U.S. Markets closed

Edited Transcript of NOFI.OL earnings conference call or presentation 14-Aug-19 6:30am GMT

Q2 2019 Norwegian Finans Holding ASA Earnings Call

LYSAKER Aug 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Norwegian Finans Holding ASA earnings conference call or presentation Wednesday, August 14, 2019 at 6:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Pål Svenkerud

Bank Norwegian AS - CFO

* Tine Gottlob Kirstan Wollebekk

Norwegian Finans Holding ASA - CEO

================================================================================

Conference Call Participants

================================================================================

* Håkon Astrup

DNB Markets, Research Division - Analyst

* Jan Erik Gjerland

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

* Odd Weidel

Sparebank 1 Markets AS, Research Division - Research Analyst

* Roy Tilley

Arctic Securities AS, Research Division - Research Analyst

* Ulrik Årdal Zürcher

Danske Bank Markets Equity Research - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Tine Gottlob Kirstan Wollebekk, Norwegian Finans Holding ASA - CEO [1]

--------------------------------------------------------------------------------

Good morning. Welcome to the presentation for Norwegian Finans Holdings Second Quarter. Today, we will go through the results and also spend a little bit more time on our strategic outlook, talking about the future. But of course, first, on the highlights, we're pleased to announce a strong quarter, earnings of NOK 475 million. We did have NOK 42 million extraordinary income in first quarter. So compared to that, we have a very good improvement from the first quarter.

The loan growth at NOK 1.1 billion, also comparable to the first quarter, where we had some negative FX effects, whereas this quarter was quite neutral. We're happy about that compared to the composition of the growth. The deposit-to-loan ratio at 93%, which is where we aim to be, going down a bit as we go along. We've kept that ratio without adjusting our deposit rates for the quarter. CET ratio at 19.5%, 19.9% so that's 4% above the CET1 requirement.

And then, as announced already in the first quarter report presentation, we signed an agreement in May with the airline to have the full control of the rights for the name and also the cooperation with a reward scheme in Europe. We'll get back to that during the presentation.

Just a bit on the customer expansion and engagement. We had similar growth in customers in the cards business and loan business this quarter, except for Finland where we have lower growth in number of cards because of more logistics, more or less in the airport.

And then on the deposits, we have lower growth in customers, which is probably tied to the changes that's been and also the more competitive rates in the market.

We have 6 million log-ins, which is steady improvement. Including the website log-in, we have 8.8 million, almost 9 million, so we have continued to see that customers both service themselves and also go more frequently into our app.

I think one fun fact that I saw now is we had 1.5 million unique views or visitors to our website in July. That's the same as Monzo, for example, which is a very famous European, so-called, challenger bank. We also have about the same number of customers. So the most -- in fact, there are 2 differences between us. One is that Monzo is valued at more than EUR 2 billion at the moment, and they don't earn money, whereas, of course, we earn a lot of money.

So very inspirational for us, of course. And a lot of that value is filled by the awareness, which I think we demonstrate very well through this web access.

A bit more detail on each market. First, in Norwegian market, we had some reduced commission income due to the seasonal effect in the first quarter, but we improved the results because of lower cost and lower provisions.

We do have a positive growth in Norway in the quarter. So in first quarter, we grew only on the installment loans, and this quarter we only grow on the cards. I'll get back to that.

The loan loss allowance in the quarter includes some model modifications. The reason we will continue to see that is that when we do upgrade the models, which we will do continuously, and we do that at the end of the quarter, we do not change the model. It's too risky to front-load all of that into the last month, so we rather just make an override, which we did, which will then be in the fourth column there. But still provisions are down to NOK 272 million from NOK 311 million in the first quarter.

Then some effects on the regulation and register, which came into -- register only came into play on 1st of July. So we see some initial effects in the quarter. We implemented the guidelines back in the fall 2017. So this is not a huge change of our models. However, there were some last-minute changes to the regulation compared to the guideline, which especially affected the refinancing, which we do see some effect of. What we also see is that for the first 6 weeks of new regulation from 15th of May to 1st of June, we didn't have the debt register, but we had to perform all the reviews as if we had. So it was a more cumbersome customer journey, and that's now been simplified again when the register came into play.

So lately, we've seen the same level. I think last week, we saw the same level of new loan disbursement as we did same week last year. So we also see that we have a lower cost per approved application. So there is an interesting dynamic in the market. And I think a lot of this will even out as we come into the year and get more adjusted to the regulations in detail, especially improving on the customer journey.

I think the debt register works very well in accordance with the regulator's intention, which is very positive, which means there are customers that will be rejected. This obviously confirm that the more structured information you have, the better quality decisions you can take. The regulation on the other hand, we are concerned that it does not always work as it should. There are customers that are rejected that should probably have had an accept. And especially for refinancing, this leave some customers without a lot of choice, which I think is a concern.

