Hello everyone, and welcome to the Avanza Interim Report January to March 2020. Throughout this call, all participants will be in a listen- only mode, and afterwards there will be a question and answer session. Today, I'm pleased to present Rikard Josefson, CEO, and Birgitta Hagenfeldt, CFO. Please go ahead.
Okay. Good morning to you all. Thank you for listening in. I expect that some of you are working from your homes, as is 85% of the staff at Avanza at the moment, and I hope that in these testing times, you all and your families are doing well despite the crisis that we are living in with COVID-19. If we get going on a business update, on page number two, where you saw the strong customer growth throughout the quarter. We had a fantastic quarter when it came to new customers. We started the quarter quite well in January, February, and I like to emphasize the fact that the growth in number of customers, of course, March was exceptional, but we had a good start of the year in January, February, and the corona crisis hit Sweden, I would say in week nine.
Pre the crisis, the start of the year was quite well. We got about 156% more clients than comparable quarter 2019, and compared to Q4 2019, it was up 131%. We can see that the new clients is, as always, a bit tilted to the younger age groups. There's no difference with the new clients as with the old clients, but a slightly higher increase in the age group 41 to 50 during Q1, which is of course good news for us. Slightly higher, more male customers than female customers, which of course, is something we would like to have an equally new men and women as customers. Of course, the number of customers becoming customers through mobile devices is still increasing.
My personal reflection is also, I think that a lot of people working at home has actually been beneficial for us because people might have a little more time to take care of their personal finances, opening an account and get going on the Avanza platform. If we go to page number three, we look at the high net inflows of the quarter, which is also on a record level by far. As I said, on new clients, we also saw January, February, up until week nine, very strong net inflows and of course, exceptionally strong net inflows in March. We are also up 189% when it comes to net inflows to Q1 2019 and 221% compared to Q4.
If you look at the savings capital total in the company, it's now SEK 368 billion, which is of course a little less than in the beginning of the quarter, but it's that same level as we had in August 2019. Of course, our savings capital has been a bit hurt by the stock market going down, but at the same time, the levels are quite high. We can also see a higher number of new clients coming in buying equities and also the clients have a very high liquidity during the quarter, so there's a lot of money on the sideline waiting to be invested. 62% of the net inflow was from the existing customer base, so that means that people are trusting us with more and more of their savings, which is of course also very good news for Avanza.
If we go to the next slide, it's slide number four, record high activity throughout the quarter. Of course, it's been a turbulent quarter, as has been in the whole economy in the whole world. As I said before, high activity in January, February. The number of clients generating equity trade was record high, 34% up quarter-to-quarter, and the commission generating notes was up quarter-to-quarter 90%. That's been an unheard of quarter when it comes to activity. Our IT systems on the platform has throughout the quarter worked well. We had an availability on the site of 99.8%, but we did have some hiccups during the quarter. When the load on the systems became too much, but it was only small periods of time during the day and especially in the morning that we had some lag in the systems.
We have fixed those problems and for the last three weeks, everything has been working exceptionally well. Going to the next slide, of course, it's an interesting slide for us because we can see that we are gaining market share in number transaction compared to our competitors, which is of course important for us and it's good news, and it also shows that our customer is trusting us in these days. They are reallocating the portfolios. They are using the Avanza platform. When it comes to turnover, we also are happy that we surpassed SEB and we are now also the number one on the Stock Exchange when it comes to turnover, which is of course also good news for us. Going to the next slide, of course on page six.
We had made a little less new launches during the quarter and focused a lot on customer communications. We did a lot of blogs, a lot of posts with record high listening and reading of those. People were really seeking information, education, and somewhat inspiration. We did launch our European index fund, which we think is a very good part in the puzzle when it comes to long-term investment, even though, of course, the fund has gone down since we launched it. We have improved the fund pages, especially when it comes to sustainability data. We added more than 800 new ETFs on the platform. We have small improvements on the site, and we have supported our clients. The pod listening is up 113%, and over 850 people were listening to our pods in Q1.
