Sparebank 1 Ostlandet

OSE:SPOL

Earnings Call Transcript 2021-Q1

[Richard H. Heiberg, Chief Executive Officer]

Welcome to SpareBank 1 Østlandet, everybody. We are now going to present results from -- for the bank for the first quarter 2021. My name is Richard Heiberg, I'm the CEO of the company. And with me, I have the CFO, Geir-Egil Bolstad. I will start with some general comments first, and Geir-Egil will come back with more details afterwards.Some highlights for the first quarter. We have had quite good lending growth in the Retail division and also increased activity among our corporate customers. We have strong cost control, costs in line with our financial targets for the year. We have, in our real estate brokerage companies, quite heavy and good start of the year. We have solid contributions from ownership interest and also the financial items. We have an improved macroeconomic forecast. And that means also that we have reversal on -- of losses in our books. We have solid CET1 ratio and strong liquidity situation significantly above both the regulatory requirements and also our internal targets in a normal situation. The Supervisory Board decided on dividends in line with our Board of Directors' recommendation and the dividend payments in April followed the guidelines from the Ministry of Finance. We have also introduced and issued the first green bond in the first quarter. And we have received an improved ESG rating from the Sustainalytics. Our main financial targets. Profitability. We have a return on equity at 10.6%, a little bit below our target of 11%. Regarding dividends, we stay with our long-term dividend policy to pay out 50% of our after-tax profit in the group. That will come, of course, in the beginning of next year, but our long-term plan is as that. Our solidity, the CET1 ratio of 17.8% is quite above our target that is a requirement at the moment, 14.3% in addition to 100 bps as a management buffer. So the regulatory or the requirement is altogether then 15.3%, and we have achieved 17.8%. We have a cost target in the mother bank or the parent bank with maximum 2% cost increase compared to last year. In the first quarter, we have an increase of 1.9% within the cost target.Some information about the situation regarding the COVID situation -- COVID-19 situation. We have low levels in Norway, at least compared with the -- what happens in -- or have happened in other countries. And we have -- we are now on our way after the third wave. And because also the authorities have imposed strict regulations and also compliance from people and companies to comply with the authorities regulations, we now see low levels and lower levels than we have seen some weeks before. The unemployment rate is going down. It increased quite heavily in March last year when the society more or less were was closed down and people were sent at home, and they not -- they didn't lost -- lose their jobs, but they were laid off temporarily. But we see that most people have come back to their works, to their jobs. And even though the unemployment rate is a little bit higher than normal, it's coming down again. The Central Bank of Norway expects a significant rebound in the activity in the second half of this year. And we see a strong housing market, the last year and so far also very little affected by the COVID-19. We see a very strong housing market, price-wise. We see that growth in housing prices in Norway in the last 12 months in Norway has increased by 12.5%. In Oslo, especially, 15.6%; and in the Inland region, 11.6%. And the turnover when houses are on sale, it takes only now 14 days in Oslo from start to the sale is done and 43 days in average in Norway. And the main driver or the main drivers are lower supply than the special demand, of course, I'm sorry, but also because of the very low interest level, of course, also affects the supply side -- or excuse me, the demand side. So we see that house prices have increased and are still increasing.Our customers, the activity, is more or less coming back to normal. We saw that the applications for installment deferrals increased quite a lot in March last year, but it came down again during second quarter and the second half of last year. And we are back at normal levels in the Retail division and also within the Corporate division. And most of the customers asking for deferrals one time, they didn't come back and ask for more. So that is a very sound situation. And we also see it in our financing company, that the deferrals have come down to more or less normal levels.And other banking services, we see a very good situation. Insurance policies, savings, funds and so on is on a very -- and pension funds are on a healthy -- very healthy development. We have still continued customer growth. We have, in the last quarter, approximately 5,000 new customers. We have off-boarded some 9,000 previously noted retail customers. These were mainly customers that, over time, not the last quarter, but over time, has left the bank for other banks. And also the KYC is not in a proper situation for those. And all those customers and all those accounts were less than NOK 100. So they were very small amounts left in the bank. So that's no problem we see at all. And we see that in the 12 months' period, we have had an increase in retail customers by 5.6%, and in corporate customers a little bit more than 2% in the numbers.We have also have an eventful quarter for the ESG in the bank. We launched, during the quarter, the -- an ambitious green bond framework followed by issuing a EUR 500 million green senior preferred bond with a very good reception in the market, high number of investors, very good diversification geographically and also higher share of green accounts. We also received an updated ESG rating from Sustainalytics telling a very low -- telling a low-risk, ESG risk. And we also were 1 out of 2 banks in Norway signing the Net-Zero Banking Alliance convened by United Nations. That means that we are committed to align lending and investment portfolios with a net zero emissions within 2050. And this is a new initiative from the United Nations. And when we signed, as I said, we were 2 Norwegian banks, but there were only 43 banks globally that signed this document. So we are very proud of that.Then I'll go to some brief information about the financial accounts. We had a good profit after tax for the first quarter with NOK 439 million after tax compared to NOK 266 million in the first quarter last year. We had an ROI -- ROE of 10.6%, as I said earlier, almost to our target, but a little bit lower. Our target is at least 11%. Solid capitalization with the CET1 ratio of 17.8% and a leverage ratio of 7.1%. Lending growth on 12-month basis, 5.7%, a little bit lower than last year when it was 9% including the covered bond companies. Strong deposit growth with 9.5% the last 12 months. And we have on our -- in our books, net reversals on losses with NOK 18 million compared to a charge of NOK 151 million in the first quarter last year, when the pandemic situation started.That was a brief information about the financials. Then we'll -- CFO, Geir-Egil Bolstad, give you more detailed information. So there you go, Geir-Egil.