I think, overall, this will even out. As I said, on the credit card, we saw an outflow in July. We had 3,000 more cancellations than normal. However, already in August, we've seen that normalized. So again, we -- there were some customers, of course, checking their register. These were inactive customers with us. I guess, we had the same for other banks. So all in all, we've seen a very active usage of the card through July and a very robust growth.

We also see a sign for lower runoff on loans in Norway, which, again, I think, is a natural reaction to the changes here.

So all in all, we are very positive to continued profitable growth in Norway.

As we also mentioned before, we have strong deposit performance despite not changing the rate. So I think our competitive advantage from still our risk-based pricing is definitely doing us well in Norway.

The Swedish market, not as much to comment there, stable good results. We only growing cards. This is fairly by purpose. It reflects our cautious underwriting in Sweden and also the fact that we do not see -- we do not find the risk reward particularly attractive in Sweden for the loans. So we are more conservative there.

We continue to see a very positive development in cards despite the fact that we changed the program a bit last year, but we do see that we grow year-on-year, which is before and after the changes that were implemented in August last year. And the loan loss allowance are stable for the quarter.

The Danish market consistently continue to have a positive growth, steady balance and earnings growth. We're very happy about the growth we are now exhibiting, which is done with increased credit quality every month.

Provisions are now still also for this quarter under 4%. We've talked about this before that we thought this was going to take longer time. So we are at 3.44% for the quarter. So we think that's also a strong sign that we have made some good choices in Denmark.

In Denmark, they -- there were some agents distribution introduced in this year. That's the first time. So in all other markets, we have agent distribution but not in Denmark.

We have not decided to join any agent yet. We are cautious about whether that's a good idea or not. So we continue, and hopefully, we continue to see a steady growth in the Danish market.

Last, the Finnish market, which is of course our second largest market. And for the third consecutive quarter, we have a result of more than NOK 100 million. So steady earnings and growth as well as deposits that have stabilized in the quarter. As you might remember, we made a very substantial decrease of the deposit rate last year, down to 75 basis point. So we had an expected outflow. And then we also have the changes in the deposit guarantee over the new year. So all in all, we are very happy that we're now stabilized, and we start to see increases again.

I think when -- for the quarter, as you see, that's also the seasonal effect from first quarter on Visa and insurance. On the loan loss allowance, we did a little model correction. We've got new macro. We get new macro every quarter, and macro outlook for Finland has weakened somewhat because of employment. So we anticipated that while it came in July, we took it into the June numbers. It's about NOK 10 million that we added to the provisions there.

The growth remained stable despite much lower cutoff rates, so increased asset quality.

I think when you look at the -- I mean, EUR 57 million in the quarter has been quite stable for the past 3 quarters.

What will happen in September in Finland is that we are getting a new rate cap at 20%. We do not foresee any problem with that. There's also a cap on fees at EUR 150. We don't have that many fees. We only have the FX fee, and there are very few customers that exceed that, so we don't see any changes there either.

We do see some dynamics in the market right now from competition on how that -- our repositioning of pricing on loans. So we will follow that. And I think we will -- I think we see this as an opportunity as well.

Then I think Pål will talk a bit more about the details of the results.

--------------------------------------------------------------------------------

Pål Svenkerud, Bank Norwegian AS - CFO [2]

--------------------------------------------------------------------------------

We're pleased to report another strong performance in the second quarter. Earnings development is strong considering the high seasonal fee income we recorded in Q1. The increase in net interest income is supported by one more interest day, which accounts for NOK 13 million. Fee income falls significantly due to the network and insurance incentives, totaling NOK 42 million, that came in the first quarter.

The value of securities and currency has been stable in the quarter. And operating expenses are down due to lower marketing spending and seasonally lower personnel expenses. Provisions -- provision levels are stable, and we are reporting a solid profitability, 25.8% return on equity and 3.8% return on assets.

On the balance sheet, loan growth totaled close to NOK 1.1 billion compared to NOK 324 million in Q1. Loan growth was evenly distributed between installment loans and card loans.

There was a minor negative currency effect in Q2 versus a NOK 700 million negative effect in Q1. So the currency-adjusted loan growth is comparable to the previous quarter.

Installment loans dropped to 2.3 -- the sales to NOK 2.3 billion, down from NOK 2.9 billion in Q1, and that is mostly due to transitional effects from the new regulations in Norway as well as weaker risk and reward in Sweden.

But we also saw a continued drop-off in loan runoffs, which was down NOK 160 million, and it totaled NOK 1.8 billion.

On the installment loans, looking at the underwriting metrics, the number of installment loan applications fell slightly. We maintained stable automatic acceptance rates, but payout ratios fell somewhat, most pronounced in Norway due to the transition to new regulations, which also affected the average loan size -- or loans paid out.