Also, we have 1.7 million customers visiting the Avanza blog, and that's up 175% since last year. We have been there for our clients. We have talked to them, we have been in social media supporting them and intensified our communication with them. Going to the next slide. Further investments ensure continued high customer satisfaction. Of course, as we stated, we are adding about SEK 10 million when it comes to cost during 2020. Most of it will probably come in the second half of the year because it's very much about scaling up IT, hiring more people, and the number of clients, the number activity. We also see a demand of scaling up a bit on our back office, Private Banking, customer services, and IT. This is nothing that's new for us.
I would say that all these cost increases have been in our plans or the midterm plan, but we took the decision to front-load this cost and do it now, and that is, of course, a reaction to the very high activity that we felt we need to make this investment in further growth a little earlier than we expected. If we go to the next page, number eight. Of course, how sustainable is the Q1 results and activity going forward after the COVID-19 crisis? Okay. We believe that we have raised the bar. We know that we have more clients. We have a lot of savings capitals on the platform. We are growing, and we believe very strongly that even though if we go into the more boring market, we're going to see that the customers' activity will be higher than in boring market previously.
The lowest level of Avanza, I'm convinced we have increased that. Of course, we can also expect some marginal effects with pension business because some of the corporate customer might go bankrupt or tend to not pay in as much pension as they used to for liquidity reasons. We also can see that high liquidity is expected to gradually be reinvested in the market, which is, of course, driving activity. We had high outflows from funds in the beginning of March, but we can see at the end of the quarter that that's turned around and the customers are coming back in the mutual fund business also, and we expect that to be quite sustainable going forward. If you go to the next page on number nine, of course, we believe continual interest rates will be there for foreseeable future.
The risk of the Riksbank will put in a negative rate again doesn't feel very strong today. I was more concerned with that a few weeks ago, but that the underlying reasons for people taking care of their own savings is still there and maybe stronger than ever because a lot of people became unemployed or temporarily out of work. To have a buffer in your economy, to have a savings capital is more important than ever. We can also see a very strong increased focus on sustainable investments going forward. That's the last slide, of course. The key focus is for us, continuous growth, customer satisfaction, being there for our clients, and we keep on innovating, keep on improving, keep on being there for our customers with innovating tools, education, and inspiration. As always, the employee engagement is key to driving success for us.
With that note, I will turn over to Birgitta.
Thank you, Rikard. As always, we start with a financial overview. We have seen record high revenues in the quarter, up 65% compared to Q4 and more than double compared to Q1 last year. Operating expenses decreased compared to Q4, mainly due to extraordinary write-down on leased assets of SEK 8.3 million we had in the Q4. Excluding the write-down in Q4, expenses were stable. Compared to Q1 last year, expenses increased by 9%, primarily caused by higher number of employees. Despite the turbulence in the stock market, we had no credit losses, which shows the low risk in the balance sheet and that the collateral and advances processes are working the way they should, even when it's very uncertain and volatile market conditions. The operating profit increased by 261% compared to last year, and consequently, the operating margin for the quarter improved to 67%.
Revenues per savings capital was up by 22 basis points to 56, costs per savings capital decreased slightly to 18 basis points. The long-term ambition is to lower the cost per savings capital to close to 16 basis points. Even though the volatile market has hit our customers' investment, total savings capital is at about the same level as at the end of August last year. As of 2020, we added a return on equity target to our long-term goals. The target is to have a return on equity between 25% and 30% the coming five years. Due to the record high revenues in the quarter, return on equity for Q1 reached 64%, and earnings per share was SEK 1.98. If we look at the quarterly revenues, you can see that Q1 is extraordinary.
As I said, we had exceptionally high revenues in the quarter, which were up 65% quarter-on-quarter. Net brokerage income more than doubled compared to Q1 and Q4 last year as a result of record high trading activity. Customer activity was high already in January and February, and it increased even further in the end of February and March after the COVID-19 outbreak. Commission-generating turnover increased by 90%, the number of commission-generating notes by 96% compared to Q4. Brokerage income per turnover krona increased from 9.8 to 10.8 basis points, since a higher share of the brokerage income was generated in lower commission fee classes, which means that it wasn't only the professionals that acted on the stock market, but a much broader group of customers. The number of commission-generating customers was once again record high with an increase of 34% from Q4.
