Avanza Bank Holding AB

STO:AZA

Earnings Call Analysis

Avanza Reports Resilient and Strong FY Results

Avanza's diversified income model showcased its resilience with net profit for the year being second only to the record year 2021. A 19% increase in net profit and a return on equity at 38% reflects strength despite market volatility reducing customer activity. Dips in net brokerage and currency-related income were offset by doubled net interest income (NII), mainly from higher interest rates and increased surplus liquidity returns. Net fund commissions grew modestly due to an expanded fund capital. Full-year costs were slightly below guidance, though up by 11% from 2022. The policy rate is expected to see cuts this year, hinted at lower interest rate trends moving forward. Avanza is committed to cost efficiency, with a focus on maintaining current staffing levels and proposes a SEK 11.50 per share dividend, signaling a 91% payout ratio.

Optimizing for Efficiency and Future Growth

The company is prioritizing internal efficiency through optimization and the use of AI, focusing on delivering exceptional customer experience and preparing for future development, with a special mention of their 25th anniversary in 2024. With a robust staffing level adequate for their growth prospects, they plan no significant changes in the number of employees throughout the year.

Solid Financial Performance Despite Market Headwinds

The company's diversified income model showed resilience with strong results amid challenging market conditions. The net profit for the full year was up by 19%, hitting a return on equity of 38%, which exceeds their target of 35%. The earnings per share amounted to SEK 12.64. The operating income reached a record high, bolstered by Net Interest Income (NII), which doubled mainly because of higher interest rates and increased returns on surplus liquidity.

Interest Rates and Customer Activity

The company adapted to market changes by starting to pay interest on customer deposits at the beginning of the last year, which significantly increased interest expenses. The net brokerage and currency-related incomes were affected negatively due to reduced customer activity. Nevertheless, net fund commissions grew, attributable to a 27% increase in fund capital, even though the average income per SEK of fund capital decreased due to a higher proportion of index funds.

Cost Management and Capital Allocation

Operating expenses rose 15% over the quarter, driven mostly by increased personnel costs and consulting fees. The full-year expenses were slightly below the communicated cost ceiling. In response to the rising costs, estimated at 9.5% for the current year, the company emphasizes high-cost efficiency. Due to a strong capital position and low-risk balance sheet, the Board proposed a dividend of SEK 11.50 per share, which represents a 91% payout ratio. This is above the company's normal policy, reflecting a conservative approach amidst an uncertain macroeconomic environment. Additionally, they maintained a solid capitalization, with the potential to issue additional tier 1 capital if market conditions permit.

Navigating Interest Rate Dynamics

The company has a right to a mortgage rate increase but may postpone this due to market competition. They also adjusted the interest rate on deposits in line with changes in the market and customer needs. Adjustments to interest rates for private banking clients and savings account rates are managed carefully to maintain competitiveness and meet the expectations of different customer segments.

Strategic Priorities in a Competitive Market

The company seeks to improve its offerings, particularly to private banking clients, by enhancing stock market data, stabilizing the trading platform, and providing better decision-making tools. Although customer churn has not been observed, they are taking proactive measures to stay ahead of the competition, suggesting a mix of digital enhancement and potential pricing adjustments may be part of their future strategy.

Earnings Call Transcript 2023-Q4

[Operator]

Good day, and thank you for standing by. Welcome to the Avanza Full-Year Report 2023 Conference Call. [Operator Instructions]Please be advised that today's conference is being recorded.I would now like to hand the conference over to your speaker today, Gunnar Olsson, acting CEO. Please go ahead.

[Gunnar Olsson, executive]

