Earnings Call: Q3 2016

Oct 25, 2016

And good morning to you guys, and welcome to this Nordenet Q3 Interim Report Presentation. And as the operator said, as usual, it's me, CEO, Hakan and CFO, Jacob, who will do this presentation. But before we jump into the presentation, let me comment on this morning's news that NNB Intercenter, which is a company formed by the Oerman Group and Nordic Capital, has placed an offer in the market for Nuvnet shares. Nuvnet sent a press release earlier this morning confirming that an offer has been received by our Board of Directors. Also informing that Klas, Ulf and Tom Dinklespiel since being part of the BIT consortium have not been involved in the board's handling of this topic. The remaining Board members have formed an independent committee for the purpose of evaluating the offer. Our Board member Kjell Hedman chairs that committee. I and we will not comment the offer any further on this call. For any questions you might have regarding the offer, I would like you to direct you to Kjell Hedman or representatives of NNB Intresenter. That would be either Tom Linkenspiel or Christian Frigg in Nordic Capital. And I kindly ask you to respect that. With that, let's start our presentation. So given the circumstances, I think we delivered a decent quarter financially. Our growth continues, and we're especially happy on the customer growth. And I'll comment more on that growth in a while. Next slide, please, operator. So financially wise, you've read the numbers. For the period, operating income decreased by 0.3% and with a consequence of profit after tax, decreased by 9%. And for the period year to date, operating income decreased by 4%. And as a consequence, profit after tax for the period fell by 22%. So next slide, please. Some highlights for the quarter. We have seen a strong inflow of customers with 22,400 new customers for the period for the quarter, and that represents a growth by 15% in 1 year. We see continued success for our loan products with the amount lent now growing by 11 percent in the Q3, that is from Q2 to Q3. And our social investment network share will surpass 100,000 members, and that represents an increase by more than 70% over a 12 month period. So next slide, please. Next slide again. So let's look at customers and accounts. And as I said, the growth of customers is on a 50% level now. And the good thing is that we are doing double digit growth in all markets. So Sweden on 12%, Norway on 14%, Denmark on 29% and Finland on 15%. So double digit in all markets. And another good thing is that we're growing faster in all four markets than we did last year, which is good. And especially happy we are about the growth in Sweden on the 12% level. So we're taking that growth up from a single digit growth to now a double digit growth. That's really good. Next slide, please. When it comes to net savings and savings capital, the total savings capital is now up 21% from the same period in last year. When we talk about net savings in Sweden, we see a 0% growth adjusted for the outflow due to Sedovarian Partners. The growth in net savings in Sweden is 4.8%. In Norway, we see strong growth in net savings at around 20%. In Denmark, the strong growth continues. The growth is 23%. And in Finland, we see a 2% growth in net savings. So good in Norway and Denmark. Finland, as you know, is a kind of gloomy economy and special circumstances there. So actually 2%, we are quite satisfied with that. In Sweden, as you know, we know we can do better. Even if we adjust for Cerro Verne Partners, the growth is 4.8%. And as you know, we have an ambition to grow double digit also on net savings. So we're working on that. Next slide, please. So when it comes to activity, we've actually see a recovery in the market since the kind of collapse due to the Brexit message. We see a positive sentiment in Finland and Sweden with a growth for the quarter of around 9%. In Denmark, it's less optimistic. So it's cooled down a little bit around the share fever that we have experienced for some years now. And also we see a we saw a collapse in the Novo Nordisk share price with I think it was roughly 30%. So I think we go to the next slide, please. Let's talk about lending. And you've heard me say that it's super important that we lend more money. We have a huge excess deposits. And in this low interest environment, it's hard to get some return on that treasury portfolio. So lending is important for us. And our lending loan portfolios develops really, really good. On margin lending and personal loans, we see a growth at around 20% in both products. And also, we have launched and see a successful development of our mortgage product. Now I think the paid out volume is SEK 670,000,000 and we aim at reaching SEK 1,000,000,000 before year end. So we're really pleased about that. So let's jump into financials. And with that, I hand over to Jacob. Jacob, please. Thank you, Hakan. Go to the next slide, please, operator, with revenues. Revenues for the Q3 totaled SEK 290,000,000, slightly lower than the same period last year and roughly 1% lower than the Q2 of this year. We'll walk through each of the main components of revenue. Net interest income, that's the blue part of the bar at the bottom, has stabilized somewhat during the last two quarters after a negative trend during 20 14 'fifteen. In the Q3, we even see a slight increase from Q2. However, even though we see positive quarter on quarter development, there's no real shift in the underlying trends within the NII. As Hakan pointed out, very good volume growth in all products, And at the