On the card side, we continue to show a very strong card growth. There were offsetting calendar cutoff effects in Q2 as they didn't influence the numbers. And we added close to 45,000 new card customers in the quarter. 185,000 new customers in the last 12 months. And the card portfolio continues to exhibit very strong and attractive performance metrics.

On the liability side, deposits increased more than NOK 0.5 billion, reversing the outflow we had in Q4 last year and in Q1 due to the rate reduction in Finland and the transition to new deposit guarantee amounts.

And we're still aiming to increase the share of senior unsecured financing to prepare for the coming MREL requirements. And we maintain a very high deposit-to-loans ratio.

Yields and margins continue to be very stable. We see a slight -- slightly lower loan yields in all markets, except for in Sweden. And it's due to adjustments in pricing, underwriting and also the increase in nonperforming loans, which have a lower yield.

And the increase in interest expense is due to a higher share of outstanding senior debt.

On the expense -- operating or expense side, very high operating efficiency, cost income at 0.25. There's lower digital marketing spending, goes in line with the lower growth and also the seasonally lower personnel expense in Q2.

The FTE count is now up to 84 from 80 in the previous quarter.

On credit metrics, very stable picture. NPLs are developing as expected. Provisions, they are stable, and we are maintaining solid allowance coverage ratios.

We have proprietary scorecards in production in all markets, and we are continuing to improve models and systems. So -- and we're seeing that is yielding improved credit quality in the new -- most recent vintages.

On the capital side, very strong buildup of capital, 19.9% CET1 ratio in the bank. For the group, it's 19.5%, considering that the Lilienthal transaction combined had a drag on capital ratio of 89 basis points. And we have more-than-adequate capital for growth going forward.

Tine?

--------------------------------------------------------------------------------

Tine Gottlob Kirstan Wollebekk, Norwegian Finans Holding ASA - CEO [3]

--------------------------------------------------------------------------------

Yes. I think with such a robust core business, it's due time to focus a bit more on what's the next chapter for the bank. And we would like to talk a bit about what we call the 4-pillar strategy, which, of course, includes the core business development, that's still, by far, our #1 priority with an ambition to be a leading or the leading digital bank for personal loans and savings in Nordics. I think we are very much demonstrating that.

We also believe that there are still significant room for profitable growth in the Nordics. So this is still our first priority. It is to continue to add to the robustness of our balance sheet through that profitable business. And of course, that is -- as we've talked about today, the distribution channel that we own, the risk-based pricing and also our operating model that Pål described now with the cost income ratio. So that goes without saying, I'll now talk more about that now, but we also have 3 other areas. We have split up the European agenda in 2. So we look at European expansion plan. We do have an ambition to become one of the leading European digital banks with the same benchmark performance that we have in the Nordics, utilizing our business model and doing this in a cautious way. I'll come a bit back to that. We will like to add the fifth country as soon as we've done our analysis. Then we have the EU banking license domicile project. And of course, our ambition here is to actually obtain an EU banking license and get a level playing field for our bank going forward. We are in the exploratory phase with the Central Bank of Ireland, I'll also get back to that.

And then, I think, we have talked a lot also in some other meetings about the FinTech agenda. It's still very pronounced for us to reach the full potential for our customer base. With that amount of customers we have, we think there is more to do there. Of course, the PSD2 readiness is the most important part right now, whereas we are more reactive than proactive on the rest of the opportunity.

But let me just get a bit more into detail on these parts. So first of all, the European expansion has been initiated. We are now doing a broader study to see where will be the optimal entry point for our fifth market. We do have very low cost of entry. Previously, we had -- our experience has been, in -- on average, NOK 10 million per rollout in each market. And it's taken us 6 to 18 months to reach breakeven through our Nordic expansion.

For our further European expansion, we do see a cautious approach. We want to maybe take more a Danish strategy rather than a Finnish strategy. What we do in our market analysis is now to verify where we can have the best support for our fully digital customer journey and business model. Of course, the importance of the Norwegian Airlines presence, and also, we look at the appropriate macro and market conditions. And I hope we will finalize fairly soon what will be the fifth market. Of course, our risk-based model -- risk-based pricing model is important to us, and it's also important how we can obtain market data in that -- in those markets that we prioritize.

Ireland is still an important market in our scope, but that's more tied to the actual domicile discussion.

And here, from last quarter, we have some updates as well. Since we last spoke, we have been in discussions with the Norwegian FSA and not least with the Central Bank of Ireland. We've had the pre-application meeting with the Central Bank in June. And based on that, we initiated, together with them, what we call the exploratory phase or what they call the exploratory phase, which is -- which has the aim to provide CBI with as much insight as possible to our existing operation and our future plans as well as for us to get as much insight as possible on what we can expect from the Central Bank of Ireland as a regulator.

