Pareto Bank ASA

Welcome, everyone, to a review of the first quarter of the annual budget. We start with the main features of the budget. After that, the CFO of the bank, Vegard Toverud, will give us more details. Finally, I will comment on business areas and market views. We will gladly answer questions at the end. For those of you who participate digitally, just send in questions in the chat to the meeting. In the first quarter, Pareto Bank received a net profit of 76.7 million. The net profit was 5%. The results were weak, the profitability low, and far below our long-term ambition of 15%. Both were affected by high loan loss rates in the quarter. The total sum of deductions and loans was 155.9 million. Model-based deductions increased by 15.8 million and were linked to increased macroeconomic losses in light of prospects for interest rates. The individual deductions were 121.2 million, and they were mainly within housing development. It was found to have lost 18.9 million in the quarter, also within housing development. It is very difficult for many housing builders at the moment. Price growth has led to significantly higher building costs and a greater difference in price between new and used homes. In the short term, we expect a large number of unsolved, finished homes. And the construction of a volume of unsolved units makes the developer and the bank sit longer with financing than originally planned. Over time, the weak new housing market has contributed to a strong increase in losses, and can also mean that in the coming quarters, these will be on a too high level. Then the year started with foreign growth. The sum of foreign loans was up by 2.5%, or 475 million, after already approved loans in Sweden were withdrawn, and we had a good increase in company loans. The sum of loans increased by 2.5% from the change of year to 19.2 billion. The average loan volume was 1.5% higher in the first quarter than in the fourth quarter. So we started the year with growth. So that was the main attraction in the first quarter. Vegard will now give you more details.

