Good morning, everyone, and welcome to the Q3 results call for Morrow Bank. My name is Øyvind Oanes. I'm the CEO of the bank, and as always, I have with me Eirik Holtedahl, the bank's CFO. We will, as usual, go through a short presentation on the results, and then open up for questions at the end. But if you have a question in the meantime, you can also send us your question on ir@morrowbank.com, and we will read out that question when we get to the Q&A session. Turning now to page two of the presentation, we wanted to start with a short overview of the bank. Obviously, a recap for some of you. Morrow Bank is a fully centralized and well-diversified consumer finance company with a well-balanced portfolio across the three countries of operation.
In the meantime, Finland has grown to become our largest market, with more than 40% of the loan book. This is a result of our focus on allocating capital to what is also the most profitable market in the region at the moment. Now, looking at the main KPIs, the bank has delivered a very strong performance year-on-year. We're looking at a loan balance growth of 35, 34%, income growth of 40%, while cost has been reduced by 19% year-on-year. This is resulting in actually in a doubling of the bottom line result, looking at the result versus Q3 last year. Now, zooming in on Q3 on page three, we continue to deliver a solid overall performance with strong cost and credit risk control.
The balance growth in local currencies came in at 5%, in line with previous quarter and with our expectations. Despite continued increase of interest expense, we were able to maintain a stable margin of around 9%, driven by successful repricing of the loan book. We maintain our focus on cost and efficiency and managed to drive the cost base further down, delivering a strong cost income ratio of 29% in the quarter. Loan loss ratio came in at 5% for the quarter. This is slightly up from Q2, driven mainly by loan loss provisions for the current macroeconomic picture. In sum, we delivered a solid and relatively stable bottom line of NOK 36 million. Again, in line with expectations and our previous guiding.
On the next page, page four, you will see that we have delivered on all the key initiatives that we laid out as part of our strategic turnaround plan at the beginning of last year. This includes product optimization, with focus on simplifying the product suite, improving throughput, and driving balance growth. Through better analytics capabilities, we have also been able to better segment and target customers and protecting margin as a result of this. Taking a structural approach to cost reductions has enabled us to drive our cost base down by more than 20% in the period, while improving significantly our operational efficiency. We are now well advanced on our IT transformation that will significantly increase the scalability of the platform in the mid-term.
A gain, having implemented all these strategic initiatives of the turnaround plan, is ultimately enabling us to continue to deliver solid results over the past few quarters and also going forward. Now, before handing it over to Eirik to review the financials for the quarter in more detail, let me say a couple of words about the market on which we operate. Firstly, we remain positive on the Nordic market overall and believe it will continue to be an attractive space for consumer finance. Secondly, looking at the macroeconomic picture and the key indicators for our type of business, we see that the outlook is improving in the medium term. In addition to expected growth and demand, we see that unemployment levels remain stable, on stable levels, and inflation will come down. This is also indicating that interest rates should be peaking.
All positive drivers for our type of bank. Now over to Eirik.
Thank you, Øyvind. I will now go a little bit more deeper into the performance, the financial performance, of our bank. T o start with the loan balance, you can see that in this quarter, we had a steady growth. The nominal increase was 2%, but the underlying growth was actually 5% when you measure it in local currencies, and you exclude the effect of NPL sales. For Finland, we had a strong development. This is our best market, with the best yields, and also where the returns are the best, as the capital requirements for Finnish loans are actually lower. Norway was steady. It was a slight decrease, but we focus on maintaining margins. Whereas Sweden, we had a slight positive development, and also we aim there at retaining margins.
Credit cards is actually doing quite well, almost 6% increase in the quarter, and this is also a product which, in the past, has shown to give the highest returns. Now, for the point-of-sale finance, as you know, we ended the contract with Komplett in April this year and stopped sales at that point, and since then, the portfolio has been in a rundown scenario, and this is also affect for this quarter when we lowered the loan balance by 22%. Jumping on to the margins, as and it's no news that the overall market rates are increasing, and this is impacting all of our products. To start with the deposits, you can see that the average deposit rate has increased upwards a bit during the quarter.
