Earnings Call: Q3 2015

Oct 20, 2015

Today, I'm pleased to present Holkann Newbury, CEO and Jacob Kaplan, CFO. Please begin your meeting, sir. Thank you, and welcome to this Nonet Q3 Interim Report Presentation. And we are happy to announce another good quarter in node net history where we see good development on and right direction on most metrics. Could you please turn to the next slide, please? So for the quarter, revenues were up by 13%, and that gives us a 15% increase for the period January to September. Flowing through the P and L, that gives us a 26% increase in profit after tax for the quarter and making up to 37% increase for the year to date. Please turn to the next slide, please. So highlights from the quarter. For the savers, Q3 has been a bumpy road on a global European and a from a Nordic perspective. We have developments in Greece, China, the Volkswagen scandal and also some some 20%, which is good. So we are focusing on customer So we are focusing on customer satisfaction, and I'm happy to announce that we from the Finnish Shareholders Association were appointed the broker with the most satisfied customers, and then it's the Shareholders Association members voting that. And also in Denmark, in a survey carried out by YouGov on our initiative showing node net as in having the most satisfied customers measured in the Net Promoter Score or NPS, as we call it. And also in Denmark, we passed a milestone in terms of 50,000 customers. So when we talk about and you have heard me saying that when it comes to customer satisfaction, we have the most satisfied customers in Denmark and Finland. And there, we also see the highest growth in new active customers. So there is a one to one correlation there. Could you turn to the next slide, please? So when it comes to customer growth, we're growing in all markets. As I said, we're growing the fastest in Denmark with 39% growth on a yearly basis and in Finland with 15%. And as I said, there we also have the highest customer satisfaction. In Norway, we are growing 14%, and we are actually picking up there quarter by quarter. In Sweden, we experienced a growth of 9%, and there we know we can do more. That gives us a total for the group on 13% growth in number of active customers. Please turn to the next slide please. So the second like long driver we focus on is net savings. We and again, we continue to see very strong growth in Denmark with a year on year growth of 45%. In Finland, we see signs of improvement. Even though we're growing 2.3%, that might seem as a low number, but still, we have doubled the net savings in 2015, making up to SEK600 1,000,000 compared to the same period in 2014, where we had a number of SEK 300,000,000. In total, in Sweden, we're growing by 2.4%, and that includes an outflow from the partnership with Soderberg and Partners of, in total, year to date, SEK 5,300,000,000 and in the quarter Q3, an outflow of SEK 1,900,000,000. So on a group level, we're on 10% growth in net savings. Please turn to the next slide. Again, when it comes to trades, one of our short drivers activity hits our P and L directly. Volatility drives activity, and we are up in the quarter 9% compared to quarter 2 this year and 49% compared to the same quarter in 2015. So volatility drives activity and for our P and L short term that is good. But we know from past experience, if volatility goes on for a long time, savers can lose confidence and also maybe hope. So let's hope the volatility stabilizes a bit. Please turn to the next slide. When it comes to our lending, we experienced good growth in both lending products. Margin lending is up 17% compared to the last to the same quarter last year. And when it comes to our personal loans business, the stagnation in growth in personal loans we experienced in the beginning of the year, we have now turned around and it's now at 8 percent growth year on year. So encouraging growth both but in the low interest environment, not all of that comes through in the P and L. And then I hand over to Jacob. Please, Jacob. Thank you, Hakan. We'll go to the next slide, and you're completely right. I'll cover net interest income in a minute. But first, as you will see, the trends affecting our revenue previously during this year continue also in this quarter. Starting to look at commission income. It continues to be driven by high stock market activity. As Hakan mentioned, the Nordic markets have all dropped between 5% 15% in value during the quarter, and this has created volatility in the market also activity among our customers. And as showed earlier, number of trades are up 9% compared to the 2nd quarter. As we spoke about last earnings call, we launched a new price plan in Sweden at the end of June this year. This has contributed to increased activity in certain segments. It has also affected net commission per trade. We now have a full quarter with the new price plan, and net commission per trade is down from about 20 5 in Q2 to 23 in Q3. The reduced commission level does offset part of the volume increase, and all in all, transaction related commission income increases about 4% to almost $112,000,000 in the quarter. Commission income related to