Addiko Bank AG

VSE:ADKO

Earnings Call Transcript 2022-Q1

[Operator]

Dear ladies and gentlemen, welcome to the conference call for Addiko Bank. At our customer's request, this conference will be recorded. [Operator Instructions]

May I now hand you over to the Addiko management team who will lead you through this conference. Please go ahead.

[Herbert Juranek, executive]

Good afternoon, ladies and gentlemen. I would like to welcome you to presentation of the results of the first quarter of Addiko Bank. We have prepared the following agenda for you.

In the beginning, Ganesh and I would like to give you the key highlights of our first quarter results, the positive developments of business initiatives and the insights into our new marketing approach. In the second chapter Edgar will provide you more details on the financial performance and Tadej will inform you about the risk perspective. After that, I will do a quick wrap up before we go into Q&A.

Well, compared with the first quarter last year, our net profit of the first quarter 2022 improved by 30% to EUR 6.5 million. This means EUR 0.33 earnings per share. In return to the tangible equity increased significantly from 2.5% at year end to 4.5%. The operating results went up by 26% to EUR 14.3 million. This number is driven by positive operating performance and the reduction in operating expenses as the consequences of our transformation program.

The NPE ratio was further reduced from 2.9% at the end of 2021 to 2.8% at the end of the first quarter. The NPE ratio of unbalance loan improved to 3.9%. This development was driven by continued NPE volume reduction to EUR 187 million. Furthermore, our NPE coverage ratio improved from 71.9% to 72.2%. The quarterly risk -- cost of risk decreased year-on-year from EUR 4.1 million to EUR 1.2 million. This means in basis points from minus 12 to minus 4 basis points.

Finally, our funding situation remained quite solid at EUR 4.68 billion customer deposits and the liquidity coverage ratio at 259%. Our capital ratio was influenced by external factors, namely the current market development in bond prices and higher risk weighted assets due to the structure of its guideline. The transitional CET1 ratio stood at the end of the first quarter at 20.4% and IFRS fully loaded at 19.7%.

Just to reiterate briefly, some important topics are already given at the AGM. Our exposure to Russia and Ukraine is limited to only indirect exposure. The Swiss franc law in Slovenia is temporarily suspended by the Constitutional Court. We keep the outlook 2022 unchanged despite elevated inflation pressure. The inaugural share buyback was completed in April 2022. And we have 2 new Supervisory Board members: Sava Dalbokov and Johannes Proksch.

Now let's have a look on the business development in the first quarter. To start with important, we are happy about the results because it shows that in addition to the effective cost management, our transformation program is also gaining traction on the business side.

The overall growth on the focus book is already is up 8% year-on-year. It couldn't be more, but we intentionally further reduced low yielding big tickets in the medium SME area. So if you look into the details, you'll see that we managed to grow our focus book, excluding the medium SME loan book by 15% year-on-year. Micro and small were even up 26% year-on-year and new business in the focus book was actually up 42% year-on-year.

At the same time, we achieved to improve the yield in focus business slightly to 5.4% despite pricing pressure in the market. Consequently, the focus book stood at the end of the first quarter at 76% of gross performing loans. All of that was achieved on the back of keeping our prudent risk approach.

Ganesh will give you more insight of our progress with our business initiatives in a minute. Before he can do that, let me show you how we want to continue and keep our momentum without leaving our prudent risk part.

We, the management, are convinced that in order to achieve sustainable success, we do not only need to further improve and innovate our products and services, but also to make our potential customers aware about it. In addition, our judgment as a team was that our current marketing approach is a bit outdated and ineffective.

But before jumping immediately into a new advertising campaign, we wanted to think broader, get the big picture and redefine what Addiko stands for. At the end, the challenge was to put everything into one sentence without overloading it. So the newly defined purpose of Addiko is to make customers' life easier, to help them in unpredicted situations and to help them get things they want.

This simple sentence will give us guidance, especially in our transformation efforts being a former universal bank. Based on that, our new brand promise, Shelby. As experts in consumer and the SME lending, we spend for speed and flexibility, and we promise to be there for you in all situations where you need that extra boost.

Translated to every day's life, this means we want to be close to our customers and support them when we need a loan for a new dishwasher or a bike for the kids. But how to deliver our message to our customers? We did a lot of research and realized that the brand character is a very effective method for driving long-term market share and building brand equity.

Consequently, in order to support us in our efforts, we hired a new brand ambassador called, Oskar. Oskar is a hamster who left his wheel to make lending easier and more convenient for our customer. He will promote that we are your best of choice for fast loans. By doing that, he will become the boss and be part of our team. This means he will take place in our boardroom to represent our clients.

