Presentation of the Q2 report. My name is Henrik Källén, acting CEO of Avanza. I will start with a business update of the second quarter. After this, our CFO, Birgitta Hagenfeldt, will take you through the financials. During the presentation, you can post questions through the system to be answered after presentation. The presentation will take approximately 20 minutes, and we will open up for questions afterwards. The operating profit at SEK 111 million was 3% lower than in Q1 and 8% lower than in Q2 last year. The stock market continued down during second quarter, but was a bit less volatile except for the second half of June that was affected by concerns about Brexit. We saw a record turnover the days after the Brexit referendum, and our customers were net buyers of the deep downturn in the market.
Despite this, trading activity in Q2 were lower than in Q1 and affected brokerage income negatively. Also, the negative repo rate put pressure on revenues. Compared to last year, the lowered repo rate affected revenues even more, and the trend towards funds with lower fees was vital. The overall activity on the Stockholm Stock Exchange and First North was up 15% year on year. However, trading activity accounted as number of trades among Avanza's customers rose by 46%, while at the same time the average transaction size has fallen. Consequently, income per the commission note has gone down by 22% to SEK 42 since last year. As a result of this, and despite the higher activity, brokerage income was only slightly higher year on year. We also saw an increased activity in corporate transactions, and Avanza did its largest rights issue ever when Paradox Interactive was listed.
Revenues from corporate finance was higher than last year's record quarter. Avanza Markets, which was launched a year ago, continues to contribute to higher other income. Costs were up 7% year on year, mainly due to increased personnel costs. Compared to last quarter, costs were only slightly up by 1%. Cost savings capital ratio continued to decrease and is down by 7% to 23 basis points from last year. It is well on track to reach our long-term target below 20 bps and tremendously important for our ability to maintain price leadership and a high profitability in any market condition. We saw a good uptick in customer inflow last year, especially in May and June, resulting in 23,100 new customers in the quarter. That is 13% up from last year and we have already exceeded our customer target with regards to inflow for this year.
Customer inflow is what drives growth in savings capital and also net inflow was high in the second quarter at SEK 9 billion. Total savings capital at the end of the period amounted to SEK 199 billion. We were first in launching free stock trading on the Stockholm Stock Exchange, an offer for customers with a savings capital below SEK 50,000, and that was very well received from our customers. In our effort to keep making our customers offering better, easier, and less expensive, we also have improved our mobile apps in the quarter including a number of general improvements as well as a new feature allowing customers to make deposits in real time from other banks to their Avanza accounts.
We strengthened our mortgage offering by lowering the rate to 0.79% and launched a new improved stock list, making it much easier to select stocks to match each one's desired investment strategy. Altogether, our customer focus and focus on user experience resulted in a couple of awards in the quarter, which we of course are very proud of. Avanza was awarded best customer service in the financial industry by ServiceScore for the second consecutive year. The growth in Avanza Pension is strong. Over 1,500 companies have chosen Avanza Pension as their occupational pension provider during 2016, and one of them this quarter was Tobii, the Swedish listed company with 260 employees. Our pension company was also awarded during the quarter and renamed Life Insurance Company of the Year 2015 and Marketing Achievement of the Year for the launch of Avanza Akademin, an online educational center.
As already mentioned, both customer inflow and inflow of savings capital was strong in the quarter. Net inflow was up 116% year-on-year, and we had the second-best inflow ever for a separate quarter, even excluding the inflow from Remium at SEK 2.2 billion. Last quarter, we saw lower risk appetite among our savers due to the uncertain market. It was especially obvious among our existing customers, and the inflow from them went down. This is a trend that we've seen before in turbulent periods. In second quarter, sentiment recovered somewhat even though it was anxious due to the Brexit referendum. We saw inflow from our existing customers improve from 34% to 41% of the total net inflow. Customer growth was 13% higher than second quarter last year, and we continue to attract a large number of younger people.
The most common age is 29, while the median age is 40. As we see savings capital growth substantially with age from around SEK 50,000 to SEK 400,000 within these age brackets. We see great potential in our customer base, and it is important to further improve user experience and digital decision support on our website and in our mobile devices as the customer base broadens. The number of commission notes were slightly down by 1% from last year's quarter's record and up 38% from last year. Avanza market share in terms of number of transactions on the Stockholm Stock Exchange and First North during the second quarter was 13%, up from 11.3% in the first quarter and up from 10.3% in the second quarter last year. This is a result of strong customer growth and several key product launches.