 Thank you, Nadia. Hello, everyone. My name is Gunnar Olsson and since November, I'm the acting CEO of Avanza. I will start off this presentation, and then I will hand over to our CFO, Anna Casselblad. And after that, we will have some Q&As.As you all know, 2023 has been a challenging year for many. We have seen high inflation, rate increases, geopolitical concerns, and a weakened Swedish krona. And all this has, of course, affected our households in Sweden. We can also see that we have had a net inflow to the Swedish savings market. That has decreased since the record years of 2020 and 2021. And quite frankly, we would not have been surprised if we would have seen a similar trend at Avanza. However, we've seen the opposite during the year. Our customers have prioritized savings throughout this year. And that is quite impressive I would say. We -- from our point of view, we have done what we can do to help our customers. We have continued to help them to keep on the good saving habits during the year.For instance, how we opened up a savings account with the competitive interest rate to all customers. We also have made it easier to pause or decrease monthly savings and that is quite important for the customer so they don't have to quit their habits. They can decrease monthly savings instead of just going down to zero. We are also of course trying to stay close to our customers, communicating to them through social media and our blogs. And the theme has been to help them through these difficult times. But as we see it, there is hope for 2024. Most likely, we'll reach peak rates although it might be a while before we see any rate cuts from the Riksbank. But we already can see that inflation is going down in the right direction and that is a good news as we see it.When it comes to net inflows, we are very proud to present that we, during 2023, have seen SEK 72.3 billion net inflows to our platform. That is more than 3x as high than 2022. And it has also been driven by the standard segment, a result of many individual customers' persistent commitment to savings. And when I listen around to our colleagues in the industry, I don't see the same kind of figures at their platforms. We can also see that we have had a strong customer inflow and we are now at a total of 1.9 million customers. And we're looking forward to -- later this year to welcome the number 2 million to our platform.During 2023, we have almost welcomed 125 customers to the platform. And it's quite interesting also from a point of view -- from a scalability point of view, I would say. Because we have in the last couple of years welcomed a lot of customers and we have not felt it necessary to increase our people planning departments such as back office or customer service and that is something that feels very good to see going forward.If we take a look at the Swedish fund market, Avanza has a strong year position in stock trading as you know, but we are relatively small in the fund market. Our ambition is to grow more and a part of that is to keep improving our pension offering since nearly 80% of the capital in occupational pension is invested in funds. And as you perhaps know, a larger fund capital also strengthens our recurring income which is important for us. In 2023, our ambition has played out well. The Swedish fund market saw an outflow in Q4 whereas Avanza had an inflow of SEK 5 billion.And for the entire 2023, we had an inflow of SEK 24 billion to funds, giving Avanza a market share of 35% of the net inflow to the Swedish fund market for the full-year. And when it comes to our own fund company, it's been a very active year. We have launched 5 new funds and altogether, we now have 23 own funds on the platform. And we are very proud that our fund company during 2023 had the largest growth in AUM and also the largest market share growth. That is quite impressive if I may add.If we're going over to trading activity, there has been a lot of uncertainty in the market during the year and it has, of course, affected the trading activity. However, we saw some positive signs of recovery in the end of Q4 and hopefully, we are going towards a more positive sentiment. We can conclude that there is a good strength in our customer base when we see indication of more positive sentiment meaning we are well-positioned once optimism truly returns. Despite of the uncertainty, both number of customers holding shares and number of customers invested in funds increased during the year to about more than 1.1 million each. However, as you can see in the graph to the right, not all are trading each quarter. But there is some truly great news for us if we can get them to trade going forward.If you take a look at the largest participant in the stock market in Sweden, our market share decreased in the fourth quarter due to higher share of institutional trading. Although we did see a good market share increase in December, giving good hopes for the future. I'm happy to say that we are reporting our strongest results since the record year 2021. We saw a strong performance on targets and we are proud to achieve the award for the most satisfied savers for the 14th consecutive year. And we're also very proud to see the strong engagement among our employees with an eNPS of 58.And as you perhaps know, the scale for eNPS is from minus 100 to plus 100. And if you combine that with our employee turnover of 13%, I feel very confident that we have the most engaged employees in the business, and that makes me also very proud. When it comes to return on equity, we come in on 38% and that is to be compared with our target of at least 35%. Our strong result and capitalization make the Board propose a dividend of SEK 11.50 per share. That is equivalent to 91% of the profit. This is significantly more than last year's 7.50% -- SEK 7.50 per share. That still leave us with very strong margins to the capital requirements.We also saw that in December, our net zero emission target was validated by Science Based Target. The sustainability score of our customer investments slightly improved and also the share of savings capital held by women increased but still on a low level, unfortunately.Looking forward on our focus for 2024, one of our long-term targets is to achieve 10% market share at the end of 2025. This is still our main aim to achieve but even though it gets more and more challenging for us to reach the target, we need to focus extra on especially a few areas. Nearly 2 million customers have entrusted us with their partner for savings and investments. This comes with a great responsibility. And the stability of the platform was high. During 2023, it was 99.8% but as you know, we had a few larger issues in 2023. And quite frankly, we have to do better. And this is something that we have worked hard on during 2023. And we have come a bit far going in the right direction but there's still more work to be done. And that is my top priority going forward.In 2024, we will continue our focus when it comes to strengthening our offering for our most active customers. We can see that the competition is getting tougher when it comes to active customers in the private banking segments and therefore, we have to do more there. We also see the importance of activating existing customers and helping new customers to get started. And as we have talked about before, we need to keep improving our pension offering. That is quite important for us. The pension business is a long tail business and it's quite important for us.When it comes to cost efficiency and internal efficiency, one important long-term target is also our cost-to-savings capital ratio of 12 basis points, which has been affected by the downturn in the market. We do a lot when it comes to efficiency especially, we tried to do more optimization, we are elaborating with AI. We are trying to prioritize internal efficiency because in the long term, that is also something that gives a great customer experience. Our growth prospect with current staffing remain high and we will not make any major changes to the number of employees during the year.As some of you might know, in 2024, Avanza celebrated 25 years. We have come far and we have achieved great deals together. The best we can do for our shareholders going forward is to keep on developing and this can only be done with very engaged employees which I also am happy to say that we have at Avanza.And with that, I would like to hand over to you, Anna.

[Anna Casselblad, executive]

