Earnings Call: Q4 2014

Jan 30, 2015

Ladies and gentlemen, welcome to the NoreNet Year End Report 2014. Today, I'm pleased to present CEO, Hakan Neuber and CFO, Jacob Kaplan. For the first part of this call, all the participants will be in a listen only mode. And afterwards, we will have a question and answer session. Speakers, please begin. Cool. Thank you. So welcome to this Q4 year end 2014 report presentation. I guess you've already read the report on the web, and we are happy about how the last quarter and then the full year turned out. Next slide, please. So for the quarter, our revenue increased by 8% and giving us a profit after tax So next slide please. And the Board of Directors, they will suggest or propose to the AGM an increased dividend of SEK 1. And you remember, we had SEK 80 5 last year, and that's 63% of the earnings per share, which is in line with the policy that we have previously communicated. During the quarter, we launched our new communication transparent banking. We know that one of the frustrations with bank customers is the lack of transparency and we are playing towards that theme with that concept. I guess some of you have seen the movies that we have produced. They got really good viral spin. So we are happy about that. We also launched Chervil previously and now we have over 30,000 of our customers having, as we say, made 1 or several of their accounts social. And those customers represent the savings volume of roughly SEK 10,000,000,000. Share wheel is an initiative to actually inspire our customers to increase their activity. It's also It's customers to become more successful in their savings and investments. And if they are successful, we will become more successful as well. You who have heard me talk about our growth ambitions previously know that we have an ambition to actually grow double digit when it comes to customers and net savings and create that growth in a sustainable way. Now if we look at the growth for 2014 in terms of number of customers, we are at least if we round off 9.6% to 10%, we are at double digit growth. We are growing In Finland, we're growing 13% in terms of number of customers Denmark, 27% Norway, 8% and Sweden, 6%. We have when we spoke like 1 year ago, we said that we're happy about the growth in Finland and Denmark, and we know that we can grow faster in both Sweden and Norway. Now we're growing faster in both Sweden and Norway. And we're especially happy about the turn of the in the trajectory of growth in Norway. And we have with the launch of the Superfunds and also share with, we have kind of in a positive sense shook up like Norwegian market and started growing at a higher pace. So we're especially happy about that. Next slide please. The same goes for net savings. So we have an overall growth for the year of 12% roughly. We are growing in all markets. The least growth we experienced in Finland, but I guess that is due to the kind of not so good economical situation in Finland. And actually like when it comes to net savings and growth of number of customers, this year 2015 has also started as the most years started in a very good way. Next slide please. So number of customers and net savings we call the long drivers. The number of trades or trades are one of our short drivers, which affects our P and L momentarily. So Q4 has been a strong month with high activity when it comes to trading and especially October you remember the turbulence and that like as a consequence gave us a high activity in our customer base. And we have also seen that high activity in Q4 being carried over also in the start of this year, which is really good. Next slide please. When it comes to our lending, our private loans business continued to grow. In the slide there, you can't actually see that we are growing the last three quarters, but it's like if we look at on the decimals behind, you can see the growth. Though we're growing a bit slower in the last half year of twenty fourteen than we did in the beginning. Margin lending is actually down in the quarter. Previously, like back in the years, we have seen a very strong correlation, but like index on the stock markets and margin lending, index down, margin lending down, index margin lending up. But that correlation, we haven't seen during 2014. But we see a large potential when it comes to large margin lending and we are planning a product launch within that concept. When it comes to like private loans, if I jump back to that, we've seen a slowdown in the growth, but we're still growing. The competition is fierce, both between lenders, but also between loan brokers. But we have now a strategy in place to continue to grow in a risk controlled way. Next slide please. And then I hand over to you, Jacob. Yes. Thank you, Hakan. So revenue development. First, let's take a look at quarterly trends for revenue and expenses, and then we'll look at the profit and loss statement and balance sheet for the full year in a little bit more detail. But starting out with revenues. Revenues for the Q4 of this year totaled $284,500,000 That's a 9 percent increase compared to the Q3 of this year and, as you can see in the slide, also an increase year on year. Compared to the Q4 2013, the increase is 8%. So we've had year on year top line growth each quarter this year, and for the full year, the revenue has increased the revenue increase is 10% compared to 2013. Breaking down the revenues in this quarter, net interest income, that's the green part at the bottom in each bar, it has been fairly stable around $120,000,000 per quarter, but it drops to $114,000,000 in Q4. We've spoken about the trends within the net interest income, I think, each quarter this year, and the trend has been increasing volumes, offsetting reduced interest rates. The story is mostly the same also this quarter. The main change from Q3 lies