Earnings Call: Q1 2016

Apr 21, 2016

People, and welcome to this Nuonet Q1 Interim Report. We've seen a bit mixed performance in this quarter. I am really happy about the customer growth. We experienced a 13% year on year or 12 month customer growth. I'm super happy about the volume growth that we see in our lending products. It's like 20% on a 12 month rolling. And we have also seen that the decrease in net interest income we have experienced over the quarters previously due to the lower increasing lower interest rates has actually flattened out. So that is really good. I'm also happy about the net savings. It's if we exclude the Cerro Ballon Partners outflow, it's 9%, which is decent. And it's been a high activity in the market where a lot of exciting things has happened, but we have also seen effects of our previous customer growth. But we also see a lower net commission per trade, and that is due to the price change we did in the mid of last year, but also trading different trading behavior. And that gives us a pressure on revenue. And could I have the next slide, please? So revenue compared to Q1 2015 decreased by 9%. And as a consequence, profit after tax decreased by 34 percent, and we will dig deeper into the effects and the consequences and the reasons for that later. Next slide, please. So some highlights from the quarter. As I said, large fluctuations in the market and high trading activity. We see a steady growth of our personal loans business here in Sweden. So the market growth is roughly 1%, and we are growing double digit with kept risk level, which is really good. We launched the mobile app for Chervil for iOS and the Android version is coming out soon. We have carried out NodeNet Live in Stockholm, as we have done 4 years back. But also for the first time, we did Nudnik live in Oslo. And actually, that has been the biggest savings event ever and really successful. And 2 things after the reporting period. So we launched a mortgage aiming low and that giving us here in Sweden the best loan portfolio by far. So now we have personal loans with from interest to 95%. We have our knockout loan, 0.99% and now a mortgage, 0.79%. That's unbeatable. We have also launched an initiative, NewNet Ventures, and that will I will come back to that, but we will launch that externally coming Saturday on startup day at Munchen Brigadier. So next slide, please. Split 2 slides to customer and accounts, please. So yes, there it is. So customer growth, 13%. We have the highest growth in Denmark as we have had the last couple of years, 34% in Norway, 13% Finland, 14% and Sweden, 8%, which is decent. But as we have said previously, we are focusing and we know that we can grow faster in Sweden. And 2016 is the year that we shall show that. Next slide, please. When it comes to net savings, our other long driver, we are growing by 9% if we adjust for Cerne and partnered, which is decent, but we can grow faster. In Denmark, we are growing by 30% in Norway, 20% Finland, 2%, which is low. But given the market conditions there and our historical performance and the nature the nature of that market is actually quite good. And Q1 is really good in for net savings in Finland. And in Sweden, we have a growth of 5%. And again, we know we can do better there. So next slide, please. There you see we have the highest activity ever when it comes to trading, and that is good. And it seems like it's picked up also the last couple of days. So but it's impossible to actually forecast that, the market sentiment. Next slide, please. Here you see the lending. And as I said, it's a 20% growth year on year or 12 month rolling period, growing both the personnel loans and our margin lending business. And next quarter, we will add 1 bar to this slide, namely with mortgage. So next slide, please. And by that, I hand over to you, Jacob. Thank you, Hakan. We'll go to the next slide. We'll start by looking at our revenues. Revenues totaled just over $300,000,000 for the 1st 3 months of 2016. That is 8.5% lower than the same quarter of 2015 and 7% lower than Q4 of last year. Despite the number of trades being up 20% year on year and by a couple of percent from Q4, as you saw on the previous slide, net commission income is lower in Q1, totaling DKK 153,000,000. The reason being lower net commission per trade. Net commission per trade is DKK 21 per trade in Q1, down from DKK 23 per trade in Q4 and DKK 27 in the Q1 of 2015. And a couple of factors contribute to this development. Year on year, the main reason for the drop is a new price plan introduced in Sweden in Q2 of last year. Also compared to Q4, there are some lingering effects of the new price plan. When we launched the price plans in June last year, our estimates were effects on net commission per trade by DKK 2 to DKK 3 from a level then at DKK 25. The effect has been slightly larger than first expected, but also trading patterns have changed as we see lower trade size during Q1. So even though trading number of trades is up, the traded value is not up by as much. Markets have had a bumpy start to the year and the lower trade size is likely a sign of lower risk appetite and something that will vary over time. In addition, contributing to the lower commission per