Sparebank 1 SMN

OSE:MING

Earnings Call Transcript 2020-Q4

[Trond Barikmo]

Hi. Welcome to the fourth and full year presentation of results for SpareBank 1 SMN. To give you the good news from Central part of Norway today, we have our CFO, Kjell Fordal, and Executive Director of the Corporate Banking, Vegard Helland.[Operator Instructions]So you like to start, Kjell?

[Kjell Fordal]

Thank you. Good afternoon. This morning, we released our Q4 figures. And this has been a very special year. But taking that into account, we are very satisfied with the figures we present here today.Strong growth in all business lines is I think the most important headline of what we are going to present here today. We have experienced strong growth, and at the same time, we have been able to fulfill a project called One SMN, which will make us more customer oriented, more effective and increase digitalization for -- making us preparing for the years to come.When it comes to the figures. We have our net profit of close to NOK 2 billion and a return on equity of 10%. 10% return on equity in a year where we lose, have loan losses of NOK 1 billion is what we call satisfactory. And also that we have the CET1 18.3% shows that we are undoubtedly solid.Dividends has been a big topic over the last year. We choose to pay out dividend last year by NOK 5 per share. This year, we have a proposed dividend of NOK 4.40 per share, which is approximately 50% of the results. However, we have received directions from the Minister of Finance to restrict the dividends paid out at this time to 30% of the last 2 years' profits, which is NOK 1.30 per share. The remaining NOK 3.10 will be paid out in fourth quarter, up to the Board of Directors decision if the conditions permit it at that time.We, as I said, have experienced high growth in the retail market and in all markets, and we focus on retail market and real estate brokerage, which is performing very well together and individually.When it comes to the corporate banking or the corporate customers, we see that the corporate division is heavily hit by loan losses, which we'll come back to in some detail. But on the other side, we see we have a very, very good figures in both the leasing and car financing company, the accountancy company and SpareBank 1 Markets that has performed brilliantly this year.We see that we have been through a long period of increasing capital levels, and we are happy to see that we, over time, is able to deliver a very good return on equity on this increasing capital levels. And as I mentioned, 10% in such challenging years. The financial targets are there, as they always have been. We are streaming for reaching 12% return on equity to have a target of 16.9% CET1, which we are well above and keeping the efficiency up. The project I mentioned to improve the bank and prepare the bank for increased competitiveness for the future is called One SMN, is to pull together the different business lines. We've worked together in order to improve the customers' experience with us, which will give us hopefully and expectedly strengthened market position, increased income, increased synergies and not to forget reduced cost.ESG is important for the bank both at it will -- because it will be required for the customers, and we feel also that this can make us even more competitive if we are able to fulfill the requirements. We have decided a new strategy where we will be the driver for green transition. We will be a partner for inclusive development and society. As a savings bank, we are a part of the society, and we will be a guide for responsible business culture, which there are many topics under implementation under this different part of the ESG strategy, which we will come back to in the near future.As always, we believe that SpareBank 1 SMN, MING, the equity share is an attractive investment also in uncertain world, which has very much shown this year. We have a high return on equity over time. As I have said, we have a very strong position and good growth. We have a good brand, which is recognized as a sustainable brand. And we have underlying assets that is very -- there are more term to say, hidden reserves in the companies we own.Q4 figure is NOK 450 million for this quarter, return on equity of 8.9%, and that in a quarter where we have fairly high losses and also made a one-off for reorganization cost of NOK 83 million.Back to the dividend and the distribution we have made this year. As I mentioned, we pay out 50% for dividend, cash dividend for the equity share owners and for the consumer dividend, but we pay out only about 1/3 of that this time and wait for later in the year to make the final decision whether we are going to pay out the rest. And that will depend on the situation in Q4, whether this capitalization is good and the future looks good, especially taking the pandemic into account and the financial consequences of the pandemic, which is following the tradition of making good profits and pay out close to 50% of that profits -- or those profits.Growth. When we was analyzing the situation in March this year -- last year, we saw that this could be a fairly grim situation in the next month, which it hasn't been. We have seen high growth in the retail market, reflecting growth in house prices and -- but we are growing much faster than the market. The market growth is 4.8%, and we have 8.2% growth following a strategy over many years to increase the market share.When it comes to corporate lending, that's also increased by a very high figure, 10.6% this year, after several years with fairly low growth on this segment, reflecting that we have become more competitive [ during ] to changes in the risk weights on corporate lending.Margins. This has been a year with a very, very high drop in base rate, 145 points, which is, to some extent, challenging for a bank like us, but we have been able to keep up the net interest income to changing the customer rates consistently.Deposit growth is also very high, reflecting that the -- most of the customers have the job. They have decreased interest cost and in a pandemic situation with, to a large extent, lockdown, there is little to use the money. And so it's a high savings rate then. It's good for us to see that we have been able to collect our share and more than our share of the growth in deposits. And of course, margins, when the interest rate falls, it's challenging for the deposit margins.An important part of our bank strategy is to broaden the income base, and that has been for very -- many years. And as we see here, we have a very high growth on the affiliates of the bank, especially the Markets division has increased their fees. So we are more solid and robust business model.Improving the cost, the efficiency of the bank by reducing the cost or keeping the cost growth at a low level has had high focus for the bank and we have just been through an improvement program, as I mentioned. And we have also reduced or planned to reduce 100 FTEs in 2021. And therefore, we have made some reservation to pay for that. So we expect a positive cost development in the years to come. Loan losses is much higher than we like to see them, and we will go into that in some detail soon.And capitalization. This capitalization of 18.3% in CET1 reflects the distribution we have made, the food distribution we have made of NOK 4.40 per share and is way above the needed capital. But in a situation like this, we are very happy to be very well capitalized.Then I will hand over the word to Vegard Helland, which is Executive Director for Corporate Banking to tell you about the macroeconomy of region and the credit quality. Please Vegard.

