A very good morning, ladies and gentlemen, and welcome to follow this Aktia Bank Plc's Q2 results presentation. My name is Mikko Ayub, I am the CEO of Aktia Bank Plc. Normally with me would be our CFO, Outi Henriksson. However, unfortunately, she was taken ill by COVID, and she's joining us only remotely at this presentation. The second quarter was yet again an exceptional quarter, unfortunately, partly in a sad way. The war in Ukraine continued. The equity market was soft. Rates increased rapidly. Inflation was persistently high, and a number of question marks can be attached to the economic development as well as the market development going forward. Against this background, I'm particularly happy and proud to report that our Q2 comparable operating profit was EUR 24.7 million, falling only slightly short of that of last year's respective period.
A few highlights on our second quarter. Our interest income increased by 10%, with corporate Banking being the driver there. Equally interesting, I think, is that the average margin of our entire loan book increased, not only the corporate loan book but the entire loan book. Net interest income continued to develop well as well. Net subscriptions were positive for our Asset Management products. However, assets under management decreased by some 5% due to a soft market. We had an extension to our international sales of Asset Management products. The results of these are not visible yet in the Q2 numbers. Regarding Life Insurance company, the increase in interest rates weighed the investment portfolio.
However, on the other hand, we had an EUR 11 million profit of a divestment of a real estate investment that can be considered of a one-off nature. Credit loss provisions continued to be on a very moderate level also during the second quarter. A couple of weeks ago, in mid-July, we updated our outlook for 2022. We see our comparable operating profit to be approximately at the same level as last year. The key uncertainties are arising from the financial markets and the overall economic situation. Going deeper into the outlook for 2022, we see net interest income growth to continue to remain strong, with corporate banking being as a driver. This is as a result of active pricing as well as expected volume growth in that segment.
Financing costs are expected to rise slightly, and commission income is expected to increase during the second half of the year. Net income from Life Insurance is highly dependent on market values, and market changes. However, the underlying business of our Life Insurance companies, that is the actuarially calculated result, is expected to increase from that of last year. Expenses at a comparable level are expected to be approximately at the same level as last year, and credit loss provisions are expected to remain at a moderate level on the latter part of the year, as well as liquidity and capital adequacy to remain stable in the bank.
This picture describes well the second quarter of this year compared to last year, and shows that given the circumstances and conditions that prevailed during the second quarter, we can be very happy and proud about what we delivered during the second quarter. Going more specifically into our three business areas and starting from Banking, I would like to set off with showing this picture that describes the interest rate development of mortgage loans of housing loans in Finland. The data is from the Bank of Finland, and the picture tells us that there was a mild, slight increase around year shift, but only towards the end of the second quarter, interest rates took an active way up north.
For us, May was an important month in the sense that during May, the 12-month Euribor went into positive territory from negative rates. As you may recall, when interest rates are negative or rising in the negative sector, then that does not have a positive effect on our net interest income. In May, the 12-month Euribor, which is the typical reference rate for mortgage loans in Finland, increased or went above zero. As said, interest income from lending increased by 10%, driven by our corporate banking business. Among corporate customers, our growth actually was stronger than what market growth was in that segment, both among operational corporates and housing associations. Among household customers, we actually during the first half of the year had very modest growth.
That was as per an active decision where we decided to allocate our balance sheet more into housing associations and mortgage and operational corporates due to a better risk-return profile available in that segment. The acquisition of Taaleri's wealth management business added to this growth by expanding our customer base in the strategically important SME segment. A part of this growth can be calculated as a positive income synergies of that transaction. The margin of our entire loan book improved during the last 12 months. The average margin of our loan book improved by 5 basis points. Of course, in new lending, the increase or improvement exceeds that 5 basis points. Credit quality continues to remain high in our loan book.