We have to follow on this because we both want to retain our existing clients, as well as attract new clients in order to get liquidity for both new loans and maintaining liquidity cushions. That being said, although we have to pay more for deposit accounts, we're also happy to see that we can actually push this increase over on our loan products a nd we've also had an increase in the month for both overall increase in the rates for this quarter. And by these measures, we're also maintaining our margins. There is some time lag, as always, when repricing the loan book due to notification requirements in Finland and Norway.
In the future, we do expect that the rates will, at least in for the Q1, keep this quarter, Q4, keep pushing upwards. But eventually, in the longer term, we see that there could be a possibility of widening the margins when when the overall rates are then again going down. Looking at the total income picture, we can see one of stability. The increase in interest income was NOK 15 million, which was just slightly outweighed by the interest expense of NOK 16.5 million. This effect was, however, neutralized by that we have had a little bit increase in the gain on financial instruments. Hence, these two components meant that had a zero-sum effect. F urthermore, if you look i n Q2, we had a one-off income of NOK 5 million kroner.
If you adjust for that one-off, you can see that the total income in Q2 and Q3 were more or less identical a nd if you look a bit further forward in Q4, we do expect that we will roughly be keeping at the same levels, perhaps slightly increased a bit. On the cost side, we've had quite a bit of development, and as Øyvind also talked about earlier, this is where we've seen the strongest direct effect of our turnaround efforts that we've had in the last year and a half. Our loan loss ratio is now down below 30%, which is quite competitive a nd in the Q3, as you can see, it landed at 29%. Our nominal cost went down from NOK 83 million to NOK 77 million.
Again, this is the result of our initiatives to improve cost efficiency, and our cost base has actually, since Q1 2022, despite a 50% increase in our loan balance, we have, in nominal terms, reduced our cost base by more than 20%. Looking a bit forward, we do expect to see some improvements. We foresee that we will maintain a ratio below 30%, and over time, the cost of IT ownership will decrease, and we will continuously focus on optimization and further implementing further efficiencies. Now, on the loan loss side, we see a picture of a slight increase. We went up by 20 basis points from 4.8% to 5% in this quarter.
This increase is actually driven by higher provision levels, resulting from the growth in the last eight, 12-18 months, but also model-based developments, which says that we need to make our provisions a little bit higher. It's important to note that these are just provisions. They're not actual incurred losses yet. They're just an indication of what may come a nd as a consequence, we also would like to mention that we have indeed tightened our credit policies in the quarter. We're now more restrictive as to which clients we let in, and in parallel, we're working on strengthening our collection processes in order to improve the performance of loans once they have become delinquent a nd as always, we keep a tight eye on monitoring the development of credit risk and adjust the models accordingly.
From that perspective, if we do look forward in the medium term, we will see that our loan loss ratios eventually will go down to 4.5, around 4.5% over time. However, we will remain in the 5% range for the near term. Now, adding up these effects of total income, loan, cost efficiency, as well as, loan loss, we see that the quarter ended at NOK 36 million. Now, if you take into account that there was a NOK 5 million one-off in Q2 , this implies that actually Q3 and Q1, and Q3 and Q2 were at a very close level. The performance in Q3 derives from, as we said here, a stable total income, for the cost of improvements, which have also been offset by somewhat higher losses and provisions.
The Return on Equity was 6% in the quarter, but that is also caused by a quite high capital base, which I will come to in the next slide. But looking forward into the next quarter, we expect that we will have a stable level, where we should be in the same range as we have been in this quarter and as well as the last quarters. Now, finally, a look at our solidity position. As you can see here, the capital ratios have been very stable from one quarter to the next. In Q2, we had a quite large or in the H1 of 2023, we undertook 2 capital increases as well as issued under a hybrid loan.
During Q3, we have been able to maintain our capital ratios as the profit generation has been in line with the loan balance growth. We expect, and therefore we have a solid position. We are actually probably among the best capitalized Nordic consumer finance, finance banks, and this gives us both the headroom to support growth and deliver on our business plan in the near to medium term. For that purpose, we don't see a need to undertake capital increases in the near future. With that, I'll leave the word to Øyvind.
Thank you, Eirik. Now, before summarizing the key messages from today's call, we wanted to quickly show you how we now stack up against our peers in the region on a few important KPIs. This is based on Q2 numbers. As you can clearly see from this slide, all the hard work that we have put in over the past couple of years has enabled us now to be very competitively placed on both growth, where we actually have been the fastest growing niche bank in the region over the last year. We, as we talked about on the call already, maintain and are able to protect strong margins. Actually, the second best of all the peers across the region.
