Sparebank 1 SR Bank ASA
OSE:SRBNK
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Earnings Call Analysis
Q3-2024 Analysis
Sparebank 1 SR Bank ASA
SR-Bank has just completed the first day of its merger with SpareBank 1 Sør-Norge and is now operating as a single entity. The integration, which is expected to be fully completed by Autumn 2025, positions SR-Bank favorably within a well-diversified area of Norway. In the third quarter, SR-Bank delivered a robust 17.5% return on equity (ROE), aided by a one-time gain from a merger in the insurance sector that contributed NOK 452 million. After adjusting for this and other one-off items, the adjusted ROE stands at 13.6%, indicating solid underlying profitability.
The bank demonstrated a significant annual growth in lending of 7.3%, with quarterly growth isolated at 1.7%. This strong lending growth is particularly noticeable in the retail market segment. The capital ratio remains robust at 17.8%, exceeding the required minimum of 17.4%. Future expectations are promising as the bank aims to achieve operational synergies of NOK 150 million and capital synergies of up to NOK 2.5 billion by 2025.
Despite higher loan impairments this quarter totaling NOK 160 million, the underlying credit quality remains strong with a low unemployment rate of 2% in Norway. The losses are balanced across various sectors and do not represent a significant geographical or industry risk, adhering to normalized expectations. The bank views this as a manageable situation, especially noting that loan losses accounted for only 22 basis points of gross lending.
While the bank reported a slight decline in lending margins, the impact is not deemed dramatic. The decline in margins was somewhat offset by releasing high-cost public sector deposits. Deposits from the public sector saw a negative growth, yet overall deposits excluding these are up by 4.2%. SR-Bank anticipates a future reliance on market funding over potentially less sticky deposits due to current market dynamics, positioning themselves strategically for profitability.
Management expressed confidence in the current market conditions, describing the environment as 'benign' for running a profitable bank. With the full integration of the new bank scheduled for late 2025, the prospect of increasing housing prices and ongoing demand for banking services signal a favorable outlook. The focus remains on achieving sustained, profitable growth with an emphasis on maintaining high credit quality.
The bank did experience a dip in net commission income compared to the second quarter, attributing this partly to seasonal trends affecting real estate activities and a lower overall activity rate during the summer months. Anticipating an uptick in income from other banking services, management urges investors to adjust expectations based on previous seasonal averages for a more accurate picture of future performance.
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Good afternoon, everybody, and welcome to this Third Quarter Presentation for SR-Bank Group and the new SpareBank 1 Sør Norge.
My name is Inge Reinertsen. I'm newly appointed CEO of SR-Bank Group after being CFO for 14 years and being an employee of SR-Bank Group for the last 23 years. Together with me is Mr. Roar Snippen, who is constituted CFO; and also Mr. Morten Forgaard, who is Head of Investor Relations.
I will give you a quick run-through of the third quarter figures, both covering the figures for SR-Bank on a stand-alone basis for the third quarter and also some pro forma figures for the new bank.
We have completed day 1 of the merger on October the 1st. We had a thorough planning for that merger, and everything went according to plan, and we are very happy to now have become one bank after planning for this for the last year. We will be fully integrated also on the system side during Autumn 2025, and we are also now doing the planning for the full integration.
If we look at the map, I'm proud to present this new bank as a very well-diversified bank after having presence on the West Coast of Norway for many years. We, in 2015, decided to become a more diversified bank. We have taken down the concentration risk on the larger corporates.
We have been a broader bank geographically and the merger with other SpareBank 1 Bank, Southern Norway, also gave us a significant portfolio within the countries of Telemark, Vestfold, Buskerud. This is a very well-diversified bank within the most affluent area of Norway, giving us good growth potential and a very profitable growth, we should be able to gain.
If we look at the main figures for SR-Bank for the third quarter, we delivered a 17.5% return on equity. This quarter, we had some one-offs. We had a gain of NOK 452 million from the merger between Eika Insurance and Fremtind Insurance, the non-life insurance companies. We had, at the same time, a write-down of shares in a company called Folkeinvest of NOK 105 million, and also, we had a merger cost of NOK 65 million.
