Sparebank 1 Ostlandet

OSE:SPOL

Earnings Call Analysis

SpareBank 1 Østlandet Reports Record High Earnings

SpareBank 1 Østlandet started 2024 with record high earnings, achieving a return on equity of 17.4%, the highest since 2019. Earnings were driven mainly by a robust core banking business, growth in interest income, and increased lending and deposits. However, operating costs rose by 6% due to merger activities and the acquisition of an accounting firm. Loan losses remained low at 10 basis points. Despite solid profitability and increased customer dividends, the bank is cautious about ongoing challenging macroeconomic environments. Financial targets remain unchanged, focusing on sustainable growth and community contributions.

Record High Earnings Mark the Beginning of 2024

SpareBank 1 Østlandet has kicked off 2024 on an impressive note with record-high earnings, achieving a return on equity of 17.4%, the best since 2019. The strong performance is attributed mainly to the bank's core banking operations, which have seen substantial growth in interest income and an expanding lending book. The total operating profit reflects this positive trend, showcasing the bank’s stability in a challenging environment.

Growth in Net Interest Income

The bank reported an all-time high net interest income of NOK 1.079 billion, a 4.2% increase from the previous quarter. This growth is buoyed by robust developments in financial activities, although adjustments related to reclassifications had some impact, bringing underlying growth for net interest income closer to 2%. Furthermore, the bank's loan losses remained manageable at only 10 basis points this quarter, indicating sound credit quality.

Operational Costs See Notable Increases

Operational expenses have risen significantly, driven primarily by personnel costs associated with the acquisition of the Siffer accountancy firm and inflationary pressures. The underlying cost increase stood at 6% when excluding merger-related expenses. However, despite these rising costs, the bank posted an extremely favorable cost-to-income ratio of 37%, indicating efficient operations.

Strong Market Presence and Future Growth Prospects

SpareBank 1 Østlandet is experiencing solid growth, particularly in the Oslo and Akershus regions. The group saw a lending increase of 4.8%, largely driven by residential property activities and a stronger housing market. Notably, there are promising signs for the upcoming quarter, with early indicators showing active housing market dynamics and an uptick in property sales.

Customer Dividends as a Unique Strength

The bank continues to prioritize its relationship with customers by distributing NOK 381 million in customer dividends, which marks an increase in their total distribution capacity to NOK 1.8 billion. This unique approach not only enhances customer loyalty but also contributes significantly to community welfare, affirming the bank's commitment to social responsibility.

Market Challenges and Strategic Responses

Despite these robust results, SpareBank 1 Østlandet is not immune to macroeconomic challenges. The regional economic outlook remains mixed, with slower growth observed in some areas, particularly in the Inland regions. The bank is adapting by focusing on strategic growth in areas with higher demand and exploring new customer acquisition avenues. Additionally, ongoing competitive pressures in the lending market are prompting a strategic re-evaluation of service offerings to strengthen market positioning.

Outlook and Strategic Planning

As the bank prepares for upcoming challenges, including the integration of future acquisitions and ongoing competitive pressures, it remains committed to achieving sustained profitability without compromising its community commitments and service quality. Capital levels are stable, with a Common Equity Tier 1 (CET1) ratio holding at a healthy 17%. The bank has set its sights high, aiming to maintain its growth trajectory despite the surrounding economic landscape.

Earnings Call Transcript 2024-Q1

[Klara-Lise Aasen, executive]

Welcome, ladies and gentlemen, to this first quarter results presentation for SpareBank 1 Østlandet. My name is Klara-Lise Aasen, and I am the Group CEO and I started in the bank 1st of April of this year. So I'm really delighted to be here today and present the first quarter results in this role. So let's get into the details. 2024 has started very well for SpareBank 1 Østlandet. We have record high earnings with a return on equity of 17.4%, which is the highest we've had since 2019.

And typically, the first quarter every year is quite good for the bank as we have customer dividends, which is reducing the equity as well as other fair value instruments has been very positive in this quarter, but the main results are driven from the core banking business. And this is also reflected in higher development in interest income as well as growth in our lending book and deposits.

