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Edited Transcript of RESURS.ST earnings conference call or presentation 4-Feb-20 8:00am GMT

Full Year 2019 Resurs Holding AB (publ) Earnings Call

HELSINGBORG Feb 8, 2020 (Thomson StreetEvents) -- Edited Transcript of Resurs Holding AB (publ) earnings conference call or presentation Tuesday, February 4, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Christina Kassberg

Resurs Holding AB (publ) - Interim CFO & Head of IR

* Christina Jungvid Ohlsson

Resurs Holding AB (publ) - IR Officer

* Kenneth Nilsson

Resurs Holding AB (publ) - President & CEO

* Stefan Noderén;Head of Credit & NPL

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Conference Call Participants

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* Patrik Brattelius

ABG Sundal Collier Holding ASA, Research Division - Analyst

* Peter Kessiakoff

SEB, Research Division - Research Analyst

* Robin Rane

Kepler Cheuvreux, Research Division - Equity Research Analyst

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Presentation

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Christina Jungvid Ohlsson, Resurs Holding AB (publ) - IR Officer [1]

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Good morning, everyone, and a warm welcome to the Q4 presentation for Resurs Holding. We have Kenneth Nilsson with us here today as well as Christina Kassberg and Stefan Noderén.

I'm going to give the floor to Kenneth without further ado.

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Kenneth Nilsson, Resurs Holding AB (publ) - President & CEO [2]

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Thank you very much. Welcome, everyone. As Christina mentioned, I have a couple of colleagues with me, and I thought it would make sense to mention that we first have our interim Chief Financial Officer, and our new CFO, Jonas, is going to take up his position from April. Christina is doing a wonderful job in the meantime as an acting CFO. We also want to be more focused on the expectations of the market. Erik Frick, our COO, has been announced to be part of this for digitization, et cetera, but we've chosen instead to invite the Head of Credit at Nordic Level, Stefan Noderén, so that you have every opportunity now to ask questions about our credit provisionings not least.

As you will have seen in today's report, we are continuing to grow by 12% in the last quarter, a good bit over the 10% we have as our aim, with good flow and level of activity, an increase by 7% in revenue, SEK 399 million. But we've made an extra provisioning of SEK 35 million for expected increased credit losses in the Norway operations. You'll be hearing more about that. I'm not going to say more about that at this stage, but there's more information in a few moments. So SEK 364 million is the total number, it dropped by 3%, and

it also means that our cost of risk has increased to 2.7%. And this quarter, the underlying, however, is 2.2%, and it's in line with where we usually find ourselves.

All in all, we have a good year behind us with a growth -- an increase in profitability to the tune of 6%. And the Board, therefore, has decided to propose a dividend to the Annual General Meeting of Shareholders of SEK 2.10. SEK 1.80 paid out last autumn. So all in all, this totals SEK 3.90, up by 8% in the dividend.

As you are well aware, we have a business model which covers the Nordic countries. We have a breadth with all the Nordic countries. And that's very beneficial when you get into a situation like the one we've seen in Norway currently. We've chosen to stay at a low level in Norway. We have a healthy level of activity. We're not growing in Norway currently, and we have exceptionally good -- keeping exceptionally good track of the credit situation. And we've made provisions, as I mentioned, wherever we deem that this is necessary.

For the other countries, Denmark, Finland and Sweden, we have good coverage so that we are well in line with our growth targets. And we've shown that by growing by 12% in total over the last quarter. We believe when it comes to Norway that if we look on a 12-month period -- I also announced in Q3 and I'll repeat it -- we believe that 2020 will be a year where the Norwegian market will be a fairly sad or stale market where we have to try and maintain our position, get the right type of business into our operations, focus on profitability rather than growth. And we know otherwise that we usually focus on profitable growth, as you know. But growth is something we're very cautious with right now in Norway. We want to look at where the market ends up, because of course when they make a significant changes as the regulatory changes have been -- that have been made in Norway right now, the market players need to adapt. And we believe that we will see that happening during 2020. And that means that at that point, we'll be ready to charge ahead again.

Let's have a look at our segments. Payment Solutions first, growing by 9% in the quarter, a little bit slower than in Q3 but continued a good level for a market with underlying growth of 3%, 4%. So we're still gaining market shares. Retail generally is quite disappointed in Black Friday and Singles Day and Cyber Monday. So we don't see the growth on par with what we've seen before. But this -- we're not at a standstill, but we're more or less growing on par with the rest of the activities. It could have been even better. But we closed with a good December and that helped to compensate to some extent.

And we continue to be successful in e-commerce. We've previously communicated that we have more than 30% of our volume from e-commerce. It's actually now reached to 35%. We continue to digitize our business. And we now have 90% of all new business, which comes in to us digitally acquired. The average in the Nordics -- that was Sweden, where we were at 90%. In the Nordics, the average is about 60% where we have one of the countries lagging behind a little bit. So there's further room for improvement and increase there. We continue to win and gain business. And I believe that we do this mainly because we are sticking to our model. We ensure that our partners, customers come into our partner stores, and once they are there, they close deals. We have the customer wallet as a model. That's what we call it. A customer who comes into a store will know how much money they can spend. And the sales people in the stores can verify, they can know quickly what type of customer they're talking to. Combining this with our proximity to retail, we of course have 40 years of tradition working with retail. We remain a very good and attractive option.

During the quarter, we've signed a number of new agreements. For example, we have expanded with Biltema. We have checkout and Click & Collect options there. We've started a few interesting subscription programs, where we helped the Grand Garden Company with something very exciting, snow blower equipment. Don't ask me exactly how that works, but it is very exciting and interesting. And we've also started to deal with a number of car dealerships, such as Bilia, with an aftermarket and service account, an interesting reasoning there.

And Consumer Loans continue to grow. This is a highly competitive business, of course. It's difficult to stand out the way we can in Payment Solutions. It's also quite challenging when you look at the regulatory requirements in some of the markets, as you know. In spite of that, we're growing in the last quarter by 14%. So a very healthy contribution to the total numbers.