mutual funds is down about $1,000,000 compared to the previous quarter as volumes in mutual funds were affected negatively by the drop in markets at the end of August. Moving on to net interest income. That's the gray part of the bar, dollars 148,000,000 in the quarter. It is made up of 3 parts: our personal loans offering, our margin lending offering and our liquidity portfolio. Our personal loans business has developed nicely during the quarter, and we have returned to good year on year growth numbers, as Hakan mentioned, around 8%, and that's after a couple of quarters with slower growth. Also, we've spoken earlier about unsecured consumer lending being very competitive, and it remains so. During this year, we have prioritized maintaining our risk level over just volume growth. Average rates at the end of Q3 are down 9.7%. That's lower than the previous quarter, and that offsets part of the effect from the volume increase when it comes to revenues in this particular quarter. 2nd part, margin lending, also positive development when it comes to volumes. And same here, we see slightly lower rates compared to the 2nd quarter. Still, it's a slight increase in revenue compared to the Q2 of this year. Final part of NII is our liquidity portfolio. We continue to see pressure on yields here. Volumes is about level with the previous quarter. And with rates close to 0, additional volume doesn't really help much anyway. All in all, we see about a $5,000,000 drop in NII from Q2 to Q3, and that's related to the liquidity portfolio. The last part of revenue, other income, purple part of the bar is made up of 2 parts, net financial transactions, and that's mainly transactions generated when customers trade outside of their home market. This has been increasing previously during the year as trading activity overall has increased. Also, our Danish, Norwegian and Finnish savers are more active outside the home market compared to our Swedish savers. And as these three grow rapidly, so does also this revenue item for us. However, in Q3, net financial transactions is flat compared to previous quarter despite an increase in trades. And the reason for that is on the downside, mutual fund volumes traded outside the home market are significantly lower compared to the previous quarter, So that offsets the increase from the stock trades. So all in all, flat when it comes to net financial transactions in the Q3 compared to previous quarter. Also in other revenue, we have an item related to license fees and other administrative fees, and that is a couple of million lower than earlier quarters this year, but roughly level with what we saw during 2014, so slightly lower there. So altogether, revenues totaled almost $294,000,000 in the quarter. And as mentioned at the top of the broadcast, the bigger trends maintained from earlier this year, meaning strong commission income while there's pressure on the NII. On the next slide, we'll look at our expenses, so cost development. Expenses, including credit losses, amount to 190 $6,000,000 for the quarter, a couple of $1,000,000 lower than the previous quarter and about 5% higher compared to the same period last year. The increase in cost base compared to Q3 twenty fourteen is partly volume related, but Sweden. This year on year increase is in line with the guidance we gave in Q1 of growth in expenses in the range of 4% to 6% for full year 20 15 compared to full year 2014. Now there's just 1 quarter left to 2015, and we can see that we will be around 6 percent growth in expenses for this year compared to previous year. Moving on to the next slide, please. Operating profit. Operating profit adds up to $98,000,000 for the quarter. It's $3,000,000 lower than previous quarter this year, but a $23,000,000 or 30 percent increase compared to the same quarter last year. Next slide, we'll take a look at our financial performance in the different markets. This slide illustrates our business across the Nordics. All four markets continue to develop well during 2015. As you can see in the pie charts here, 40% to 50% of our business comes from Norway, Denmark and Finland. And at the end of September, over half of NovoNet's customers reside outside of Sweden, so a small milestone there. NovoNet's customers reside outside of Sweden, so small milestone there. Also in operating profit, share from Denmark, Norway and Finland increases is 38% year to date to 2015, as you can see in the bottom right pie chart, and that could be compared to 16% in the same period last year. As most of you know, we operate all 4 countries from a joint platform. Part of the platform is a fixed cost that is allocated evenly to all countries. So, the effect is that larger business volume also generates better margins, and that's the case. Denmark, though, still stands out. It has roughly 2x the number of trades per customers compared to the other markets, and that leads to really good operating margins in Denmark at the moment. We'll take a little bit closer look at the income statement on the next slide. So if you can please flip the slide. Revenues for the 3 month period, July to September, totaled $293,800,000 As mentioned earlier, that's 13% higher