Hello, welcome to the Avanza interim report for January to June 2018. Today, I'm pleased to present Rikard Josefson and Birgitta Hagenfeldt. For the first part of this call, all participants will be in a listen-only mode, and afterwards there will be a question and answer session. Please begin.
Okay. Good morning, everybody. Thank you for calling in at this conference call about the Q2 results for Avanza. I'm Rikard Josefson speaking, and Birgitta Hagenfeldt will take you through the numbers a little bit later in the presentation. If you go to slide number two, I would summarize the quarter as not satisfactory. We are not happy with the net inflows, and of course, we have been not happy with the brokerage income. I think if you look at the total picture of this, I think with the normal pattern for Avanza, that our old clients do not deposit money and invest in a dull market. You also see positive signs that our new clients are depositing money and starting to invest it. The customer inflow so far for the year has been quite good. We have over 65,000 new clients.
Of course, we know from a seasonal pattern that the clients usually onboard in the beginning and the end of the year. Q1 and Q4 are usually the most satisfying results. We can also see that the savings capital is now over SEK 300 billion for the first time in the history of Avanza, which also, of course, is a good sign. We can also see that several surveys has shown that our customer satisfaction is still where we want it to be at a very high level because, as I always say, our most valuable asset is the satisfied client base. If you go to the next slide, you can see that if you look at the transactions on the Stockholm Stock Exchange, it seems that we are losing market share. In my absolute opinion, we are not losing market share to our competitors.
What has happened on the Stockholm Stock Exchange is that a lot of our investors and institutional trading is now down over the stock exchange if you look at the chart to the right side. We also see from service that we did internally during the second quarter that when customers take out money or advance that we see it is consumption and real estate investments. We are convinced that we are not losing market share or clients to our competitors. Our clients stay with us and are still very satisfied with the offering that we have. If you go to the next page. Of course, the second quarter compared to the first quarter was strong, was the income of SEK 244 million. As I mentioned, we have seen a very non-Avanza-friendly market during the second quarter. Low turnover on the stock exchange.
I think a lot of customers are thinking about where to invest, what to invest. If you read the newspapers, you get one message one day and another message another day. We see good signs of fund inflows, and I think the savings capital when it comes to funds is now almost 30% of the total capital. That's, of course, is in line with our strategy to make more fund business, and also make more reoccurring income. I think that is quarter by quarter, we're showing the effects of that, and of course that's a long-term job that we are doing. We can also see good activity in our corporate finance. We were part of several IPOs and also a bond issue for Soltech which was quite successful.
I think one good news for us is that since we put it on the Bolån Plus together with Stabelo, we are now in the excess of SEK 2 billion, which is in line with our expectations. We have also, in this process, not done a lot of marketing for our mortgage loan. The reason for that is basically because we are very concerned that our customer experience has to be on top of it, and that we ensure that every customer who applies for the Bolån Plus is getting a good journey through that process. Of course, if we get too many customers at the same time, we would risk that. That's why we step by step is, so to speak, stepping up our ambitious when it comes to the mortgage.
The cost development is according to plan, I will come back to the cost issues. I like to stress the fact that if we wanted to, we would absolutely be on the 8%-10% interval for the cost increase during 2018. I will come back to that. The net result of SEK 79 million is, of course, not satisfactory. I think that with that being said, we still have a lot of faith in the future. If you go to the next page, we come back to the cost guidance. We have guided an 8%-10% cost increase. We feel that we would absolutely deliver on that. During the last couple of months, since I'm the new CEO, six months or eight months back, I did a lot of work trying to really get in-depth knowledge on our development processes.
I think that we are spending a lot of time in our development during the first two quarters on regulatory issues when it comes to MiFID, GDPR, and so on. Of course, that takes a lot of capacity from our development teams. I also look forward in the future, I can say time to market is becoming more and more important. Giving all these circumstances, my absolute belief is that we need to recruit 20 new employees, mainly within IT development, to speed up our development and innovation within the company. I think this is a very good decision for Avanza long term. We are in some ways a fintech company. We have very modern technology, but you have to be in the forefront, and we have also done a lot of work, not just regulatory issues, but a lot of work on new products and services.
