Pareto Bank ASA

Welcome, everyone. Welcome to the third quarter of the third quarter. We start with the main features in the accounting. After that, the CFO of the bank, Vegard Toverud, will give us more details. Then I will comment on business areas and market views. As usual, we will answer questions at the end. For those of you who participate digitally, you can send questions to the meeting chat. In Q3, Pareto Bank received a net profit of 176.8 million kroner. The net profit was 13% and was lower than our long-term investment of 15%. Net income was 287.2 million kvartals, 26 million less than in the same period last year. The main reason for the decline in the net income was a lower loan volume. The sum of the loan ended at a snowy 19 billion kroner at the beginning of the quarter. That was 266 million kroner down from the half-year shift. As expected, we received loan exemptions and had fewer new credit commitments. Sum of deductions and taking out loans was a total of 15.1 million. The model-based deductions were down by 10 million, primarily due to a lower loan volume. the individual deductions increased by 16.6 million. These were mainly within housing development. It was also found to have lost the corresponding 8.5 million in the third quarter. In this picture, we show the development in central and key figures for the last five quarters. It is natural to focus on the net income. It was 287 million in the third quarter, and was down by 26 million compared to the third quarter last year, and down by 32 million compared to the second quarter this year. We received, as expected, benefits on business and offshore, and at the same time we had fewer new credit commitments. The loss percentage was 0.08% of average net income. This is about the same level as in the second quarter, and lower than the previous three quarters. Nevertheless, and in light of an increasingly difficult new housing market, we must expect that mortgages and losses in the next few quarters will be at a level that is higher than what it has been historically for Pareto Bank. A lower net income, as a result of a lower loan volume, of course has an effect on the result. The result in the third quarter was shown here at 176.8 million. It is marginally up from the same period last year, and it is down from the second quarter this year. Expenditure volume was down in Q2 and Q3 this year, and that is what we now see the effects of on net income and results. The profitability in the third quarter was 13%. It is now lower than the same period last year, and lower than the second quarter this year. The profitability in the second quarter this year was an artificial high. We explained this in connection with the fact that we proposed a part-year plan for that quarter. Then we got a small increase in the cost percentage. This was also due to a lower volume of payments. The operating costs in nominal kroner is somewhat lower in the third quarter than in the first and second quarter of the year, and slightly higher from the same period last year. Pareto Bank is very solid at the quarter change. We have a pure core capital coverage of 21.3%. The increase from the half-year shift is due to a decrease in volume and a good profitability. At the moment, we have a lot of growth capacity. You've had a look, and Vegard will go into more detail.