Fund commissions increased by 5% quarter-on-quarter, mainly due to higher average fund capital. Capital was high during January and February, but then decreased significantly during the fall of the stock market and net sales. Income per SEK of fund capital increased slightly to 33 basis points despite an almost unchanged share of index funds. Fund commissions year-on-year was higher due to higher average fund capital. Customer net saved during the quarter, which resulted in lower fund volume will affect the fund commissions in the coming quarters if customers don't start to invest soon again. The NII increased by 26% quarter-on-quarter, an effect of higher lending rates in connection with the repo rate hike of 25 basis points in January. Average three-month STIBOR was 19 basis points higher than in the Q4, which also improved the return on surplus liquidity.
The surplus liquidity is managed overnight and through investments in primarily covered bonds with an average interest duration of three months linked to STIBOR. All else equal, without taking changes in customer behavior into account, a one percentage point change in the repo rate with today's volume and our customers' current all-time high share of liquidity would affect full year net interest income by around SEK 450 million to be compared with SEK 300 million at year end. Most of the increased surplus liquidity is invested in instruments with very short maturities where returns are lower. Therefore, we now have treasury bills on our balance sheet yielding according to repo rate. The reason is to be prepared when customers increasingly start to invest again. Times are very uncertain and hard to predict at the moment, but the Riksbank's own forecast indicates a rate hike at the end of 2022.
Compared to Q1 last year, NII increased by 87%, mainly due to a better return on surplus liquidity as the repo rate was raised by 20 basis points in January 2020, but also the rate hike we had in January last year. Higher lending volumes also contributed positively. Other income increased by 85% quarter-on-quarter, mainly due to significantly higher currency-related income where customers' increased trading activity also has affected trading in foreign securities. The high activity is also reflected in the income from Avanza Markets, which also rose substantially. Corporate Finance has also a good quarter like in Q4. Compared to Q1 last year, FX-related income increased significantly, and income from Avanza Markets and Corporate Finance also increased. Looking at the costs, operating expenses decreased by 4% compared to Q4.
As I mentioned before, this is mainly due to the extraordinary write-down on leased assets of SEK 8.3 million in the Q4. If we exclude the write-down, total expenses were unchanged. Marketing costs, which are normally higher in the beginning of the year, increased while other expenses decreased slightly. Compared to Q1 last year, expenses increased primarily due to increased development capacity with a higher number of employees and higher other costs. As communicated in the end of March and as Rikard mentioned, we have raised our cost guidance for the year to a growth of 12% instead of 10% compared to last year. This means an additional cost of SEK 10 million, where the big parts are personnel costs and other costs, which primarily occurs in the second half of the year.
The capitalization is still strong with a total capital ratio of 18.1 to be compared with the requirement of 14, including all external and internal buffers as well as Pillar 2 requirements. The regulatory requirements are lower compared to December, since the countercyclical buffer was lowered from 2.5% to 0% due to the uncertainty around the aftermath of the COVID-19 crisis. The LCR ratio increased during the quarter as a result of the increased deposits from customers. The leverage ratio, though, was negatively affected by the increased deposits. A regulatory requirement for the leverage ratio of 3% will be introduced as of June next year. We are currently discussing the level of the ratio, including an internal buffer we would need, taking the volatility in the deposits into account. This will be communicated well in advance of the requirement being introduced.
Avanza leverage ratio can be improved through increased Tier 1 capital and/or by reducing the balance sheet and off-balance sheet commitments. As you have seen, we have announced that I will leave Avanza in about a year from now. I've been working at Avanza for 12 fantastic years. Decided a long time ago to not continue in an operating role for longer than the summer 2021. This has been tremendous years. I love Avanza, leaving will be very double-edged for me. I'm convinced that I will leave the company in the hands of a strong and competent management team that will take Avanza to new levels. With that, Rikard, I think we can open up for questions.
Thank you. Absolutely.
Ladies and gentlemen, if you do wish to ask a question, please press zero and then one on your telephone keypad now. If you wish to withdraw your question, you may do so by pressing zero two to cancel. The first question is from the line of Patrik Brattelius from ABG. Please go ahead. Your line is now open.
Rikard, you write in your CEO comment that you expect to see a more passive period going forward. Could you elaborate a little bit what you mean by that and how you expect it will affect your P&L primarily than your income side?
