Good afternoon, dear listeners. Welcome to Šiaulių Bankas Investor Conference on the results of the second quarter. I'm Emilija from Nasdaq Vilnius, and I'll be moderating today's event. We will start with the presentation from the management, which will be followed by the Q&A session. Please be informed that this webinar is being recorded and will be available for a rewatch on the Šiaulių Bankas website and the Nasdaq Baltic YouTube channel. I encourage everyone to submit questions in the question box on the side of your screen. With that said, I am pleased to introduce today's presenters, the Chief Financial Officer, Donatas Savickas, Head of Investment Management, Tomas Varenbergas, and the Chief Economist, Indrė Genytė-Pikčienė. Please, the floor is yours.
Good afternoon. Good morning to our investors in United States. „Sveiki visi lietuviai!" Hope summer is going on well for all of you, and I'm happy to start presentation of financial achievements of Šiaulių Bankas for the first half of this year. To begin, we achieved an all-time high in both net interest income and net fee and commission income. This impressive achievement is driven by solid volumes and pricing. Our new lending volumes have surged across all business lines or lending business lines, resulting in 14% year-on-year growth in our loan portfolio. This expansion reflects our proactive approach to meeting the diverse needs of our clients. While growing fast, we continue to demonstrate robust asset quality with low impairment provisions.
In anticipation of market conditions, so we effectively managing our funding costs. Our deposits costs expected to peak in the second half of this year, and our strategic planning ensures that we remain well-positioned to navigate these changes. Our Return on Equity is to that robust 16.2% for the first half of this year. This high performance highlights our resilience and ability to deliver sustained profitability in a dynamic environment. Our capital position has been further strengthened by the successful issuance of EUR 25 million in Tier 2 bonds, which saw an oversubscription of almost 4 times. This reflects the strong confidence of our debt investors.
We are proud to announce that Moody's has affirmed the bank's long-term deposits rating Baa1, stable outlook, and this highest-ever investment-grade rating underscores our financial strength and sound management practices. We have also a significant success in our asset management company with assets under management surpassing EUR 1.3 billion, and this achievement is a proof of our strong performance and the trust our clients place in us. Furthermore, Norne Securities, yes, we initiated the coverage of our stock, and this coverage highlights our potential and positive outlook for our future growth. We are in process to further increase the number of analysts covering our stock this year.
As we strategically committed to three business segments, I'm pleased to present the key highlights of them from the last quarter. In corporate segment, we faced a strong lending activity. In the second quarter, our new corporate loan origination surged by 22% quarter-on-quarter, reaching more than EUR 250 million. This impressive growth underscores the favorable business environment and our strong lending prospects. We keep financing greener future. We are proud to emphasize our financing a wind power plant in South Lithuania, and this initiative not only contributes to greener future, but also supports our regional economic growth and diversifies our loan portfolio. Our commitment to sustainable development is firm and in place.
In the private segment, mortgages and consumer lending rebounds, and, during the second quarter loan, we saw a significant rebound in mortgage lending with the new contracts totaling EUR 72 million, and that represents more than 50% year-on-year growth. The same with the consumer lending, we saw a robust growth amounting the same amount, EUR 72 million, and that is 16% year-on-year increase. And these figures reflects our strong position in the private lending market and our ability to meet the needs of our customers. We're honored to have achieved a five-year high in Lithuanian Business Reputation Survey, which was conducted by the independent consultancy company, Civitta. And this achievement underscores our dedication to excellent customer service, innovation and active community engagement.
We are committed to maintaining and enhancing our reputation as a trusted financial partner. In investment segment, we have launched a pioneering open-ended investment fund, which provides retail investors access to the private equity funds and private credit asset classes. And this initiative demonstrates our commitment to offering innovative investment solutions, well, that meets evolving clients' needs. Looking ahead, our Lithuanian government is set to introduce a new investment and saving account from next year, and this initiative will stimulate long-term investment and will foster the development of local capital markets. And we are really excited about the opportunities this will create for our clients and the broader Lithuanian financial ecosystem.
Before turning to more detailed financial review, let's turn to the macro update, and I will pass a word to our Chief Economist, Indrė.