We have not sought growth at the expense of our risk profile or our credit quality. That is important to keep in mind, and we do hold a tight focus on customer selection, particularly in these times when question marks can be added to the overall economic development. A very important and powerful vehicle for customer acquisition is the new Finnair Visa credit card that was launched in June. The demand for this credit card has exceeded our expectations, and out of 10 customers that we have received, nine are new. Nine out of 10 customers that have applied for this credit card and become our customers are completely new customers to Aktia. Many of them are very close or in the strategic sweet spot that we have.
A very powerful and good customer acquisition vehicle for us as planned and as expected. Another point that I would like to raise here is the Aktia Wealth Plan that has now been fully launched in production. This is a very important vehicle for us in Banking for cross-sales among our all three business areas, Banking, Life Insurance, and Asset Management. As per today, approximately half of our housing loan offerings and customer dialogues include and work around this Wealth Plan, and we will introduce this into all our customer dialogues in Banking, the Wealth Plan. Customer feedback has so far been excellent, which we are of course happy to note.
Before going to Asset Management, I would actually like to pause for a moment and go back to the interest rate development and spend a few moments on analyzing the effect of rising interest rates on our net interest income. Now, performing such a calculation or estimation is not easy because it requires modeling, and modeling requires a number of assumptions behind them. With the assumptions that we have made in our calculation models, we can state that a 1 percentage point increase in interest rates will result in up to EUR 30 million increase in net interest income. One percent increase in interest rates would result in up to EUR 30 million increase in net interest income. Now, it is good to keep in mind a couple of things.
One is that this is based on the interest rate level prevailing at the end of July. The second is this is a steady-state situation. A situation where all our loan book has been repriced. Keeping in mind that the typical reference rate for home mortgages is a 12-month Euribor, one can calculate then that it takes a year to reprice that complete loan book. Yet again, keeping in mind that interest rates went positive in May, that means that year 2023 is not a full year of a repriced loan book in the territory of positive interest rates. These are important to keep in mind. Regarding the latter part of this year, the second half of 2022, the effect of positive interest rates on net interest income is limited.
It is modest for a couple of reasons. The first reason being that it was only in May when interest rates went positive. The second thing is that, and now it gets a bit technical, but the TLTRO program, and the ECB's rate hike, as they come up front, while loan book gets priced down the road, means that we are taking a negative toll of the TLTRO program repricing of about EUR 4 million during the latter part of this year. That is a toll on net interest income that comes more upfront than what the loan book gets repriced.
Finally, maybe stating the clear thing, but we are an Asset Management bank or an asset manager bank, where Banking is just one business area of us, and then we do have Life Insurance and Asset Management that are also affected by interest rate increases. On the Banking side, as said, all else equal, a steady state loan book repriced one percentage point increase in interest rates up to EUR 30 million in net interest income. Moving on to Asset Management. During the second quarter, net subscriptions turned positive. We had positive net flows from both domestic and international customers, as well as from private banking customers. However, the soft market took its toll on our overall assets under management.
Assets under management, which amounted to EUR 13.9 billion at the end of the quarter. The good cooperation that we have with Taaleri Plc continued in the second quarter of the year and resulted in sales of about EUR 70 million in the Aktia Bioindustry I fund. This sale is not included in the second quarter figures, as the fund has not yet had a capital call. International sales was distributed into eight new markets. This also is not yet reflected in the second quarter figures. Life insurance. Underlying business, both in risk Life Insurance as well as in unit linked Life Insurance was good.
We saw a positive net flow in unit-linked products and we had steady growth in the sale of risk life products. However, the rising interest rates took a toll on the unrealized market values of the investment portfolio of our Life Insurance company, which were then on the other hand balanced with a divestment of a real estate investment from the Life Insurance portfolio. A few words on our strategy and sustainability. Our strategy remains unchanged. We have our three business areas: Asset Management, Banking, and Life Insurance that are tightly integrated with our strategic sweet spot being where these three business areas meet.
Our earnings per customer are clearly higher in this segment and our customer acquisition targets on customers who either are in this sweet spot or have the potential to become customers in this sweet spot. Given the situation that we have in the surrounding world, politically, economically, and in the market, has not undermined any of the ground principles behind our strategy that was sharpened and updated about a year ago. We do not see any change as such in the strategy going forward of us building a wealth manager bank. We feel we are well on the way doing this. Our financial targets for 2025 remain unchanged. Comparable operating profit of EUR 120 million or above. Return on equity, 12% or more. Cost income ratio, 0.60 or better.