Thank you. As mentioned earlier, we have a reduction in net interest rates in relation to the corresponding quarter of last year of 26 million. This is largely due to the volume of expenses, but also some pressure on margins, which I will get back to on the next page. On other revenues, we account for a total of 6.5 million in loss of value in the quarter. The biggest explanation for this is our fixed interest rates. When we lower the interest rates on fixed interest rates, we get a loss of value on our existing fixed interest rates. At the same time, we also have a 4 million profit on interest savings in the quarter, where we swap from fixed interest on our fixed interest income to flowing interest. So we have 4 million that will partially compensate for the reduction in interest netto. We also have a high rate compensation for our currency swaps. This contributes to the level of responsibility we've seen in the previous quarters. On the cost side, the cost per quarter is only 2.6%- compared to the corresponding period last year. Underlying cost inflation is higher. The year-to-date number, 8%, is more of an indication of where we are. A little of the reason that the costs are down compared to the previous quarter is our surplus order. We have 8.8 million in surplus division, which we book in the quarter. That's down from 9 million in the corresponding period last year, and down from 11.6 in Q2. So in spite of good cost control, the cost income increases up to 19.4, and that follows the reduction in the top line. The losses for the quarter are 15 million, which is down from 31 million last year, and we will get back to that later. But as mentioned, it is model-based reduction that affects this quarter as well as the previous one. In total, our profitability ends at 13%, and we have an EPS of 2.13, which is a bit up from the period last year, when the loan was founded. If we look at the slide that may be most important for the quarter, which explains the change in net income between the previous quarter and this quarter, we see that the largest component is growth. If we go back to the previous quarter, our volume was down by 7.7% at the end of the quarter compared to the start of the quarter. At the same time, the average volume in the quarter was only down by 1.4%. In this quarter, it is a bit the opposite. The balance at the end of the quarter is down by 1.4%, while the average loan volume in the course of the quarter is down by 6.9%. We get the effect of the balance change we had in Q2. If we look at lending volume and fee income there, it is a total of 46 million. If we look at a 7% or 6.9% reduction compared to last year, it explains around 36 million. We commented on the fee income in Q2 that it was slightly higher, and that it varies from quarter to quarter. This quarter, the interest income that we book on the interest net will go back and explain the majority of the corresponding reduction. We try to adjust the balance to the reduction in the loan volume. Therefore, the reduction in interest the reduction in market funding, and also the increased income on the liquidity portfolio, which in total is 19 million, is seen against the effect of reduced volume. The remaining effect, in addition to an extra day of interest, is what goes on margin. In total, we have a reduction of SEK 7 million per quarter, as a result of pressure on the margins. Here, lower interest rates are allocated to the foreign side, but it is more likely that the pressure will come on the foreign side, which we will show in the next slide. And remember that the compensation we get on the fixed interest rate for our floaters does not come on the net interest rate, but comes as a profit on other income. If we look at the margins, the exit margins are relatively stable, and our income margins are under pressure. We swap the cost of fixed interest rates, but we fix them with three months of continuous lag, which means that in a period with repricing, as we have now, we will get lag effects on our interest rates below. On both the foreign side and the investment side, we have had the effect of interest rates changes that were announced in August. And we have announced further interest rates changes, like most other banks, which will also affect the interest rates in Q4. If we look at the losses, the loss rate in the quarter is low, but is driven, as in the previous quarter, by the reduction in exposure and therefore the reduction in model investments. If we look at the investment in Trinn 3, it's 16.6 million, which is net. and lower than the level of around 30 million that we have seen earlier in the quarter. This is due to the entry of a number of exposures in Trinn 3. So if we look at what we take in new deposits on Trinn 3 investments, they are around the same level as in previous quarters. I think it's okay to notice, since we now have two quarters with lower losses, without necessarily seeing the same trend in the underlying development. There will be variation here from quarter to quarter. If we look at the volumes, the volumes in section 3 are somewhat lower in the quarter. At the same time, the volume in section 2 is increasing by 180 million. Despite this, the return to section 2 engagements is somewhat lower. This is because we have a lower risk of what is in section 2 this quarter than in the previous quarter. We have also made some minor adjustments to our macro scenarios. The most important one is that we have seen a slightly lower development in housing prices in the long term. In total, the macro adjustments amount to 2.3 million in the quarter. Finally, we can take some details on the development in pure core capital or capital coverage. We have good profitability in the quarter and it builds 40 points. In addition, the reduction in volume and calculation basis is another 70 points. We reduce a little on our liquidity portfolio, which contributes further with around 10 points. And then we have some other smaller effects that in total make up 20 base points. We are then in total at 21.3 percent in pure core capital, approximately over our requirement of 16.3. If we look at the leverage ratio, we are up to 18.0% from 17.0% last quarter.