So we will conduct that work through the third and into the fourth quarter. And based on that work, we will take the final decision of whether we will send an application. And then the application process will be between 6 and 9 months. We are not the most complex bank they've seen, I guess, we're probably the opposite. And we've had very good constructive dialogue with them so far. So we will then have a submission of a detailed application, and then there will be an iteration of that. And then the final approved application will be processed from the Central Bank of Ireland within 3 months.

So we will continue to update on this project.

And then the last part, I think, on the FinTech agenda, I mentioned Monzo in the introduction here. And of course, I think, as I've mentioned before, the combination of attributes that we have in Bank Norwegian are quite unique. So when you look at the current dynamics between what are the strength of a FinTech? What are the strength of a bank? We very much see ourselves in the middle here. So just picked out a few elements that I think characterize the FinTech agenda, which is about the fast-growing customer base and fully digital customer base. And you see our growth here from 200,000 customers in 2012 to 1.6 million customers now, which is in the Nordic market. It's, of course, a much smaller market than what our peers have.

Our modern IT stack and, of course, our low cost operation, again, illustrated from '12 with 0.47, and now we are at 0.25, which is quite unique for the market.

And then, I think, one thing that we emphasize more and more is the deep analytics and the fact that we are fully digital in all part of the value chain. These are not only for portfolio risk. It goes from the start of sales into conversion and then, of course, portfolio risk and behavior on the book.

So these are a set of tools that I think will be beneficial in whatever market we're in.

And then, of course, the difference between us and others with those attributes are obviously our strong capital base that enables expansion opportunities and the fact that we have a very robust balance sheet that we are adding and improving every quarter.

So as I said, I think our priority right now is the PSD2. If it's ready in September, we have to be able to work both on sending and receiving side, becoming an account and a payment agent as well as providing other players in the market with our data. So that's an important part.

On other FinTech agendas, on savings, investments and so on, we are so far more reactive than proactive, but there will be a lot of opportunities, and I think they will be better and better for us as we go along. So I'm not sure we are so much in a hurry. So when we are prioritizing, we will definitely prioritize our core business expansion as #1, getting into the fifth market and potentially look at the possibility of EU domicile before we approach this. I think in our daily business, we are very much operating as a FinTech already. And I think these attributes are exactly what makes us very competitive.

So just to summarize, I think with this quarter, I think, we really emphasize that we are very well positioned to execute on this very ambitious strategy, of course. In the Nordic, we see that we have very macro -- stable macros, and we see that we have a huge opportunity to continue our growth here.

On the European expansion, of course, it's very important for us that we do have full control to rollout our benchmark performance, and the agreement with the airline in May was obviously the starting signal for that. So we've worked as fast as we've been able to during the summer to get in place with that. And we have -- we are emphasizing that we want a cautious rollout because we do understand that the Nordics and rest of Europe are 2 different things.

And then, of course, the banking license. So far, very positive contact with the Central Bank, very constructive. And we look forward to, hopefully, take a decision by the end of the year. And FinTech agenda, first step PSD2.

So this was the presentation. I think we will now open for questions. And we will have a microphone. Very good.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Ulrik Årdal Zürcher, Danske Bank Markets Equity Research - Analyst [1]

--------------------------------------------------------------------------------

Ulrik Zürcher, Danske Bank. Just on a bit more short-term thinking here. Your new sale has got a dramatic fall, and I'm getting a bit worried like your churn goes down, but your new sales falls more. So I think you're much, much closer than you've been in a very long time, I think, to like, where actually the churn will be higher than your new sale. And now the debt register is coming, and just like -- should we price in like negative growth in Norway on installment loan? Or like how do you see it developing?

--------------------------------------------------------------------------------

Tine Gottlob Kirstan Wollebekk, Norwegian Finans Holding ASA - CEO [2]

--------------------------------------------------------------------------------

I think, first of all, we are not as concerned as you are, at all. I think what's important, and what I think the market should also be focusing on is, what kind of growth you want and what development you want for the future. And we have to see our loan book as a composition of installment loans and cards. This is very important because as we've talked about before, these are 2 different attributes. So they fit very well together. So we will also see a market dynamic where customers will behave differently. So we are not particularly predicting a negative outlook for the Norwegian market at all. We are overall predicting a positive outlook for the Norwegian market. And as I said, what -- I mean, we don't know what will be the future of any market, of course, but what we do see coming into July, August is that we think that a lot of this works in a positive way. And I think, also, this is partly a question of competition going forward. And as we've said, there are as many applications in the market, and we will see how the competition will spill out later. And then, I think, also, we have seen -- for everything we've changed over time, we've seen a downward trend immediately after we change, even if we do change it ourself. So if we do a change in our own application process, we will see that. Of course, this is more dramatic. And I think most of it is good. As I said, the register works well, works after the intention, and we think that is good. The regulation, we are a bit more concerned about the refinancing. That's a big part of what we are normally doing. That's not my biggest concern. My biggest concern is that there are a lot of customers that, right now, do not get the best option for how they could handle their personal finances. And we are in dialogue, of course, with the regulators about that as well to make sure because this was a last-minute change in the regulation and probably not thought through as well as the other changes. So I think it's a bit more open, and we have not concluded the same way as you have, but again,...