Thank you, Gunnar, and good morning, everyone.As you already heard, we are reporting very strong results today. For the full-year, net profit have only been higher once and that was the record year 2021. Once again, we see the strength and resilience in our diversified income model. Operating income increased compared to last quarter due to higher NII and other income. Operating expenses also increased compared to last quarter, mainly as a result of seasonally low personnel cost in Q3. For the full-year, costs came in slightly below our communicated cost ceiling.Net profit was 19% higher than 2022 and return on equity ended up at 38% for the year, fulfilling our target of at least 35%. And altogether, this gives us an earning per share of SEK 12.64 for the full-year.Looking at full-year revenues, our operating income came out at an all-time high driven by NII and despite market conditions negatively affecting customer activity throughout the year. NII has doubled. The increase was mainly due to higher market interest rates and an increased return on surplus liquidity, but also higher average interest rate on internally financed lending. And as I'm sure, most of you should be familiar with by now, we started paying interest rates on customer deposits on the 1st of January this -- last year.And this of course affected interest expenses that increased significantly by over SEK 700 million. And the average interest rate on deposits for 2023 was 1.21%. The uncertain market conditions had a negative effect on customer activity throughout the year which resulted in net brokerage income decreasing by 24% and net currency-related income decreasing by 21%. However, net fund commissions increased by 3% due to 27% higher fund capital. And the moderate increase in commissions was due to a higher share of index funds which amounted to nearly 44%. And this made the average income per SEK of fund capital decrease.Other income decreased by 10%. And this was mainly a result of lower trading activity within the Avanza market. Income from stock lending increased as the lending limit was raised in the second half of 2022.Moving over to Q4 revenues. Operating income increased by 3% compared to last quarter. NII and other income increased while net brokerage income was stable and income from fund commissions and currency-related income decreased. When it comes to brokerage, for the quarter as a whole, activity will still slow even though we saw increased activity in December. Gross brokerage income per brokerage-generating turnover decreased from 11.2 basis points to 10.6 basis points as Private Banking and Pro customers accounted for a higher share of the brokerage income.Foreign trading in both equities and funds decreased resulting in lower net currency-related income. Foreign trading as a share of total brokerage-generating turnover decreased to 16% from 18% last quarter. And as Gunnar mentioned, the fund market in Sweden reported a net outflow of close to SEK 400 million in the quarter. And at Avanza, we had net inflows of mutual funds of SEK 5 billion. Fund capital volumes were 9% higher by the end of the quarter. Despite this, net fund commissions decreased as the share of capital in index funds rose, making the average income per SEK of fund capital decrease to 26.4 bps. This, however, stabilized during the quarter and that was the same by year-end.Other income increased by 12%, which was mainly a result of higher income from the market and Corporate Finance where we were financial advisors in 2 transactions during Q4.Taking a closer look at the NII. Despite increased interest expenses, NII increased by 7% in the quarter where the main driver was return on surplus liquidity. That increased to SEK 485 million. And this was a result of both a larger liquidity portfolio and higher market interest rates. Income from lending was also higher and amounted to SEK 224 million. The average interest rate on internally financed lending increased to 4.59% while volumes were basically flat. The mortgage rate increase of 25 bps that was made on the 1st of August took full effect in the quarter. And on the 1st of November, we increased the mortgage rate with another 50 bps.And on the 1st of February, we have the right to do another 25 bps rate hike, but most likely, that will be postponed further due to competition. Interest expenses increased and the average interest rate on deposits was 1.76% in the quarter compared to 1.44% in Q3. The last change we made to interest rates on deposits was in September when the rate of our own savings account was increased to 3.50%. We haven't made any other changes to deposits rate since then. And the policy rate was left unchanged in November. And the general forecast is that peak rates have been reached and that we will see rate cuts during this year. And the next Riksbank decision will be announced on the 1st of February.Moving over to costs. Quarterly operating expenses increased by 15%, which was mainly due to seasonally low personnel costs in Q3. Other expenses also increased primarily due to higher costs for consultants, which also were lower during the summer.Looking at our full-year costs, we came in slightly below the communicated cost ceiling due to lower-than-expected expenses for information and consultancies. And compared to 2022, costs increased by 11%. The increase in personnel costs was the result of salary increases of slightly above 4% for the whole year, but also 4% more employees. Other expenses increased mainly due to higher costs for licenses and trading information. Our cost-to-savings capital ratio for the year is at 16 bps which is above our long-term targets and that is of course not satisfying. And the large part is of course related to the market downturn during '22. However, that target rate remains unchanged. And as Gunnar emphasized, we have a strong focus on high-cost efficiency.We have good growth prospects with current staffing and we will not make any major changes to the number of employees during the year. The people plan from the last 2 years still applies on an overall basis. And operational efficiency is a strong focus and expansion in one area needs to be met with withdrawals in another. And the cost increase for this year is estimated at 9.5% where inflation will be the main cost driver. Higher personnel cost stands for more than 50% of the increase. This includes total wage adjustments of 4%, market adjustments related to occupational pension premiums for our employees, and an increased cost due to the replacement of the CEO.Higher costs for licenses and information are also in effect from the increased number of employees, which together with inflation accounts for approximately 1/3 of the total cost increase. Based on the strong capital position, our strong results, and low-risk balance sheet, the Board proposes a dividend of SEK 11.50 per share, and corresponding to a dividend ratio of 91%. This is well above our dividend policy. While at the same time, the Board wants to take a cautious stance due to the uncertain macro environment.The margins to the capital requirements are still very prudent with a total capital ratio at 24.7% and the leverage ratio at 5%. Meaning that we could grow our deposit base by another SEK 31 billion without falling short of leverage ratio requirement of 3.5%. And amount of capital structure is continuously evaluated from a capital efficiency perspective, where for example, we are considering the opportunity to issue additional tier 1 capital this year if market conditions improve.And to conclude, our ROE target ensures a continued focus on profitability as well as demonstrates that we value low-risk balance sheet and capital efficiency. We have a strong focus on costs and are lowering our cost growth in 2024. If it hadn't been for the high inflation, this could have been even lower. And the main part of our cost is inflation-driven. Putting 2023 behind us as one of our most profitable years, we are all eager to take Avanza to the next level.We are a great team of 660 employees, which every day strive to do the best for our customers. And this has made us hold up strong in current macro environment and our customers have shown resilience. The large number of customers interested in equities also makes us well-positioned once market optimism returns.And with that, I would like to open up for questions.

[Operator]

[Operator Instructions] And now we're going to take our first question and it comes from the line of Jacob Hesslevik from SEB.

[Jacob Hesslevik, analyst]

When the Riksbank hiked the policy rates, you didn't hike the interest rate on mortgages to private banking clients directly but if I remember correctly, it is linked to STIBOR. So hence when the Riksbank actually cuts, you will have to cut the rate to private banking directly.

