Aktia Bank Abp

OMXH:AKTIA

Earnings Call Transcript

[Oscar Taimitarha, executive]

A very good morning, and welcome to follow Aktia's Q1 results presentation. My name is Oscar Taimitarha. I'm Aktia's Investor Relations Director. Earlier today, we published our results for the first quarter. Aktia's CEO, Juha Hammarén; and CFO, Outi Henriksson, will soon walk us through the results. If you're following us online, please feel free to write your questions in the comments section on the website. And of course, you here on site can post questions as well. We'll answer the questions after the presentations. So let's move on. Juha, please welcome.

[Juha Hammarén, executive]

Good morning, everyone, and welcome to Aktia's first quarter webcast also on my behalf. My name is Juha Hammarén, and I'm the CEO of Aktia. As before, I will go through the highlights of our last quarter, after which, our CFO, Outi Henriksson, will walk you through our financials in more detail. Aktia's strong performance continued during the first quarter of the year. We made one of the strongest results in the history of our bank, mainly thanks to our excellent net interest income. Both the cost income ratio and the return of equity improved clearly. In the first quarter, net commission income from asset management remained solid. And our assets under management increased slightly from year-end. I'm satisfied that we managed to keep our costs well under control. So the IT cost slightly increased, reflecting investment and efforts to improve systems and customer experience. We also maintained good quality in our loan book and our credit losses remained at a moderate level. Then let's move on to our businesses. First, our banking business, which again delivered a strong result. In the first quarter, our net interest income remained on an excellent level. The main reasons were high interest income from lending and growth in profitable financing solutions. In a corporate customer business, the demand for factoring, leasing and higher purchase financing remained strong. The strategic choice to focus on these solutions contributed to a continued improvement in average margin of the loan book. On the housing loan side, the demand was still slow. Although we note slightly increasing financial difficulties among retail customers. The quality of our loan book remains good and credit losses remained at a moderate level. We saw continued growth in the card business and sales of investment products to banking customers was also good. Then let's move on to our asset management business. Asset under management increased slightly during the quarter in a mainly favorable market environment. In January, Kati Eriksson took over as Director of the business area. She is now leading the dedicated development work in our asset management organization. In accordance with our growth strategic we shall be the best asset manager, which requires long-term and methodical work and the development of processes and products. It is the pleasure and confidence that I look at the work being done. It is also positive to see how the work with the private banking business has borne fruit. And that we, once again, had a quarter with positive net subscription in this customer segment. However, net sales to institutions were negative in the first quarter, resulting in negative net subscriptions on group level. That said, the negative net sales had on -- [Audio Gap] and then our life insurance business. Also, the Life Insurance business remained solid. Both sales over risk life insurance policies and investment-linked insurance policies developed well during the last quarter. The result from investment activities was stable. Our solvency ratio remained on a good level. Then a few words about sustainability. During the first quarter, we developed our active ownership methods by creating a new model for sovereign engagement. The purpose with the model is to improve how aspects related to climate change are taking into account touring investment decisions in Aktia's emerging market debt funds. The model will be piloted during the second quarter. Aktia's own principles for responsible investing were updated during the first quarter and has come into effect from the beginning of April. In Aktia's updated principles for responsibly investing to exclusion criteria has been specified as well as improved alignment with Aktia's climate strategy. Also, how ESG-related risks and opportunities are considered in investment practices have been specified in the updated principles. The following KPIs and targets are part of Aktia's climate strategy and sustainability per gram. In the first quarter, the share of Article 8 and 9 remained on the same level as in the fourth quarter last year. However, the share of Article 9 funds has increased since the first quarter of 2023. The relative carbon footprint of Aktia's equity and credit portfolios has decreased by 40% since 2019. This means that Aktia's 2025 target has already been achieved. For the social part and for our own employees, we are following several KPIs in our sustainability program. Port Sidney and Ian PS which are measured annually have a recent rise since the last measurement. The CE index, again, is measured on an annual base, and this is why the figure percentage is from 2023. For the governance part, we are tracking Aktia's ESG ratings and following our ratings according to MSCI, just Analytics and ISS ESG. At the moment, our ratings are over the industry average. The MSCI rating for Aktia has increased from A to AA. So to summarize, the first quarter of 2024 was excellent for Aktia. We have every reason to be both happy and proud. With these words, I would like to invite Outi on the stage to go through our financial performance in more detail. Outi please, welcome.

