Resurs Holding AB (publ)

STO:RESURS

Earnings Call Transcript

[Operator]

Good morning, and welcome to the Resurs Holdings conference call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to the CEO, Mr. Nils Carlsson. Please go ahead, sir.

[Nils Helge Carlsson, executive]

Thank you very much, and good morning, everyone. A warm welcome to the Resurs Holding Q2 presentation. My name is Nils Carlsson, and I am the President and CEO of Resurs Bank and together with our CFO and Head of IR, Sofie Tarring Lindell, we're going to walk you through our development for the second quarter.

Moving swiftly along to the summary first of Q2. And this summary is of the figures for this quarter compared to the previous year. During the second quarter of 2022, we saw good growth in both our segments and the lending growth was 11%, up to SEK 34.6 billion. Excluding net financial transaction, the total operating income was up by 1%. The cost of risk level continued to improve up to 2.1%. And if we look at the cost levels, we saw an improvement there as well and the CI ratio, excluding net financial transactions, improved by 0.8 percentage points.

All in all, net income, excluding financial transaction and nonrecurring items, profit was up by 4% and our financial position and capital position remain strong and stable. Total capital ratio amounted to 16%, corresponding to 3.2 percentage points above the regulatory requirement. In addition, the Board of Directors intends to convene an extraordinary general meeting in the autumn of 2022 with the aim of distributing SEK 0.92 per share, corresponding to 50% of the reported net profit in line with our dividend policy and the ambition of the Board to carry out biannual dividends.

Let's continue with a summary of operations for the quarter. It has been a fairly eventful quarter with a high level of activity in both our segments and in all our markets. For example, we've acquired the Hemma operations and platform for green loans for energy investments in the homes in order to meet the significantly increasing demand for solar panels, heat pumps and charging stations for the home environment. And in connection with this acquisition, we've entered into a partnership with 10 or so companies who are market leaders in Sweden on the installation of solar panels and all these partners will offer financing solutions to the customers via the platform, Resurs green loans.

We've also extended our previously very successful cooperation with Ellos Group AB. This is a real sign of strength showing that our e-commerce solution is relevant from one of the largest e-commerce players in the Nordics. And towards the end of the quarter, we also extended our ABS financing with JPMorgan at unchanged terms, which also, goes to show that there is considerable confidence in Resurs Bank on the international banking market in spite of the turbulence and the market preconditions, generally.

Towards the end of quarter 2, the Swedish Financial Supervisory Authority completed its review of credit assessment procedures with a number of companies in the consumer credit market with a final outcome where Resurs was handed down a remark and an administrative sanction to the tune of SEK 50 million. The Board of Directors of Resurs Bank has decided to appeal this decision to the administrative court, and I'm going to tell you a little bit more of that in more detail in my next slide.

The Swedish FSA has been carrying out a review since 2020 into credit assessment procedures with a number of players in the consumer credit market to ensure that all the provisions of the Swedish credit are complied with. It's fundamentally important as we perceive it, that private individuals have a possibility of taking out loans and credits when they need to balance their economy for different expenses and investments. However, this places high demand on us as creditors when we grant loans and credits in a responsible way. We need to show due care for the customers and their private finances to ensure that they don't borrow more money than their credit rating and their private finances can handle.

Responsible credit lending and careful credit assessments are important to combat over indebtedness. And we perceive it as a positive thing that the SFSA have decided to review this matter. We always perform a careful assessment of the repayment capacity of our customers. And therefore, as you can see, our credit losses are at low levels. We use a method which is a long-standing one. We have great experience of using it, and it's based on extensive data support.

In June, the review by the SFSA was concluded and Resurs received a remark and an administrative sanction. We and the SFSA have different views on the legal requirements and the process for credit assessment and how the customers' data shall be used in the credit assessment process. We consider that the application of the Swedish Act for consumer credit is unclear. This causes problems for the industry as a whole and, by extension, also for consumers. And in order to ensure added clarity in the application of the Swedish Consumer Credit Act, the Board of Directors of Resurs Bank has decided to appeal the decision by the SFSA.

In parallel, however, we've also taken measures to ensure that we fully comply with the Swedish FSA's demands, and we assess that overall, this will neither impact our operations nor our financial performance measures.

So let's now have a look at the loan book. Since some time now, we have increased our transparency on the different markets in order to show our development, compared to previous year, we've seen a positive growth on all our markets. The Swedish market continues to grow substantially. It has a good growth both in the quarter and compared to previous year. So if we look at the Norwegian market, it grew with 6% compared to previous year. But we have also chosen to stabilize growth during the quarter since we have a strong loan book. Therefore, we prioritize profitability to volume growth looking ahead.