The marketing -- sorry, the management team of Addiko is very confident that the recruitment of Oskar and our new marketing approach will create positive awareness in the market, strengthen our brand value and most importantly support our growth ambitions in our focus business.

Now Ganesh will give you more background on our business development in the first quarter and our new marketing repositioning program.

[GaneshKumar Krishnamoorthi, executive]

Many thanks, Herbert. Good afternoon, everyone. As Herbert mentioned, our transformational program has produced strong results in quarter one. On Page 6, I would like to highlight some growth initiatives in our key focus areas, followed by Q1 growth results. Please let me start with the 4 key revenue growth levers in consumer.

Our first lever is growing net disbursements. I'm glad to inform you our several growth initiatives, together with strong marketing sales productivity and digital performance have resulted in 40% year-over-year growth in our gross disbursement.

The second lever is about growing our active customer base. In Q1, initiatives like PNP2 income verification, which replaced our traditional salary verification methods, instant payments, increased digital marketing approach and launching fast cash loans with lower ticket size with lower tender loans differentiated us from the competition and are driving higher than 150% growth in new customer acquisition over quarter one last year. We will continue to work on our goals to make paperless and fast lending experience to make our customer life easier.

The third revenue lever is about driving higher margins and fees. Our net commission income grew 18% year-over-year and was mainly driven by 37% higher sales in cards, account packages and lending and complemented by a high penetration of bancassurance and recent economic revival in tourism. We will continue creating the value of customers for providing financing mineral and wherever at their convenience and tested with higher interest rates to compensate inflation.

Moving on to SME fronts. Our better lending services to underserved micro SMEs through our digital platform are seeing good results with 85% year-over-year growth in gross disbursement. We are working on further automating end-to-end digital lending platform for micro and small SMEs and enhancing it with functionalities like loan prolongations, which would provide a faster service to the clients, giving us the opportunity with higher pricing and fees.

We have also reached a new milestone that 63% of our lending business is being done in our digital platform. We believe there is a good scalable market opportunity to drive profitable organic growth in the focus area for the future.

Moving to the third focus area, our expansion plans. Our expansion plans are based on our solid plug-and-play embedded financing platform, which enables our partners like car dealers, electronic sellers, smart merchants, big retail merchants to provide financing at their point of sale to their customers.

Last but not least, we continue to improve our operational efficiency through process simplifications, branch reductions and digital automations.

Moving on to Page 7. Here, I would like to highlight that we are in a good path to deliver our vision as best specialist bank in the region, and the Addiko ecosystem is the key to achieve our specialist status. Please refer to the right side of the slide.

Our desired state of the future is to provide a solid plug-and-play financing platform, which enables our partners in a modern digital marketplace to provide financing to consumer and small businesses at every touch point, thereby creating a new ecosystem, making financing accessible and provide that extra boost whenever and wherever they need finance.

This year is a stepping stone on the path to enable this Addiko ecosystem as we are developing in 4 essential areas. Number 1, as Herbert mentioned, we have already launched repositioning campaign with brand characters to amplify our marketing and PR communication. Number 2, we are launching the Buy Now, Pay Later service in key markets with a FinTech partner this month. Number 3, we will enhance our platform with a best-in-class card offering. Number 4, we are enrolling new partners in each of our markets, having our focus on the lifestyle areas with the highest importance for our target customers.

On Page 8, Herbert talked about alignment we made between the specialist bank strategy, Addiko purpose and the Addiko Bank promise. Let me provide you with further details how and where this marketing change is visible to customers.

Addiko brand repositioning has been introduced last week in all 6 markets this month through an omnichannel marketing campaign. The new brand character, Oskar, replaces the previous triangle symbol, and he will, from now on, be the message carrier for Addiko, both outside to potential and existing customers as well as internal to all our employees to reinforce customer-centric focus.

The brand character, Oskar, has a voice in every market in the local language and it's visible starting last week across all media channels like TV ads, outdoor billboards, social media and digital advertising and mobile. We have an intensive TV campaign throughout May, which will be continued in June and July, particularly when it comes to digital advertising.

Cost per messages addresses our existing customers speaking about how Addiko promises to deliver cash flow and fast uncomplicated whenever and wherever we need an extra boost and will act as a customer representative champion, as Herbert mentioned.

For new and potential customers, Oskar is inviting them to try Addiko and is communicating that we are here to serve young employees, pensioners, staffing entrepreneurs and digital savvy people.

