Earnings Call: Q1 2015

Apr 23, 2015

The Nordnet January to March Interim Report 2015. Today, I'm pleased to present Haakon Newberry, CEO and Jacob Kaplan, CFO. For the first part of this call, all participants will be in listen only mode and afterwards, there will be a question and answer session. Speakers, please begin. So welcome to this Q1 report presentation. As usual, I have CFO, Jacob, with me. We are really happy to present this Q1 report, interim report. It's been a strong quarter financially wise, growth wise, but also operational wise. Could you please take the next slide, operator? So it's actually the best financial quarter in Novem's history. Q1s are always strong, but this Q1 has been especially so, driven by extreme market condition. We have very low interest and people and capital seat stock exchanges, but also and driving valuation. And we will see and we will show you that we see the effect of both these phenomena, high activity and low interest rates in our numbers. So revenue was up 17% and profit after tax by 39%. Next slide, please. As I said, best operating profit in Nuna's history, high growth in terms of customers and savings. And also, as you know, the number of customers and savings are our long drivers, of course, partly due also to the low interest and people and capital seeking the stock markets, But also, we've been able to support that growth in 2014 by a number of product launches, and we have also been able to launch 2 new products during this quarter, new mobile apps for all three platforms, iOS, Windows and Android and also just recently the new margin lending product we call the knockout loan with knockout competitive terms and conditions. Next slide please. So when it comes to growth in customers, we see a very strong quarter. We are growing in all markets. In Sweden, we are growing by 8 percent, in Norway by 10%, Denmark by 33% and Finland by 14%. So good growth in all markets, and we have actually increased the growth rate in all four markets. The dynamics are, of course, the same, interest in the stock markets and also helped by our product launches. Next slide, please. Also when it comes to net savings, we are we see a real strong quarter growing in all markets, Sweden by 12%, Norway by 25%, Denmark by 42% and Finland by 2%. And we're especially happy about Norway. As you might remember, we have seen a new level of growth in Norway the last part of 2014, and that actually continues into 2015. So we're especially happy about that. On overall level, we see on group level, the growth is 14%. And as you can see on the slide, in terms of total capital, we're closing in on SEK 200,000,000,000. Next slide, please. As I said, Q1s are always like strong also when it comes to activity, but this Q1 has been extremely high activity. And we see that in all markets, and valuations are up, and Denmark is in the lead with a 28% increase in valuation in 1 quarter. Next slide, please. When it comes to lending, we have seen a pickup in our margin lending volumes, which is really good. The interest of the knockout loan and the super loan, as we call it in the other markets, is really high. It's been well received. And we see volumes also starting to pick up. When it comes to private loans, we are still growing even though it doesn't really show in the numbers, it's like rounding errors there or we're growing though at a lower pace than we've seen historically. And we have now put a new strategy in place to come up to like historical growth numbers when it comes to private loans. So next slide, please. And with that, I hand over to Jacob. Thank you, Hakan. We'll start by taking a look at quarterly trends for revenue and expenses and then look at the profit and loss statement and balance sheet for the period in more detail. Revenues totaled $330,000,000 for the Q1 of 2015, that's a 17% increase compared to the Q1 of 2014 and a 16% increase compared to the Q4 of 2014. The increase versus both periods is mainly within net commission income as trading activity has been high during the quarter in all four markets, as Hakan highlighted. Activity has been high in the market as a whole, but also specifically within Nordnet, we have seen a broad part of the customer base make trades during the quarter. The customer mix has been positive and has held up commission per trade. Also FX currency is in our favor this quarter with a weaker Swedish kroner, both versus the euro and the Danish kroner. So both compared to the same period last year and to the previous quarter, we have a positive effect. The effect on total revenues, so not just commission but total revenues, is roughly $5,000,000 versus the Q1 of 2014 and roughly $1,000,000 versus the previous quarter. Within net commission, we also have commission from mutual fund fees. These commissions have increased over 50% compared to the same period last year. The increase is driven by higher fund volumes on the platform. In Q1 this year, 3,000,000 of net commission is related to mutual fund fees. Moving on to net interest income, which is lower both quarter on quarter year on year, and the story here is the same as we spoke to 3 months ago when we last spoke on the on our earnings call. The drop from the Q4 is mainly from our bond portfolio as market rates have continued lower, reaching even negative territory in some cases. The other components in net interest income include our consumer loan offering and our margin lending product. Consumer loans make up about half of net interest income in the period. And as Hakan spoke to, we virtually flat volumes in the Q1 compared to the Q4. Some pressure on rates also here, but nothing as dramatic as the quarter we've seen in market rates in general. Margin lending volumes have been kind of sluggish during 2014 in spite of a stock market increase. But as you saw in earlier slide, we have picked up almost $500,000,000 during the Q1 compared to the end of 2014. Part of that is the positive stock market development, of course, but we also have a positive response to our launch of the repackaged margin lending product, the knockout loan or the super loan. The repackaging does mean lower rates, especially in loans with very low loan to value ratios. In Q1, however, there's no real change to average rates in margin lending compared to previous quarter. We'll see how