Then I will give an update on business areas and tell you a little about market views. I start as usual with a overview picture. At the beginning of September, the total credit exposure was 23.5 billion. And the distribution in the different areas you see here. In the next picture, we show the development in credit exposure from quarter to quarter per business area. We had a good growth in exposure in the first quarter. It increased by 800 million. Then we got a decline in exposure in the second quarter, and it continued in the third quarter. The exposure was down by 1.1 billion. The volume decline came as expected from shipping financing and operations, and we also got, as expected, a flat development in volume on business units. Then we got an increase in exposure to 200 million in the category of finished housing, and then we got a decline in exposure to housing development of 1.3 billion. I will now elaborate on each area, starting with housing development. Here we got a decline in exposure of 1.3 billion when we look at the financing of housing construction and non-financed housing. When we released the forecast for half a year, we said that we were waiting for a decline in the volume of loans, and then we were waiting for a fairly flat development in credit exposure. The conclusion was different when it came to credit exposure. There was a decrease in the volume. There are three reasons for that. First, the opening of a handful of large construction loans was postponed. They were postponed to the fourth quarter, and some to the first quarter next year. Secondly, there was a large construction project in Oslo that was completed in the third quarter, while we were waiting for it to be completed in the fourth quarter. Finally, we had fewer new credit commitments in this area. The housing market is still very weak. The production of housing is low. There is a big price difference between new and used housing. This weakens the activity in this market. This also causes lower credit demand in the bank. We also now experience that it takes longer to meet our sales requirements, which should be in place before the building loan is opened. This means that opening and withdrawal under building loans are postponed. The speed of circulation in this portfolio is also high. It is difficult for us to predict exactly when a single project will be completed with the corresponding deregulation of financing in the bank. In summary, this means that for the fourth quarter, we still expect some decline in the volume of loans, and we are unsure of how the credit exposure will develop. So it is of course positive with interest rates both in June and September, and gradually it will have an effect on the housing market, but we do not think it will have any particularly strong effect for our part of activity in the fourth quarter. Transaction activity and investment will within the business sector is low, and in spite of interest rates in June and September, the prospects for long interest rates are high. This also means, for our part, low financing demand and low appetite. We expect a flat volume in the fourth quarter. In the third quarter, we saw a drop in volume. This was due to the materialization of the loan exemptions. We have a good deal flow in the company. We have also seen more loan exemptions in the coming year. This means that we think the volume will rise in the fourth quarter. Ship financing. We also had some volume losses. We have had higher competition on offshore. We have communicated that in the last few quarters. And there has also been low activity and investment in shipping. Now we see increased interest, better deal flow for this area, and therefore we expect some increase in volume in the fourth quarter. The offshore markets are doing well, there is good demand, low supply side growth, and of course a drop in the oil price can negatively affect market development. On shipping, it will also be so that increased geopolitical uncertainty can frame the market. There is also some high supply side growth in some of these segments. But collectively, we have increased interest and now expect some volume increase in this area towards the year shift. In summary, we see a stable development in credit exposure in the fourth quarter, with some decline in the volume of loans. The room for growth in housing development is currently quite large. We continue to work on building a robust portfolio in Sweden, where we have good activity at the moment, waiting for the volume to increase in the future. And as I said, we also see some volume growth or some volume increase in business and ship financing. At Pareto Bank, we are long-term, we build stone by stone, and we always prioritize profitability and quality over growth. So with that, you have gotten some insight into the forecast for the third quarter, and then we are ready to answer questions, both from the hall and possibly from the chat to the meeting. We can maybe start in the hall. If anyone has any questions?

Thank you, Herman from Apparetto Securities. First on corporate financing. As you said, you have a good deal flow. Can you tell us what type of financing it is?

There are different types of financing at the moment. Some are linked to Sweden. There is some type of labour capital supply. But it's not all about one or the other. Different sectors, different types of financing. Throughout this year, we've had We have a good deal flow, and we have had a bit of a break, and we have also had some loan relief that we did not expect, and that has had to do with structural things, new owners who have come in, refinancing, and that is how it can happen. So it is so precise that I can answer that.

You have a high percentage of fixed interest rates, but on those flows, did the interest rate adjustment exist when it was matched in the quarter, both on the foreign side and the interest side?

What do you mean?

No, it's not like that. So you had to adjust it down faster on the foreign side?

We have adjusted different products differently, and there is a bigger mix, for example, of payments that have a link to a reference or interest, than what you have on the income side.

Try to understand where Returndetektor is at the moment. It can go back a bit in the next quarter, is that how I should read it?

It's a bit difficult to predict. It's a mix of different elements. In the next quarter, the development of interest will be important- in terms of how things are fixed- and if we make any additional interest adjustments. In general, for the products on the investment side- that don't have fixed interest- you get an effect when we change the interest rates for those who do not have a NIBO link. And the same on the foreign side. And then you have fixed interest rates, which is a large part of us, where we change the interest rates more continuously in relation to where the market competition is.

And then just on the provisions that are being written down. Given that you expect a flat exposure, a little lower on the exit in the next quarter, is it reasonable that it will be quite flat? What are the drivers of that in the short term?

The drivers there are activity and volume.

Yes.

Generally, we have two fees that are recorded on the interest rate. We have the establishment fee, which we periodize according to how long we expect the exposure to last. And then there are frame provisions, which we have continuously on the frames we have.

Thank you. Let's see if there are any questions.

Yes, we have several.

Yes, a question from the audience.

Hi, Jon Sammeie from Aksjon. A question about building costs. That's starting to become a problem. Some projects in the outskirts of Oslo are becoming difficult. How do the banks think about that? I don't think they're profitable in the inner city core, but otherwise it's too expensive. Hamburg in Germany has the same problems as in Oslo and other cities. They have started an initiative between the industry and the authorities. It's quite dramatic how much construction costs you can get if you are willing to lower some requirements that are not always as reasonable. What do you think about that picture? If we have many projects that have too high construction costs and there are new changes, it can also be a risk moment. I don't know, but it's a problem that it's so expensive to build.