When it comes to the cost area, we say this is somewhat higher than we have -- would have wanted. And the underlying cost increase is around 6% if we derive away the merger costs and the effect related to inclusion of Siffer, which is this accounting firm that we bought in late last year, which is now included from January this year. And I'm also glad to see that we have increased initiatives towards customer activities. And that relates to hiring of good employees within direct banking area.

On our loan losses, it's around 10 basis points this quarter, and that fluctuates every quarter around these levels. And our underlying volume development and the credit quality in the lending book is very solid. And the increase of 4.8% is something we are quite satisfied with. And it's mainly in the Oslo and Akershus region, while we have maintained our position in the Inland area. When it comes to the division -- the distribution of dividends, it's an area where we are focusing on having bought enough equity to drive our growth ambitions, but also to give back to our owners, and I'll come into that very soon.

But first, let's look at our financial targets. Our financial targets are unchanged from previous quarter, and this is an area we are continuously working on, see how we can have good financial targets that drives our results also going forward. And this quarter, as mentioned, the profitability is very high. We don't expect these levels every quarter, but it's really good to see that our underlying business delivers solid results.

And the bank is also contributing to our social responsibility. Of course, our main focus is to have a profitable bank, which delivers dividends to our owners, but it's also extremely important for us to also deliver contribution into the society at large. And first at the left-hand side here, gifts and sponsorships as a large part of our duty to deliver into our environment, gifts and sponsorships.

And in 2023, we gave around NOK 34 million in sponsorships through various initiatives. And this is both supporting young and children and also activities at grassroot level and not only on the top level in sports, for example, but definitely also there. So this is a great way to give back to society and to the talented individuals across our markets.

And in the middle, we talk about Sparebankstiftelsen Hedmark, our largest owner. It's also contributing heavily into society at large. And with gifts to all kind of good causes, everything from humanitarian areas to entrepreneurship and culture activities is something they are contributing very well to. And finally, customer dividends. That's an area where we were front runners for banking and giving the customers also part of our profitable net results. And in 2024, we delivered NOK 381 million based on the results from 2023 to our customers.

And I have the pleasure of being at one of our offices, the 11th of April, when we delivered this out to our customers. That's really a great event. And these large distributions from the bank to the community comes in many forms. And we mentioned the Sparebankstiftelsen Hedmark, but it's also good to note that we have almost 6,000 owners of the bank.

And the interesting thing is around 80% of them are actually living in the area where we have our business. So this -- the small owners are really a huge part of our community of owners in the bank. And customer dividends, I mentioned this year, NOK 381 million, but steady, we have shown an increase in dividend payout and now up to NOK 1.8 billion.

And it is approximately 20 basis points effect on a regular loan that a customer has as a household customer. So it's also helping us in giving great customer satisfaction. However, even if we have quite good numbers now in the first quarter, we see a continuous challenging macroeconomic environment in the areas where we have business.

On the left-hand side, we see the regional indicators on the growth in each region. And it is fair to say that the Inland and East part of Norway are more damped in the development, while it's more elevated in the petroleum-intensive investment areas, which are in the Southwest and the North area.

So it is a challenging environment with low growth, close -- or negative growth right now, and it's also affecting our customers. And we see on the bankruptcies, it's -- we see a somewhat a small rise compared to 2023, but it's still quite moderate. This is something that we will, of course, follow very closely, and our ambition is to help our customers also going through difficult times and be there in that phase as well.

Our customers are typically saying on the corporate side that it's a challenge to get the right employees. So unemployment is still on the low level, and there's no expectation of high increases in unemployment in our regions and rather the opposite is a problem to get the right competencies, and that's a challenge in our region as well.

We see over the years that the general appetite and activity regarding credit has decreased. The dark blue line here is related to the households, which has decreased from around 7% 10 years ago to now around 3%. And this decrease of credit appetite is something that we see also in our books. However, we see that our growth in both household area and in the corporate sector is higher than the market growth, which is really good because then we are sustaining our market place, but again, we see there is a shift now on new selling of home loans.