But if we exclude these one-off items, we had a 13.6% return on equity after tax. I'm very happy to enter into this merged bank with a strong lending growth, equaling 7.3% on an annual basis and as shown on the third quarter isolated on 1.7%, where retail market actually now has the strongest growth at time being.
The capital ratio stands very strong on 17.8%. SR-Bank became [ SFI ] Bank a year ago. And by September 13, we had to also increase the common equity Tier 1 ratio by 100 basis points, leaving the requirement on 17.4%. The 17.8% fully fulfilled this. And we also, as I will show you, have an even higher capital ratio if we look at the pro forma figure, which are kind of the figures on October 1 after having the merger.
Some -- to some extent, a bit higher loan impairments on lending and financial commitments this quarter, but we -- still with a very strong underlying credit quality. And as shown, the cost-to-income ratio remains very low at 32.3%.
If we look at the key figures and the quarterly development, we are well beyond the 13% target on return on equity, have been that for quite a few quarters. Now the capital ratio stands 40 basis points higher than the target and also the cost-to-income ratio is well below the less than 40% target.
If we look at the main figures, we managed to increase the net interest income by NOK 42 million compared to the second quarter. And we also managed to increase the net interest income by NOK 173 million compared to the same quarter last year. Financial -- excuse me, operating expenses are a bit higher this quarter because we have some costs related to the merger. And altogether, we delivered a profit after tax of NOK 1.450 billion for SR-Bank on a stand-alone basis.
If we look into the figures for the fully the pro forma new bank, you will see that the new bank, if it had been merged already for the third quarter, would have delivered a 16.2% return on equity and excluding the one-offs, a 12.8% return on equity. The common equity Tier 1 capital ratio would have been increased by 0.5%, up to 18.3%. And at the same time, the fully integrated bank would only have increased the impairments by NOK 6 million to NOK 166 million.
This shows us that we have now become one bank with a very strong position within our market areas. We will, of course, work now on achieving synergies, both on the capital side and the operating side, which I will show you on this slide. And also, we expect some capital synergies from the NOK 2.5 billion identified that will come during 2025. We are now working with the operational synergies to -- seek to increase them even further from the NOK 150 million, and we will come back with new estimates on that when we present the figures for the fourth quarter.
If we look at outlook, we are very confident that our market area is a very benign area for running a profitable bank. And we have a very strong position within this market area, and we look forward to have a full integration of SpareBank 1 Sør-Norge, which is expected to take place during Autumn 2025. That was a quick run-through of the figures.
That means that we now can leave it to you to ask a question. And please just raise your hand, and I can see that Hakon Astrup from DNB is the first. So please, Hakon.
My first question on the loan losses. Could you shed some light into what is driving the individual loan losses this quarter? Any particular sector, any particular, say, geography that is driving this development? That was the first question.
Yes, I will, Hakon. On screen, I'll show you some underlying early indicators, which are all flattish both within the retail and the corporate market. Even though the loan losses are higher this quarter, I'm not worried in the meaning that it's not a particular industry that drive the loan losses. Of the NOK 160 million, NOK 39 million is IFRS 9 losses on portfolio, NOK 121 million are individual. Of the NOK 121 million, we have one larger engagement, which stands for approximately 40% of that. And it's not a particular kind of geographic segment nor industry segment that kind of drives the loan losses.
So of course, over time, we should expect some loan losses. The NOK 160 million is equal to 22 basis points if you look at SR-Bank. And if you look at it on a consolidated basis, it's equal to 17 basis points of loan losses on gross lending, which is according to what we could expect as normalized levels of loan losses through the cycle. The unemployment rate remains low on 2% in Norway as such. So I'm not worried that this is kind of any sign of kind of a weakening credit quality.
So you're not seeing any disproportionate share of the losses coming from the Oslo region where you have been taking, say, most market share over the last 5 years?
No. No, that's not the case. The loan losses are kind of distributed in between geographies and also industries.
