether a positive change here. Our bank has a very high share of wallet with our customers. Therefore, we have lots of provision income and we have a commission income and we have also income from other industries than the capital challenging loans and deposits, such as accountancy and securities, as I have mentioned. Our bank has the covered bond funding through a separate entity, SpareBank 1 Boligkreditt. Therefore, we booked the income from the loans that is funding through this vehicle as commission income. Capitalization is at a record high level, 17.6%, compared to the target of 15.4%. Then it is important to bear in mind that the countercyclical buffer was reduced earlier on this year from 2.5% to 1%. We see that we are very well capitalized, but we also realize that the countercyclical in due time will come back to the 2.5% level. We plan and we also calculate in this CET1 calculation that we will stick to our dividend policy and pay out 50% of the profit as dividend when that times come. There, it's also important to mention that there is some discussion from the FSA whether we should pay out and so on. But the plan is to pay out, and we certainly are capitalized in a way, so that is possible. And the funding situation, which we, of course, was very worried about a few months ago, is working very well. The pricing levels has come down to very decent levels. And we have also started to issue our senior nonpreferred debt at levels that is very good as we see it. I have not commented on the loan losses and the credit risk. So therefore, I will leave the floor to Ola Nerasen, which is the Chief Risk Officer. Please, Ola.
Yes. Thank you, Kjell. If we start by looking at the retail side, then you see that house prices have been leveling out for the last couple of years. Still a slight growth in house prices. But in our view, that is sound growth that we're seeing. If we look at unemployment, there was a significant spike in unemployment during the start-up of the COVID crisis and then the shutdown of the Norwegian economy. Since then, unemployment level has dropped significantly. And from what we're seeing now, we see no particular reason to worry. Also, around 50% of our retail customers are employed in the public sector, which means that, that is a relatively low risk. If we look at the views on the industry indicators in the -- on the corporate side, then certainly, the picture is very much the same as it has been. Offshore is a challenge, has been a challenge and will be a challenge also going forward. We were worried about the development in the retail trade during the COVID lockdown. That has proven to be quite strong. The retail trade, which means that it's not really huge risks that we can see there either. As far as the customers go, we see that deposit levels have been increasing. The use of overdraft facilities have been -- have decreased and also bankruptcy rates are very low. If we look at the composition of the loan book, then you see that we are around 68% retail loans, which are primarily mortgages, which gives us a very robust portfolio. And commercial real estate is not really bothered by the COVID situation so far. So we think that this loan book gives good diversification and significantly a stabilizing factor in the huge retail part of the portfolio. Of the sectors that are of worry, then it's the oil-related sectors, which is bothered by the low oil price and also tourism, which is an area of concern. If we look at the offshore, then you see that we now have an impairment level of almost 19% of the total portfolio. Our view is that certainly, for the PSV and the anchor-handling segments, they are going to have a challenging winter season. But if we look at the subsea, which is around 2% of our total exposure in that -- in offshore, then 50% of those vessels are currently working with offshore wind, which means that there is possibility to find other means of generating income for them. The development in loan losses is, as you can see, a significant spike in the first quarter and then slightly increased losses in the third quarter. The distribution is 58% -- NOK 58 million in retail and corporate in the parent bank, which is the primary source of losses. And if we look at the distribution, if we look at the retail, then we did the IFRS 9 adjustments to Stage 1 and 2 in retail. So primarily the losses on retail this year is based on our expectations of a more challenging outlook due to COVID. We have one huge loss, which we own a single exposure, which we booked in the first quarter. And what we also have done in this quarter based on our outlook on the hospitality and hotel business is to do an increased impairment of around NOK 45 million there on the expectation that winter is going to be challenging for some of them as well. And the rest is based on offshore. If we look at actual payment defaults and you see that they have been dropping, they are at a very low level. And there's still no problems for the majority of our customers to pay their loans on a timely basis. There has been a significant drop in payment deferrals, which was spiked during the COVID onset, but now it is a very stable picture.
Thank you, everyone. Then it's time for some questions that we received. If you could please all join me up here. The decent distance, of course, -- Thank you. We'll start on a very high level. You said you're open for consolidation? Do you see anything happening within the banking sector within this region?
There are lots of savings banks in this region. And if we had something to tell, we would have told it. But still, it's -- there is lots of talks in the savings banks environment. I think we'll stick to that. But we are welcoming circular changes, which we think is needed.
Okay. Thank you. And we'll go into some more detail on net interest. What's the cause, main cause, for strong net interest in the third quarter as opposed to the previous ones?
The main driver is that we have the ordinary interest rates this time in the second quarter. We was -- we reduced the loan rates 2 months ahead of the interest rates, and that has a negative impact on the capitalization. Now we are back on the planned interest rates for everything. So that is a main driver.
Okay. Any expectations on -- any pressure on the interest margins going forward into Q4 and the next year?
There is always pressure on the interest margins. So with -- of course, there are very good lending margins and very poor deposit margins for the time being, which may have an impact on the net interest margins. We also have seen the last days an increases in the Norwegian interbank offered rate, which is not positive for the net interest income.
Okay. Also seen that there's been quite a growth in the agreement with the labor union. Is that profitable? How are margins there compared to the rest of the bank? Is it...
Well, it's obviously less profitable, but it's a large group of customers. So -- and with a broader share of wallet, they will give us -- they will be profitable for us.
Good. Thank you. Well, losses. We have to talk a little bit of losses. You said last quarter, you expected the losses in the first half to be higher than the second half of the year. Does that still stand with the increase that we had from the second quarter to the third quarter?
I think we haven't changed our view on that. We said that first quarter is going to be the quarter with the highest losses and the second half of the year is going to have lower losses than the first half, and that's still our view.
Okay. Thank you. And can you give us some more detail on the provisions made for the hotels and tourisms? Are there any specific areas with airports, anything that we have an exposure to?
We do not have any exposure to airport hotels or large conference hotels as well. So that's more on -- based on more rural tourism, typically Germans coming fishing and so on and some hotels. So we haven't seen any challenges with payments. But it is, I would say, a precaution given that the winter season is coming and tourism from abroad isn't coming.
Okay. Then there I have a couple of questions on costs. From the One SMN, will the biggest cost savings coming in the bank or in its subsidiaries?
It's in the bank. It's in the bank. And it's also within the retail division. We are experiencing more digitalization and so we are adapting to that. And hence, we reduce the branches and the number of employees.
Okay. And will there be any restructuring cost relating to the staffing down?
I think it's fair to assume that there will be a restructuring cost when we have the overview of who is applying for the package we have offered to the employees in order to reduce the number of staff caused by rent for branches that is closed on. So I think it's fair to expect that, yes. But we have no figure for it yet.
Okay. Thank you. And then on the last 2 questions on capital. You did mention that the 50% dividend policy still stands. You don't want to spend all the excess capital?
Yes. We -- as I mentioned that when you take the countercyclical buffer into account, we are not that overcapitalized. So we are planning for being able to take care of the unexpected increase in that. But that said, we are the -- we are -- we can certainly afford to pay dividend, and that is what we would like to do.
Okay. Good. And could there be a buyback program like certificates?
No. We don't have that on the agenda. It's a trade-off between buybacks and cash dividends and our -- certainly, our view is that our owners do prefer cash dividends.
All right. Thank you. Then we have no more questions that is coming. Thank you for presenting, and thank you for watching. And we'll see you back here in 3 months.
Thank you.
Thank you.