trade is a customer mix favoring the lower commission tiers. Also in commission income are fees from mutual funds and also here a drop of about 10% compared to the previous quarter as fund volumes during the quarter have increased sorry, decreased, my mistake. All in all, this makes for a weaker quarter on net commission income. On a more positive note, our net interest income increases, if only by $1,000,000 but still an increase from the previous It's the Q1 since the Q2 of 2014 that the NII is not decreasing. And as Hakan just pointed out, we now have a portfolio of the best products in the market in personal loans, in mortgages and also margin lending. Mortgages were launched after the end of the quarter, but for both margin lending and personal loans, we continue to see good volume developments during the 1st 3 months. Rates are slightly lower, but reduction is offset by the higher volume in both products. Expectations on increases in market rates are still 1 to 2 years out in most analysts' expectations. So we see no quick turnaround in NII, but possibly we have seen a bottom here. The largest part of other revenue, the yellow bar at the top, is the result of FX transactions when customers trade outside of their home market. Other revenue totaled $47,000,000 in Q1. We have seen a reduction in trading outside the home market as a consequence of lower risk appetite. I'll remind you also that Q4 includes $10,000,000 related to fee sharing from the Danish CSD in this revenue item. We will see the first part of that fee for 20 16 in the Q2, so that's not included in the Q1. Still adjusted for that, other revenue is down a couple of million compared to Q4. So also there some effect of the changes in trading pattern. So to summarize revenue during the 1st 3 months, we see stabilizing development on NII, while net commission is clearly pressured by the new price plan and the change in trading pattern with smaller trade sizes. Moving on to the next slide. We'll have a look at our costs. Expenses, including credit losses, amount to $212,000,000 for the quarter, from the same level as the previous quarter and in line with our guidance of an increase for the full year of 6% to 8% compared to 15. As we have spoken about previously, the increase in cost base is mainly related to continued investment in IT and product development. We believe these investments are needed to maintaining our high pace of development and continue to improve on our long term drivers of growth. Still, as we just covered revenue and you saw it's down both year on year and quarter on quarter. Should we see 6% to 8 6% to 8% cost increase compared to previous year. Moving on to the next slide. Operating profit for the quarter is $89,000,000 It's lower by 34% compared to the same period last year and also down from the previous quarter by 21%, so lower numbers there. Next slide, please. This slide shows our business across our four markets. And today, you can see roughly 50% of our business comes from Norway, Denmark and Finland. So right now, more than half of Nordenet's customers reside outside of Sweden. So truly a Nordic operation. Looking at the operating profit, share from Denmark, Norway and Finland is increasing. For Q1, the 3 countries make up 43% compared to 19% during all of 2014. So we saw that increase also during last year, and it continues in this quarter. So we have a strong position in all markets and can continue to grow from that. We'll go to the next slide for a closer look at the income statement compared to the previous same period last year. Thank you. Next slide there, yes. Revenues for the 3 month period, Thank you. Next slide there, yes. Revenues for the 3 month period, January to March 2016, are $301,500,000 and that's 8.5% lower compared to the same quarter last year. We covered the main reasons for the decrease in the quarterly trend slide, so I won't go over that again. Moving down to operating expenses. We see that there's an increase compared to the same period last year of 12%. The increase lies within general administrative expenses, which includes personnel and also within other operating expenses, which include marketing. During Q1, as Hakan mentioned, we have run 2 of our larger events during the year in Nordenet Live! Both in Stockholm but also in Oslo this year. And we have also put some extra marketing effort in Sweden compared to last year. Moving down to credit losses. They are all, that's $8,300,000 for the quarter. It's all related to our personal loans business. That's our unsecured consumer lending. It's a good level given that we continue to grow the portfolio. Our loss rate is now around 1.6%. Tax rate for the 4th quarter sorry, for the Q1 is 19.1%, and it totals $17,100,000 and profit for the period $72,000,000 giving us an earnings per share of $0.41 for the rolling 12 month period earnings per share at DKK 1.84 per share. Next slide. There are no big changes to our balance sheet in this quarter. Total assets have increased some since 1 year ago to $61,000,000,000 The increase is mainly a consequence of deposits from the public increasing, also increasing for policyholder risk, meaning assets our customers' assets in pension insurance products. The increase in