Addiko Bank AG

VSE:ADKO

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, welcome to the Addiko Bank AG Results First Quarter 2024 Conference Call. I am Mina, the coference call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions] At this time, it's my pleasure to hand over to Herbert, CEO. Please go ahead.

[Herbert Juranek, executive]

Good afternoon, ladies and gentlemen. Let me welcome you to the presentation of the first quarter results 2024 of Addiko Bank on behalf of my colleagues, Ganesh, Bader, Edgar, and Constantin. We have prepared the following agenda of the year. I will start with the key highlights of the first quarter and then pass on to Ganesh, who will update you on our achievements on the business side. In the second chapter, Edgar will provide you with more insights on our financial performance. And today, we'll inform you about the development in the risk area. At the end, I will do a short wrap-up and comment on our outlook for 2024 before we move on to Q&A. So let's begin with the highlights. The results of the first quarter are quite positive. We were able to raise our net profit by 61% year-on-year from EUR 9.7 million to EUR 15.6 million. Compared to the previous quarter, the increase amounts to 42%. This leads to EUR 0.81 earning per share in the first quarter. The return on average tangible equity jumped from 5.4% in Q1 last year to 8% this year. Our operating result grew by more than 41% year-on-year to EUR 28.5 million despite inflationary impacts on the expense side. This positive result is based on a double-digit year-on-year growth in our focus business and the solid cost management in the given environment. In addition, we were able to improve the net interest income by 14.5% year-on-year despite increased funding costs and the usual seasonality effects. Due to our acceleration program efforts in product management, mostly in cards, bancassurance, accounts and packages, we were able to improve our net commission income by 8.4% compared to last year. Our expansion project to Romania is also progressing according to the plan. Now let's look at the risk side. Our cost of risk remains benign at low 20 basis points or EUR 6.9 million. The NPE volume slightly increased to EUR 146 million with an NPE ratio of 2.9% based on the provisioning case, with one customer in the first quarter. But Dave will give you more details later during his part of the presentation. Nevertheless, we were able to further improve our NPE coverage level to 81.4%. The funding situation remained quite strong, with a slight growth in our deposit base to EUR 5.1 billion deposits, resulting in a loan-to-deposit ratio of 69%. Our liquidity coverage ratio is currently above 400% at group level. And finally, our capital position is also very strong with a 20.3% fully loaded CET1 ratio. As you know, we had the AGM on the 26th of April with all agenda topics approved. Consequently, we paid out EUR 1.26 dividend per share yesterday on the 7th of May. Now let's look at our business development. The 2 main messages on this page are that we were #1, able to continue our double-digit growth of our focused book. And #2, that we managed to increase our new business generation by 10% year-on-year despite a bit of a slowdown in the micro and small SME segments. To give you more background on this development, I would like to mention the individual growth rates. On a year-on-year comparison, our consumer book grew by 12%, while our total SME book grew by 6%. This blended rate in the SME book is based on the growth rate in our micro and small SME book of 13% year-on-year, while at the same time, reduced our large ticket medium business by 15% in order to further decrease concentration risk in our portfolio. The focus book stands currently at 87% of all gross performing loans. Our focus yield in the Consumer business improved further from 7.7% at the end of last year to 8% at the end of the first quarter. On the SME side, the focus yield went up from 5.7% at the end of last year to 6% at the end of the first quarter. This development resulted in a blended focus yield increased from 6.3% at the end of last year to 6.6% at the end of the first quarter. As usual, I want to highlight that we continuously calibrate our underwriting criteria to the current environment in line with our risk appetite. We keep our prudent risk management approach in order to ensure the right balance between business growth and risk management. With that, I would like to pass on to Ganesh, who will give you more insights on our business activities.

[GaneshKumar Krishnamoorthi, executive]