A CET1 ratio of 1.5 percentage points at minimum above the regulatory requirement. During the first half of the year, we signed United Nations Principles for Responsible Banking, and we launched our responsible lending policy. I'm happy that we were able to do this, and we are advancing on our path of sustainability. I would also like to point that we were certified as a Nasdaq ESG Transparency Partner during the first quarter. And like for a longer period of time, the carbon footprint of our equity funds is substantially lower than that of the reference indexes of our funds. That would have traditionally completed my part of the presentation, but like I said, our CFO, Outi Henriksson, is taken ill by COVID, so I will briefly walk you through highlights of the financial overview.
Outi, she is present to answer any questions you may have, at a later point. From here, I would like to draw your attention to the chart on the right-hand side of the picture, where net interest income is highlighted by green. From the third quarter of last year, we have had a steady and solid increase in net interest income. Like I said in the beginning, the second quarter of last year compared to the second quarter of this year is not comparable, as last year's second quarter holds a one-off booking of the gains of negative interest rate of the TLTRO III program. Regarding net commission income, we had a EUR 31.6 million net commission income, an increase also there.
Given the market conditions, I believe this is something we should be extremely happy about. When we look at our operating expenses or comparable operating expenses on the right-hand side of the chart, we see that the first thing to keep in mind is that the first half of 2021 and 2022 are not completely comparable due to the acquisition of Taaleri's wealth management business that was closed in the beginning of May last year. Hence, last year, that is included only for two months, while this year it is included for the full half year period. We see that generally comparable costs are expected this year to be at that comparable level of last year. Our underlying profit for the first half year increased by 3%.
Below you see items that we have taken away from what we would call the underlying business. For example, increase in the stability fee, and the value changes of Life Insurance investment portfolios and the like. But an underlying business or underlying profit increase of 3% is what we delivered during the first half of this year. Finally, I would like to draw your attention to the expected credit losses. They are at a very moderate level also on the second quarter. During the first quarter, we actually had positive credit loss reservations, meaning returns. We have thoroughly gone through our loan book from the perspective of whether a management overlay should be made, but we did not find any grounds for such management overlay.
We could not motivate such a overlay, so we have not made that during the second quarter. Goes without saying, of course, we follow our loan book very closely. So far, we have not observed anything that would cause particular concern. I conclude my presentation at this point, and I'm happy to take any questions you may have. Thank you for joining.
A very good morning on my behalf as well. My name is Lotta Borgström, and I Head Aktia's Investor Relations and Communications. Also, as Mikko just mentioned, Aktia’s CFO Outi Henriksson is now joining our webcast remotely for the Q&A. Outi, are you online?
I'm here, Lotta.
Excellent. Let's move forward to the questions. Let's start here at the venue. Antti.
Hello. Antti Saari from OP Bank . First I would like to ask on expenses. They were somewhat higher than analysts expected. I remember that earlier we discussed some quarters ago that Q3 last year is a good proxy for quarterly expenses. Is this still correct? Were there something exceptional in Q2, or is this a good run rate to be expected going forward?
Outi, do you want to take the-
Sure.
Expense question?
Sure. I do think, Antti, that the third quarter last year is still a good approximation of the running costs. With maybe exception of IT costs that are on a higher side due to the investments that we have simply had to do given the requirements that are coming from the regulatory side as well. That is maybe on a bit of a high side. Every quarter we do have fluctuation in the costs, and we need to bear in mind that in the first quarter and also slightly on the second quarter, we see the impact of the stability fee majority booked in the first quarter, but the kind of additional part now also on a second quarter.
All in all, we see already now some inflation in the cost base. Not a lot, but anyway, slightly. Another thing is that the labor union-related salary increases came into force now in the beginning of June, having some impact on the personnel costs as well. Third quarter may be a good indication, but as I told earlier, we shouldn't be looking at it as an estimate that you can multiply by four. As Mikko pointed out earlier, our guidance is that we'll be on a comparable level approximately at last year's euro level.