The market share in terms of turnover were flat from last quarter and up by 25% from second quarter last year. I would also like to comment on the development of Avanza Markets, not included in these statistics. Avanza Markets are traded on both NGM and OMX and accounted for 58% of the turnover on the total ETP market during the half-year period. In total, Avanza market share on the ETP market was 71% in terms of turnover. Something that I'm particularly pleased with is that we managed to decrease the cost savings capital ratio further during the second quarter. When we develop new products, they should not only be better and simpler than others, but also less expensive. That's what our business model is built on and what's going to make customers having more left in their own pockets with us than with any other bank.
That's our way to build customer growth and sustainability in our business. With the growing demands from customers, competitiveness will be a matter of cost position and user experience. In the long run, a highly competitive cost savings capital ratio is tremendously important for our ability to maintain price leadership while maintaining high profitability in any market condition. We strive to a cost position where it is hard for others to follow. The operating margin in second quarter was 49%, which is a decrease with 4% from last year. This graph proves the importance with satisfied customers. Long term, client growth numbers are the single most important driver of net inflow and growth in savings capital, and thus the most important long-term driver of revenues. As you can see from this graph, revenues have flattened out a bit since the Riksbanken started to lower the repo rate in 2012.
The upcoming regulatory changes with MiFID II and other regulations will make it increasingly more expensive for retail banks to offer financial advisory services the coming years. Consequently, we believe a growing part of the retail market will be forced into digital services for the savings and investments. This is a great opportunity for us to capture growth over the coming years, as Avanza is the leading online savings and investment platform in Sweden. To maintain strong growth and to attract broader customer groups with younger savers as well as those who need more support, we will continue to improve our digital support tools and mobile user experience. Higher price sensitivity for financial services among the retail segment and in order to strengthen our competitiveness further, our focus on cost effectiveness, scalability, and internal efficiencies will continue with a cost to savings capital ratio target below 20 basis points long term.
Thank you. Now our CFO, Birgitta Hagenfeldt will take you through the financials.
Thank you, Henrik. First, some financial highlights. Operating income decreased by 1% compared to the same quarter last year. Decreases in net interest income and some commissions was offset by increased other income. Compared to the first quarter 2016, revenues were also down by 1%. Operating profits decreased by 8% year on year to SEK 111 million, the result of higher operating expenses that were up 7% year on year, mainly due to increased staff costs. Costs per savings capital ratio decreased to 23 basis points, which strengthens our competitiveness even more. Although altogether, this gives us an earnings per share of SEK 3.18 for the second quarter, a decrease of 11% year on year. A larger number of customers traded in Q2, but decreases in the overall trading activity resulted in lower brokerage income quarter on quarter, which is the dark green line.
The brokerage fee per commission note decreased since the trades are smaller and more customers consequently trade in the lower brokerage fee classes. Compared to Q2 2015, we saw an increase of 2% on brokerage income due to higher trading activity. The repo rate cut in February, coupled with the lower mortgage loan rates, kept pressure on net interest income, the light blue line, in combination with deposits increasing more than lending. Net interest income was down 25% year on year, where the repo rate, but on an average, was 25 basis points lower during Q2 2016 compared to the same period last year. During the quarter, we also lowered the mortgage loan interest rate by 20 basis points to 0.79%. Our customers' savings in mutual funds has decreased since year-end by 1% to 24% of total savings capital.
The trend towards funds with lower fees and the customers taking less risk in the uncertain markets resulted in 13% lower fund commissions year on year, which is the light green line. Other income, the dark blue line, increased year on year by 27%, mainly due to higher market shares in the ETP market, but also higher activity in corporate finance. The launch of Avanza Markets in Q2 2015 has been successful. Avanza Markets offers commission-free trading in ETPs, and Avanza Markets' part of other income in Q2 amounted to just over 29%. Trading income decreased due to lower trading in foreign securities, mainly FX accounts. Corporate transactions picked up, and we had made our largest IPO ever as advisors to Paradox Interactive. This proves Avanza as a good alternative also in large transactions.
We also took part in a number of ownership diversifications where companies seek our unique customer base to broaden their own base. Compared to the first quarter, other income increased by 52%, mainly due to corporate finance that was up 18% and amounted to 31% out of total other income. Total operating expenses increased by 7% year on year to SEK 113 million. That was about the same level quarter on quarter. Personnel costs, the dark green line, increased by 7% year on year to SEK 74 million. This increase is, as mentioned earlier, mainly due to the expansion in our IT development department, compliance, and legal. The latter is an effect of the heavy burden of new regulations coming up and that will take place in January 2018. Marketing expenses, light green line, increased year on year, but this is more a question of timing.
