Earnings Call: Q2 2015

Jul 16, 2015

Welcome to the Nonet General to June Interim Report 2015. Today, I'm pleased to present CEO, Hakan Nuegger and CFO, Jacob Kaplan. For the first part of this call, all participants will be in a listen only mode. And afterwards, there will be a question and answer session. Speakers, please begin. Thank you. And guys, welcome to this Q2 interim report presentation. And as the moderator say said, beside me, I have CFO, Jacob. So we are happy to announce another good quarter for Nubnet. The low interest rate environment has actually like driven money to the stock exchanges and also like stimulated high activity. We saw that in Q1, and that momentum has like followed into Q2. At the end of the quarter, we have also seen some volatility driven by the different crisis in Greece and also in China recently. So could you like flip to the next slide, please? So we always like experienced some seasonality with Q1 being higher activity than Q2 and so also in 2015. But if you compare the Q2 20 15 towards the Q2 2014, it's significantly better. And as you can see on the slide, revenues increased by 16% and also profit after tax was up with 46%. And that takes us for the period January to June. Revenue increased by 17% and profit after tax up with 42%. Next slide, please. So some highlights from the quarter. So we have launched a new and better pricing model in Sweden. It has been well received. It's too early to say what impact that has given us on the P and L, but we will come back to that after summer. We passed 50,000 members in Cherwill, our social investment network, and that was a milestone. We was also for the 7th year in a row named stockbroker of the year in Denmark for our Danish business. And that is especially like satisfying because it's not a jury, it's the members who are actually voting for the best buschmagler. Next slide, please. When it comes to customer growth, we are experiencing growth in all markets. Denmark standing out with a growth rate of 35%. We are still happy with the growth rate we experienced in Norway with 13% and also in Finland with the same number, 13%. In Sweden, we have experienced a growth rate of 7%, and we know that we can do better. And that gives us on a group level a customer growth or a growth of active customers of 12%, which is double digit. Next slide, please. When it comes to the growth in net savings, it's the same like picture. We see Denmark standing out with a growth rate of 44%, really good growth in Norway with 28% Finland, 1%. We have some other market dynamics and other customer behaviors in Finland, and I won't go to the details of that. But typically, one of the factors is that dividends are taken out by our Finnish customers and that is a market behavior, so to speak. In Sweden, we experienced a growth rate of a net savings of 7%, and that includes the outflow from our one of our partners, Cerro Veron Partners. So if we take that away, the underlying growth rate in Sweden is 11%. And that takes gives us a growth rate when it comes to net savings of 12% on a group level. Next slide, please. When it comes to trades, we saw an uptick from when it comes to Q1, from Q1 2014 to Q1 2015 of 18%, and the Q2 uptick is actually 36% when we compare Q2 'fourteen to Q2 'fifteen. And that goes back to what I said in the beginning. So we're really happy about the like momentum we saw in Q1 being carried into Q2. Next slide, please. So when it comes to lending, which is you know, you've heard us say that it's high on the agenda. We have actually seen an uptick in margin lending. As you remember, we launched new margin lending product in all four markets, and that gave us an uptick. Now in Q2, we have seen some cautiousness when it comes to leveraging from our customers. So it's more or less flat. When it comes to personal loans, we still experience and we're working to grow that portfolio. And we do grow it in the new environment with more kind of fierce competition. Many actors want to lend money and also the like increasing number of loan brokers. Next slide, please. And then I hand over to you, Jacob, I think. Thank you, Hakan. All right. Let's take a closer look at our financial results for the Q2. As you heard in Hakan's comments, development compared to the previous year that we saw in Q1 has continued in Q2. The low interest rates across all Nordic markets continued to support the stock market and create a good environment for our growth. However, as you will see, what benefits part of our revenue is a drawback on other parts. The total revenue amount to $300,000,000 for the period April to June 2015, That's a 16% increase compared to the same period last year. And if we look at the different parts in our revenue, we see that the trends differ a little bit within revenue. So starting with net interest income, that's the blue part of the bar the blue part to the bottom of each bar. It's down by $5,000,000 or 4% compared to Q1 and down 14% year on year. This is an area where the low rates are affecting us negatively. Our NII is made up of 3 main parts. The trends within the different parts are similar in this quarter to what we've seen over the last year or so. So let's go through each one of them. Starting with our private loans business, it continues its stable performance. It's roughly 50% of net interest income in the second quarter. Volumes are picking up a little bit, as you just saw, but we're not growing at the same pace as 2013, beginning of 2014, and partly due to the increased competition, but also overall market growth has slowed compared to 1, 2 years ago. We are seeing somewhat lower interest