Good morning and welcome to INDEXO Investor Webinar. Today we are hosted by INDEXO Management, Valdis and Henrik.
Yep, good morning. Good morning, everybody. My name is Valdis Siksnis, and I'm Co-founder of INDEXO and currently also CEO of the company.
Yeah, and I'm joining the webinar. I'm Henrik and also a co-founder and a member of the management board of INDEXO.
Yeah, and let's start then. As always, we are conducting those webinars in English to ensure transparency and to be understood and reach out to as wide as possible existing shareholder base or existing shareholders and also potential shareholders. Last time we asked our Latvian audience if there is a need for Latvian replication of the same content, and we ran a small survey where demand for Latvian version was very small, actually. Most of the Latvian investors said it's okay that you do it only in English, and Latvian version is not needed. However, if anything has changed, we encourage you to reach out to us, let us know, and we will take that feedback into consideration. And we can also come back to that today during our Q&A session. But then about the results of 2023.
2023 has been really another outstanding and impressive year for our pension management business. In terms of number of customers, we are a newly acquired number of customers, we are the fastest growing pension manager in the Baltic countries. Growing customer numbers naturally helps to increase our assets under management. At the end of the year, we reached over EUR 915 million. Actually, yesterday, we crossed a very symbolic EUR 1 billion assets under management mark. We were passive investing pioneers in Latvia, and when we introduced the passive investing strategy, we were just telling about its benefits. But now when we have a five and six years results, actual results, our good performance, excellent performance of our pension plans really tells the story itself and proves the benefits of the passive asset management. Our results are among the best in the market.
As I mentioned already, among the customers, we've been choice number one. We've been choice number one in Latvia among the people who decided to change their pension manager. And if they decided to change their manager, then a vast majority of those customers moved exactly to INDEXO. So we're loved by our customers, and not only by the customers, also retail investors. We had a very positive response from retail investors during our last public share offering. And as a result of that, our shareholder base has increased to almost 6,000 shareholders, mostly from Latvia. And we are exciting and really looking forward to the moment when we will be able to launch our banking services. And I think we have many things to show to the market, many things to surprise the market, and many things our customers will be excited.
We are very impatiently looking forward to that moment. The key word to describe our journey so far is growth. We have an impressive growth track record, and our growth is continuing. Here I'd like to give the word to my colleague Henrik to tell about our main achievements during 2023.
Yeah, thank you, Valdis, for those words from my side as well as seeing this company grow. It's a fantastic year that 2023 turned out to be for us, both in terms of assets under management growth, client growth, and also the progress that we have made in the bank. Just to give a few more insights into our pension business, so to start off with repeating our end-of-the-year figures, we ended up with EUR 917 million under management with 127,000 customers, with a EUR 3.1 million revenue generated, and basically our customer number increased by close to 30% year-over-year. Obviously, also the commission income generated, given the fact that we are a very fast-growing company and our run rate revenue is much higher than the historic revenue. Yes, you can see that over the year we managed to increase our assets under management by 57%.
That is due to increasing contributions from customers and also a very positive market growth that followed a year which was lackluster for the asset managers. We'll get into the details of what are the growth drivers in a little bit later. Our assets under management obviously drive also our revenue growth, although we are always looking to decrease our ongoing cost figure and our fees just to keep in line with the regulation, which sets certain limits for fee growth, but also doing the work voluntarily to make sure that our customers have constant improvement in their terms also as we grow and can offer better terms for our savers.
Just to give the feeling of what we as founders have seen, how the company has grown, then if you compare it to where we were in 2018 or five years ago, then our client number has grown by 6.7 times, our assets under management has grown 13 times, and our revenue has grown 10 times over this period. And we are looking to follow that high growth figures also by constantly growing our asset management business and also by opening the bank services after receiving license from the European Central Bank. This is just to give the historic perspective of what the growth has been. I think it really makes sense to point out 2022 versus 2021 when actually the markets, overall the indices were dropping, we still managed to grow.
Actually, this 2022 growth to 2023 in assets under management is a combined great growth of the market indexes and also us having our increased client number that you can see growing there in the graph below. Given that we are constantly growing our assets under management, our market share grows, and last year was, in that sense, kind of in line with our general trend of making improvements in that. Here you can also see that our client, the number of clients joining INDEXO, is by far the largest in the market. Also, I think what really is important for us and good for our investors to point out that already on the kind of a run rate basis, INDEXO is growing its assets at the clip that is second in the market.
