Pareto Bank ASA

Welcome, everyone. Welcome to the fourth quarter of the year. We start with the main features in the budget. After that, the CEO of the bank, Vegard Toverud, will give us more details. Then I will give an update on our business areas and comment on views. We will gladly answer questions at the end. For those of you who participate digitally, just send questions into the chat for the meeting. For 2024, Pareto Bank received a result after tax of 687 million. The result is 14% better than 2023. The main reason for the improvement is a strong foreign exchange growth last year. The total foreign exchange rate increased by 12%, which is 2.2 billion kroner. The result per share was 8 kroner and 29 øre. Own capital spending for 2024 was 13.6%. The spending was affected by the fact that the capital was not fully allocated throughout last year, and that deposits on losses and loans were higher than what was normal for Pareto Bank. Our main market, the new housing market, is still difficult. Summary deductions and loss of loan amounted to a total of 0.65% of net and loan. And the deductions were primarily for housing development. The individual deductions were linked to a limited number, but weakly increasing, of loans. The operational efficiency was also high last year, expressed by a low cost percentage of 18. This despite the fact that we are increasing our efforts in Sweden. With 687 million in cash, 2024 was the best year in the bank's history. Pareto Bank has an exchange policy, if the intention is to share 50% or more of the annual surplus. For 2024, the bank's board has proposed an exchange rate of 4.15 kroner per share, which corresponds to an exchange rate of 50%. As shown here, you can see that the exchange rate has been around 50% for the last four years. At Parete Bank, we are long-term builders, stone by stone. We have created values since the start of 2008, at a total of 86.30 kroner per share, divided between an accumulated exchange rate of 22.70 kroner, even in 2023, and 63.60 kroner in recorded values per share. In the fourth quarter, the result after the tax was 160 million. This was equivalent to a one-capital tax return of 12.2%. The net interest amounted to 311 million. We got a lot of growth in the fourth quarter, and that came at the end of the quarter. The foreign loan was actually up 1.3 billion in the end of the fourth quarter, and that made the sum of the foreign loan end at 20.7 billion. We continue our work by building a robust and profitable exchange portfolio in Sweden. We have also had good financing demand throughout last year, and the exposure to the Swedish market increased to 2.8 billion at the beginning of last year. In the fourth quarter, there were a total of 55.3 million deposits, of which the individual deposits amounted to 31.1 million. The individual deposits are primarily for housing development, and although the sentiment in this market is somewhat more positive, we have to assume that in the next few quarters we will be able to see downloads and take them abroad at a higher level than what has been historical for Pareto Bank. So I have given you a little intro to the fourth quarter, and then Vegard will give us more details.