same time, interest rates are lower across the board, offsetting most of that volume increase effect on the NII. As you know, we have 4 parts making up the NII: a liquidity portfolio, margin lending, personal loans and more recently, a mortgage product in Sweden. So in personal loans and margin lending, our volume growth year on year is around 20%, which we are very happy with. In both products, rates are lower both year on year and quarter on quarter. And for personal loans, the average rate in the portfolio is 7.7% at the end of the period. This is partly due to market condition but also due to us growing fastest in the lower risk tiers where interest rates are lower but also expected credit losses lower. Our mortgage product that was launched in Sweden earlier this year has grown to over €600,000,000 as you saw in the previous slide at the end of the period. It's still not significant from a revenue point of view in the quarter, but customers continue to show great interest in the offering, and we expect it to continue to grow in the coming quarters. We have a slight positive contribution still to the NII from the liquidity portfolio, but the low and even negative market rates in some countries continue to be a challenge in this area. Net commission, moving on to the next part, that's the gray part of the bar. It totals SEK 142,000,000 in the quarter. It includes $32,000,000 in commission on mutual funds. That's slightly up from the 2nd quarter as savings capital in mutual funds has increased to just over SEK 41,000,000,000 at the end of the quarter. The transaction related commission income in the quarter totals SEK110,000,000. Number of trades is roughly on the same level as the previous quarter. Slightly lower activity per day in Q3, but the quarter includes 4 more trading days compared to the Q2. So compensating for that, the number of trades is roughly level. The net commission per trade is also roughly on the same level as the Q2 of this year, but it's down compared to the same period 2015. Net commission per trade is DKK 20 per trade this quarter compared to DKK 23 per trade in the Q3 of 20 15. The reduced commission per trade is due to one part, the gradual adoption of the new price plan in Sweden, which was introduced in the Q2 of last year. Also some smaller changes to price plans made in Norway this year. Also a significant change compared to last year is the smaller trade size of the shift in trading behavior, so the customers moving towards trading smaller ticket sizes. Other revenue mainly includes the result of FX Checkers transactions when customers trade outside of their home market, but also some other, other revenue. In this in the second quarter, I should say, the other revenue item included a positive nonrecurring item related to sale of shares in Mastercard, which were a relic from the card offering we had a few years back. Also, other also includes fees invoiced to partners for different services such as participation in events and so forth. These items were also on a high level in Q2. So Q3 on a little bit lower level there. But back to FX revenue, which is the main part of the other component here. It's SEK 36,000,000 out of the SEK 46,000,000 in the other category, a good level in Q3, slightly higher than the Q2, even though total trading volumes were above level. So continued interest in trading outside of the home market. That covers the main revenue items. We'll go on to the next slide, please. Costs. Expenses, including credit losses, amount to CHF 206,000,000 for the quarter, an increase of CHF 13,000,000 year on year and slightly lower than the previous quarter. This is in line with our guidance at the end of the second quarter that cost for the coming quarters would be at the Q2 level or lower. It's also in line with the guidance given at the start of the year where we said that cost increase excluding credit loss for 20 16 compared to 2015 would be in the range of 6% to 8%. Our outlook right now for 2016 is that with Q4 costs at the Q2 level, we end up at around 7% increase for 2016. Looking ahead next year, 2017, our outlook has somewhat evolved compared to when we spoke last at the end of the second quarter. Our best estimate right now is that cost increase for next year will not be lower than that of 2016, meaning around somewhere meaning somewhere above 7%. Areas for investments include IT development resources, both to maintain product development capacity but also to invest in regulatory compliance. And I would say it's on planning of the latter that our view has evolved during the quarter. Keeping standards on both these fronts will require added resources compared to what we saw a few months ago. Moving on to the next slide. Operating profit for the quarter is SEK 84,000,000. It's lower by 13% compared to the same period last year, down from the previous quarter. It's down by 3%. We'll move on to the next slide. Nordnet in the Nordics heading. Returning listeners, you will recognize this slide. It shows our business across our 4 markets. As you can see in the charts, roughly 50% of our business comes from Norway, Denmark and Finland. More than half of Nordland's customers reside outside of Sweden at the end of the Q3. Also measured by operating profit, the share from Denmark, Norway and Finland is increasing year to date. This year, the 3 countries make up 43% of operating profit. That's more than double the share what the share was 2 years ago. It was 19% for 2014. So an increase in share of operating profit from outside of Sweden. Operating profit in Denmark stands out as you see in the