Avanza Bank Holding AB
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Ladies and gentlemen, welcome to the Avanza Q1 Report 2019. Today, I am pleased to present Rikard Josefson, CEO; and Birgitta Hagenfeldt, CFO. [Operator Instructions] Speakers, please begin your meeting.
Okay. This is Rikard Josefson. Thank you for listening in on our Q1 results presentation.I will start off by just commenting on the sanction that the pension company within Avanza got in February for SEK 35 million administration fee. And all in all, it was due to a poor implementation of the Solvency 2 regulation that went into place in the 1st of January 2016, and we agreed with the authorities of the implementation by itself. But you also see that the actions we have taken actually from a little bit more than a year ago where we have changed the Board in the company, we have one Board member left, the rest of the Board is new, and we also put our new Board members in the annual meeting here in March. We also made the CEO change who left the company. We are now have an experienced pension CEO in the company. So we're quite confident for the future because the pension company is, of course, still a very important growth area for us.And we can also see that the occupational pension capital has grown 27% year-on-year. So the underlying growth in the company is giving us the confidence, and the ongoing monthly inflow just from premiums paid in by corporate is in excess of SEK 200 million a month on a rolling 12-month basis.Also commenting on the pension company, we have talked a lot the last couple of years of the legislation when it comes to removing pensions into Avanza from other pension companies and the actions that have been in the legislation. We've got a new legislation proposal right now, which was at the first glance quite promising but digging into it a little bit deeper, there will still be incentives for companies losing volumes to charge for embedded value 10 years back, which is quite sad for the Swedish consumers. But of course, we cannot just feel sorry for ourselves in that respect. So we are working a lot on even though the processes are quite burdensome to increase the moving of pension into Avanza from other company and we see there's a customer interest for that. So all in all, we have great confidence that our pension company, our pension offering and using the pension company after gathering to -- will increase the inflows into Avanza in the next couple of years.Coming back to a bit more short term. We can see that the quarter, we considered a decent quarter. We still had a continuous growth in number of new clients, which is that we are tracking to 1 million clients next year. The net inflow was satisfactory, looking at the quarter, which show different phases in the quarter. I would say that the quarters, even though the stock exchange increased in January, activity didn't increase in January as much as the stock price has increased. But going into the quarter, we saw picking up Avanza client trading activity. We saw the fund volumes coming back. On average, it was a bit weak in the quarter. But at the end of the quarter, the volumes are -- were at very, very good levels.So that makes us confident going forward into the future. We can see that the increased interest on clients' investment in funds. Brokerage was up, but the turnover decreased from 9.8 to 9.4 basis points. We also saw as a seasonal effect not that many Corporate Finance activities. But we also have -- in the pipeline, we are confident that if nothing happens with the market conditions, the Corporate Finance business will pick up in the year. And we also saw that the volumes in our Mortgage+, again with Stabelo, reached over SEK 7 billion. We also noticed that the fund was -- a little price war has emerged. And we also see activity with the larger banks, calling the customer who wants to move the mortgages and try to -- have like the recovery units to keep them. So I think there will be intense competition when it comes to mortgage shifts going forward, but we are confident that we will be able to handle that quite well.Going to the next slide, we can see that the turnover, the stock exchange, we actually increased our market share a little bit when it comes to number of transactions. We see that the institutional investors, part of the trading was decreasing and turnover was quite stable. So we are keeping our position as the #1 on transaction on the stock exchange which, of course, is important for us to keep volumes up and to get good prices for our clients.Moving on to the next slide. Of course, it's a lot about costs. We have a budget that we have communicated, 10.5% increase in costs during this year. We are confident that, that will be something we can deliver on. And I also think it's worth noting that compared to other similar entities, like Avanza, we have over 70% related to stock cost because we do everything almost in-house. That means that increasing stock cost is increasing our ambitions