Morrow Bank ASA

OSE:MOBA

Earnings Call Transcript

[Oyvind Oanes, executive]

Good morning, everyone, and welcome to the third quarter results call for Morrow Bank. [Technical Difficulty] the CFO of Morrow Bank. So we will start, as usual, with a short presentation before we open up for Q&A at the end. [Operator Instructions]

All right. So let's get going. As usual, just a quick recap on Morrow Bank for those of you who are new to the case. Morrow Bank is a pan-Nordic consumer bank, targeting a roughly NOK 600 billion market, about 80% by now of our exposure is outside of Norway, notably in Sweden and Finland. We've been through a significant turnaround over the past couple of years and have built a very scalable platform as we will talk about throughout the presentation. In the meantime, Norwegian krone at the end of Q3.

Now let's review more the operational highlights and a bit of the outlook. from the quarter. Happy to report that we have seen another very strong quarter for the bank. And we're looking and improving across the KPIs. Looking at growth, for example, we were able to grow the lending book by 25% in the quarter, obviously also driven by the 2 loan acquisitions that we also have reported. That gave us also a very strong NOK 321 million in the quarter, that's up about 5.2% versus previous quarter.

It's also important here to say, and Eirik is going to talk about that in a minute, but the income from the 2 acquisitions are not really counted in for on the income line when we look into fourth quarter and beyond. Cost, as you know, and efficiency have been in focus at the bank for the past many quarters and a couple of years. And we continue to have focus on cost and efficiency. And I'm happy to report that we're still industry-leading on this KPI with a reported down from 26.3% in the previous quarter.

The underlying cost base is now also improving, and we were able to further automate and streamline the organization, and we had a 13% FTE reduction throughout the quarter. Loan losses is also something that for the third quarter in a row, our loan loss ratio is moving in the right direction. And I guess we alluded to that at the last call that we would see the loan loss ratio come below 5% as we moved into this quarter or the third quarter that I would say and reported now at previous quarter. This is driven, as we've talked about multiple times before, that we have applied a stricter credit risk policy already from last year, and we're now seeing the impact of that as well as the loan book maturing.

All in all, that means that we're up from NOK 50 million in the last quarter. And we're also seeing that the returns are going in the right direction as it has done over the past few quarters, reporting now a return on equity of 9% in the quarter, up from 8.5% in the last quarter. And the presentation, we've updated our medium-term ambitions. Yes, we alluded to that in the previous call, and we've also alluded to our process around redomiciliation to Sweden, and I'm happy to report that this morning, we are handing in the application for Swedish. A slide is that we have produced a profit before tax of NOK 72 million in the quarter. That's up 7% in the quarter, but 50% year-on-year, which we are very proud of, obviously.

Now moving to the improvements in a bit more detail. Previously, we had guided on year-end 2025 ambitions. We moved that 1 year out now as we have actually a year before beat all the ambitions that we set ourselves for year end next year. Looking at growth balance at ourselves, obviously also driven by the inorganic growth that we've seen in the quarter with the acquisition of NOK 2.3 billion of Swedish loans. With that, we have now lifted our target for the gross loan balance to NOK 17 billion. So above NOK 17 billion by year -- cost remains a strong focus in the bank and efficiency.

And we've always said that the size is creating scalability and scalability means also that we can run the bank more effectively and efficiently. And we're seeing the cost levels for the bank and also industry-leading when we look across the peers. But we don't stop here. We continue to drive cost out of the bank and target now a cost/income ratio of 23% by year-end '26.

What we have seen over the last 3 quarters, as we predicted that loan losses are tracking in the right direction from the sort of all-time high in a bit of a negative way about a year ago, we have seen quarter-by-quarter that loan loss ratio is coming down and credit quality in our -- and targeting a 4% to 4.5% level by year-end '26.

All in all, then we're looking at what we call the output KPI, which is the returns here illustrated by return on target equity. We are happy now to return on target equity in the quarter of 10.1%. That's also in line with the ambitions we set for actually year-end '25. So we're also meeting that target a year ahead of plan.