--------------------------------------------------------------------------------

Ulrik Årdal Zürcher, Danske Bank Markets Equity Research - Analyst [3]

--------------------------------------------------------------------------------

I haven't concluded. So I...

--------------------------------------------------------------------------------

Tine Gottlob Kirstan Wollebekk, Norwegian Finans Holding ASA - CEO [4]

--------------------------------------------------------------------------------

You have not concluded. Very good. That gave you some...

--------------------------------------------------------------------------------

Pål Svenkerud, Bank Norwegian AS - CFO [5]

--------------------------------------------------------------------------------

I think it is the transition quarter, adjusting the customer journeys, et cetera.

--------------------------------------------------------------------------------

Ulrik Årdal Zürcher, Danske Bank Markets Equity Research - Analyst [6]

--------------------------------------------------------------------------------

Because you -- I think you said that you have the same new sale in August now as you had in '18. Was -- is that correct?

--------------------------------------------------------------------------------

Tine Gottlob Kirstan Wollebekk, Norwegian Finans Holding ASA - CEO [7]

--------------------------------------------------------------------------------

Yes. In this -- in last week. Yes.

--------------------------------------------------------------------------------

Ulrik Årdal Zürcher, Danske Bank Markets Equity Research - Analyst [8]

--------------------------------------------------------------------------------

Yes. Okay, so like basically, it doesn't look like we will see a further decline in the new sale of installment loan?

--------------------------------------------------------------------------------

Tine Gottlob Kirstan Wollebekk, Norwegian Finans Holding ASA - CEO [9]

--------------------------------------------------------------------------------

No.

--------------------------------------------------------------------------------

Ulrik Årdal Zürcher, Danske Bank Markets Equity Research - Analyst [10]

--------------------------------------------------------------------------------

As of now yet?

--------------------------------------------------------------------------------

Tine Gottlob Kirstan Wollebekk, Norwegian Finans Holding ASA - CEO [11]

--------------------------------------------------------------------------------

No.

--------------------------------------------------------------------------------

Ulrik Årdal Zürcher, Danske Bank Markets Equity Research - Analyst [12]

--------------------------------------------------------------------------------

And one other thing, the same topic, sort of. And as also -- we've seen some -- I think, someone from Bank Norwegian actually said in the news that a lot of the applications you have a -- like you discovered with the debt register that they have loans, they lied on their applications basically. And then we also got some, like, distribution stats on the average loan size, which was like very high. So the model is -- like, what is the risk that you have to take up your loss given default basically now that your debt register is implemented?

--------------------------------------------------------------------------------

Tine Gottlob Kirstan Wollebekk, Norwegian Finans Holding ASA - CEO [13]

--------------------------------------------------------------------------------

Let's take -- there are a few things in there. But first of all, you said a lot. We said, there are differences between what people record and what's in the register. Secondly, I don't think people lie. I think it's not that easy all the time to remember. I mean, first of all, you have to remember all your credit card limits, which is not that easy. So I would also make that a more soft -- then the third one is the LGD, which is, of course, we do our LGD based on our data and not on external assumptions in that way. So we don't think that will change because we look at the behavior in Norway. We have data back from 2007. So our LGD models is based on that. And then, of course, we have a future-looking perspective for our macro models. So we don't -- the LGD is based on that, and that's always been -- the debt people have is the same as it was before. It is now you have it in a register as well.

--------------------------------------------------------------------------------

Ulrik Årdal Zürcher, Danske Bank Markets Equity Research - Analyst [14]

--------------------------------------------------------------------------------

And you know about it?

--------------------------------------------------------------------------------

Tine Gottlob Kirstan Wollebekk, Norwegian Finans Holding ASA - CEO [15]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Ulrik Årdal Zürcher, Danske Bank Markets Equity Research - Analyst [16]

--------------------------------------------------------------------------------

But you might not have known about it before?

--------------------------------------------------------------------------------

Tine Gottlob Kirstan Wollebekk, Norwegian Finans Holding ASA - CEO [17]

--------------------------------------------------------------------------------

But we know the performance before. We know how the customer performed.

--------------------------------------------------------------------------------

Ulrik Årdal Zürcher, Danske Bank Markets Equity Research - Analyst [18]

--------------------------------------------------------------------------------

I guess, you're thinking more in that -- you want...

--------------------------------------------------------------------------------

Tine Gottlob Kirstan Wollebekk, Norwegian Finans Holding ASA - CEO [19]

--------------------------------------------------------------------------------

I think they performed the same way.

--------------------------------------------------------------------------------

Ulrik Årdal Zürcher, Danske Bank Markets Equity Research - Analyst [20]

--------------------------------------------------------------------------------

Yes. I guess, last question and that is -- because you -- as I understand, you will be able to use the debt register data to build your own models.