Generally speaking, we're roughly at the same level. 80% of the new customers are known to us, they're already in our systems. And that facilitates for us when we make our credit assessments.

We have an average loan ticket which is increasing. But only at a small level from SEK 88,000 to SEK 102,000 during the quarter, nevertheless. And if you look at the loan book in general, we see that during the quarter, we had 40% of all new lending and credits that exceeded SEK 300,000.

And in Q4 -- we've gone up to 50%, rather, from the SEK 300,000 which was Q4 2018. So we're now at 34% in Q4 2019 for credits exceeding SEK 300,000. That impacts the margins and the profitability, but also the risk for these customers. Of course, we have a better level of risk because we can get an opportunity to perform a new credit check with these customers. And we see that the balance transfer work we do, where we consolidate loans, means that in other situations we might have lost those customers to competitors. But we now bring them back in and we get to do more business with them. So the rate of -- price of acquisition is reduced. So it's reducing costs generally. But some of the impact will be seen later than other, of course. And the upside tends to come a little bit later than the downside in fact, unfortunately.

Insurance. Here, we continue to show positive trend in the Fourth Quarter. We've seen an improvement of the technical result by as much as 29%. It's driven mainly by growth in security and motor segments, but also from the increased profitability in the motor segment. We saw an improved profitability in the Insurance business. We've reduced the total cost, as -- per percentage, to 87.8%, it used to be at 88.9% previously. Positive development of the percentage when it comes to damage claims, that contributes. And we've also renewed agreements with one of the -- some of the bigger partners (inaudible) and a new partner in security has been launched. And we intend to announce an acquisition which will make us a stronger player in bike insurance. So all in all, we're very satisfied with the fourth quarter of Solid as a company.

Now the annual report for 2019 will be announced soon. That will include our third sustainability report. I'm going to take the opportunity, nevertheless, already at this stage, to boast a little bit about all the work that we do in the area of sustainability. For research, this is something we do on a daily basis. It covers everything we do. It's not just about having an environmental focus, not just handing out lots of -- and it shouldn't be just a piece of paper we hand out to the people who work for us. And we do this on a daily basis. Every employee is awarded 8 hours per year for voluntary work that they -- of their choosing. We have people who've picked up rubbish on beaches. We've -- some people have been out at local schools, helping those who need it to get support in doing their homework. We've people who've gone out to an elderly care facility, cooking food with them, serving it, chatting to the people who live there. That was very appreciated. And just over a year ago, we started something called the woman -- Women Potential Program. We were very satisfied with that decision. Over a number of years, I've tried to have a more equal situation in terms of gender balance in senior management, and we are -- we have taken important steps in that direction. The idea came when we saw that young women need support from more senior women on how to progress and move through a career path. So the 4 or 5 who are on board on that project have succeeded in finding new jobs or new positions. We believe that we're fostering the leaders of tomorrow. We're very happy about this. And it has a spillover effect as well. We're being noted. We are listed on the AllBright's Green list for the second consecutive year. We're on the Career Company of the year 2020 list, together with 99 other companies. So only 100 companies selected. We're on the Universum survey on attractive employers for -- amongst students. And we were nominated as one of the newcomers of the year. In May, we'll know how that contest (inaudible). Perhaps you saw in Dagens Industry newspaper a few years ago that we ranked as one of the highest in our work against corruption. So for our anticorruption facilities and focuses, we're very proud of that. And we'll continue this work during 2020. And it's a very important part of the work that we do so that we are an attractive employer for all stakeholders.

And now I'm going to hand over to Christina, our CFO. The floor is yours.

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Christina Kassberg, Resurs Holding AB (publ) - Interim CFO & Head of IR [3]

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Thank you, Kenneth. And then I'm going to walk you through in some more detail the numbers that our CEO, Kenneth Nilsson, has already started to introduce. I'll go more in that.

As has already been said, lending was up 12%, and that pretty much is at the same rate as the last few years. And in absolute monetary terms, this is an increase of close to SEK 3.4 billion, which means that we deliver bigger and bigger loan book every year.

Operating income in the quarter was up 7% or SEK 62 million and was up to SEK 945 million. And operating income for the quarter is at the highest level ever.

As we then look at the operating profit for the quarter, that was impacted by an extra credit provision, SEK 35 million, and was down 3% to SEK 364 million. But without that provision, the underlying operating profit was 7% [at] SEK 399 million.

And then the loan book. Our lending, and Kenneth has already talked about this, is in order to have sustainable profitable growth. And we're active in two different segments for different markets. And one of our strengths is that we can balance growth between the different areas. It's very pleasing that Payment Solutions continues with good growth, an increase in the loan book as of this quarter with 9%, and this is somewhat lower compared to what we've had before in the year. But it's still a good healthy increase.

Growth is mainly driven by the fact that volumes are up with existing retail partners and also that we continue to get new partners.

Looking at the different markets. Norway is more or less at a standstill, but we're growing with good rates in the other countries. And Sweden and Denmark have the largest increases in absolute numbers and Finland in percentages. In this quarter, and Kenneth has talked about this, we felt that the Black Friday and Cyber Monday were somewhat of a disappointment. And of course, that has a spillover effect on us. And the volume increase was overall somewhat lower compared to Q3.

And then if we look at consumer loans, it continues to grow, with high numbers in this quarter as well, increased with 14%. However, Norway is completely still. However, we see good increases in the other countries. Finland is growing, good rates with absolute numbers and percentages as well, and delivered its best growth ever.

Sweden has a strong development as well in absolute numbers. And in Denmark, we saw healthy developments in percentages.