Thank you, Herbert. Good afternoon, everyone. Moving to Page 5. I'm pleased to inform you, we started the year with strong business results with an impressive 10% year-over-year growth in Focus book with premium process yield of 6.6% despite the challenges in SME markets. Our consumer segment saw exceptional growth this quarter with a 37% year-over-year increase in new business and yields reaching 8%. However, we experienced a slowdown in SME new business, likely due to SMEs anticipating interest rate cuts in the next quarters, resulting in current reduced demand. Despite competition driving rate cuts in pursuit of volumes, we maintained our premium yield at 6%, up by 65 basis points year-over-year. Going deep into Consumer segment, our strong growth can be contributed to; #1, market demand, strong demand across key markets has been a driving force. #2, expanded partnerships. We have doubled our partnership lending business through 575 partnerships across 1,000 locations, and our new partnership business will also be launched in Bosnia to drive further growth. #3, improved cross-selling. Enhanced cross-selling efforts have boosted our revenue by driving new customers from partnerships to high-value consumer loans. #4, effective marketing. Both digital and off-line marketing initiatives have bolstered our brand recall better than the competition and generated business opportunities. #5, digital expansion. Launching branchless digital operations in 3 key markets have led to incremental growth. #6, focusing on new nonlending products. Product feature improvements in cards and insurance have resulted in a 35% increase in net commission income. #7, innovative products. Introducing ID-only loans in Bosnia has also driven the growth forward. Overall, we have consistently focused on driving growth by targeting digital savvy customers and point-of-sale segments with lower ticket high price flows. Shifting our focus to SMEs. Our goal remains to be become the fastest provider of low ticket loans to the underserved micro and small segments throughout our digital platform. Last quarter, our efforts were focused on: #1, process efficiency. We continuously refined our loan application process, resulting in reduced time to cash and strengthening our unique selling proposition while maintaining premium pricing. #2, enhance online channels. We prioritizing improved experience and increase conversion on our new online platforms. #3, product expansion. In line with our aspiration program, we introduced auto overdraft and bancassurance products to enrich our SME ecosystem and revenue streams. Last but not least, risk fine-tuning. Tara's team is constantly refining criterias to improving risk assessment, mitigation and monitoring. Looking ahead, we anticipate the interest rate cuts will stimulate market demand in the second half of the year. On technology front, last quarter, we started piloting Copilot and other AI tools to support automation, programming and various other use cases. We believe in AI's fetal role in banking and will actively explore and test various use cases to drive innovation and efficiency. Briefly on Page 6. We consolidate key milestones that drive us forward towards our midterm objectives and our banking specialized vision, which we set 3 years ago. Last quarter was another positive step towards achieving this vision. To conclude, we are positioned well to deliver strong sustainable growth in future, and we continue awaiting and solidifying our specialist position in consumer and SME space. Please let me hand over to Edgar.

[Edgar Flaggl, executive]

Many thanks, Ganesh, and hi, everybody. Starting on Page 8 and the composition of our results for the first quarter 2020. Quite a good start into the new year. Net interest income improved significantly and despite higher deposit funding costs, was up 14.5% compared to the previous year. The quarterly development is naturally muted due to starting the year 2024 at, in our view, pretty much peaked deposit funding costs. Despite this fact, our NIM remained at a strong 389 basis points. Overall, our key revenue driver, the interest income improved by more than 25% year-over-year. This was driven by our focus segments, which recorded a 22% year-over-year increase on the back of our premium pricing of new business and the contribution from treasury and liquidity management. We ended the first quarter with 87% of our book in high-yielding focus loans compared to 83% a year earlier, and we remain on track to exceed the 90% in 2024. Interest expenses ramped up through the year 2023, as we have all seen. And naturally, we started the new year with higher deposit funding costs. We expect that we have more or less reached the peak in terms of funding costs, which stood at 126 basis points for the first quarter, up from 69 basis points a year ago, mainly driven by the strategic shift into more stable term deposits. So fully in line with our expectations and guidance so far. The second key income driver, the net commission income now started showing the results of activities performed by the business teams and is now up 8.4% year-over-year in a naturally weak first quarter. This is what we spoke about in our last earnings call about having a plan to get back on a positive trend going forward, and Ganesh and his team will continue to work on further improvements. This continued momentum on the top line led to further improvements on net banking income with an increase of 13% year-over-year. Now to the other income, which comprises the net result on financial instruments and the other operating results. The development in this position is mainly driven by deposit guarantee costs and regulatory charges. In the first quarter, we recorded a positive effect from lower deposit guarantee costs in Croatia related to the fourth quarter last year and the first quarter this year. This positive effect, however, was consumed by higher bank levels, mainly driven by the new Slovenian banking tax for which we booked EUR 0.7 million in the first quarter, which corresponds to EUR 2.8 million for the full year. Next, the general administrative expenses in short OpEx, which continue to be up year-over-year and remained contained at an increase of slightly north of 6% year-over-year. We are currently performing better than our full year guidance. However, the guidance had not planned for advisory costs related to the voluntary take offer that was announced in March. Our cost income ratio ended at 60.7%, which is a year-over-year improvement of 3.8 percentage points. To sum up, we have continued to deliver a positive improvement of our earnings power, which is reflected in a 10.4% increase in the operating result compared to the previous quarter and 41% year-over-year. The next item is the other result, which includes costs for legal claims as well as for operational banking risks following our prudent approach. As you can see, the first quarter charges remained benign and normalized while also containing a charge related to Swiss franc metrics in Slovenia, such as for the voluntary settlement offer that we launched for socially vulnerable customers. Just in northern credit loss expenses, which once again came in benign and below expectations, so they will provide insights on the development in a moment. To conclude, a strong result on the back of our ongoing momentum in the top line, continued cost containment, coupled with sound risk management, which allowed us to achieve a net profit of EUR 15.6 million, which is up 61% year-over-year and corresponds to an 8% annualized return on average tangible equity. Briefly over to Page 9, which illustrates our capital position that remains standing strong. At the end of the first quarter 2024, our capital ratio landed at a strong 20.3% fully loaded and all of that in CET1, and that is excluding interim profit and accrued dividends. As you can see in the chart, our OCI continued the trend of recovery, adding back roughly 10 basis points in CET1 while RWAs continue to grow on the back of loan book growth. To summarize, the batteries are fully charged for continued growth. And now over to today to share insights on risk management.

