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Edited Transcript of AZA.ST earnings conference call or presentation 17-Oct-19 8:00am GMT

Q3 2019 Avanza Bank Holding AB Earnings Call

Stockholm Oct 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Avanza Bank Holding AB earnings conference call or presentation Thursday, October 17, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Birgitta Hagenfeldt

Avanza Bank Holding AB (publ) - Deputy CEO & CFO

* Rikard Josefson

Avanza Bank Holding AB (publ) - CEO

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Conference Call Participants

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* Ermin Keric

Nordea Markets, Research Division - Analyst of Financials

* Jens Hallén

Carnegie Investment Bank AB, Research Division - Research Analyst

* Maths Liljedahl

Handelsbanken Capital Markets AB, Research Division - Research Analyst

* Peter Kessiakoff

SEB, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Avanza Bank Holding Interim Report January to September 2019. Today, I am pleased to present Rikard Josefson, CEO; and Birgitta Hagenfeldt, CFO. (Operator Instructions) I will now hand the call over to Rikard Josefson. Please begin.

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Rikard Josefson, Avanza Bank Holding AB (publ) - CEO [2]

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Okay. Thank you very much, and good morning, everybody.

If we go to Page 2 on the presentation, we can conclude that it's been a strong quarter for Avanza. Our net inflow is up 19% quarter-to-quarter and 22% for the full 9 months, which is absolutely satisfactory. Total savings capital is up to SEK 377 billion. And we also, when we look at the statistics on the mutual fund associations, we then -- we conclude that we are, in all, taking about [20%] of all mutual funds new savings in Sweden for the first 9 months. And bear in mind that our total market share is 4.2%.

We also did a lot of updates when it comes to our mutual fund offering with a new site on the mutual funds, so we give more ESG data to Morningstar. We also have better tools for analyzing funds. And then last week, we released a better engine to filter funds, so you can sort them out since we have quite a few on the platform.

If we go to the next page, we can see still strong customer growth at 14% better this quarter than Q3 last year, and year-on-year, it's 4% better. We also have 940,000 clients at the moment, so we are in a good pace reaching our target for 1 million clients.

When you look at the next page, Page 4, we saw a quarter with very high activity during the quarter. More customers than ever was generating a commission for us and the commission generating notes were at a record level. And the good thing about this is that we did not have a fingerprint, bitcoin or anything we are also trading extremely high. So overall, it was an underlying good activity throughout the quarter.

Going to the next page, we also here can note that our market shares when it comes to transaction on Nasdaq and First North, we were actually increasing that a bit during the quarter, which is a KPI that we keep close eyes on.

On the next page, we can see that we have high pace in innovation during the quarter. We had new log-ins with the biometrics. We're also complementary released Swish for depositing money from other banks into Avanza.

When it comes to the Open Banking area, we can now have other banks' accounts on our platform and our customer experience. We can take out mortgage loans from other banks, you can compare them to our own offering. And our increased sourcing on assets under management has been bearing fruit.

We also did business society work when it comes to the pension reform that is being in the Swedish parliament to make it change so it would be more to the customers and less to the pension companies, and we have been quite successful in that such as the lobby work. And we will see what it comes out from it, but I think it's a very important issue for the Swedish savers.

Going back to next page, Page 7, we also released a new My new pages (sic) [My pages], which was a very big change in how the customer will consume Avanza when they're going on the platform. And we have been getting a lot of good creds from our customers, and new navigation and a more tailormade starting page for each client has been very appreciated by the clients. And I think this also shows that even we know that we have satisfied clients, we dare to always improve and change our customer experience and make it even better. So we will never rest our case when it comes to the UX experience on Avanza's platform.

Going to the next page, you can see strategy for more recurring income is going quite well. We had a record quarter when it comes to brokerage income, which was satisfactory, but the fund capital is up to SEK 109 billion. The income per fund krona is down to 33 basis points from 34, but I think that's in line with my expectation and we will compensate that in volumes.

The Corporate Finance on the Q3 was quite low, which is seasonally is on Q3, but we were part of the EQT introduction in stock exchange. And actually 30,000 clients on one (inaudible) EQT owners in that issue and the new owners of EQT was, in total, 40,000. So we think that's proof of the distribution capacity that we have within the company.

And going to the next page, to sum it up, we have a great growth in the company. [We're growing] that the pace of innovation has increased. That means that the cost increase of last couple of years is paying off. And important for me is that we also just recently did a survey with our employees that we do 3 times a year and their eNPS is at 54, which is more than our target of 45. And also the income growth now for the full year is surpassing the cost growth, and we are comfortable that we will deliver on that target for the full year. We have a great momentum in the company, and we look at the future with very positive outlook.