And then looking at the operating income, we had a 7% growth for the year-to-date and for the quarter as well. And we've already mentioned that this quarter was at the highest level ever. And then if we look at the different components, we see a somewhat more mixed picture. Net interest income and commission income was relatively weak in the quarter, which had to do with the weak growth and margins in Norway and the fact that partners with lower margins are growing faster. And we have tried to work in the quarter with selective price adjustments in new lending. And when we do that, we see positive effects.

Insurance and premiums earned. Here, we had a good positive development. And net expenses from financial transactions. Here, we have a negative impact because of reevaluations of securities and currencies. And we know that this can have, in absolute numbers, a big effect. And apart from that, mainly fees were strong in the quarter.

The challenge that we are struggling with, and you know about this, and we've been struggling with this for some time, is the NBI margin. It doesn't matter if we look at the NBI margin for the quarter or the year. It was down with 0.9 percentages, and in Q4, ended up at 11.3% and for the full year, 11.7%.

And the underlying reasons are mainly driven by the consumer loans and the situation in Norway with the new debt register, GJELDSREGISTRET. We now have effects on margins and adaptation to the market. And we have pressure on our margins. So what is positive, however, is that if we compare NBI margin in Q4 with Q3 overall, we see that it's leveling out. And we have had a decrease with just 0.1 percentages in Q4, talking NBI margins. And that we do not make any promises for the future, but we've seen a leveling out for this quarter.

And then if we continue with the positive -- real positive side of our result and looking at the expenses, Q4 SEK 370 million, which is an increase with -- well, less than 0.5% compared to the same quarter last year. And we continue to look at costs and work on an ongoing basis with efficiencies. And we're continuously reviewing our working methods and working with digitization of our processes. And we still make extraordinary efforts in certain areas and our brand is important. But we've been able to reduce the costs in an efficient way in Norway, and we have been able to focus on costs.

Overall, the C/I ratio, costs in relation to the income of the business, continues to improve over time. Q4, 39.5%, which is a good, healthy improvement compared to 1.2% for Q4 2018.

Full year 2019, we saw an improvement of 1.4%, and this is a result of scalability in our business model, what we do with digitization and that we can quickly adapt to new market changes.

Our ambition is to continue to work with different types of efficiencies and also digitize more and more of our business.

And then if we continue to zoom down to credit losses for the quarter, the underlying credit losses were SEK 175 million. The increased underlying compared to what we have now -- compared to last year is driven by the loan book and that growth. The cost of risk is stable, underlying with 2.2% for the quarter and for the full year, 2.1%. In addition to the model-based IFRS 9 provisions that we make on an ongoing basis, in Q4 we had an extraordinary provision of SEK 35 million. Our CEO, Kenneth Nilsson, has already talked about this. And with that factor that we have taken into account the increased credit risk in Norway. And we think that this will materialize in 2020, and that we want to, in our annual report, have a correct view of the provision needs.

And our objective is -- I want to stress this again -- to have a profitable long-term growth. And we continue to work with evaluation models for credit risks in lending. And our Credit Manager, Stefan Noderén, will talk about this in more detail very soon.

All in all, total credit losses were SEK 210 million, 2.7% for the quarter, 2.3% for the year. And let me stress again that when it comes to choosing between growth or credit loss levels, we're going to continue to work with a comfortable level of credit losses. And then if we continue to look at the risk-adjusted NBI margin, the NBI margin after credit losses has ended up being 1.6% for the quarter, 1.2% for the full year. And this extra credit provision gave an effect of 0.5% for the quarter and 0.1% for the full year, which means that for the full year there was only a marginal difference.

The reason for this underlying deterioration of margins is mainly driven by consumer loans and the situation in Norway. With the new debt register, we now have marginal -- margin effects that adapted to the market. We see still healthy demand for loans but also competition about volumes, and that is depressing our margins. And as has already been said, with somewhat lower margins in other markets, we have, well, data-driven by ticket size and we also have the fact of the customer mix. And this is a trend that we have experienced over time. And it is something that we now see with a lower C/I ratio.

And then if we look at Payment Solutions, the loan book had healthy growth with 9% in absolute numbers. This is SEK 0.9 billion. And we see good growth in all countries with the exception of Norway, where we have a standstill. And the growth of 9% is driven by a number of retail partners, where we have developed and deepened collaborations and we also have new partners.

NBI margin for the quarter ended up at 13.9%, 0.5% lower than last year. And the lower margin is driven by the customer mix, where we have partners with lower margins growing faster.

What is positive, however, is that when we compare the NBI margin and Payment Solutions with the outcome of Q3, it's now going upwards and has gone up with 0.4 percentage points, which means that we have a real increase and an upwards-heading curve. And as has been said already, we make no forward-looking promises, not for Payment Solutions either. But this quarter, we see a change in the trend.

Cost of risk for the quarter was 3.2%, an increase with 1.3%. And if we adjust for the extra provision, it's a 2.9% for cost of risk, increase with 1% and full year is stable, where we have a positive development in Sweden that has compensated for the Norwegian market. And Stefan is going to talk more about this very soon.

If we look at the risk-adjusted margin, it was down in the quarter with 10.7%. And without the credit provision, 11%. And for the full year, it's down with around 0.5 percentage point. And margins, overall, are at a very good level and in line with our targets.

Consumer Loans. The loan book shows continued healthy growth with 14% in absolute numbers, an increase with SEK 2.5 billion. And the segment shows good growth in all countries with the exception of Norway. The NBI margin for the quarter ended up at 9.9%, which is 1.1 percentage points lower compared to previous year, but also 0.4 percentage points lower than Q3. And the reason has already been mentioned, it's the situation in Norway and the adjustments to the market. And another fact is that there is more competition for lending volumes, and that has depressed margins in the Norwegian market, the situation in Norway. Well, in addition to that, the other markets have marginal effects of higher ticket sizes and also increased competition.

Cost of risk was up in the quarter to 2.4%, an increase with 0.3 percentage points. And adjusted for the extra provision, it was 1.9%, which is an improvement of cost of risk with 0.2 percentage points. And for the full year, it's relatively stable.