[Outi Henriksson, executive]

Thank you, Juha, and welcome on my behalf as well to follow up as first quarter results presentation here at the studio and online. Great to be here this morning. I'm very pleased with the first quarter results. The comparable operating profit was EUR 33.9 million, and that is 44%, up from first quarter last year. We will walk you through -- I will walk you through the kind of details behind this positive development on the following pages. Let's first take a look at the summary of the P&L. A few things that I would like to take up from here, those things you have already mentioned. The first one is the cost income ratio, which was 0.53. That is a very solid improvement from last year. Looking at the last year number, though, 0.65, we need to bear in mind that it includes the reservation for the stability fees like you have EUR 5 million. If we take that away from the comparison figure, would the comparison be between EUR 0.57 and EUR 0.53, again, very, very nice improvement. I'm also very happy about the return on equity now over 16%, way up from last year. We will get back to the details behind the income development and the cost development on the following pages. If I start with the income side, total operating income was 10% over last year level, top line, obviously driven by net interest income, the composition of the NII, we will see on the following page. The interest income from lending has been supported by favorable margin development, no major growth in the loan book, but the growth that we have seen has come actually from the corporate side and therefore, the product with higher margins or the product mix from a margin point of view has improved. At the same time, the cost of funding has also increased not only the market-based funding, but also cost of deposits. A few more words about that one as well on the following page. Net commission income was flat. Again, looking at the picture, it's been at approximately EUR 30 million level now over the few past quarters. And here's the composition of the group net interest income. The income from lending continued to increase EUR 93.7 million compared to EUR 91.8 million in the fourth quarter last year. But as I said, the cost of funding a market-based funding has increased that well. As I have mentioned before, a majority of our funding, market-based funding is tied to 3 and 6 months Euribor, while the income from lending is tied to 12 months Euribor. And we have also looking at the deposit base, we have seen a shift from current accounts, noninterest-bearing accounts to term deposits that is investment account. And that obviously has an impact on our cost of funding from deposits. Looking at our funding base, our funding is approximately EUR 9.4 billion, of which 48.8% is deposit funding. There's a slide in the appendix, if you want to take a look. Then the financing from central banks, now decreased to EUR 150 million in the first quarter that is the TLTRO that kind of expired in the first quarter. Net commission income mix here, no major changes here in the structure of net commission income. Majority is coming from the mutual fund supported by the commission income from asset management and securities brokerage. And again, a quite large portion of the net commission income mix comes from the banking business. That is lending-related commissions as well as payment services and credit cards.As we all know, we have seen very high inflation last year. Inflation has continued this year, and this obviously have an impact on our cost base. Having said that, I need to admit that I'm quite actually happy with the development that I see here. I mean, in the cost base, if we eliminate the impact of the stability contribution or stability fee, that is actually relatively flat compared to last year. But again, very high inflation affecting the entire cost base. And then we have seen also labor union agreement related increases last year. We will see them also this year. So that has an effect on our personnel cost base. So bearing those things in mind, I do think this is a good development. a little bit pressure on the IT cost side. They have increased. part of that has to do with the kind of outsourcing where they kind of have seen the positive impact on the personnel costs and some increase in IT, but the inflation has had quite a big impact on IT costs as well as the kind of investments that both in terms of costs and investments in the balance sheet in June 2023 and continue to do that in 2024 to improve the customer experience and the investment in data and analytics and system improvements, automatization and so forth. Our quality of the credit portfolio remains a solid EUR 2.7 million increased reservations in the credit loss provisions in the first quarter. Again, I would say that's a modest level given the market situation. The loan-to-value ratio remained at a very healthy level of 42%. Balance sheet total, slightly over EUR 12 billion, maybe worth mentioning here that the deposits are at the same level approximately in the beginning of the year. So relatively flat. However, as I said, some shifts inside shift inside the kind of deposit portfolio, and again, I mentioned already the kind of liabilities to central banks, they have decreased by EUR 150 million. And the remaining EUR 100 million will disappear from the balance sheet in the end of this year that is in December. And here's, again, to remind about our structure of lending and deposits, very much household-driven, 65% of our lending income is to households then followed by 19% to corporation and then 16% to housing associations. Deposits follow approximately the same structure. Majority of our deposits is from households, 66%, followed by corporations, 25%. Our common equity Tier 1 ratio still at the solid level, 3.7 percentage points above the regulatory requirement, 11.4%, 0.1 percentage point over the level that we saw in the end of the year. Some increase in risk-weighted assets due to the fact that the growth has come from the corporate side, looking at the loan book and the from the products with somewhat higher risk weights. We also updated our dividend policy beginning of this year, which means that we have now deducted 60% of the kind of result from the own funds in capital adequacy calculations. Few changes that will take place now after the first quarter. If I start from the second bullet, a systematic buffer will increase by 1 percentage point from the beginning of April. So right after the first quarter, that will be the same and is effective for majority of the Finnish credit institutions. Another change that we will see. I'm very happy to see that change is that the Finnish FSA decided to adjust the discretionary additional capital requirement, that is Pillar 2 requirement, down to 1 percentage point from 1.25 percentage. And that change is valid until further notice as of September 30 this year. Market has been really good and active in the beginning of the year. We have completed six senior preferred private placement transactions in the first quarter, totaling approximately EUR 285 million maturities ranging from 2 to 5 years. We also issued a Tier 2 in Swedish krona in the first quarter, approximately EUR 31 million, SEK 350 million, as said. Liquidity continued to be at a very good level. Our LCR liquidity coverage ratio was 187% at the end of first quarter. We have slightly updated our outlook for this year. We are still in the beginning of the year, but move the kind of guidance to slightly more positive direction. So we added the higher to the outlook, it was actually somewhat higher than last year before, and now we say here that somewhat higher or higher this year. So a notch towards the more positive outlook for the year-end. We'll see how it goes then towards the rest of the year. We are just the first quarter behind us. And we haven't updated our long-term financial targets that are not very long term as they only cover the period until 2025. We will be looking at this one in the end of the year as we update the strategy after the new CEO has started. So obviously, we are working on this one already, but kind of the formal update, I assume, will follow then at the end of the year, covering the years until '28 or '29. That was the part that I was thinking about covering and I'm very happy to answer the questions that you may have.