--------------------------------------------------------------------------------

Tine Gottlob Kirstan Wollebekk, Norwegian Finans Holding ASA - CEO [21]

--------------------------------------------------------------------------------

No. No. We have to be aware that the register is when a customer applies, they -- we will look it up. We can't sort of take our customer base and match it to the register. That's not how it works.

--------------------------------------------------------------------------------

Ulrik Årdal Zürcher, Danske Bank Markets Equity Research - Analyst [22]

--------------------------------------------------------------------------------

But I think they say 4 times a year you can get some sort of a data dump from them or something, it says on their page.

--------------------------------------------------------------------------------

Tine Gottlob Kirstan Wollebekk, Norwegian Finans Holding ASA - CEO [23]

--------------------------------------------------------------------------------

Yes. We have not seen that. That is a possibility.

--------------------------------------------------------------------------------

Ulrik Årdal Zürcher, Danske Bank Markets Equity Research - Analyst [24]

--------------------------------------------------------------------------------

Do you have -- as, like, sort of, A/B testing in, like, your system?

--------------------------------------------------------------------------------

Tine Gottlob Kirstan Wollebekk, Norwegian Finans Holding ASA - CEO [25]

--------------------------------------------------------------------------------

But we do that already. So we do -- we test. So every time we approve an application, we follow our rejection rates and we look at the quality of the customer based on their general position in the market and their -- if they have any notifications in register or something. That's something we've done for a long time.

--------------------------------------------------------------------------------

Ulrik Årdal Zürcher, Danske Bank Markets Equity Research - Analyst [26]

--------------------------------------------------------------------------------

Yes. But in July and August, then you sort of would be able to see, okay, if we didn't have the debt register information, we wouldn't have given this guy a loan, if you understand.

--------------------------------------------------------------------------------

Tine Gottlob Kirstan Wollebekk, Norwegian Finans Holding ASA - CEO [27]

--------------------------------------------------------------------------------

And that's what I say. I think the information on the register is working very well, and it does give us, I mean, a structured information, like we have seen in Sweden for many years. We've seen it in Finland, to some extent, and in Denmark. That is giving any bank a better decision making. So I think in Norway, I'm sorry to say, I think we are making too much of a fuss about this because I think what the authorities have now done is putting in place something they should have put in place for a long time ago. And they should even include the mortgages and everything else. And this is how we've been working in Sweden for a long time. So I do not -- I just see this as a very prudent tool to have in any financial market. And I think it's good, and we're happy about it. So there's no -- there's nothing else to say about the debt register. It's a good thing that we get it. And I think also, there are -- the cases are, of course, what you talk about the credit rating information. There's also one other aspect which were very much in the media last year, which were -- this winter, this was about people that were somehow taking up a number of loans very quickly. And in some extent that was combined with ID theft, for example. These things will now be almost impossible because we and some other banks, we are actually checking the register when we approve the loan, but also before we pay out, which is an extra mechanism, which, I think, I'm very happy about that because that's also a situation that no bank would like to have, even though I know that some media think we actually work towards that. So I think there's a lot of good quality coming into the Norwegian market with this.

--------------------------------------------------------------------------------

Odd Weidel, Sparebank 1 Markets AS, Research Division - Research Analyst [28]

--------------------------------------------------------------------------------

Odd Weidel, Sparebank 1 Markets. Just a little short question here. How will you view the competitive picture in Norway? You see some of the Swedish banks being very aggressive, growing very faster in Norway now. You also mentioned that you still aim for growth in the Nordics. Should that growth be through a market share or through the total market being much higher 2 years ahead?

--------------------------------------------------------------------------------

Tine Gottlob Kirstan Wollebekk, Norwegian Finans Holding ASA - CEO [29]

--------------------------------------------------------------------------------

So for the last question first. I think, mostly because of market share. On the competition in Norway, yes, it's a good question. First of all, we mentioned in the presentation that we saw a lower cost for application in July in Norway than last year. So we don't know the indication of that, but it might be that there are some constraints in competition. Then of course, there is a chain -- there's a difference between the Swedish and Norwegian banks. There are probably some of the banks that have been very aggressive Norwegian banks. They might slow down a bit. So that will give more room. And then, of course, it's the Swedish banks, we will look at. I think one concern that we still see is that even though it's not a digital campaign, but on -- we get nice letters to everyone in mailbox. And the only letter we get is from one of the Swedish banks. And they still offer 12- to 15-year loans. I think that's a concern. I think that should be a level playing field. And I think that's something that should be reacted on. So, of course, we cannot -- that's something we can't manage if there is an opportunity for a foreign bank to continue to not follow the regulation. I do not think that's a big problem. We are also -- in Norway, we are very different from competition because we are so strong in our direct channel. So 80% of our customers come directly to us and not through agents, which also makes a difference. So I think what we've been talked about for a long time is that we are continuing our strategy, our plan. We've done that all the time. We've kept our pricing strategy, our risk strategy. We have improved what we think, and not so much looking at the market as such. And I think that's proven to be very well.