To summarize by growth first, we pursue a purpose-driven transformation with a clear reason to grow and extend the platform into a bigger ecosystem where customers find simple and fast lending solution to whatever lifestyle needs they can. We believe this is the key to continue providing strong differentiation to other players that are active in our region.

Please let me hand over to Edgar.

[Edgar Flaggl, executive]

Thanks a lot, Ganesh, and hi, everybody. Now on Page 10 to our financial performance in the first quarter this year. Starting on the left side of the page with the composition of the P&L. Our unaudited net profit amounted to EUR 6.5 million compared to EUR 5 million last year as Herbert pointed out already.

At operating result level, the year-over-year increase was 26%. This is a quite good result considering that the first quarter this year includes one-offs such as defense costs against the onerous Swiss franc law in Slovenia, reserves for forecloses in Slovenia and lower gains from financial bonds following our strategy shift to hold to collect.

Net banking income continued on a good trajectory with NII flat in the bridge year 2022, driven by the accelerated rundown in non-focus and medium SME loans. This also explains the reduction in the average loan book of close to EUR 280 million year-over-year. In that sense, the currently flat NII is proof that our strategy to reallocate capital focus areas is working while strong NCI allowed us to compensate this accelerated reduction in non-focus as well as low yielding and higher ticket medium SMEs.

Our gross performing loan book started to grow again with an increase of just shy of EUR 60 million, so 6-0. And that's thanks to strong new business in our high-yielding focus areas, illustrating that we are on track in the transformation of the bank.

The other income comprising the net results of financial instruments and the other operating result is down versus last year mainly driven by lower gains from the sale of our financial assets that are part of the liquidity portfolio, and that is in line with the new investment strategy to keep positions until maturity to collect interest income.

Now down to operating expenses, which have been one of the key priorities of our transformation program. Our operating costs are down 7.5% year-over-year and 5.8% versus the fourth quarter last year. Excluding OpEx that is related to the Swiss franc law topic in Slovenia and to the euro fermentation project in Croatia totaling roughly EUR 0.2 million, our pure operational OpEx run rate for the first quarter this year was at roughly EUR 41 million, beating our guidance of EUR 41.5 million on our last call.

I will come back to OpEx in a moment. The other result remains influenced by charges related to active and passive legal claims, including our initial costs for our big claim against Slovenia. In addition, we built a reserve of $1.8 million for a potential mass claim regarding new [indiscernible] forecloses in Slovenia. Together with our quarterly review of legal provisions also related to Croatia, this reflects the continued prudent approach of the team on legal risks.

Now to credit loss expenses, which once again remains benign due to the stable portfolio quality. Today we'll share the usual update on the highlights in a few minutes. Briefly over to the right-hand side of the page with our key operational and key out drivers and their development over the last 5 quarters.

As Herbert and Ganesh pointed out earlier, we have visible results from the transformation program on the business. This is reflected in a good development on both NII and specifically NCI during the first quarter, which usually is the weakest quarter in any given year. Just to keep in mind, given the accelerated reduction of non-focus during the second half of last year, the starting point in terms of interest-bearing loan book for the first quarter 2022 was the lowest in any of the 5 quarters shown on the page.

On OpEx. As mentioned, we are happy with the development in the first quarter, which brought our cost/income ratio down to just below 71%. However, we also remain cautious of the dynamics for the rest of the year. The spending on the euro implementation profit integration will inevitably ramp up, and we still expect mid-single-digit one-off costs for this.

We also see significantly elevated inflation pressure across all our markets, which specifically puts additional burden on supply, services and energy costs, but increasingly also on wages. We do see several large banks in our region, adjusting wages significantly. And since we cannot fully await this, we are working on finding mitigation measures to minimize this impact.

Now to Page 11, which illustrates our capital position. During the first quarter, the overall development in terms of capital is mainly related to 2 topics, as Herbert pointed out already. First, the changes in OCI driven by the current market volatility in sovereign bonds in general and specifically in the CSEE region.

And second, changes in RWAs from the guideline on structural FX, which you see across the banking sector. Some flavor on the OCI development. Roughly 60% of the current bids in OCI stem from main [ manila ] Croatian and Serbian government bonds, so right in our region. From a credit perspective, we do have a very stable portfolio, predominantly issued by governments of the region. So that all led to a fully loaded CET1 ratio of 19.7%, while the transitional CET1 ratio stood at 20.4%. These ratios do not include interim profit or accrued dividends.