This is really interesting delay as this development now we see on the red line there on the middle of the page, where we see that new homes sales are now increasing from a quite low start of the year, we see an improvement in the market. This is also visible if we look at the unsold homes and the deviations between the sales price, the asking price, which has now become positive the last 3 months. This is a good development. It's probably not fully back to where we would expect it to be in a normal environment, but we see there is some good signals on this area. And what is our market strategy for Eastern Norway?

Well, we have said that the Eastern Norway stretches in all directions. It's east towards Sweden, it's north towards Trøndelag Høyre and it is definitely also with the coming merger with Totens Sparebank, also important West and South.

And we see really looking forward to the Drammen office that we will launch in the fall. And right now, recruitment process is ongoing. And I really look forward to share to you in the second quarter, the locations of where office will be in Drammen. But it's a very diversified area, and it's also a very attractive area. If we look at the growth prospects for people where people are moving, it is in Oslo and Akershus area is definitely a growing area.

And that's also what we see if we look at the retail market. We see a continuous growth, as I mentioned, above the credit movements in the total market, but it's stabilizing now in the first quarter. And it's very much due to also strong competition. We need to fight harder and show the trust to our customers that customers can trust us. That is something that's really important for us. And we see a growth in the household and retail segment, typically in the Oslo and Akershus area, while it's more stable in Inland.

And on the margins to the right-hand side here, we can see the lending margin has increased somewhat. Now the lag effect is soon implemented completely. The last interest rate hit was 14th of December, the 25 basis points is now 2/3 effect has come into the margins. On income -- sorry, on the deposit side, we see a different product mix where more of our customers are choosing fixed interest products and saving products, which naturally gives a lower margin, but it's great to see that the customers are saving.

I also want to mention that we had a fund campaign in the first quarter out at everything-in-one campaign in the SpareBank 1 alliance. And it's really great to say that we have gotten 2,100 new fund savings customers with 3,800 new funding schemes. So this is also a great contribution to our business.

And before I move on to the corporate side, also on the insurance and other type of products, really important when we see an increase in competition on the lending side, but we also need to look at how can we complement the services to our customers the best way in order to have also capital-light products into the sphere of products and services that we deliver to our customers. And we are succeeding very well on that, both on insurance for -- with life insurance and other types of insurance products.

Moving on to corporate market. We do see also here a stronger competition. Competition is all over. However, we see -- it's really good to see that we are gaining momentum and increasing our market shares in Oslo and Akershus' region. And this is an area that we believe that we have more potential to take out. Another important thing to mention is the -- now we see an improved market also on the project schemes.

The building industry and the project has been lower activity for some time and credit demand has been lower, but we do see a good pipeline now into Q2. And also here, margins are affected by the product mix as well as furious competition.

So before I leave the floor to our CFO, Geir-Egil Bolstad, I'll mention a few words about the Totens SpareBank merger. This was signed the early January between the banks and 22nd of February, the General Assembly and the Supervisory Board approved the merger. And now we are waiting for the approvals from the authorities, the supervisory FSA, Financial Supervisory Authority, and the competition authorities need to issue their approval before we can move on.

So now we are also preparing, making plans to the integration process and the legal merger is planned to be in -- during the fourth quarter, and then we will see later how the development of the timing will be.

So thank you. With that, I will leave the floor for more details on the figures to our CFO, Geir-Egil Bolstad.

[Geir-Egil Bolstad, executive]

Hello, everyone. And I will take over from Klara-Lise and take you through some of the more detailed slides on the accounts. So digging into the accounts, starting off with an overview with the changes in operating profit from last quarter and also the comparable quarter last year.

First of all, starting with the changes from last quarter. As mentioned, we are posting a record high profit. This quarter is driven by strong gains on net financials, but also the tax deduction from the customer dividend, but in addition, underlying is also a strong development in net interest income, commission fees and also positives on the loan losses. Compared to the same quarter last year, we've seen solid strengthening of the net interest income. In addition, we see solid contribution from net financials.

So having on the negative side or at least on the other side, the operating costs have increased quite a bit, and I will dig into that on a later slide. But the key takeaway here is that the bank, in addition to posting a very solid return on investments on equity, we also are posting record high profits.