--------------------------------------------------------------------------------

Odd Weidel, Sparebank 1 Markets AS, Research Division - Research Analyst [30]

--------------------------------------------------------------------------------

Okay. So the Swedish banks will be aggressive for a time going forward and then your return would have mentioned, so...

--------------------------------------------------------------------------------

Tine Gottlob Kirstan Wollebekk, Norwegian Finans Holding ASA - CEO [31]

--------------------------------------------------------------------------------

Yes. Not -- I wouldn't say all Swedish banks. I don't know, that would be -- yes. We just see the examples. I don't think it has a big impact because I think most customers are digital now. So I'm not sure that it really matters, but of course, it's something we register happening.

--------------------------------------------------------------------------------

Odd Weidel, Sparebank 1 Markets AS, Research Division - Research Analyst [32]

--------------------------------------------------------------------------------

Just one last question. Have you calculated the effect of the change in systemic risk? How will this affect Bank Norwegian in, say, 3 years?

--------------------------------------------------------------------------------

Pål Svenkerud, Bank Norwegian AS - CFO [33]

--------------------------------------------------------------------------------

Sort of 3 to 4.5.

--------------------------------------------------------------------------------

Odd Weidel, Sparebank 1 Markets AS, Research Division - Research Analyst [34]

--------------------------------------------------------------------------------

Yes, in Norway, but you can -- like your different lending positions with the systemic risk preferring Sweden, et cetera. So you will get a lower systemic risk prefer...

--------------------------------------------------------------------------------

Unidentified Company Representative, [35]

--------------------------------------------------------------------------------

Potentially.

--------------------------------------------------------------------------------

Tine Gottlob Kirstan Wollebekk, Norwegian Finans Holding ASA - CEO [36]

--------------------------------------------------------------------------------

Potentially, yes. Potentially.

--------------------------------------------------------------------------------

Unidentified Company Representative, [37]

--------------------------------------------------------------------------------

Slight positive effect.

--------------------------------------------------------------------------------

Odd Weidel, Sparebank 1 Markets AS, Research Division - Research Analyst [38]

--------------------------------------------------------------------------------

Slight positive effect. How many basis points?

--------------------------------------------------------------------------------

Unidentified Company Representative, [39]

--------------------------------------------------------------------------------

I don't have that on top of my mind.

--------------------------------------------------------------------------------

Pål Svenkerud, Bank Norwegian AS - CFO [40]

--------------------------------------------------------------------------------

But it's far ahead.

--------------------------------------------------------------------------------

Odd Weidel, Sparebank 1 Markets AS, Research Division - Research Analyst [41]

--------------------------------------------------------------------------------

It's far ahead.

--------------------------------------------------------------------------------

Tine Gottlob Kirstan Wollebekk, Norwegian Finans Holding ASA - CEO [42]

--------------------------------------------------------------------------------

And it's also potential.

--------------------------------------------------------------------------------

Håkon Astrup, DNB Markets, Research Division - Analyst [43]

--------------------------------------------------------------------------------

Håkon Astrup from DNB Markets. Start off with one high-level question on the strategic road map and on the FinTech agenda. Here you mentioned M&A as a possibility. How large tickets and how much capital are you willing to deploy here?

--------------------------------------------------------------------------------

Tine Gottlob Kirstan Wollebekk, Norwegian Finans Holding ASA - CEO [44]

--------------------------------------------------------------------------------

We are -- we don't like to spend money. So we talk about very small tickets. The point is that we like to develop our own things and we do that extremely well. That's, of course, the whole secret to our benchmark performance. At the same time, we do see more and more small environments getting out very nice product solutions and having no possibility of scaling. So in that context, we would see that it might be an idea for us. If we really want to talk about a FinTech agenda, I think that might be the way to do it, except for what we're doing in our current business, which is obviously continuously upgrading what the customer -- how the customer interacts with us and how we manage that. I think that might be the best way for us. So we are not talking about anything major. And as I said, it's more on a reactive basis. We are contacted by a number of different small teams that have done very great work, but that's might not be a business model, and that might not be a good way of scaling and those kind of ideas we look at. And of course, we also do cooperations. So like Lucitech, that's a small environment that actually other banks have invested in, but I think we were the first to actually go to market with them on our bill payment solution. So there can be partnerships as well.

--------------------------------------------------------------------------------

Håkon Astrup, DNB Markets, Research Division - Analyst [45]

--------------------------------------------------------------------------------

And also, on a bit more technical question on the runoff. So you saw quite meaningful drop in runoff from -- compared to the first quarter, is this new level more sustainable? Or was this more of a one-off due to the change that we've seen in regulations in Norway?