that develops going forward, but our expectation is that the volumes will more than offset slightly lower rates in this product. The last part of revenue, other revenue, mainly includes resulting from when customers trade outside of their home markets. The increase here is somewhat higher than what at least I was expecting. It's 52% year on year and 50% quarter on quarter. Normally, this follows overall trading activity, but in Q1, we see higher volumes of trading from outside the home market, especially customers outside of Sweden trade a lot across border. And we'll see how this higher level if it's a new higher level that we've reached or how that develops going forward. Nonetheless, it's a very positive effect of our Nordic presence. I think that sums up revenue. Moving on to the next slide. We'll look at cost developments. Expenses, including credit losses, totaled 193 point $5,000,000 rounded to $194,000,000 there in the slide. For this quarter, this is an increase of $8,000,000 or 4% compared to the same period last year and 2% quarter on quarter. As we also spoke about last time, we have increased the cost level during 2014, mainly by adding resources in our product development team, our corporate pension sales team in Sweden and also in IT development. And on the back of good growth in customers, net savings and revenues, we have continued to invest in these three areas during the start of 2015. New products have been a way to fuel our increased growth the last couple of years and discontinued in Q1, where two examples are the new mobile apps that are released for all platforms and new margin lending product in all four markets. Our aim is to continue high pace of development also during 2015. Development, I should mention, it also includes our operating platform, where higher volume increases the need to automate as much as possible. Looking ahead to the rest of the year, we have decided to change the way we express our view on future cost development. We have previously talked about a target cost level for the next couple of quarters. We now change that to a growth rate for costs for the full year. So for 2015, we expect expenses before credit losses to increase by 4% to 6% compared to 2014. Note that we have earlier talked about total costs, including credit losses, and we now changed that not because we expect any change in credit loss, but it's just a more traditional way to talk about cost in the bank setting. So in essence, this is not a change to our previous communication, but we feel that it we're expressing it in a more clear way, and we hope you share that view. Also, as we've said before, we see that operating margins should increase with increasing revenues, meaning that revenues should grow faster than expenses. So next slide, please. That brings us to operating profit. Operating profit is $136,000,000 for the quarter, which is an all time high for NovNet. It's a year on year growth of 43% and 41% increase compared to the previous quarter. And as we said a couple of times in the call already, Q1 normally is strongest quarter of the year, but nevertheless, 2015 has started in a very positive way. Some more encouraging news on the next slide. If we move on, looking at Nordenet and our Nordic footprint. The pie charts here illustrate that around 40%, 50% of our business measured as savings capital, number of customers or revenue comes from Norway, Denmark and Finland. What's encouraging is that also share of operating profit from the same countries has increased to 40% of the total for the first quarter. That's up from around 20% for the full year 2014. As most of you know, we operate in operate all four countries from a joint platform, where part of that platform is a fixed cost, which is allocated evenly to all countries. Hence, markets with larger business volume would also generate better margins. And during the 1st 3 months of 2015, business volume has been high across the Nordics, and we can see good business leverage and increased margins in all four markets. So we're happy about that. Denmark continues to grow very, very nicely, contributing almost 20% of group operating profit in the Q1. Also Finland and Norway show positive development, and it's encouraging to see that good development on the long term drivers, customers and capital, which we saw already last year, are also is translating into growth on the bottom line. We'll go to the next slide for a closer look at the income statement. So revenues for the 3 month period, January to March, totaled almost 330,000,000 dollars to $329,800,000 It's up 17% to the same period a year ago. And as mentioned earlier, the main increase lies within trading related revenue items, net commission income and also other income. And that's at the same time, net interest income is lower compared to the same period last year. We covered that. So moving on to expenses. They amount to $181,000,000 dollars 181,700,000 I should say and are up about 3.5% compared to Q1 last year. The bulk of the increase is in general administrative expenses, which include personnel costs, and the increase is due to added additional staff in IT product development and also the corporate pension sales force in Sweden, which we've talked about. So moving down to credit losses. We see that they totaled $11,800,000 Credit losses are slightly higher compared to the same period last year, but well in line with our expectations. Tax rate is just over 20%, up a little bit compared to the full year 2014. The reason is that from a tax perspective, a less favorable business mix during the quarter, with a larger part of the profits coming from the bank legal entity and less from our insurance entities where we have a lower corporate tax rate. Profit for the period is $108,500,000 and that works out to an EPS of $0.62 per share, 37% increase compared to the same period last year. Moving on to the statement of financial position or balance sheet. Here, you see total assets have increased since the end of 2014 to $60,000,000,000 174,000,000 increased lives within financial assets and also some within loans to the public. This is a consequence of deposits from the public increasing on the liability side. Also, you see assets and liabilities where policyholders bear the risk both increase, and that relates to customers' assets in our pension