Thank you. Yes. As we can see here, we have a drop in profitability in the quarter. This is mainly due to two elements. There are increased interest rates. And it is a correction of previously too high interest rates so far this year. The interest rates therefore seem to fall marginally, despite the average balance in the balance sheet being 2.2%. But corrected for this periodization, the interest income is well above that. As a result of these two elements in particular, the profitability is down to 12.2% for the quarter. This is under a level we are used to seeing, and it is also under a level we want to see. But for the whole year, we ended up at 13.6%. The operational efficiency is still good, expressed by a cost of income in the quarter of 17.4%. We experienced a strong outlay growth towards the end of the quarter. This means that we have now benefited from the growth capacity, the capital that we originally had. Therefore, we see that our pure core capital falls to 17.2%. Loan losses in the quarter were at 28 basis points. This is not a level we want to see, but it is worth noting that in spite of this level, which corresponds to around 110 basis points in annualized interest, we deliver a one-capital discount of over 12%. Net and interest income was relatively stable compared to last quarter, but up with the growth from last quarter. In total, we book 2 million in value gains in the quarter. Here we have some more currency gains than we are used to seeing. At the same time, we see that the total value gains we have at 2.2 million is considerably lower than the 10 million we had in the combined quarter last year. The cost values in the quarter are up by 9% compared to the corresponding quarter last year, and for the year as a whole, it is up by 11%. This is driven again by three more years. This gives us a cost-effectiveness of 18% for the whole year, which is marginally lower than last year. The losses are 55 million. This is an increase from the corresponding quarter last year. But if you look at the year, we are on about the same level. The individual loan losses in the quarter are at about the same level as last quarter and as fourth quarter last year, while model-based deductions on fresh loans increase due to negative risk migration into fresh loans. This is what explains the big difference compared to last quarter. In total, we end up with an EPS of 1.91 for the quarter, 8.29 for the whole year, and the increase in EPS of 12% largely corresponds to the increase in the exchange rate. To illustrate the effect of the interest periodization, this is the bridge from Q3 to Q4. Here we see that there is a lot of growth, both on the balance and as a result of activity, which raises the interest rate net. while we have 10.5 million in this bulk of too high recorded interest rates in Q2 and Q3, which we have corrected for in these figures. Adjusted for this, we see that we have an increase here of about 3%, marginally higher than the balance increase of 2.2%, as a result of high activity and the so-called GBYR interest rates. Throughout the year, we do not have the same correction, so it is clean. We see here that there is an increase in volume that increases. The increase in interest margin is largely offset by the increase in income costs, both in revenue and in market. As we can see in the figure, they cancel each other out relatively well. The margins are also relatively stable quarter over quarter on the foreign side. We see that there is still some pressure on our income margins, and when our average margin measured against the balance goes marginally upwards, it is due to the balance mix. The loss rate in the quarter was high. But we see that it is in line with the uncertainty that we have tried to communicate earlier for 2024. If we look at the development in steps 2 and 3 together, the volumes are down. But if we look at the commitments in step 3, they are up 125 million compared to last quarter, or 12%. It is worth noting that our revenues increase by 20% for step 3. The individual revenues are on the same level, at 31.1 million, and roughly the same level as 29 million in Q4 last year. Increased model deductions in step 1. That explains the rest. And we have seen a loss of 7.7 million in the quarter. That's an increase from 0.9 million in the quarter last year. For the whole year, we have seen a loss of five basis points. Five basis points is about the same as we saw in 2022. but significantly less than what we found in 2023, where the corresponding number was 30 points. In the appendix, you can also see an overview of what we have historically found. The strong growth towards the end of the quarter has meant that we have now dealt with most of our capital. We end at 17.18 on pure core capital, taking into account the exchange proposal to the board. Our demand for the moment is 16.74, so we now have a significantly lower buffer than we had in the last quarter. This requirement is based on Norwegian anticyclical buffer and Norwegian systemic buffer, also for the Swedish volumes. So if we had, like most other banks, set a goal based on what we have in the different geographies, then our goal would have been considerably lower. On CRR 3, there is no significant new information for us. So we repeat what we said last quarter, that we see a neutral to potentially some positive effect of CRR 3, with the uncertainty still there, all the time the technical standards are not completed. Our leverage ratio, is still at 17.1%. This is the capital we have to save. The one-capital-discount on 13.6 should, in our view, be looked up to the capital we have. We are not satisfied with 13.6 for the whole year, but given the challenges many of our customers have, and the capital we're renting, we still think it's a strong result.