If we look at the risk-adjusted NBI margin, it was down in the quarter to 7.5%. And adjusted for this extraordinary credit provision, it's at 8%. If we look at the full year, the margin is down with 1.5 percentage points for the reasons I've already explained. And of course, we are not happy with this, but it is a trend that we have experienced over time. And we countered this with a lower C/I ratio.

And then the third segment, Insurance. The Insurance business in the Nordic market is done under the brand name Solid Insurance. And the premiums earned were up 9% in the quarter, 8% year for the year. And the increase is mainly within the areas of motor and security. The technical result was up 29% in the quarter and 17% for the full year, mainly driven by growth in these areas. So security and motor, we also see improved profitability within motor and a good cost control. And the cost bind (sic) [combined] ratio was improved with 0.6 percentage points. Overall, this is a nice business that we're very proud of that's developing well.

And then we have our capital position. We have a strong capital base with CET1 total capital ratios that are with a good margin above regulatory requirements, and also above our own targets. The total capital ratio in Q4 was 16.3% compared to 14.7% in 2018. Regulatory requirement is 13.5%. And the risk rate -- exposures, here we are stable and unchanged. Then we have the proposed dividend, and we see that we are at 64%, an increase with 8%.

Let me also mention, and this is something that we often are asked the questions about, repurchasing. We do not have a mandate. It has expired. And this is a question for the annual meeting and the Board, what to do towards the financial supervisory authority. And we have also changed from a basis method to a standard method. And that increased the numbers with 0.5%. In December, we issued an AT 1 bond at SEK 300 million. And that strengthened the capital ratio with about 1%.

According to the regulations, we still have room for more issues. But right now, we do not have any such plans. The issue in December was heavily oversubscribed and there was a big interest.

I can also mention that this bond is comparable to equity, and that that goes also for the interest costs. It's issued by Resurs Holding, and 2/3 have been sent to Resurs Bank. And we've asked -- been asked some questions, as I can mention, that this is just for technical reasons. And it has to do with minority interests and subordinated debt.

We ended the year with a strengthening the financial targets for total capital ratio to above 15%, which is an increase with 1 percentage point.

All of this taken together means that we have a strong capital position, and we live up to with good margins, future regulatory requirements about buffers, which means that we are well equipped for continued responsible and profitable growth.

And then the financing structure. Well, it looks pretty much the same as before. Our strategy is to work in an active way with the different financing sources for well-diversified financing. Our liquidity is -- continues to be good and we have different sources of financing. About 75% is our own lending from the general public. We have that in Sweden, Norway, and also for about a year now, we've had this [through raising] in Germany. So we have different channels, which means that we have a good currency, mixed and also balanced financing cost.

In addition to that, we have our ABS program, our MTN program. And within MTN program, we have been working with new issues on a regular basis since 2015. We have SEK 1.6 billion this year. And then we have the bond that was issued in December, SEK 300 million.

In May 2019, I can also mention that we were awarded the credit rating, BBB-, by Nordic Credit Rating because of the stable outlook. And you can also see looking at the slide that we have a certain fluctuation between the quarters. And that has to do with the dates of the issues and the maturities.

And, well, all of this taken together, if we look at the financial result for 2019, we managed to meet 5 of our 6 targets. Loan book increase ended up being 12%, which is a good increase and the outcome of the fact that we are active in 4 different markets.

The risk-adjusted margin ended up at 9.4%, a bit below the ambition we had of 10%. And this is a trend that we have seen for some time now. And we do not make any promises about the future. It's also too soon to say what developments will be in the future.

And what we do is that we work with an improved C/I ratio. We ended up at 39.1%. And we see that this is improving by and by. This has to do with scalability and different types of efficiencies that we're working with. And we have an ambition to continue with this work.

RoTE ended up at 32.7%. And total dividend has been proposed to end up at 64%, which means that we had the best full year result ever, in spite of lower margins. And that this will be transferred to our shareholders by increasing the dividend value with 8%. And also, we ended up at a healthy capital ratio compared to internal targets and also regulatory requirements.

And then, I am done with that in the presentation of the numbers. And I'm going to hand over to Stefan Noderén.

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Stefan Noderén;Head of Credit & NPL, [4]

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Thank you, Christina. Stefan Noderén is my name. I'm Head of Credit and NPL Resurs. And it's a real privilege and a pleasure to be here and tell you a little bit more about how we work with credit risk.

I may be a little bit technical in some parts of my presentation, but I'm going to do my best to keep it at a good and accessible level.

Let's start by delving into the outcome for Q4 and the credit situation. If we look at Payment Solutions and take away the extra SEK 35 million of provisioning, the cost of risk ratio in the quarter increased by 1 percentage point. This is mainly driven by updates of our IFRS 9 models, which we carried out during Q4. And I'm going to tell you in a few moments about how we work to develop our models. But the driver here is that we have an actual increased duration in the Payment Solutions credits. And this is now reflected in our models, meaning in turn that the provisioning in Stage 2, where we make provisions for the entire remaining maturity of the credit, goes up as opposed to stage 1, where we only make provisions for the next 12 months.

It hurts a little bit on the cost of risk side, but the underlying is a positive because the customers stay with us for a longer time, and we increase the revenue.

In addition, we also have a minor impact from Finland with a higher portfolio PD and higher volumes into Stage 2, outstanding effects of the Finnish postal strike in November and December. However, we do see that this is going to resolve itself over the next few months.

When we look at Consumer Loans, we see a somewhat different development. If we take the extra provision of SEK 35 million to the side, we see that we have a reduced cost of risk ratio in the quarter by 0.2 percentage points to 1.9%. And this is also an immediate impact of our model updates in Q4. And it's lower provisions in Stage 2, as a result of clearly dropping lifetime PD because we make provisions for the entire remaining outstanding credit. In addition, we also have an impact on the mix where we've seen additional credits with lower risk and lower levels of provisions therefore.