[Bader, executive]

Thank you, Edgar. Good afternoon to all. We continue on Slide 10 with the credit risk part. In the first quarter of 2024, our overall portfolio quality continues to be strong. As you can see on the chart on the left-hand side, the stock of the nonperforming exposure increased from EUR 138 million to EUR 146 million, resulting in the NPL ratio of 2.9%. Increase of NPA portfolio was planned, but to a slightly smaller extent. Increase happened due to 2 factors: first, worse risk performance in Serbian SME portfolio, especially driven by one legacy defaulted clients. And second, a plain debt sale in Croatia was postponed. For Serbian SME portfolio, we have already implemented more restrictive risk criteria during 2023, and we are working on a further fine-tune. On a positive note, we successfully concluded the restructuring of the 2 largest MP tickets in Addiko Group and already received the first installment payments following the restructuring wins. This should bring a visible positive effect still in 2024. We are continuing to find solutions for a further NPE reduction and due to high coverage ratio and a material part of portfolio being 100% provisioned, we are solidly equipped to reduce NPEs without further P&L impact. Let's now move on the next slide. The credit loss expenses for the first quarter amounted to EUR 6.9 million. This resulted in a cost of risk of minus 0.2%, a performance better than we have anticipated. At the same time, we kept the post-model adjustment unchanged at EUR 6.5 million. Provisions were released in the non-focus segments, resulting in a positive cost of risk of 0.45% and allocated in the focus segments with negative cost of risk of 0.30%. To conclude, from the risk behavior and risk put perspective, we are solidly on track. We see negative deviations in SME portfolio in Serbia and on a smaller level in consumer portfolio in Slovenia. But overall, we are inside our plans and expectations. We are actively managing mentioned deviations by tightening risk criteria where needed. And I believe this will soon be reflected in lower NPE inflow in specific some segments and have positive impact on the NPE portfolio size also. With that, I hand back to Herbert.

[Herbert Juranek, executive]

Thank you, Bader. Let's go to the ramp-up. In the upper part of the slide, you see our outlook figures, which are derived from our midterm targets. We are in line with these targets and hence, we want to confirm them for this year. Nevertheless, I would like to mention that additional costs related to unforeseen shareholder activities are not included in our initial assumptions. The macroeconomic environment continues to be impacted by uncertainty driven by the war in the Ukraine, the Israel-Hamas war and other factors like the inflation and the interest rate environment. Altogether, the macroeconomic situation leads to a bit of reservation and a wait and see attitude with the part of our SME customers. Consequently, we see the demand in certain business segments slowing down. However, we are already in the process to establish measures to compensate a potential impact on our growth plan. We share the view of the Vienna Institute for international economic studies that our region will outpace growth in the Eurozone. Therefore, we should have enough possibilities to fuel sustainable business growth for Addiko. We are confident that we will get closer to our goal to be the best specialist bank for consumers and SMEs in Southeast Europe. On that basis, we continue to work with full energy to further improve the bank to create value for our clients and for our shareholders. With that, I would like to conclude the presentation. Our next earnings call to present to you the half year results is scheduled for the 8th of August. I would like to thank you for your attention. We are now ready for questions. Operator, back to you.

[Operator]

[Operator Instructions] The first question comes from the line of Hugo Cruz with KBW.

