Sparebank 1 SMN

OSE:MING

Earnings Call Transcript 2021-Q4

[Kjell Fordal]

Good morning, and welcome to the SpareBank 1 SMN Fourth Quarter Presentation. I will give a brief walk-through of the presentation that is issued on our website. This is my 110th and last presentation of the quarter figures since 1994. And as I will show you, this is a very, very good final lap. We have year been through a year with a great transition and modernization of the bank. And despite all that, we deliver record results and good figures in every respect, both growth and capitalization. We have reduced loan losses that has been holding us for some quarters and have a significant improvement in asset quality. And we are also able to distribute 56% of the profit, which is NOK 7.5 per share. So that is -- also as you can see from this slide, we have a good return on equity on every quarter and we are also being rewarded on the stock exchange. As a savings bank, which is a very good position to be in Norway, savings banks are the growing part of the Norwegian banking area. Banks -- savings banks are improving market share, both in retail and corporate banking and are among the best performers when it comes to return on equity. And our bank is among the best in this in this system as one of the best banks in Nordic countries as we aim to be. We delivered a net profit of NOK 703 million in the last quarter, NOK 2.9 billion for the full year, which is 12.7% in return on equity for this quarter and 13.5% return on equity for the year as a whole. CET1 ratio is 18%. So the bank is significantly solid and above the goals for the bank. We have, over the last years, delivered a good return on equity. And I think it's -- to be mentioned just last year, where we had 10% return on equity in a year with SEK 1 billion in loan losses. This year, lower loan losses, as you can see from the slide, and then we come back with 13.5%. This has been a year of transition and modernization, and we have also aimed to do a lot of other activities. And most important is what I will come back to in the end that they have found a replacement for me, which is not an easy job, but it has been very successfully fulfilled. The macro situation after a period of the corona pandemic, we see a very favorable climate in our region and in Norway as such, with very, very low unemployment. Actually, the biggest problem is lack of workforce in different industries and increasing house prices, which we see as a signal that the economy for the individuals is performing very well. The industry is presented here. I will not go through each and one of them. It's reflecting what industries -- our region, it's preoccupied with and it's also reflected in the loan books. They are performing well. And as I mentioned, the biggest problem is lack of workforce. And the customers -- as you will see from the growth figures, which I soon will come back to, is into a degree, choosing our bank and also very lucky to see that the preference share is steeply increasing, showing that our concept is working very well and we are able to compete. We stick to our goals and deliver on all of them. And the strategies is the same as it's been for some years, is to build 1 SMN, taking advantage of our broad income shore and the different business lines, increased digitalization, take active part in the restructuring of Norwegian banking, integrate sustainability in the business processes and take advantage of our ownership model. Over many years, we have built very strong subsidiaries in nonbanking activities, but very closely related to the banking business as a real estate broker, as accounting services, market operation and leasing and car funding operation, which has turned out to be market winners and very profitable and participating and making the bank's profitability improving. As a consequence of the strategy of integrating and take out the synergies between the subsidiaries and the parent bank and banking operation, we also plan to open an Oslo branch to follow our customers that are -- we already have in the Oslo area and taking advantage of our very strong position in the capital market operation in SpareBank 1 Markets. This will be our very quiet start-up taking, of course, risk consideration with us, but we expect this to be a long-term improvement of the bank's profitability. Digitalization has been the topic for several years. We are pushing even more efforts into making the processes more effective, making it possible for the customers to sell service in order to improve the customer experience and improve the efficiency, of course, and reduce the cost level of the bank in the long term. Sustainability and social responsibility is also an important part of the bank's strategy. We have committed ourselves to sustainability ambitions and we plan to -- and we are working for being a driver for the green transition of the economy. And there is lots of activities, as you can see from this slide. And here, there is more to come. There will be development in use of how to gain it and what our role in this transition will be. First, we have to see through that. The bank is -- the bank's own operation is performing in a green way, and then we have a role in helping our customers to go on the same path. 36% of the bank is owned by the community as equity share type of bank. And this -- their part of the dividends is invested in order to improve the region and improve the reputation of the bank. And we have launched a new strategy to invest in community activities sports and outdoor, arching customer, innovation and value creation and sustainability. Last year, we spent NOK 200 million in these activities. And for the year that is -- come 2022, we plan to use SEK 250 million. Return on equity for this quarter, 12.7%. Sustainably high level above our goal of 12% on a very, very high capital base, 18% CET1 and, of course, very much helped by the fact that we have a much lower losses and improved asset quality. Even though we have losses, so the figures is made without any paybacks. Over the last years, there has been a continuously growth in income, especially in the subsidiaries, as I presented earlier on, and a very controlled development on the cost side, especially in the parent bank. Our bank is focusing on the different customer groups and the biggest and most important part of the banks area is serving the retail customers with the retail division in the bank and the real estate brokering. Figures are performing very well. And I think the most important part of the cooperation with the real estate brokerage is that when we sell 35% -- other broker sells 35% of the homes in our region, we are funding 55% of those homes, which is significantly higher than for other homes sold by other brokers. That is important contribution to the very high growth in mortgages, as I will show you later on. Serving the corporates in our region and the corporate division has, after the wave of loan losses come back with very, very healthy profit. And here, we have some very successful subsidiaries, SpareBank Markets, which is the winner when it comes to the