And with the growth we're seeing in the balance, with 12% to 14%. Previously, we had guided on 10% to 12%. So that's lifted by around 200 basis points in the outlook. The basis for all of this, as we've said, is that we're seeing and continue to see a strong underlying performance. We're seeing also that we are able to act on it, communicate, improved ambitions for the midterm.

And with that, I will hand over to Eirik, who's going to review the financials for the quarter in a bit more detail. Eirik?

[Eirik Holtedahl, executive]

Thank you, Oyvind. I will now go a bit more deeply, it’s nice to see here the jump we're making, and that is, of course, due to the acquisition of the Swedish portfolio totaling NOK 2.3 billion, which essentially lifted our Swedish loan balance by 90% in the quarter. The overall growth, therefore, led to a 25% growth in the loan balance.

The growth in Finland was also nice clocking in at 7.6%. But in Norway, it continues to decline. And as we have said in the past, we continue to allocate the capital where the margins are the best and the capital requirements are the lowest. And for that reason, the underlying growth in the quarter, if we eliminate the effect of the acquisitions and FX was 3%.

And as you see here, we are on a good path to achieve our 2026 goal of more than NOK 17 billion in loan balance. Now at the consumer loans are virtually flat from 14.7% to 14.6%, so just some minor tweaks going on there. The credit cards decreased a little bit. That is because the Finnish credit card book is weighing more in, and there's a usual rate in -- or a limit a little bit down on the credit cards. But bear in mind, they only have 7% of the total loan balance, so the impact is quite negligible.

On the deposit side, it is flat. Yes, the interest rates are decreasing in both the Eurozone and in Sweden. they're flat in Norway, and we've been doing that through client deposits. And for that reason, we have not been lowering our rates. But going forward, you can expect that the average yield will drop as we now have been -- as we are fully funded for these acquisitions.

Now combining the loan balance development and the yield development NOK 1 million, that's an increase of 5% over the quarter or almost 22% on the year. This is mainly driven by the organic growth. And it's important to note here that the portfolio acquisitions virtually have no impact. We only have 1 month of interest income from the Qliro portfolio. But on the other hand, we did a nice increase in the market-based instruments. They've also contributed, there we had an increase from NOK 10 million to NOK 19 million, and that also contributed to lift the total income.

And if you look forward, the loan growth will continue and also next quarter, we will have a full effect just by simple math, that will lead to an increase in the total income. On the cost side, we're continuing our stable development. And this is a bit of a testament to the model that we now put together. First of all, we managed to put in both portfolio, that's the acquisition part and also operating the Qliro portfolio for a month.

And going forward, they will not have any impact either. There is -- we did, however, have a one-off this month, and that is related to a restructuring where we now have lower FTEs next quarter. And then finally, also the cost efficiency is set to continue to improve. And therefore, we will see that we will be able to keep this cost base going forward. There will, however, be some costs in the next quarter related to manning activities going on for the time being.

Now jumping on to the loan loss side. You will see that, yes, there is an increase in nominal amount. But bear in mind, we did increase the loan book by almost 25%. And we have also now taken in the [Technical Difficulty] but overall, the loan loss rate was 4.8%. Now if we look aside from the underlying, if you disregard the client, the portfolio acquisitions, you will see that the underlying loan loss rate was 4.9%.

And hence, the portfolio is -- the loss development portfolio is continuing the downward track. This is a result of the loan book maturing and also the fact that we have been tightening in on our credit policies and are improving our credit collection processes. Now putting all this together, you'll see that we still -- we made another nice increase in our profit, NOK 72 million after tax or NOK 54 million after tax. This gives a return on target equity of 10.1%. When we made our -- when we previously made our ambitions, we said we would be in the 10% to 12% at the end of 2025, we're there already also at the end of this quarter.