lower right pie chart. One reason is the higher trading activity among Danish customers. Danish customers have more than 5 trades per month end customer during 2016 compared to the normal average of 3.4 trades. We'll go on to the next slide and have a closer look at the income statement compared to corresponding periods 2015. Revenues for the 3 month period, almost $290,000,000 As you saw earlier, It's above level with the same period of 2015. Year to date, revenues are SEK882,000,000, that's 3% lower compared to the same period last year. The development is similar both for the 3 9 month periods. For July to September, the net of the for the July to September period, net interest income has increased by 3.5% year on year. Volume has increased but offset by lower rates. Net commission is about 3.5% lower. Also here, volume measured by number of trades is up, while prices, I think commission per trade is lower. Moving down to operating expenses. We see that there's a 7.5% increase in the 3 month period compared to the same period last year. The increase was mainly within general and administrative expenses, including personnel. Next, we can move down the table to credit losses, SEK 7,300,000. They are all related to our personal loans business. Our loss rate is now around 1.2% of the personal loan volume. It's lower than 1 year ago. And as we have stated previously, we are growing fastest in the lower risk tiers, which also affect our loss levels. So we've been at a slightly lower level for all of this year. Tax is SEK 14,800,000 for the quarter, resulting in a tax rate of 17.6 percent. And all that results in a profit for the period of SEK 69,000,000 leading to an EPS of SEK 40. For the rolling 12 month period, EPS is at SEK 1.71 per share. Next slide for a look at the statement of financial position. Total assets have increased since 1 year ago to over SEK 70,000,000,000. Increase is mainly a consequence of increasing assets and liabilities where policyholders bear the risk. That means assets in our pension insurance products. Also deposit from the public increases, which affects on the asset side our financial assets, that is our liquidity portfolio. Also, also the public increase on the asset side since the end of Q3 of last year. So increase on several line items here last year. Shareholders' equity amounts to 1,000,000,000 891,000,000,000 and that brings us to capital requirements on the next slide. We focus here on the consolidated situation, that's where the CRO regulation with capital requirements and buffers are applied. So I'll cover that here. Starting with our capital base, it's made up of shareholders' equity with the usual items deducted. Interim report has been audited, so we include profit for this year, but we also deduct SEK 101,000,000 as expected dividend. That's according to our dividend policy of 60% payout. All in all, capital base has increased compared to last year and amounts to 1,259,000,000 at the end of the period. Risk exposure amounts for credit risk are about SEK 250,000,000 higher compared to 1 year ago. It's due to increased credit volumes. Mainly, market risk is a little higher and operational risk has increased compared to last year, and that's due to us using the basic method, which is based on a 3 year average of revenues. So our 2015 revenues are higher than our 2012 revenues, and that's the increase for the increase full increase year on year. That's the reason for the increase year on year. All this gives us a total capital ratio of 16.7%. That was the end of my prepared remarks. I'll hand back to Wolfgang for a wrap up, and we'll open up for questions after that. Wolfgang, back to you. So next slide, please, operator. Or actually 2 slides forward. So next at NoveNet. One slide more, please. Yes. So again, a decent quarter financially. We have experienced good growth on new active customers. We're really about really happy about the growth we see in our lending products, and we know that we can do more on net savings. So going forward, as I wrote in my comments to the report, we will launch a beta version of the new site at the end of this year. It makes sense to continue to focus and grow our lending portfolios, absolutely. And we have started also a design of digital advisory service. And we will comment on that further going forward. So and with that, thanks for listening. And I think it's time to open up for questions. Thank you. Our Our first question comes from the line of Monique Haunsell from SEB. Please go ahead. Your line is now open. Hi. Thank you for good presentation. Hi, Monique. Hi, Monique. Hi. I'm just wondering, I have 2 questions. And the first is about your customer acquisition in Sweden and the net savings. And how much of the customer intake was affected by your role as distributor in the IPO during the quarter? And how do you see the trends in customer acquisitions in Sweden going further? Are there any trends worth highlighting? Thing? My second question relates to the mortgage lending and what has driven the growth there in the quarter? Okay. So coal, yes, IPOs creates a great interest from the markets and that gives us an extra kind of fuel to our customer growth. So exactly what relates to what, it's hard to say. But especially the IPO of Angus Kaskola, the English School, gave us a good tailwind on customer acquisition. So you're right in that when it comes but nevertheless, we have taken up the customer growth on a higher level than before regardless of the English School IPO. So that's good. And we aim and our ambition is to maintain that level or increase it even