Sparebank 1 SR Bank ASA

OSE:SRBNK

Earnings Call Transcript 2023-Q1

[Benedicte Fasmer, executive]

Welcome to the presentation, the quarterly result of SpareBank 1 SR-Bank first quarter of 2023. I'll start with the headlines and Inge Reinertsen, our CFO, will go somewhat into more detail on the numbers, and then we'll open up for questions. And we'll do a short version for your information to start with, but you can, of course, ask any questions you want afterwards. SpareBank 1 SR-Bank has had a growth of 10.5% in the first quarter of this year. All customer segments or divisions can show a good growth, and we see positive results from the fact that we've split the corporate market into 2 segments, the larger corporates and the SME and agricultural business, and we have good growth in both of those segments and are working more systematically in customer solutions and tailoring the products to the 2 quite different segments of the corporate market. We are also growing our business outside the lending -- the loan portfolio, which is what you see on this slide. But I'm very happy to see that the growth in Haugesund or home turf or home region has picked up somewhat again with 6%, but also good growth in the rest of our local markets in the south in the Southern Norway. If we look at the more regional market picture in Norway, we've had -- the housing prices have come back after a decline in the end of 2022. So kind of back on was about to say on track. The highest growth in the prices has been in Stavanger in Rogaland with 9%. And in Kristiansand, the very south tip of Norway with also 9% and a bit less growth or the growth of a slower growth rate in some of the other major cities. We see inflationary pressures on consumers and the effect of higher interest rates, but we have not seen any warning signals in our leading indicators in that side of the portfolio. And similarly, we do see a higher number of bankruptcies in the Norwegian economy. But so far, with 27,000 SME clients, we have no very severe negative signals from the corporate portfolio on our books. The unemployment rate is still very low, and the investment in the mainland economy and in the petroleum sectors remain at a quite satisfactory level, which is driving the activity in the Norwegian economy. If we look at the results in the first quarter, we had an increase in our quarterly result of NOK 210 million to NOK 1.131 million. We had, as I had mentioned, a loan growth of 12.5% or NOK 25 billion over the last year. And in the personal market -- consumer market we grew by 7% in larger corporates, 18.1% and in SME and agriculture 15.2%. Adjusted for exchange fluctuations, the growth would have been overall 9.7%. We also had a satisfactory deposit growth of 7.1%, and the costs are within our target of 40% cost to income. Loan losses were also below side, 5 basis points of the portfolio with NOK 35 million in the quarter. If we look at our equity return on equity, we adjusted our long-term target from 12% to 13% at the end of last year. We deliver, as you see, 12.3% in the quarter, and we believe to be able to move that towards 13% through growth in other income, cost efficiency and well diversity and profitable lending portfolio. Our capital level is at the same level as last quarter with 17.4% in capital ratio.We have been suggested to become a significant -- CF bank in the Norwegian market by the FSA. They have recommended that to the Ministry of Finance. It's a little bit earlier than we anticipated ourselves, some months early. And if the Ministry of Finance agrees with the FSA, our core capital has to be adjusted upwards with 1 percentage point or 100 basis points. And we will have 12 months to adjust our capital levels. We expect to have around 70% positive -- 70 basis point positive effect through a reduced Pillar 2 requirement. And we also expect to be able to build some capital through our profitability. We believe that the CFE position will benefit us when it comes to pricing in the funding market and be a stamp of quality that would -- even though it does require more capital on our side, it still will be of benefit to us as a bank longer term as for. As I said, the cost-to-income ratio was below our target of 40% at 39.5%, and we have just recently paid out our dividend of 54.4% of last year's returns and we maintain our policy to pay out 50% over time. And with that little warm up, I'll hand you over to Inge, who will go through the numbers in a bit more detail.

[Inge Reinertsen, executive]

Thank you very much, Benedicte. As shown on this file, we have delivered a very strong net interest income for the first quarter of this year compared to the same quarter last year. It represents almost 40% increase. And we also managed to increase the net interest margin by 9 basis points from the fourth quarter last year to the first quarter this year, which represents an increase of NOK 116 million. That has been possible due to the flattening LIBOR, which has increased the lending margin and still the interest margin on deposits remains on a very high level. Net commission and other income is flat from the fourth quarter last year, a seasonal decrease in the payment facilities, but also, at the same time, an increase from our accounting company. What is on the low side this quarter is the net income on financial investments. Of course, it shows that it has been volatile quarter. We had much less contribution from the Pulp Insurance Company. And also we have a reduction on the valuation on our bond portfolio had for liquidity purposes. So if we take that into consideration and look at the 12.3% return on equity, we regard this underlying result as strong and good quality also underpinned by the low impairments on loans mentioned by Benedicte only NOK 35 million, which shows that credit quality of our portfolio remains on a very high quality. The operating expenses, up NOK 9 million from last quarter. We have hired more people in the current bank during last year. And of course, we experienced a pressure on the cost due to the inflation, both on wages and other expenses, but at the same time, if we flip to the next chart, Martin, this shows the change in profit from last year this quarter to this quarter. And if we add the net interest income of NOK 388 million, an increase on the net interest income with the NOK 25 million on net commission and our income and compare that to the NOK 67 million increase in operating expenses, we believe we have a very sound development comparing revenues with the increased cost and still with impairments on a very low level, but then with the fluctuations in net income on financial investments. If we look at the lending volume, the growth is high on 10 but it's also high on the deposit side. We haven't had any outflow of deposits, even though with higher inflation, higher cost of energy and a higher interest rate. If we look on the right-hand side, you see that for the group in total, we have increased the lending margin this quarter and slightly reduced the interest margin on the deposit side. But all together, we have strengthened the combined margin, and this is actually kind of the pattern in all 3 segments, both the retail segments and large corporate and the SME and agriculture. So due to time constraints, I will not dig into details for each of these segments. The loan portfolio remains very much with the same industry breakdown. More than 60% of our portfolio is retail and mortgages for profit purposes and with a very strong underlying credit quality. And just to summarize on the liquidity, our liquidity is very strong. Also our capital adequacy rate remains on a high level. We are well in compliance with all capital requirements from the Norwegian FSA. And as shown on this chart, after a challenging year of 2020, the loan losses have remained on a very low level now for, I believe, 8 quarters in a row, and we have even added more than NOK 200 million extra in provision on the IFRS 9 collective impairments by increasing the probability of default to kind of be even more prudent on our provisioning due to the challenging macro environment, but more in Europe than in Norway. So we strongly believe with that we are under conservative side both with individual impairments and the collective and permits. So I believe that summarizes the financial position of the bank at time being. We regard the macro environment as benign for high activity. And even with higher interest rate, we feel confident that we should be able to grow the bank possible and targeting the 13% return on equity target. So with these words, I hand over to you for questions. So please unmute and ask questions if you want. Anyone?

[Benedicte Fasmer, executive]

No questions. Okay. We can't see any hands here anyone raising their voice.

[Inge Reinertsen, executive]

So just kind of to encourage you, if you have any follow-up questions, don't hesitate to contact either Morten Forgaard on Investor Relations or myself Inge Reinertsen, CFO, and we will be more than happy to assist you on answering questions at a later stage. So thank you all for joining this conversation.