deposits have affected financial assets available for sale and also financial assets held to maturity, both those items refer to our liquidity portfolio. Also loans to the public increased since the end of Q1 last year, as you saw in earlier slides. Shareholders' equity, dollars 1 958,000,000. And on the next slide, we'll see our capital requirement. And as you may have seen in the report, there are some changes as to how capital requirement on the conglomerate level is reported. This is due to Solvency II, which has now come into effect. However, here, we focus on the consolidated situation as that is where CRO regulation with capital requirements and buffers and so forth primarily affects us. So starting with our capital base, it's made up of shareholders' equity. We have not audited this report, so deducting profit for the period and also the proposed dividend and intangible asset, it brings us to a capital base of $1,150,000,000 And that's an increase compared to 1 year ago, even though we have bought back our a little bit offset a little bit offset by lower risk weight in the bond portfolio. So total exposure, dollars 7,586,000,000 and that results in a total capital ratio of 15.2%. So within the range of 14% to 16% that we have communicated as a target for our capital ratio. That was the end of my prepared remarks. I'll hand back to Hakan, and we'll take questions after that. Could we take the next slide, please? And the next one, the one that said Sweden's most attractive lending products. So lending is important for us, and every NOK, SEK or euro we can lend will give us a better situation than holding it in the liquidity portfolio. And that is one of the reasons we are launching the mortgage. And as I said, now here in Sweden, we have the best loan portfolio or loans offering in the market with the personal loans from 2.95 percent, the knockout loan, the margin lending product from 0.99 percent and now the mortgage from 0.79 Next slide, please. So what you can expect from us, we will stick to our strategy and execute on that. The growth strategy is very simple, super happy buzz in the market around savings, so more people know about us, create awareness about Nunet, and then we fuel that with coming out with good things for customers. And as I said, now we launched mortgage 2016. We will focus on the user experience, and we will continue to invest in IT and product development by taking out costs from not so value creating parts of the business and reallocate that to IT and Product Development. You know also that we have launched an initiative, and partnering up and also making it possible to invest in FinTech startups. And that plays also to coming out with good things for our customers at a higher pace. Even though we are building out our capacity to do so and manufacture the things for ourselves, whether it's the user experience or new products, we have a higher ambition than that. So launching new Net Ventures plays to that. So we can have other people building good things for our customers. And when we think about that, it's not only good things for our customers, it could also be technology enhancing our platform. And with that, we I end there and open up for questions. We have Peter Wallin from Handelsbanken registered for a question. Please go ahead. Your line is open. Thank you and good morning. Hi, Peter. Hi. I would like to start off with a question you touched upon already about seeing some kind of early signs of risk appetite returning. If you could give some color of that, if it's general activity levels or if you're seeing the trade size per node going up or anything in that area? Well, it's just that we have seen some higher activity now the recent days that we actually saw in, well, the recent weeks. But that doesn't really say anything. So we don't base any forecasts on that. So anything could happen like as we speak, right? Yes. And I think I can add to that. I mean, as we saw in our press release, March was a slower month activity wise. And now we're coming into the report season, and normally, we see a little bit higher activity then. So I think it's really sort of these next couple of weeks kind of determining a little bit the sentiment for the coming period. So we'll see these things change quickly, but sort of based on what we saw in March, definitely lower risk appetite. But then we'll see where we come out on the other side of the report season. I think that's what we can say. Okay. But I guess sticking to the topic, if I interpret your communication correctly, it was also like a negative mix effect in Q1 when some like very frequent traders with very low fee deals were considered a larger share of trading activity. I mean, how when you've had this kind of risk appetite going down, how quickly are normally sort of like the not equally active retail clients to come back? I'd say it varies. I mean from time to time, you see sentiment swing quite quickly. And other periods, maybe taking a few months. So it's hard to we don't really have an answer for that actually. But it's fairly normal what we see now when the market is a little bit more sluggish and maybe goes sideways and sort of as we saw quite steep drops in the beginning of the year, the more