Great. I'll give you an update on the business areas, and then I'll tell you a bit about the outlook. I'll start with an overview picture. By the beginning of 2024, the total credit exposure was 25.6 billion. Housing development is still the largest area, and as you can see here, it resulted in 39% of the total, and then 9.9 billion. After that, of course, business financing with 29%, 7.3 billion. Then we have the economy, 12%, 3 billion, finished housing, 13%, 3.3 billion, and finally shipping financing, 2 billion, and 8% of the total. This picture shows the development in exposure per area from quarter to quarter. As expected, we got a strong growth within the business area in the fourth quarter. Exposure was up by 913 million. We also got a very strong growth in housing development. It was not expected to be so strong in the fourth quarter. Here, the exposure is actually up to 1.2 billion. We also got a volume growth in finished housing at 200 million, and in the two other areas, the volume was almost unchanged. I'll comment on each area. I'll start with housing. The growth was strong in the fourth quarter. As you can see, the growth mainly came from building loans. We also got some volume increase on rental loans- and on what is called residential housing. We had strong activity throughout last year, with good access to attractive customers and projects. This materialized with a strong growth in the coming year, when a handful of large building loans were opened. This explains the growth that came so rapidly at the end of the year. We also take with us the good activity in the first quarter, which means that we expect some growth within housing development in the first quarter. We still see an increased entrepreneur risk. It is a sector that has been hit hard by low activity, low profitability, a difficult sales market and significantly higher loan costs. There is also low renovation activity for projects that are underway. So we think the activity will increase, and that it will primarily be driven by some rent reduction, but also that the price difference between used and new housing will be reduced. That was housing. Let's talk about business. In the first quarter, we expect a flat volume development. We see that the transaction activity is gradually increasing. Investing will can go down again if a higher interest rate is expected than previously assumed. The activity has been careful in this area over time, and as I said, we are waiting for an unchanged volume in the first quarter in this area. Here we had a strong growth in the fourth quarter. The volume was up to 913 million, and that was a result of good activity through much of last year, and especially through the autumn. We see that around the year change, the activity has become more normal. This means that we for the first quarter are waiting for an almost unchanged volume within the business area. In the long run, we still see good opportunities. We see that Pareto Bank is a very attractive partner for large Norwegian companies. Finally, ship financing. Here we also expect a flat volume in the first quarter. There is still good demand for offshore, but we see that the competition has increased significantly through the autumn. Within shipping, the activity is more measured. Most of the segments in this category are high in the market cycle. Furthermore, the loans in this portfolio have a very steep decline profile, which of course also affects growth in the future. At the moment, we have the largest exposure to offshore and dry bulk, and we believe in good prospects for the offshore market, especially subsea, where the demand is good. A possible oil price drop could of course weaken the market development. And in Tørrebulk, we see that the demand growth has decreased somewhat, and there is a fairly large increase in new tonnage, so we expect a weaker market in the future. In summary, we see growth within housing in the first quarter, and an unchanged volume in the other areas. At Pareto Bank, we have two long-term ambitions. To create a 15% tax return on our own capital, and to share 50% of our annual surplus. The ambition for profitability is high. And it is of course extra difficult to meet when our core market, new housing, is demanding. In addition, we are a bank that does not enjoy reasonable income, as most other banks do at the moment. On average, we have delivered a single-capital transfer of 14.5% in the last ten years. We meet the ambition through foreign growth at a robust foreign margin, good cost control and, last but not least, high credit quality. We are long-term, we build stone by stone, and we focus on healthy operation and profitability, and that creates results. It is illustrated here. We see that an shareholder in Pareto Bank on average has received a yearly total return of 16% over the last 10 years. In comparison, an shareholder in DNB received 12%, and if you were invested in the main index at the Oslo Stock Exchange, 10% in annual total deposit. With that picture, we'll end the presentation. We're ready for questions, both of you. We can start if anyone has questions from the audience. We'll use the microphone so that everyone can hear. I see there are questions from Håkon.

Thank you very much. Holger Nastrup from DNB Markets. Questions about capital and growth capacity. As it looks now, how much capacity do you have to grow this year? And is it that profitable customers meet a closed door because they don't have enough capital at the moment?

We are a project bank, so we are used to swings in volume. That means that we can have periods where we have to control the capital use extra tightly. We are in such a period now, so we have to prioritize well and use the tools we have, so that we can grow with the results we create and within the framework that the capital coverage regulation And that's how it is in periods. I don't know if you want to add something.

Luxury problems are also problems. It's good that there's room for a lot of good business. But when you have less capital available, you have to prioritize harder. There are some tools we have to get more room. We continuously evaluate that. But we also have, as you well know, a good organic capital generation that gives growth capacity.