What I believe is that when you have a turbulence in the market that we have right now with this extreme volatility and activity, of course there will be a period after the crisis where volatility will go down, activity will go down, and that will, of course, affect us when it comes to net brokerage income. How it will play out with the mutual funds, we will see, because I still believe that people are coming back to mutual funds. Also, of course, it's affected about the levels of the valuations. As I said, I believe very strongly that we have raised the bar for Avanza because with the fantastic customer base of over one million clients with a substantial amount of assets under management, there will still be more activity on the platform than it usually is when the times are yet a bit boring.
Of course, the brokerage income in the short term is what is at stake a little bit when it comes to activity going down. We have more clients than ever generating brokerage income, so the fall will not be as big as it has been previous times.
Yes, I understand. Regarding the strong customer inflow then, are you seeing that a lot of clients are coming in through the open banking app, or is it through more traditional ways?
To become a client, you need to identify yourself with mobile BankID. There's only two ways of becoming a client, to put it simply, is through the web or the mobile app. What we say is that we can see that more and more clients are becoming clients using the mobile devices than it was previously.
Okay. I was thinking this where you transfer your account from other banks.
You have to be a client to be able to do that. First you have to become a client at Avanza, then you use mobile BankID to transfer your funds from other bank. Of course, that's an increasing activity, which is one part of the puzzle where we can see the strong net inflows.
Okay. Lastly is regarding activity. Can you say anything about the activity level we've seen the last three weeks?
Not anything more. You can see that the volatility is there, the turnover, the stock exchange is there. The activity is still high.
Okay. Thank you. That's all from me.
Next question is from the line of Peter Kessiakoff from SEB. Please go ahead. Your line is open.
Yes. Hi. First of all, just a follow-up question from Patrik, and perhaps rephrasing his question a bit. The tool that you launched, was it a year ago or so, which enables you to transfer money from other banks onto Avanza platform in a very convenient way. I think I've asked this question each quarterly report since that tool was launched. Do you see that that has had an impact in terms of the high inflows that you've seen in the quarter, and especially the fact that you're mentioning that you're seeing existing clients transfer more money into the platform than we've seen recently? Is it just the ordinary people just transferring cash onto your platform like they always have?
It's one important piece of the puzzle, but I wouldn't say that that has been the way to fame for the net inflows, but of course it helps us.
Okay. It's a small positive contribution, but it doesn't stick out.
I would say it's a positive contribution, absolutely.
Okay. In terms of the inflows, because they have been, I must say, great so far this year, and also pre-COVID-19. There's nothing in particular in terms of single clients transferring a lot of money onto your platforms or any partnerships that are relevant to take into account when looking at the inflow level that we've seen so far this year?
No, it's been broad inflows. Of course, we can see that we are also gaining Private Banking clients, so we have some of these clients have substantial amount of money, because a lot of people, in my opinion, believe their Private Banking has not been so active and they get a bit, I want to see what the alternatives are. The inflows have been very broad.
Again, the private banking part of the total net inflows are not substantial.
Absolutely.
It's absolutely a broader number of customers putting in a lot of small numbers of inflows that's achieving this.
Yeah. I noticed that standard clients had a significant inflow as well, but there's nothing underlying in that is relevant to highlight then? Okay.
No partnerships, no special big installments.
Just in terms of marketing, has there been any thoughts around increasing the marketing spend? I think we've seen a bit more ad campaigns, et cetera, from Avanza perhaps the last year than we have in the years prior to that. In terms of increasing that spend in order to drive inflows, is there any consideration done there?
No, we have a marketing plan, and we're sticking to that. We have not revised it. As we discussed previously, I think the biggest marketing we have is word of mouth, especially these days.
All right, just a final question, and that comes back to the leverage ratio, which is now at 2.5%. As you mentioned, Birgitta, there's a binding requirement of 3% in roughly a year's time. You mentioned which levers you can pull in order to improve the leverage ratio. I guess coming back to the fact that it's a binding requirement means that you want to have a good buffer also in times in stress, such as we're seeing right now. Is there any consideration done in terms of perhaps over-issuing additional Tier 1 capital or perhaps holding back on the dividend in terms of improving the ratio and the resilience of that? Do you think that you're able to offset a lot or improve it a lot by, for instance, reducing off-balance sheet exposures or pulling other levers?