frequent traders sort of stay in the market, whereas more other the broader parts of the customer base become a little bit more cautious at those times. So I think it's a lot determined on how market develops in the next couple of weeks, months. Okay. Great. And then change in topic towards your most recent initiative on mortgages. Do you have a cap for how much you can take in here? And also in terms of do you think you will be this will make a very clear footprint in the reported new clients coming into you? Or is it mainly about getting a higher share of wallet of existing clients you already have? Yes. So two parts of the question there. I think in terms of the cap, we've not sort of communicated a firm cap, but sort of the range that we're comfortable with is about $2,500,000,000 at this point. And then we'll see what type of yes, what the take up is. But around $2,500,000,000 is the frame we're looking at right now. The initiative, of course, it's open both for new and existing customers. And naturally, we hope to attract more customers with this product in our offering. So we'll I think it's been a good start. We'll include in the volumes in the monthly press releases that we send. So you'll be able to follow that as we go forward. And I can add on that. It's aiming at the Private Banking customer segment. So we see new private banking customers coming to us, and also that will kind of boost or help out on the net savings side. And the start that we have experienced now starting on Monday has actually exceeded our expectations. So it looks bright. Okay, great. And then a final question is on your consumer lending operation, which is obviously offering good resilience on income and on profits in a quarter like this. Could you comment a bit on the competitive pressure there? Now we're having even more of similar operations coming to the market? And also if there's any chance that you might expand this operation geographically? Yes. So let's start with the competition. It's fears, I think, is the right way to put it, right? And it's underpinned also by the pop up of even more loan brokers, right? So fierce and that puts pressure on interest levels. And we can see other actors taking more and more risk. And I've said it before, it's the easiest thing in the world to grow a business like this. It's only to take on risk. But we are not doing that, so we are actually seeing lower risk in the portfolio, and still we can grow. And that is because we our analytical capability, so we can target kind of the right customers and select the right customers from the loan brokers and in our direct marketing efforts as well. The second part of your question there, Peter, on the geographic expansion, we had talked about that previously, and it's something that we've considered and looked at, but we've chosen not to move ahead at the moment. And no change on that right now, But definitely looking we're keeping that option open. It's definitely an option in the future. So we're not working now, but we're not ruling it out for the future. Okay, great. Thank you very much. Thank you. Our next question comes from the line of Richard Henze from Nordea. I just had one drivers for this are clients converting to different pricing plans that is more favorable for them. Have you seen any trends or trend shifts in the number of clients that is converting into different price plans? Or is it more or less stable quarter over quarter or month over month? Hi, Richard. No, it's not stable, I would say. I mean, we've seen a continuous shift in that during since the fall and also sort of continuing into Q1. And that's when we've said some lingering effects of the new price plan. I think one of those is that it's easier now for customers to switch between plans. And that was an intended feature, but it was hard to exactly forecast sort of how much of that would take place and how that would happen. So I think that's part of the reason why I'm saying that the effect is a little bit higher than what we thought almost 1 year ago. But so yes, that continues to vary. So just to be exactly, we should expect that this conversion continues, which means that it's fair to assume that the commission income per trade will continue to decline going forward, all other things being equal? I think it's all other things being equal, you could say, but they won't be equal. So one of the what will determine an efficient trade is also what does how will the trading pattern vary. And if the market were to increase, I think in the past, we've seen trade sizes go up a little bit, and then that's the positive effect. So it's hard to we don't really we don't have a firm forecast on the net commission per trade. But the dynamic, I think, will continue that customers will continue to switch to different price plans depending on how they see the trading pattern. And there is no plan to limit the possibility to change pricing plan, say, like once a quarter instead of once a month or once a year or something like that? Those are options, but there's no intention to do that right now. And have you seen any examples of the clients moving frequently back and forward? Or is it just adjustments since you changed the pricing plan since last