Obviously, one competitor that is dominating the market in asset management just has a higher growth rate due to the markets performing well, but we are already, by our assets growth rate, second in the market. Unfortunately, of course, with our success comes also the increased activity of our customers or our competitors who are trying to tell our customers that their products are good enough to be chosen for investments, which sometimes they are and sometimes they're not. Unfortunately, the matter of the fact is that still a vast majority of the Latvian pension fund customers are not in index funds, low-cost index funds. Many of our competitors are using short-term performance to try to lure customers into their products.
But we really believe that despite that client activity or client selling activity that some of our competitors are doing, in the long term, they will really have to show the performance that INDEXO has shown so that customers would stick with them. And yeah, overall, the journey in the market has increased in the last year. But we hope also that us launching a bank will give us more client contact points and also make us more relevant in the lives of our customers. We said that our market share has increased to over 12%. So actually, last year was also very important for us in terms of taking over two of our competitors and becoming the third largest asset manager. So we overtook Luminor and Citadele to get that third place in the market in pensions.
We hope to receive, also become the second largest manager soon enough. I think it's also important to remind our shareholders and listeners, what are the kind of growth sources for INDEXO? One important source, which is a very stable source for increase in assets under management, is the monthly contribution. Every client we have is making monthly payments to our pension funds. Then there are clients who are joining us. Those clients bring over their assets under management from other funds. Then we have clients leaving us, which decreases the assets under management. And then dependent on the market of that particular year or the index performance of that particular year, we also have growth coming from the market returns. And so last year, as you can see, all of those figures were significantly positive, thus contributing to our phenomenal 57% growth in assets under management.
I think it's also important to point out that together with the growing customer number and also together with the generally high labor participation of the Latvian population in the labor market and growing salaries, the monthly contributions that our customers are making into our funds are constantly increasing and thus also constantly allowing us to grow our revenue base. Also, the third pillar has had positive development last year. We have been talking about it in the past as something that we are really trying to pay more attention to and getting people to understand that it is a very important part of overall saving for their retirement age and taking care of your financial planning for the future. Many more people are listening. Our customer number is increasing. Also what really makes us glad is that actually 63.9% of our customers are doing regular contributions.
That means that they have a standing order where whatever they can, be it EUR 10, be it EUR 20 a month, they are putting that money aside for their retirement. And they're doing it in a low-cost third pillar fund, which is giving them the market returns together with the development of the share markets. And those contributions then obviously will start compounding. And hopefully, our customers will see a worthy retirement. And hereby, I would hand over the word to Valdis again, who will comment a little bit on our pension fund and consolidated financial results.
Yeah, thank you, Henrik. And so what it all means for our profit and loss statement. So for years, we've been growing our customer base, our assets under management. And as a result of that, we've been growing our revenues and our profit before customer acquisition. We have been for many years already profitable before customer acquisition. And as we communicated before, we are deploying that profit and actually even more money investing in a new customer acquisition. Why? Because we can acquire our customers lower than lifetime customer value. And that is a very, very sensible investment for the future, for the future profitability. And actually, 2023 was the year where we can have very clear evidence that this is a very wise strategy and it works. Because in 2023, we reached the scale, the volumes, the revenues to become profitable also after client acquisition.
So the first two quarters after client acquisition, net profit was negative, but third and fourth quarter was profitable already. Fourth quarter, however, I have to say we had a large one-off expenses related to the public share offering. So if we deduct that, then the fourth quarter result was ±0. But without that, we would see a net profitability growth from quarter to quarter. And I think this is a very important milestone. It is a very important achievement for us because pension business from now on, actually from mid-2023 on, is profitable, is generating positive cash flow, and is going to be able to support the launch of the bank business or early days of our bank development. This is a more static view. And probably I like a previous slide better, which reveals a better picture. But as you can see, our revenues have increased.