[Geir-Egil Bolstad]

Thank you very much, Richard. Okay. Good morning, everyone. I will take you more into details in -- on the accounts. First off, an overview of the accounts, I will go into details on the different line items. I just want to draw your attention to the tax expense in this period. It's significantly larger and higher than the same quarter last year. Last year, in the first quarter, we had a positive tax effect on return on taxes in association with the customer dividend. We haven't yet paid the customer dividend this year, it's expected to be done in the fourth quarter. And such, it will imply an expected NOK 58 million in a tax benefit in the fourth quarter. So when comparing with last year, please take into account the different timing of the positive tax effects on the customer dividend.Seeing the development over time, the pretax profit in the group, it's been more or less stable for the last 4 quarters following a troublesome first quarter last year as a consequence of the pandemic that hit us just before the end of the quarter with the resulting loss costs and also write-downs on financial items, in particular the last year. What we've seen since is quite a good rebound on the loss side, as you can see on the bottom left. Having the accounts done by the IFRS 9 accounting standard, it implies the front-loading of loss charges. So we did a lot of model-based and also, after a while, individual provisions for losses in the first 2 quarters last year, whereas we've seen the fourth quarter last year and also this quarter, reversal first on individual provisions and also this quarter on the more group-wise and model-based provisions.Operating costs, more or less on the same level, a tad lower than what we saw in the same quarter last year and a significant improvement for the last quarter. There are some reasons for that, and I'll get into those details later on. Net interest income, commission fees from the covered bond companies that are more or less comparable to the net interest fees, slightly lower than what we saw last quarter, mainly driven by 3 fewer interest days and also an increase in the Norwegian reference rate in NIBOR. So we'll give you analysis later on. Return on equity, a healthy 10.6% on the back of a very strong CET1 ratio on 17.8%, unchanged solidity quarter-on-quarter, but an improvement since the same quarter last year. Lending growth, a bit reduced, but still healthy numbers. I will break it down for you later on. And also the deposit growth, very solid, as you will see in a lot of Norwegian banks. The savings have been stable and high for the last year in Norway. That also means that the funding composition of the bank is, for the time being, very healthy.The profits contribution from our subsidiaries, our leasing company, financing companies, SpareBank 1 Finans AS planner, our subsidiary, reports a very healthy first quarter around NOK 19 million in lower loan loss costs than the same period last year. And at the same time, increased net interest income and reduced operating expenses, so a very good quarter. Our accounting subsidiary, delivering more or less a 0 result. This is a company that is under reorganization/reconstruction, so to say. There have been operational costs or charges related to the restructuring. And of course, working from home office the last year it's been taking a little more time than we hoped to do the necessary changes in the company, but the prospects for a company, we believe, are quite good.The real estate agent in the Inland region, that's the EiendomsMegler 1 Innlandet, the result more or less in line with last year, whereas the real estate broker in the capital area has a first quarter better than we've ever seen before. Both a high turnover in the real estate market, but also increasing the market share in that increasing market. So a very good situation and a good pointer to the subsequent quarters. Profits from joint ventures within the SpareBank 1 Alliance, I have another slide on the SpareBank 1 Group, our product offering company. But our company providing credit cards and unsecured consumer lending, SpareBank 1 Kreditt, delivers in line with last year, a bit of a depressed profit after tax, reflecting that the demand for Norwegian unsecured lending has dropped quite a bit as Norwegian consumers have prioritized repaying consumer debt for last year. Probably good from a macro perspective, but of course, a bit of a burden on the profitability of SpareBank Kreditt. Our covered bond companies delivering much -- more or less in line with expectations and, of course, SpaBol, the residential covered bank company, a large improvement compared to last year. Last year was heavily influenced by negative mark-to-market effects on both derivatives and securities.SpareBank 1 Betaling, our joint company within the payment area, still in negative territory, but a large improvement compared to last year. And finally, our ownership in the commercial bank, BN Bank, showing quite a good increase in profitability. Reversals on loan losses, improved other income, just a small decline in net interest and also very strong cost control. So delivering as an isolated bank, an ROE of some 10.5%, we believe, is very satisfactory on the back of a very strong CET1 rating of that company.Within the SpareBank 1 Group, the first quarter was historically good. Not the best quarter ever, but the best first quarter ever. And all the subsidiaries within that Group, Fremtind, the casualty insurance company, delivered a very strong both insurance and financial result. The pension company, SpareBank Forsikring, delivered a deficit of NOK 26 million, mainly driven by higher provisions for different kind of pension schemes. The