Komplett Bank ASA

OSE:KOMP

Earnings Call Transcript

[Operator]

Ladies and gentlemen, welcome to the Komplett Bank Loan Production and Q3 Trading Update. [Operator Instructions] I am you pleased to present Mr. Oyvind Oanes, CEO. Sir, please go ahead.

[Oyvind Oanes, Chief Executive Officer]

Thank you very much, and good morning, everyone, and welcome to the short update session related to the press announcement that we issued late last evening. My name is Oyvind, and I'm the CEO of Komplett Bank. And with me on this call is also Henning Fagerbakke, the bank's CFO. So we will start this session with a short introduction to the topic and then go on to answering any questions you might have. And as you would have seen from the press announcement, you can submit your questions online.So the bank started a process of evaluating selling its nonperforming loan portfolio in late summer and obtained indicative offers for spot sales across all markets and for forward flow agreements in Sweden and in Finland. Forward flow agreements are already in place in Norway, as you might know.Having gone through a process with multiple potential current -- contracting parties and obtain attractive conditions, we have now decided to execute the spot sale transactions in all 3 markets of operation as well as to enter into the forward flow agreements for Sweden and for Finland. In parallel to evaluating these various proposals in the sales process and in order to have a better or updated basis for assessing the attractiveness of the prices we achieved, the bank started a thorough review process of the entire loan book, an impairment test, if you will, with focus on the loss given default levels, the LGDs.As more detail became available and these days that were compared with early estimates, it became evident that the actual trajectory for collection was below early estimates. Furthermore, the process has revealed some weaknesses in the bank's earlier models, which resulted in too high expectations for recoverability of defaulted loans.Following several rounds of quality assurance of the new calculated LGD levels, using new and more extensive data, the outcome of the process is that the bank must increase its loan loss provisions, LLPs. The increased LLPs amount to NOK 150 million. And together with a realized loss of NOK 106 million related to the spot sales as well as the impact on interest income due to a smaller overall loan book going forward and certain other minor elements, we are looking at a total impact of NOK 410 million after-tax in Q3.As you would have seen from yesterday's announcement, the bank delivered a stable quarter adjusted for these non-one-off effects, with continued growth and improved -- and improvements across multiple KPIs.So to sum it up and before going on to answering the questions, while these transactions represent a negative impact on the Q3 results as well as on the total results for the year, it significantly reduces the risk on the bank's balance sheet. The NOK 1.4 billion now being sold in the 3 spot sales transactions represent 100% of the bank's NPLs in Sweden and in Finland and around 65% of the bank's overall NPLs. The remaining NPLs are primarily related to Norwegian products or portfolios with existing forward flow agreements. And we're getting down to an NPL ratio after these transactions of around 8%, which I believe is pretty solid. Isolated from the impact on the bank's results, we are very satisfied with the agreements obtained. We believe that de-risking the bank's balance sheet and reducing its risk exposure going forward is the absolute right thing to do at this moment in time.As stated in the press announcement, these transactions will have a limited impact on the bank's capital situation, and hence, its ability to continue operations and further growth. In other words, the bank is strong. And following these cleanup actions, we can focus on setting the strategy for the further evolution of the bank. We continue to believe that there are significant opportunities for growth and development in this industry. A thorough strategy process is already initiated, and we aim to share more about this in the Q4 earnings call that we plan to have in February next year.Okay. So we will now start with the actual Q&A part of the session. Naturally, Henning will address most of these given my short tenure in the bank. And so operator, please, now we can go to questions. I guess we get the first questions online here.

[Henning Fagerbakke, Chief Financial Officer]

We have one question so far. And the question is, have you changed the depreciation time line for agent marketing costs? Or is this still 5.5 years on average?First of all, we have written off agent commissions in the balance sheet related to the portfolio being sold now in November. That's for sure. And also, we have updated our estimates in lifetime of the remaining loans that also result in an expense now in the quarter. So yes, the lifetime has been updated. It's not longer 5.5 years on average.The next question is, what is the ongoing effect on total income from the sale of NPL?Well, the ongoing effect of the sale is -- first of all, we will receive less interest income because of a lower loan book. So that is an effect, of course. So the effect will be approximately 5 million to 7 million monthly -- on a monthly basis. Next question is, can you elaborate a bit more around the hit on net interest income?The net interest income is affected by several items. First of all, there is a write-off of the interest income related to the portfolio being sold. We also have an effect of the interest income not being sold because we are increasing the LGD for the remaining NPL balances, personal for Norway. Also, the agency commission, that I also answered on the first question, are being expensed in net interest income in this quarter and as well as commission costs related to the price of selling this or taking the portfolio back from the third-party agencies right now. So the major part of the effect of net interest income is accumulated interest income on the NPL portfolio.We have another question. Can you provide a breakdown of the NOK 410 million effect? How much is due to additional loan loss provisions? And how much is loan -- is loss on sold portfolios? Well, if I can break down in 2 numbers, NOK 256 million is a negative effect on the loan losses. And the NOK 256 million we can split in 2. NOK 150 million is related to increased loan loss provisions for the remaining balance and NOK 106 million is for the portfolio being sold. And then the 2 remaining NOK 290 million is related to the total income I just explained, majority affected by the interest income accumulated in the NPL portfolio.We have a question. What was the average time with nonperforming -- nonperformance for the sold loans?We know that in -- the loans being sold in Sweden and Finland originated -- most of them originated from 2019 and earlier. So that is a couple of years back. And we see that PDs are coming down after that, and we are having a better credit risk in our portfolio. So the -- most of the nonperformance originated from 2019 and earlier.