Perfect. And then my second question on the capital side. On the slide, you showed the different capital synergies and the timing. I see you state that you expect IRB to -- or expect the capital synergies to come next year. Have you received any, say, confirmation from the FSA? Or have you been in dialogue on the timing of this? Or is just your best estimate or your hope on when you will see the approval of the IRB model?
Yes, it's the latter. They don't give kind of any guidance on how fast they will hopefully grant the application. That's why we are kind of wide in the interpretation of this, saying 2025 because it's kind of a third-party decision from the regulatory authorities, and we actually don't know when it will arrive, but we expect it to be granted in the year 2025.
Is there a risk that it may be prolonged until '26 as well? Or is that too pessimistic?
That risk should be very low, and that is at least not what we are expecting. And in addition, we have also another option if this were not granted and when we have the fully integrated bank, we also can transfer this portfolio from the mother bank to SR-Boligkreditt and then you get on the IRB platform. You won't release 0.7, but the main portion of the 0.7 can be utilized using SR-Boligkreditt or the cover bond entity.
And then you have to wait for the technical merger for you to do that? Or can you do that right away?
No. We have to wait for the technical merger, but that is planned to take place during September, October 2025.
Perfect. And my last follow-up on capital. Can you just remind us of the moving parts on the capital side in Q4? I remember last Q4, you had a lot of, say, moving parts, but can you remind us of the moving parts that you know at least as of today?
Yes, it's a difficult question because it's a bit early still. But I think on -- where we have had some risk is on the operational. That calculation is based on the revenue, so -- and the 3-year average. And of course, this year is much better than 3 years ago. So that will be an increase on the risk weights.
But on the other side, we have had last year, tax, which were pretty high. So we expect now the swaps to be not to have such a negative value. So that we believe will be a release. So that's -- are the main parts of it. And I would expect that to be pretty even. So not a big portion of that.
In this graph, we have said that 100% of the results of Sør-Norge is included in the CET1. So of course, for [indiscernible] Bank, we have 50% dividend into the figures, but that's not on the Sør's side. So that said, that will be -- it's the 50% if we have a payout ratio of 50%, of course, we also include the portion from Sør-Norge.
And the next one is [indiscernible] from [indiscernible].
Can you hear me?
Yes, we can.
Okay. Sorry. I just wanted to shed some light into the better volume growth you sort of had this quarter. And you pointed to some of your geographically areas where you had a growth. How can you just -- how do you see the sort of the turnaround for the bank sort of merging with the old [indiscernible] when it comes to growth because they have had some slower growth steam at the end of their pace, but it seems like it's coming up a little bit again. So how are you integrating? How are you working now with your front desk when it comes to lending growth to keep up this pace, which seems to be then quite high on a group level?
If you look at the -- for Sør-Norge, we had very low growth in the corporate side. And it's still quite low on the corporate lending. On the retail side, it's growing as more like SR-Bank ASA, marginally lower. But I think we are fully set up with resources now compared with the former organization to keep up the growth as we have had in the third quarter.
That said, we are focused on having profitable growth compared with the requirements on 30% return on equity. But the organization is fully set up. We have all the resources and the needed capacity to keep on the growth if it's in the profit area in the market also in the fourth quarter. If that was your question, [indiscernible] [ Erik ].
Yes. Yes, it's more about how you sort of will start to focus more on the growth in your area. And as I said, more on the eastern part of Norway, which has been not struggling, but it has been challenging to have growth in the area. And so the profitable growth, is it easy to get? Or is it hard to get? So should we expect competition to gradually take down your margins? Or how should we read it then?
I would first just say that [indiscernible] [ Erik ], that we had low growth in the South area, not in Oslo in the retail side, mainly due to the resources, the organization after the merger with the other banks. As I mentioned earlier, we had to employ new employers, they have to get the authorization and to all the authorities. They need to fulfill the loan book. But that is on setup now. But as in all the areas, the competition is quite tough.
Yes.
Okay.
The competition is always fierce. But of course, with flattening and even declining housing prices for quite a long time in the Stavanger area, we have kind of a distribution force that is kind of trained and equipped for working very systematically on how to attract new customers. And also now we are seeing some appreciation on the housing prices, which are low in a large share of our market area. And probably that will also give some uplift or add some growth to the figures with an increasing housing prices.