[Anna Casselblad, executive]

No, Jacob. It's directly linked to the policy rates, the Riksbank policy rates. So it's not --

[Jacob Hesslevik, analyst]

So when the Riksbank cuts with 25 bps, you're going to have to cut the interest rate to private banking by 25 bps the same day, right?

[Anna Casselblad, executive]

Yes. That's right.

[Jacob Hesslevik, analyst]

Okay. But how --

[Anna Casselblad, executive]

Not the same day, but in a couple of days. Yes.

[Jacob Hesslevik, analyst]

But how quickly can you cut the rate on your savings account? Because if we assume your external partners, so for example, Resurs, Norion, et cetera, who have a funding problem right now will have to keep a high deposit rate. Then I mean, Avanza would screen poorly if you cut, which would lead to large deposit outflows. So if that's the case, I assume you will not be able to cut the deposit rate to the same extent as the Riksbank cuts. Or how do you think about this potential issue?

[Gunnar Olsson, executive]

If you take your first part of the question, if you look at the mortgage rate on our private banking offering, we haven't followed the rate all the way up when we have had the increased rates. So there are some room for us to elaborate when the rates are starting cutting down. So we have some handling room there. And when it comes to the interest rates on those things, deposits, we -- your question was how fast we can act on that. Wasn't it?

[Jacob Hesslevik, analyst]

Yes. Because if you think your external partners might not cut as quickly as you might want to.

[Gunnar Olsson, executive]

Yes. That is a business decision that we had to make in that case. We have done different things over the years. For us, it's most important for sure that we have a great interest rate for our customers. And -- but we have to stay pretty close to our partners, for sure.

[Jacob Hesslevik, analyst]

So it's more important to screen well than to lose some deposits.

[Gunnar Olsson, executive]

No, I wouldn't say so. But it is a combination of both aspects that we have to take care of when we make the interest rate decisions.

[Operator]

And the next question comes from the line of Patrik Brattelius from ABG.

[Patrik Brattelius, analyst]

We could see in the quarter that the savings capital and also the fund capital increased by 9% quarter-over-quarter. However, the fund income decreased by 2% quarter-over-quarter. Do you see any need for changing your margins within fund income?

[Anna Casselblad, executive]

We are -- as we have said before, if we need to adapt to, for example, new regulations and so on, we are willing to -- or we have to adapt the business model. But as it is right now, we are pleased with the business model we have. And despite that, we see our lower margins. And that is just -- and that is also what we have been communicating with our clients for years that they have to be aware of what they are paying for, especially when it comes to index funds.

[Patrik Brattelius, analyst]

You showed an interesting chart on Page 5, which shows an increasing trend on the left side, where you showed brokerage-generating notes per trading day. Could you say anything if this trend has continued here in January or if that has leveled off?

[Gunnar Olsson, executive]

I would say that it's too soon to see. It has been a little bit by day-by-day basis here. So I think it's too soon to comment on that. I'm sorry about that.

[Patrik Brattelius, analyst]

Going over to capital. Your capital surplus in comparison to your requirement is still substantial with over 650 basis point buffer and you also have a substantial leverage ratio buffer. Do you foresee any issues that from the regulator's perspective that if you're always so overcapitalized that the regulator will demand you or will always believe that you will maintain this high level in comparison to your requirement that this will hold back your profitability potential?

[Anna Casselblad, executive]

I'm not sure if I see that. But of course, we -- as we have said before, we think that we are overcapitalized given the low risk that we are having in the balance sheet, and that is also why the Board decided to do a higher dividend ratio or payout this year than last year because we have been offering money during a couple of years now. And since we got the Pillar 2 guidance requirement lower than by the end of Q3 from 3.9% to 3.5%, that has also given us some maneuver to do a higher dividend this year.

[Gunnar Olsson, executive]

And I would also say that since they did lower it from 3.9% to 3.5%, I don't see that they're going to raise it again.

[Patrik Brattelius, analyst]

But if we then -- if we were to fast forward 1 year, do you still perceive yourself to be overcapitalized that you would deviate from your 70% dividend target and again raise the payout ratio? Or is this a level that you want to be at?

[Anna Casselblad, executive]

I think it's too early days to say, and we have just even started this year. But of course, the Board and now from the management, we are always looking at that capital structure. So we will get back to that.

[Patrik Brattelius, analyst]

And my last question for the deposit guarantee scheme was lowered. Is that -- the level here in Q4, is that a sustainable run rate level or is that a one-time effect?

[Anna Casselblad, executive]

No, that is a one-time effect because we -- as we get to the figures for the whole year in Q4, that's why we have taken too high costs during Q1 to Q3, and that is why it has been lower. But going forward, it's my belief that the cost for this year will be increased because of higher deposits.

[Patrik Brattelius, analyst]

And what do you expect the quarterly level to be at then?

[Anna Casselblad, executive]

It might up around, don't take it but around SEK 10 million up from looking at from the whole year figure from this year.

[Operator]

And the next question comes from the line of Nicolas McBeath from DNB.

[Nicolas McBeath, analyst]

So first, a question on net interest income. So I was wondering if there are any residual tailwinds left from the rate hikes last year that you expect to benefit the NII from here in addition to the 50 bps rate hikes on the mortgage portfolio that you mentioned, Anna, in November. Anything in the liquidity portfolio that's going to contribute to higher NII in Q1? Maybe the liquidity portfolio is not fully repriced. If you could comment on that, please? And also if you think NII can continue to grow sequentially in Q1 versus Q4.