We're continuously moving up the ladder on being one of the more efficient banks in the region. Now, with a cost/income ratio here in Q2 of 30.8, had we put in the last numbers, you know, you would have seen the 20 numbers. We reported 29% for Q3 s o all in all, we're pretty proud of the work that we have done on the turnaround. This has given solid results as we've seen through the presentation, but also stacks us extremely well when we then compare to our peers across the region. Now, the last page we have today, a summary page of what we talked about throughout this call this morning.
Again, let me just summarize. Q3 was another quarter with a solid overall performance, underpinned by an underlying growth of 5%, stable margins, continued cost optimization, and credit risk control. Based on the results of the strategic turnaround, we believe that the bank is well-positioned to deliver improved returns in the midterm, and therefore, maintain our medium-term targets as laid out on this page. That's all we had in terms of presentation. Thank you for listening. We will now open up for questions. Some of you might have submitted some questions already by email. Henning, as usual, is the orchestrator here of questions, and can read out the questions.
But if you also want to raise a question on the line, you just raise your hand, and we will open up your line so that you can ask your question.
Yes there's a question from Christian Holmes, you can now open your microphone and ask your question. Daniel?
Hello, Daniel Rörvik, SpareBank 1 Gruppen. I have a question regarding your funding. What are the geographical split in deposits? How much is in Germany, and yeah, what is the typical interest rate there?
We are funding.
Thank you for your question. We are funding ourselves in the currencies in which we make our loans. We try to, over time, to match the overall levels in each currency. But that may, from time to time, vary a bit, meaning that one market may be more funded in one market than in the other. For the time being, we're slightly more funded in the Euros for in Germany, which we use to lend out in Finland. The current rate there is around 3.2% for the time being.
Thank you.
There is a question in the chat. How do you think the implementation of the debt register in Finland will affect your business?
Thank you for the question. Let me try and answer that. I mean, we were obviously aware of the debt register coming in next spring, and working hard on being compliant with that, obviously. We continue to think that Finland is a large and growing market, obviously, with more data being both reported and being able or available to us. We do think we can be even more targeted in terms of our credit underwriting and pricing to customers once more data is available s o we do actually welcome the new registry, and believe that that will actually just give a lift to our industry in Finland.
There's also a question from Ulf Husa: How do you see growth going forward?
Thank you. That is a fairly general question, but let me try maybe and answer that. As you can see on the slide here, we have a, we've communicated a sort of stable growth in the 10% a year space. We had, you know, 5% underlying growth in the Q3, as reported. We continued to control growth. You know, if we look back a couple of years, the most important thing for us was to restart our growth engine and get control over that, which we have demonstrated that we managed to do.
At the moment, we take a more sort of controlled view to growth, balancing, obviously, as we always do, but even more so now, you know, yields, as, you know, interest rates have come up a bit, in the market, credit risk s o it's very much about profitable growth. I think you can expect a ±10% annualized. But the most important thing for us is profitable growth, making sure that we grow our book at the margins that we need and, you know, have control over the credit risk.
We have also received some questions to our mailbox. First question is: I see from the report that the loan loss ratio is slightly up this quarter. How did the underlying credit quality develop in the period?
Actually, the underlying credit quality is quite stable. Yes, we did have some increases in our loan loss ratios for the quarter, but this was basically based on increased provisions. Now, what are driving these provisions? Well, first of all, we increased our macroeconomic provisions. Then that has nothing to do with the actual observed performance of our portfolio, but just taking in how the macroeconomic indicators in the near to mid-term would develop versus a baseline nd based on that, we therefore increased our provisions for macroeconomic buffers somewhat, and hence that also affected the loan cost.
Secondly, it's also important to notice that we've had quite a strong growth over the last 12-18 months, and as you may be aware, in the early stages of a vintage cohort or vintage age, that means as long as how long the client has been on book, there is a higher loan loss levels. F or the time being, these new loans are actually consisting of more than half our total loan portfolios, and with them there is a slightly higher loan loss ratios due to the fact that they're new, and that is actually impacting our current loan loss ratios and will also continue to do that to some extent in the next quarter or two.