administrative result within the company was improved by some NOK 23 million compared to last year. Finally, the fund managing company, ODIN Forvaltning, strong improvement over last year, and it has increased assets under management to around NOK 85 billion. So a very strong development in that company.Moving on to some analysis of the different line items on the group's accounts. The net interest income, a bit down from the previous quarter, but in line with the second and third quarter, especially last year. A reduction from last quarter was driven, as mentioned, by fewer interest days and also an increase in the NIBOR. The interest margin as a percentage of the average total assets declined by some 2 basis points. After the end of the quarter, the Norwegian NIBOR has declined by some 15 bps. So the start of the second quarter has been more positive for the interest earnings of the bank.Still good lending growth with the 12-month growth rate of 5.6% -- 5.7%, sorry. The retail lending is at around 8%, whereas the corporate lending growth is more or less flat. I'll get back to that later on, there are some explanations behind those numbers. And the underlying activity within the Corporate division is picking up among our clients. As mentioned, the NIBOR increased during the first quarter, resulting in a pressure on the lending margins, as you can see on the bottom left-hand side. The lending growth, divided by our different subregions or areas within our primary market area, you will see there that the Inland region, historically the strongest market area, has seen quite much lower growth than what we typically see. I'll get into that, it is mainly driven by -- on the corporate side. As you can see on -- in the Retail division, it's strong growth across the board, both in the Inland and the Oslo capital area and the surrounding Viken County. Also strong growth in other areas of Norway probably based on the agreement with the Norwegian Confederation of the Trade Unions. And of course, these large percentages is a reflection also of a lower volume outside the primary market areas. But still, we would consider it quite good growth across the board.Within the corporate market, in the Inland region, we have seen some individual customers. It could be seen as a positive on a regional side with some companies actually doing extra down payments on their loans as a result of a good liquidity position. At the same time, some very large lending just fell out of the 12-month growth period as we had a very strong fourth quarter of 2019. As mentioned earlier on, activity levels are picking up. But what we see is some cautious optimism among the corporate clients having been granted credits within the bank, but not yet utilizing the lines of credit that they are extended. So going forward, we do expect a return to normal on the growth on the corporate side.You probably know the composition of the lending book, 75% being on the retail side, predominantly retail mortgages, low risk, low LTVs. The corporate side, the 25 remaining percent, as you know, not any exposure to oil offshore, any like coastal type of exposures being totally landlocked in our region. Some sort of a novelty in the last year is the exposure to more COVID-19 affected industries. Transport, communication, hotels and restaurants being the most affected by the government measures following the pandemic in Norway. You will see at the very bottom that the total exposure to those industries in the banking book is quite limited. And of course, again, perhaps being a bit lucky, but also reflecting the business industry structure within the region. Again, it's an argument of a lower-risk spending book and also again reflected in the reversal on the loan loss provisions.As mentioned, still solid deposit growth, 9.5% the last 12 months, and we have a deposit coverage ratio of some 77% in the parent bank level and also at the group-wide level at 54%. More or less where we would like to be, perhaps a bit higher than the internal targets, but probably a solid and good place to be, taking into account the expected reopening of the economy and what we do forecast to be an increase in personal spending and also then withdrawals of some deposits and savings from the last year with limited possibilities to spend in the economy. Increases in deposit margins follows, again, the increases in NIBOR. So it's a reflection of the lending margins. Another quarter with solid contribution from financial items, I mentioned the contributions from the ownership interest in SpareBank 1 Group and also BN Bank, very positive. But we also see a healthy contribution from other financials, even though not in line with the 3 latest quarters on a very solid and good level. So also, when you compare it to the first quarter last year, please have in mind that in the first quarter of 2020, we did book a gain on the Fremtind transaction of some NOK 207 million. So those -- the loss booked of NOK 48 million was a bit positive compared to the underlying realities of that quarter last year. A positive development or the commission fees and other income. What we see after a seasonally strong fourth quarter on payment services, we have a strong reduction on fees from payment services following little personnel and private spending in the first quarter following lockdown measures and also little opportunities to actually spend. But except from that, we have a very strong contribution both from fees -- commission fees from the real estate companies and also particularly, and that's a strong recurring item, the commissions from mutual fund savings and also different kinds of insurance commissions. As you can see, we do see in the first quarter a 15% or 16% increase