This picture gives a good overview of the development in the last five quarters. If we start down to the left, we see that the net income is relatively the same as what we have seen in the last few quarters, and after we experienced a strong negative growth at the beginning of last year. It is worth noting that in this quarter we have moved the interest compensation on our currency swaps to the interest net. If we look up to the left and up to the right, we see that the profitability has dropped dramatically in the last few quarters, driven by the increase in losses. Down to the right, the losses in this quarter are 82 basis points, or more than 3% if we had looked at it on an annual basis. The bank has a surplus model that links the capital issuance directly to the employee's bonus. It puts employees and shareholders in the same boat. With such a low return that we have had this quarter, it will not be a bonus for the first quarter ever in the bank's history. This means that the costs are low and that the cost income is 18.1 in the quarter, which we see at the bottom. Up to the right, we see capital, pure core capital coverage. And the bank is by no means solid. And we'll get back to that in the development of capital later. If we first look at the development of QN compared to QN last year, we see that net interest rates have been reduced by 30 million, or by 9%. This is primarily due to 6.5 percent lower loan volume compared to the first quarter last year. It is also due to the fact that we have reduced the liquidity portfolio a lot. The liquidity portfolio is actually down around 30 percent compared to Q1 last year. We have continued to reduce interest rates to adjust the balance, also this quarter. And for the second quarter in a row, we have reduced our interest rate portfolio by 12%. We are now at a level where we do not want to let ourselves down much more on interest rates, and we have therefore raised the price of our fixed interest rates. This gives us a mark-to-market effect on the existing balance of fixed interest rates. Approximately 9.8 million in the quarter, and this explains the other revenues we have. In total, revenues are down by around 6.5% compared to Q1 last year. Our costs are low, and down by 9% compared to the corresponding quarter last year. This is due to the bonus order, which I talked about earlier, and comes as a direct consequence of the low capital return. This quarter, we have put from zero to a bonus of 9.1 million in Q1 last year. Therefore, we end up with 18.1 percent in cost income compared to 18.5 percent last year. The losses are high. and I will come back to them later. The income per share is 84 euros, and the capital investment is far below the ambition. If we take a closer look at the development of net and interest income, there are many effects that move in the quarter, as a result of the balance adjustments we make. As mentioned earlier, the average net income is up to 1.5% per quarter. This contributes to an additional 6 million in interest rates. The decline in interest rates in the previous quarter and this quarter reduces interest rates by another 17 million. Then we have a reduction in our liquidity portfolio, which we have greatly reduced in order to finance both borrowers and compensate for the lower interest rates, which gives us 25 million. In these 25 million, there is also pressure on margins on the interest rate side, so lower return on the interest rate portfolio, which is around 3 million of this. In the fourth quarter we had high activity and we had an exposure growth of 3.9% in the course of a quarter. This meant that we had high interest rates that we booked on the interest net in the previous quarter. So compared to Q4, there is lower activity and 4.4 million in less income that we book on the interest net in the quarter. Then we also get full effect from the interest deductions we made on outloans in Q4. They were carried out towards the end of November, so we got a little at the end of one month with the reduced margin on outloans in the previous quarter. Now we get the full quarter and that makes up 7 million. At the same time, we have also had slightly lower interest rates on interest, which is 3 million. In total, we have a small margin gap of around 4 million, but it is compensated by higher interest compensation, which is the last 5 million. We also have two fewer interest rates, which is 5 million. So there are many effects that move towards each other, but if we are to sum up, there are 11 million in reduction in net income from Q4 to Q1, and these 11 million are mainly explained by two lower interest rates, which is 5 million, and lower interest rates, which is at the top of 4 million. If we look at the margins at the product level, the exit margins are down. This comes as a result of the full effect of the interest adjustments in Q4, as I mentioned. At the same time, NIBOR has moved upwards, especially in March. The development on the investment side is relatively flat. At the same time, our net profit goes up, not as a result of improvement in the product margin, but as a result of a mix on the balance sheet. Expenditure at the exit of QN is a higher proportion of the balance than it was at the entrance. 78% of the balance at the exit versus 74% at the entrance. Since our expenditures have higher interest rates than the average balance, the interest rate net is pulled up. Now to the losses. The loss costs are in the quarter, unfortunately, very high. The highest in the bank's history in a quarter. In Q1, we see 19 million in losses. Down from 30 million in the previous quarter, but still at a high level. We do this partly because we believe in unity, So if we look at the balance, the value we have agreed on increases from 9 million to 68 million. Last year, we found a total of 20 basis points in losses. After Q1, we have already found 10 basis points, and we expect that to increase over the course of the year. As I mentioned earlier, the increased interest rates in the quarter have meant that we, in our macro model, take increased deductions on our property portfolio. This results in an excess of 18.1 million, to be exact. If we look at the development in the quarter on interest rates, we have an increase in step 3 of 233 million. This corresponds to an increase of 18% over the quarter. This development is due to deterioration in the credit quality, large engagements within the financial development, most of the clients who have been in the bank for many years. As a result, we put another 121 million in revenues. If we look at our revenues, what we have set for Trinn 3 against what we have in Trinn 3 exposure, it now increases to 30% from 26% last quarter and 24% a year ago. The bank is very well capitalized. If we look at the changes from last quarter, the income in the quarter builds very little capital. And here is a technicality. Due to the high exchange rate for 2025, we set only 1.6% of the income in Q1, Q2 and Q3 in the course of 2026. For Q4, it affects the non-capital position, and in practice it does not affect the bank at all. But when we report capital coverage for Q1, Q2 and Q3, we calculate less than the usual 50% that we usually have calculated. Now we only calculate 1.6%. What affects capital coverage, pure core capital coverage now in the quarter, is partly an increase in the credit lines, i.e. the exchange rate growth, and partly some credit loss as a result of the development of non-performing loans and so on. In total, this results in 40 basis points. There is a limited impact of other effects in the quarter, and pure core capital therefore falls to 19.8. If we look at our requirements, our requirements are adjusted marginally down, as a result of the fact that most of the growth is coming from Sweden. So our pure core capital requirement is now 14.9%, and if we have a management buffer of 1% at the top, then we are at 15.9%, which is the expectation of Finanstilsynet for our capital level. We want to have a buffer over that, but our buffer is currently around 4 percent points, which is too high. This means that the bank has a very large growth capacity in the future and is undeniably solid. We see the same with leverage ratio. Our leverage ratio is now up to 18.9 from 18.2 last quarter, driven by the reduction we make on the balance in general, despite the fact that exporters are rising.