As Kenneth mentioned by way of his introduction, we've made an extra provision to the tune of SEK 35 million for the Norwegian market -- in the Norwegian portfolio, as it were.

In the background is, of course, the introduction and implementation of the debt register GJELDSREGISTRET. I want to be clear in saying that we have a very positive approach to what has happened in Norway. In the longer term, we believe that it will raise the quality of the credit portfolios. But in the short term, it has a negative impact on our credit provisions. The backdrop, the background to this is that the register in the Norwegian market has made clear some overindebtedness in parts of the Norwegian consumer collective. This in turn is due to the fact that previously in Norway there was no real way of verifying the actual indebtedness of an individual, and their customer behavior and willingness to and the ability to pay back, linked to this. And because the introduction of the debt register is an exceptional occurrence, PD models, which are based on historical behaviors and historical data will not catch this sufficiently, rapidly or significantly enough to inform the decisions. And now if we look at the introduction of the debt register in Norway, there has been a behavior in the Norwegian market where customers have sought out new lenders -- there are many available in Norway -- in situations of difficulties of payments. And so they've continued to resolve their difficulties by accessing new credit,

and so over time they have ended up in a situation of overindebtedness. And that's where we make extra provisions so that we ensure that we have provisions for what we've identified in the portfolio in Norway.

Based on the analyses that we've made of our customer portfolio, our credit portfolio, and the extent to which our PD models have been able to catch this, we feel secure that the SEK 35 million is a conservative level of provision.

Let's have a look at the development of our lending book in stages and the corresponding provisions. We see that we have a stable ratio of NPL of stage 3 during the year. This is mainly driven by the portfolio sales that we've carried out in Q1 and Q4 but also the forward flow agreements that we've had in place during the year. But they're only a limited part of our portfolio, however. The stage 2 component has gone up, and mainly between Q3 and Q4. This is an effect of the development in the Norwegian market, but it's also partly driven by what I mentioned in Finland on a remaining effect of the postal strike in Finland. However, we see that this is going to resolve itself over the next few months.

As for the rate of provisions, we see that they've dropped over the year, both for stage 2 and stage 3, even if the development paths look somewhat different.

For stage 2, we primarily see a reduction between Q3 and Q4. This is an effect of the model updates that we implemented during Q4 and the drop in lifetime PD, which results in lower needs for provisions. When it comes to stage 3, this is partly an effect of the fact that we've divested portfolios during the year, but also due to the fact that our LGDs have reduced somewhat. The latter, in turn, has 2 reasons. One is that during the year, we've seen an increase in cash flow from our NPL portfolios. And the second factor is, and it's a more technical one, the discount interest rate has dropped somewhat. Of course, the interest rate in our LGDs are based on the contractual interest rates that we have in our credit agreements. And when the lending margin and the margin development is impacted, we see an impact.

Against the backdrop of the portfolio divestments and sales that we've done with prices above the book value and the fact, in addition, that we've seen a positive development in terms of the cash flow in our NPL portfolios, we feel secure in saying that our rates of provisions are robust.

Now lately, there has been some developments in the market, regulatory changes and credit loss provisions not least, and there has been some turbulence in the market, mainly surrounding us niche banks. Yes, things happened, indeed, and there are challenges. But we are well prepared to take on these challenges. We don't perceive it as a problem, rather a natural part of our development. We've been active in this business for over 40 years, over 20 of those with a bank license. We intend to continue to operate for at least as long yet again. There are many reasons, of course, why after 40 years in operation, we remain strong. But some of the basic reasons that I would list is the fact that we've always had a very conservative outlook when it comes to risk. We are prone to change. We are prepared to adapt our operations and processes based on new preconditions. We perceive credit assessment and credit valuation as a key to good sustainable business. And finally, we've always had robust provisions when it comes to credit losses.

And now, I'm going to say a few words about IFRS 9 and what this means. As you may know, from the 1st of January 2018, we have to relate to the new regulatory setup for IFRS 9 with everything that this entails.

And I thought I'd tell you in general terms how we work with this on Resurs. A lot of this has to do with modeling work. And it can be applied also to how we work with our applicant scorecards. But I'm going to focus mainly on our credit provision models here. We have an extensive database with credit-active customers, giving us the best possible optimal possibilities to build robust models for credit provisions. In order to optimize quality and precision in our models, our ambition is to have product-specific models wherever possible, but of course at a level to ensure that the statistically -- that the information is statistically significant. The aim of having such granular models is, of course, to be in an optimal position when it comes to reflecting and predicting risk in our portfolios, both at country level, at segment level and product level.

The basis for this is the fact that within a country, of course, we do see different types of products, customer types and customer behaviors. They can differ. And that is of course what gives us the impact that we've seen here earlier, that our model updates can have a different impact in different segments because the behavior is not identical everywhere. To us, it is perfectly natural and makes perfect sense to continually follow up and analyze the result and the precision of our models, and this is an integrated part of the credit management work that we do. We both have the resources and the skills required to do this. We have a large team of competent skilled model developers with extensive long-standing experience of working with models and developing models. And we know that both the customer segments and customer behaviors will change over time. And the changes are the ones that we strive towards catching as early as possible.

In addition, we perform an independent validation of all parts of our IFRS 9 work annually. This is to do with our models, but also the entire framework that surrounds it and everything from internal procedures and processes and the distribution of responsibilities in the organization. And to ensure full independence, we've outsourced that independent validation to an external player. That's yet another way of increasing the feeling we have that we're very comfortable -- profitable with our processes, our models and our credit provisions. They are fair and robust. But we know that models can be reactive because they're based to a large extent on historical data. So an important part of our regular follow-up and analytical work is to identify whether there's anything in our models -- or rather, whether there is something or any factors which our models are unable to cover.

