Sparebank 1 SR Bank ASA

OSE:SRBNK

Earnings Call Transcript 2024-Q1

[Benedicte Fasmer, executive]

Welcome to the English short version presentation of the Quarterly results for SpareBank 1 SR-Bank for quarter 1, 2024. I thought I'd just start with -- for those of you who don't know it that well, I'm just going to set a [ SR-Bank ], for short, into perspective. We are Norway's largest SpareBank or savings bank. We are in the process of merging with SpareBank 1 Sør Norge and other savings bank to become a SpareBank 1 Sør-Norge, which is what you see on the right-hand side, and we will become the third largest bank in the Norwegian market and the second largest within the listed on the Stock Exchange.

We are working on the merger itself. We are planning to make it affected from -- legally from the 1st of October. It's the biggest bank merger in Norway in 25 years, and we expect to realize capital synergies of NOK 2.5 billion and cost and income -- cost synergies, sorry, of NOK 150 million per year. We also have an ambition to look forward to communicate potential income synergies at the later stage. We got the permission from the Norwegian Competition Authority a couple of weeks ago, and we are awaiting the permission to merge from the Norwegian FSA as well as we have a tax application to the Norwegian Ministry of Finance. All of those have to be [indiscernible] up before we have the permission to merge.

But we are very positive [indiscernible] actually take place well before the 1st of October. If we look at the merged bank, we will become approximately 65, 35 percentage share in the retail market and the corporate market, respectively. We will serve the big smile in the South Coast of Norway from Bergen and the Northwest; [ Rogaland ] to Oslo in the East. We don't have any overlaps. This is the merged -- or a picture of the merged office structure, and we will not have any overlaps in any towns or cities.

So it's very complementary -- 2 very complementary banks. And we also -- both banks or both groups have quite a large accounting business. Altogether, we will be 550 people working with accounting, making accounts for companies. And we also have a similar structure on the retail broking side -- real estate broking side.

If we look at the -- this is the -- now I am back to just SpareBank 1 SR-Bank, prior to merger and as of first quarter, 2024. This is our growth split down into regions in Norway. And you also see where we are represented. And you see there, in the big smile, we lack a couple of tooth or teeth to the right, which would be part of the -- or where the merger will actually make the smile complete.

We have a lending growth altogether in the quarter, 12-month lending growth of 7.7%. It's well diversified in all the 5 regions as you see on to your last and I'm also quite pleased to see that we are able to grow in our home market, which is [indiscernible] on the very left-hand side of this slide. We have a growth of approximately 15.5% in the SME -- corporate SME segment, 9.9% in large corporate segment and 5.8% in the retail market, and we grow by more than the market in all 3 segments.

If we look at the first quarter result, it was as close as we can come to NOK 1.5 billion in pretax profit, an increase of 32%, if we compare it to the first quarter of last year. And in the fourth quarter of '23, we recorded a one-off income due to a sale of a possible business. If we disregard that, this quarter is actually the strongest quarter in nominal terms in the history of SR-Bank, which I think I can allow myself to say, I'm quite proud of. The return on equity was 14.6%, well above our goal of 13%. As I mentioned, we have a growth -- exceeding the growth in the credit market both in the retail and corporate market. So we are gaining market shares. We have profitable growth all the way.

And if we look at our net interest income, it increased by 26% as a result of high growth, higher margin and higher rates on the equity capital. In addition to that, we have good growth on other income and the businesses that we own. So all in all, we are quite pleased with the top line growth. Our ambitions to grow in -- particularly in the [ auto ] area and a higher level of activity has given us some higher costs, but our cost-to-income ratio is 35% in the first quarter, down from 39.5% in the same quarter of last year.

And if we look at the parent bank, it came in at 31% compared to 34% in the same quarter last year. We have low loan losses, 5 basis points, NOK 35 million, and Inge will give you a bit more detail as to how that is composed. And we are well capitalized at 17.6%, which gives us core capital, which is 1.25 percentage points above the required level. And with that, a little start, I'll hand you over to Inge, who will go a bit more in detail on the numbers.

[Inge Reinertsen, executive]

Thank you, Benedicte. Just to have a quick look at the key figures. Our return on equity target is 13% and with 14.6%, we are well above that. Also on the capital side, as commented on from Benedicte, target at time being, is 16.37%, leaving us with a headroom of 125 basis points as of today. But as we have become a SIFI-Bank, the capital requirement will increase by 100 basis points by last or by end of third quarter, increasing that target 100 basis points.

But still, our Common Equity Tier 1 capital ratio is above that requirement, and we also, of course, expect profitable growth, adding to the capital ratio for the 2 upcoming quarters. Also, with the merger in place, we will have significant capital synergies. So our capital position is undoubtedly strong and we will have a good headroom for the capital requirements and also being able to have a profitable growth and a steady dividend to our owners.

The cost-to-income ratio is commented on already, and the 35% is well below the 40% or less target. We can then look at the main figures. Here they are, as you can see, we managed to increase net interest income by NOK 14 million compared to the fourth quarter. That is also we won less interest day, which is approximately accounts for NOK 19 million and also the fact that by year-end, we have to capitalize the deposit range towards our customers, and that adds cost of funds.