I think that in the autumn you will see launches of new services and products from Avanza that we have great faith in will be very appreciated by our clients. That's why we raised our cost guidance to close to 11%. Of course, it's very much a matter of how fast we will be able to onboard these 20 new employees, because as you all know, there's a lot of demand for good developers. We are historically, and what we can see on the people applying for jobs in Avanza, we are an attractive employer, and I think we will be able to employ the right talent going forward. As always for us, customer satisfaction is to keep the number one position. We see in the service and the internal service we have done during the second quarter that our customers are very happy with us.
We are a growth company. We want to grow both in number of customers and volumes. As I previously said, we're not happy with the net inflows during the second quarter. I still also think, coming back to the cost issues, that we need to create even more possibilities for strong innovation. As always in Avanza, I think the corporate culture and the employee engagement is key to our success. I think a lot of these pieces are in place for a bright future. Having said that, I will leave it to Birgitta.
Thank you, Rikard. As Rikard mentioned, the operating income has actually decreased, affected by the dull market with lower brokerage income as a consequence. Cost growth is still high but will slow down in the second half of the year. As Rikard said, the guidance for the 2018, it's raised to close to 11% instead of the 8%-10% we had guided from before. Operating profit declined both quarter-on-quarter and year-on-year. Profit was affected by higher costs compared to last year and lower revenues compared to Q1. Consequently, and due to growth in savings capital, revenues per savings capital was down by five basis points quarter-on-quarter and three basis points year-on-year.
Costs per savings capital are about the same level as both quarter-on-quarter and year-on-year, and could go below 20 basis points already in 2019 given continued strong growth in customers and savings capital. Revenues were down 10% quarter-on-quarter, but increased by 4% compared to the same period last year. Looking at the brokerage income was down due to the market environment, both compared to previous quarter and last year. We can see that there are fewer customers actually trading. The number of notes were down significantly, and the turnover was lower. We can also see that a larger share of the trades were made within the Pro and PB customer segments, which have lower brokerage fees. The number of trading days were three fewer than the previous quarter.
Compared to the same quarter last year, the number of commission-generating customers were higher, as was the number of notes. Brokerage income per turnover declined from 10.0 to 9.3 basis points from Q1. We can see that the trading in cryptocurrencies slowed down significantly and now only accounted for 2% of the brokerage in Q2. Today we see no special interest in crypto certificates or cannabis stocks as we've seen before. The fund commissions increased. We have seen good net inflow and growth in capital. Savings capital in funds increased by 20% year-on-year. Fund savings now account for 29% of savings capital and 30% of our revenues. Fund commissions in relation to the fund capital are flat at 35 basis points, both when you compare to Q1 and compared to last year. NII is more or less flat.
Mortgage lending continued to increase, whereas margin lending was affected by the market sentiment and slightly down in the quarter. Deposits increased, putting more pressure on the NII. With three-month STIBOR rates above minus 0.4, we almost have no floors in the bond portfolio. An improvement of the STIBOR rate above this level will fully affect the yield of these bonds. Compared to Q2 last year, the increased cost for resolution fee and deposit guarantee fee also affected negatively. All else equal, and without taking any changes in customer behaviors into account, a one percentage point increase in the interest rates with today's volume would affect full year net interest income by over SEK 250 million. Other income was slightly up if you compare quarter-over-quarter and a little bit more up year-on-year.
Trading in foreign securities was slightly down in the quarter like the overall trading activity. The share of trading in foreign securities was slightly up to a little bit more than 10% of the turnover. Corporate finance revenues were 22% higher compared to Q1, slightly lower than last year. Avanza Markets revenues were down by 11% compared to Q1 due to the lower turnover and less trades, up 4% compared to last year. Costs are according to plan, and the growth is attributable to the capacity expansion that we started in 2017. In the second half of the year, the growth will be lower compared to the first six months. We could meet the guidance, as we said before, of 8%-10% growth.