when it comes to time to market, to development and also to give our clients a better customer experience and good services. And we still have a target to reach [ 16 ] of our payments in cost which is the #1 in the industry to have that. We think we will do that both by being cost-efficient, but also by growing the savings capital over time, and that I think will be the way to fame for us.And other cost, just mentioning, is actually market data that we give to our clients, premises and some IT costs. So I think our cost structure is quite simple. And if we want to increase time to market, increase our ambitions, of course, we will increase cost when it comes to stock.Going to the next slide. Of course, we have also done other things during the quarter. One is we have a new starting page for our clients, which is always a tricky thing to do because customers are used to the starting page. But the customers seem to like our new starting page a lot. We have also educational savings, schools that we have to reach new clients, a new clients group. Also, I think we have done something excellent for the consumer in the transparency, where they can see exactly what they have paid during 2018 and see how much was Avanza, et cetera, et cetera. And that, of course, is something connected to MiFID II, which over time, I think, will be very beneficial for us because I think that transparency and the security for the customer is what they are paying, is going to be an important factor in the future.When it comes to new products, we have launched Avanza Gender Tracker, which is an alternative to ETF and we now have over in the excess of 25 Avanza trackers on Avanza markets, which is appreciated by the clients because to have an alternative through the ETFs have been in demand from our clients. We also see that Avanza Global, our global index fund that we launched on 26th of August last year, which I must say was not the best timing because we all know what happened to the market, I think there was index peak on the 29th of August. But now we are seeing good inflow in that fund, and we have around SEK 2 billion in it.And also in Avanza Emerging Markets, which we launched here 2.5 weeks ago, something like that, we have seen a great interest from the clients. It's a well-priced, well-positioned product for our client. And we have almost SEK 500 million in just a few weeks in [ past a term ], and that's a more niche fund for our clients. So we're very satisfied with that development.Going forward, I think one thing we like to note out also is that we have launched our first real open banking services and I think it's, in my opinion, the best in the industry. And this makes it a lot easier for our clients who have securities assets and mutual funds in other institutions to transfer them over to Avanza. And now this is done in collaboration, we think, but it's also we can see early days that the clients are using it more. They are moving more funds. And also in every move, they move more funds than they did previously. And this means that you can move your mutual funds from one banking to Avanza in less than 60 seconds. And you have don't have to fill out any forms or anything. And I think this is something is promising for the future in connection to our ambitions, of course, to increase the share of wallet with the existing client base. This is one puzzle -- piece of the puzzle that can enhance that strategy and I think also enhance the customer experience.Going forward to the next slide. Of course, cost growth, which will lead to increased growth in shareholder value long term, this is very important for us. We are confident that we are investing in the right things. We also see that the time to market is becoming more and more important. We launch our platform every Thursday morning. And you can see that, that ability to have that kind of speed in time to market is extremely important for the future. We also see customer satisfaction is also dependent on that we can beat fast new things on the platform, new things on the mobile phones, and the customer expects things to happen, Avanza, to create the wow factor that many want to do. But also, we see that we are becoming more and more relevant to the larger audience, the people who are not happy to the market. We see good flows when it comes to monthly savings and customer who also comes to Avanza are becoming a bit more active while they are Avanza clients as they were in the previous banks. On the core, both customer growth and share of wallet is very important for our growth -- growing the net inflow. Of course, also in the quarter, the repo rate increase helped our NII. And of course, the full effect of that, I think Birgitta will mention it, will come in the late part of the quarter. So that's always continuous growth, customer satisfaction and strong innovation is extremely important going forward. And we are confident that we are on the right track growing the business.And with those words, I will leave it to Birgitta.