So with the underlying growth, we are content with the development in the net interest income. And if we look at the lending and deposit margins separately, we have managed to increase the lending margin, although there is some pressure on the said margin from record-high level. Net commission on other income increased by NOK 15 million compared to last quarter, strong contribution as always from the net commission and other income where we build portfolio and also managed to increase the arrangement fees from our corporate customers significantly this quarter.

The 14.6% return on equity came with a net income and financial investments below average with NOK 149 million (sic) [ NOK 1,498 million ] and we have some negative basis swap effect this quarter, but also a good contribution from partly-owned companies. [indiscernible] operating expenses were down by 89% compared to the fourth quarter, but there was some significant one-offs that quarter. So if we compare the NOK 826 million on an annual growth basis, that is explained on the right-hand side, which means that cost has increased by approximately 8%.

We, at the same time, as shown on the right-hand side has significantly increased the net interest income and the net commission at the same time. So of course, our outgrowth definitely outperforming peers at time being, also have some cost effect, but the upcoming merger is to make us become even more cost effective and the kind of platform for profitable growth with a low marginal cost increase is according to our schedule, and we're very much looking forward to the upcoming merger with our SpareBank 1 peer.

And the impairments on loans came in low at NOK 35 million. That is composed by NOK 125 million in individual impairments but at the same time, a reversal of NOK 90 million in the IFRS 9 collective impairments due to positive migration within the portfolio. And this leaves us after-tax expense with tax expenses with a profit after tax of nearly NOK 1.2 billion, which is a record high result if we subtract the one-offs from the last quarter of 2023. I believe that summarize the main figures, and then we will open up for questions from you. So please just raise your hand and unmute, and we'll be happy to answer any questions.

[Unknown Analyst]

Thank you for that. I can unmute now. You had a fantastic growth in [indiscernible] cooling the Norwegian market. You have based ourselves in the Rogaland, which is probably a lot of better prices to be, but you also have fantastic growth in the other areas, which you showed on the slide in both Vestland market and the Oslo area. When should we really expect that to sort of cool off if anything? Or do you extend to -- intend to move your market share even further upwards as it didn't seem like you had to give us so much on the margin side to take this kind of volume? That is my first question.

[Benedicte Fasmer, executive]

Yes. I think when the market cools off as we see signs of now, and it was actually confirmed today that the market growth and the retail side is around 2.3%, and we delivered 5.8%.I think it's just very good work, both in the digital channels as well as in all of our offices by our employees, and I don't think we intend to stop that whether or not we can keep the pace with that margin up at length, I mean, we will do our best every day I mean I was about to say a time will show. But having said that, I think we see also a tendency on the SME side that the growth is actually coming down a little bit. And I think that will affect all banks, including SR-Bank.

[Unknown Analyst]

It was more about the -- since you haven't sort of been giving that much on the margin side, it looks like it's quite impressive to be there. How do you view the competition for deposits these days? You still have sort of a probably -- wish and work for more deposits as is a cheap funding source. How should you view you in that context going forward?

[Benedicte Fasmer, executive]

We definitely would like to have a fair share of the deposit side as well. But as we do on the lending side, our ambition is to grow profitable growth. And maybe this is wrong to say, but I don't think -- we don't have an ambition to be the cheapest. I mean we have a different strategy as to how to serve our clients. And it's not being a single-product price leader. It's more -- we are in relationship banking and trying to combine the digital services with a presence either by phone or video or in our offices. And I think that's being loyal to strategy and approach, I think, is one of the core ingredients in our recipe, also going forward. And when it comes to the deposit side, you see that in our figures that it's been a bit down in the first quarter, which is mainly a result of some deposits that we lost in the municipal area -- public sector.

[Inge Reinertsen, executive]

Municipal area -- public sector deliberately due to low quality and [indiscernible] of volatility and price. So the underlying deposit growth is actually in the -- more in the area of 6% for the Group as such. So we have a nice increase on both sides of the balance scheme.

[Morten Forgaard, executive]

Johan Ström. You have a question?

[Johan Ström, analyst]

I do have 2 questions. I'll start with one, and that is on the capital side. So I'm just curious on how you see the trajectory of the CET1 ratio in the next couple of quarters. I mean we have the SIFI label coming up in Q3. So just curious on the trajectory in the next couple of quarters given the strong growth? And then also the potential capital synergies from the merger with [indiscernible]. When can we expect the IRB conversion to be completed and free up additional capital for the bank? That's my first question, and then I can probably come back with another one, if that's okay.

[Inge Reinertsen, executive]

Yes. Thank you, Johan. If you look at the capital requirement, today, our capital position is 125 basis points beyond the capital requirement. Then the capital requirement will increase by 100 basis points by the end of third quarter. So if you subtract that, we have a headroom of 25 basis points. But then, of course, we expect the combination of our growth and profitability for the upcoming 2 quarters to add on top of that.