And with that, I will hand it over to Birgitta.

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Birgitta Hagenfeldt, Avanza Bank Holding AB (publ) - Deputy CEO & CFO [3]

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Thank you, Rikard. So if you look a little bit at the figures, revenues were all-time high in the quarter, up 16% (sic) [17%] compared to Q3 last year, and all revenue lines improved. Comparing the 9-month period with last year, revenues were up 11%, mainly due to higher NII, but also higher brokerage income and fund commissions.

Operating expenses increased by 10%, mainly due to higher personnel costs. Comparing the 2 9-month periods, costs were up 9% and in line with our budget of 10.5% cost growth for the full year. The long-term guidance is -- guidance is cost growth of 9% to 12%.

And as Rikard mentioned, if nothing unexpected happens in the next few months, we believe there's a good possibility that we will reach our long-term target regarding income growth higher than cost growth also for the full year.

Operating profit increased by 23% year-on-year and by 11% for the first 9 months. Consequently, the operating margin improved to 52% in the quarter, which was 2 percentage points higher than last year.

Revenues per savings capital was up 1 bps compared to last year and down 1 bps compared for the 9-month period, mainly due to higher average savings capital.

Costs-to-savings capital is down 1 basis point to 16 year-on-year. And for the 9-month period, the cost-to-savings capital was 19 bps, in line with last year. Our long-term ambition, as you know, is to lower the cost-to-savings capital ratio to close to 16 basis points, which is in line with the best international peers.

Now revenues were, as I said, a record high in the quarter and up 10% quarter-on-quarter and for the first time over SEK 300 million. Net brokerage income increased by 20% compared to previous quarter, mainly due to 8.5 more trading days, but also due to higher brokerage income per turnover krona. Income per turnover increased as a result of larger share of the brokerage fee being related to transactions made in lower brokerage fee class. Number of commission-generating customers were record high as was the number of commission-generating notes. Brokerage income per trading day increased by 4%. Compared to Q3 last year, net brokerage were -- was 13% higher.

Looking at the fund commissions, they increased by 4% quarter-on-quarter, mainly due to higher average fund capital. Income per krona of fund capital decreased marginally to 33 basis points, which is the same level as for the 9-month period. This is a decrease of close to 2 basis points compared to last year and the result of a somewhat higher proportion of index funds. Fund commissions were, in the 9-month period, 6% higher compared to last year.

Looking at the NII, it increased by 5% quarter-on-quarter. STIBOR decreased 1 basis point compared to the second quarter. In spite of this, the return on surplus liquidity improved slightly due to the 3-month interest duration and subsequent lag in the bond portfolio.

Income from margin lending and the Private Banking mortgage improved due to higher average lending volumes.

For the 9-month period, the NII increased by 60%. This is, of course, mainly due to the raise -- or the [rate raise] in January and consequently higher STIBOR, which has turned the last year's cost for the surplus liquidity into positive [beat]. All else equal and without taking any changes in customer behavior into account, a 1 percentage point change in the interest rate from here with today's volume would affect full year NII by around SEK 300 million where the upside effect is larger than the downside effect. However, we don't see a [rate hike] As likely.

Other income increased slightly quarter-on-quarter, mainly due to higher income from FX and -- above the market. Revenues from Corporate Finance were seasonally low. Compared to Q3 last year, income from Corporate Finance increased, income from Avanza Markets increased by 29%, FX-related income was mainly unchanged and payment services commissions increased due to increased trading in foreign securities.

Operating expenses decreased by 10% quarter-on-quarter, and this is mainly a result of the seasonally lower personnel costs that we have in Q3. Compared to the 9-month period last year, personnel costs increased by 11%, mainly due to expanded development capacity, also costs for IT licenses were higher whereas costs for external services decreased.

Our capitalization is good with a total capital ratio of 19.7% to compare with the requirements of 16.5%, which is including all external and internal buffers as well as a Pillar 2 requirements.

The total capital ratio increased compared to Q2 due to the 9-month results being reviewed by the auditors, the consequence that the net results have been included in own funds after deduction of assumed dividend. The main part though is due to the share issue as a result of the exercise of employee -- or employee warrants, which increased our own funds with about SEK 180 million.

The leverage ratio for the group was 3.5%. It is now settled that the requirement will be 3% taking effect in June '21. The leverage ratio will be an important measure for us going forward when managing the capitalization. Since increasing the profits will have a negative effect on the LR ratio, we are discussing the size of buffering needed to comply with the requirements in all kinds of market condition as we grow.