further. So that was about that was was it about the mortgage, the second question? My question was what drives mortgage growth? So we have a good product. And as you know, if you have the SEK 2,500,000 or more or up to €5,000,000 you get an interest level of 0.99%. And if you have more than €5,000,000 on our platform in savings, you get an interest rate of 0.79%, which is really I mean, it's a good product. It's competitive. And of course, people mortgage is a high interest product for people. So that drives both kind of new customers coming to us, but also existing customers transferring more money in order to get the product. Just a follow-up question, if I'm allowed, on the customer intake and how you perceive the competition in Sweden at the moment? Well, Sweden is the most competitive of our 4 markets. I usually say we are perceived as or we are number 1 in Norway, we're number 1 in Denmark and we are number 1 in position in Finland. We are clear number 2 after Avanza in Sweden. So Sweden is the most competitive market and we saw that not the least last year with price pressure. And you know that we changed our prices and our price models in the beginning or in the midst of 2015 and that kind of put some pressure on our revenues. So hopefully, we won't see any more price pressures. Having said that, I have no illusions that trading shares will be more expensive in the future. Our next question comes from Nicholas McGrath from DNB. I just had a couple of questions, Starting out with competition also, if you could say something about the outlook for net commission per trade from here. I think it was actually stable here quarter on quarter. Has all the pressure from the recent changes in price plans been reflected now? Or was there anything else that mitigated the pressure from the reduced prices here in the quarter? I would say that the broader picture on sort of the fee pressure has not really changed in the quarter. As Hakan stated, I think Sweden is maybe the most competitive market, but there is competition, of course, in all four markets. In the quarter, it did stabilize a little bit. Partly part of the explanation is the trend with falling trade sites or ticket sites for trade leveled off a little bit. So actually, you had even a little higher average size per trade this quarter. So that helped. But I would say the broader outlook is unchanged. It's more stable than it was in the beginning of the year, but it's maybe a little early to say that the trend has turned. So Okay. And then secondly, I was wondering if you could elaborate a bit here about how you view the long term need for investments and also related to that competition. If we read the press release from the potential buyers here of Norgen today, Ermangruppen and Nordic Capital Systems. Like they believe that the need for investments from here is going to be quite large. And that, I think, stands in a bit contrast with what you have been communicating here over the recent quarters. Like you mentioned last quarter, flat costs here over the coming quarters. Now it's actually that costs are going to increase a bit, but still you haven't been talking about such big need for investment. Have you been in any kind of communications with this with your main owners and also noncapital indicating that you expect the need for investments is going to be higher? Or is there anything you could comment on that topic that would be appreciated? Yes. We can't really comment for on what the bit consortium and their plans or their ambitions. I think what we're presenting here is the current plan for Nordnet, which has been sort of discussed by the Board, of course. So there's we can't really comment on what plans of the bidders are. But what we can say is that we can reiterate what we have said in the past quarters, and that is the list of things we would like to do and good ideas is longer than we have capacity. So when we see the market allowing for that and our revenues allowing for that, we want to invest that in products and as a consequence IT development. So that has been the story and we have 3 years. But as I said, the list of good ideas we would like to do is very long. Okay. I understand you cannot comment on the plans of the capital and Amagruppen. But like, Holger, you mentioned, you don't you hope that price pressure, for instance, is not going to continue here, you just mentioned. And that's a bit stands in contrast to the market outlook that they communicated. So what you're saying is that, that market outlook is their view and that's not been influenced by your view on what's happening on the competitive side and so on? What I said was that, I mean, Sweden is the most competitive market and we saw some moves in the market among others from us last year. So that was the case and we have experienced that. So I think the prices now for Swedish kind of savers are on a good level. And in the other markets, we don't really see that kind of head to head competition that we experienced in the Swedish market. So that's the story. And I think, again, from my view is that prices in Sweden, they are at a good level. But I think maybe to just Kevin, we don't see that the price pressure has there's no price pressure. That's not what we're saying. We mean it's more stable in this quarter. And then like you can outlined, there is, of course, competition in all the markets and most fiercely in Sweden. But not to say that there's no fee pressure from here on out. That's not our position. No. And again, as I said, we have no illusions that trading shares would be more expensive in the future.