Hello, hello, good afternoon. Thanks, Tomas. Traditionally, I will cover the macroeconomic trends, so which will set the, which are setting the stage for our bank's developments, as well as to our major customers, corporates and individuals. This time I will start with a short overview of the major macroeconomic indicators, and later I will cover some special topics on labor market, long-term trends and foreign direct investments. Because this is the source of concern both here in Lithuania and on the broader stage. Looking to the Lithuanian macroeconomic dynamics, the country can boast with the good results of the first quarter. Our GDP amounted by 3% year-on-year, and actually was supported by the increasing number of economic activities.
The second quarter flash estimate will arrive only tomorrow, but the expectations are also positive, and the economy will proceed on a strong footing throughout the second quarter because the operational data coming from retail trade sector, construction sector and manufacturing well perform a growth. Concerning manufacturing, actually, it's a good footing for our economy because Lithuania is a very open economy, and last year this our flagship exports driver has been stalling. And for now, we can see that manufacturing has been recovering pretty solidly.
Now, what concerns investment climate and investment trends, private investments proceed to look weak because of the high interest rate environment and not expressed intensity to invest by private companies. However, at least on part, this trend is compensated by the public investments, and as a result, we can see a pretty nice performance of our construction sector, which feeds from the construction works coming from the civil engineering, the adapts, as well as energy infrastructure developments. And hopefully this trend will proceed further throughout the year.
Moving forward to the consumption pillar and to the domestic demand developments, we see optimism here because the consumer confidence remains at the top of the EU in Lithuania. This indicator has been improving in recent months. That trend is supported by relatively favorable trends of inflation after the inflation shock and energy crisis the country experienced in 2022 and the aftermath trailing last year. This year, Lithuania stands out among the countries with the lowest inflation numbers, and the flash estimate for July reaches only 1.1% of annual inflation.
So that's how that set the background for us to upgrade our forecast and to reduce it down to 0.9% for the average annual inflation for this year. Also, low inflation, together with mounting wages, form a very nice background for the purchasing power recovery. As you can see from the diagram of real earnings index, which are already recovered the levels seen before the energy crisis and inflation shock.
From now, from now on, it will improve further, supporting the household consumption, consumption growth pillar for the GDP dynamics. Now let's look to the labor market, which proceeds performing strongly despite some trends of non-economic nature, because given the geopolitical tensions and unfavorable business cycle phase, the labor market has been really vivid as employment and labor force numbers have been increasing and actually reached the levels seen long time ago, only before the crisis of 2009. And despite the significant inflows of the labor force coming from net migration, which has been positive for several years, the unemployment rate is still at relatively normal levels.
It will be elevated a bit higher this year, as compared to the last year, 6.8%. However, it is only natural, given these trends in migration and given the weaker stance of some more cyclically exposed economic activities. Now, let's touch a little bit our attractiveness for the FDI situation, because given the geopolitical and geoeconomic challenges, not only Lithuania, but all the region is a bit exposed to the challenges coming from this problematics.
But looking at the dynamics of the outstanding amounts of FDI, Lithuania still looks pretty good because the outstanding amounts have been increasing despite of the war and despite the aggressors just across the border. And the structure of investors already invested in Lithuania points that the investors are developed European countries, strong Nordic countries, and the U.S. at the sixth biggest position in the rank are those who came here for long-term performance. And also, it is another interesting angle to look to our FDI environment is through the lens of Invest Lithuania results.
Here we can see that, despite the war and the spillover effects from it, the incoming FDI projects have been pretty significant, even last year and the first half of this year is also promising because Invest Lithuania managed to attract a very significant investment into the defense sector, Rheinmetall, and it will kickstart this snowballing effect and attract more investments to this area, as well as it may stimulate local defense and arms industries centering around this flagship.
It is good to know from the market analysts FDI markets that the major cities of Lithuania, the major economic centers of Lithuania, are well ranked in the top European cities of the future, according to the climate for the FDI. Vilnius ranks the third, and the other big our economic centers, like Kaunas and Panevėžys, also stand out according to some some categories. So that's it from my side. Thanks a lot, and I'm passing the virtual floor for Donatas.