within our bond portfolio, our treasury portfolio, which has been affected by the reduction of government rates, especially in Sweden and Norway. Deposits have increased some during the quarter, but not enough to offset the lower rates in the market. So that's the big change quarter on quarter when it comes to net interest income. Looking at other two components in the NII. Our consumer lending business has grown volumes steadily during the year, about 9%, although, as Hakan mentioned, a little bit slower during the second half of twenty fourteen. Interest rates for consumer lending have held up and been fairly stable even though there is some pressure on rates also there. The 3rd part 3rd component of the net interest income is margin lending, which has been a little bit up and down also, as Hakan spoke to earlier, in terms of volumes. And we end 2014 at just about the same volume as where we ended 2013. Interest rates are a little lower also here, but nothing as dramatic as the drop in market rates for bonds. So all in all, a drop in net interest income due to lower market rates, and we also have to conclude that the low interest rate continues to create some headwind going into the New Year. Looking ahead at the current year, we will buy back our debenture loan, the first part in February and the second part in September. Enough crying about the interest enough crying about the interest rate environment. Onto something more positive. The blue part of the bar, it represents our commission income that's made up of commission on trading and also includes commission from mutual fund fees. In total, commission income is $134,000,000 for the quarter, and that's an increase of 22% quarter on quarter and 21% year on year. The increase compared to Q3 lies within transaction related commission. It totals $104,000,000 for the 4th quarter, up 28%, and that is, of course, due to the high trading activity as you saw in the previous slide. Mutual fund fees had a slight increase compared to the previous quarter but have grown steadily throughout the year and are up 36% compared to the same quarter last year. So very good finish to the year when it comes to commission income, and the high activity has continued into January, which is expected. Seasonally January is always one of the best months of the year. Also, retail savers give themselves a fresh start and a new mandate for the new year. Concluding revenue, the orange piece of the bar there that represents our other income, where the main part comes from FX transactions resulting from when customers trade outside their home markets. Trading in foreign markets follows the overall pattern for trading activity and has also compared increased compared to Q3. Other income also includes license fees for trading applications and some administrative fees. Both of those are fairly stable during the year. I think that includes revenue. Moving on to the next slide and a look at our cost development. Expenses totaled $189,000,000 for the quarter. This is in line with our guidance given at the start of this year, where we said that expenses would rise a little bit and be in the range of $180,000,000 to $190,000,000 And as you can see in the slide, we have increased expenses during the year to this level. Looking ahead, the next couple of quarters, we expect to remain around the current level, meaning around $190,000,000 per quarter, and that number is including credit losses as previously. During the year, we have increased our resources mainly in product development, our corporate pension sales team in Sweden and also in IT development, and we have continued to invest in these areas during the Q4. During 2014, we've seen the effect of this investment through product launches as Chervil, the social investing network, and our fee free index funds, the super funds, for instance. Our aim is to continue a high pace of development also during 2015. And as Hakan mentioned, we will launch a couple of new things already in Q1. So hope to speak more about those when we talk in a couple of months. So that's it for cost development. We'll flip to the next slide. And if we add the 2 previous slides together, we'll get this one, the operating profit. It's 95 point $6,000,000 for the quarter. That's up 27% from the 3rd quarter and up 14% from Q4 of 2013. So in many ways, Q4, a very good finish to the year. Next slide. Thank you. A quick look at our Nordic footprint. For 20 14, we see around 40%, 50% of our business measured as either savings capital, number of customers or revenue comes from Norway, Denmark and Finland. The share of operating profit is lower, but it's growing. It's around 20% of the total coming from the same 3 countries for full year 2014. The reason for the lower margins is mainly lower economies of scale. We operate all 4 countries from a joint platform, where part of that platform is a fixed cost that is allocated evenly to all countries. Hence, markets with larger number of customers will also generate better margins. The exception is the Danish market, where it's our smallest market, but in terms of number of customers, but it's the 2nd most profitable. And the reason is that we do have a really good growth rate in Denmark, as well Kenneth mentioned. And also, the activity in the customer base is high relative to the other countries. We have more than double the number of trades per customer in Denmark this year compared to the other markets. So good development there. All right. We'll move on and take a closer look at the income statement on the next slide. Thank you. So as mentioned, revenue for the 3 month period, October to December 2014, totals 184 $500,000 And for the full year, the revenue amounts to $1,086,000,000 which is an all time high for Nodenet, beating 11 by about $1,000,000 So just barely, but still a record number. And it's also