I'd like to know about the tools. You mentioned that if you use Swedish exposure, you have a lower risk-risk buffer. How easy is it for you to get there? Is there something you can do at once?

It's often the steward who wants to lay the groundwork. It is quite easy to calculate what the effect is, but a quick summary from my side is that the counter-cycle buffer is about 5 basis points on the requirement, and the system risk buffer is 40. So everything else is equal to 6.74 minus 45.

Last question from me. On the TAP side, you mentioned that the main difference compared to last quarter was the model deductions. What are the parameters that drive the increased model deductions?

There is negative risk classification within Trin1. Within Trin1, there are healthy performance engagements. But the risk assessment on these engagements ends up in a lower risk score than on Q3, which means that we model-wise set aside a little more for these engagements, in spite of the fact that they are still performing in a completely normal way.

So it's more based on the fact that your, for example, PD or competition probability increases, than that the interest rate is expected to be higher or lower? That's right. Great, thank you.

Thank you. Herman from Pareto Securities. I asked the same question last quarter, but I thought I'd go back a bit. I think it's interesting to see where you are on the interest rate picture. How do you now think about a bit of intermediate funding, on investment campaigns and so on, versus what you did earlier through the interest rate increase? And how do you think about a funding strategy if you grow more in Sweden, if that will change anything there?

That's an important and central question. All we can do about funding is to strengthen our competitiveness. There's no short answer to that. We put our plans out year after year. Funding strategy and investment are something we focus on a lot this year. The Swedish market needs to be mapped to see if there are opportunities to get there. It can be on the loan side, the obligation side, but also on the income side. We are in a phase and can't come up with a precise answer, but it's natural that we explore it more than we have done today. We source funding from Norway, and swapping to Swedish kroner for everything we do. But with increased localization, we want to use time to see if there are opportunities there. We want to get involved in the work of meeting potential investors, lenders, but also look at the investment market. We try to be dynamic and use fixed interest rates, interest rates, fixed rates, and other sources of interest. Fixed interest rates are very fast, but the price is very important. We tested a fixed interest rate product last year. The response may be slower, and it's a product we have to sell differently and more often. We'll explore that more in the coming years. Those are some of my thoughts. I don't know if you have anything to add, Vegard?

The strong growth towards the end of the year also requires more investment. Our need for information has only increased since you asked that question. Thank you.

Could you help us understand what you think is attractive about Sweden now versus, for example, in Norway on housing projects? Are there any characteristics with the projects and engagements you have there that are more attractive, or is it generally the competition?

A lot of growth came from Sweden last year. We increased volume and exposure from 2.2 to 2.7 in the fourth quarter. It's about having access to very solid customers, where the credit is structured even better, perhaps with more capital. Cursions to a much greater extent for the entire loan budget. And of course, we have the requirements there, as we have here. But in general, a higher quality and at an even better price. We have not set any volume goals, but all of the business we do in Sweden will have a one-capital deposit after tax of more than 15%. And we experience that we get that quite easily. And it's about the structure in the Swedish market. There is no project financing bank that purifies the craftsmanship that we do. And then we have the big banks. And if you are a customer in the big banks, you get very good conditions in Sweden. But there is no one who acts specifically. The medium-sized customers who operate with different types of ownership. projects, housing construction. So we experience that there is a demand for the type of bank we run. Simply put, and that we try to fill it, and all the time it is underpaid, then we achieve collectively good loans there.

Thank you.

We might check the chat as well, if there were any questions there.

There are no questions on the chat.

No questions. We have a question for this as well.

Nils Kumner from Gjellæring Vesthavet. A follow-up question on capital coverage. Is there a reason why the government shouldn't go for a geographically based capital coverage?

It's hard to answer everyone's questions.

It's up to the board to decide, but I can't think of anyone right now.

So it's all about making sure that the budget is set up in a good way. And based on that, decide on a capital goal that we present to the board with recommendations and decisions. Are there any more questions?