Sparebank 1 SR Bank ASA

OSE:SRBNK

Earnings Call Analysis

Merger Enhances Growth and Solid Financial Performance

SpareBank 1 SR-Bank reported strong financial performance in the second quarter, with a return on equity of 14.6%, surpassing its 13% target. Profit before tax rose by 10.2% year-over-year to NOK 1.472 billion, driven by strategic growth initiatives. The merger with SpareBank Sør-Norge, effective from October 1, is anticipated to generate NOK 2.5 billion in capital synergies and NOK 150 million in annual cost synergies. This merger positions the bank as Norway's largest savings bank with a loan book near NOK 400 billion, enhancing its competitive edge and market presence.

Strong Financial Performance and Growth

In the latest earnings call, the company reported a solid increase in profitability, with a profit before tax of NOK 1.472 billion, marking a 10.2% rise compared to the same quarter last year. Over the first half of the year, profits soared by 20.4% to NOK 2.971 billion, buoyed by successful growth strategies that have paid off across all market segments. The return on equity stood impressively at 14.6%, comfortably exceeding the management's target of 13%.

Improved Cost Efficiency

A notable highlight is the improved cost-to-income ratio, now at 34.9% compared to 39.6% from the same period last year. This reduction signals enhanced operational efficiency, which is vital for maintaining profitability as the market becomes increasingly competitive.

Stable Lending and Credit Quality

The company achieved a robust lending growth of 7.5%, with indications of stability in lending margins. Despite some pressures on deposit margins due to competitive conditions, the company has managed to slightly increase its lending margin by 5 basis points. Additionally, impairments on loans remained low at NOK 103 million, or 15 basis points, which the management regards as a normalized level, reinforcing the confidence in the credit quality of their portfolio.

Strong Growth in Retail Segment

Particularly encouraging is the notable growth within the retail segment, which experienced a 2.6% rise. The net income from real estate brokerage operations increased significantly, reaching NOK 134 million from NOK 91 million the previous quarter. This growth in retail not only boosts revenue but also enhances the company's capacity to expand its lending capabilities.

Capital Position and Future Prospects

The company is well-capitalized, with a core capital ratio of 17.7%, exceeding the new requirement of 17.4% that will take effect later this year. This healthy capital position provides a solid foundation for future growth, particularly with the upcoming merger that is expected to strengthen operational capabilities further.

Guidance and Outlook

Looking forward, the company aims to maintain its positive trajectory. The management is optimistic about continued market growth and plans to leverage its diversified portfolio to tap into further opportunities in Southern Norway. Analysts and investors should monitor the impacts of market competition on margins and the effects of the impending merger on overall performance.

Earnings Call Transcript 2024-Q2

[Benedicte Fasmer, executive]

Good afternoon, and heartly welcome to the very short presentation of SpareBank 1 SR-Bank's results for the second quarter of 2024.

We have, over time, worked consistently, both structurally and organically, in order to strengthen SR-Bank's position both in the market as well as contribute to a stronger SpareBank 1 alliance over time, and this is what we actually now see some results from -- in the present quarter.

In the first half of 2024, we had a good underlying growth in the group. We had increased loan growth, growth in other income and low loan losses. In addition, we have worked in order to prepare for the merger with SpareBank Sør-Norge, which will take place from first of October.

When we merged the seventh largest and the largest -- these 2 banks, #7 and #1, both SpareBank 1 banks, we will by far become the largest savings bank in Norway. And we will have a loan book close to NOK 400 billion. And if you look at our retail and offices distribution, we will have 65 offices along the Norwegian coast, in the south of Norway. And if you look really well at the picture, it's a very nice smile.

The merger will give us increased competitive advantage and also an opportunity to give loans to larger corporates. It will -- we'll have an increased presence in Southern Norway, our market area. And we hope to become even more attractive to both customers, our employees as well as our shareholders and owners. We will become a very forceful savings bank and with head office and head office functions outside the Oslo region and with the loan book composition of approximately 65% retail and 35% corporate loan book.

We have had or asked for business as usual from our employees in the period since we announced the merger in October of last year and until the merger will actually take place first of October, as mentioned. And I must say I'm very impressed with the 2 organizations' ability to actually deliver increased growth and acquiring increased market shares in both banks leading up to the merger. All the necessary permissions from regulatory authorities are now in place. although subject to some conditions, but we will lift all of those conditions and very confident that we will actually merge on the first of October as planned.

The synergies from the merger will be around NOK 2.5 billion in capital synergies and NOK 150 million a year in cost synergies. And we also have a very clear ambition to deliver on income synergies going forward.

We have announced the new group management of SpareBank 1 Sør-Norge, the new entity, and it will be operational from the first of October. We have as -- one of the changes is actually to increase the customer divisions by 1 and introduce private banking as a separate area of new growth in the merged bank. And we have also 3 divisions which will deliver services and efficiency to all 4 customer divisions will -- and operate across the 4 customer segments.

We also are very -- not concerned, but we want the real estate brokerage and the accounting house to be a very integrated part of our business, and we've organized those 2 important subsidiaries into the private market segment and the corporate market segment, respectively.

SpareBank 1 SR-Bank's loan book today is NOK 285 billion at the end of the second quarter, and it's distributed across Southern Norway, with the highest weight in Rogaland where we have more than 50% of our loan book. We've had a loan growth over the last 12 months of 7.5%, equivalent to NOK 20 billion, which we are very satisfied with. Our growth is solid in all market segments, but we have the highest growth outside our home base, Rogaland, also in the second quarter.