Now shortly on stress, no changes to our previous disclosure. We still remain cautious on future P2G since among the whole environment, the comprehensive assessment stress that is based on the COVID year 2020, which results in a higher capital depletion and could be a pull into a higher P2G again in the next slide.

And now over to Tadej for an update on our risk metrics for the first quarter this year.

[Tadej Krašovec, executive]

Thank you, Edgar. Let's go to Slide 12. I can conclude that credit risk situation was quite uneventful in the first quarter of '22. On the left side, we see that we have continued with an NPE decrease and slightly decreased also NPE ratio to 2.8%. That is the decrease of EUR 7 million in nominal amounts.

NPE formation in the same period was below expectations, and NPE decrease remains our focus further on for the year as part of our transformation program. So no material changes in that respect in the first quarter.

On the next slide, if you can go to the Slide 13. Overall, I can say that our portfolio remains strong and even better than expected. However, we have to recognize that several topics, war, inflation and supply chain disruptions, some of those Edgar mentioned before, increase market volatility and can potentially affect credit risk going forward. At the same time, we are well positioned to manage such a situation.

Quality of the portfolio was reflected also in our cost of risk. Allocation in the first quarter was lower than we expected and amounted to EUR 1.2 million. That is cost of risk of only 0.04%, which is for comparison 3x lower than in the same period last year. That mainly means we had some onetime positive cases in the first quarter, and it doesn't predict that the rest of the year will automatically follow this trend.

While consumer business or consumer portfolio behaved very close to our plans, allocation of provisions was in amount of EUR 4.3 million. SME and non-focused portfolio performed better and were the source of provision releases in amount of EUR 3.2 million in the first quarter.

Again, let me conclude that we have achieved planned or even better than planned risk results dependent on the customer segment we're looking at. At the same time, I have to recognize that the volatile market conditions could potentially have an impact on the credit risk. This is why we are keeping a close eye on the situation and are introducing some mitigation measures already now.

With that, I hand over to Herbert for the outlook and wrap up.

[Herbert Juranek, executive]

Thank you, Tadej. As mentioned, our transformation program is well on its way. In 2022, the emphasis is shifting from restructuring and cost measures more towards growth initiatives to kick start our business. In that context, we consider our brand repositioning is quite important, and we will concentrate our activities to further improve our digital capabilities and to extract value out of the partnerships, which we have built in the recent months.

We will continue working on our strategy to deliver our goal to become the best specialist bank for consumers and SMEs in Southeast Europe. This also includes our goal to further improve our risk management systems to ensure a prudent risk approach, but also to support our growth path in an efficient way. At the same time, we will continue our constructive cooperation with the regulator and our efforts to manage our NPEs effectively.

As said in the beginning, we keep our outlook for 2022 unchanged despite inflation pressure and despite all macro economical influences. Nevertheless, I want to mention this outlook does not include any potential impacts from the Slovenian Swiss franc law or potential knock-on effects from the war in the Ukraine. Based on the current view, we do not expect negative influences from COVID-19 anymore going forward. But we expect market volatility and inflation to remain on an elevated level in 2022.

As mentioned by our CFO Edgar, we will be confronted by consequential cost updrifts, which we need to counterbalance with other measures. However, we as the management team of Addiko are positive on our business model and on the opportunities our market has to offer to us. We continue to work with full ambition to improve the bank in the interest of our customers and of our shareholders to create value for both of them. With that, I would like to conclude the presentation.

The finalization of the AQR is expected until the end of the second quarter, and our presentation of the half quarter results is scheduled for the 17th of August. I would like to thank you for your attention, and we are now ready for questions.

Operator, back to you.

[Operator]

[Operator Instructions] And we have the first question. It is from Mladen Dodig, Erste Group.

[Mladen Dodig, analyst]

I think the chart on Slide 10 top right corner says it all. My questions are, first, regarding Slovenia. So we have heard on the market some speculation on when constitution called Slovenia might decide and with respect to the recent political changes, et cetera, et cetera. Do you have any -- how should I say, insights updates on this issue?

[Herbert Juranek, executive]

Yes, thank you for that question. I mean, the injunction was approved by the constitutional court. According to what we hear, our feedback is -- or the feedback we got is that the constitutional court wants to take a decision fast. Fast means from our perspective within the next 3 to 9 months. So overall, we expect was probably that the decision will happen this year.

According to the feedback of all our lawyers, internal and external lawyers, international and local lawyers, the common opinion is if everything will be decided according to the books and to the loss, the law should be turned down completely. That's our expectation. But of course, we don't know. We need to wait for the ruling.