Thank you, Rikard.So we will start with a financial overview. The revenues were in line with previous quarter and slightly down year-on-year. Operating expenses year-on-year were up 8% at [ 10.4% ] and in line with our budget of 10.5% cost growth for '19. Compared to last quarter, costs were down due to decline from Swedish FSA of SEK 35 million regarding the pension company, which was reported in Q4.Please note that the costs for Q4 have been amended compared to the preliminary financial statements. The costs, excluding the fine, were up 6% quarter-on-quarter.As from last year, Stabelo is classified as an associated company in Avanza's accounts, therefore, our share of Stabelo's results are included in the consolidated accounts. Stabelo's result burdened the operating cost and yield about SEK 2 million in the quarter. We are confident this is a good investment long term, even though the effects for the profit negatively in the start-up [ effect ]. All together, this gives us an operating profit of SEK 100 million in the quarter and decreased compared to Q4 of 7%, excluding the fines and a decrease of 16% compared to Q1 last year.Consequently, the operating margin dropped to 37% in the quarter, down from 44% a year ago, a result on the investment in further growth.Revenues per savings capital was stable compared to Q4 but down 4 bps year-on-year, mainly due to higher average savings capital.Costs per savings capital, which excludes the fine, was up to 1 -- was up 1 basis point quarter-on-quarter to 21 and stable year-on-year.A long-term ambition is, as Rikard mentioned, to lower the cost per savings ratio to close to 16 bps, which is in line with the best international peer.I said total revenues were flat quarter-on-quarter and slightly down compared to Q1 last year. Net brokerage increased only slightly quarter-on-quarter, despite some more trading days and increased number of commission-generating notes and higher commission-generating volume. Brokerage income per turnover decreased from 9.8 to 9.4 basis points, the result of a larger share of transactions in fixed commission classes. Compared to Q1 '18, one brokerage was boosted by the high trading increase for certificate. Net brokerage decreased by 8%. Brokerage income per turnover decreased from 10 to 9.4 basis points, while at the same time turnover decreased by close to 1%. The number of commission-generating notes increased slightly, whereas the volume was down slightly. Customer Securities are traded at lower volumes and in lower brokerage fee class.Fund commissions decreased slightly, both quarter-on-quarter and year-on-year. Quarter-on-quarter, this is an effect of lower average fund capital, causing a big downturn in Q4. Fund inflow was good in the quarter though and the markets were up. And as of March, the capital is back on high level.Year-on-year, the annualized fund commissions of some capital decreased by close to 3 bps to 33 bps, an effect of customers investing in funds with lower management fees. The NII increased both -- increased by 30% -- 34%, both quarter-on-quarter and year-on-year. This is a result of quarterly repo rate in January and consequently also higher STIBOR, which decreased the cost for our surplus liquidity. Since our bond portfolio is managed an average interest duration of 3 months, the interest rate hike was not fully materialized until in March. Income from margin lending was only slightly higher than Q4, despite increased volumes. This is due to a lower average interest rate, which in turn is a result of improved customer offering in October.All else equal, and without taking any changes in customer behavior into account, the 1 percentage point increase in the interest rate from here with today's volume would have a full year effect of interest income by nearly SEK 300 million.Other income decreased by 16% quarter-on-quarter, mainly due to lower income from Corporate Finance and lower other commission income. Income from Avanza Markets and FX was stable in the quarter compared to last year income from Corporate Finance was lower as well as the currency-related income, which last year was positively affected by the high activity in Canadian shares. Income from Avanza Markets increased.So looking at the cost. You can see that in Q4 '18, we were burdened by the fine of SEK 35 million in the pension company. If we exclude the fine cost -- if we exclude the fine, costs increased quarter-on-quarter by 6%, mainly related to personnel costs and marketing expenses. Due to the introduction of IFRS 16 in '19, leases are now -- on premises are now recognized as a right of assets and the lease liability in the balance sheet. This reduces costs from premises, including in other costs, the green line, while the depreciation increased by about the same amount, which is the yellow line.At the same time, an interest expense of about SEK 500,000, the quarter in '19, arise in the net interest income.Compared to Q1 last year, costs increased by 80%, also here due to higher personnel costs and higher marketing expenses. Personnel costs rose due to an increased number of employees, mainly related to expanded development capacity.Capitalization is good with a total capital ratio of 17.2%, which is well over the capital requirement of 16.1%, which includes all external and internal buffers and Pillar 2 requirements. Part of significant holdings, which is Stabelo group and our pension company, is now deducted from the capital base. The aggregated sum of the significant holdings can, up to 10% of core Tier 1, be managed through capital requirement for shares with a risk weight of 250%. The part that exceeds 10% of core Tier 1 must be deducted from the capital base. The Q4 figures have been adjusted accordingly.Please note that the figures for Q4 have also been changed compared to what we've previously reported due to the time from the Swedish FSA.The decrease in total capital ratio compared to Q4 is mainly due to higher risk exposure amount for credit risk regarding institutions and covered bonds. We had a one-off effect in Q4 where we temporarily had a deposit of SEK 2.9 billion at the Central Bank with a risk weight of 0% compared to the institutions that cover bonds with risk weights of 20% and 10%, respectively. This also had a temporary effect on the LTR, which reads 8 at the year-end, but now has returned to above 2, well above the requirement of 1. The leverage ratio for the group is 2.9%, which is just under the required level of 3% that is expected to be implemented in the second half of 2021.And with that, Rikard and I think we can open up for questions.