[Anna Casselblad, executive]

No. It's all depending on the development of, for example, the STIBOR. And as you said, we have a lag effect in the surplus liquidity portfolio of 3 months. So I think your guess is as good as mine, and we don't have any forecast on -- when it comes to the NII.

[Nicolas McBeath, analyst]

But assuming that the STIBOR remains around current levels, would you expect tailwinds -- continued tailwinds from repricing of the liquidity portfolio given that assumption?

[Anna Casselblad, executive]

No, I don't think so. It's --

[Nicolas McBeath, analyst]

And then I noticed your comments in the report about the development on the savings capital. And you're right that most of the net savings in 2023 came from the standard segment, suggesting that the Private Banking segment is not contributing that much in terms of net savings. So if you could first perhaps comment on what is explaining the reduced savings in the Private Banking segment. And if it's also possible to break down the savings in -- within these standard segments to even further greater detail, maybe help us understand what is making your net savings so quite resilient. Maybe any particular age or wealth brackets within the standard segment, which is contributing to a disproportionate extent to the net savings because I think most of us have been quite positively surprised about the relatively high degree of net savings. So anything there that could help us understand the drivers of that, I think, would be interesting.

[Anna Casselblad, executive]

Well, if we look at the recurring well, automatic monthly savings from customers, we see increases within all age brackets and within the standard segment. So I would say it's quite strong. What we have seen rather is that the more ad hoc installments have gone down slightly which has compensated for the increased monthly savings. So that's also an explanation why the SEK 1.5 billion monthly savings has been flat.

[Nicolas McBeath, analyst]

Right. And the ad hoc savings. So is that -- has that mainly been coming from the Private Banking segment? Is that why the Private Banking is down and the standard is compensating for that or how do you view that?

[Anna Casselblad, executive]

Not necessarily. I would say that that's spread out throughout the whole customer base.

[Nicolas McBeath, analyst]

And then what is explaining the decline in the Private Banking or why Private Banking is not really adding any net savings if I interpret your comments in the report right?

[Anna Casselblad, executive]

It's, of course, hard to say. I don't have a clear explanation of that. I mean I would say that, of course, we have still installments from the Private Banking segment, and we are growing within Private Banking. They have -- I know that they have also amortized more on their mortgages. So that could be one explanation.

[Nicolas McBeath, analyst]

And then just a final question on costs. So 11% cost growth last year, and now you're guiding for 9.5%, 2024. Do you think around 10% is a good indication or what kind of cost growth that you think is reasonable for Avanza in kind of medium to long term? Or is the cost growth you're seeing now still at an elevated level in your view?

[Gunnar Olsson, executive]

Our focus is, of course, coming down when it comes to cost growth and also especially when it comes to what kind of costs that we have. We see that Anna was talking about earlier on that, we try to minimize our costs in administration and back office and those kinds of things. And when we get more effective there and a bit more scalable there, we'll move over to take the costs in innovation and stability. So our target is to stay lower and our long-time target is 12 basis points, as you know. So we're looking for 9.5% this year, and that is something that we're trying to get lower in the future as well.

[Anna Casselblad, executive]

And also bear in mind that a lot of the cost this year was affected by inflation as well. So hopefully, that will lower going forward.

[Nicolas McBeath, analyst]

Sure. But on that target, though, I mean you mentioned that you have had adverse market development. But I mean looking at where the stock market and your savings capital is right now versus when you set the target, it's not down by so much. I think the stock market is down by around 10% or so. I mean is there anything else you think you could improve, I mean, internally? Or what's your plan really to get to below 12 basis points? Because when you set the target as well, it wasn't like you're targeting 12 basis points. It was quite clear by the management back then that that was supposed to be a ceiling. And now you're kind of 25% above that level, which was supposed to be a ceiling. So I mean anything you can do internally on a more kind of comprehensive level to get the cost base down? Or I mean is it just more hoping for the stock market to surge to kind of save you and get you to within that cost target level?

[Gunnar Olsson, executive]

Of course, we had to do a lot internally. And when it comes to internal efficiencies, it is extremely important for us, and we are elaborating with both AI. We are looking over our processes. We are looking on certain areas that we should perhaps stop doing. So we are doing a lot of things to be more scalable. And we are a bit scalable already when it comes to adding more customers on the platform, but we want to be even more scalable. And I think there's a lot of room there for us to work with and be more efficient. And that will help us also with the cost going forward.

[Nicolas McBeath, analyst]

But still I mean the cost growth is expected at almost 10% for this year. So it doesn't seem like those efforts are really contributing to help you to get to that target. I mean is it enough what you're doing or if you want to get to that target, which is still -- which is standby, it seems like you need to do more?

[Gunnar Olsson, executive]

Yes, we need to do more. I totally agree with you there. And I think we're going to focus even more on that going forward. But as we also said, we need some help from the market to reach the goal, to reach that target. But there are a lot of things that we can do. And -- but still, also we want to take some cost to be more innovative going forward as well because we want to reach our other targets when it comes to 10% and also beyond that. And therefore, we need to take some investments going forward as well.

[Anna Casselblad, executive]

And that is what we're doing. And for example, for the last year that as I said, if we free up people or -- and time in one department, we move that capacity to another department. So in those figures, we are working on every day, improving the customer offering, as Gunnar said, and that is very important for us. Because we think the ones who dare and have the effort to invest every day will be the winners in the long run. And we still see great growth potential in our customer base and improve even further growth.

[Operator]

And our next question comes from the line of Rickard Strand from Nordea.