In Denmark, we and the entire businesses has a negative effect from the Danish FSA, tougher requirements for credit assessment that they started to use in the beginning of the year. We focus intensively to make customer experience automatic and to improve the collection of external customer data. So we could see a slight positive development towards the end of the quarter.

The Finnish market, we've seen a good growth in the last quarter, and there is no difference. In the second quarter, we see a growth of as much as 15% compared to last year. So let's continue. We'll look at our different business segments. We start with payments. We can see that the loan book increased with 10%, and we've had a good growth in our volumes of new sales compared to last year and last quarter. Most of the things we see a continued positive development in the travel industry since societies are opening up after the pandemic and consumers are starting to book travels again. Sales volumes within the travel industry surpassed the last quarter and the quarters during the pandemic.

The quarter was also a strong period for other businesses such as the car aftermarket, construction industry, gardening and different investments that people do in their homes. And consumers can now, to a high extent, book trips, events, experiences, reset meals. We see that sales of Resurs cars is also developed positively, but we can see that it will take some time before this is converted into a loan book. As I mentioned in the beginning, we have extended our collaboration agreement with Ellos Group, and we are happy about that. It's a sign of strength that one of the major e-com traders in the Nordic countries really appreciates our e-com solution.

For quite some time now, we focused on developing our e-com solution, and we're now fully competitive and prepared for a much larger share of the market. We have, during the quarter, also signed agreements with approximately 500 new agents. And we are good at customized solutions, but our win-win-win solutions for partners, customers and us. One example of this would be Watches of Switzerland that opened the first retail store in the Nordic countries with designer -- high-quality designer watches. They've chosen research as their financing partner for their entire business in the Nordic countries because we have a very customer-friendly offer to pay by installments.

So let's look at the next business segment, consumer loans with a growth of 12%. And we have a strong loan book. That means that we prioritize profitability to volume growth. We also want to strengthen sales in our own channels. In Norway, we've seen a good growth of the loan book compared to previous year. But the margins on new sales during the years have been lower than the margins in the existing portfolio, which has a negative effect on the NBI margin. And during this quarter, the priority loan, secure loans, that is, have developed further in order to ensure that research has a competitive -- good and competitive offer and the credit limit has being increased to NOK 1.5 million. But we're still talking quite small volumes though.

However, in Sweden, in June, we reached a new sales record and profitability in Sweden has been very stable. And we've seen a good growth, both in internal and external sales channels. In Finland, we've experienced less demand on the market globally. And our evaluation is that it's due to where it's concerning the inflation and higher interest rates. In spite of this, sales and loan book growth has been strong in Finland, thanks to improvements in our own sales channel, which has increased conversion. As I said previously, in Denmark, we and the entire business is affected by the tough requirements from the Danish FSA, tougher requirements for credit assessments. But towards the end of the quarter, we could see a cautiously positive development.

So I'd like to summarize -- sorry, this was a summary. And by this, I'd like to give the floor back to Sofie.

[Sofie Lindell, executive]

Thank you very much, Nils. And before I proceed with the presentation of the financials, I'd like to mention the fact that all figures that I will be speaking of are excluding nonrecurring items.

The loan book, Nils mentioned it, it was up by 11% compared to last year, and it now amounts to SEK 34.6 billion. In constant currencies, growth was 8%. And as Nils mentioned, compared to the previous year, we have good growth in both our bank segments and in all geographical markets. Operating income was down by 1%, amounted to a total of SEK 773 million. Net interest income is lower than last year, mainly due to lower margins in Norway, a continued mix impact in Payment Solutions and higher interest rate costs than previous year due to increased financing volumes.

On the topic of financing costs, our perspective on the future is that we can expect a higher interest rate level, which will impact our financing costs. However, we do not expect the funding margin to increase at the same pace as the increases by the central banks. And our ambition, therefore, is to gradually transfer and increased funding costs to our customers in lending. Net fees and commissions were up due to strong new sales volumes, where, amongst other things, we've had an entire quarter with a reopen society, which has had a very positive impact.

Net income from financial transactions was at minus SEK 12 million compared to minus SEK 1 million last year as a result of the drop in value of interest-bearing securities, mainly as a result of the market turbulence and volatility in the interest rate market. Excluding net income financial transactions, operating income was up by 1% compared to previous year.