Absolutely.
[Operator Instructions] And the first question is from the line of Peter Kessiakoff from SEB.
First of all, just going back to your comment, Rikard, relating to the new tool that you've launched together with [ Think ] and you mentioned that you have better flows on the back of that. Would you say that we should -- or would you dare to guess that we should see a positive impact from that in the net flows in April? Or is the magnitude that big that we can see it on a group level? I think that's my first question.
I think that's different. And to answer that question, I think this is one piece in the puzzle to enhance our customers to gather more of the savings into Avanza. But how large effect it will have on that, the inflow on the total, I think it's just a bit too early days to make a judgment of that so far. But of course, it will have a positive effect. But the magnitude of the positive effect, I don't want to comment on right now.
Okay. Then just my second question relates to your other income, where you have the other net commission income, which is a negative number of SEK 11 million in the quarter. And that my -- as I understand, a part of that or a majority of that is marketing expenses. And when I then add the marketing expenses that you have on your P&L, it looks like the overall marketing cost for the whole group is up close to 40% year-on-year. First of all, is it -- do I understand correctly that other net commission cost is mainly marketing? And why, in that case, would marketing expenses be up so materially year-on-year? And is this a new level, you would say?
Well, first of all, that is -- the main part is not marketing. Marketing is some part of it, but it's not the main part. And the effect of the marketing has been up -- when it actually comes, what we in operation cost call marketing, that's just the -- well, sometimes, we take the cost in Q1 and sometimes in Q2. So we had a good -- something to talk about in the first quarter. The other income is a lot of other costs, including search engine optimizing, but that is not the main part. It's also cost for our mortgage product. It's cost for all other kinds of revenues that we have, cost for our customers, traders, cost for information on the website and so forth. So it's a lot of different costs.
Okay. But the level of SEK 11 million negative that we had now, is that a level of what -- that we should expecting -- expect onwards? Or was is it a temporary increase, for instance?
Well, actually, it depends. It depends on what our customers actually are using for -- on the platform. So I couldn't say if that is an ongoing trend but -- or not.
Okay. And then just on Stabelo, which, as you mentioned, burdened the P&L by just about SEK 2 million in the quarter. Is that the run rate that we should expect throughout the year? And then secondly, as you mentioned before, you have some income from Stabelo in terms of distribution fee. Would you say that if you look at the whole P&L effect at the Stabelo Corporation, is it still loss-making? Or is -- are we close to breakeven?
I think that we don't comment on our relationship with Stabelo when it comes how our distribution fee and the cost is, and there are 2 reasons for that. One is, of course, it will take time because before it has a significant impact on the P&L, that's for sure building a mortgage portfolio. And the other side of that is that there's a lot of people in the city starting mortgage funds at the moment that we don't want to disclose how the relationship between Stabelo and Avanza is in any further detail.
Right. Then just my…
Just a comment here on the SEK 2 million in the quarter. And of course, that is a -- that is dependent on how many new mortgages Stabelo actually gets. So of course, it's hard to say, if we get a lot of new mortgages, then that cost will probably increase. And if they will get much fewer, that would probably decrease.
Okay. And then just a final question on the leverage ratio, which is above -- below 3%. And I think that, as I understand it correctly, you haven't audited the results in Q1, so it should have been above 3% if you adjust for that. But do you feel that you need to do an additional Tier 1 issue before the leverage ratio legislation comes into place in 2021? Or...