a 10% increase compared to 2013. The development of the different revenue items is similar year on year and quarter on quarter. Net interest income is slightly down as lower interest rates more than offset higher volumes, commissioning coverage up as trading activity is higher and mutual fund volumes also increased, and other income is up mainly due to FX transactions FX transactions related to trading outside the home market. So similar story year on year and quarter on quarter. Moving down, operating expenses, we've seen increased by 4% for the 3 month period to $178,400,000 and for the full year, an increase of 7.5%. And as we've spoken about, the main part of the increase is within personnel expenses, which is within general administrative expenses. So increased resources related to IT and product development. Further down in the P and L, we get credit losses. They amount to $10,500,000 in the 3 month period. That's up compared to a year ago. And all the cross all the credit losses stem from the consumer loan portfolio. And as the portfolio increases in volume, so do the losses. The loss rate, however, is around 2.2%, and that's in line with our expectations. That's a full year number. It's slightly lower in the 4th quarter. So stable development there. That takes us to tax, which amounts to $15,500,000 for the quarter and a tax rate of 16%. It's a little lower than the full year tax rate, which is 18%. Profit for the period amounts to just over $80,000,000 or actually $80,000,000 and earnings per share for the full year, DKK1.58, an increase of 18% compared to previous year. Moving on to the next slide. Balance sheet. Here we can see that the total assets have increased to a little bit over $50,000,000,000 at the end of December. The increase since the start of this year or sorry, the start of 2014 is related to increase in the deposits from the public, which has increased our financial assets and also both liabilities and assets where policyholders bear the risk have increased. So that refers to assets in our pensions pension and insurance products. Total equity, dollars 1,750,000,000 We'll discuss the capital situation on the next slide. So if you operator, thank you. Our capital base, starting from the top here, our capital base is made up of shareholders' equity. We add on 80% of our debenture loan. Since we are under transition rules, we do not count we can't count 100% of the debenture loan. And during 2015, only 60% of the remaining $75,000,000 will be included until that's bought back in September. So we'll have $45,000,000 dollars during the until September in the capital base related to the mature loan. Next, we make an adjustment for prudent valuation. It's a new item under CRR, where we qualify for what's called a simplified approach, and that requires us to reduce our assets held at fair value by 0.1%. Then we deduct the proposed dividend of SEK 1 per share. That works out to SEK 175,000,000 and we also deduct intangible assets. So that brings us to DKK 1,000,000 sorry, DKK 1,270,000,000 as a capital base. Risk exposure amounts have increased compared to 1 year ago and mainly due to increased size of our bond portfolio and also some increase in lending volumes. Total risk exposure is a little bit below $8,000,000,000 and that results in a total capital ratio of 16%. And looking at just the core Tier 1 ratio, it's 14.2%, so taking out the debited loan entirely. That those percentages should be compared to regulatory requirement, comes into effect. So you can say sort of 11.5% for NUNET right now. It will increase to 11.5% later this year when the countercyclical buffer comes into effect. So you can say sort of 11.5% is the regulatory level that we're yes, we have. That was the end of my prepared notes. I'll hand back to Hakan for some closing words, and we'll take questions later on. Thank you. Thank you, Jacob. So the next slide, please. So going forward, we will continue to market and develop our social investing network share will. We will like to make our occupational pension effort and our beefed up sales force productive, and I expect to see the results of that during this spring. We will continue to invest and build up our capabilities when it comes to innovation and IT. And in the like during the quarter, you can expect a product launch within the more margin lending area and also new mobile apps. So with that, we say that we are happy about how Q4 and Our first question is coming from Mr. Stefan Ober from Handelsbanken. Please go ahead, sir. Well, thank you and hi. I got 2 questions for you today. Let's take them one at a time. Yesterday, the inquiry of MiFID II was published. What's your thought on that? And what you estimate will be the from an implementation of that into Swedish law? If I knew, but I mean the whole like idea of the legislation or regulation is actually to like strengthen the consumer protection and we welcome that. That is a good thing. It is a bit like hard to understand because like the finance in Spikunen, the Swedish FSA will have a mandate to actually like decide on what is allowed and what is not allowed. And well, I can't actually speculate in that, but we welcome consumer protection. We think that from a like we have a strong position because we have distribution power. We can come to an agreement with the other parties that comply with MiFID IV and the Swedish implementation of that and protect our revenues. Okay. But just to follow-up on that, do you think we will see platform fees in Sweden? I think it's too early to say actually. That I mean, we have seen kind of platform or account fees popped up in U. K. As a consequence of this regulation. But it's actually we can't actually know how the Swedish implementation will be. But I don't rule that out. All right. Great. My second question is concerning the Giro's entrance into