rates also in private loan market, but the drop is not as dramatic as in the market as in market rates for bonds. The next part, margin lending. Volumes are up about SEK 500,000,000 since the start of the year. That's positive. And as Hakan mentioned, we've also launched new products within the margin lending. Also here, rates are slightly lower, but the effect on NII is mostly offset by the larger volumes. The last part of net interest income is the treasury portfolio, where we manage our excess liquidity. Here, we are directly affected by the continued drop in market rates, and a large part the major part of the drop in net interest income from Q1 to Q2 is explained in this part. So that covers net interest income. Moving on to the next part, commission income. Here, we benefit from the low interest rate environment as equity markets have performed well during the year, even if valuations fell back a little bit during the final months of the quarter and some volatility as well. But number of trades are up over 35% compared to the Q2 of 2014. Net commission per trade, so the revenue per trade is level compared to the same period last year, but down a little bit more than DKK 2 per trade compared to the Q1 of this year. As Hakan mentioned, we did launch a new price plan for our Swedish customers during the Q2, but that was at the end of June. So the explanation for the drop in commission per trade from Q1 is more related to seasonal change and the difference in customer mix. In the Q1, there's often a very broad part the customer base that trades, which drives up commission per trade. So it's still early to evaluate the effect of the price change in Sweden. It will reduce commission per trade further from these levels, but will also lead to increased number of trades. So we will come back to the effect of the price plan or the new price plan when we sum up the Q3 in a couple of months. The last part of revenue is made up of other income, which includes administrative fees and licenses, but the main part is revenue from FX transaction, which are generated when customers trade outside their home market. We've seen this increase steadily during the last year and also during the start of this year as overall trading activity has also increased. Partly, it's an effect of more and more people discovering how easy it is to trade foreign shares through our platform, especially if you look at our Danish, Norwegian and Finnish savers, they are more active outside the home market compared to our Swedish savers. This is due to smaller home markets, of course, explanation. And but as we grow outside of Sweden, this that affects this revenue item. So a positive development when it comes to FX transactions. I think that sums up revenue. We'll go to the next slide, have a look at our cost development. Expenses, including credit losses, totaled $199,000,000 for the quarter. This is an increase of 6% compared to the same period last year and roughly 2.5% quarter on quarter. The increase in the cost base is related to us adding resources in our product development team, our corporate pension sales team in Sweden and also in our IT development team. The increase is in line with the guidance we gave in the Q1 interim report of growth in expenses, excluding credit losses, in the range of 4% to 6% for full year 2015 compared to full year 2014. So we have gradually increased expenses during 2014 and continue to do so during this year. And we've been building out our capabilities in the mentioned areas and also increased the pace of our product development. During this period, we've also had a strong revenue development, and we've gotten the question a couple of times on so how fast could you cut costs if market activity drops? It's a fair question, but as with many fair questions, the answer starts with it depends because it does depend on the situation. True, part of our expense increase is directly related to higher volumes in our operations, and also some items can be adjusted fairly quickly, such as marketing. However, the bulk of the increase is in staff working on development in areas we see as vital for Nordics in the long term. So should top line growth slow, we will naturally address expenses, as we have also done in the past. But there's not a direct answer today to exactly how much the cost reduction will be given the certain revenue level. So I hope that gives some guidance on our thinking on the topic, and of course, we will continue to be as transparent as we can around this going forward. That's it for expenses. Moving on to the next slide. Quick look at operating profit. Totals $101,000,000 for the quarter, 26% lower than the Q1 of this year, but a year on year growth of 43%. So happy about that. Not much to add. We'll go to the next slide. This our Nordic footprint. All four markets have developed well during 2015. The pie charts here show that around 40%, 50% of our business comes from Norway, Denmark and Finland. The share of operating profit from the same countries has increased to 43% of the total so far this year. That's up from around 20% for the full year 2014, so really good development. And as Orkin pointed out earlier, Denmark continues to stand out in growth at a rapid clip, 30%, 40% growth on long term metrics of net savings and number of customers. It's not long ago that we referred to Denmark as our smallest market, but today, it's actually our 2nd largest market measured in revenue and operating profit, as you can see in the slide. Norway also very positive development during the last four quarters with an increasing growth rate both for number of customers and