These IT costs that were high, will they remain on a current level or will it fluctuate, meaning that there was somewhat more IT expenses in Q2 than normally?
There were some more IT expenses in Q2 than normally. Costs that I wouldn't expect to continue on an ongoing basis. That is maybe the sign that we have most pressure to invest in compared to what I said in the end of last year.
Okay, thanks. Second question. What's your overview at the moment on Finnish property and housing markets and loan demand?
If we look at household customers and mortgage loan demand, we can confirm what can be read out from the media and out from statistics that demand has slowed down. We see that also, and like said earlier, we have our growth has been less than what market has grown, as per an active decision. We do not, at this point at least, see a large number of stressed customers or cases where the financial ability of mortgage takers to service their mortgages would be challenged. It is of course clear that if the most dullest scenarios of the economic development materialize. Then, that would be expected going forward.
Our credit portfolio, we are sort of comfortable and satisfied with the credit profile that we have and the credit portfolio that we have, and we have gone through our credit portfolio. We have taken more of a precautionary or an upfront approach in potential problem credits. If we identify potential problems in the credit, then we make provisions for them rather at an earlier stage than a later stage.
Thanks. Could you still specify a little bit? Were there some certain sectors that caused the loan losses on Q2?
No specific sector or no sector specific pattern that we can observe, just individual cases. Our exposure to what could be identified as challenging sectors is relatively low as it was also during the COVID, the active COVID period.
Okay. Thanks.
Outi here. Maybe I could add certain things. First of all, if we look at the whole first half of the year, the first quarter was on the positive side, meaning that we actually released reserves rather than made further. EUR 2.1 million for the first half, I would consider being low. Another thing is that we actually went through the whole corporate loan book in the second quarter and looked at all of the corporate exposures over EUR 1 million corporate exposure. Did a quite a thorough going through of the portfolio. Maybe two cases a little bit bigger, but nothing that would worry at least myself.
If you look at the half year EUR 2.1 million, I do consider it very moderate. As Mikko said, we haven't found any risk concentration, so any reason to kind of make any extra reservations either.
Okay, thanks. That's all from my side.
Hi. Matias Arola from Inderes. My question is also related to the cost side. If the capital markets remain weak and that puts pressure to your income side, are you ready to take actions with your costs?
Yes, of course. We have one of our long-term financial targets is to have a cost income ratio of 0.6 or better in 2025. It is not easy. I think I have stated at an earlier point that out of the four long-term financial targets, I think this cost income ratio is probably the more challenging or most challenging. We are committed to run a sustainable business. The answer to your question is yes.
Second question about the new distribution agreement in Asset Management business. What are your expectations with that in terms of net inflows for coming years? Can you give us little more details related to that agreement?
Unfortunately, I can't share any number in terms of what flow or what size of sales do we expect. The markets that this new partnership cover are Denmark, Norway, the Netherlands, Belgium, Luxembourg, the U.K., Ireland, and Switzerland. All of these markets are very established markets and relatively large markets, if not large markets. The potential that we are now addressing is meaningful. Like always, it takes time to ramp up the business to put our familiarity on a level that is required for getting sales started and so on. During the very nearest months and quarters, I would be more cautious.
This is more of a long-term partnership than something that I would expect during Q3 or Q4 to have a material impact.
Thank you.
Yes. A couple of questions from Andreas Håkansson at Danske Bank. First of all, loan loss provisions. We already discussed that, but Andreas is asking, loan loss provisions moved up relatively sharply and Stage 3 loans as well. What segments drove that increase, and would you expect a similar elevated level of provisions also in coming quarters? We already discussed this, but anything you'd like to add on that?