[Antti Saari, analyst]

It's Antti Saari from OP Group. Firstly, on NII, the development has now been quite strong, and we're probably reaching the peak before interest rates turn down. If we see rates to come down from June in ECB, as markets are expecting. Is it fair to assume that this won't have a material impact on your NII before the end of this year, because there are certainly some kind of lag?

[Outi Henriksson, executive]

Sure. Yes. I mean, as I have pointed out earlier, a majority of the housing loan book is tied to 12 months Euribor and that carries actually over a longer period of time. And at the same time, when the kind of shorter rates will start going down, that will kind of, with a little bit shorter cycle, have a positive impact on our market-based funding costs. So I would say that, yes, the NII, right in the outlook is actually estimated to be at a solid very good level this year despite the kind of expected rate cut from ECB.

[Antti Saari, analyst]

And the hedges, would you like to say, like say anything about them? How long and how a large impact they would have once the rates on down?

[Outi Henriksson, executive]

I think that you have asked this question almost every quarter, and I'm still not answering the question. No, I mean, seriously, the issue is just that we have several hedges. And obviously, if I start opening what is the impact then it's a complicated issue having impact on many things. And it has impact, although the impact depends on the kind of the level and shape of the forward rate curve. So that is something we obviously internally model but do not disclose the impact.

[Antti Saari, analyst]

But putting it differently, once rates started to go up, you gave us the sensitivity estimate. How much NII you would make with each percentage point of interest rates. So the sensitivity is probably weaker once the rates come down because of the hedges, that's probably correct.

[Outi Henriksson, executive]

I would say that, that is correct, yes.

[Antti Saari, analyst]

Then one more question. If you look at Etsy client satisfactory review from was it September, October last year, in retail clients, you had, by far, the lowest client satisfactory. So have you analyzed the results? What's the reasons behind this? And have you taken some actions to improve the situation?

[Outi Henriksson, executive]

We have obviously reviewed the results and taken actions as well. I'm personally not the right person to ask a kind of a comprehensive way to the question of the kind of rating changes. So I need to get back to that one with some experts from in-house.