summer? Yes, more the latter. So it's more that once you see that there are the new price plans and then you make a choice and then you and I think you maybe adjust your trading pattern a little bit more to the new price down than what we had in our original models. Okay. So the effect of the impact should decline even though it would still be negative going forward? Thank you. Our next question comes from the line of Nicholas McBeath from SEB. Please go ahead. Your line is open. Hi, good morning. A couple of questions. First of all, you've talked a lot recently about really trying to ramp up the growth in Sweden. But in the quarter, I think you only added around 5,000 new customers in Sweden. When do you expect to see this initiative and this effort to result in higher growth figures in Sweden? Well, as I said, we expect that to see that within the year 2016. We're doing a lot of things right now. But as you can understand, there's no silver bullet that we can shoot out and that will solve everything. So we're doing a lot of things. And well, I can't give you any more better prediction than within the year. Okay. And then secondly, also on Sweden, on net savings. I think you've had now outflows from Soderberg around SEK 9,000,000,000 in total. And you're right in the report that there is a total SEK 15,000,000,000 left from Soderberg, of which half could be subject to transfers. So just to be clear, does that mean that there is a risk or that you expect maybe around SEK 7,000,000,000,000, dollars 8,000,000,000 in more outflows from Soderbergh Partners from here? Yes, that's correct. And we'll the difficulty in sort of predicting the exact number here is that, as we've said before, that the process is that Sotheby is that they are sort of having face to face meetings with their customers and sort of agreeing on that. And ultimately, it's the customer who needs to make a choice. So it's difficult to exactly know that. And our forecast jointly, we said the $5,000,000,000 to $10,000,000,000 when we started out a little bit more than or just about a year ago. And we're now seeing that so roughly half of the 15, so 7.5% is the estimate at the moment. So you can say but also just remind you that the revenue impact from that outflow is less than it's a low margin savings capital for us. So but you're correct. And we'll report that in the press releases as we have during this year. So you're maybe to follow that. And what is the reason that the outflows have been so much larger than you first assessed? And do you think there's a risk that actually outflows coming from here? All right. So the first one is outflows coming from here? To the first part of your question there, part of that 15% is in insurance products, corporate pensions and so forth, which are not subject to be moved right now. They're not Soderberg has not built that infrastructure at the moment. Going forward, long term, they we're not ruling that out, but that's more a question for Soderberg, how they choose to build their infrastructure. And we haven't seen any other partners choosing to go that direction, sort of building their own back end. I think maybe the trend, if there is one, is probably in the other direction that different firms sort of choose to focus on a part of the value chain. So it's nothing that keep us awake at night, actually. And again, to Jacob's point about it's a low margin savings capital that is moved out. The thing is that we get some disturbances in the stats for net savings, but that's about it, I think. Okay. And then just finally on the timing of this additional 7.5%, do you think those will be transferred during this year? Or will it be more like over a couple of years? I would expect the majority to be during this year. I haven't seen the exact timetable, but we'll do the same as this year. We'll schedule a couple of we'll do the transfers at certain dates. So Yes. And then on mortgages also, could you give us the cost of administrating these mortgages? And is that cost included in the 6% to 8% cost guidance for you? It's included in the 6% to 8%. That's included in our cost guidance for the year. And could you give us the of administrating the mortgages? We haven't no, we haven't broken that out as a separate product. And then just to comment on the profitability on the product, it's so it's low risk, of course, as you understand. So we're targeting private banking customers. They have savings with us, loan to value, maximum 50%, but also the fact that they have, say, other collaterals with us gives us a really good on equity on that product. So it's even though low interest rate, but high return on equity. Okay. And then finally on non debentures, if you could elaborate a bit on that, what do you see what kind of potential do you see? How do you view the And what kind of fintech companies do you currently see the most exciting potential for from a Nelnet's point of view? So the idea and we usually use Chervil as an example. That was a Swedish startup, and we stumbled over that and got interested. And we bought parts of it, right? We kept the entrepreneurs. We rebuilt the thing from funny money to real money and from Sweden only to a Nordic service, right? So and now it's super successful. So