Costs, however, are not very well comparable to the previous year result because the previous year was more like a management allocation because we didn't have a separate legal entity for the bank. And probably we made a bit more accurate allocation what really belongs to the pension management business and what it doesn't. Today, when we have a separate legal entity, these legal entities result, and we are still keeping some of the group development costs and bank costs in IPAS INDEXO, in the pension management business results. And that would be related to non-cash expense of personnel options, public share offering, and a few other things which are actually needed more for a bank development than the pension business itself. Nevertheless, we have made significant investments in client acquisition. And despite that, our result before, and even after customer acquisition has been profitable.
However, we have these non-cash option expenses, which is mostly not only, but mostly bank-related. And the net legal result is minus EUR 330,000. However, again, I would like to reemphasize what I told in a previous slide. Pension business is profitable, is generating positive cash flow. And this situation is improving every day as we continue to acquire new customers, as our assets under management continue to grow, and so does our revenues. Many of the pre submitted questions were revolving around our bank project. And that indeed is our biggest, or it's a huge development project for our group. And we have not only invested almost EUR 4.5 million in that project.
There is actually more than 30 people who are spending a lot of time, a lot of energy, and sometimes also sleepless nights thinking how to improve our bank products, how to surprise the market, and how to bring something fresh and interesting, impressive to the Latvian banking market, and how to disrupt that market in a similar way as we did with pension management. Our technical readiness is very high. There are two good proofs of that. For instance, CRM and ERP systems from that newly built IT infrastructure we have taken already into use for our pension management business. At the end of the previous year, we successfully completed a Visa certification process. Basically, that is an external party giving the confirmation on the readiness of our card systems to be deployed, to be launched immediately after receiving a banking license.
And our main customer engagement channel tool will be our mobile application. And we are really doing huge things with that. And we have already over 1,000 working screens built into this application. And probably the people who have not been anyhow involved or related with the development of the mobile applications, then I can tell you that the 1,000 screens is a lot. And that means that that is a good indication on the functionality of our application, different scenarios, different situations, different very exciting situations, then also some problem scenarios. This all has been addressed and designed and built into our mobile applications, which I'm sure will raise the standard of mobile apps in the Latvian banking market. When it comes to the consolidated result, then this is a less interesting story because revenues are only coming from the pension management business. Those are the same figures.
The bank project is generating only costs. In the previous slides, I mentioned we invested EUR 4.5 million last year. Part of those costs is capitalized. On a P&L statement, as losses, we have recognized something close to almost EUR 3 million or EUR 2.9 million. The most important thing is for us to complete the licensing process, to launch the bank, and to start generating income on these very, very significant investments we have made and we continue to make until the moment we will be able to launch the bank. I don't want to spend too much time on balance sheet and cash flow statements. Probably we can come back to those in a Q&A session.
The only thing I want to emphasize is that this is already somewhat old information because that reflects the situation before the capital raise we did at the end of the year. So the capital raise was completed only in January. The new share issue was registered in January. And so our cash and equity position has improved significantly since then. So that is shortly all what we wanted to tell about our results. And we are open to your questions.
Thank you for the presentation. I encourage every one of you to share your questions in the Q&A section that you can find on the bottom of your screen. Questions can be submitted either anonymously or with your name. Let's start with the first question that we have received. Could you provide more information on third pillar pension product in comparison to other companies?
Yeah, I'll take that. And basically, like last year in our third pillar product, we pretty much performed according to the indexes that we are investing in, which is MSCI World Index. There were some other managers who achieved similar or slightly better results. But if I remember correctly, our third pillar fund returned last year 18.6%. And overall, I think that is a very, yeah, close result to the market performance. What I can say, I think, is that our history of the third pillar and comparative data to other managers is quite short still. We will have a two-year track record somewhere in spring of 2024. And that allows us to give a kind of a little bit better picture on the results. But overall, anyone who is having our third pillar product should compare it to basically our 100% equity fund.
Our 100% equity fund has returned over 10% compounding in six years' time, which is again in line with what the equity indexes have provided. I think a good result for that six-year period. Always bear in mind that short-term volatility in the market means that the performance is one or another year can be better or worse.
Thank you. How will INDEXO compete with SEB and other funds when the management commission is the same or even lower than INDEXO's?