Starting out with the net interest income. Again, it's an all-time high, taking into account the contributions from the covered bond companies. What we refer to as real net interest income, the commission fees from the covered bond companies amounts to NOK 1.079 billion. That's an increase of 4.2% and from the last quarter. You have to take into account, though, that we have a reclassification effect from commission fees in our leasing company that from this quarter and further on, it will be taken into the net interest income. The run rate as of today is approximately NOK 19 million. So if you correct for that, we still have a nice growth underlying in the net interest income of some 2%.

Going into the commission income, it's a pretty stable picture, starting at the next bottom line. Again, the other operating income is covered by the reclassification effects on commissions to the leasing company. It is at NOK 19 million this quarter is a 50% reduction from the previous quarter, and it can fully be explained by the reclassification effect into the net interest income. Except from that, the income from accounting services have seen quite a strengthening as a consequence of the acquisition of the Siffer accountancy company with effect from the first quarter this year.

We also see a good start to the real estate brokerage commissions. And as I will comment later on, we've seen a strong start to the housing market and also activity levels. Other commission income is more on par with early years, but there are, especially in the payment services, some seasonality effects. That means that comparing the first and the last quarter of the year, typically, it doesn't really make any sense. So we will expect payment services to strengthen throughout the year as a consequence of seasonality.

I mentioned the subsidiaries. First of all, our leasing company, SpareBank 1 Finans Østlandet, the group, a good development from the previous quarter. A solid lending growth, still a bit elevated loan losses, but the net interest income has seen a nice development and also a year-over-year increase.

Our real estate companies, EiendomsMegler Innlandet and in Oslo, has started out the year better than last year. And early look into the second quarter, what we see is that the activity levels during April, it looks very promising with a good development in housing prices and also a number of items for sale. So as some sort of a leading indicator, it looks promising.

Finally, our accounting business for EiendomsMegler has started the year better than last year and also had the first quarter better than the fourth quarter. It can partly be explained by the acquisition of Siffer company with an additional 44 employees.

The joint venture's an integral part of our business proposition, especially the products and services delivered by SpareBank 1 Gruppen. Here, especially the insurance company, but also different kinds of services. We see that we have a modest contribution in the first quarter, a solid increase from the fourth quarter, but still not at the level that we historically have seen and also what we expect going forward.

One thing to mention is that the debt collector, Kredinor will, from the second quarter be consolidated a part of the SpareBank 1 Group, as SpareBank 1 Group has acquired the majority stake in the company at 68.8%. Another honorable mention in this case, is Bank to jointly held commercial bank within the alliance, posting record-high profits amidst strong growth and also excellent cost control.

So in sum, the profit from the joint ventures, not at the level that we expected to see, especially from the SpareBank 1 Gruppen, but at least, quite a bit better than we saw last quarter. Net income from financial assets and liabilities. The dividends is related to dividends from Totens SpareBank, mainly the profit and loss of the associates and joint ventures, I mentioned that on the previous page, whereas the net profit from other financial assets and liabilities. Of those, we have mark-to-market effect on the ownership stake in Totens and visa incorporated with some NOK 60 million this quarter.

In addition, also the liquidity portfolio, including hedges with a positive unrealized gain of some NOK 40 million. So some positive market effect this quarter, bringing the total on that item to some NOK 230 million. Operating expenses, we see still an increase in the personnel expenses from last quarter. Have in mind, though, that the addition of 44 new colleagues within the accounting company contributes to the personnel expenses compared to last quarter. And compared to the same quarter last year, we have to take into account an increase in the parent bank of some 45 full-time equivalents, in addition to general inflation.

So those are the main items. I can't comment on merger costs, making it explicit to the second -- to last line here, we are booking NOK 26 million of merger-related costs this quarter. But on other expenses, these are down because of the wealth tax that banks are obliged to pay by year-end accounting for NOK 20 million in the fourth quarter.