net savings. As most of you know, we operate all 4 countries from a joint platform, where part of that platform is a fixed cost, which is allocated evenly to all countries. As the markets with the larger business volume will generate better margins, operating margins. Denmark does stand out even here with because it's roughly 2x the number of trades per customer compared to the other markets, and that leads to very good operating margins in Denmark at the moment. We'll go to the next slide for a little bit of a closer look at the income statement. Thank you. I'll cover the top part here pretty quickly as we have spoken to most of those items already. But as mentioned earlier, revenues for the Q2 totaled $300,000,000 16% up compared to the same period 2014. If you look to the right in the slide, also the 6 month period, January to June, shows similar development compared to last year, and it's up 17%. And also, as we mentioned, the increase compared to last year is on the revenue on the trading related items, so net commission income and other income, while the NII is lower in both those periods. Expenses, just over $187,000,000 up 6% compared to Q2 last year and also year to date up around 5% compared to same period last year and the bulk of the increases in general administrative expenses, which include personnel costs. Moving down to credit losses. We see that they totaled 11 point $8,000,000 in the 2nd quarter, so well in line with our expectations and just slightly up compared to the same period last year. All of this is related to our consumer lending business and works out to a loss rate of about 2% of volumes in that business. Tax rate, just under 16% for the 2nd quarter and 18.3% year to date. The lower tax rate in Q2 is related to effects from converting our insurance company's branch in Norway to a subsidiary. Ultimately, the business mix between the different legal entities will decide the tax rate, but I think the year to date level is a good indicator of at least my expectations for the rest of 2015. So probably a little low on the tax rate in the Q2. Profit for the period, dollars 85,300,000 leading to an EPS of €0.49 per share, a 48% increase compared to the same period last year. And the rolling 12 month EPS is at DKK 1.91 per share. On the next slide, we'll have a look at the balance sheet. Total assets have increased since the start of the year to almost $62,000,000,000 The increase lies within financial assets and also some within loans to the public. It's a consequence of deposits from the public increasing on the liability side. Also increasing our both assets and liabilities where policyholders bear the risk that, that's related to customers' assets in our pension and insurance products. Shareholders' equity, dollars 1,742,000,000 We'll go to the next slide to speak a little bit to our capital situation. Here we see our capital base. It's made up of shareholders' equity, deducting profits for the quarter as we have not been subject to audit. We still have a debenture loan, which adds $45,000,000 to the capital base. We've said this before in this forum, but we are planning to buy back that loan in September. So, it will be taken out then. If we make an adjustment for prudent valuation, deduct our intangible assets, that gives us a capital base of 1,161,000,000 dollars The risk exposure amounts are fairly stable compared to 1 year ago. Lending has increased, but it's offset by lower risk weight in the bond portfolio, and the total exposure amounts to 7,951,000,000 dollars That results in a total capital ratio of 14.6 percent and a core Tier 1 ratio of 14%. Adding back 40% of the unaudited profit from 2015, we had a dividend policy of 60% of profit. So you should sort of if you add back 40% of the unaudited profits and also take out the Tier 2 capital, which we will do in September, we would now have a capital ratio of 15%. So adjusting for those two items, it will be slightly higher. And the 15% for the 14.6 percent can be compared to a minimum Pillar 1 requirement of 8%. It was required to have a capital conservation buffer of 2.5%. And in the Q3, there will be a countercyclical buffer added of about 1% coming into effect in Sweden and also in Norway. And on top of that, there will be a Pillar 2 requirement. So going forward, we aim for a capital ratio of 14% to 16% for Nove Net. So that gives you an idea of what we're aiming for when it comes to capital deployment. All right. I think that was the end of my prepared remarks. I'll hand back to the questions afterwards. Thank you. And the next slide, please. So if we look forward going forward, we will continue to execute on our very simple growth strategy, having super satisfied customers recommending us to colleagues, family members and friends also increasing brand awareness, so we become a choice for people in the Nordic countries and actually like fueling those 2 initiatives with what we call innovations, I. E, coming out with good stuff for our customers at their high pace. And if there will be any kind of change going forward, we will try to increase the speed which we come out with stuff for our customers. Also going forward, the last couple of quarters, we have launched new products, and we will continue to product develop and market, especially lending products. But we will also put more focus and more resources in enhancing the user and customer experience in the digital interface. So that is actually like we will continue again to execute on the strategy and more focus on the user experience. Okay. So I think we're ready for questions Our first question is coming from Mr. Stefan Ober from