We really welcome competition. We love the idea that our competitors are launching good quality funds at similar or lower costs than what we have. Unfortunately, the fact of the matter is that most of our competitors are providing more than one choice for our customers. So they offer side-by-side index funds together with actively managed funds. And unfortunately, still, a vast majority of Latvian savers are in non-index funds that have been historically underperforming the index funds. So we are particularly glad that there are good quality index funds that are competing with INDEXO. Our commitment that has always been to our customers and also which we show year-on-year improvement is that we are lowering our costs. We are also lowering not direct management fees, but also our ongoing cost figures.
We are really working also with all our third-party service providers to lower the cost there for our customers so that the bigger share of the market returns will remain with our customers. I think we're doing a good job.
Thank you. Moving on to the questions about the bank. When do you plan to launch INDEXO Bank, and what is its current situation? Is there any feedback from the application process?
Yeah. Of course, as I said, technical readiness is very high. We invested a lot of money. There is nobody else in the world who is more impatient to launch the bank than us, the whole team. I think we have many good things to show to the world. However, of course, we need a banking license to do that. The last official feedback we have received is that the decision will be taken by the 22nd of April. We hope it will be faster, but that is the official deadline we have. From day one after receiving the banking license, however, I have to emphasize that the products will not become immediately available to the wide public because there are several other processes we can complete only after receiving a banking license with several third parties like SWIFT, European payments system, Visa, and many others.
That is a process which will take at least weeks, if not several months, to complete. Then, of course, before launching our products to the general public, we need a certain period of piloting to a limited customer base, which would be probably our employees. Once we have tested everything in a live environment and completed all the processes which I mentioned before, then we will be able to launch the services to the general public. But we still hope, and we are working towards that goal, that it should be within the first half of this year.
Will INDEXO Bank offer mortgage loans from the start?
Yes, INDEXO Bank will offer mortgage loans, but that probably will not be from day one. Mortgage loans will be available in autumn this year, but definitely this year. We'll start with a mortgage loan, with consumer lending and payments and cards and many other products.
Talking about other products, what about accounts and cards for individuals and legal entities, also including the transfers?
Yeah, sure. The first step will be our service will be available only to the private individuals. The legal entities will follow six-nine months after the launch of the private individuals. So why private individuals? Because it's technically simpler. The private individuals are our existing pension management customer base. Those 130,000 customers, they all are private individuals. And of course, we'll offer them our banking services. That will be one of the first groups. The product offering otherwise will be rather wide. This will be a mobile application, of course, through that mobile application access to your current accounts, term deposits, vaults, payments, and of course, cards and consumer lending products in the beginning. A little later, also mortgage loans.
Will crypto trading be eventually possible in the INDEXO Bank app?
I understand that it's a very exciting theme and topic in the world. Generally, we definitely want to provide our customers access to capital markets and then investments. It will not be, though, part of the first year's priorities because I think we have sort of more important issues to address in the financial environment of Latvia. With crypto, it is like that. I think one of the principles of our development is to evaluate everything from a do-no-harm perspective. I think with crypto, the problem is that a little bit the regulation is lagging the markets itself. On this particular investment opportunities, we would most probably wait a little bit to see where the environment evolves to.
Thank you. Is there a plan to open local branches in cities?
No, we believe that it's actually already the modern banking is a digital distribution. We will put our emphasis mostly on digital distribution channels. However, we will have from day one one physical location where the customers will be able to come to get maybe more high-value-added services or resolve some problem situations. That will be a big differentiation from some of the international fintech service providers. A large branch network is not in our plans. There might be, in a couple of years' time, more than one physical location. There might be, but definitely, there will not be a big branch network.
Thank you. Will INDEXO Bank benefit from the newly adopted law changes regarding mortgage refinancing? The new law will allow clients to refinance their mortgage online without contacting the previous bank.
Absolutely. We very welcome those changes. We are happy they're coming into force. However, this year, I believe that the refinancing market will be still very passive because of this government support or support to the mortgage borrowers, which clients would lose if they refinance their mortgage loan this year. I think starting from the next year, that will be an opportunity. We intend to play a very, very active role. There are many customers who have maybe paid half of their mortgage, and their margin has remained the same as in the beginning. We believe that there will be opportunity for us to offer better margins, maybe increase the amounts, increase the maturities, provide other benefits to stimulate this refinancing market. We intend to play a really active role. We are very happy about the recent changes.