And as I said here, the total income will increase due to the effect of the portfolio purchases. Our cost base is stable as we keep on demonstrating and our loan loss ratios are declining, and hence, the loan losses will decrease more slowly than the loan balance. And hence, that should all put together that, and we have, therefore, as Oyvind said, lifted our return on target equity on a Norwegian basis to 12% to 14%.

Now going to the solidity side. Of course, the acquisition of the loan balances of the year that the total capital ratio went down to 23% to 21%. Our CET1 equivalently went from 19.6% to 17.5%. However, we're still comfortably above the regulatory minimum. The regulatory minimum is 14.5%. We have a Pillar 2 guidance on top of that. We still have a cushion, and that cushion is set to increase as we will include the profits in the next quarters.

Also to mention, we did issue NOK 100 million Tier 2 loan in September. This is just to optimize the capital structure because the 2.1% where the maximum is 2%. And going forward, as I said here, this capital ratio is set to increase further.

And that brings me over to the next slide, just to bring -- to illustrate how this development is. If you look on the left side of the green line is the return on equity. When the growth exceeds the return on equity, we are consuming capital. And that has been the case until now, as you've seen with both organic growth as well as the client -- the portfolio acquisitions that we did. As we now we'll probably -- as our equity will be higher than the growth and that you see on the right-hand side of the graph, and at that point, we will be starting to generate capital.

And when we start to generate capital, we are in the position that we can start to look at what -- how to employ this capital. It could either be by increasing the organic growth further, and we are stipulated here, we'll be in a position to consider those or it could be dividends or it could be a mixture of the 3. But basically, the essence here is that we will put -- we will allocate our capital to where it generates the highest long-term shareholder returns. And with that, I will leave the word to Oyvind.

[Oyvind Oanes, executive]

Eirik, that was very good. Now before opening up for questions, we wanted to spend a couple of minutes on the value creation that we are targeting going forward. We call that the investment case here in this section. We talked quite a bit about beating over the past few quarters. but we're also beating our peers.

And as illustrated on this page, especially when it gets to or comes to the 2 KPIs that we have been focusing much on, most on over the past couple of years, growth and efficiency, 47% growth over the last couple of years and also on cost income where we now have reported a cost income ratio for the quarter below 26% and targeting 23% in the outlook. We're also happy to see that there is more and more happy to see that the pricing of our bank is moving in the right direction.

With that, we also wanted to bring this picture back up. This is a page we introduced, I guess, at the last quarterly call, where we also started to look a bit forward. And in addition to all the organic, both improvements in terms of operation and the growth that we've seen, the organic growth that we've seen over the past couple of years with a target previously to get to 10% to 12% return on equity. We talked about at the last call in form of potentially going out there and see if we could acquire portfolios.

And we also started to indicate that we're looking at potentially redomiciling the bank and operate under a different regulatory regime. And as you would see on the illustration to the left side, our growth would lift our returns. And we now -- as we actually executed on this throughout the quarter, we have now bought NOK 2.3 billion of Swedish loans, adding that on top of the organic growth, we're now able to go forward and Eirik just illustrated how we will be generating excess capital.

Going forward we will definitely look at other opportunities of that sort if they should come up. And we are seeing that there are things happening in the market, and we now also have acquired and also onboarded successfully 2 portfolios in just 1 quarter. So that's definitely some part of -- going to be part of our strategy as we go forward.

The third pillar here is also something that the market has talked quite a bit, at the last call, where we said that we are evaluating to see whether we can actually redomicile the bank to -- then we said Sweden or Finland. And there are different ways to get there and the rationale here is, one, obviously, that the bank now is, of Norway, 35% of our loan book by now in Sweden with the inorganic growth that we've managed to produce in the quarter. And we're also seeing that there is a larger cluster of niche banks, especially in Sweden.

So we have got and made a decision for a Swedish banking license that actually went in at 9:00 this morning. So I guess, I can say it is being submitted. That application goes in from our wholly owned Swedish subsidiary, and we will pursue a strategy of the license. But again, just illustrating that we have, over the last couple of years, done a lot to deliver on the targets we set around both the restructuring of the bank and the organic growth.