We have decided to recruit more employees and therefore raise the guidance to close to 11%, in order to speed up the time to market and to increase internal efficiencies further. Costs were merely flat quarter-over-quarter, with increased staff costs and lower other expenses. Compared to last year, costs were increased by 17%, where we see increases in all lines and mainly as a result of expanded development capacity with more personnel, added office space, et cetera. IT costs associated with the regulatory changes of MiFID II and GDPR increased. Recognized credit losses refers to the new models used to calculate expected credit losses according to IFRS 9. The parliament has decided to reduce Sweden's corporate tax rate in two steps from 22% to 20.6% from 2019 to 2021. For the first two years, the tax will be lowered to 21.4% and then to 20.6%.
The Avanza Group's effective tax rate is about 14%. Therefore, only around 75% of the tax cut is expected to have an impact based on current volumes, of course. Moreover, as you probably saw in the report, in an ongoing case the Swedish Tax Agency this week announced a draft decision to charge our insurance company a retroactive tax on intermediate commissions. This is expected to raise the group's tax expenses by an estimated SEK 5 million for 2016 and beyond, divided into SEK 2 million per year for 2016 and 2017 and SEK 1 million for the first half of 2018. This tax is expected to be recognized in the third quarter of 2018. We will though analyze the Tax Agency's decision and then consider a possible appeal. Operating margin has declined to 37% for the quarter due to the increased costs.
Our ambition is still to have an operating margin of around 50%. We had a good capitalization with a total capital ratio of 16.9%, which is well over the capital requirements of 15.7%, which includes all external internal buffers and Pillar 2 requirements. The Stabilitas credit facility we had has been terminated in Q2 and does no longer affect the requirements, which has had a marginal effect on the capital requirement. With that, Rikard, I think we can move over to questions.
Absolutely.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press zero and then 1 on your phone keypad now, and if you wish to retract that question, just press zero and then 2. Our first question is over the line of Irming Pontvik at Nordea. Please go ahead. Your line is open.
Thank you. Good morning. My first question is, now in the start of Q3, do you see any trend shift in activity? Also, do you believe there is anything you can do to increase activity on the brokerage side, apart from long term trying to grow the recurring revenue part of your total income?
I think that the first part of your question is about Q3. We don't comment on that, but I think that we can say that the market has not been in July so far. The second part of your question, I think in some sense, when it comes to brokerage income, the only way for us to actually affect that is more clients. I think we are gaining clients. We are gaining a lot of new clients, and I think the big thing right now is that the existing client is not putting in as much money as they used to do in Avanza for making activity. I think that it's short term quite hard to have improved, so to speak, the activity among the clients.
I think also that the thing that we can see is that a lot of new clients is investing in mutual funds and our pension company is growing. As you can see quarter by quarter, I think the recurring income from mutual fund is extremely important to continue for Avanza.
Okay, thank you. Then on your cost, you mentioned that you had to devote quite a lot of time to regulatory implementation with MiFID II, GDPR, and so on. Do you see any of that falling off, or is the compliance cost quite sticky, and especially with you also growing?
I would say like this, with what we know today when it comes to new regulations, I think the time we are spending on IT development due to regulatory issue will go down. In that sense, we will have more capacity for making new products and services to our clients. That's also the reason we're adding 20 more employees to really make sure that our innovation is going to go much faster in the future. As I also mentioned, I think that we have launches that we will do this autumn that also will create interest and be a big talk of the town for Avanza, which I think will increase our both net inflows and new customers.
Okay, thank you. A final question on the NII sensitivity. Now you say that if rates go up 100 basis points, you would see an NII effect of more than 250 million SEK. Could you perhaps talk a bit more about the kind of actual net effect you expect? Because historically we're seeing quite a lot of offsetting trends when rates go up, which have a negative effect on equity markets and activity and so on.