Well, that's the question that we will discuss internally going forward, of course. Just to set the ground here, we have 2.5 today. We haven't been working actively in order to improve that, which we actually could have done by the end of the quarter. If the requirement were binding by this time, we could have made actions within our current balance sheet in order to get the leverage ratio beyond or higher than 3%. Even though we had this stress on us, which we have had during this part and where customers are now having so much liquid assets, we still can keep the leverage ratio at 3% or above 3%.
Again, as you said, we will need to have a buffer to make sure that if anything like this happens again, and if that should be by lowering the dividend, issuing Tier 1 capital, or decreasing our balance sheet, that's what we are going to discuss, both the mechanism and of course, the level of the ratio. We will come back to that later in the fall.
We may communicate long before the requirements are in place.
Of course. May I just follow up a small detail on that? Is it possible to quantify or mention some of the levers that you think you could have pulled in Q1 in order to improve the ratio?
We could have moved more of our insurance company's liquidity from the bank's balance sheet, which had left the consolidated group's balance sheet smaller. We could also had our auditors to audit our Q1 results, which could mean that we could include the revenue, so the results from the quarter in the calculation of the capital base. There are different things that we could have achieved already with the balance sheets that we have today.
All right. Okay. Those were my questions. Finally, Birgitta, sad to see you leaving, but job well done over the years, and I'm looking forward to talking to you in the coming quarters as well before you leave.
Thank you.
Next question is from the line of Nicolas McBeath from DNB. Please go ahead. Your line is open.
Yes. Hello, can you hear me?
Yes, we can hear you.
That's good. First, a question on the fund commissions here in the quarter. If you could explain why the fund fees in relation to fund capital increased, and if you could also comment on the business mix trend you see in this business. I was a bit surprised to see the increase in fund fees in relation to fund capital, as I think normally when you have this type of market, customers change into lower fee products in market declines.
Well, I would say that one thing is that, as we said during the presentation, the fund outflows came in March. We had good fund months in January, February, and we get paid every day in the fund and the fine commissions that we are making.
I also would say that the customers didn't sell out their hedge funds investments. It was the mid part of the funds that actually. It wasn't the low index funds and it wasn't the hedge funds investments. It was more fixed income funds and so forth.
Could you comment on if you take a snapshot of the business mix at the end of the quarter in the fund business, is that generating a lower fee in relation to the fund capital than the average in the quarter, so to speak?
Too early days to say. What we said during the presentation is that we see that the fund flows in the end of the quarter is starting to come back. I don't have the information exactly how the customers are which kind of fund types they are investing in right now.
Okay. A question on the net interest income. If you could comment if the rate hike, is it fully reflected in the Q1 NII level, or do you expect a further sequential boost to the Q2 NII like we had last year after the rate hike due to how the liquidity portfolio is maturing, et cetera?
I would say that the impact of the rate hike hit us pretty early this quarter, since when it comes to the bond market, they already made that change in the end of Q4. I would say that we don't have anything that is rolling over to the next quarter.
Did you have anything rolling over in Q1, which then wasn't fully reflected in the Q1 results?
I wouldn't say that. I would say that we don't have anything that will come as a consequence afterwards. I think they are fully affected.
Okay. Also a question. Looking at the Q1 results, very high activity and profitability, as I mentioned, ROE of 64%. Probably that's going to decline eventually, could you consider if the activity and profitability stays elevated, could you consider then lowering prices on, for instance, brokerage, to not overshoot your ROE targets? Yeah.
I would say that's probably more related to the profit margin that we have. Of course, the profit margin is extremely high during the quarter. If this was to be a profit margin that would stay on that level going forward, we would absolutely further invest some of our profits in further growth. That means lower prices, more innovation, more investment, whatever that could be. I wouldn't take the Q1 and just prolong it, and this is not the new normal.
No.
It's a good question.
Agreed. Thanks. Finally, a question on the Corporate Finance business. You had strong Corporate Finance fees in Q1, I think, considering the market conditions. Do you think this performance reflects investments you have made into this business over the past year, or is it more a coincidence of lumpy fees booked in this business? If you could also comment on the pipeline for Corporate Finance revenues for the remainder of the year, if that's been impacted now a lot by the COVID-19 situation.