NBI margin is lower as a result of lower margins in Norway and the mix impact in Payment Solutions. I'm going to get back to this when I talk about the different segments to some extent. But if we compare with the previous year, income was up by 1%.

Let's have a look at credit losses. The cost of risk, as Nils mentioned, compared to last year continued to improve. It's now at 2.1%. Compared to the first quarter of 2022, the cost of risk was stable even if we -- it increased somewhat in absolute numbers as a result of growth in our loan book. During the quarter, the payment patterns of our clients were stable and we follow along with the financial development in society and we monitor this very carefully as increases in inflation and interest rates could have an impact on the household's disposable income.

As you know, we tightened our credit lending at the beginning of the pandemic, which makes us more resilient now. However, obviously, we monitor this very carefully. And as I've mentioned, we are not -- we've not identified any negative impact as of yet on the payment patterns of our customers.

Looking further at the segments, starting with Payment Solutions. Our loan book was up compared to last year to the tune of approximately 10% or 7% in constant currencies. The growth in the loan book comes from the retail finance operations while the loan book and credit cards is unchanged compared to last year.

New sales, as Nils mentioned, in all of Payment Solutions has been very strong during the quarter, both compared to last year and the previous quarter. But both in credit cards and retail finance, it does require a few months to go by before this is converted to the loan book, and we start seeing an interest income.

Compared to last year, income and margins are lower as a result of the fact that a larger share of our loan book comes from partners and industries where we have a lower margin. So it impacts the total. The segment is also impacted negatively by the net result in financial transaction. Excluding this, the margin would have been strengthened by 0.2 percentage points. Cost of risk improved compared to last year, stable compared to the previous quarter.

Let's now have a look at consumer loans. Loan book, up by 12% comparing to last year, we saw positive growth in all our markets whereas Sweden and Finland are the strongest growth drivers, both from a percentage perspective and in absolute figures. Income up by 3% compared to last year, and the NBI margin is lower mainly due to the lower margins in Norway, where new sales margin was lower than the total portfolio, but also, due to the fact that we have lower levels in Denmark where we've increased our ticket size. And since we work with the risk-based pricing, this produces lower income margins, but over time, also a lower cost of risk.

The net income financial transactions also impacted the NBI margin in a negative manner to the tune of 0.2 percentage compared to last year. And compared to the previous quarter, income was up by 2% in this segment, and the NBI margin remains stable. Cost of risk ratio was stable, both compared to the previous year and the previous quarter, amounting to 2.5 percentage points.

And let's have a look at the cost levels, our expenses. We have good cost control in Resurs. And in Q2, the costs amounted to SEK 320 million, lower than the previous quarter and last year. Compared to last year, the payroll cost was lower mainly due to the fact that we have fewer people employed. However, IT costs are up. The CI ratio amounted to 41.4% in the quarter. So an improvement, both compared to the last quarter and last year. And excluding the net income of financial transactions, the CI ratio was 40.8%, i.e. 80 points lower than last year.

It is our ambition to continue to reduce our CI ratio in the medium term. And the objective is that within a 3- to 5-year scenario, we will have a CI ratio of 35%. In the short term, we can expect income in absolute numbers will be going up somewhat.

Now we're on Page 16 and our operating profit. All in all, operating profit is compared to last year. But excluding for net income of financial transactions, operating profit was 4% better than last year and 5% up from Q1. All in all, for the first 6 months of 2022, the net profit, excluding financial transaction, was up by 9.5% compared to last year. And then our capital position. As Nils mentioned, we have a strong and stable capital situation with a total capital ratio of 16.0% and a CET1 ratio of 14.4%, which gives us a good margin over the regulatory requirements and our targets. The reason for the lower capital relations ratios being lower than last year is because we have increased our growth but also, because in January we repaid a subordinated loan of SEK 300 million positioned in January 2017, and this impacted our total capital ratio to the tune of 0.6 percentage points.

The capital ratios include the Board's intention to propose a biannual dividend of -- in this case, SEK 0.92 per share in the autumn 2022 corresponding to 50% of the reported net profit during the first 6 months and in line with our dividend policy and the ambition stated by the Board to carry a biannual dividend payments. As we've discussed earlier, our assessment is that the capital requirements will increase in the future. However, the timeline is not known yet in addition to the fact the countercyclical buffer requirements are gradually being reintroduced. We know that much.