Our cost guidance for 2016 remains with an increase of 8%-10% compared to 2015, which means that costs will increase more in the second half of the year than in the first six months. The operating profit in the second quarter decreased by 8% year on year to SEK 111 million compared to the first quarter decrease of 3% due to lower revenues and higher costs. The operating margin was 49%, which is lower than the average level last year of 54%, as a result of the market environment, further investment in growth, and a broader customer base with younger customers. The income to savings capital ratio in Q2 was 46 basis points, a decrease of 8 basis points compared to the corresponding period 2015. The expenses to savings capital ratio decreased by 2 basis points year on year to 23 basis points compared to 25 at year-end and 24 in Q1.
This means we are well on track to reach below the 20 basis point mark as a long-term target. Profit after tax decreased year-on-year by 9% to SEK 94 million. Lending is still on low levels in spite of increased stock market activity. Margin lending is primarily a product for our more active customers, and they tend to seek leverage in other ways or do not seek leverage at all under these market conditions. Total lending is down 1% during the quarter and somewhat up since year-end and amounting to SEK 6.6 billion. Margin lending is down 5% during the quarter to SEK 3.6 billion and is now amounting to 1.8% of total savings capital. Mortgage loan is up 6% and now amounts to SEK 3 billion. During the quarter, we extended the lending ceiling with SEK 0.5 billion to SEK 4 billion to meet our customers' demand.
Deposits, including external accounts, has increased by 7% in Q2 to SEK 34.9 billion and has since year increased by 15%. Deposits amounted to 17.5% of the total savings capital by the end of June. As a result, our covered bonds portfolio increased by 6% to SEK 13.8 billion during the quarter and by 14% since year-end. The total capital ratio in the consolidated situation was 17.2% compared to the requirement, including buffers of 12%. In June, the countercyclical buffer rose from 1% to 1.5%. The liquidity ratio was 4.18 at the end of the period and compared to the requirements of 0.7. This strong capital situation entitle us to keep on growing. We have a dividend policy that at least 70% of the net profit shall be paid out as dividends to the shareholders.
In April, a dividend of SEK 10.50 per share were paid out. With that, I think we should open up for questions, or if it's anything you want to add, Henrik?
No.
No? We move over to questions.
Thank you very much. Ladies and gentlemen, if you have a question, please press 01 on your telephone keypad and you will enter a queue. We have our first question from the line of Peter Wallin of Handelsbanken. Please go ahead. Your line is open. Peter Wallin of Handelsbanken, you may go ahead and ask your question.
Sorry about that. I forgot to unmute there. Good morning. I just would like to ask a question about the very strong trading activity seen post-Brexit and then second half of June. Is it reasonable to assume that will continue also, to say for longer in June and July?
You mean in July? Usually in July, the first summer month, and usually the trading activity goes down. As you know, we have the report season coming up now, we have seen pretty good activity in the beginning of July and probably going to see some good activity during the report period also. Generally, the activity goes down from July and also in August.
Okay. Thank you. I don't know, maybe a bit more of a philosophical question considering, I would assume that the very strong effects we can see now from your very market leadership in terms of pricing, do you have any ideas at all of how to maybe try to get clients up to slightly more expensive pricing schemes or try to mitigate the very strong drop in commission per average trade?
No, actually. Our strategy is to always offer the best product, the best offering, and to the best price to our clients. That's why our most important goal is the cost per savings capital ratio. We are striving to be the most effective company in the market having the lowest cost structure. The answer is no.
Okay, thank you. A question on the other income and your very strong performance in the ETP market. I don't know if I misheard you, but if I just read the report, I think you say that you had the 60% of the turnover in Q2, and that was 72 in Q1. Is that correct? If that's the case, why is the market share turnover even though very high, but still dropping so relatively fast quarter-over-quarter?
The market share for Avanza in the ETP market, the first half year was 71%.
Okay.
What was that?
The 60%, that was for Avanza Market.
Yeah. Avanza Market had the 60% market share in the second quarter. In the half year, it was 58%.
Okay. It was very stable quarter-over-quarter, essentially.
Yes.
Okay. Just a final question on NII. Just looking into the figures, the interest income is dropping quarter-over-quarter is very reasonable. Also that your interest expenses are increasing quarter-over-quarter. What's driving that?