compared to the same period 2014. Also, the 9 month period January to September shows increases compared to last year by about 15% in that case. And as mentioned, the increase compared to previous year lies within trading related revenue items such as net commission income and other income, while net interest income is lower compared to the same period last year. Operating expenses, just under $188,000,000 That's up 7% compared to Q3 of last year. Also, year to date, operating expenses are up by around 5%, comparing the 9 month periods. And the bulk of the increase is in general administrative expenses, which includes personnel costs. So that was covered earlier. Moving down, credit losses, they are all related to our personal loans business, that's unsecured consumer lending. We see that they totaled just $18,000,000 for the 3 month period. This is low, both compared to the same period last year and also compared to the Q2 of this year. Our credit losses do vary a little bit quarter to quarter, and I'm not yet extrapolating this level going forward. Year to date losses are $31,600,000 That's more in line with our expectations of about 2% credit loss. Tax rate for the Q3 is the opposite. It's on the high side of expectations. Tax rate is just over 22.5 percent for the Q3 19.6% year to date. The Q3 does include some nondeductible costs, which increases the tax rate in the quarter, but over time, the main factor explaining our tax rate is the business mix between our different legal entities in each country. Profit for the period is $75,700,000 leading to earnings per share of SEK 43, that's a 26% increase compared to the same period last year, and the rolling 12 month EPS is at SEK 2 flat per share. Moving on to the next slide, a look at our statement of financial position. Total assets have increased since the start of the year to just over 63,000,000,000 dollars The increased lives within financial assets available for sale and financial assets held to maturity, both those items refer to our liquidity portfolio. Also, loans to the public increased since the start of 2015. The increase in assets is mainly a consequence of deposits from the public increasing on the liability side, also increasing our assets and liabilities where policyholders bear the risk that relates to customers' assets in our pension insurance products. Moving down, shareholders' equity amounts to $1,820,000,000 And if we go to the next slide, we'll talk a little bit about our capital requirements. I'll walk through this slide from the top. Our capital base is made up of shareholders' equity. This interim report has been audited, so we are including profit from this year, less assumed dividend in the capital base. We have bought back our subordinated liabilities during this year. The final part of that was now in the end of September. So that's not included in the capital base as of this report. Also making the adjustments for prudent valuation and deducting our intangible assets, that brings us to $1,237,700,000 as a capital base. The risk exposure amounts are increased compared to 1 year ago. Lending volumes have increased during this year. That is partly offset by lower risk weight in our bond portfolio. The total exposure amounts to $7,533,000,000 That brings us to a total capital ratio of 16 point 4%. This is higher than our target of 14% to 16%. Part of the explanation is, as mentioned as I just mentioned, that we had quite a low risk weight in our liquidity portfolio at the turn of the quarter. Likely, we will increase that some during the quarter. And also, this capital ratio provides room for expansion on the credit side, which we're also pursuing. It's a strong capital ratio, and it does reflect good earnings from this year, which has enabled us to buy back $175,000,000 in subordinated debt while maintaining solid capital ratio. All that said, 16.4% is still on the high side of our target range of 14% to 16 percent for the for NovNet going forward. That was the end of my prepared remarks. Before we're on to Q4, I'll hand back to Hakan for a wrap up, and we'll take questions after that. Yes. Could you turn to the next slide, please? So looking forward, we will continue to execute on our growth strategy, I. E, focus on customer increase brand awareness and fuel those 2 components with innovation, I. E, coming out with good stuff for our customers. Going forward, over the last 18 months, and I've said this previously, we'd like to launch a number of products. Going forward, we will like put more weight on enhancing the customer experience in the digital world. Though we will continue to market and product develop around lending products, especially in this low interest environment that is essential for us. So with that, I suggest we'll open up for questions. Thank you, sir. Sir. The first question comes from Stefan Oberg from Handelsbanken Capital Markets. Please go ahead. Your line is now open. Well, hello. Hey, Scott. Hi, there. Could you please elaborate a bit on the possible pros and cons of divesting your consumer credit operation? Okay. But I mean, it's like if we look upon it now, it's growing and it's very profitable, right? And I think especially