Good afternoon, dear investors, partners, and colleagues. In the following slides, I will comment our financial results for second quarter and first half of this year, and provide the key insights. Of course, you had a chance already to get through the financial statement that was released, but with this comments, I will try to make main comments, what was different or was distinguished in this quarter. So net interest income represent the biggest part of our revenue, and despite the wide moderate growth in percentage terms, so this growth was driven by growth on loan book. And despite the higher funding costs, we managed to reach a quite good increase in that item of revenue.
What we are especially happy about is the trends in our fee and commission income. And, this growth of more than 10%, compared to the previous year, so... Sorry, 40%, compared to the previous year, is mainly driven by the acquisition that we made at the end of last year, and the strong performance across other fee-generating business lines. What another worth mentioning factor is the trend in our new subsidiaries life insurance and asset management subsidiaries. The trends are very positive, and sometimes it even exceeds our plans, what we had in the, in the, on the acquisition phase.
So the result for net revenue for life insurance is EUR 3.5 million in the first half of this year, and asset management profit was EUR 0.6 million. However, due to the accounting requirements to find this result, it's quite complicated, and therefore, for those who want to go deeper and to understand how these figures derive, so it's quite useful, and I suggest to look afterwards in the appendix of this presentation for further deeper analysis. Talking about operating expenses, so we had the increase in that, even with taking account taking off this impact of insurance business. But this increase is explainable by the larger group and ongoing business investments.
We had one one-off impact due to the adjustment of windfall tax for 2023, which we found need to be adjusted on the later stage before the be- in the second quarter of this year. We decided not to change the previous year financial statements, but rather to put into the financial statements of 2024. But I repeat that it reflect the trends in last -- in the previous year. Impairment losses are good and even lower a little bit than we expected, and that explains why our Return on Equity is even higher than we presented guidance for 2024. Next few slides provides more details what I just mentioned in summary.
But, talking about net interest income, so we keep margin stable, and increase of cost of funding was offset by good trends in different types of loans and also good activity and return from treasury activities because HDC securities portfolio were reinvested and provide a higher interest yield. Yeah, let's go further, and how this net interest income comes from. So loan portfolio is the main source of the revenue generating source, and the structure of loan book hasn't changed so much in the second quarter. The corporate represent more than half of our portfolio, and mortgages are increasing each quarter by quarter.
But, when we look at the trends, and, and what the, portfolio development were in the last quarter, we see that we, we saw positive, development in all categories. And, the yield is, stable and, you see, we saw the first sign of interest rate decline, but it's not, significant yet. Going further about funding, so, also no major changes, and, we, we are funded by local deposits mainly. And what we see trends that, portfolio is shifting towards a longer term and more stable deposit base. So cost of funding stabilizing, and we expect that it will, we see possibilities to adjust, interest rates in the coming, months.
But the peak of cost of funding, probably we will, what we are having right now and will be, how to say, not growing much in the coming quarters. Let's move on, and probably I have a chance to spend some time answering questions if you have any on this or other topics. Net fee and commission income, again, very good trends what we see right now. And on the left-hand right-hand side graph, you see the main sources what we generating fee and commission income from, so daily banking. So it's challenging times, but it's still a significant part.
But it's a good add-on on, on this daily banking income is from renovation process, where we are the leader in the, this segment, and also new segments, asset management, what you see was almost not visible in the previous year. Now we're generating quite significant source of, part of our fee and commission income. Talking about expenses, again, so, we face increase in operating expenses by 22% quarter-over-quarter. But if we exclude this one-off windfall tax impact, it increases 11%. And this increase is mainly caused by the larger organization, ongoing investments into the, as you know, the this IT platform where that we already have started this renovation of this chain of IT platform, so it requires some investments.
General inflation impact, it also requires higher expenses. Let's move on to the slide commenting asset quality trends. So despite the quite challenging economic environment, but the asset quality in Šiaulių Bankas's portfolio, it hasn't changed much. We have a stable stage three loan ratio, which stands at 2.8%, and I would say stable. Also, we have some downward trend in stage two loans. But probably this fluctuation is not obviously it could change quarter by quarter, but I would generalize this definition as stable. And also, cost of risk decreased in the last quarter, and we probably reach our, how to say, level of cost of risk according to the current market situation.