Well, that's mainly driven by our customers having more deposits, which means that we have more liquidity in deposits and in overnight.
The larger deposit volumes.
Yeah.
Okay, great. Thank you very much.
Thank you.
Thank you. Our next question comes from the line of Peter Kessiakoff of Carnegie. Please go ahead. Your line is now open.
Thank you very much. A couple of questions from my side. I'll start off on the cost side, and I know, Birgitta, that you reiterated your cost guidance there for the full year. Just if you can comment a bit in terms of cost flexibility, given that you're seeing bigger income pressures that perhaps most of us had anticipated. You're saying costs to increase by 8%-10% for the full year. It's increased 6% during the first half. If we continue to see these income pressures, would you perhaps be willing to reduce that cost guidance a bit, or how should we look in terms of cost into 2017, assuming this continues?
Of course, we have our eyes on both the costs and the revenues at all time. As you know, we are here for the long term, so we're not investing for the next quarter or next year. What we will do is look into the opportunities that we see for the moment, and if we believe that this is a good time to actually invest in growth, even if revenues for one quarter or a few quarters is up or down we will have our eyes on the horizon and look further forth instead. Just because the revenues have been a little bit weaker than consensus doesn't mean that we are going to change our cost targets. If we will change our targets for the coming years, we will inform you. Now we have no such decisions that we could inform about.
Okay. Great opportunities ahead, I guess.
Yes.
In terms of the staff cost, just to understand that part a bit, I think it increased to roughly 7% year-on-year while employees are growing around 3%. I know that you're adding a lot of staff within compliance, but also IT, and I know that we can read in terms of, well, to some extent that you have a shortage of competent IT staff in Sweden and difficulties with housing in Stockholm and so on. Are you seeing a big or a fairly high staff cost inflation being driven by IT staff? How is your ability to attract relevant staff?
I do not see any inflation in salaries. Some IT personnel has a higher salary than the average employee, That could be a reason when we are adding very skilled persons within our IT development department. What we have seen when it comes to attracting new employees is for a year or a year and a half ago it was really tough. We had been working a lot on the market in order to get Avanza on the map for skilled persons. I think our IT development partners worked very well in order to do that and manage that. Today we have a lot easier to actually find the right persons to employees in that department.
Even if it's a tough market and we have a lot of competitors wanting to have the same skills that we want, we believe we have good opportunities to offer them a interesting place to work.
Okay. Just two more questions. You're saying that you are attracting more young people than before. Was it the average new person was or new customer is below 30 and has significantly less savings on day one compared to your existing customers? If you look the last year and a half, you've seen income pressures on the brokerage side coming from people trading in smaller ticket sizes. Would you say that the trend of attracting more young people will continue driving this trend? Without you actually changing any commission rates, you will most likely see lower commission per notes going forward on the back of the trend of more young people.
We think it's probably yes on that question. We attract more younger people now, and of course they don't have that lot of money that our average client has in our client base. As I said in the presentation the savings capital growing by age. We've seen that, and that's a very interesting potential in Avanza. The size and the commission note is going down, but also we see that it's more clients than before who is doing trades on the exchanges. It's up 37% in last year, and I think it was up 9% since first quarter. Yes, it's younger people and it's a smaller fee per commission note, but it's more customers who's trading.
Just one last question. I guess this one goes to Birgitta, but just in terms of RIA, which increased to 12% quarter-on-quarter, and I guess partly related to the increased deposit base from customers, how should we view that one going forward?
That's correct. It's mainly due to the deposits, and we're trying to it's hard when you have those large inflows that we actually had this last quarter to invest in bonds in the same pace as the net inflows. We are trying to invest in secured bonds, and we will continue to do that, taking down the RIA and to have a better level of bonds compared to overnight deposits.
Just assuming that deposits don't increase from customers in Q3, for instance, should we expect RIA to be down quarter-on-quarter?
Yeah, I would say so.
Okay. Thank you very much.
Thank you.
Thank you. Our next question comes from the line of Nicolas MacBeath of DNB. Please go ahead. Your line is now open.
Hi, Henrik Källén and Birgitta Hagenfeldt. A few questions from me. Starting with the price pressure we see in the brokerage commission. It seems like it accelerated over the past two quarters, I appreciate it's partly driven by the impact from younger customers coming in. This seems like something that's been going on for maybe the past year or so and these trends that you mentioned with movement from lower ticket sizes and lower pricing plans, that should be more of a general trend for a longer time period, I think, than just over the past two quarters. Are there any other explanations behind this rather dramatic drop we see in, for instance, average brokerage income per commission note rather than those that you mentioned? Thanks.