in this low interest environment, every kroner that we can lend makes up better profit for us than putting in trying to put some yield in the treasury portfolio. So obviously, it's profitable and especially now in the low interest environment that would be on the pro side to keep it, of course, On the pro side, to divest it, it's like there's a big interest in the Swedish market for unsecured consumer lending. Private Equity has taken interest in it and also interest from the public in terms we've seen a couple of IPOs. So there is a big interest, and therefore, you could expect to get a decent price if you divest it. So that would be on the pro side to divest. But it's like our conclusion is it's best to keep it. Yes. I mean, we should be clear on that. I mean, there's no plan to divest the consumer lending business at the moment, but everything is for sale all the time. So but it's a good fit within the group right now, as Wolfgang said. Understood. You changed your brokerage fee in the Q2, but it doesn't really show in the activity in relation to your peers. Why would you say that is? Well, that's true. I mean, I'll be fair. I was also expecting maybe a little more bump in market shares from that. It's hard to sort out exactly what's driven by that, what's driven by what. We do see in certain segments where customers have actually chosen on the new price plan that activity actually has gone up in those customer groups. So I think overall, we're happy with the change, and we felt that it was a necessary move. But yes, I can only say that I noted the same thing that you're pointing out. All right. And how do you see the need for adding additional people to your organization over the next 12 months? Well, as Jacob said, I mean, some parts of the our operation and also like staff is volume driven. That's a smaller part. So if the like market conditions allow and are like we can see the revenues coming continue to come through, but foremost that we continue to grow on the long drivers when it comes to new active customers and also net savings. Then we feel that we have a license to continue to kind of beef up our growth strategy. And we want to increase the capacity in innovation, I. E, more people, product developers and IT developers. So to answer your question, we don't really see the need to do that, but we want to do it to be like continue and accelerate the growth. All right. And then finally, what's your take on the current status on and possible introduction of commission ban for funds? Well, it hasn't like we haven't seen any like development since the Baerje Pappas Magnus Reddingen was presented. So there's nothing new under the sun really. We see some developments and like some preparations in some of the other Nordic markets, and we're following that closely, of course, but it remains to be seen. And I'm like but we are like strategizing around that, but it's too early to make any conclusions, too many moving parts, I would say. And what's your current strategy? The current strategy is like so we believe that we have a kind of strong position. We are a distributor, and every manufacturer of financial services and products, they want distribution. And that's what we have. We have like 4 60,000 plus customers, which is quite a huge customer base, right? So we believe that we're in a strong position. Of course, our strategy is to find ways of like protecting our P and L. How we are going to do that, it depends on the development from the regulators, right? It's too early to say actually. Okay. That was all for me. Thank you. The next question comes from Martin Johansen from Nordea. Please go ahead. Your line is now open. Good morning, Hakan and Jacob. I have 2 questions. My first question is in regards consumer lending on the personal loan business. What is the reason for the pickup in growth? And how much do you want or how much do you want to grow this business going forward? So I'll start from the your last question is that we want to grow the business, but we want to keep the integrity of the scorecard. I mean, consumer lending is the easiest to grow. It's just to take on more risk, right? And I believe actually what we see in the market in the Swedish market, a number of actors are taking on more risk, but we are not. So risk keep the risk low, but grow it, right? And what we have done is actually we've done a number of things just to increase sales. We've done price adjustments but also put retention mechanisms in place in order to keep customers. So we work both on the like proactive on the sales side and also on the retention side. And those initiatives have given effect, and we are now back on growth of 8%. Okay. And in regards to my second question, which is related to credit losses, which continues to fall. What do you see as the main reason for this? And how low you think this number came yet? As I said, I mean, it is a low number in the quarter, but there are a number of things that sort of vary a little bit quarter to quarter in that. So I think around 2% is our is still our expectation on credit loss. So we'll see. I mean, the risk level in the portfolio, of course, develops over time, but it's a little