[Kasper Mellas, analyst]

This is Kasper from Inderes. My first question is about the resolution fees. Did you book any of these kinds of fees in Q1 this year?

[Outi Henriksson, executive]

No, we did not book any. We got a confirmation that there will be no resolution for this year.

[Kasper Mellas, analyst]

Do you have any expectations on the upcoming years? Is the amount going to be small than this?

[Outi Henriksson, executive]

I cannot confirm that, that won't come back. I mean I don't actually don't know about the next year, but this year, it will be 0.

[Kasper Mellas, analyst]

What were the new items included in the assets under management?

[Outi Henriksson, executive]

The new items?

[Kasper Mellas, analyst]

Yes. You adjusted upwards the historical figures in the assets under management.

[Oscar Taimitarha, executive]

Yes, perhaps I can answer. Yes, it's a minor change, but there are some structured products.

[Kasper Mellas, analyst]

Okay. Yes, that explains it. And then to your guidance, now you expect your net interest income to be higher and previously, this was somewhat higher. What's the difference? Could you elaborate a bit, for example, in percentage terms what kind of development should we expect?

[Outi Henriksson, executive]

Yes. We haven't given any guidance on our guidance. However, obviously, we are slightly more positive. Now we actually, when we do the budgeting and kind of our forecast for the year, we obviously look at the balance sheet and tied to the forward curve in the beginning of the year. The rates have stayed at a little bit higher level than what the market expected in the beginning of the year. That is one contributor. And also how the loan book has developed, and we have work again, model the current updated balance sheet expectations with the latest forward curve. So that had led us to assume that we can improve the guidance a bit.

[Kasper Mellas, analyst]

Then my last question is about your employee count, which decreased quite significantly. How did this -- I mean, how was this divided between your functions?

[Outi Henriksson, executive]

Sure. Comparing to last year, we outsourced the IT service desk, and that has impact on the headcount in IT. So that I would say is the single biggest change. Then we have done some efficiency improvements. So I would say that the kind of a headcount other than the IT related has come down in all areas of the business.

[Sauli Vilen, analyst]

Sauli Vilen from Inderes. On the asset management side, if you look at the inflows or in this case, outflows, I guess, you trailing 12 months, flows to the funds is roughly EUR 0.5 billion minus, if I calculate correctly. There is a major delta between you and relevant peers who are more focused on the traditional asset management. So I guess the question is that has the new Head of Asset Management made any changes and what is her diagnostic on these issues, obviously, with the EUR 0.5 billion minus you cannot be satisfied with that result?

[Outi Henriksson, executive]

If you first look at last year, the negative net subscriptions came mainly from the international institutions side. And we obviously cannot comment on our assumptions why that happens on the customer side. This year, actually, it has been a domestic institution or institutions, mainly and obviously, the new Head of Asset Management, she has issued. She has taken actions both what comes to the kind of way of working organization and so forth. We are looking at our offering as well. But we do know or we think we know the reasons behind the negative net subscriptions, but obviously, do not do that comment on our customers' actions. What I need to take up is that, as Juha pointed out, actually, the net subscribes have been on plus on the private banking side. And the other thing is that part of the AUM that we have lost has been actually very low income. So the income on home hasn't been very high, and that's why actually the impact on the net commission income hasn't been really, really high.

[Sauli Vilen, analyst]

Then you mentioned that you are looking also your offering at the asset management side. Do you see this issue with the net subs or issue with the net subscriptions more of an offer issue or more of a sales issue? At least from this side of the table, it shouldn't be the offer issue. It's something else definitely.

[Outi Henriksson, executive]

Yes, obviously, it's not just the offer issue. We have great products. We have very good fixed income side and so forth. So yes, I think you have a point. I mean, I think we need to be better in sales.

[Sauli Vilen, analyst]

Then we agree on it. Okay.

[Oscar Taimitarha, executive]

Thank you very much. Do we have any more questions? No questions online, at least. So then I suppose that was the last question. Many thanks to all of you, both those who have participated here on site and those who have followed us online. And a special thank you to Juha Hammarén, who went through the quarter with us for the last time in this role. The next quarter will be presented by our new CEO, Aleksi Lehtonen. We wish you all a very nice day.