So those are the main drivers behind the changes in the operating expenses from the last quarter, but especially in mind that we have made a sizable acquisition with effect from the first quarter in the accounting business. So having a breakdown by parent bank and different subsidiaries, the changes in operating expenses are apparent in the parent bank with NOK 56 million in increase again, with 45 full-time equivalent increase in staff and underlying inflation goes a long way to explain the change, whereas also you will see in [indiscernible] partner, the accounting company, it has seen an increase since last year of NOK 10 million, explained by a sizable acquisition.

On a more positive note, if I might say, is that on the right-hand side of your slide there, you will see that the cost/income ratio at group level is standing at an excellent 37%. That's an all-time low of the group.

Moving to loan loss provisions. We are posting NOK 33 million this quarter in lost credit losses. It's a bit of a different picture than the previous quarters. What we see is that the model-based loss provisions are at a very modest NOK 1 million. That's a reflection of a stabilizing outlook as published by the Central Bank, both with respect to interest rate expectations and also expectations regarding unemployment going forward.

Also with some expectations on assets, securities like housing prices and expected price developments on commercial real estate. So having made some strengthening on the model-based provisions for the last 1.5 years. This quarter, it's almost flat. We have seen some modest strengthening of individual loan loss provisions related to a few exposures, but not at levels that we have seen in the last quarters. And finally, realized losses, write-offs are at a level that we've seen in the previous quarters.

In sum, what we have seen is that the loss costs, and you can see that on the right-hand side of your slide. This is another quarter with more moderate or expected levels of credit losses with quite a reduction from what we saw in the second and third quarter last year. And this is also reflected in the Stage 3 exposures where we saw quite an increase in the second and third quarter last year related to a few larger defaults in the bank, which have since been restructured but are still nonperforming as such and are included in the Stage 3 exposures, but both in the first and the second quarter of this year -- or the last quarter and this quarter in '24, it's been the sideways development and also Stage 3 as part of total exposure is stable at 1.5%.

And that brings me to the point that what we have seen in the last year is some single exposures defaulting clearly been reflected in the credit losses. But we do not see not yet. And as we have told you the last quarters, not yet have we seen any systematic changes in the credit risk profile, either on the retail side or on the corporate side. Leading indicators might be the share of retail customers with interest-only payments. It's been stable for the last quarters.

And also being some sort of a news item in the Norwegian media is the share of housing mortgages going to debt collection. We don't recognize those statements in our own portfolio. We see quite a stable development and still at very moderate levels. And on the corporate side, the drawdown on credit facilities are pretty much stable at pre-COVID 19 levels. And finally, the loan-to-value on our commercial real estate portfolio is having a stable development, taking into account also the update of market prices.

Finally, on capital levels, the CET1 ratio is sideways from the last quarter at 17.0%. This is with a sizable buffer to our internal capital target. You might wonder why not a record high profit wouldn't increase the CET1 ratio by a sizable amount. This is related to an increase in the risk-weighted assets related to loan certificates, quite an increase in loan certificates and the demand for loan certificates in the retail market with some NOK 4 billion this quarter that we see, combined with what I mentioned on the housing prices and also the activity in the real estate companies as a positive leading indicator going forward.

So that has increased the risk-weighted assets. On the same time, we have in our corporate bond companies have some mark-to-market effect on basis swaps that draws on the equity over other comprehensive income.

And finally, we've seen some smaller changes to the risk rates in the housing loans, reflecting the price decrease in the Norwegian housing market the second half year last year. But as you have seen for 4 consecutive months now, a good price increase in housing prices in Norway, we expect going forward, that increase in risk rates and housing mortgages will probably go down as new and higher prices is reflected in the LGD criteria in the risk rates.

So a sideways development in the CET1 ratio with some hopefully temporary effects but also with a positive outlook on demand for housing mortgages. So that concludes the presentation. I'll leave you with the slides of why we believe that our equity is certificate. So the tickers pool is an attractive investment. We are profitable. We are uncomplicated and solid bank with sizable growth potential and with a strong brand. We have some add-on on the sustainability side and a unique customer dividend. So with that, I leave you. And before that, I will just remind you if you have any questions, inquiries, if you would like to have a one-on-one meeting, please do not hesitate to reach out. You'll find the contact details in the presentation, and we are here to meet with you whenever you need. Thank you, and bye-bye.