Well, actually, we haven't put our foot down when it comes to that. As you see, we are constantly bit by bit getting up to the 3%. And of course, it depends on what level we decide to -- we have to have. I mean, 3% is the lowest level when we come to the end of 2021. So we haven't really finalized the discussions on how we should make sure that we at all times are above 3%. It could be a Tier 1. It could be core Tier 1 capital but nowhere in our dividend, but we haven't discussed that yet.
Next question is from Nicolas McBeath from DNB.
First of all, on the NII impact here in Q1. You're right, that the full impact on the bond portfolio from the rep rates came from March. And could you quantify how much of the total NII benefit from the rates like that came in Q1? And how much you would expect to remain also into Q2?
Well, I can, of course, not quantify that in numbers. But what I can say is that we have the full effect by the end of March. So of course, we haven't seen the full effect in the quarter from last year. You have to do your calculations yourself.
Okay. And then on -- also on Stabelo, could you say anything about the outlet for volumes? And also, there's been some comments from Stabelo over the past few weeks about considering to broaden the offering to also to higher loan to values and possibly also with down payments and bridge loans and so on. Is that something you expect to launch in 2019?
Let's put it this way. We are working -- Stabelo is working and we are working together with Stabelo in improving and broadening the mortgage offering. I think it's not today, I can disclose what we are doing, when we are doing it. As always, when we will do something, you will notice it. And I don't want to comment on our future plans with Stabelo also because I don't. We believe also that there's a lot of things going on in the mortgage market and we like to keep those cards close to ourselves. But to answer the question is that we are working on, if I go down the road and be a [ visionary ], of course, our offering with Stabelo will be different and more fully than it is today. But I don't want to disclose any time lines for that.
Okay. And then, finally, question on the mutual fund margin, which was down a bit here in the quarter. What do you think will be the kind of trend from here? Do you see -- expect any kind of further pressure on the margin given that you can launch some very low-cost mutual funds of your own? Or do you see a potential for recovery on a back of rising stock markets and the inflows into equity funds, which typically had higher fees than maybe fixed income funds?
I would comment on it like this. I think that one result, of course, is that in certain types of conditions that customers go to index fund, money mortgage fund, low-income funds for Avanza, some risk is on we get people investing in higher funds. So of course, that fluctuation will be there.What I stated previously and I say today, I think there will be a price pressure on mutual funds. I think that 1 bp or 2 down is probably a long-term trend. But I'm also confident that we'll compensate that well with volumes. I think the transparency in regard with MiFID II, I think we in industry thought that all the customers would care a lot of this in the 3rd of January 2018. I think it takes a little bit of time for customers to value the price for the products when it comes to making their investment. So I think it will result from that, but I think that the margins on mutual funds in the industry is going down a little bit compared to today. So I think that number will be a bit lower in the future.
Next question is from Ermin Keric from Nordea.
So my first question is on the commission on turnover. You say this came down to 9.4 basis points in the quarter. This mainly owing to more commissions being done on a fixed rate. Is there anything in the trend or so that points to that continuing down or bouncing back up? Or how should we read into that?
I think it's -- we communicated because we noted that during Q1. I think it's -- 1 quarter is still something that will come for the future. I think we have to wait and see to give a good answer to that question.
Okay. And then on the cost inflation. So 8% year-on-year now in Q1, could you give us any flavor on how...
Could you repeat the beginning of the question? It was some disturbance.
Sure. So on the cost inflation, you're currently below your run rate for the full year you guided for of the 10.5%. Could you give us any flavor on how to think of the phasing to reach those 10.5%?
I think we stayed with our guidance. We have stated our cost budget for 2019 is a cost to increase by 10.5%. So we do not change that comment.
I understand that, but I was more thinking throughout the year as you start the year on a lower pace.
Yes, yes.
I would say you don't have to expect large fluctuations in the increased ratio quarter-on-quarter. But of course, there will be some changes as we only used 8% this quarter. But it's pretty even over the year.
Okay. And then the last question, just on -- I'm sure you've seen Swedbank also issued this new offer, offering basically the corresponding of Avanza starts, but with savings capital up to 100,000 for their clients. Do you see any impact from this? And I mean, Avanza has historically strived to be sort of price leader. Could we expect any changes from your side to adapt to this? Or you rather wait out and see any effect it has first?