Will there be a possibility to invest into the stock market through your bank? How will you compete with Swedbank's offer of no commissions trading with Baltic stocks and no holding fees until EUR 100,000?
We definitely want to provide our clients access to financial markets. As we said before, it will not be in our plans for the first year of our operations. It is also something that we most probably will rely on outside providers to give us a kind of almost ready-made product which we can adopt for our customer base. I think it is really great that many of the other market participants have lowered fees, especially investing in the domestic markets. I think the fees still remain high when it comes to investing globally. I think from a sort of a risk diversification point of view, that is also an important consideration for any of the local investors. When we design and will finalize our product development thoughts, then obviously, it will address the need to improve something for our customers.
We will not do something which will be, let's say, worse than what other people are doing.
Will private individuals have securities accounts and the possibility of custody? Have you opened, or are you planning to open a custody account, and you're clear?
In a longer term, if we speak two, three years, we intend to have all the traditional banking services, both for private individuals and the legal entities. Basically, what you can receive from other banks in Latvia, you should be able to receive also from INDEXO Bank and probably even more. However, one should understand that it is a journey, and we can't deliver everything on day one. On day one, that will not be possible. It interlinks with what Henrik said. That is gradually on our drawing boards. That is something we will launch in a year or so. Especially, we would like also to help our shareholders to keep their INDEXO shares at low cost or no cost at all with us and also trade INDEXO shares.
Do you have some ideas for a cashback system or collaboration for debit cards in the future?
Probably the short answer would be yes. We are looking at all those opportunities. We are considering that. But I'd like to keep also some secrets until the day we launch. So that very detailed and nuanced product offering will be announced shortly after we receive the banking license. When we will be ready to launch, then shortly before the launch, we'll have an event and market communication about what exactly we will do.
Will shareholders be allowed to participate in the beta testing period?
Yeah, the firm decision is not made, but we are considering that. Probably, yes, we could give some of our supporters. We really appreciate that. We feel that there are several thousands of big supporters who are actively participating in our surveys, who are providing us ideas how to develop our banking services. So I think we probably will give the privilege for them to test and give their feedback, comment on our offering before the public launch.
Just to kind of also add here that actually, most of our employees or very many of our employees are also our shareholders. We actually are very much aligned in terms of what we build for our shareholders with our own also interest to succeed in our own investments.
Thank you. Moving on from the bank-related topics to INDEXO trading on the stock market, why have INDEXO shares dropped in value?
Well, I think, as discussed many times over also while commenting on the pension fund results, financial markets are volatile. They are a product of many different things that go on in the world economy, in the psychology of investors, and so on and so forth. So we, unfortunately, have no control over our stock market price. What you can, though, and what all shareholders can feel from or should know from our side is that we are really considering the sort of long-term value growth as our main goal in this company. That is why we are investing our free cash flow in building the business and then giving the business a totally new direction where we will be able to generate much higher revenues and also hopefully much higher profit.
That effect will be felt once we are able to launch the banking services and start providing the fruits of our investments that we have done over the last two years.
Yeah, if I can add, me and Henrik, we are two larger shareholders, and we are not really worried. We are focusing on medium to long-term value growth, and there everything is intact. Our pension business is growing. Our bank is ready. I think the launch of the banking services will be an extremely important kind of milestone, which will drive our growth going forward. We invested a lot already. The moment when we will start to generate return on that investment should be a turning point.
On the same topic, how do you describe the share price at the first and second issue, especially considering that the starting price of the second issue is lower than the first?
So I think, as the answer was for the previous question, really, the market price often is or is always a function of supply and demand. The pricing of the issues that we did were done with, let's say, the best interest of shareholders in our minds and hearts in terms of protecting for dilution, but also taking into account at what price we are able to sell those shares. That was basically pretty much the terms that we were able to put this issue together. The second issue, as you saw, was a combination of direct share sales and commitment letters. It was not wildly oversubscribed. So basically, it means that it was a tightly priced issue. I think that is also a testament to us doing the best job we could for the company.
Thank you. How does INDEXO Bank plan to raise funds in the future via customer deposits, money market, or borrowing from the central bank?