I would say that we had a good Q4, good Q1 when it comes to Corporate Finance. It has absolutely reflection of the team that we have hired that will do this for us. We have developed our offering in Corporate Finance, so I'm very happy with the development up until Q1. Going further this year, looking at the IPO market and all these things, the uncertainty are extremely high. I have no guess what the Corporate Finance market will go for this year. The Corporate Finance people, they meet their clients, or they have Zoom meetings with their clients. We are very active when building the relationships, so we will be in a good position once the IPO market gets back, but I have no idea when that will be.
Of course, the expectations going further for Corporate Finance rest of the year, the uncertainty is extremely high, especially in that type of business.
Okay, just a final question as well, if I may. Other commission expenses you write in the report decreased due to offloading of the administration of the Stabelo mortgages. If you could just explain why this was changed during the year, if there's any change in the way you view the business or cooperate with Stabelo, and also how much this administration cost was that on a quarterly basis, which was handed over to Stabelo?
The reason that we changed it was that we had a administrative complicated relationship with Stabelo that was set up when we started that business. That was more a gross, where we got the commission and we paid some of the costs. Now we have a business model that we changed where we get an income and they take all the costs. That was the reasons why we did that. On the numbers in it, we will not comment on that.
Okay. Thank you very much.
Just as a reminder, if you do have a question, please press zero and then one on your telephone keypad now. Next question is from Jens Hallén from Carnegie. Please go ahead, your line is open.
Thank you. Morning. Just one clarification on the brokerage revenue. I understand your general comment that after such a turbulent time, it will be slow in the future. Are you talking already about Q2, or you also mentioned volatility has been high so far in April so that we could perhaps expect a pretty decent Q2 as well?
No. What I said is that we have a high turnover with software change, and we have volatility in the market. Having those things combined is also, in the market, generally speaking, high activity. That's the only general comment that I made.
Okay, fine. Just a question on the capital, on the leverage side. You talk about things you can do, putting maybe some of the deposits with third-party providers. Do you make a margin, or do you take a fee to do that? Is that income generating?
No. It's just having our insurance company's customers' deposits in an external bank account instead of on Avanza balance sheet. There's no fee connected to that. It's more than the revenues or the returns that we can get on the deposits from the third bank.
Okay, fine. Just one question also on costs. You increased the guidance to, or your expectation to 12%. We didn't see that coming to then in Q1. Expectation for then Q2 to Q4, should we just model an even split of those investments? Will it be a, I don't know, more H2 effect?
It's a lot of hiring people, and it takes time to get them in place and get the cost in place. I would say, since I said more part of it will come in the second half of the year, probably even a little bit end-loaded to the Q4.
Okay. That's perfect. Then just a final comment, or final question, I should say, on this funds commission. Given that you effectively get in revenue per day, is it something that we should think about then when we're looking at Q2? We're starting with a lower volumes that, like we saw after Q4 2018, we actually saw a decrease in nominal terms for the following quarter. Will that be something that should be repeated then for Q2 2020?
I'm not sure I understand your question. Could you take that?
Sure. We saw that it was a strong performance, and you explained why that early January and February were strong months. That's why we had Q on Q increases in funds commission or funds commission. For Q2 this year, we're starting from a considerably lower level, so the amount of revenue should actually reduce in nominal terms unless they will start to invest a lot. The amount of revenue should be down.
Since we are starting at on lower levels, of course it depends on what customers do. We are still pretty early in the Q2. If customers reinvest the investment in funds again, so whether we will actually have a increase or not fund commissions for the quarter, that's of course not something that we could comment on. We are starting from a lower level when it comes to assets under management within the fund part.
Okay. Perfect. Of course, we will have to follow and see what happens. Those were all my questions. Thank you very much.
There are currently no further questions registered, so I'll hand the call back to the speakers. Please go ahead.
Okay. Thank you very much for listening in on the call. I hope you all continue to have a great day. Thank you.
Thank you. Bye.
This concludes the conference call. Thank you all for attending. You may now disconnect your lines.