--------------------------------------------------------------------------------

Tine Gottlob Kirstan Wollebekk, Norwegian Finans Holding ASA - CEO [46]

--------------------------------------------------------------------------------

It's been -- I think we've seen that a little bit over time. I think our hypothesis is that this will probably increase, but again for the Norwegian market. So that's now less than half of our loan book. But there's a lot of logic in that, this could change.

--------------------------------------------------------------------------------

Håkon Astrup, DNB Markets, Research Division - Analyst [47]

--------------------------------------------------------------------------------

Okay. So if I understand it correctly the new level, you will see slightly lower runoff in Norway now due to...

--------------------------------------------------------------------------------

Tine Gottlob Kirstan Wollebekk, Norwegian Finans Holding ASA - CEO [48]

--------------------------------------------------------------------------------

Yes. I think we also see that in the third quarter so far. But I wouldn't put too much into it. I mean, as we said, we think most of these things even out, both on the growth -- on the new loan side and on the runoff. So -- but that's what we see right now, yes.

--------------------------------------------------------------------------------

Roy Tilley, Arctic Securities AS, Research Division - Research Analyst [49]

--------------------------------------------------------------------------------

Roy Tilley from Arctic. Just a question on the European expansion plan and the banking license. So you do split these 2 into 2 different separate tracks. So if you decide to -- if you don't apply for a banking license or a changing domicile, you will still consider rolling out new countries, is that...

--------------------------------------------------------------------------------

Tine Gottlob Kirstan Wollebekk, Norwegian Finans Holding ASA - CEO [50]

--------------------------------------------------------------------------------

Yes, we will. I think that's exactly the point about splitting this, that we think with the -- with such a stable performance in our business now, we think we do very well and we think we have the capacity to add a fifth country, and we think it's better to start that work now and identify the market from the parameters that we -- that I talked about and get that going. And then in parallel, we are looking at the potential redomiciliation, and what comes out of that, we will see. And then we can join it or we can keep it apart.

--------------------------------------------------------------------------------

Jan Erik Gjerland, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [51]

--------------------------------------------------------------------------------

Jan Gjerland from ABG. Just a quick question on your costs. In the light of European expansion, I think it's relevant to look at the profitability and cost difference between credit cards and installment loans. So specifically, you have a cost-to-income ratio of 25%. So if you were to treat credit cards and installment loans separately, how would that figure look like? It's sort of stupid question, but yes.

--------------------------------------------------------------------------------

Tine Gottlob Kirstan Wollebekk, Norwegian Finans Holding ASA - CEO [52]

--------------------------------------------------------------------------------

No. It's not a stupid question, it's a good question. So the profitability on loans are higher than on cards, especially initially. So the initial profitability for the country or the market would be better if we emphasize loans rather than cards.

--------------------------------------------------------------------------------

Jan Erik Gjerland, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [53]

--------------------------------------------------------------------------------

Yes. But you don't have any ballpark figure as to how the difference would look like, to say, cost-to-income ratio on credit cards?

--------------------------------------------------------------------------------

Tine Gottlob Kirstan Wollebekk, Norwegian Finans Holding ASA - CEO [54]

--------------------------------------------------------------------------------

We don't report details on this. But it's a known fact that the cards are more expensive in the beginning, and it takes longer time to build up the portfolio. And this is also why you see that, I think, the card business has only in the past 2 years of the bank really made a significant impact. And now it's about 1/3 of our business. Profitability comes from the card. Hope that gives you some indication. You want to add something or? No. Okay.

--------------------------------------------------------------------------------

Pål Svenkerud, Bank Norwegian AS - CFO [55]

--------------------------------------------------------------------------------

Anyone else?

--------------------------------------------------------------------------------

Unidentified Company Representative, [56]

--------------------------------------------------------------------------------

We've got one question from -- or through e-mail. I can take that. Can you be -- from Truls Roysland in SEB. Can you be clear on what application you are referring to with regards to the timeline you showed? You write license/domicile, is the timeline referring to a banking license or both license and change of domicile?

--------------------------------------------------------------------------------

Tine Gottlob Kirstan Wollebekk, Norwegian Finans Holding ASA - CEO [57]

--------------------------------------------------------------------------------

It's both. Yes.

--------------------------------------------------------------------------------

Unidentified Company Representative, [58]

--------------------------------------------------------------------------------

Quick answer.

--------------------------------------------------------------------------------

Tine Gottlob Kirstan Wollebekk, Norwegian Finans Holding ASA - CEO [59]

--------------------------------------------------------------------------------

Yes. We see that as the same, yes. Exactly. And of course, that is the discussion with the Central Bank of Ireland and it's also a discussion with the Norwegian FSA. So we are in dialogue with both.

Well, very good. Thank you so much for coming and for watching on the web. Thank you.