I don't think we will. I mean, Swedbank launched this yesterday, so we have not seen an effect yet. But I think that we are confident that our offering, our customer inflows, our customer satisfaction, and what we give to our clients is a very strong offering compared to all the peers in the industry. We are always following what our competitors are doing. But we are not going to rush and do something just because Swedbank did something because they don't lead our agenda. But I think that if you look at this free trading, we had it since, I think, 2016. So it's not a new invention into the market. I think the new invention is that they do it for 100,000. I think Nordea has 80,000. We have 50,000. So time will tell.
[Operator Instructions] Next question is from Jens Hallén from Carnegie.
I just have one last question. Rikard, you mentioned again in the CEO comments that the higher costs would contribute to increased growth over time. And are you worried that we might not see that through the revenue impact until 2020 or even later?
I think that we are concerned that our growth has to be sort of transforming into higher income, but we believe that the long-term target is growing number of customers, growing savings capital. And we believe that we are confident that we'll grow income over time. That's the comment that I have. Because I think that we are more and more [ deep ] every customer satisfaction, customer experience, brand recognition, brand name is extremely important to gain the client and keep the client. And we think we're quite good at that. And we think that we will get paid over time for sticking to our strategy.
Okay. Of course, you are succeeding in terms of customer numbers. Maybe as a follow-up on that, do you think that you can reach this revenue growth without adding on new products then, i.e., can you reach the -- a faster revenue growth than cost growth with the products that you have today? Or do you need to add on something different?
If you look at the long term the assets, the mortgage loan, which is still early days and we launched it, I think it was the 4th of April last year. So we have SEK 7 billion down the road, and I think the potential is much higher. That will, of course, increase our income. And as I said before, I still think we have great opportunities of growing our mutual fund business, both by the bank and the pension company. But all in all, it's about growing the volumes, the same with capital that will generate more income or the business volume within Avanza. But I think that we have the products and services in place. But I also think that we have to do more work with existing processes, existing services. We can make them easier, better, easier to use, that will increase activity among our clients as our open banking initiatives will move in securities as shown. That's one piece of the puzzle in getting more share of wallet, will -- which will be transformed into more income over time for Avanza.
Next question is a follow-up from Peter Kessiakoff from SEB.
I just had a follow-up question. Just to, I guess, pick your brain there, Rikard, a bit. If I look at products that have been launched over the last, I don't know, 6, 9, 12 months, you had the global fund, you had the emerging market funds, which you released recently. Within brokerage lending, you can borrow up to a certain amount for free. So a lot of the products that have been launched have been to kind of reduce margins or to lower the price towards customers quite significantly. When looking forward and the products that you might consider or looking at launching, is this the overall theme, that it is to lower the price of existing products? Or should we see that there is some element of broadening the product base?
I will not comment on Q2 products because we never comment on them. But I can put it like this. If you look at the global index fund, of course, it's a very cheap fund for clients. And if you look at the emerging market fund, it's also a very well-priced fund for our clients. But we -- what we see is that when a customer comes to Avanza and buy the global index fund, 90% of them buy something else with a higher margin for us. So it's a little bit having these products in the window, so to speak, to get the customer to go in and invest in other products with higher margin. And we can see very clearly that, that works when you see new clients entering into Avanza, buying the emerging market funds, 90% of them also invest in something else with higher margin. So that's the base idea behind it.
But I think, in the past, I think Avanza's communicated that the price point has become less -- well, it's less of an important factor for the clients when they move to Avanza. It's rather the user experience, for instance, and that the platform is simply great. Would you say that, that has changed then?
No. I would say that I would emphasize that, that's absolutely still in place, that the customer experience is extremely important to gather new clients. But I would say that the Avanza emerging market and the Avanza global index fund is more of creating a wow factor, becoming the talk of the town, become a piece for them to get interested in Avanza to get more inflows that will be invested in diversified portfolios for our clients. So I think not either or, it's probably both.
And there are currently no further questions registered, so I'll hand the call back to the speakers. Please go ahead.
Okay. Thank you very much.
Thank you. Bye-bye.
Bye.
This now concludes the conference call. Thank you all for attending. You may now disconnect your lines.