Yes. And related to growth on the corporate side, I think that would pick up because ASA has a lot of resources on some of the areas, which [indiscernible] didn't have knowledge in. That is especially for large corporates and with agriculture. And we have some more resources on small and medium enterprises. But it's from the build and landing side of the book, it's very low growth still in the area.
Okay. On the margin side, we can just see from the high level depending on how we look at it because you have many good slides here with the 2 banks and the pro forma numbers. But if you look at the high level, it seems like the lending spreads are coming a little bit in. So it means that you have lost some spreads on the lending side and on the deposit side.
Could you shed some light into what happened on the deposit side? Because it seems like it has increased a little bit more than what you have lost on your lending side. So has it been any product changes or any migration between customers? Or how should we read the difference between the lending and the deposit spread changes?
If you look at the deposit volume chart and the annual growth, you will see that it's negative on an annual basis, and that is explained by deposits from customers in the public sector and treasury which we have kind of released.
So if you look at the growth without them, the growth is 4.2%. But at the same time, if you look at the margin side, losing those highly priced deposits will in itself increase the deposit margin. So it's kind of -- having kind of the disguise on the figures here due to that effect. But as commented on, we lose a few basis points on the lending margin, but nothing dramatically.
So you're aiming to fund more in the MREL or covered bonds market going forward since that's more favorable than some of these highly priced deposits. Is that how we should read that?
Yes. If you look at the quality of these deposits, they are, of course, not as sticky as the market funding is. And at all time, when we are having tenders for new municipalities and so on, we look at what kind of -- what is the alternative cost of market funding. And then we have kind of deliberately lost the competition on some of that funding because if you look at the pricing compared it to the quality, we are better off with market funding.
Okay. On the fee side, it seems like you missed out a little bit on expectations. Is there any level on which you should sort of -- which is not a seasonal effect or where you sort of -- you were just a little bit disappointed on the fees and provisions on Slide #9.
Yes. If we look at the net commission and other income, you will see that it's lower than the second quarter. Of course, the second quarter has some seasonal effect on the [indiscernible] part of the accounting companies and also the real estate broker in EiendomsMegler 1, where the second quarter is much higher activity than the third quarter where you have holiday and very low activity in -- especially in July.
Also, it is a bit lower on the arrangement and customer fees. And on the savings placements, the NOK 47 million last quarter was a bit elevated due to what we call periodization. Yes. So you should kind of look at the NOK 30 million plus NOK 47 million and divide by 2, which is more of the accurate level of more than NOK 38 million. So altogether, it's kind of pretty flat this quarter, taking the seasonal changes into consideration.
Perfect.
Anyone else having questions, please just raise your hands.
This is Thomas Svendsen from SEB.
Please Thomas, go on.
Yes. So -- yes, two questions. On margins, deposit margins to households and SMEs as you see it now, do you have to -- could you sort of shed some light on the market dynamics? Do you have to increase the terms for the clients now? Or is stability in client terms in those 2 segments most describing?
Yes. I think if you look at the retail market, we don't see that. We have been very flattish on the deposit margin on the retail side. I think there's more competition on the SME side. So if you look at SMEs, we have lost some deposits due to price. So I think the price sensitivity is a bit higher on the SME side, currently.
Okay. And the second question, have you said anything about restructuring charges for Q4?
No, we haven't given any guiding on the cost side. And due to kind of the accounting principles, we booked the cost when they occur. And this quarter, they are kind of high because we have paid our counselors on the merger this quarter as kind of no -- nothing was kind of keeping us away from the merger. So when everything was okay, we paid these costs. But the -- so -- the cost for merger will definitely be lower in the fourth quarter than it was in the third quarter.
Thank you. I don't see any more hands. So anybody feel free if you have questions.
It doesn't seem like we have more questions, then I will just take the opportunity to thank you, everybody, for participating in this short conference and wish you all a good day.
Thank you very much.
Thank you.