If we look at the return on equity, we delivered 14.6% in the second quarter, well above our target of 13%, and it was at the same level as last quarter as well as same period last year. Our result before tax was NOK 1.472 billion, up 10.2% or NOK 136 million compared to the same period last year. And if we look at the first 6 months in total, our result increased by 20.4% to NOK 2.971 billion. The strong result is a result of that we succeed with our growth strategy.

And if we look at the quarter on an isolated basis, we grew on a group level by 2.3% and by 2.6% in the retail segment. And we consistently work to take out efficiency in our distribution and make -- and fine-tune our operations in order to optimize our advisers' work and to have enough capacity to serve the customers well. And the strong growth we deliver in today's market confirms that what we -- those initiatives are giving results.

We have increased our presence in Oslo, and we have also higher activity and growth, and that gives us somewhat higher costs. But the cost-to-income ratio is at 34.9% for the group, down from 39.6% last year and at 31.5% in the parent bank. As in earlier quarters, we have low loan losses, and we have loan loss provision in this quarter of NOK 103 million, equivalent to 15 basis points, which we consider is at a normalized level.

The requirement for core capital at present is 16.4%, and we are at 17.7%, which also is higher than the new requirement of 16 -- sorry, 17.4%, 1 percentage point higher than we have today, which will be introduced the 30th of September of this year. And in our region, the businesses are more optimistic this year than -- or now than they were in January, and we think we have a well-diversified portfolio and are positioned for further growth in Southern Norway. And not the least, as exciting and merged bank with a new name, SpareBank 1 Sør-Norge from the first of October.

And with that introduction, I'll hand you over to Inge Reinertsen, our CFO, for to go through the numbers in more detail.

[Inge Reinertsen, executive]

Thank you, Benedicte. First, a short reminder that you're more than welcome to ask questions, as shown on the screen, and Benedicte and myself, we will do our best to answer after my short presentations of the figures.

If we look at key figures, as commented on from Benedicte, we are achieving the return on equity target by 14.6% versus the target of 13%. Our capital ratio stands at 126 basis points above the requirement. But as also commented on, the requirement will increase by 100 basis points as of the last of this quarter. The cost-to-income ratio far below the target of 40%. And this gives earnings per share of NOK 4.20 per share.

If we look at the main figures, we delivered a profit after tax of NOK 1.162 billion, which is fairly in line with the numbers from the previous quarter. Net interest income is down NOK 3 million on the same number of interest days. The reason why we have a decrease of NOK 3 million despite the significant growth is the fact that we paid dividend by approximately NOK 2 billion at the end of April and also the payable tax of approximately the same amount, which had then to be funded by market funding at a cost. So the underlying trend of the net interest income still is positive, although there are some pressure on the deposit margin.

Net commission and other income shows an increase of 13% quarter-on-quarter and 4% year-on-year. This quarter, we have a specific strong contribution from the real estate broker. The net income on financial investment stands at NOK 148 million. which is slightly below what we regard as an average during a longer period. So that means that the 14.6% return on equity now is delivered with a below average net financial income line. And the impairments on loan, which is NOK 103 million, which is equal to 15 basis points, is what we regard as a normalized level through the cycle. Although the underlying credit quality still remains very positive. So the largest share of this amount has arisen from one specific engagement. So altogether, this continues the very positive trend with respect to the credit quality.

If we look at the lending growth, which stands at 7.5% for the group, as such. You also see that the margins altogether are fairly stable, both on the deposit side and the lending side. What perhaps is especially interesting this quarter is the significant growth in the retail market, both on the lending side and the deposit side. And I'm also very pleased to see that we have managed to increase the lending margin by 5 basis points, although we have a significant growth within the quarter. Some pressure on the deposit margin, but after having -- some quarters had an interest margin on the deposit side on a very high level. The competition is, of course, fierce, both on the lending and the deposit side, but our position remains strong with a very strong distribution power on both sides of the balance.

If we look at some early warning indicators, it shows that underlying credit quality remains on a very robust level. We don't see any signs of deterioration, neither in the retail or the corporate market. So we feel very confident with the credit quality and also this is with a very low unemployment rate in Norway, as such.

I commented on the net commission and other income. The real estate broker EiendomsMegler 1 increased from NOK 91 million last quarter to NOK 134 million this quarter. We have some seasonal variations in this segment, but also compared to the same quarter last year with NOK 120 million. It shows a very strong underlying growth within the real estate broker, which, of course, also is important for our ability to grow the retail side in the parent bank.

If we look at loans and financial commitments, as shown on the right-hand side, Stage 3 commitments show still a continuous downward trend, which underpins that we have a very strong underlying credit quality. And also with NOK 138 million as of first half this year, it also shows that the net amount of the loan losses for the last 4 quarters -- excuse me, for last year is close to 0 after the challenging 2020.

Finally, looking at the capital ratio. As it shows, we are 126 basis points beyond the requirement. That will increase by 100 basis points as of the end of this quarter, but that gives us a leeway of 26%. And of course, we also expect to increase this further during the quarter due to profitable growth and our ability to strengthen the capital ratio. So altogether, we are in a perfectly good shape and ready for the merger, which will give us a very strong platform for continuously profitable growth.

And with this presentation, we would like to hand it over to you if there are any questions. And my dear colleague, Morten, on the first row, he is showing me that we don't have any questions. Just if you, at any time, have any questions, don't hesitate to give a call to me or Morten in the IR department, and we will do our best to answer your question at a later stage.

So with these words, I thank you all for participating and wishing you a good day.

[Benedicte Fasmer, executive]

Thank you very much.