[Rickard Strand, analyst]

So starting off with the margin on brokerage. I noted that it dropped 1 basis point in the quarter. Just if you could elaborate. You mentioned in the report that you have a higher share of trading done by Pro and PB customers. Is that explaining all of it or is there some underlying decline as well or is it due to seasonality?

[Anna Casselblad, executive]

It's -- as we said, it's mainly because a higher share of the trading was made by the Private Banking and Pro customer segment.

[Rickard Strand, analyst]

And regarding your comments that you need to work harder on the offering to your most active customers. Could you elaborate a little bit on what you mean here more specifically? What do you want to accomplish in order to address this?

[Gunnar Olsson, executive]

Yes, sure. That is, for sure, a very important customer group for Avanza. And in times like these, what you always see through years going back, is that a lot of more companies are competing in this customer segment. And therefore, we need to improve our offering. This is also the core offering that Avanza is founded on. So therefore, we want to be the best in this area. And there's a lot of things that we need to do here. We need to -- we need to improve our stock market data. We need to address the stability on the platform. We need to make sure that we have the services that they needed to trade and also what help them to make better decisions.So there's a lot of things that we are working on and that we are looking to implement going forward as well. But the reason is basically that the competition is tougher in this segment. And we want to stay ahead of them.

[Rickard Strand, analyst]

And could you mention something about -- has there been sort of customer churn here? Or --

[Gunnar Olsson, executive]

No.

[Rickard Strand, analyst]

Is it just that they become more muted in their activity?

[Gunnar Olsson, executive]

No. We haven't seen any churn on this area. But what we feel is that we want to be the best in this area, and that's what we are trying to be as well. So it's not a churn problem. It's -- but we want to prevent to have it from becoming a problem.

[Rickard Strand, analyst]

And then moving on to fund revenues and the margins there declined 1 bp quarter-on-quarter. Was it fully driven by the sort of the mix impact from higher share of passive funds? Or has there also been some sort of underlying trend of also some price reductions?

[Gunnar Olsson, executive]

I would say mainly, it's because of greater interest in index funds, and we can see that at Avanza and also in the market in total.

[Rickard Strand, analyst]

Yes. And then just lastly, Anna, your comment there about the mortgage prices for internally financed mortgages. Are you still planning to do 25 basis points increase and -- or could it be more? And what's the timing you're currently thinking about?

[Gunnar Olsson, executive]

Definitely, not more. I think looking at -- as I said, we have the right to do another 25 bps increase, but looking at the competition, it's not the right thing to do. So given that we will see no further interest rate increases from the Riksbank, that's my clear belief that it will be on the level that we are having right now.

[Operator]

And the next question comes from the line of Ermin Keric from Carnegie.

[Ermin Keric, analyst]

Maybe if we start on NII. So we talked a little bit about the rates you're giving on normal savings accounts. How about on the investment accounts? Do you expect that to be reduced one to one when we see rates start coming down? Or is it more when we come down to the same market rate level as we had when you introduced, say, a rate on those accounts?

[Gunnar Olsson, executive]

We haven't made any decisions there yet. But I think that we're probably going to reduce when it comes to the investment savings accounts because it more -- makes more sense than having a traditional savings account if you have liquidity. Having that said, for certain customer groups, such as, for instance, traders, Pro traders, it still could be interesting to have an interest rate because they are often lying in liquidity overnight. So we'll see how we do. But I think that in general, also in the market, you will see a decline when it comes to investment savings account.

[Ermin Keric, analyst]

Then just a little bit more tangibly on Private Banking. You mentioned you want to improve the offering. Do those clients have different digital tools or is that more that they will get more attractive pricing? Is it more personalization? Would that be more adding kind of sales staff? Or how do you more tangibly improve that offering?

[Gunnar Olsson, executive]

Today, I don't know if you see an offering right now, but today, it's not that big difference compared to the standard segment. But we are looking into it right now. And I think we're going to improve it both digitally and for sure, also with the decision-making tools in some way. And there might be a pricing issue as well, but we haven't decided on that yet.

[Ermin Keric, analyst]

Well, we could see a scenario where you actually have certain decision tools, et cetera, just for Private Banking because, as you said, historically, it's been quite similar. In offering, it's been more on the pricing. That's been the difference between the two.

[Gunnar Olsson, executive]

Yes, that's correct.

[Ermin Keric, analyst]

And then just one last question on your capitalization as well. I think we touched upon it before, but should we see the current policy of 70% payout as more of a floor going forward? Have you had any consideration about announcing a capital buffer target to steer by?

[Anna Casselblad, executive]

I think that the dividend policy, we haven't made any changes to that, but whether or not we haven't really disclosed what the internal buffer is, but if we will do it forward, we'll see.

[Operator]

And the next question comes from the line of Michael Macnaughton from UBS.

[Michael Macnaughton, analyst]

Just staying on the NII, just on the mortgage pass-through that you have the right to do in February. You say that it's potentially be delayed, but should we maybe think that there is the chance that this won't come through given REI expectations are kind of going in one direction? Just how should we think about that?

[Gunnar Olsson, executive]

I think that depends on what our competitor is going to do. So we are -- we keep the right to increase the rate, but we'll see what competition makes, what kind of moves they make.

[Michael Macnaughton, analyst]

And then on the costs, just given some of the continued technical issues that you've had, the most recent in January, I think, how confident do you feel that the 9.5% cost growth in '24 can cater for any additional investment needs to tackle some of these issues? And maybe on the most recent issue, can you give us a little bit more color of the reasons behind that? And yes, if you -- kind of what the steps are being taken to kind of limit these into 2024?