[Hugo Moniz Marques Da Cruz, analyst]

I wanted to ask 2 things really. One was on your shareholders, the Mr. Kostich and the Ultapay Group. I was wondering if you could disclose what kind of conversations you've had with them ,and what are their intentions for their stake in the bank? And my second question was around your comments around the peak in deposit rates. So how do you expect those deposit rates to evolve? Why are you confident that we are at the peak level and could you give a bit of color there around the timing and the repricing strategy that you have for your term deposits.

[Herbert Juranek, executive]

On your questions on the shareholder, since the AGM, there was no contact with both shareholder groups. And there's also nothing I want to share right now about it. You know that Agri announced the acquisition and I would assume now the regulatory process is in place, and we need to wait for the feedback of the regulator on that side. And as you also know, Agri Europe, there will was probably between the 13 and the 16 the proposal will be public. And then we, as a management board, we have to reflect on that and give our opinion on that. And we will do that according to the procedure. Who wants to take the other question?

[Edgar Flaggl, executive]

Can you maybe repeat your second question? Because I'm not sure for 100% understood on the term deposits.

[Hugo Moniz Marques Da Cruz, analyst]

If you could explain what is your repricing strategy for the time deposits and the timing of that repricing? Or do you expect deposit costs to come down as rates come down as well?

[Edgar Flaggl, executive]

Look, I'm not going to share or disclose here in detail our deposit strategy. But in general terms, our strategy was to start earlier where prices were still lower for term deposits, which we did. I would say, if you look at it, not only at 1 year, but across 2 years horizon, also financially until today, this has been beneficial, let's call it this way. We are not pricing anywhere in the top of the market in any of the markets. So we are usually within the average in contrast to loan pricing, where we are 100 to 150 bps above the market. And we will, of course we are watching as pretty much everyone rate environment and also what the competition does very closely. And we do expect with rate cuts coming in with the sufficient liquidity that is available to banks in all the markets. but also pressure on deposit pricing will not only go down further, but reduce. We have already reduced in the network here and there, deposit pricing as we go and have not lost any volumes in that sense. So maybe, Ganesh, if you want to chime in.

[GaneshKumar Krishnamoorthi, executive]

Well, just to add one thing. We have also been cautiously getting deposits with the lower terms, like 6 months is not 3 or 4 years overall from my term point of view. So when the rate cuts come in, we can capitally also extend those deposits with the lower rates. So what I mean is that we have not committed into long-term deposits where we would have more interest expense, and we can reflect more the interest environment as we go forward.

[Operator]

Ladies and gentlemen, that was the last question. I would now like to turn the conference over back to Mr. Constantin for questions on the webcast.

[Constantin Gussich, executive]

I have one question from Wolfgang Market and Partner Asset Management. On an actual basis, did you see some movements within your client base in relation to the latest announced shareholder activities?

[Herbert Juranek, executive]

Well, I will take this question. We didn't see any movements in our shareholder base. But what we are getting is we are getting questions from our clients, and we are answering these questions.

[Constantin Gussich, executive]

Then I have 2 more questions from Alexandra Babich from Agri Europe Cypress. First, any changes related to CHF topic.

[Herbert Juranek, executive]

Look, overall, you have seen in the other result, we have not had any additions in terms of provisions related to Swiss franc in Croatia, which has been carrying the highest charges last year. In Slovenia, we have added some provisions for both slight additions on legal provisions as such, but also provisions for our assumed acceptance of the voluntary settlement offer for socially vulnerable customers, which was, I believe, announced on 8th of April and where we and the few other banks are actually proposing that. This has also been positively commented by the Banking Association, of course, but also the Ministry of Finance. When it comes to verdicts on Swiss franc legal claims in Slovenia, I think it's worthwhile to mention that there has been positive Supreme Court verdict recently. Now it's still too early to say how this will affect the rest of the claims. But this is at least a good start, I would say, closer to the right direction in terms of legal stability.

[Constantin Gussich, executive]

Then the second question from Alexander from Europe Cyprus. What is the level of NPL ratio overall and on SME segment?

[GaneshKumar Krishnamoorthi, executive]

I will take that away speaking. So NPE ratio overall is 2.9%, while on the SME segment, it's 2.6%. How exactly it depends a little bit on the segment, subsegment in SME, but it is between 2.2% and 3.5% NPE ratio depending on the segment. Yes, and you can find these data further on the Slide 4 of the presentation.

[Constantin Gussich, executive]

I have no more questions on the webcast. So I hand over to Herbert for closing remarks.

[Herbert Juranek, executive]

So I would like to thank you for your participation. We wish you all the best, and we see you next time we hear each other next time at the next earnings call in August. Thank you very much. Have a pleasant afternoon.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.