Well, I would say that everything is dependent on the volumes and the situation that we have today. Of course, we look at the balance sheet as it is today and see that we will not with a 1% raise of the rate, we will not pay any interest rates on the deposits since we have the Savings Account Plus system as well, offering our customers actually interest rate on their savings. When it comes to the asset side of the balance sheet, we see that with the volumes that we have today, we'll get this effect. Of course, if the customers increase their deposits and the lending is going down, that would be another issue, of course.
Okay, thank you very much.
We now go to Peter Kasparek of SEB. Please go ahead. Your line is now open.
Yes. Hi, thank you very much. A few questions. The first one is relating to the IT investments. As you write in the report, Rikard, you're mentioning that there's an increasing pace of acceleration in the market. Just on that, is this driven by customer demand, or are you seeing that competition is actually increasing and that more banks and brokers and so on are investing more and improving their products?
I would answer to that question that it's of course, everybody's investing more. That's one part of the equation. I would say that Avanza, by definition, wants to be leader not a follower. I think it's just to keep up the pace and keep up, in my opinion, the forefront that we have. I think it's more trying to customer demand, create new products and services to our clients.
Should we read it as these investments that you're now making is important for you to keep up the long-term growth opportunities rather than actually accelerate it further? As you also mentioned in the report and now during the conference that the pace of inflows, for instance, has been below your own target.
I think the answer is both. Of course, we think that we need more innovation, more product and services to get more clients and more net inflows. I think they're very tied together. I think you could put it like this, we want to increase the tempo in Avanza.
Just in terms of the tax case that you mentioned, Birgitta, is that something that would increase the tax rate going forward as well for the overall business? Is it annually increased by SEK 2 million if the case is, say, lost?
If they will win the case, that would probably, at the levels that we have today, increase the cost for tax of about SEK 2 million per year.
That would lower somewhat of the positive impact from the lower corporate tax rate in Sweden, I guess.
Yeah.
Just a third question from my side in terms of activity, because you mentioned that Pro and Private Banking customers are a larger share of trading activity in the quarter compared to before. I guess that comparison relates to Q4 and Q1, where crypto trading was quite a lot. If I look a year back and look at the, for instance, average commission rate in Q2 last year, it's pretty similar now versus a year ago. It looks like the underlying mix is, if anything, kind of normalized rather than being very weak on the standard customers. Would you describe it that way as well?
Well, yeah. That might be a correct assumption, yes.
Okay. I think I'll stay there. Thank you very much.
Thank you.
Thank you.
We now go to the line of Mattias Liljedahl at Handelsbanken. Please go ahead. Your line is now open.
Thank you. Good morning. Just to follow up, I think. What can you do? We see the negative trends in terms of commissions per trade for every flow. What can you do to turn this around? Is it new products or is it just. It's positive that you add new clients, but still the revenue trend has been negative. It's a little bit follow up on, I guess Irming's and Peter's question. Is there any concrete you can do to turn this around in the near future, or should we just wait for the market to improve? Thanks.
What we can do in some sense, of course, we're always a reflection of the market. I think that will always be like that. I think, of course. We can create new services, new products. We attract a lot of interest from our clients, and we become more relevant. I think that's what we're going to try to do this autumn. I think the important thing for us to keep our eyes on is, of course, that we still have good net inflows, new customers. I think what we can do a better job is to even get larger share of wallet of the existing clients and the new clients that we have. There are different marketing tools that we try to do this with. I think that's high on the agenda, at least for the management of the company.
Are you thinking then about developing new products in-house, or is it white labeling of, let's say, other banks products? When could we. You say autumn, could we expect this already in Q3, or should we see towards the latter part, maybe Q4 before we can see some new products coming to the market?
I think that we will stay at the during the autumn after summer. I think that we will not be very specific. We never talk about what we're going to launch, how we have developed it, and what it is. I just say that during the autumn, we will have new products and services from Avanza.