We primarily intend to be a customer-focused. Basically, okay, to simplify it, why anybody needs a banking license? Banking license means a lot of regulations, a lot of restrictions, etc. But the banking license gives you a privilege to attract the customer funds. And you get also this EUR 100,000 deposit insurance per customer. So that's the main advantage, what gives you a banking license, and the privilege. And then our goal, at least in the early months or the first years of our operations, will be to attract as many customers as possible, to get as many accounts opened, to use our accounts, to use the term deposits, other saving products, which will enable us to do the rest, lending, etc., etc. So we intend to be a customer-funded. But of course, a banking license also permits us to do many, many other things.
For instance, raise the deposits in international markets. If the Latvian, for whatever reason, will not be sufficient, issue bonds, etc. But the primary goal is to attract customer funds. And there are plenty of them in the Latvian market. If we speak only about the private individuals, there is EUR 10 billion in bank accounts one way or another. And about 70% of that are current account balances where people are not paid anything or not paid very much. So I think we'll have the opportunity to offer a very convenient service. And we also have our thoughts on how we will incentivize our customers to bring some of their money to our accounts, to our deposits.
Can you comment whether the sudden drop to EUR 9.9 per share from EUR 13 per share in December during the second share issue announcement was a scare tactic done by other big players?
No, we can definitely confirm that that was not a scare tactic by other big players. It just coincided that one of the shareholders, for whatever personal reasons, was selling quite a large block in the market. That also, unfortunately, coincided with our share offering. These things happen. Again, I really and we really see with Valdis this as sort of a kind of a three-five-year investment horizon project, right? So that's really the reason to keep the shares in the company, to buy the shares in the companies, to get part of that value growth that is built by us today by investing into the banking services.
Generally, in the same way as you would think about savings for the pensions, you should really sleep tight and not worry too much about what is going on on a daily or even on a monthly basis in the market unless something really significant would happen to the company. You have all the reasons to believe that we are providing value growth.
When will it be possible for investors who bought more than 50 shares to get an INDEXO card?
At the moment of the public launch, what they will need to do, they will need to download our mobile application. They will need to go through the onboarding process. And during that process, we will know already that they qualify for that card, and they will have an option to apply for that. If somebody has invested through some legal entities where the process is more complicated, then we'll address those cases individually. But those who participated as a physical person will have a smooth service, and it will be easy to receive that card.
You previously mentioned about the discounts and other special benefits available to your shareholders. Are there any details on these items? Can you specify them?
Of course, we have ideas, but we have not final firm decisions. That will be communicated a little bit later before the launch. I'm also not prepared to answer the question in details right now.
If I bought shares during the sale and then sold them, will I still be counted as an INDEXO shareholder?
The rules were that everybody who had those 50+ shares at the end of the public offering will qualify.
Thank you. We have two last questions. How are we protected from situations similar to the BaltCap scandal? What safety measures are in place?
Yeah, I mean, it's very unfortunate when large financial scandals like what has made BaltCap happen. I mean, I think it's not great news for the Baltic capital markets. BaltCap, I think, overall has been a really great source of funds for companies to invest into improving the economies of the Baltic countries. So we feel sorry for them. We basically are using this opportunity to recheck every procedure we have in place when it comes to how we run our fund management operations, how we do our transactions, so on and so forth. What I must say is that obviously, with us, the situation is a little bit different from BaltCap because most of our equities and the investment bonds are liquid. They are quoted on the stock exchange with a very clear price. There is a very simple cash flow management of the pension fund.
I would think that it is much more safe. Also, we have been fully regulated by the financial market supervisors, whereas BaltCap, let's say, had more relaxed regulation in mind. We have had to sort of set for ourselves higher standards from the very start. Really, I have a lot of empathy. I hope that they will pull through and still be providing the financial markets the support that all local capital markets need.
The last question that we have received: Are your children INDEXO investors?
I can say directly that they are, yes. My children are not investors. But my family, well, through me, we have a lot of wealth or money value with INDEXO. But all my family, children, and all the relatives I've spoken to, they are INDEXO customers.
Thank you. All questions are now answered. This session was recorded and will be available for rewatch shortly after the call. Please follow INDEXO announcements to stay up to date with companies' news. On behalf of INDEXO, thank you, everyone. It was a pleasure to be with you today.
Thank you.