[Vegard Helland, Executive Vice President of Business]

Thank you, Kjell. Then we will have a look at some key metrics for the credit risk in the bank. And of course, for a bank who has 68% of its portfolio through the retail market, the housing market is very important. And we have actually seen that the house prices has increased during 2020.We had a drop in the sale of houses in the first half. But after the summer, we have seen that the demand for houses has increased, and we also see that the prices has increased as well. The increase in this part of Norway is lower than what we are experiencing in other parts of Norway. So I actually think that's a healthy and good sign.When it comes to unemployment and unemployment rates, we had a sharp increase during the first quarter. We have seen a heavy drop during the second half of 2020. And we also see that the unemployment rate is lower here in the middle part of Norway than what we are experiencing in the central part of Norway or Eastern Norway. So we believe that these numbers are related to the diversification in the different industries here in the middle part of Norway and that a large percentage of the people are employed within the public sector.When it comes to the corporate market, a lot of companies, of course, are experiencing a lower turnover in 2020 than they had in 2019. Many industries are marked by red in this figure. And these companies or industries are experiencing a turnover, which is more than 7.5% lower than 2019. At the same time, we have experienced that we have a lot of industries that have a more or less normal situation. We see that the bankruptcy rates here in the middle part of Norway is down 25% if you compare with 2019, and this is related to the measures which was taken by the Norwegian government. We have had these relief packages which has helped a lot of companies through the crisis. The uncertainty in the business life is, of course, still very high, but we are quite comfortable with the portfolio by the end of 2020.If you look at the loan book, we have 68% of the portfolio related to retail market, and that's primarily related to mortgages and to car financing. 32% of the loan book is related to corporate banking, and corporate loan book is very well diversified among a lot of industries. The one and only industry which has had a real crisis is the offshore service vessel company -- industry, which has been into a crisis since 2014.We are also experiencing some challenges within travel, both for companies that are transporting people and also for hotels and things like that, but we do not have a very large exposure related to individual hotels or transport companies. So we are kind of comfortable with the situation within those industries.When it comes to the loan losses, we see that 2020 was [indiscernible] with NOK 950 million in losses. NOK 242 million was booked as losses in the fourth quarter, and we also see that more than 50% of the total losses is related to offshore service vessels and NOK 50 million to NOK 60 million is related to travel business. The risk of the impairments is related to single exposures and Stage 1 and Stage 2 general assessment within the corporate and the retail markets.When it comes to the offshore portfolio, this is still declining. In 2014, I think the numbers were NOK 7.5 billion. At the moment, the portfolio is NOK 4.3 billion. It is almost 2.2% of the total portfolio. And at the moment, we are actually experiencing that some parts of this portfolio is performing better than we have seen earlier in 2020. This is especially the [ subsidiary ] part of the portfolio, which is 51% of our offshore exposure. And we see that the growth in demand for these vessels are pretty good at the moment, and we also expect that the demand for such vessels will be good in 2021, '22 and maybe also '23. The demand are coming both from the oil and gas sector, but also from renewables. But still, we have 50% of the portfolio related to seismic and PSVs. There we see oversupply, and we will still experience that some of these companies will have trouble during 2021.When it comes to payment default, we see that we are going back to normal levels. If we also look at payment holidays both within the retail sector and the corporate sector, we are back to levels that is more or less normalized and at the same situation as we had before the corona crisis.Then I will hand the picture and the stage back to Trond, who will guide us through the questions. Thank you.