No, I don't. No. I don't see any other things that affect them, no.
Okay. It's uplifting your performance on the commission income in the quarter. I understand it's partly driven by the IPO of Paradox. Do you have any other such IPOs in the pipeline where Avanza is targeting to be a global coordinator, or should we consider this as more of a one-off? What's your view here?
The listing of Paradox was a success for us and for the client and also for the company that we're very happy for. Of course having been doing this kind of IPO, it signals out to the market that we can help others with the same kind of introduction. If you're going to have something more in the future, yes, I hope so. We have had some discussions, but more than that I can't say.
Okay. You continue to be very focused on reducing the costs relative savings capital targeting below 20 basis points to remain ahead of the competition you mentioned. Could you elaborate a bit on what's your view on the competition and what kind of peer group are you benchmarking against, and what is your assessment of where your competition is on that metric?
Well, what we are aiming for is the customers that doesn't know the market as well as the customers that we have today, and that are not as certain about what decision to make when they are trying to invest. We are trying to and we will continue to offer more decision support products and the digital support to make it easier to make your decision in order to reach out to customers that need more help and need more information. We will not go for the customers that do it for me, but we will try to reach out more to customers, help me do it. I have a lot of money. I want to invest it. I don't really know how to discuss when I should choose or pick an investment.
These are the customers that we reach out to, and we will, of course, also continue to improve our offerings to our existing clients and existing customers in order to make sure that they will stick on with us.
Okay. The final question a little more detailed one. You had SEK 2.3 million in the quarter in net results of financial transactions, which is higher than what we're used to on that income line. What is the reason for that in the quarter?
Excuse me, I didn't hear you. SEK 2.3 in?
In net results of financial transactions in the quarter that you booked. Yeah. That line is usually zero or maybe SEK 1 million per quarter, it was a bit higher than that this quarter.
Yeah.
Is there anything particular going on there?
No, there's nothing particular going on. It's just a one-off, we are not starting to trade. We do not have own trading. That's an effect of our back office services to our customers. Sometimes when we aim to help our customers we tend to, or we stick with some stocks or some funds deposits, and that gives us a revenue. That's not an ongoing business or trading or anything like that.
Okay. That's all my questions. Thank you.
Thank you.
Okay. Thank you.
Thank you. Our next question comes from the line of Mikaela Åkerlund of SEB. Please go ahead. Your line is open.
Thank you, and thank you for the presentation. I want to come back to the brokerage fee line. We've been discussing lower brokerage fee per transaction. Perhaps if you could give us some color on what share is due to price pressure and the new price plans and what share is just the size of the tickets.
I think it's two things. The one thing is that the growth in customer base is mainly coming from younger people now. They don't have, as we said before, that lot of savings. That means that the ticket size is going down. Also we see that these clients are moving to another Commission class that we have that they have lower commission on. They do more trades also. It's younger people and they have less savings, and they do less size on their trades.
Okay, thank you. We should expect that this is a new normal ahead or will you see that is there any correlation with the risk appetite in the market as well? Could we see this picking up and to what degree if market sentiment returns?
It's hard to say if it's a new trend or so. We haven't seen that long period. What we know is that when we get in younger customers they tend to stick that out and they start to invest more money, put in more money, save capital to us. They find other products in our boutique and put them in there where we can get some revenues. It's too early to say if it's some new trends.
Okay, thank you very much.
Thank you.
Thank you. Our next question comes from the line of Maria Rasmussen of Nordea. Please go ahead. Your line is now open.
Hi, thank you. I have a question regarding the corporate transactions and the Paradox IPO. Is that a business you actively try to grow within and recruiting people within?
We are not recruiting right now. We have a really good team in the corporate actions department, and we are continuing to work our way into this market, and we had a lot of good connections out there. It's a good potential also in that part of Avanza.
Okay, thank you. Regarding the mortgages, what is your growth target in that business?
Well, we really don't have a growth target, actually. What we do is we try to not grow it faster than our capital base entitle us to have.
Okay. Yeah, that was all. Thank you so much.
Thank you.
Thank you.
Thank you. Ladies and gentlemen, may I remind you that if you wish to ask a question, please press 01 on your telephone keypads. There are no further questions at this time. Please go ahead, speakers.
Okay, thank you very much. I hope you get the information for this report and looking forward to talk to you later. Thank you very much.