And also, as we are to merge with our counterparty October 1, they have a higher capital Common Equity Tier 1 ratio than we have. So it will be additive. And that is even before we have the application for utilizing IRB advanced on their portfolio, which will release NOK 2.5 billion approximately. That is equal to almost NOK 7 per share.

We don't know when that application will be granted, whether it will happen in the fourth quarter this year or the first quarter, 2025, but we expect to have a capital position which gives us kind of headroom for both profitable growth and a steady dividend according to our dividend policy and even a potential for even more distribution as we have the application granted by the Financial -- FSA.

[Johan Ström, analyst]

That is a great answer. And then secondly, and this is my last question. On the risk-weighted density showed on one of the slides in the presentation, is at 40.4%. Just curious on how you see this moving forward with the strong growth in the corporate market compared to perhaps a more capital-light retail market? Is it going to creep up a little bit? Or how should we think about the risk-weighted asset sort of development in the next couple of quarters?

[Inge Reinertsen, executive]

We are aiming at having a growth in risk-weighted assets less than the nominal lending growth on the corporate side. We have deliberately kind of excluded new engagements in the higher risk categories. And by that, we expect also for the upcoming period to have a lower growth on the risk-weighted assets than what we have on the nominal lending side, making the total risk in the portfolio even lower than what we have today.

[Benedicte Fasmer, executive]

And as I mentioned earlier, we do see some less demand also in the big corporate segment, if we look ahead. So monitoring our current pipeline, I think that we are quite comfortable that, that would be the situation as we go forward. And remember that it's -- it's a bit -- I was about to say funny, but that's probably the wrong word. But we are a SIFI Bank as of now. The capital requirement will be increased by 1 percentage point, 30th of September. We know the 1st of October, this will certainly not be an issue. And we will make sure that we will actually maneuver well over that point, which would be a minute of potential discrepancy in worst case.

[Johan Ström, analyst]

Just coming back to the answer there. You said you are avoiding to take on too much risk on the higher risk categories. Does that include commercial real estate?

[Benedicte Fasmer, executive]

All industries.

[Inge Reinertsen, executive]

Yes, but not -- we are still open for commercial real estate, but we don't want it to add risk into our books.

So the higher risk categories that kind of -- is relevant to all industries, including corporate real estate, but that means that we are still open for corporate real estate in the lower risk categories.

[Johan Ström, analyst]

Congrats on the great quarter.

[Morten Forgaard, executive]

I think then it's Håkon Astrup.

[Håkon Astrup, analyst]

One question from me on the margin development. We are now likely to see a bit longer period with a stable Central Bank benchmark rate. How do you think that, that environment will impact the competition and the margin development?

[Inge Reinertsen, executive]

We are kind of always humble in the meaning that the competition is fierce at all time on both the lending side and deposit side. We have seen some pressure now on the deposit margin. However, we have managed to increase the lending margin. So altogether, we have increased the total margin by 28 basis points during the last 12 months. And of course, even if we have now a pressure on the margin, the growth and the underlying cost efficiency of the group, which will be even further strengthened by the upcoming merger, we clearly means that, that actually was in a very good position for profitable growth and fulfilling our above 13% return on equity target.

[Håkon Astrup, analyst]

But on the deposit side, do you still expect that, as a customer will move [indiscernible] from low-yielding transaction accounts to higher-yielding saving accounts or move from saving accounts to the term deposits, which has higher rates? Or do you think that, that environment has now stabled out a bit as it seems that the Central Bank has reached a top in terms of interest rates?

[Inge Reinertsen, executive]

I believe most customers, they have kind of transferred their available cash from local yielding [indiscernible] accounts to the savings accounts, doing whatever they can to increase their deposit rate. And of course, from accounts with almost several rates to high-quality deposit accounts, you have a very, kind of, variety in different interest rates. But of course, it's very difficult for us to kind of predict what our competitors will do on their margins, but we will be competitive, no matter what our competitors do. And we also have a very strong kind of access to market funding, if we have a pressure on the deposit margin and we don't want to kind of follow up on the race on the margin side.

[Benedicte Fasmer, executive]

But I think, Inge, I can just add a little bit of flavor to that. I think we have -- there is an increased competition on the deposit side, without a doubt. And I think also the -- we have seen more than 60% higher activity when it comes to request from clients on price or seeking advice. And we see an increasing trend on price demands or references on the deposit side as well. So I don't think that is over, Håkon. I think it will continue going forward.

Any other questions, Morten?

[Morten Forgaard, executive]

Yes, we have one from -- it's only stated M, we don't have the full name. So please go ahead.

[Benedicte Fasmer, executive]

Sounds like James Bond with M. Are you there? We can't hear you if you try to unmute.

[Morten Forgaard, executive]

Now the hand is down. So I think we'll conclude this session then.

[Benedicte Fasmer, executive]

Thank you very much for your attention, and thank you for calling in, and please don't hesitate to keep in touch or contact either Morten, Inge or myself if you have further questions.