And by way of conclusion, I would like to say a few words about our funding. Over a long time, we've worked in a very structured manner on financing and liquidity. And in a more challenging market situation, like the current one, this serves as well. Liquidity is strong and our LCR amounted to 265% during the quarter. We extended our ABS financing with JPMorgan, entirely in line with our strategy to have diversified financing and then we can enter into financing agreements of this type with unchanged terms and conditions in spite of the market situation shows that we have a very good quality in our underlying assets. And this is a true testament to the confidence that exists in our operations in the international banking market. Now I'd like to hand back to Nils to conclude.

[Nils Helge Carlsson, executive]

Thank you very much, Sofie. If we look at the upcoming period, we are keeping our focus on strengthening our profitability and our growth. We're going to continue to focus on new partnerships, but also, ensuring that we can maximize the potential of our existing ones. Furthermore, during the quarter, we'll continue to implement our new cloud-based core banking system. It's a central component when it comes to strengthening our competitiveness over time. It's progressing according to plan, and we'll continue to monitor what Sofie touched upon, the global economies and the uncertainty we see globally and the increase in inflation, of course.

Our expectation is that central banks will take various measures, which will impact our financing and funding costs. And we do expect to pass on that increase to our lending customers. The rising inflation and interest rates may also impact the disposable income of households in the next quarter.

However, at the same time, currently, we're not seeing any negative impact on the payment patterns of our customers. No impact whatsoever, in fact. And by way of conclusion, I just like to say the following. It's particularly important perhaps to emphasize, in light of the global turbulent situation, the fact that we have a strong and stable financial position in the bank very much to our favor.

Now I'd like to open up for questions. And I'd also like to take the opportunity to wish you all a very pleasant rest of the summer.

[Operator]

[Operator Instructions]

Our first question is from the line of Jens Hallen from Carnegie.

[Jens Hallén, analyst]

I thought we could talk about margins first. In Payment Solutions, for quite a number of quarters now, we've seen the mix impact. We talked about the mix. And my question is about the downside. I can understand that margins continue to drop, it can vary a little bit, but what's the duration in the book? How much more could the mix effect produce in krone, not on the margin, but in actual numbers? Are you seeing a stabilization soon? Could you give us a little bit more guidance there to try and assist us when we look at this?

[Unknown Executive]

Well hard to put any more -- much more color to it. We don't give any guidance on the margin at all, of course. As we've said earlier and as you know, of course, we have seen relatively good growth in the quarter, but the margins have not been able to keep up. And this is, of course, something we will prioritize as we move forward. Now whether the margin continues down or will stabilize, we'll have to wait and see. We do everything to stabilize the margin as much as possible always as I stated in my presentation earlier as well. We're going to prioritize -- perhaps I nearly say that profitability would be prioritized over growth almost. That's not perhaps the answer that you were looking for.

[Jens Hallén, analyst]

I understand that it's difficult to say much more and give guidance. But if we look at this margin, the volumes are up, the larger customers continue to grow, but the net interest income in krona continues to drop. And that's really where you're struggling in installments and payback times, the small traders who suffered during COVID. At some point, that volume should have almost disappeared out of the portfolio. So lower margin, yes. But the impact in krona should be -- the change should be visible at some point.

[Sofie Lindell, executive]

Jens, Sofie. In the quarter, we do see an impact with some of the major partners in the quarter, where we have a different profitability structured model, which has a continued impact. But the ambition as we move forward is that as we see improved sales in retail finance and in credit cards, that this starts to build the loan book because the customers pay back in installments and the earnings model is different. It will see a positive impact in absolute numbers, but it takes some time to build that positive trend. So it depends on -- and it's very much related to the situation previously.

[Jens Hallén, analyst]

Could you tell us anything about the duration on that point?

[Sofie Lindell, executive]

It varies a little bit depending on the type of products in the book. But in around or just over 6 months, generally speaking.

[Jens Hallén, analyst]

And then a question about Norway. Norway being one of the areas where you've seen some pressure on the net interest income with volumes impacted, not a huge increase. What's happening in Norway? I remember about a year ago or so when we talked about Norway. When the debt register was introduced, et cetera, you identified a wish to stay in Norway, but what's the situation now? Do you expect this to be a growing and profitable market to you?

[Nils Helge Carlsson, executive]

Yes, absolutely. We've received this question before, of course. Even the question of whether we will leave Norway or not. But I think we've shown that we're able to and well able to create growth to build growth in the Norwegian market. There's a good market there. There's good demand. What happened in the last quarter was that we started to move slightly across to a situation where new lending has performed very well, indeed. But the problem is that new clients, new customers, are at lower interest rate levels than existing ones in cars, for example, putting a pressure on the margins, of course. That's what's happening.