If it will stay so, so probably this trend will continue further. And, last but not least, the slide about capital ratios and requirements. So it's a new design of this slide, and it describes our risk appetite in the actual composition of different capital and in real ratios. And in all of them, we have quite significant surplus of actual ratio versus our appetite. That means that we have enough room for some unexpected negative events, and also we have it creates room for our further growth and also possibility to return some unused capital to our investors in the future. On this, I pass word back to Tomas, and thank you.
Thank you, Donatas. Yeah, so let's continue with our reporting segments. So, at the beginning of the year, we unveiled a new strategy that emphasize our commitment to focus on three strategic business segments, so that's corporate, private, and investment. And each of these segments is substantial in size, possess a competitive edge in the market, and they'll have favorable growth prospects. As we move forward, we'll continue to consistently report on performance of these segments, and we'll keep ensure transparency and provide increasingly detailed insights. And today, we'll give key highlights of recent performance.
Starting with the corporate segment, we have achieved an impressive 15% year-on-year growth in our loan book, and that was driven by record high newly originated loans during the quarter that reached more than EUR 250 million. Well, that milestone reflects our strong lending capabilities. What is good, that loan growth was matched with the corporate deposits growth, and it grew 14% year-on-year. Corporate loan portfolio remains well diversified across various business segments or sectors, and that ensures a balanced and resilient credit portfolio. This diversification helps mitigate our risks and supports our sustainable growth.
To add, corporate loan book portfolio continues to be solid, with loan-to-value ratios significantly below those of our overall portfolio, and this is reinforced by high collateralization levels and demonstrates our prudent lending practices and commitment to maintaining a high-quality loan book. On private client segment, as it was already emphasized, we have reached record high levels in mortgage originations and consumer lending. Well, that shows our comprehensive approach to meet the diverse needs of our clients. Again, our growth is well matched by local deposits growth, and for the first time, the deposits portfolio, private clients deposits portfolio exceeded EUR 2 billion mark.
Our commitment to client-centric approach remains at the core of our operations, and we're continually enhancing our cross-selling opportunities and unifying the client journey to ensure a seamless banking experience. By focusing on our client needs and delivering integrated financial solutions, we are strengthening our relationship and, well, driving mutual growth. Going forward, the last business segment is investment clients, and, well, asset management business is performing well. The assets under management exceeded EUR 1.3 billion at the end of the Q2. What is good, that the growth comes not only from a positive market performance, but from the net positive flow from clients as well. As already mentioned, focus to innovate.
And just recently, we launched a new pioneering open-ended fund that is unique in the market, and that opens the doors for the investment clients, for retail investment clients, to access to the private equity funds and private credit asset classes. Life insurance business continues steady, profitable growth by booking EUR 3.5 million in the first half. Gross written premiums are on the rise and assets under management and life insurance products also are on the growth as well. To continue the capital market business, so well, we do see a trend of increasing clients' focus on investing.
We do see that value of investments held in the bank is at a record EUR 1.9 billion, and that's 10% more than we had one year ago. Our key capital markets product, debt capital market solutions, are surging. We have originated 15 bond issues in the first half of the year, and that amounted to EUR 92 million. The business line is growing very well. We are working with multiple well-known brands in the country, and we do see that, well, we are a big part of the capital markets development in the country. In conclusion, the first half of this year has been a period of continued strong growth.
We are committed to building on this momentum and continue to delivering value to shareholders, clients, and other stakeholders. Thank you for your support and confidence in our journey, and we are ready to switch to a Q&A session, and we do see that we do have a couple of questions already. So go ahead if you have additional ones.
Thank you for the presentation. We will now proceed with the questions. I would like to remind everyone, you can submit your questions in the Q&A section on the side of the screen. The first question we received is for Donatas. Your half year ROE was 16.2% compared to your 2024 target ROE of 13.7%. What is your policy for raising targets? Do you foresee much lower net interest income in the first half? And one-off costs for IT systems and rebranding.