[Trond Barikmo]

Thank you. Thank you very much, gents. If you could both join me up here, please. We have some questions from our viewers around the globe. Let's do the boring ones first about losses. What's your expectations for 2021? Any guidance you can give or...

[Vegard Helland, Executive Vice President of Business]

Well, we haven't guided any numbers, but we have seen that we are -- we have said that we expect quite a high drop in the losses for 2021.

[Trond Barikmo]

Quite a high drop. That's good. Okay. And you talked about offshore. Any other industries you're worried about? What -- how is the development or outlook for the commercial real estate in our region?

[Vegard Helland, Executive Vice President of Business]

Well, it's pretty good, actually. And the real estate portfolio is really good. It's performing well, and we are not worried about the real estate portfolio at the moment.

[Trond Barikmo]

Okay. Then we have a question on margins.

[Kjell Fordal]

Favorite topic.

[Trond Barikmo]

Yes. You said there's always pressure on margins. Is that still valid?

[Kjell Fordal]

Yes. It is also always a pressure on margins. And in the long run, the margins following the efficiency, so we have to improve the efficiency in order to be able to compete.

[Trond Barikmo]

And any pressure in the competitive situation? Has that changed during this year or...

[Kjell Fordal]

It's a very, very high competition on margins and especially on mortgages. It has changed in that respect that it has become more a market following the different interest organizations [indiscernible] interest, but the trade unions and so on, and we have a deal with being the favorite supplier for the trade union members, which has improved the volumes, but has been a challenge for the margins, obviously.

[Trond Barikmo]

Okay. Thank you. Growth, you've had some quite high growth in 2020. Do you expect that to continue in retail and corporate?

[Kjell Fordal]

We have -- just to start, we have had high growth in mortgages for a very long time. And that has been a strategy to obtain volumes. And this is, to some extent, a volume game is if we can produce more loans under the same cost base, we are improving the efficiency. So that has been like that. We have said for several years that this growth can continue, but it has shown to continue, and we have a fairly positive view on the -- for the next year. When it comes to corporate, I will hand over to Vegard.

[Vegard Helland, Executive Vice President of Business]

Yes. And we also expect the growth within corporate. Actually, last year, we had 40% increase in the number of new customers if we relate to the 3 years before. So we had a quite heavy growth also within the numbers of customers, not only the volume. The growth will be there, and it will be profitable.

[Trond Barikmo]

Do you also expect the continued growth in commission income? That is a [ big ] part of the income?

[Kjell Fordal]

Yes, certainly. Certainly, it's an important part of the strategy to improve the commission income and income from other sources than lending and deposits. It's to do cross-selling, which is an important part of the One SMN project is to enhance the cooperation within the different business lines, so we certainly expect a high growth there as this year it's been a higher growth in those kinds of income than the net interest income.

[Trond Barikmo]

Okay, thank you. Then as -- let's finish a little bit on capital. You have a very high capital level. Do you plan to pay that out if you're not growing -- or what, any changes in the capital requirements?

[Kjell Fordal]

I mean, well, the -- when the pandemic hit us 12 months ago, the contracyclical buffer was reduced. We are planning for that by 1.5%. We are still keeping our target of 16.9 CET1, which is, in effect, planning for that the contracyclical buffer over time will come back. So that is what we are planning for. But our general strategy -- and today, we have 18.3% capital, which means we are overcapitalized. Our general answer to that is if we are overcapitalized, we will use that capital for something, do more lending or pay back to the owners. So that is what we will look into. For the time being, there is slightly strict regulations for payouts for this year.

[Trond Barikmo]

All right. Thank you. And that concludes our questions and then just a reminder, this will be available on our website after we're done here, and thank you so much for watching and welcome back in 3 months.