[Anna Casselblad, executive]

You want me to take the cost question. I think that we have been working with stability during the year, and we have a modern tech stack. So it's not about old systems that need to be -- has a lot of investment needs, but it has been a focus for us since the summer. And in the 9.5%, we are already taking -- we have some focus on that in those -- in that figure.

[Operator]

And the next question comes from the line of Panayiotis Ellinas from Morgan Stanley.

[Panayiotis Ellinas, analyst]

You mentioned a couple of times competition in terms of it limits your ability to pass on the rates. You have to be conscious of that and also cutting the rate you pay on cash. In terms of the rest of the offering, how shall we think about pricing and competitive forces like here in the U.K., for example, many of the platforms have been cutting prices on dealing on brokerage. And so how do you think about that? Is it maybe another tool to reactivate maybe some of the users or gain more share? So that's my first question.

[Gunnar Olsson, executive]

Right. First, if you look at pricing in the Swedish market, I think the pricing are pretty low actually. We have been driving cost pricing down over the last 25 years. So I don't think it's going to be a pricing war, so to speak. I think it's going to be more about what kind of offerings that you have for your customers, how you communicate with your customers, what kind of data you can provide to your customers. I think it's -- that is what the competition is going to be all around. For sure, there are some pricing points that we can fight with each other on -- but mainly when it comes to commission and fund costs, it's pretty low already in Sweden.

[Panayiotis Ellinas, analyst]

And then on the, for the longer-term guidance to get to the -- sorry target, to get to the 10% market share of the savings market. I was just wondering, I think even if we assume the Swedish savings market doesn't grow from today at this level, it implies that you need to grow the savings capital at about 20% a year. Obviously, it's going to be even more if the whole market is growing as well. But so how do we get there in terms of, how do you think about that getting to this 10% and the 20% growth that you need to have every year on the savings capital?Is it going to come from inflows? Is it -- do you expect more improvement in the market performance or also a shift within the asset mix you have on the savings?

[Gunnar Olsson, executive]

I would say that, as you know, we already have a great net inflow. But what we have to figure out is what kind of drivers there are that can improve these net inflows even more. We have to take decision if we should go a bit wider in our offering or if we should do something else. But basically, we need to both have a great market in the next couple of years and also, we had to be a little bit more successful with attracting even more customers than we do right now.

[Panayiotis Ellinas, analyst]

And then the last one on the cost and the target of 12 basis points. You mentioned some optimization and financial efficiencies that you can extract and also the use of AI. Maybe you can provide some examples where you can use the AI? And is there any sort of one-off implementation costs to achieve these efficiencies from AI?

[Gunnar Olsson, executive]

I will say that we are right now like probably like everyone else in the business, looking into AI in more or less every area of the company. But for sure, that we know that all the way from coding to back offices to collect data, to enhance the customer experience when in communication with customers, there are so many areas where we can adopt AI. We are not there yet. So right now, we are elaborating and seeing what's the status. So we will definitely come back with that later on. But for now, we are on more or less testing or a lab status when it comes to AI.

[Operator]

And the next question comes from the line of Markus Sandgren from Kepler Cheuvreux.

[Markus Sandgren, analyst]

I just had three questions. One is on -- has there been any new nuances in the discussions with the regulator about the split between distribution and asset management of funds that we should be aware of?

[Gunnar Olsson, executive]

Okay.

[Anna Casselblad, executive]

Inducement piece.

[Gunnar Olsson, executive]

Inducement piece. We have had some discussion with the financial department about it because you have the European suggestion when it comes to this area, when it comes to inducements. I think more or less, everyone think this is a bad suggestion. And because it's unfair for the -- for basically both customers and the customers -- and the companies acting in the market. I think that we're going to see that they -- my personal view is that they will withdraw this suggestion and come back with something else during the year.

[Markus Sandgren, analyst]

And then the next one is about taxes. The tax rate moved up 0.5 percentage point but it seems like the trend has been that it has come down during the last couple of years, and I understand that's related to what you put in the insurance company and what's in the bank. How -- is there any trend that we should be aware of going forward? When you talk about expanding your market share within occupational pensions, would that drive down that -- the efficient tax rate more? And also is there -- if that happens, is there any other effect about -- on the other income and cost lines that we should be aware of?

[Anna Casselblad, executive]

Yes. As you said, it's correct that it depends on how much that is generated within the pension company and in the bank. And that is, of course, fluctuating a bit between the quarters, depending on, for example, trading activity and so on. But over time, as we see a greater potential in the pension company, that could be a fair assumption that going forward, that could have effects on the effective tax rate, implying that a larger share of the revenues are within the pension company.

[Markus Sandgren, analyst]

So the tax rates we saw a couple of years back above 15%, those will not come back?

[Anna Casselblad, executive]

If we grow tremendously within the bank part of the business.

[Markus Sandgren, analyst]

And then the last one is just -- let me also follow up on capital. I was just trying to understand how -- I mean what's your thinking? You consider yourself as overcapitalized and then you pay a large part of this year's profit but not everything. And then you're thinking about issuing an AT1. So what should we read into that? Are you -- is this the way to adjust the capital stack to what you want it to be and then make a one-off dividend payout or something when you adjust your overcapitalization? Or I mean why are you considering issuing an AT1 when you consider yourself overcapitalized?