[Mladen Dodig, analyst]

I asked the question because the last Board, I have heard this everything between 6 months and 2 years, but 2 years really looks too long, especially since you have a recommendation from the regulator not to consider dividends until it is fully clarified, but these 3 to 9 months does sound reasonable.

The second question is regarding the rate hikes in the region. Do you have -- can you provide us with information how much of your portfolio are exposed to the variable rates?

[Tadej Krašovec, executive]

Sure. Mladen, thanks for the question. This is Tadej speaking. So we did not include in the first quarter deck, the -- an updated version of the interest rate sensitivity. But if you look back just a couple of weeks ago, based on the full year '21 financials, in our [indiscernible] at the support link which shows that the overall book is roughly 40% variable. That, of course, differs among different business segments. So on the consumer side, it's roughly 90% plus fixed, while if you go to the non-consumer, it's more on the variable side.

[Mladen Dodig, analyst]

Okay. Okay. Yes, that's all for now. Maybe if I come up later with some other questions, I will log in.

[Operator]

At the moment, we have no further questions via the telephone lines.

[Herbert Juranek, executive]

We have one question here from [indiscernible]. I read the question, and then we will go to answer. Could you please repeat the marketing costs related with Oskar? Who will take that? Edgar or Ganesan? Ganesh?

[GaneshKumar Krishnamoorthi, executive]

So the Oskar production cost EUR 150,000, which includes like the ad production for TV and also billboards, all the materials, procures, et cetera.

[Herbert Juranek, executive]

Good. Then we have another question from [ Wolfgang ]. Is your risk control system different to your competitors? And how do you handle possible changes in the ability of your clients to repay their loans?

[Tadej Krašovec, executive]

I think that's all -- it is hard to judge and compare the risk control systems between the banks on the market. But I can say for us that we have several layers of their different risk controls implemented from the large or high portfolio levels down to the subsegments of different -- of different consumer and corporate segments. On top of that, our process of early collection or early warning system, even I think it's one of the best on the market and actually catches clients already very early in the potential for romantic phase.

Regarding the -- how we tackle increased monthly living costs of the plant -- so first, for the new business, we have already introduced in almost all countries increased monthly living costs that go into the calculation of the 3 monthly salary of the client that can be used for the loan repayment. In that way, we are trying to incorporate already this part of inflation. For the clients that are already in our portfolio from the best, we have actually a proactive approach and early warning system that allows us to identify, let's say, problems early and offer clients reasonable restructuring if that is needed.

So far, up to now, we didn't see material changes in the performance of our consumer portfolio, even though that we see high inflation in practically all of the countries that where we are present, I hope that answers the question.

[Herbert Juranek, executive]

I have one more question from [ Bokoni ]. As mentioned by you that you want to keep the bonds in your portfolio until redemption, isn't there the option for you to value them at 100% open to you.

[Edgar Flaggl, executive]

Thanks a lot, [ Bokoni ]. This is Edgar speaking. Very good question. I start a bit broader on this topic. So first of all, when the new management defines the enhanced strategy and on the basis of the strategy, the new plan, which was approved last year, also up to the Supervisory Board. This plan already reflects a lack of gains compared to the amount we had in the past in this bank from recycling as an accounting bonds in that sense.

Why? Because the focus was clearly to focus on consumer and SME point 1. Point 2, with the accelerated reduction of non-focus, there was even more liquidity available so liquidity and capital freed up. In that sense, we have clearly shifted the strategy towards keeping especially the bonds with a choosy coupon for until maturity to collect interest income because that's the main source of our P&L still -- of our revenue still, sorry.

So in that sense, there is good -- very good arguments on that, but the topic is much broader because when IFRS 9 was implemented, so decided in 2017 implemented from the 1st of January 2018. Back then, on the old strategy, under old management, we decided to keep the bonds on a fair value growth. but that was based on a totally different business model as we have it here now what we run as a new team going forward. So we are in the progress of assessing this is the short answer.

[Herbert Juranek, executive]

Good. Thank you. Operator, I do not have any more questions on the webcast. Do you have any questions on the telephone line?

[Operator]

No, there are no further questions via the telephone line.

[Herbert Juranek, executive]

Okay. Thank you. Then I think now we can -- there is one more. Okay. Understood. Thank you. Okay. If we can open the questions, we thank you for your participation and your attention. And we, as a management team, we go back to work in order to further improve the bank. Thanks a lot, and have a good afternoon. Thank you. Bye-bye.

[Operator]

Ladies and gentlemen, thank you for your attendance. This conference has been concluded. You may disconnect.