Now I will give an update on business areas and market views. After strong exposure growth in the fourth quarter, the volume was flat in the first quarter. So at the beginning of March, the total credit exposure for Pareto Bank was 24.2 billion. The exposure was 2.3 billion lower than at the beginning of March last year. And it is then within housing development that the volume is mainly down. In this picture, we show the development in exposure from quarter to quarter per business area. Exposure to housing development is down from the top of 11 billion to 8.2 billion now. This decline of 2.8 billion is explained by two things. One billion is linked to a recategorization of exposure, where one billion is moved from the category of building credits or housing development to finished housing. While 2.8 billion is linked to lower access to loans in this area, which meets our requirements for profitability and quality, in combination with the completion of projects, and thus also loans are included in the bank. If we look at the first quarter in total, we had a decline in the category of finished housing, housing development and business management were flat, and we had a weak decline in shipping financing. We also got a good increase in company loans, with 450 million. I will comment on each area, and I will start with housing development. As we have mentioned several times, the new housing market becomes demanding. The used housing market is fortunately well-functioning, but cost inflation has led to significantly higher building costs, and there is now a big price difference between new and used housing. In addition, there are prospects for interest rates. The sum of this means that projects are pushed out in time, and there is low activity in this area. Low activity also leads to increased competition, and we now experience that some banks stretch themselves both in terms of profitability and conditions. We say no to some projects that do not meet the requirements we have for quality at the moment. The room for growth in the future is still large. It is difficult to exactly predict when projects will be completed and the loan belonging to the bank will be approved. Also as a result of a weak new housing market, we see that it takes longer time for our customers to meet our requirements for pre-sale. This means that also withdrawals under permissible building credits are postponed. So for the second quarter, we expect a flat volume of payments and a weak increase in credit exposure. Then the business area, which is our next largest area. Here we had good activity and good growth in the first quarter. Exposure was up by 450 million. We work systematically and have been doing this for a long time with sales in this area, and we are waiting for further growth in the second quarter here. The growth in this area has also been supported by activity and access to good businesses in Sweden. Finally, ship financing. There we are. Finally, chip financing. There has been good activity and deal flow in the first quarter, but there will be tough competition. For the second quarter, we are waiting for some exposure to offshore. There is generally high uncertainty due to the war in Iran, which affects all shipping segments, especially the tank segment. The demand will be largely affected by access to tonnage, which is a bit limited. Oil and gas prices are volatile, have increased, and of course, if they remain at a high level, it will also be negative for BNP growth, and will negatively affect several shipping segments. There has been an increase in focus on energy security, which undermines activity and market development on offshore. For our part, we expect some exposure growth on offshore in the second quarter. In summary, we see some growth abroad and some growth in exposure for the bank collectively in the second quarter. We have been aware that Sweden is important. We had a good growth in Sweden in the first quarter. The volume was up from 534 million to 4.7 billion, as shown here. And we expect further growth in the second quarter. In the first quarter, the growth came through the fact that we had already approved loans, and these were withdrawn as planned. We also have authorized loans that we expect will be closed in the second quarter. And we also have a number of exciting processes that we expect will materialize. We are increasing our efforts in Sweden. We now have a team at the company with three customers who work in this market twice a week. And the focus is still, of course, on broad networks and customer base. The access to businesses is, as I said, good. The quality is high. We work long-term. The ambition is to build a diversified portfolio, where each business gives us a one-capital transfer after tax of more than 15%. At Pareto Bank, we are long-term and we are building a bank for both up and down times. Along the way, the share exchange rate will swing. The difference in total issuance between the bank and Oslo Børs is a little less now than it was at the beginning of the year. And that is natural, since we and our main market are now in the middle of a perfect storm, where many negative conditions have hit at the same time. With that, we are ready for, not appendix, but questions. We can start in the hall, as we often do, and then we will check in the chat if there are any questions. I don't know if anyone wants to ask anything.

Herman Sahl from Pareto Securities. On these major engagements that you mentioned that have moved to step 3 now, is it possible to say anything more specifically about what has changed with these customers in the course of the quarter and how the flow of information has been for you since it was not like that before last year?