But our dividend policy to distribute at least 70% of the net profit still stands.

And with that, Rikard, I think we can open up for questions.

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Rikard Josefson, Avanza Bank Holding AB (publ) - CEO [4]

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Absolutely.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question is from the line of Peter Kessiakoff from SEB.

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Peter Kessiakoff, SEB, Research Division - Research Analyst [2]

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So I have a few questions. Start off with -- on the brokerage commission rate, as you mentioned, Birgitta, that you've seen more trading within the lower commission classes. Is that the only driver behind the all-time high commission rate, at least given the data I have, it's an all-time high level? Is that -- there's been no other changes kind of on, I guess, towards pro clients in terms of what they're being charged or anything like that?

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Birgitta Hagenfeldt, Avanza Bank Holding AB (publ) - Deputy CEO & CFO [3]

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Well, we haven't changed any prices or anything like that. So yes, it's -- the rest of the trades are more business as usual and even more trade. But yes, I would say that is the main difference between the previous period.

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Peter Kessiakoff, SEB, Research Division - Research Analyst [4]

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Okay. Okay. Would you expect that drift to continue given that -- I mean, as we've discussed before, you're taking in more -- younger clients, which then will have less savings on their accounts. So in essence, the brokerage commission rate could, in essence, drift higher due to mix effects. Is that reasonable to assume or think about?

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Birgitta Hagenfeldt, Avanza Bank Holding AB (publ) - Deputy CEO & CFO [5]

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That is always hard to answer on because, as you know, the brokerage revenues are so market-dependent and depending on the volatility and so forth on the Stockholm Stock Exchange. But we definitely see more new customers -- or the new customers that we are taking in is, of course, there are not so many day traders out there. So of course, we're willing to take in more and more customers that is trading in a little bit lower volumes and probably lower classes as well.

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Peter Kessiakoff, SEB, Research Division - Research Analyst [6]

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Okay. Then on the cost side, first of all, the fact that you've launched that -- one can deposit money through Swish on your platform, does that change your cost picture or anything? I mean, is Swish less expensive than Trustly? Could that have a positive impact or is that -- is there only a minor difference?

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Birgitta Hagenfeldt, Avanza Bank Holding AB (publ) - Deputy CEO & CFO [7]

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Well, Swish is better -- or lower cost for us. But then again, you should realize that with Swish, you can only transfer smaller amount. If you want to transfer larger amounts, you still have to use Trustly. So in some effect, of course, there will be but I would say that it's not significant.

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Rikard Josefson, Avanza Bank Holding AB (publ) - CEO [8]

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No. I would say that on the margin, I think, Swish will add, that new clients will get going a bit quicker sometimes.

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Peter Kessiakoff, SEB, Research Division - Research Analyst [9]

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All right. Then on the cost guidance for the full year where you reiterate your message, that implies quite a steep increase in cost in Q4. What is that? Is there anything in particular that is driving that? Or is it just ordinary seasonality and that you will be recruiting a lot during Q4 for the next year?

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Birgitta Hagenfeldt, Avanza Bank Holding AB (publ) - Deputy CEO & CFO [10]

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We have been recruiting a lot during the year, some of them won't be fully in place until in the fourth quarter. So I would say it's a seasonal effect. And it's normal that we have higher costs in Q4 and Q1.

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Peter Kessiakoff, SEB, Research Division - Research Analyst [11]

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Okay. But that would imply that kind of the hiring throughout 2020 should be lower than in 2019, at least how it looks on an absolute level.

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Birgitta Hagenfeldt, Avanza Bank Holding AB (publ) - Deputy CEO & CFO [12]

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Yes. At an absolute level, we are not planning to exceed the total number of employees in a significant way anyway next year.

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Peter Kessiakoff, SEB, Research Division - Research Analyst [13]

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Okay. Then just the last question. On financial targets. I mean should we expect -- Q4 is obviously the, next quarter report. Should we expect any kind of new financial targets or updates or anything like that to be expected? Or is it just business as usual?

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Birgitta Hagenfeldt, Avanza Bank Holding AB (publ) - Deputy CEO & CFO [14]

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Yes. Since we're also reaching 1 million customers, close to -- after the interim report or the report -- Q4 report, we definitely will launch our new forward-looking financial target.

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Operator [15]

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Next question is from Ermin Keric from Nordea.

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Ermin Keric, Nordea Markets, Research Division - Analyst of Financials [16]

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So on the 1 million clients global you have, given the current pace, you would basically reach that by the end of Q1. How should we view that? Has it been progressing ahead of plan for you? And is there anything special that has driven that sort of above expectation customer acquisition rate?