[Anna Casselblad, executive]

That's a good -- that's a valid question. But it's from a pure capital efficiency perspective. Looking back a couple of years, when we got the leverage ratio requirement, we were talking about issuing additional tier 1 capital, but we were awaiting that because we were -- we had a lot of capital, so we didn't see the need for it. So -- but that is one thing that we always consider. But just to issue additional tier 1 capital and then do an extra dividend, I don't think that is what we're going to do, but we will get back to that question.

[Markus Sandgren, analyst]

Yes. But I mean what's the -- what conclusion should I draw from that you consider yourself overcapitalized and still think of issuing an AT1?

[Anna Casselblad, executive]

It is whether we want to free up more capital, but it's not what we have in the plan. I just wanted to emphasize that we are looking into the AT1 market so to speak are following. So it's just more --

[Markus Sandgren, analyst]

So it's more like a general, you're always looking into it. And if it's good, then you can do it then basically.

[Anna Casselblad, executive]

Yes.

[Operator]

And the question comes from the line of Enrico Bolzoni from JPMorgan.

[Enrico Bolzoni, analyst]

One is on the competitive dynamics in brokerage and someone has asked already a similar question. There's a number of players that have been lowering their fees also in other Nordics market. And one of the feature usually is a reduction in the fees for trading foreign shares. So in particular, the U.S. market, which is very popular among investors. So I was wondering if you could give some color on what you think is the medium-term trend is going to be there. Do you foresee a scenario where everybody would be able to trade FX using multicurrency accounts, for example, and therefore, the FX commission will gradually disappear? Or you think that this is actually quite far in the future and then you don't expect in near term? So that's my first question.My second question is on the cost of deposit over the quarter. I just wanted to see if you could give some extra color. So over the quarter, your saving accounts grew by again, by quite a lot, about 20% in terms of volumes yet the cost of deposit was up around 3% quarter-on-quarter. In the previous quarter, there was a similar strong growth, but then the cost of deposit increased quite a lot. So I was wondering whether -- what we should read into that? Is it because a lot of the increase in saving accounts was maybe funded by Pro and Private Banking clients, and therefore, we didn't see such an uptick? I just wonder if you could give some additional color there.And then my final question is on the fund margins. Again, there was a bit of a decline even if arguably, I would have expected maybe a positive mix in terms of split between equities and fixed income over the quarter. So what kind of floor should we see there? So I would think that passive funds probably on average will cost around 50 basis points, and you're clearly already at 50% of that. So are we close to the floor? Can it go much lower? Any color would be helpful.

[Gunnar Olsson, executive]

If I try to start with the commission and FX question, your first one. So as I said that when it comes to commission, it is rather cheap in Sweden already trading equities. And for instance, Avanza is not the cheapest one in the business, but still we're growing, and you can actually trade for free in -- at some brokers in Sweden. And I don't have seen they have a great success yet, at least.Your question about FX, I think that's quite interesting because it is possible that you're going to see some moves in that. Also here, you can see that some brokers have solutions for that when it comes to special FX accounts that they're offering the customers. So I guess a bad answer, but I guess we'll see how it develops in the future. But I don't think that pricing is going to be the biggest thing when it comes to competition. It's one part of it, but -- and then it's perhaps much more what kind of pricing model that you offer the customers. But I think that in total, the pricing is pretty low already.And I can also take your third question about the fund margin and if I understood it correctly, if we see what the floor is when it comes to the expenses for a fund, you mentioned 50 basis points, I think. And I think that you will -- I don't think that you're going to see that much more cheaper funds in the future. But perhaps, and I also hope that you're going to see more ETF business in Sweden. I think that's the trend that more and more customers are buying index funds. And I think that's a strong trend and I think it's going to continue.But so you will see some more switch from active to passive, I think. But I think we're pretty close to how we're going to see it in the future, but because the active funds definitely have their room as well in the market.

[Anna Casselblad, executive]

I think it's also very dependent on the market sentiment and what's going to happen going forward. I mean we did see the downturn in the margin leveling off during the quarter. So it was the same at the end of the quarter on average in the quarter, but what's going to happen this quarter, we'll see.And your -- the second question, we didn't really catch that. With the --

[Enrico Bolzoni, analyst]

No, I just wanted to -- I was just asking on the cost of deposits or the deposit remuneration. I was looking at the number you reported, and I think you went from SEK 280 million in Q3 to SEK 287 million in Q4 in terms of how much you paid to customers for their deposits. However, which is -- it's quite a small increase, but the saving accounts increased by quite a lot more because saving accounts went from SEK 22.5 billion to nearly SEK 27 billion. So it's about a 20% increase. So in a way, I was expecting almost a larger increase in deposit remuneration. So I was just wondering if you can give any color in the dynamic there.And one thing I was thinking maybe is if a lot of the liquidity moved from current to saving accounts, it came from Private Banking clients maybe that already paid quite a lot that would explain, but I don't know. Maybe there is some other elements I should keep in mind.

[Anna Casselblad, executive]

I would say that looking at the 3 different segments, the Pro, the Private Banking, and the standard segment, they are around 7% to 10% liquidity share as a percentage of the total AUM. And looking at, for example, at the endowment insurance and the ISKs, it's quite low on those account types and we have seen the liquidity part going down a little bit during the quarter. And as you said, the growth on the savings account has slowed down a little bit, and we see that customers are -- keep on net buying shares and funds.

[Operator]

There are no further questions. I would now like to hand the conference over to Gunnar Olsson for any closing remarks.

[Gunnar Olsson, executive]

All right. I would like to thank everyone who has participated in this conference. I think we have had some great questions and also inspiring questions in some sense. And I guess we'll see each other in a quarter, if not earlier. So thank you very much for this conference.

[Operator]

That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.