We're seeing now double-digit returns that we are happy to report for the first time in terms of the market conditions, the fact that we're able to then also onboard inorganic growth in terms of buying portfolios, gives us comfort of lifting that target to 12% to 14% and should we be able to, some of the peers and obtaining the same sort of conditions as we see our Swedish peers have, we could be targeting returns in the midterm of around 20%, which would obviously be very, very attractive in our mind.

Now just a few more about this as we go forward. I'm not going to bore you with all the details. There is a lot of detail around this, but just to illustrate here that what we have done so far in terms of assessing the opportunities to redomicile, we have landed on a strategy subsidiary and the actual banking license went in this morning to the Swedish FSA. Now we are expecting to have an answer back from the FSA somewhere in the spring in course of the second quarter next year.

Then there will be under Swedish entities, but if all that goes well and as planned, we foresee starting the Swedish banking operation somewhere in the beginning of 2026. And with that, we will then obviously also delist or move the listing of our share from exchange. That is the plan high level. I'm sure we will talk more about this as we move forward into the next quarterly calls.

Now just to summarize, and then we'll open it up for questions. What we have done over the past couple of years and we've said this multiple times, really good track record, we believe to see that, that actually has paid off. We're starting to see good returns. And we're also able to, in a very efficient way, onboard inorganic opportunities by the fact of buying portfolios, adding that to our platform without acting in underlying cost down in the quarter.

So that actually gives us a strong opportunity as we go forward and look at similar opportunities. We are also, again, quite happy to see that the indicators around the macroeconomic. We're seeing interest rates come down in both Sweden and Finland. Keep in mind, 80% of our exposure is in Sweden and in Finland. We're seeing growth continue to go up, and we're seeing inflation come down. That as well as everything we've done in terms of our own actions around loss ratios coming down, and we're seeing improvement on the credit quality of our book, which gives us again a good comfort as we look forward.

And as Eirik said, our projections, our forecast first is that we -- and that obviously gives us lots of opportunity to either go after more growth, inorganic opportunities or pay out some dividend at some stage. We still have a dividend policy in the bank in case someone forgot that. Now again, just last few words on that one then. We've updated our underlying performance, adding on the inorganic opportunities and then potentially redomiciling to Sweden could bring the returns in the long term to about 20%, which we would think is very, very attractive.

[Operator Instructions] And we have potentially also got some questions on e-mail and Henning will read that out.

[Oyvind Oanes, executive]

We're giving a bit of a minute to see if there are any questions. Questions coming up. There are no questions. We've said before, we're always available. You don't have to ask your questions only at the quarterly calls. You can feel free to send us a question on [email protected] at any time. And Eirik and myself are also happy to meet with you if you -- and now there seem to be a question.

[Henning Fagerbakke, executive]

Yes. There is a question in the chat. How are the market and competition developing in Finland?

[Oyvind Oanes, executive]

Yes. Well, that's a good question. We're seeing continued growth in Finland. Finland deployed a -- so we're seeing some dynamic in terms of how to position in the market, how the various competition or competitors are positioning in the market. We also took a pretty prudent approach in the beginning and saw a little bit of a dip in sales throughout the summer as this debt registry came up to speed, but growth in Finland.

I would assume that there will be some pressure on interest rates in the market going forward. But luckily on the deposit side as well, we're seeing that the euro funding rate is coming down. So we're bullish on the Finnish market. We believe that the Finnish market will be more data and can make better credit decisions.

All right. Before then just the opportunity to say a big thanks to the Morrow Bank team. It has been a hell of a quarter. We've onboarded 2 portfolios that we acquired. We've put together an application for a Swedish banking license and still delivered all-time high income and a very, very strong thank you then to all of you who called in.

And as I said, we're always available not only on the quarterly calls, but for those of you who want to wait to the next quarterly call, that will be our Q4 call in February. Thank you very much, and have a good day.