I might prefer to try to characterize the volume in paragraph 3 first. It is not possible to link the volume or the increase in tax deductions to one explanation. And there are loans that are in different stages, from empty to finished housing. If we still try to give a little more insight, then this time we have tried to categorize the volume a little in relation to one main factor. What we see is that about half of the volume in paragraph 3 has one form of regulatory, political, public legal risk, or an impact of risk. It can be changes in regulation along the way. For example, phase 1 versus phase 2 of a project. It can be bad information from a municipality. It can be a number of requirements that increase or change along the way. to mention some examples. And if we look at that volume, we can attribute around 55-56% of the deductions in Trinn 3 to that category. Then we have around 9% of the volume in step 3, where the customer's ability to implement is not good enough. So we have made a too bad assessment of that risk. So these are customers we should not have taken, and would wish we had not taken. And that risk is reinforced in a difficult market, of course. And if we look at how much of the deductions in Trin 3 that can be attributed to that category, it's about the same, that is 9%. And the rest is difficult in a way to draw up a main factor to explain. I have to repeat that what typically happens when a project develops negatively is that several conditions come into play. When the market is in addition difficult, time becomes much more expensive and a risk in itself than it was in a strong, well-functioning new housing market. It's not a direct answer, but to give a bit more flavor to the volume, you can probably supplement it.

It's hard to answer very concretely on the question. All the time we can't say too much about our customers. That's the big problem. It's related to several customers. and it is linked to everyone within property development, and there are fewer customers that go out of Trinn 3 in the quarter than there were in the previous quarter, which is part of the net you see in development. We have commented in the report that most of those who now and that drives the increase you are referring to, are customers who have been at the bank for many years.

Geographically, we have a concentration around the Baltic countries. The question is whether it was a phenomenon in the Baltic countries. We say that the main focus is on the Baltic countries. Thank you.

That's a very good answer. Can you tell us what you do with the organization when you have so much problem money? Now you have taken over some properties, and you have a credit department that handles it, and you want to not sit on it for long before the annual report. I wondered how that affects the organization, and if it is actually a hindrance, or what it does. Do you have any competence in it, and so on?

It's a new situation for us. We've been in it for a while, but it's a new situation for us. We've been considering how to work with these difficult issues, and we chose to establish a restructuring team this year. And it's not that we haven't worked with them before, but we saw that it was the right time to focus the effort even more, instead of having customers responsible for working with both difficult things and working with ordinary things. acquisition and customer service. Now we have a restructuring team consisting of three seniors, one lawyer, and we have also employed a technical engineering engineer. And last but not least, he has been very useful and important to us. So it has been a good strengthening of relevant competence for us. So I would say that this is something we are currently considering. And I think we have a good setup now. But we all know that it's tough. We learn to build knowledge throughout the bank. Because it's not just the concrete work with difficult things But this is through the whole organization, in the accounting department, how to handle this and take over property in a regulatory way, etc. This with bonuses is also an element. It's the first time we experience that we have a rejection that means that we don't give bonuses. What effect does that have? Motivation is also an element. So there are many sides to it. So the important thing is that we are flexible, adaptable. We are a small, easy-going bank. We use the market opportunities where they are, and we are concerned about learning to become an even more robust and better bank through what we are now experiencing. More questions? Should we check the chat?

There is nothing in the chat that I get up, but let's see if I have fallen off the internet.

Just check if we find it.

I log in again. Yes. Arne is wondering about the change we are making in the reporting of interest compensation on our currency swaps. If we can find out what the reason for this change is, why we are doing it in a weak market, and whether it affects the collectability or the result presentation against previous quarters. If I were to answer that, the reason for the change is because We think it's best to do it that way, and that's something we've tried to achieve over a period, and we've finally received approval from reviewers who agree that it's right to do it that way, and not the way we did it before. The fact that we do it in a weak portal is completely random. It was planned long before we knew what the loss was. And if it affects the collectability, we hope not. If we look at the APM, we have reworked all the quarters back to 2011 or so. So hopefully there should be good collectability, also historically. The ambition is to give better accounting information than we have done before. Then it came... A question from Kjetil. There is high liquidity in Sweden. Can you elaborate a bit on what criteria you have for loan to ownership in Sweden?

On a general basis, we have stricter criteria in Sweden, of course, because it is a new market for us. So we have a higher demand for own capital, both for business ownership and for cash financing, to the extent that we do that in the Swedish market. We also have as the main rule, the rate of interest on the loans we give, often on the entire loan amount. So, a little over-ordered, I would say that we have a stricter policy in the Swedish market, on both housing and food, than in Norway, and also a demand for higher profitability. Good. Anyone wondering about anything else? They are welcome to answer. No? Then we'll wrap this up. We are available for questions. Both later today and later this week. Thank you for coming, and thank you for good questions.