And this also means that we have a possibility for bank management to make extra provisions -- management overlay and management adjustment, as we call this. And that's what we've used in Q4 to ensure that we have a robust provision in place based on the effects we've seen in Norway and the introduction of the debt register, GJELDSREGISTRET.

So based on how we work in this area and based on the composition of our credit portfolios, our view of the market preconditions, we're very comfortable with the level of our credit loss provisions and our NPL provisions.

A few words, generally, about the NPL situation. Over the past 12 to 18 months, we've seen that EBA have issued additional regulatory requirements in the [LPL] (sic) NPL area. That has changed the market, and we believe that the market will continue to be impacted by this. We understand that the EU and the EBA take action in this area, but we find it unfortunate that this is going to hit the entire EU market in a blind manner, because in the Nordic markets where we operate, possibly with the exception of Denmark, we have completely different preconditions when it comes to recovering NPLs. And so the NPL issues are not as extensive in the Nordics as they are in the other parts of the European Union. However, the regulatory provisions have been implemented, and we need to relate to them.

During this period, we've carried out 3 portfolio sales: 2 in 2019, 1 in 2018. The most recent one that took place in Q4 2019. And even if we've seen a drop in the price since the middle of 2018, we've been able to carry out these divestments at levels which go above the book value of these assets. And we look at the possibility of extending our forward flow volume and agreements, and we're discussing this at a perfectly acceptable level compared to the level of provisions in the company.

Gazing into the future, our assessment is that the prices of NPL portfolios and forward flow in the Nordic market will not go up within the foreseeable future. We rather conclude that the risks are on the downside. However, it is also our assessment that for the next while, we will be able to implement divestments and sign new forward flow agreements at levels which will well match our levels of provisions. We base that assessment partly on our perception of the market generally and the pre conditions in the market, but also and not least, on the fact that we are a known player, we've been active in the market for a long time. We've been able to build up good long-term relations with a number of players on the buyer side.

Historically, they've acquired NPLs from us. Relatively speaking, good quality, if you can express it in that manner when you're talking about NPL. We are convinced that in the future, they will still be prepared to pay for the quality that we can offer in that area.

And with those words, thank you, and that was my presentation.

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Kenneth Nilsson, Resurs Holding AB (publ) - President & CEO [5]

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Thank you, Stefan. That was the longest presentation we've had, I think, but we felt it was important for us to be open. And we hope that we have answered most of the questions that you would otherwise have tried to figure out yourselves. But we open up for questions and we'll have help from, well, our friend from Carnegie.

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Questions and Answers

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Unidentified Analyst, [1]

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Well, thank you, and good morning. (inaudible) is my name, and I work for Carnegie. And I'll take the opportunity to start with some questions myself. And if we start with the provisions for Norway, you say that this is because of the new debt register, the GJELDSREGISTRET. But if we look at Finland, things have been done as well. And there -- well, there is work with the database. But if we look at Finland and particularly Denmark, where you do not have much data, is there a risk.

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Kenneth Nilsson, Resurs Holding AB (publ) - President & CEO [2]

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Well, the immediate response would be no. But in more detail, in Denmark, well, Denmark is very much like Norway when it comes to information and the possibility you have to avail yourselves of information. But we do not look at risk in Denmark in the same way at all because growth in Denmark is a lot lower. And generally speaking, consumer credits, well, it's not comparable with what we've seen in Norway the last 10 years or so. And that is why we feel that there is less of a risk in Denmark. Denmark also has introduced the last few years, well, I think it was 2 or 3 years ago, where they introduced what is referred to as e-tax, where you have a better picture of, well, income and financial status. If we look at Finland, well, then we have Asiakastieto. And they have the equivalent of the Swedish UC. And they have started to build, the past few years, a debt register, it's done on a volunteer basis, but there we have different actors, different lenders, comparable with what has been done in Sweden. And the last few years, we have seen that -- we see, well, very high-quality in that credit register, which means that we do not see that type of danger in Finland because we have this register. It is done on a volunteer basis.

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Unidentified Analyst, [3]

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If you allow me to continue with IFRS 9, and of course, you have to follow rules and regulations. But in more general terms, what do you think about this with the possibility to make forward provisions? And you talked yourself about management discretion. Will we see in the future that we'll have more -- well, ad hoc measures?

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Kenneth Nilsson, Resurs Holding AB (publ) - President & CEO [4]

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Well, looking at IFRS 9, it allows us to do this. And this is actually what IFRS 9 encourages us to do. And I don't feel that this will be something that will be done on a very regular basis, that we make adjustments like this one, to have models and model provisions. Well, that is something that is based on historical behaviors, which means that it's a somewhat slower method because behaviors can change. But in Norway, we have seen very big changes. And that is what it takes to change the picture to such an extent that you may have to make extra provisions.

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Unidentified Analyst, [5]

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One last question for me, and then I'll hand over. Cost discipline has been very impressive this year. If we think about the future, is there a risk that that will have an impact on income where you'll end up in a situation where you cannot generate enough growth?

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Kenneth Nilsson, Resurs Holding AB (publ) - President & CEO [6]

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No, no. There is not that type of risk. However, well we've been around for a very, very long time, and we see that there are more and more actors entering into the market, which means that margins are being lowered and we think that will continue. And we think that in the future, you'll be have to very skilled in managing your company. You have to be cost efficient to be profitable long term. And we have that history. We have always been very aware of costs. And I don't think you can find anyone who is as careful as we are when it comes to costs. And we are going to continue to be very careful and try to hold on to our money. We also try to avoid costs having to do with manual, routine work. We try to invest. We're going to continue to invest in IT, and we're also going to review our organization on an ongoing basis. We've been doing that for the last few years, and we're going to continue that way so that we can ensure that we have a proper cost mass.

Yes, next question?