Yes, it has been for a long time, and it still is. Especially after the pandemic, the cost of building increased by 20-30%, and the costs are still high, and have been in the past. That means that the sale price of new housing... Of course, the cost of building has to be a margin. And the used housing prices... It's lower than the cost of building. That's something to do with the dynamics in the market. That's a challenge. That's one of the reasons why the new housing market is slow with low activity. If you get a price increase on used housing, the price difference between new and used housing will be different. That would be an advantage. The price difference can be around 10 %, but if we have a higher price difference, it hinders or stops the activity in the new home. As a bank, we don't get to do anything with the cost of building, but we have to look at every new project we finance. What should I say? Extra thorough. We always go through enterprise costs and choice of entrepreneurs. But it's more important than ever. It's also a sign of the times that entrepreneurs stretch a bit. Because there is low activity. So good control there is important. I also think that in Norway there are things you can do to increase productivity, but of course with a strong wage growth, which is also a contributing factor, this is a bit complicated at the moment. That's why the production is as low as it is. A lot of technical standards have been introduced that are too expensive. There's talk of refugee rooms and so on. At the same time, we have a government that wants to increase housing construction. So it's not quite the same thing. It's challenging, and it shows in numbers for us and for other banks and for the construction industry as such. But people are going to have a place to live, and there is an underlying need for housing. So I think the market will come back, but right now it's a bit of a vacuum. No, I'm not familiar with any concrete initiatives other than that there is a lot of talk about it, but there has to be something concrete if this will have any consequences in the practical life. In the meantime, I experience that there is a lot of talk. Yes. Were there any questions in the chat now?

Yes, there are several questions in the chat from Simen, who I assume works for DNB. Question number one. Your losses come in a lot lower than expected, but we have seen that some savings banks make slightly larger losses, especially on the credit side in Q3. What do you think about the credit quality here in the future? Are you worried? Question mark.

Yes, what should we answer to that? We have already said, and we have admitted in the last quarter, that we must assume that mortgages to be taken abroad will be on a higher level, will be able to be on a higher level than what they have done historically for Pareto Bank. Most of the miscellaneous downloads are for housing development, not for businesses. That's the part of the portfolio we still see a higher risk. We see that in the future. You mentioned in your presentation that even though we now have individual downloads at 16.6, we don't see anything a fundamental change in risk. So it can vary a bit from quarter to quarter.

Question number two from Simon is about Rhein's core capital. He referred to a discussion we had on Q2. We now have 21.3%, and wondered if we had changed any thoughts about what we should use the capital on.

We're a project bank, so things can go fast. In the fourth and first quarter, we had a strong growth. We had to prioritize capital. We're now in the opposite situation. That's what it's like to run a project bank business. You have to wear glasses a little longer than one or two quarters. We also have an investment in Sweden, where we have good access to business growth, but we build it stone by stone, long-term, as we are in Pareto Bank. Our most important ambition is to create a 15% discount after tax. That also means that we have to work on our own capital. We have an exchange policy that says we should share 50% or more. We also have an opening to share surplus capital. So this will be a assessment that the board naturally has to make, in connection with the fact that we are releasing the quarter-year plan for the fourth quarter. So there are several conditions here that must be addressed to each other.

Let's take a question in the room before we go back to the chat.

Yes, this is Kjetil Kjørsen from ProFond. First and foremost, we are very happy that we are focusing on quality, not quantity. As shareholders, that is how we want it. But my question is about stage 2 and stage 3. We read in the newspaper that some of these things are solving themselves. So, among other things, Bakkegruppen has solved itself. So my question is, when you get into such a situation, you get solved, at least, Is it that they go out of stage two or three, or do they just stay there? You have this problem every now and then. Do you find a solution after a while, or do you just stay there?

The first part is that it depends on which one. In step 2, there is no quarantine. In step 3, there is a quarantine. The quarantine time in step 3 depends on whether you have received relief or not. If you get relief, you'll be in quarantine for a year. If you don't, you'll be in quarantine for a quarter of a year. Apart from that, it's movement in relation to what we experience as the correct risk at the time we report.

What does relief mean?

If you have received, for example, a fee to help you complete the project, which we do not think is marketable, but you received a fee, not because it was competition and you could get a fee from others, but you got a fee because you needed it.