Okay. Thank you for this question. So yeah, we are currently in the process of reviewing our targets and updating our budget, because during this six-month period, we saw some changes, both positive and negative, and it will affect our some balance sheet and profit and loss lines. As soon as we complete this process, and if we have a significant deviation from the previous target, we will inform all investors accordingly. But as I mentioned, we have both positive and negative factors. In the first half, we have positive impact regarding the provision level, but there are no guarantees that second half could change this trend if some unexpected macro-level events will happen.
Regarding investment into IT systems, yes, we probably it will have some negative impact on this, because we... what we are considering to putting all investments immediately as pre expenses in our P&L.
...Rebranding, yes, it's the one of the items in our strategy plan, but no significant expenses are projected for the second half of this year. So, summarizing, so we will either we report to the investors in the due time if some significant changes will happen. But from today's perspective, these negative and positive trends, so balances, it balances which are other, and if we could be in the line of our- between our earlier conservative, quite conservative projection and this first half, which are quite promising regarding Return on Equity.
Thank you. What's your view on further monetary policy actions this year? How have restrictive ECB decisions affected the credit and deposit developments in Lithuania? How the bank loans and deposits look in the broader market context?
Okay, so a different big question for me. Actually, we all know that European Central Bank targets price stability, and currently, the Euro area's inflation remains about above ECB's target 2%. It stands at 2.6%. And especially inflation of services remains pretty high at more than 4% year on year. So this inflationary stickiness supports a bit more restrictive path of easing this year. And we follow closely the expectations of market participants as well as the outlook on the futures. And we believe that the ECB will cut the target key interest rates 2 times this year.
It's according to the consensus of the markets, and it will make the monetary policy easier for our customers as well as the whole market here in Lithuania. But I need... I would like to stress that the indebtedness levels here in Lithuania are pretty low, and despite the tightness of monetary policy in last year and in the first half of this year, the crediting processes were pretty intense, and the loan portfolios, both to households and to non-financial corporations, have been increasing. For example, first results of the annual growth of loan portfolio to households is 6.8% above the levels seen a year ago.
What concerns non-financial corporations, the annual growth rate was even faster. It's nearly 10% year-on-year. What concerns deposits, so the picture is a bit different. We saw the pretty intense transformation in household deposits from demand to term deposits, and the growth in deposits was pretty intense at 8% year-on-year in June. But what concerns non-financial corporations, the deposits has been decreasing annually because of retreat of inflation and the increasing demand of working capital. Yeah, and it is nice to admit that in such an environment, our bank stands out as a bank increasing its market share in both in terms of loans and deposits.
Looking at your capital ratios, it seems that you are very well capitalized at the moment. What is your capital distribution policy and priorities at the moment?
Okay, I'll take that. So, yeah, I mentioned during my main presentation time, so we feel quite safe and in comfort zone regarding the capital ratios and looking what opportunities do we have, how to use this capital surplus in the most efficient way. So there are several directions, one of them to support our further growth, and sometimes we see the opportunities comes to grow our business more than we considered in the past. Another option is to follow our dividend policy, which says that not less than 25% of annual profit could be distributed as dividends. And this definition, not less than 25%, is quite flexible, so we can go above this minimum level.
And also, considering these both alternatives, we should keep in mind too that we, anytime we should be in the zone of our risk appetite, which does not breach any requirements set by regulators, and also where we have our management buffer above that. So this consideration is going on, and again, we want and we have to keep all interests of all different stakeholders group.
... You have an approved share buyback policy. Are you planning to do buybacks this year?
Thank you for your question. Share buybacks is subject for getting approval from ECB. In the beginning of the second quarter, we have applied for getting that permission, and hopefully in the Q3, that permission will be received.
Could you please hint at how much you spent on the new IT platform integration in the second quarter?
Without disclosing exact figures, so I could say that we are going in line with our budget, and of course, in the early stages. But we are right now, the spending is not such significant as we forecast in the coming quarters, but it's already started, and also it's already recorded in our P&L. But probably no groundbreaking changes in the coming quarters. Of course, it will be this increase will be visible, but not drastic or dramatic.
Back in February, you said that you expect that you may need to pay back the bank solidarity tax. Has this prediction changed? And if yes, what is the estimated sum of the tax, and will it be paid for the nearest paying period? What is the bank's opinion about the decision by Lithuanian authorities to apply the bank solidarity tax for one additional year?