Thank you. Yes, we discussed that. As I said, I'd restate that when we have looked at our loan book, we have not identified a specific segment or a specific sector that would cause worries for us. These have not risen from any particular risk concentration. Our approach has been more precautionary and acting at an earlier stage than at a later stage. Of course, forecasting future is very difficult and it all depends on what the economic development is going forward. I'm very comfortable that the risk profile that we have is able to weather also more darker periods of the economic cycle.
The loan growth slowed in the quarter, and I was therefore wondering if you could give some comments how you expect the NII develop going forward considering volumes, TLTRO, and higher ECB rates?
I think we touched that also. Maybe do we trust that Andreas captures it from what we said earlier?
I'm sure he does.
I do actually could add some comments to what Mikko went through. As Mikko pointed out, the full effect of the 100 basis points and the EUR 30 million up to EUR 30 million, it's very well driven by the fact that the whole housing loan book is repriced. That happens over a year, as was pointed out by Mikko as well. That's gonna be done in June 2023. If we then assume that from June 2023 onwards, the following year, and all the other parameters unchanged, then we would probably see something up to EUR 30 million. A lot of uncertainties, certain things just to keep in mind.
The structure of financing, the cost of deposits, probably something more than zero in the future. Refinancing of the EUR 800 million TLTRO loan. The last tranche will expire in the beginning of 2024, majority of it already in 2023. When Mikko's referring to the EUR 4 million impact on the second half, that compares to what we had in the first half of this year. If we had EUR 800 million of TLTRO loan in the balance sheet, and we have gained 1% negative interest on that EUR 800 million, it's obviously EUR 8 million positive in a year's time.
The special interest period ended now in June 2022, which means that the interest rates went down from -1% to -0.5%. What came as a bit of a surprise, obviously, compared to the early expectations or expectations that we have taken in the beginning in the end of last year, was that the ECB increased the interest rate by 0.5%, which means that we do not get any negative interest on the TLTRO 800 million right now, which means that that's around EUR 4 million less than in the first half of this year. That is where the EUR 4 million come from.
Next year, if we assume that the ECB will further increase interest rates, as they have indicated, the we will start paying for the TLTRO loan. That is to some extent obviously offsetting the gain that we get from lending. We kind of net interest income from housing loans. We have considered that, by the way, in our estimate of the benefit going up to EUR 30 million. There are a lot of components affecting. If we are thinking about the second half of this year still, EUR 4 million are said coming from TLTRO compared to first half, offsetting the benefit that we get from lending. We have also some hedging costs that are related to hedging the interest rate risk in our treasuries liquidity portfolio.
Our funding costs have also, to some extent, senior financing increased in the beginning of the year due to the higher interest rate. That is just a little bit more flavor on the topic.
Antti here. Just to confirm.
Yeah.
Outi, to what you just said that, it's logical what you just mentioned about TLTRO and all, but these are into your estimates, in this EUR 30 million that you mentioned, right? Of course, they can turn out differently than you have expected, but the things that you just mentioned are in this EUR 30 million.
That is right. My point was just as Mikko was pointing out earlier, that the whole housing loan books needs to be kind of repriced until we see the effect. At the same time, the financing costs will increase. Yeah, we have considered that.
Yes. Just to confirm. Thanks.
Yes. Then finally, still regarding the NII. When you gave the 2025 targets, did you include an impact from higher rates? And if so, how much? And does the potential EUR 30 million for 100 basis points potentially change the target?
Outi, would you like to comment on that?
I can give some comments on that. Obviously, the current interest rate levels, the EUR 30 million and so forth, they are not included. Or the model hasn't been built with that, with that assumption. When we published the long-term financial targets back in September 2020, the world looked very different. We hadn't seen the interest rate hike, we didn't have Ukraine war, neither had we the downturn in the stock market. Obviously, when updating the model for the long-term financial target in current environment, it will look different from the point of view of NII, and probably also to some extent from the point of view of net commission income.
That is again coming mainly from the interest rate hike that has hit us in terms of the fixed income funds. No, the current targets haven't been modeled with the current interest rate assumptions.
Okay. No more questions.
Thank you very much. Thank you very much for joining, and I wish you a very pleasant weekend. Thank you.