IPO market in Norway, not in the region, but in Norway and SpareBank 1 accounting services, which is having 25% or something of the accounting in the area. Here, there is some path to go to improve the synergies, but there is a huge potential for both getting more SME customers and more accounting customers. And as a SpareBank 1 bank, we have the product companies, especially in the SpareBank 1 Gruppen, Forsikring and SpareBank insurance, which is performing extremely well, as you can see from this slide. And in addition to this, profits that we get as a dividend from these companies, we also have a big contribution to the business lines I presented earlier as commissioned from selling the different products. New things from this year is SpareBank 1 Asset Management, which is a good figure of SEK 12 million here. But most importantly, this is our vehicle to develop a new savings platform for -- to offer our customers the absolutely best platform for savings. The bank is growing, which we have been doing for the last 10 years, substantially more than the growth in the total lending in Norway. 6.8% in the retail area in mainly mortgages and 7.1% in the corporate side. Over many years, we have had a fairly low corporate growth due to capital considerations and unfavorable risk weight. But now we are back in again and can see that we have had NOK 10 million in growth over the last years. We are in a period of increasing interest rates after the National Bank's interest rate of 0% due to the corona pandemic. We are now in a period of increasing interest rates, which is, in my view, good for the economy and reflecting that risk. Room for increasing interest rates. It is challenging when the interest rate is increasing, and therefore, you can see a drop in interest rates over the last quarters. Mainly, we can see this is a delay effect on the market interest rate -- the market rate is increasing faster than we are able to increase the interest rates for the customers' rates. Deposits has been growing very, very much in the pandemic -- in the corona period, reflecting the liquidity situation for Norwegians. But we are happy to see that we are taking our chair and more than that when it -- the savings is increasing in the degree that we have seen here. And we are very curious to see what the development will be when the society opens up again. Coming to margins. Here, you have the flip side of the declining margins on the deposit side and increasing deposit margins, decreasing increased margins and increased return on the equity itself. We see that, that will have a positive impact on the on the net interest income. Cost has been an important topic for the bank. To control the cost, this is -- especially when it comes to the retail part of the bank, it's very much a cost game. We have had, over the last year, a fairly flattish development in cost in the parent bank. In Q4 '20, we had some restructuring costs and that's the reason for the decrease. And when it comes to the subsidiaries, markets and broking industries, accounting and so on, the cost is more volatile and following the success of these companies. Asset quality, back to 7 basis points. We have been through a wave of cost or credit cost of loan losses, fairly much due to problems in the offshore industry. We have seen very little corona-related loan losses. Now we are back to ordinary level. This quarter, there is no offshore -- oil and offshore industry loans. So it's on a more ordinary loan loss level. This is a long story about the capitalization. It's 18%, as I mentioned. Our goal, our target is 16.9%, which is including management preference and a full contracyclical buffer, which we used it planning and we have a relatively good distance to this target. And as this slide shows, there has been a very long, over the last 11 or -- a buildup of capital from what we today consider as very low capital levels. And in this period, we also have had a lower payout ratio. But as you can see from the return on equity over the years, this has paid off for the investors. The distribution of profits for 2022. NOK 2.7 billion is what's there for distribution. We follow our distribution policy. Of course, NOK 13.31 is the return per share, and we pay out NOK 7.5 per share, which is 56% of the dividend -- of the return -- of the profit. And the same percentage is also used for the community dividend. So you have no dilution effect this year, which is according to the dividend policy. As this is my last presentation, I have chosen a slide here, which is the selection of lives is slightly subjective. But even though there has been a very fine period for the investors, continuously growth in profitability, even then we have -- when we have a very bad year when it comes to loan losses, we have a substantial profit, but we come back with 7.5 -- with NOK 13.3 per share this quarter. And we are sticking to the payout ratio of about 50% -- above 50% and 66% this time, which is telling the story that we are focusing on the interest of the investors and the owners. And what I would say is that we have -- the reason for this very good profits over time, of course, in addition to operating in a very favorable banking area. We have had continuously focused on profit. Profitability is the main driver and that is done through heavy focus on sales efforts and control of cost. And that is -- and control of risk, of course, is the main drivers for doing business and we have been very successful with that. And also, I will add on that, we have been -- have high courage to do a transaction with notice needed and step forward when there is something that should be done. For instance, when we bought BN Bank in -- even though 13 years ago, but that is an example of the ability to be courageous. And so therefore, as we have been focusing on over the last presentation, this is a good investment and that has also the stock exchange back that they agree to. And as I am retiring, the Managing Director has been looking for my replacement and then he went to BN Bank, which is a bank we own 1/3 of. And Trond Soraas, which has been the CFO of the bank and where -- it's a guy we know very well. I think he will be a very, very good replacement. So please, Trond, come here and introduce yourself.

[Trond Soraas]

Thank you, Kjell, and thank you for the kind words. Although the image that you have chosen could indicate otherwise, this is, of course, something that I'm really looking forward to, to formally take on the role as CFO from the end of this month. And of course, and as expected, you leave your position with a record high result. And as you have just described and explained in detail, but you also leave me with a very strong team, a team that I'm very excited to start working with. And make sure that this transition is as frictionless as possible. So thank you so much for passing the baton to me. I should take very good care of it. So thank you.

[Kjell Fordal]

Thank you. There will be a possibility to post some questions on the chat, which will be answered to not in live, but it will be -- you will get an answer to the questions. Thank you.