But back again, that so far, we haven't really seen any particular negative development, which is also underlined by the macroeconomic parameters that even showed that unemployment is stable, that income is expected to go up. But what has we have seen is also that the interest rate is higher, but so far, this has not really given us any indication that performance of our clients has worsened.
There is a follow-up question from Vegard Toverud. Could you re-repeat your Euro funding cost? Was it 2%?
No, 3.2%.
That's what we pay for deposits in Germany.
Christopher Agnes has a question in the chat. Can you elaborate on the market for default loans? Do you see prices coming down?
Yeah, that's actually a very, very good question. Listen, we, in our business model, we will always assess and evaluate this, this market. This is a sort of an integrated part of our, our business model to work with external debt collectors as well as purchaser of non-performing loans. For those of you who, who follow that market a bit as well, you would have seen that their refinancing costs have come up a nd that obviously will impact that industry for some time s o we will always then assess whether pricing on whether that is our forward flow agreements or potential spot sales is attractive. We don't have to sell non-performing loans.
We can keep some of that on our own book, continue to work with external agencies for the collection. So yes, there will probably be some deterioration of prices due to the purchasers increased refinancing cost b ut so far, what is more important to us when we look at their recovery rates and the performance on recovery, that actually looks pretty good, s o that actually indicates that we could decide if the prices come down too much to actually not sell the loan, keep it on our own book. We have lots of space. We've taken down NPL ratio on our balance sheet below to below 3%, which is some of the lowest in the market.
There's some space to hold some of the NPLs on our own book and continue to work on the so-called 3 PC with these agencies so that they collect. That could make sense as long as also the recovery rate seems to be fairly untouched.
Another question to our mailbox. Your return on target equity was around 7% in Q3, and your medium target is about 12%. What are the key drivers to get there?
Yeah, thank you. That is obviously the main question that we're working hard on every day a nd as you can see on this slide, the target is indeed there to get above 12. We think we need to be more competitive in also in the capital market. Now, the drivers are along the whole PNL, as we talked about at previous calls and throughout this call as well. We need to continue to grow, and we're working on controlled growth. We need to continue to keep or improve our margins over time. We need to work on cost/income ratio. Now, that is already, you know, fairly good, but we continue to drive that down.
As credit levels or loan loss ratios, we believe will stabilize back to around 4.5 level. These are all the drivers that ultimately, you know, will give you the output. ROE is an output of what we do on growth, what we continue to do on pricing and margins, what we continue to work hard on around cost and controlling credit risk. But ultimately, it is a scale gap, so we do need to continue to grow and continue to become more scalable, more efficient, and ultimately, if you do the math, the returns will come. Any further questions on the line, in the chat or on email?
No emails or in the chat either.
Okay. As always, feel free to also contact us on ir@morrowbank.com or directly, either Eirik or myself. You have probably our contact details, and we can follow up for those of you who want that. T hen, I guess, it only remains to say thank you very much for calling in. Now Henning raises his hand. There's always a last-minute call question. We'll obviously take that.
Yeah. The question is from Maurice in the chat. What is the current interest rate on your hybrid capital, and are at some point looking to pay this back? Also, what was the reason for the reduction in Tier 2 capital from Q4 2020 to Q1 2021?
The interest rate that we're paying on our hybrid capital is based on two components. First of all, is the underlying rate, and that is the three-month NIBOR rate, which is around 4% these days, and which obviously was a lot lower some time ago. On top of that, we do have a margin which we have to pay, which reflects both Morrow Bank as well as the market interest for these products and the characteristics of this product, and this margin is around 7%-8% currently. As to the reduction in Tier 1 capital from, you said from 2020?
Yeah, Q4 2020 to Q1 2021.
That's quite a long time ago. I need to look into the actual numbers, but I believe that could be that some of these have come to a term. These loans have the Tier 2 capital, they have a limited term. They have a five plus five-year duration, which means that we have the right to call them after five years, which we usually do, although they have a ten-year term, and then at that point, we do renew them s o I need to look back in from 2020, but it could have been that one had matured, and for that reason the rate had come down. It could also be because our risk-weighted balance has increased. I think actually that is probably the more reasonable answer from that.
Okay. Thanks for that question.
Other questions coming in.
Other questions before we round off? Again, thank you for calling in, listening. We're available offline for those of you who want that. Yeah, I think we'll just say again, thank you and have a good day, and see you next time.
Thank you.