insurance products. Shareholders' equity increases by a little bit more than $100,000,000 to $1,858,000,000 dollars I think that concludes the balance sheet. We'll move on to the next slide and I'll speak a little bit more to our capital situation. Looking at capital requirements. Starting at the top, our capital base is made up of shareholders' equity. We deduct profits from this quarter as they have not been subject to audit. During the quarter, we have bought back the first part of our debenture loan. So the remaining debenture loan is the $45,000,000 that you see in the chart, And we intend to buy that part back in September of this year. We also make an adjustment for prudent valuation and deduct the proposed dividend for 2014 of SEK 1 per share, which works out to SEK 175,000,000, deduct intangible assets, and that brings us to SEK 1,174,000,000 as capital base. Risk exposure amounts have increased slightly compared to 1 year ago. Lending has increased during the same period, but that's partly offset by a lower risk weight in our bond portfolio. So total exposure amounts to $7,875,000,000 and that gives us a total capital ratio of 14.9% and a Core Tier 1 ratio of 14.5%. That can be compared to the minimum Pillar 1 requirement of 8% plus capital conservation buffer of 2 point 5%. And during the Q3, we expect the countercyclical buffer of 1% to come into effect in Sweden. Also add we need to add the Pillar 2 requirement. So going forward, we aim for capital ratio of between 14% 16% for NovoNet. That was the end of my prepared remarks. I'll hand back to Hakan for a wrap up, and we'll take questions afterwards. Cool, Hakan. So the next slide, please. So in summary, it's been a strong quarter financially wise, growth wise, but also operational wise. And we will continue to execute going forward, we will continue to execute on our growth strategy. It consists of 3 components, really satisfied customers that go around and recommend us to their family members, colleagues and friends, increasing the brand awareness, so we may so we become a choice and also fueling that with innovation, I. E, coming out with good things for our customers. As Jakob said, the high volumes and the flow of volumes has put pressure on the parts of our operating platform that are not so scalable. So we will direct more resources on that the coming quarters to actually do more automation and increase scalability. That was it from us. So now we open up for questions. Operator, please. And we'll take your first question from Mr. Stefan Holberry from Handelsbanken. Please go ahead, sir. Yes. Hi. This is Stefan. You guide for a 4% to 6% cost hike in 2015. If we were to assume that current underlying market remains strong, looking at activity and inflow, etcetera. Are you comfortable with that range also for the cost growth in 2016 and possibly even 2017? Well, we expect it as a number for 2015. But and as we said before, depending on the market development, we see the opportunity to when the market develops well and we see good revenue development, we also have a chance to run a little faster and put some more resources in our development. And consequently, the other way around, should we see a downturn in the market, we can also sort of back on some of those things. So it depends a little bit on how the market develops and for what also sort of what type of growth we see when it comes to customers and net savings. Yes. But if you assume that the current underlying strong market remains, would you still be happy with 4% to 6%? I'm not I don't really have a firm answer on that intentionally. So it's not unreasonable. If we see a continued positive development in market, I think, like I said, we will continue to invest and to and that will some increase, of course, driven by increasing business volume, but also some increase driven by just more development on new things. All right. Maybe I can comment on that. So we want to invest in things that can help us grow, continue to grow or grow even faster, right? At the same time, we are working like to actually like take out costs from less value creating things to more value creating things. So we're not only like investing on top of our current cost base. We're doing stuff with our cost base also. So like 4% to 6%, as long as we can continue to improve our cost income ratio and our profit margin, that is okay, I think. All right. And also on cost, could you please describe the flexibility in your cost base? Let's say the market collapsed tomorrow, how quick can you come down on cost? It's a tough question. Like we said, most of the cost that we're adding on is additional staff. And one of the hardest things right now is finding the right people to recruit. So in a situation where the market a situation where the market turns quickly downwards, that will be a tough decision on sort of what are the initiatives that we see are still worthwhile to continue investing in and what are the ones that we can scale back on. So it's not there's not one number to give you that the market goes down and our costs go y%. But it's it will be a that's what Hakan and I are here for. That's our job. Tough decision. All right. And I got two questions on consumer credit operation as well. First, do you have any plans to expand that outside of Sweden? And then finally, how would you describe the competitive landscape right now within consumer credit? You mentioned in the report that you have seen the demand come down a bit recently. So as of now, we do not have any plans to expand that business geographically or to our other markets. Even though with these low interest rates, I mean, lending products is high up on our development agenda. And as an evidence of that, our new knockout loan we just recently launched is a thing to actually address the low interest rates. So but we and one thing is that we believe that we can continue to grow that business in Sweden with good numbers and in a risk controlled way. It's super important that we keep the integrity in our scoring model, right? Now the landscape has actually changed and the distribution has been taking over by the loan brokers. So it's a new kind of a new ballgame, and we are addressing that by putting a new strategy in place to actually come back to, well, better growth numbers. All right. Thank you. Thanks, Hassan.