However, the market as such is and remains a good market. We want to have a presence there, and we're convinced that, that is the case. We have no question marks there. But it's tougher competition that we're seeing in the Norwegian market, but we probably feel nevertheless that it has stabilized after the developments and the debt register that was introduced back in 2018 and '19.

[Jens Hallén, analyst]

Okay. And one final question about the margins. Funding costs that you've outlined, they should go up likely in the future. So my question is, what do you do looking into the future? You know that the costs for financing will go up. Is there room from a competitive perspective to assume that it's going to be perfectly possible to raise the interest rates to customers or is the market expecting a situation where financing costs will go up first, and then you pass it on to customers? Will it take a quarter or 2 before that has been passed on? What's your reasoning there?

[Nils Helge Carlsson, executive]

Contractually speaking, when our financing costs go up, and we know that, that's going to happen, we can pass it on to the customer level. In the Norwegian market, you have to inform the customers a little bit earlier than in some of the other markets. It varies between our markets. But there's -- we are going to be as proactive as we possibly can. But it's also related to the competitive environment, of course, how much and to what extent you can pass on these increases, but the ambition is clearly to pass it on to customers. But it's also a matter of timing from one quarter to the next. Depending a little bit on when we can implement the increases and when the higher financing costs are experienced, you may have some impact for shorter periods, but the intention is nevertheless to pass it on.

[Jens Hallén, analyst]

And if we look at this year, there has been an increase that we've seen. You are much closer to the market. What does the competitive landscape look like? Has it been possible to pass on these increases? Or generally, are you holding off, waiting to see about volume?

[Nils Helge Carlsson, executive]

We've implemented increases at the start of the third quarter, in fact, in the beginning of Q3.

[Jens Hallén, analyst]

Okay. Actually, one final question. Investments to develop the core banking system. Is there anything that you could tell us there? How is it going? It's a very interesting component looking at the longer term. What's the pace? How quickly is it progressing? What can you tell us? Or are you taking all the investments now and the information is lagging or -- what's happening?

[Nils Helge Carlsson, executive]

This project has been running for 2 years now, and it's an extremely significant project. We've been able to show, as I see, that we're sticking to the timeframe, to our deadlines. We're not spending a lot of time in our quarterly reports discussing this. But we're according to plan time wise and our assessment is that the first release will come next year, the beginning of next year. It's looking very promising, but it's a very, very extensive project.

And during next year, we're going to be able to show what we can save in terms of costs. It will be a great cost saver to us. And at the same time, we can have a much more competitive modern solution in relation to customers. So the customer journey will be a lot more modern, more efficient, simplified. There are many good factors and effects here. I understand that there may be a number of questions, but we're not sharing a lot of information on this, but this is also due to the fact that this is something we want to use to compete, simply put. But so far, it's looking very well. The project is progressing entirely according to plan. So nothing out of the ordinary there.

To me, this is a very positive thing. It's going to be very interesting indeed to see what happens and how we can see it as we move forward.

[Jens Hallén, analyst]

So I'll have to just be patient and look forward to 2023 when you'll start showing us more of this?

[Nils Helge Carlsson, executive]

Yes. With a very high pace. We're progressing in this project compared to many of the other banks across the globe have implemented similar systems, we are progressing, but it does take time when you do things like this.

[Operator]

Our next question is from the line of Emil Jonsson from DNB.

[Emil Jonsson, analyst]

Thank you for the presentation. I just have one question. Are there any examples of anything concrete, intangible that you've done in credit assessments or the credit side of things to reduce credit losses where you can expect a more resilient long-term effect for upcoming quarters?

[Sofie Lindell, executive]

Sofie. Emil, we follow the cost of risk and credit losses, and we are continuously working to fine-tune our processes, but we haven't done anything in particular in detail that we'd like to share with the market here and now because we have credit analysts who follow this on a daily basis, making fine tunings and adjustments. So we're always working with this continuously, but there's nothing major that we have made that we are informing the market of in this quarter.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Nils and Sofie for any closing remarks.

[Nils Helge Carlsson, executive]

Thank you very much. And thank you for the questions asked and thank you for your interest in Resurs Bank. And hereby, I'd like to wish you a very pleasant summer. And let's be in touch in quarter 3. Thank you very much.

[Operator]

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.