in commission fees from insurance and savings compared to the same quarter last year. So we believe that's a good development. We also state that we have a satisfactory cost control, both on the group level and also in the parent bank. We've been post around 3%, 4% reduction in costs compared to the previous quarter on the group-wide level. Compared to the same quarter last year, there is a small reduction, but we can say it's more or less in line. In the parent bank, we have a cost target of staying within 2% increase from previous years for 2021. And at the end of the first quarter, we have a reduction more or less bottom at a cost increase of 1.9%. Seen in conjunction with a reduction in operating expenses in the parent bank the last couple of years, we believe that that's quite an ambitious target and a clear sign of good cost control. We mentioned the reversal on loan losses. This is a detailed breakdown on the different components of this quarter's booked loan losses. We have done some changes to the underlying key assumptions, probability of default and loss given default related to an improved macroeconomic outlook for Norway. Based on the Central Bank's forecast, we do see it natural to reduce the estimates going forward on the default somewhat resulting in a reduction in the necessary provisions of NOK 13 million. The growth in the period in isolation contributed a need of an increase of provisions also NOK 3 million, whereas we also reduced and removed the post-model adjustments or the management overlay to the quantitative models this quarter. These were replaced by more individual and industry-wide evaluations and changes to individual assumptions. So in a way, we changed the management overlay and replaced it by more individual-based assumptions. On the individual loan loss provisions, we had a small increase of NOK 2 million, more or less nothing. And we saw a net write-off of realized losses of some NOK 11 million. So in total, we had negative loan loss or write-back on loan losses of NOK 18 million. And as you can see at the very top, the development in loss cost for the last year clearly shows the front-loading characteristics of the IFRS 9 loan loss standard. So going forward, it's natural to expect a more or less normalized loss development. As a consequence of implementing a new default definition, as defined by the EBA, that's the financial authority within the EU, we had an increase in the defined defaults. No underlying changes in the credit risk, but purely following new default definition. Within Stage 3, we saw an increase of NOK 236 million or around 45%, meaning quite a sizable increase in stage 3 loans following from a new definition of defaults. Two main drivers, one being that the definition period has been extended from when you resolve your defaults with the bank. Well, you are placed into some sort of [ foreign ] time of a duration of either 3 or 12 months depending on the severity of the default, in itself, prolonging the period of defined default. Purely a definition, following the standard. And in addition, you also have the contagion of default between the different companies within the group. So within the leasing company or between the leasing company and the parent bank, if you see default of the same customers in one of the companies, well, by automatic, the same customer is in default in the other company, in itself increasing the volume in default following the standard. So again, we don't see any changes to the underlying credit quality, but we see quite an increase in the volume of stage 3 lending. Having said that, the volume or proportion of Stage 3 lending is at the equivalent rate as a year ago as we saw quite a decrease in the stage 3 last quarter, and that was following actual reduction in credit or in defaults. Trying to land after a while, stable development in the solidity, the CET1, at 17.8%. As Richard mentioned at the start of the presentation, that is some 2.5% above the internal targets and 3.5% above the regulatory requirement. Two important takeaways, one being that growth capacity is very much still intact. And also the dividend capacity, of course, very much intact. Pointing to the future, the implementation of the EU banking package in Norway, it has been delayed. But when it comes into effect probably later this year, the most important effect is being a strengthening of the CET1 estimated to be around 0.4% and as a result of the SME discount that's been expanded. So again, solidity, stability, and a very good starting point for continued growth and dividends in the bank. So just a final reminder, dividends. The first round of the dividend for 2020 was paid in April following the decision in the Supervisory Board according to the recommendation from the Board of Directors. The Board of Directors also got an authorization from the Supervisory Board to pay an additional NOK 3.04 per equity certificate in the fourth quarter, conditions permitting. And at the same time, we also plan on paying the customer dividend with the added tax benefit of NOK 58 million. Of course, it's important to emphasize, if conditions permit, but again, a strong capital position and a good underlying profitability and the outlook for improvement in the macroeconomics, we believe in the bank that this is a good starting point. So lending. At the end of the presentation and also on our homepage, you will find contact information, either telephone or mail to myself, the CEO, but also our Investor Relations contact. So if you have any additional questions, so please don't hesitate to reach out. And with that, we do conclude the accounts presentation for the first quarter in SpareBank 1 Østlandet. Have a nice rest of the year day.