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Rikard Josefson, Avanza Bank Holding AB (publ) - CEO [17]

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Well, I was not in the company when they set the target. But I would say looking at Birgitta that we are close to reaching that target to be earlier than we expected from the beginning.

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Birgitta Hagenfeldt, Avanza Bank Holding AB (publ) - Deputy CEO & CFO [18]

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But then again, we had set 2020, never when during 2020 so...

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Ermin Keric, Nordea Markets, Research Division - Analyst of Financials [19]

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Sure. But then also jumping to the brokerage income, I'm just wondering sort of with recent development in the U.S. and we've seen especially new places as Robinhood from Google sort of intensifying price competition, do you see any risk for that playing out in Sweden?

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Rikard Josefson, Avanza Bank Holding AB (publ) - CEO [20]

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In the mid- to near term, I don't see that happening. Because if you look at the U.S. market, they have different regulation, which means that they can sell their order flows and make money on the spreads in other ways. And if you look at Charles Schwab, when they lowered their commissions to 0 brokerage, it was 3% to 4% of the total income. So the methods of making money on trading is much larger than it is in Sweden where we have MiFID II and best execution.

We have also seen in Sweden a couple of years ago when DEGIRO came into the market with 0 brokerage that they didn't really take any market share. We appreciate -- we are quite comfortable that our clients appreciate the inspiration, all the information, the overview, the decision-making tools and they believe it's worth the brokerage they are paying. So I don't expect that to come into Sweden, but then we always keep an eye on price competition. But I think the market has moved from price competition when it comes to brokerage to the UX experience and the customer journey on the platform and in the mobile phones being more important than the last krona on the brokerage.

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Ermin Keric, Nordea Markets, Research Division - Analyst of Financials [21]

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I understand. That's very helpful. Just if I can stay on that question, I don't know if you view sort of a first-mover advantage to be any barrier to entry. But if you do, would this sort of make you more inclined to expand to other Nordic countries before we see players such as those sort of entering in Norway or the likes?

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Rikard Josefson, Avanza Bank Holding AB (publ) - CEO [22]

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No. I said it before, I think that one of our success factors is our focus on the Swedish market and we have a goal of increasing our market shares and our assets under management, and we believe we can keep on doing that for quite a few more years focusing on Sweden. So it doesn't change how we look at any international expansion.

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Operator [23]

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Next question is from Nicolas McBeath from DNB Markets.

So we'll go to the next question, which is from Maths Liljedahl from Handelsbanken.

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Maths Liljedahl, Handelsbanken Capital Markets AB, Research Division - Research Analyst [24]

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Sorry for the hangup here on the brokerage income, but that was the main deviation, at least in my model. Is there anything you can say about what the underlying in this, was it driven by the EQT transaction? At least when I calculate, this seems like brokerage income per commission note is up slightly in the quarter, which is not has been a trend. It's just on the margin, but nevertheless, it's turning the corner a little bit.

And also I mean, usually, you have a quite seasonal effect in Q4, maybe not last year, but Q4 is much stronger than Q3. Should we expect the opposite perhaps this quarter. What I'm aiming at is, is there anything particular that draw commission income this quarter?

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Rikard Josefson, Avanza Bank Holding AB (publ) - CEO [25]

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No. I would just say just that we have more clients trading than ever. We have -- I think it's a -- I think we are seeing results of innovation, larger customer base. We are inspiring our clients to changing. So it's just, I would say, something that we get from just expanding the client base.

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Maths Liljedahl, Handelsbanken Capital Markets AB, Research Division - Research Analyst [26]

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But if brokerage per note goes up, is that because they are trading more foreign stocks or more complex products or is there anything underlying behind that or just larger tickets or...

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Birgitta Hagenfeldt, Avanza Bank Holding AB (publ) - Deputy CEO & CFO [27]

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No. But as we said before, more trades are being done in lower brokerage classes, which means that the percentage of the trade is a little bit higher. So on an average, it's more -- that is the reason for the brokerage per turnover to go up.

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Operator [28]

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Next question is from Jens Hallén from Carnegie.

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Jens Hallén, Carnegie Investment Bank AB, Research Division - Research Analyst [29]

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Perfect. Jens Hallén here. Just some, I guess, almost follow-up questions. But if we're looking at net inflows and net new customers throughout Q3, they were record numbers. What's your take on the drivers of that? Is it something that you think is sustainable for the rest of the year, thinking about inflows and customers?