what we are adding to the table is our infrastructure, our brand, Good Guy brand. We're adding our kind of competence around risk and compliance and, of course, 500,000 of customers, right? And we believe that we should be really interested for fintech startups. So we of course, we're not like building a venture capital firm here. We the base is a corporation and that they can provide good things for our customers. And then we are able to invest in them. So but we are not building a venture fund, and we are driving that as a separate part of the business. So but of course, savings and investments are core, like different type of guidance tools would be super interesting, I don't know, but also stuff that could enhance our operating platform actually. And again, we will launch that on the start up day at Mince and Briguriet on Saturday, and I will be there myself, and it will be really fun. Okay. Thanks for all the answers. Thanks. And as there are no further questions, I will return the conference back to you guys for closing comments. I have some this is Johan Tiederstad working with Communications at NovoNet. We have some questions on the web as well, which I will read out now. You touched on them, so I'll summarize them. Could you please briefly summarize the most important factors between the commission drop from 20 27 to 20 21? Sure. We covered that briefly earlier. I mean the biggest change year on year is the new price plan in Sweden. That's the majority of that change. Also some effect in the other markets from the change in trading patterns. And then meaning that the trade sizes are smaller, which affect the commission per trade. So those are the 2 main things really. So but yes. And on the survey by subject, is the effect bigger than what you anticipated in 2015 when the decreased corporation was announced? Yes, a bit actually. So our reasoning was then they had roughly SEK 20,000,000,000 with us. Half of it was in Investir in Sparconto and I think half of it in insurance products, right? And they as Jacob said, they have not at least not yet built an insurance infrastructure, but only for Investeir and Sparaconto. So we forecasted that they would move all the capital in the Imisterengsparkonto. But obviously, I think what is happening behind the curtain is that they move from capital endowment, savings from capital endowment to invest in Spark content and making that movable, so to speak. But again, we are not like we are not sleepless over that phenomena. Very good. And on the cost side, why is your cost structure still growing? Where is the message in 2015? What's more on a stable cost structure, Jacob? Yes. I don't I think we haven't really said stable. I mean, I think we had guidance in during last year of increase between 4% 6% compared to the previous year, and we ended up a little higher than that, around 7%. And for this year, we've said 6% to 8%. So cost increase is sort of in line with our expectations. And the reason for it during last year, it was the investment in IT and product resources, which continued during this year. And during last year, also the build out of the corporate pension sales force in Sweden and also some added resources in our analytical customer data analytics team. So that's the reason behind the increase. And then I should also add, which we covered last quarter, but volume on the platform is significantly higher during these 2 years. So that's also driving some of that cost increase, not all of it, but a little bit. So those are the reasons. So I think costs are and going forward, as I said, we're keeping the 6% to 8% guidance. But naturally, we see that if we see a continued pressure on top line and the market development that's not positive, we will reevaluate that and have to look at that again, of course. But for now, 6% to 8% for 2016. Very good. And the last question from the web is about Nordic Ventures. You talked about what kind of fintech startups we would invest in Hokkien, the savings, the guidance on the platforms. Could you say something about how much we will invest through Novet Ventures? No. It's so case driven, but we want to do it at an early stage, right? And we believe because we believe that we can provide the most value in a partnership at an early stage, right? And but we have said to ourselves, let's do 2 to 3 investments during this year. I'd say kind of rough number, and then we have something to evaluate in. So we're so we don't have a big waterfall plan on this. We're trying to be agile, right, but 2 to 3 investment at early stages in fintech startups. Yes. I think maybe just to add to that, I think we see that our contribution in a partnership like that could be our knowledge of the market, our access to our customer base using our APIs. So it's yes. Right. Thanks a lot. That was all the questions from the web, and back to Werkam for rounding off the call. And I think like coming back to the venture thing, we will also keep you informed in these calls and in other ways of how we are like progressing in that initiative. So if there are no other more questions, thank you very much. And I guess we will be in contact with a lot of you the coming days. Thank you very much for listening in. Thank you.