Okay. So yes, I remember I mentioned that, and today, I try to express that these expenses that we put in our second quarter results so refers to the solidarity tax in 2023. So initial calculations, which went through all the checks both internal and external, appears to be not how to say, 100% exact, and therefore, in the last moment, we had to adjust this solidarity tax for 2023. However, this change does not affect our projections for 2024, and we still state that we will not have to pay the solidarity tax for 2024.
This is due to our Šiaulių Bankas' balance sheet structure, and the subject for this tax is not applicable to us, due to this structure of Šiaulių Bankas. Regarding the second part of your questions, about bank's opinion, of course, we have—can have different opinions, but as a bank, we take what is decided by the government, and we follow this requirement, and we understand the general purpose for that, and we support that purpose. But it's a little bit pity that all or almost all initiatives are trying to be covered by one particular segment, and the bank sector is this segment.
Asset quality trends seem to remain quite benign, and the cost of risk low. Does this merit a revision in the cost of risk guidance or of around 30 basis points should be level for 2024?
Yeah. Again, I would refer to my remark regarding we are reviewing the budget, and the cost of risk could be lower than we projected earlier. But again, the disclaimer is, if nothing significant happens on the macro level. Therefore, the author of this question could be right or could be wrong, but how to say, I'm not, and right now, I could not confirm or say that you are not right completely. So let's wait and see. But the guidance probably... So far, we are going better than expected.
Asset management contributed nicely with almost EUR 2 million in 2020, in the second quarter of 2024. Can we expect this to be the run rate for the rest of the year?
Thank you. Absolutely. Asset management is performing very well, and asset management revenue depends from two parts. So the first one is performance of financial markets, and the second one is the net flows of the clients' inflows and outflows. So we do see a good trend from both of them, and well, we do expect that asset management will continue to deliver strong results going forward.
Other operating expenses almost doubled, even if windfall tax, one of excluded. Where it came from, and is it new normal level for the upcoming periods?
... Okay, but the probably I mentioned earlier, but other operating expenses is affected by two factors. Windfall tax, what it's rightly mentioned, but and also insurance activity impact. It increases both other income and other expenses. If we exclude this insurance activities, so our operating expenses increase is 22% quarter-over-quarter, and if we further exclude this windfall tax impact, so increases 11%. So this 11% spreads out through the different types of expenses, and none of them could be distinguished, and the growth rate of 11% would be explainable by this growing organization and this new initiatives, including IT platform Temenos integration in introduction.
I think that this level of EUR 20 million plus in the range of 2022 it will be new, let's say, benchmark for our operating expenses, excluding accounting impact of insurance activities, which could be, how to say, understood by analyzing this annex what we provided in our presentation.
Loan book target for 2024 seems to imply a slight deceleration in loan book growth in the second half of 2024. Is this to be expected, or are you on track to overshoot the 2024 target?
Yeah. Again, this budget review exercise that we are going and trying to combine both requirements from regulator to regarding risk appetite, regarding RWA targets and limits. But yes, we see the opportunities that loan book, especially in the safer segments such as mortgages and other some segment sectors in corporate loan book, could be higher than we forecasted in the beginning of the year.
Net interest margin is 33 basis points down year-over-year. Considering that you had some tailwind from interest rates in the first half, does that indicate your volume growth is partly at the expense of thinner margins, or is that primarily due to funding costs?
Yeah, I can step in. So actually, it's primarily due to the funding costs. If you would look to our loan yield, so the growth of loan portfolio keeps the margins steady, but as funding costs just needs to catch up. So we do see that the NIM is being decreased mainly by that part of our balance sheet. But as already mentioned before, that we do expect our funding costs to peak in the second half of the year, so well, slightly above our long-term net interest margin should be expected going forward.
As all questions have been answered, on behalf of Šiaulių Bankas and Nasdaq Vilnius, thank you for being here with us today. It was a pleasure. The recording of the presentation will be available on the Šiaulių Bankas website and the Nasdaq Baltic YouTube channel. Thank you for a very informative conference, and have a great day.
Thank you.