early to say that we're at the lower level right now. But we'll monitor it, of course, and speak more to it in the future. Okay. Thanks. The next question comes from Jens Barnevik from Denan Gerga. Please go ahead. Your line is now open. Hi, this is Jens Barnevik. I just wondered about the occupational pension effort that you're trying to grow within. What is your staffing situation there? And how is that progressing that organization? So we're roughly 20 people, like making up to that effort, right? And if you remember, when we announced that we are going to go for a bigger like chunk of the market, we said we are tripling the sales force. That is done. All of the people are in place and like having geared up. So and when we see the numbers, both when it comes to transfers, but also in Loeppan der Preammer, whatever that is called in English, sorry about that. So we are on or ahead of plan. So we're really happy about that. There was an article today in Dogen's Industry about the difficulty of moving from certain pension companies because of fixed fees and moving. Do you see that as a problem? Yes. Of course, it's a problem. It's a problem for us as citizens in Sweden, right? And it's I'm a bit like personally, I'm a bit concerned about nothing happening in that matter. I was just the other week, I went to see the Finance Market Minister, Per Boe Lund, and trying to like fill him with enthusiasm to actually pick up that like extended transfer rights ball and run with it. So we'll see what actually happens. But it's I think I mean, to be honest, I think it's terrible. Nothing has happened there. But long term, I'm optimistic. So and when that comes into place, that creates a big business opportunity for us. And I had a question on the commission ban for funds. As you're not giving any advice to your customers, is that applicable for you and Avanza, the commission band because you're just a neutral platform? That's correct. And the way that it's the Verde Papisch, Markus Zdrenningen sort of proposes it is they're not including open platforms such as ourselves in the commission ban. So that's a little bit of different track than what we've seen in the U. K. And Netherlands, which sort of moved ahead on MiFID II a year or so ago and where they actually have introduced the commission ban. But that seems to be sort of the base case in Sweden and I think in the Nordics as well is that there won't be a change there. Having said that, I mean, ultimately, we our customers value transparency quite a lot, and we feel that anything that brings more transparency into how you're paying for services and how services are constructed, that's in the end, we could see that as a positive. So we'll see how legislation plays out. But at the moment, I think the base case is that, like you said, open platforms will not be included in the commission band. Okay. Do you see any negative mix effect in your funds business that ETFs and index funds are growing instead of active funds, which is less profitable for you because the fees are much lower on those products? Yes. Actually, we've seen that for quite a while, right? So it flows from like actively managed funds to more index and also ETFs are like a growing part of it. But we don't really bother about that. I mean, it's like our customers want to have those products, they want, right? So we're not taking any measures in order to like do anything about it. I think also we should point out that, I mean, most of our we had this discussion a lot when we introduced the fee free index funds in each market, the super funds. And I think most of our customers, they have a mix. I mean, you have both passive and active products. So even though there's a little bit of a move in between, I don't we don't see the end game being that everyone is 100% in index products. I think when we look at our target customers, the sort of self directed customer who wants to be involved in decision making, they tend to use a mix of individual shares, passive products and active products. So it's a mix between in the quarter, I think what pressures our mutual fund income is it's mainly that the volume, the market has gone down and that has brought the value in the funds down. It's not that so much the mix between it's a little bit shifting towards interest rates, but slim. So I would say that the main explanation is that the volumes overall are down. And one example actually of what Jacob is saying is that if we look upon our customers and the ones who actually have a position in 1 or several of our index fee funds, they hold roughly 10% in the fee free index funds and the 90% is like invested in other products that might be shares or other like more actively managed funds. And I think that's like what we've seen, it's kind of stabilized on kind of 10% of the customers who holds the super funds. Okay, great. Thanks a lot then. Thanks. Thank you. There appear to be no further questions. I'll return the conference back to you, sir. Okay. So thank you all for attending, and I'm looking forward to see you around and if not, to talk to you when we present the Q4 and 2015 results. Thank you so much. Have a good day. Thank you. Bye bye.