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Rikard Josefson, Avanza Bank Holding AB (publ) - CEO [30]

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It's always difficult to predict the future, but I think that we are -- we have satisfied clients. We have launched a lot of new functionality, a lot of new UX experience. We have a solid reputation. You see a little younger people are being more and more interested in finances and so on. And we have all the ambassadors out there, our biggest marketing tool is word of mouth. So I think we have reached a position where it's actually if you start saving in Sweden, you ask your friends, their answer will be go to Avanza and we are benefiting from that on a broad level.

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Jens Hallén, Carnegie Investment Bank AB, Research Division - Research Analyst [31]

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Okay. So in other words, you actually do think this is sustainable, i.e., it's something that we should build on going forward.

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Rikard Josefson, Avanza Bank Holding AB (publ) - CEO [32]

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You never know quarter-to-quarter. But of course, we are growth -- I mean, we want to grow -- we want to increase some market share, we want to have more clients. And then it's not a straight line in that growth. It goes up and down. But of course, we are very optimistic about the future.

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Jens Hallén, Carnegie Investment Bank AB, Research Division - Research Analyst [33]

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Okeydokey. And let me ask some questions on Avanza Markets was actually -- when I'm looking at it, it looks like a record quarter. And on the FX side at SEK 33 million, it's actually at the top end where you've been trading in the past. Are there any specific drivers for that, i.e., should we extrapolate that?

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Birgitta Hagenfeldt, Avanza Bank Holding AB (publ) - Deputy CEO & CFO [34]

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I don't know why markets were growing or if there was any specific reason for that more than activity in the market, which, of course, is -- this trade -- our revenues are based on both trades and volume. I would say that if the market is a little bit volatile or moving, that the transactions will be more and so forth.

When it comes to the FX, I would say that -- I mean, we -- the FX part of our customers' trading is growing even though it's not growing very fast. But we see that the part of the total transactions in foreign stocks are growing.

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Rikard Josefson, Avanza Bank Holding AB (publ) - CEO [35]

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And I think that's important to note because we also think that we have given [investment] information of what stocks on the side, of course that creates more interest and more comfort. So it's both that we increase or we make our offering in foreign trading better, people or the customers are more comfortable in trading. So we can sort of see, by ourselves, effective a bit.

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Jens Hallén, Carnegie Investment Bank AB, Research Division - Research Analyst [36]

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Okay. Very good. And then, finally, you did talk about the leverage ratio, you are 3.5%. Requirements would be 3%. Will this be a constraint for Avanza, I mean, either on dividends or maybe on the types of product that you had in pipeline that you may or may not now roll out?

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Birgitta Hagenfeldt, Avanza Bank Holding AB (publ) - Deputy CEO & CFO [37]

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Well, as I said, this will be a very important part when we manage our capitalization since we will be sensitive to where the customers have a lot of liquidity or not on our balance sheet. And therefore, we are discussing the buffer or the level that we should have so that we always will be compliant to this. I wouldn't say that it will be a restraint, but of course, it will be an important tool for us to discuss regarding the capitalization.

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Jens Hallén, Carnegie Investment Bank AB, Research Division - Research Analyst [38]

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Okay. Do you foresee sort of in the medium term you're having to put in some kind of limits on how much liquidity the customers have or make it less appealing to hold cash? I mean how would you ...

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Birgitta Hagenfeldt, Avanza Bank Holding AB (publ) - Deputy CEO & CFO [39]

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We are still very customer-friendly, so I don't think that will be our first move. I think we will find other ways to handle this without being -- that won't be that negative to our customers.

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Jens Hallén, Carnegie Investment Bank AB, Research Division - Research Analyst [40]

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Yes. Okay. So I presume then holding more capital is the other option, right? Or am if I missing something.

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Birgitta Hagenfeldt, Avanza Bank Holding AB (publ) - Deputy CEO & CFO [41]

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It's one of the options. We have different kind of tools to handle that.

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Rikard Josefson, Avanza Bank Holding AB (publ) - CEO [42]

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We have our Savings Account+ where you can deposit with other companies through our platform, so there are means of handling that. But as Birgitta said, I think we are a long way from starting to limit how much cash the customer can have because most of the cash the customer have is usually money on the sideline waiting to be invested. So that's part of the volatility, so to speak.

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Operator [43]

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(Operator Instructions) And there are no further questions registered, so I will hand the call back to the speakers for any closing comments. Please go ahead.

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Rikard Josefson, Avanza Bank Holding AB (publ) - CEO [44]

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Okay. Then I think we conclude this and say thank you, and have a great Thursday.

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Birgitta Hagenfeldt, Avanza Bank Holding AB (publ) - Deputy CEO & CFO [45]

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Bye-bye.

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Operator [46]

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And that concludes your conference call. Thank you all for attending, and you may now disconnect your lines.