Okay, thanks.
Okay, we're now online of Niklas Magnusson at DNB Markets. Please go ahead. Your line is now open.
First a question on the net savings as well. I think you wrote in the report here that it's mainly the existing customers that are a bit more cautious and accounting for the decline in net savings. Could you give any more info on what kind of behavior you're seeing within your existing customer base? Do you see that gross savings are high and that customers are also taking out money, or is there any kind of data you could provide us with? If there are any segments within the customer base you think are more cautious than others, that would be interesting to know. Thanks.
I think that we see the pattern we have seen before. We see that existing clients are depositing less money, making less investments, and I think that more number of customers are depositing money. We have, as I mentioned, analyzed this, and we can see that when they take out money from Avanza, it's absolutely the lion part of that goes to consumption and a lot of clients do real estate investments. Of course, there's other investments that we don't have in our portfolio. Of course, we don't sell real estate. I wouldn't say that it's something that's worrying us. I would say that I think we can do a better job at making sure that the customers use Savings Account Plus and these kind of measurements, but it's a very seasonal pattern.
Okay, thanks. Then on the cost growth as well. You now indicate around 11% cost growth for 2018, and you're going to hire more employees for the second half of 2018. Does this mean that there is a risk also of higher than 8%-10% cost growth in 2019, the way you see it, given the increase in staff towards the second half of this year?
I'm very convinced that we can keep 8%-10% for 2019.
Okay, thanks. Then a final question also on net savings. If we break down the net savings, you provide a table in the report, and it seems like occupational pension net inflows are not growing as much currently as they have been. If you look in last year, for instance, I think the growth in net savings in occupational pension was only 4% year-on-year in Q2 versus Q2 last year. Do you see any trend here or what is the reason for the slowdown in growth in occupational pension? Rikard, I know you've been talking about this as the most interesting growth potential for Avanza in the long term at least. Are you still as hopeful about this, or how should we think about it?
I think that if you look at it all in all, I think the, what you call it, the moving of pension is not at the level we want it to be. I think we have discussed that before, Niklas, is that the administration burden of moving your pension is still there. We see positive signs on that. If you look at number of new premium-based clients, I think we are growing quite nicely, but I think we could accelerate the growth in our pension business absolutely.
Okay. That's all from me. Thank you.
We're now online of Jens Hallén at Carnegie. Please go ahead. Your line is now open.
Thank you very much. Three quick questions from me. First, on brokerage income. There's one thing that you could do, I guess, is to raise prices. Is that on the table at all?
No. Short answer.
Short answer. Okay. In the absence of a new, I guess, Fingerprint or Bitcoin or cannabis shares, it's purely going to be volume driven for the next few quarters.
Absolutely. If you look at the cannabis, the Fingerprints, and the Bitcoins, I think in the market right now, there is no theme like that going on at the moment. My guess is not better than anybody else what the next theme will be and when it will come.
Okay. Fair enough. Let me ask a quick question on cost. Talked about, I guess, 2019 and onwards. We saw last year, of course, you ended up at the upper end of your guidance of 15%-20%. This year it's now coming up to 11%. How confident are you that you're not going to find some new investments for this in the second half that you will sort of exceed the 11% new guidance? Are you fairly confident in that number?
You never know what you will find, I'm extremely confident that we could have ended up 2018 for 8%-10%. I think that's very important to stress, that this is a very active decision to guide the 11%. I'm very confident that the 8%-10% guidance for 2019 will stand. Of course, if we run into something extremely interesting, we will look into it, because I think that a company like Avanza, like we are doing right now, we will not miss on opportunities and growth opportunities that we can see that we can create over time to keep the growth in the company. I would say that I'm very confident that the 8%-10% for 2019 stands, and the 11% is a conscious decision that we have taken.