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Peter Kessiakoff, SEB, Research Division - Research Analyst [7]

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Peter Kessiakoff, SEB. I appreciate that you had a few extra slides on the credit provisions and IFRS 9, et cetera. And on that topic, considering the fact that the provisions in stage 2 go down quite significantly in the quarter, I know you talked about the drivers in your presentation. But if you take the example of the increasing cash flow and nonperforming loans, which is driving down the stage 2 provisions, what assumptions have changed? Is there something major? Or is it purely an update of the data that you feed into the model? And then secondly, is there a risk that it's a procyclical update which is made. So now, in times where people have good earnings, the labor market is strong with employment, et cetera, now you're adding more? And do you expect it to remain this way?

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Stefan Noderén;Head of Credit & NPL, [8]

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Well, I shouldn't correct your question, but let me just put it this. The cash flow on our NPL portfolio does not impact stage 2 provisions, only an impact in stage 3, just want to clarify that -- this is Stefan. The stage 2 provisions are driven -- the fact that they go down is driven by the actual output that our models have been updated with, which is to say that the PD -- so the probability of failure after the 12th month -- has dropped quite significantly over the past few years. And that's the driver for the reduced need for provisions in stage 2. Another question?

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

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I'm wondering about the financial targets. If you look at your financial targets, there are two, perhaps, that stand out as far as I'm concerned. One is the C/I ratio, where you're clearly now below 40%, and it remains unchanged. You're not reviewing that target. Should we read anything into the fact that we might expect more investments in the future so that there is a belief that the C/I ratio won't drop any further? And if that's not the case, the cost of driving growth, it can still be profitable, of course? And then secondly, the NPR -- NBI margin, it's not being adjusted. Is that because you still believe that you can get in within the interval 10% to 12%?

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Kenneth Nilsson, Resurs Holding AB (publ) - President & CEO [10]

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Those are relevant and good questions. This is Kenneth. Now we -- when it comes to the 10% to 12%, we believe that we will be living in reality south of 40% as we move forward. So we're focusing on this. We've discussed this with the Board and we have had them since we were listed in 2016. We wanted to look at whether they should be reviewed potentially, but we're currently in a period where we're waiting for the next CFO to take up his position. And it was the opinion of the Board, that it could be wise to listen carefully to that individual's views and contributions. And if we review our targets, we'll probably have fewer targets rather than more in number.

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

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And then one final question, on costs. I see that you have a drop in the number of employees year-to-year. Can we expect that that is a trend that is likely to continue? Or was that more a one-off effect?

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Kenneth Nilsson, Resurs Holding AB (publ) - President & CEO [12]

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We are a business which can be scaled. We're scalable. And I think you can expect that we're not going to see at least any dramatic increases. We work with a lot of automation of procedures and cost efficiency. It's not something we strive towards to have people to do routine work just for the sake of it.

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Patrik Brattelius, ABG Sundal Collier Holding ASA, Research Division - Analyst [13]

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Patrik Brattelius, ABG. I was thinking about this with the credit losses. Could you tell us a bit about differences between Payment Solutions and Consumer Loans? And the provisioning and the degrees of provisioning and differences between the different countries?

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Kenneth Nilsson, Resurs Holding AB (publ) - President & CEO [14]

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Well, when it comes to countries, we do not communicate that specifically, the specific data for the countries. But generally speaking, about the segments, the model updates that we're doing in Q4, which means that we'll have changes between the segments. That is something that is to be seen as an adaptation and the full effect will be in the quarter, but we'll have a more accurate picture if we look at year-to-date. And then we do see as before that we have lower credit risk in Payment Solutions compared to Consumer Loans.

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Patrik Brattelius, ABG Sundal Collier Holding ASA, Research Division - Analyst [15]

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Okay. If I may have a follow-up question as to what Peter said about financial targets. If we look at Q4 and growth and compare the quarters, what will you do to reach the level of 10% in annual lending growth. If we fast forward 12 months, will you be able to get there?

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Kenneth Nilsson, Resurs Holding AB (publ) - President & CEO [16]

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Well, absolutely. If we fast forward to 12 months, we expect Norway to see an improvement. And we have managed to get above 10% with a Norwegian market that is not moving. So we think that we'll get it to the growth rates that we want to have and we expect to reach 10%.

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Patrik Brattelius, ABG Sundal Collier Holding ASA, Research Division - Analyst [17]

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And if Norway continued to be a headache for a longer period of time, what is your thinking about geographical expansions?

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Kenneth Nilsson, Resurs Holding AB (publ) - President & CEO [18]

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Well, that will have to be a later question. If that were to be the case, we have a lot that we can do still in Denmark, Finland and also in Sweden, as a matter of fact, which means that we have enough to do in the home markets. Of course, we're looking at other geographies, but nothing that we expect to see in the short term.

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Patrik Brattelius, ABG Sundal Collier Holding ASA, Research Division - Analyst [19]

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Then 2 more specific questions. If I look at other operating income, it seems that like it's very strong in Q4.

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Kenneth Nilsson, Resurs Holding AB (publ) - President & CEO [20]

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Well, I think you should look at the bigger picture for income, as a matter of fact. And we may see changes in other expenditure, for example, so you should look at the bigger picture.

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Patrik Brattelius, ABG Sundal Collier Holding ASA, Research Division - Analyst [21]

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Okay. Do we have one-off effects?

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Kenneth Nilsson, Resurs Holding AB (publ) - President & CEO [22]

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Well, in that cost item -- well, it is other expenses and income. And of course, you might see one-offs.

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Patrik Brattelius, ABG Sundal Collier Holding ASA, Research Division - Analyst [23]

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Last question. Other operating expenses has been going down for 3 quarters. Is this something that we will -- should -- expect to see in the future as well or is this something that will move upwards instead in 2020?

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Kenneth Nilsson, Resurs Holding AB (publ) - President & CEO [24]

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Well, expenses, costs and -- well, as IT investments, perhaps, might go up and targeted marketing as well, apart from that, most likely we'll see a downwards trend.