Sweden. What's your thought on that? And do you fear price pressure? Well, it is a price pressurer, right, absolutely a global one. When you look into their offering, it's very stripped down and very like lean. So we are not so worried about that putting pressure on the price of our offering, right, at least not right now. So for instance, the majority of our Swedish customers, they do their savings within some kind of shell, whether it's an insurance shell like a Pachungs Verskering or a Capital Verskering or in the in Spar Kontoor, right? And that's not part of the Chiro's offering, right? And like tax reporting is not part of that. So it's not really comparable, right. So having said that, we were also once upon a time So we need to follow this hero very closely and like take measure understanding them. And if that turns out to affect our customers, we need to take measures. But I mean they launched in Sweden a week ago or something. They launched in Denmark 4 or 5 weeks ago. And we have not had any like or felt anything with our customers or any effect in the market. Okay. Thank you, Hakan. Thanks, Hakan. Thanks, Hakan. Our next question is coming from Mr. Richard Henzeff from Nordea Markets. Please go ahead, sir. Two questions. Firstly, if we look at the geographical development during Q4, what stood out compared to our estimates at least was that Norway developed very strong both in terms of activity but also in terms of underlying growth. Is the development we're seeing in Q4 driven by something special? Or It was a bit hard. There were a bad line there actually. Could you take the question once again, Richard, please? Sorry, I'll try again. Norway, Q4? The development in Norway, Q4, is that a onetime effect? Or what's behind that? That's how I interpret the question. Exactly. No, I think I mean the product launches that we did with the Superfunds and also Cherwill, that has actually like made an impact in all markets, but maybe the market where we saw the most positive impact was Norway. And the growth that we experienced Norway in Q4, it continues, carries over actually into this year. So we are very optimistic about Norway. All right. Secondly, on the net interest income, can you give any indication what you think about the development in the upcoming quarters or if you have any mitigating actions to reduce the impact from the falling interest rates? Well, like I said, there is several moving parts. And previously during the year, we've had the increase in volumes, which have offset the development in the interest rates. And looking ahead at the next quarter, rates continue to go down. So when it comes to the bond portfolio, I think we will see pressure there also in at least in Q1. And the other products, as I mentioned, more stable. And in terms of mitigating actions, I think one is we have a product launch in the margin lending area with some new packaging around that, which we think will be a product that, that can help volumes in that area. So yes, it's hard to say. I don't have a sort of firm forecast for Q1, but definitely still pressure in the bond portfolio. All right. And finally, have you made any more progress in the termination with the corporation with Just last word, Solberg. Oh, with Solberg. Well, progress, yes. As we spoke last quarter, Soderberg will leave with part of their business that they have with us. And we are right now working with them in order to sort of do the transfer of customers in a structured way. I think the first run will be sometime in March, and then we'll do a second run sometime before summer, and it will be at a couple of sort of fixed dates. So we'll as we said, we'll communicate how that impacts our flows in our monthly press releases. But I think March will be the first batch. And any updates on the impact of your assessment the same as when you press release the news? No. I would say no change there. It's sort of no new information. As the year goes on, we'll, of course, know more on sort of what the actual volumes are. Still, it's the reason for the sort of broad 25% to 50% range is that ultimately, it will be the customers who will need to sort of agree to move. So we'll see how that comes out, and we'll come back to it continuously throughout the year, of course. All right. Thank you very much. Our next question is coming from Mr. Nicolas Macbeth from SEB. Please go ahead, sir. Hi, Oka and Jakob. Most of my questions have been asked. But just a bit follow-up on the competitive situation in retail brokerage. I mean, you're quite well above some of your competitors in terms of pricing and rates, including all the new ones. Do you think your current brokerage pricing is competitive at the moment? Or do you think there's need to cut rates in order to kind of remain in the and remain credible in the value oriented segment? Yes. I mean, definitely, we're always looking at our pricing and wanting to keep that accurate and relevant. And during the past couple of months, we have seen some shifts and especially in Sweden where we've where some of our competitors have announced changes in pricing. So we're naturally looking at that as well. Then you can say in certain segments, I think our pricing is absolutely competitive. But as a whole, it's a topic right now for us. So we'll come back when we have sort of anything firm to say around that. But you're right in observing that there has been some changes in the pricing structure among competitors in Sweden. So should we expect changes to your pricing like early this year? Or could you give any more indication of that? Not right now really, apart from what we've just said. Okay. Thanks. We have no further questions. So back to your speakers. Thank you. So with that, if there are no further questions, so thank you for listening, guys, and I'll see you in well, somewhere around soon. Thanks a lot.