You give a loan on conditions you wouldn't normally have given. That's one way of putting it. As far as how long it takes, we've said that it takes time to work through the projects. It's mostly within housing development, and things have to be finished. A semi-finished building or an empty one, where it's buried but nothing else has happened, doesn't have much value. So it takes time to work through the project. One or two interest cuts don't solve it. The financing costs can go down, but it's often linked to the implementation and completion, that there are challenges. And that things have to be completed. We have worked with several of these commitments for a long time. In most cases, we work closely and well with the customer. That is the best, because the customer normally possesses competence and knowledge, and can handle this better than us. We are a bank, so we are good at financing, but not so good at building. We work hard to find solutions together with our customers. In most cases, it works well. We were involved in the financing of Bakke. It's well-known information. We worked closely Both with Byggherre, the other banks, and the obligation owners. They ended up with a well-groomed solution, I would say. The banks came out of it quite well. Through sales of projects to the SPG, liquidity was added, and a future obligation for the backing group was taken down. It's a more integrated customer experience, because there are more people involved. Often, it's more of a one-to-one project. Do you have anything to add, Vegard?

No. We have two more questions. One from Petter. You see that the big housing developers are doing well in bad times, but the smaller ones don't have the same muscles. Can you elaborate on the size of the developers you are funding?

Yes, we are in the middle segment and have always been. The average size, if you just average with us, is about 40-50 million. So it is clear that the big ones are not typical customers for us. But that is what we have built Pareto Bank on. And built a robust business on. But we are in the middle segment. But we are also lifting projects on several hundred million in size. So it's not like we're just doing apple garden development, which maybe some people think, or just small houses. We finance large apartment buildings, projects, but then on slightly intermediate large customers.

We have an overview of the average size of our engagement in Appendix. It's a little bit based on that. It can be used as a starting point. You can see that we have increased our size on average. That's because we share the opinion with Petter. I have one more question. You mentioned that you are getting growth in Sweden in Q4. Can you tell us a little bit about how much is being talked about here?

We don't have growth goals. We have the ambition of profitability as our leading star. 15% is what matters. It also applies to Sweden. We have an ambition to deliver more than 15% on every business we do. That is our goal. We don't have any volume goals in Sweden. There has been a stable volume from the half-year shift and through... In the third quarter, we expect a profitable growth in that area, and good activity there now. There was a little higher competition there for a short period. Now we think that has slowed down a bit, and there is work to be done with several exciting transactions there at the moment, so we hope to get in on all of them. Yes.

I just want to follow up on the construction discussion. If the situation doesn't get better, the cost of construction is where it is, and it's difficult to start new projects. Intuitively, what you have to give in the end is the value of the coin. Have you seen any signs of that? I know that very few people have been transferred. What is the typical reward rate in that country?

Yes. We share that it's a small turnover, and it's not easy to have an exact understanding of how much the values are down. Some say that they are down 15-20%, but it's not so transparent and easy to find data for it. We have a requirement in policy, in general, that the net capital contribution should be at least 20%. We also have a fairly stable exposure to Tomte. It has been around 3.1-3.2 million. It's very stable from quarter to quarter, so we haven't accumulated Tomte funding, but it's stable and has a certain relationship to that. But of course, right now, It's demanding to sell tomatoes. There's little interest in buying things that sell at a low price. We'd like to make a good deal.

Let's take a look at liquidity. You have 700% plus LCR and NSFR at almost 200%. Is the investment base going down, or do you want to just have a good amount of surplus liquidity for a while?

With the assumption that the balance will not change, we are not ready to adjust to revenue or market funding. Our ambition is not to have more than 700% health care.

But it takes time.

Yes, you are right. It depends on the level you want to get back to.

Back to what we are doing this quarter. Not many other banks have reduced their loans by 7.7% in a quarter. It takes time for us to adapt to that. We let an obligation come to pass without setting up anything new. But our obligations are set up for five years. There are a lot of things like that. We mostly use fixed interest interest. The brother of that is on a one-year horizon. It takes some time to adjust that part of the interest. And for the remaining revenue, we have to feel ahead of the margins in terms of volume. We don't have the ambition to keep falling. We want to grow in the long run. So we have to have the short-term idea of adapting to profitability, while we have to think about not making it more difficult for us in the long run. It's more expensive for us to get the income back than what we earn by leaving it in the quarter. So we have to have that time factor there too.

Yes, I agree.

Thank you. Good. More questions? Not there either. Good. Thank you for good questions and a good meeting. We appreciate that.