Okay. A little bit on that. My final question is on the non-brokerage income. Of course, we saw here how volatility can affect the brokerage income line. On the non-brokerage side, you've increased that quite significantly. On the fund commissions and Avanza Markets and FX, et cetera. Do you see any of that picking up in the short term? How should we look at the non-brokerage income line? Is that a slow improvement that you see over the next, I don't know, year or so? Do you see that there's going to be a big bang of new products or transfers into those lines?
I would say we have, I think the last couple of quarters shown that quarter by quarter we're growing our fund commission, our commission income, and more recurring income. I think that it will be quarter by quarter improvements in that. I think the long term, I think we stated that the strategy for us is to make a broader Avanza with more recurring income. I think that we are executing on that and we are proving that. I think that step by step that will continue that improvement, and that's totally in line with our strategy.
Okay. That makes sense. Actually, just a final one, if I may. Did you see any revenues from Stabelo at all in the second quarter that affected Avanza or any of the lines?
Absolutely. We have revenues from Stabelo. It is within the other income line. We have decided not to publish the numbers until the volume in Stabelo mortgage is much larger than today.
Okay, fair enough. Thank you very much.
Okay. We are now back to the line of Peter Kessiakoff of SEB. Please go ahead. Your line is open again.
Yes, I just wanted to do a follow-up question on one question that was asked earlier relating to existing clients depositing less onto your platform. Correct me if I am wrong here, but if we look on an average basis the last, say, two years, has not that been the trend that we have seen now for roughly two years, that existing customers have deposited less and new customers have deposited as much as before? Would you agree?
No. Well, in some sense, we see a strong difference between a dull market and an up market where it's more 50%-60% divided between existing and new customers when the market is up or it's more interesting, I would say, or not that dull as it has been the last month. A small change, I would say, of course, to more new customers. That is, of course, the reason why we have been attracting a lot of new customers the last three years relatively to our total customer base.
Okay. Thank you. That's all from me.
Okay. At this stage, there are no further questions in the queue. Simone, I'll please pass it back to you for any closing comments. Actually, I do apologize. A further question has come through, and that's through to the line of Bart Gielen, Degroof Petercam. Please go ahead, Bart. Your line is now open.
Yes, hi. My question is, can you, on the cost increase, give a split on what of this cost increase is attributed to, let's say, the more recurrent income part of your business, so into the pension platform and into the, let's say, fund management platform compared to the trading platform?
The cost, no, we don't give that kind of guidance. The cost increase that we will have during the rest of the year is totally 20 new employees, mainly within IT. Our teams work on a lot of different issues, and we never disclose what we are cooking, so to speak.
Is the most of the emphasis put on, let's say, further developing the recurrent part, investing on pension platform, on the fund platform? Is it really adding products on the trading platform? Without giving maybe numbers, but what is the focus?
The only thing I can answer is that as we said before, our focus is creating more recurring income
Yeah. Maybe to put it differently as well, you're of course active in a very cyclical business at the end of the day. Markets are now at rather high levels. We can maybe expect one day as well that there will be a correction in the market, that trading income will come off quite a lot. You have been increasing costs the last couple of years quite dramatically. What is the capacity you have, if it's really necessary, and the willingness to do so, at least as well, to cut costs, let's say, instead of increasing costs every year, 8%-10%, last year, 15%-20%?
I would say that I think one of the strong thing about Avanza is that even if the markets are good or the markets are bad, we always invest in keeping in the forefront of customer experience. We do not believe that starting cost-cutting just because it's a dull quarter or a dull year would be in the long-term interest of Avanza's owner or Avanza's clients. For the next couple of years, we keep investing, we keep growing, and we will do that always because we are a growth company, we are a very scalable company, and we have more potential in that scalability. I think it would be very unwise to start lowering costs and jeopardizing the future.
Okay. Thank you.
Once again, as there are no further questions in the queue, may I please pass it back to you for any closing comments?
We try again then. Thank you very much for listening in, and have a very nice Thursday. Thank you.
Thank you.
This now concludes our call. Thank you all very much for attending. You may now disconnect your lines.