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Robin Rane, Kepler Cheuvreux, Research Division - Equity Research Analyst [25]

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Robin Rane from Kepler Cheuvreux. Going back to the credit losses in Norway. The debt register, GJELDSREGISTRET, in itself, gives you more information about the market. And so did you underestimate the risk in the Norwegian market and this has now been discovered through the debt register? Or is the register in itself something which triggers an inability amongst people to refinance what they do, and that increases the risk?

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Kenneth Nilsson, Resurs Holding AB (publ) - President & CEO [26]

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I would say that it's primarily the second. It's the behavior that has been there already. Customers have looked for new loans to get out of payment difficulties. Historically speaking, this opportunity no longer exists since the register was introduced. And that's really what we've seen the impact of now. And so we're making allowances and provisions to ensure that we have the provisions we need by the end of the year.

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Robin Rane, Kepler Cheuvreux, Research Division - Equity Research Analyst [27]

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Okay. So it's not that you basically worry that you underestimated the risk in the market? It's the actual development in the market?

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Kenneth Nilsson, Resurs Holding AB (publ) - President & CEO [28]

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Yes.

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Robin Rane, Kepler Cheuvreux, Research Division - Equity Research Analyst [29]

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Okay. And another question. Getting back to the growth target of 10%. That's a good level of growth for lending. Provided that Norway doesn't grow very much, is there a danger that you're being pushed and need to be more aggressive in the other 3 markets to stay at a growth level above 10%?

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Kenneth Nilsson, Resurs Holding AB (publ) - President & CEO [30]

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No. I wouldn't say that. There is no such risk that we will become more aggressive. Not to the extent that it could be a problem. We choose to rechannel our marketing efforts to the countries where we get the best output. That's not Norway right now. So we increase in Sweden and Finland and Denmark, and as we mentioned in our introduction, Finland did really well during this quarter. And so they've been a priority in the quarter because we've seen a good impact there.

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Robin Rane, Kepler Cheuvreux, Research Division - Equity Research Analyst [31]

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Okay. And further on growth. What's your reasoning on growth? If you look at the market as a whole, the indebtedness in consumer credits, it can't just keep growing to the sky. Do you believe that this growth will mainly be maintained in the future from gaining market shares from other large banks, for example, or that the market will continue to grow at high levels?

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Kenneth Nilsson, Resurs Holding AB (publ) - President & CEO [32]

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Well, the markets grow not at all on par with how we grow, the markets grow by 3% or 4%. If you look at retail, for example, we often see figures around 3.5%, 4%, whereas we grow by 8% to 12%. So of course, we are gaining market shares. Yes.

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Robin Rane, Kepler Cheuvreux, Research Division - Equity Research Analyst [33]

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Okay. And in e-commerce. That's becoming an ever more important part of the lending and Payment Polutions. What are the marginal differences in offline and e-commerce? Is there a danger that the mix somehow will have an impact on your margin moving forward?

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Kenneth Nilsson, Resurs Holding AB (publ) - President & CEO [34]

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Well, to some extent, because there tends to be more invoice buying online compared to traditional retail, and we earn less from an invoice situation. But we see it as an omni trade situation. And many of the customers who come in and have a look at an online offer will then go to a physical store to buy. And so there can be additional sales on the spot, for example. Over line -- Overall, we don't perceive this as a problem.

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Robin Rane, Kepler Cheuvreux, Research Division - Equity Research Analyst [35]

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Okay. And then a final question. How large a share will come, mainly -- I presume this is consumer finance, but how much comes from intermediaries? And how has that share developed over time?

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Kenneth Nilsson, Resurs Holding AB (publ) - President & CEO [36]

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Oh. I don't think I had the updated numbers. This is Kenneth. But Norway, which used to be the market where we had most intermediaries were at 65%. Sweden, 30%, 35% or so. I don't have the updated numbers, I apologize, but...

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Christina Jungvid Ohlsson, Resurs Holding AB (publ) - IR Officer [37]

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Do we have more questions in the room or online or on telephone? (Operator Instructions)

There are no telephone questions.

Then, perhaps, I can add a couple of questions. If we continue with the competitive situation, I'm thinking about Norway but Finland as well, and do you see that, well, the competition is already there now in Norway, and that's having to do with the register, and Finland as well, [do] companies try to compensate, so to say, in Finland for what is happening in Norway?

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Kenneth Nilsson, Resurs Holding AB (publ) - President & CEO [38]

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But it's difficult to give a response when it comes to Finland with the debt register in Norway. Well, it's now been turned into legislation. And we did see it changes. And perhaps it hasn't been fully adjusted everywhere among everyone. But we see that more and more now getting in line and the growth is decreasing, which is what the regulatory body wanted. And the underlying credit need has not really changed. Stefan talked about that; we have the people who've had too much debt. And that hasn't been visible before. They will not be able to continue to borrow money. But that is, well, a problem that we, banks, will have to deal with. And then we have to adjust our models so that they fit legislation. And I think that this is a pretty good framework. And if you follow that legislation and that requirement, and if you adhere to what is being said, that you'll have good customers. And we think that we'll see in 2020 that will have an improvement of the market in 2020.

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Christina Jungvid Ohlsson, Resurs Holding AB (publ) - IR Officer [39]

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I was also thinking about what we got from [Riksbank] and the Central Bank in Sweden and the interest rate adjustment that we saw in December. Will that have an impact?

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Unidentified Company Representative, [40]

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Well, we'll have a better return of -- on our liquidity portfolio, which is good, and we have also increased interest rates on our Swedish portfolios in Consumer Loans that was done in December. And I can't say whether there will be more adjustments there, because that was actually linked to costs overall.

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Kenneth Nilsson, Resurs Holding AB (publ) - President & CEO [41]

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Well, if there are no more questions, I say thank you, unless you have something you want to say?

Well, we have a few more slides. No. Joking aside, I want to say thank you for coming.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]