Handelsbanken. Please go ahead, sir. Hi, there. I only got 2 questions for you today. What would you say the main reasons are to why your main competitor is able to grow so much faster than you in Sweden? Do you think it's possible for you to close that gap? And if so, how could you achieve that? And the second question is concerning the consumer credit operation and your churn strategy there. Are you looking to increase the level of growth in that business? And if so, how will you manage to do that? Okay. So maybe I should start, and I'll start with your second question first, if that is okay. So I think one of the like critical success factors in driving a consumer lending business or personal loans business is to take on the right customers in upfront. And that means you need to have a, well, a scorecard and a scoring process that actually ensures ensure you're taking on the right customers. And it's easy to grow a personal loans business. It's just to take on more risk, but that's not our like not our way of doing it. We have a healthy sales of new volumes. The increased competition and like phenomena of the loan brokers have actually like increased the turnover rate. So our focus now is to like create loyalty and keep our customers longer than we do today. So retention is the focus for us. And if we do that, we will grow faster than we do right now. Cool. Then when it comes to like the switch business, we follow, of course, like competitors and peers in all four markets. We do that in Norway. We do it in Finland and we do it in Denmark. And of course, we follow Avanza in Sweden. And we can conclude that they are they have a high growth or a higher growth. And our conclusion is that we can also grow faster in Sweden. So and the way we are doing it is to execute on our growth strategy and like we will also speed up or try to speed up the pace in which we come up with good things for our customers. So that is the very simple plan. We'll continue with Nicolas Macneal from SEB. Please go ahead. Good morning, Rok and Jakob. Thanks for a good presentation. A couple of questions from my side. First, you are receiving lots of deposits from your clients at the moment, which increases the size of the liquidity portfolio a lot, which is probably costing you money at the moment given where interest rates are. Do you have any way to address or mitigate the impact from an increased liquidity portfolio and negative interest rates? I can answer that. The best way for us is to increase our the volumes in our credit products. So we're definitely putting a lot of focus on that. And Hakan said, we've had a focus on that for some time. That doesn't at the moment, that doesn't cover at all. So yes, we have the effect that you're saying that it's in some cases, we actually do pay negative rents negative rates, but if not negative, it's very slim returns in the bond portfolio right now. So that's strange enough that type of growth can put pressure on net interest income. But the best way to go forward is to continue to grow on the credit side. And I think if I can add, I think we can do better on the private loan side, as we spoke about, right? And to Stefan's question, we can also do better with our existing margin lending, and we will also, going forward, product develop around new lending products. Okay. And to follow-up on that a bit, if you could give some further info on what's the interest rate duration in your liquidity portfolio? How much further downside to the net interest income would it be if your current liquidity portfolio would be yielding at current market rate? As I assume, you still have some bonds, for instance, that are paying higher coupons than the current on such bonds? Yes. You do. I mean, average duration is, I think, just under 6 months in the average duration, a little bit shorter, maybe 4, 5 months. But so but like you said, I mean, some that's the average. So some are, of course, longer and they're yielding better. So I would say all is equal. We've seen a drop Q4 to Q1, and we've seen a drop Q1 to Q2. And all else equal, there's another step down in the Q3. But it varies, of course, it depends on what happens in the market. And I could add to your previous question around what customers do. It can also swing pretty quickly that savers look to invest. And then our excess liquidity is reduced, of course. So it could also be that savers choose to act differently. But yes, there's more it could all else equal, we would have another step down in Q3. Okay. And what is the average on your liquidity portfolio at the moment? Do you know? It's still positive, but not by much. So I don't have the number right in front of me right now. And then my final question related to inflows. Do you have any update on your view, how much you expect for outflows from SODIBAN Partners from the for the rest of the year and maybe also through next year? No. I think what we experienced during the first half of this year is in line with like estimates that the joint estimates that we and Cerro Verano Partners made initially. So we have no reason to believe that there will like land or the actual numbers will be any other than the estimates. In September will be the next transfer of funds. So sometime ahead of that, we'll know more. And we'll communicate in the monthly press releases the exact amount that how it affects net savings, but no news really on that. Okay. Thanks. Thanks. We have no further questions. So back to you, speakers. Okay. If there are no further questions, we can only say thank you, and we will see you guys around. And have a very nice continued summer. Thank you. Thank you.