[Oyvind Oanes, Chief Executive Officer]

I think that's a very, very important point to note is that these are loans that did indeed originate, as Henning is saying, in 2019 and earlier when the bank was at a different stage of its development, had different tools at hand and obviously less data. So we do believe that with all the implementation of all the various actions and better scorecards, better data, more data since that time, we obviously now have much better control than we potentially have back in the years when these loans were originated.

[Henning Fagerbakke, Chief Financial Officer]

There is another question. Was there any difference in price between NPL sales and forward flow?Yes, there is a difference between those transactions. As the NPL sales are related to the older parts of the portfolio, the price is lower on those loans, of course. And the forward flow prices are higher.

[Oyvind Oanes, Chief Executive Officer]

Which again reflects what we just said. I mean, lower prices for things that have originated when we had different models versus what will be originated going forward where there is clearly then a trust in that would be of better quality.

[Henning Fagerbakke, Chief Financial Officer]

Third question, at which time is NPL transferred on the new forward flow agreement? The new flow agreement transferred on [ 90 days ]. So that's more or less a typical forward flow agreement.There is a question here. Based on the new data and analysis related to the loan sale, has this changed your medium- to long-term outlook on growth and profitability?

[Oyvind Oanes, Chief Executive Officer]

Maybe I can try and answer that one. I think what we're doing right now is, as we've stated also in the press release and as I said in my introduction, it is a -- called a cleanup action of loans that were originated some years ago. So obviously, we will carry less risk with us going into the future. And also with the forward flow agreements, we will have less risk exposure as we go into the future. That, I think, is a very, very good starting point for the work that we have initiated on strategy around growth and profitability.So if it doesn't necessarily impact directly growth and profitability, I do think that we now have a cleaner, better starting point, a cleaner, better platform to work on those initiatives that will secure stronger growth and stronger profitability going into the future.

[Henning Fagerbakke, Chief Financial Officer]

Yes. There's a question here. How will this affect dividend for 2021? For 2021, we are not paying out dividend. However, we are expecting to pay out the rest of the dividend for 2019, 2020, as communicated earlier this year of NOK 0.28. So we expect that to be paid out in December this year. But as the results for 2021 will be negative post this transaction, there cannot be paid out dividend based on 2021 results.What will be the coverage on the residual NPL post the transaction? The coverage ratio on the NPL will be approximately 60% on the remaining NPL portfolio post this transaction. In terms of forward flow, what's the assumption in terms of selling price?

[Oyvind Oanes, Chief Executive Officer]

So what are the assumptions in terms of selling price?

[Henning Fagerbakke, Chief Financial Officer]

Well, what we can say is that we cannot comment on the prices, but what we already have said, the prices on the forward flow is better than we have seen earlier. That's a good trend. And that's the reason we also wanted to sign this agreement with our partner.

[Oyvind Oanes, Chief Executive Officer]

I think maybe just to build on that. I think what we can say is that obviously, we believe these prices are attractive. They're in line with what we're seeing in the market sort of post-pandemic. And I think the third part of that question around how long these forward flow agreements run. They run 12 months.

[Henning Fagerbakke, Chief Financial Officer]

How is that you expect loan losses going forward to be in line with 2020, 2021? Well, going forward, we are not having nonperforming loans because we are selling these forward agreement. So that's one of the things we see as an upside. However, the LGDs are increased on the remaining balance. So that's on the downside.When we sum it up, we expect the loan loss ratio to be between 3% and 4% as has been the loan loss ratio. It is look back at the 2020, 2021 results. So we believe that will be a reasonable assumption for the -- for our costs going forward.

[Oyvind Oanes, Chief Executive Officer]

I think maybe I'll read out the next one, and you can have a step also, Henning. The capital ratio is around 18. It's -- actually, I think we reported 18.7, 18.8 in Q3 following this transaction. And then the question is, could you share some thoughts on this and how to raise it? I think Komplett Bank had around 20% before the loss. So basically, what we are saying, and this is more technicality, when we actually do the sale and go through the impairment that we've talked about here, in Q3, the core CET1 ratio will drop down to 18.7 in the quarter. But as and -- when we actually transfer the sold loans, the NOK 1.4 billion off our balance sheet, that capital ratio then shoot back up to an estimated 20.1. So when we've gone through the forward transaction and booked this and taken the NPL -- the sold NPLs off our balance sheet, naturally, that will take some time into November before that is done. We will be back just about 20%.

[Henning Fagerbakke, Chief Financial Officer]

Right now, there is no more question. Wait. Some more seconds before we close the questions. Let's see.

[Oyvind Oanes, Chief Executive Officer]

Okay. It does look like we've exhausted the questions for the moment. So if there are no further questions, obviously, feel free to reach out to us after this call as well, and we'll definitely try and provide some more flavor and answers. And we will have our scheduled Q3 call next week on Thursday. So that's obviously the next opportunity to interact and talk to us.Before we can round off, I would again like to reiterate that from an isolated point, what we do think is that these transactions around both the spot sale as well as the forward flow agreement are the absolute right actions to make at this time, also given the prices that we're seeing in the market. And it does definitely take a significant portion of risk off our balance sheet and provides us with a much clearer and predictable future view on risk exposure. But on an isolated basis, again, and absolutely -- the absolutely right thing to do.Now obviously, not a nice message to be talking about a loss, but that is unfortunately the effect. We believe will be back in normal mode in Q4 in terms of the underlying KPIs. And as I said earlier, we have started a strategy process. And I -- my intention is that we come out and talk much more about that when we talk about Q4. So that's the summary we have for you. I think we had -- no, we just have to thank you at the end. So thank you as well. Thank you for your time this morning. Thanks for calling in, and please don't hesitate to be in touch. Have a good day.

[Henning Fagerbakke, Chief Financial Officer]

Goodbye.