Hoist Finance AB (publ) (HOFI) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Hoist Finance Quarter 2 Report 2020. Today, I'm pleased to present CEO, Klaus-Anders Nysteen. Sir, please go ahead.

Thank you, and a very good morning to you all. And welcome to this second quarter review for Hoist Finance. And long story short, the key takeaways today are that, first of all, I'm very pleased with the way we have handled the COVID-19 situation. Secondly, we have seen improvements week by week through the quarter. And as a last message, this leads us to believe in a good recovery over the next quarters to come. So with me today, we have our CFO, Christer Johansson in Lancaster.

Good morning.

And our Head of Investor Relations, Andreas Lindblom. Good morning, Andreas.

Good morning.

So let's then first go to the presentation on Page #4. And given the uncertainty of COVID-19, one of the priorities of the quarter has been to strengthen the capital at Hoist. So we left the first quarter with a CET1 ratio of 9.5%. But due to the strong cash flow generation and a very cautious approach to investments, the CET1 now is at 10.1%. Secondly, we are pleased to see that collection performance is picking up. We expected to deliver around 90% collection performance, and we are happy to have done so. And the rest, as I mentioned, significant improvement during the quarter with several markets now performing at a normalized level, and we expect that positive development to continue. Let me assure you that we are committed to our cost-savings targets. When we launched the program, we also made it very clear that there would be some upfront costs to deliver the necessary improvements. These costs are visible in the quarter, but with a lot of the benefits coming later. What I can say is that underlying cost development is trending the right way. We are becoming more efficient and we will talk more about this later. In order to continue to simplify and focus operations, we have decided to close our 3PC business in the U.K., and this will have a possible impact on our cost base from 2021. As we have discussed before, our ambition is to be the digital leader in the industry. And if you want to succeed in building a true digital value proposition, it is important to think about digital as a business in its own right. Digital cannot be a project, a program, an initiative or something that IT Department is responsible for. Hence, we are now building on our experience on creating customer journeys that are truly digital, cross-border and with products and services are tailored to our customer's taste. I believe that our approach to digital must be called end-to-end. And I will need to treat digital as a business in its own right. It starts with investments, and it continues all the way through to collections and helping people back to financial inclusion. This will drive performance, profitability, speed of innovation and make sure that we better, more realistically, find ways to help our customers. And we are now recruiting a new member to the executive team to be responsible for this business line, and we are looking forward to keeping you updated on our progress. As far as the financial performance is concerned, I will leave the details to Christer, but just say that we are pleased to see that underlying profit generation is strong, and that we are taking some prudent forward-looking write-downs to adjust for the timing effect on delayed collections, but more about this later. Moving on then to Slide #5. I am very proud of the way we have been dealing with COVID-19 in the second quarter. We have been protecting the health of our professionals, but also the well-being of our customers. We haven't lost production time, but productivity has been somewhat hampered by working from home. We have to accept that for some of our people, it's not easy to be as productive as normal and the working conditions are less than optimal. As we speak, I'm happy to report that staff is returning to our premises. In Germany and Italy, around 50% of our people are now back in the office. It's also positive that courts are opening up again, and naturally when 15% of our collections is still in litigation, this makes a difference. And as the courts are catching up, there's a backlog. We're expecting to see a possible development from legal collections. As you can see from this tornado diagram, the U.K. has been a bit of a special case for us during COVID-19. There is kind of a positive and an important improvement in collections through the quarter, but the impact from COVID-19 on collections is more visible in the U.K. compared to some of the other markets. From what we understand from our competitors, they more or less observe the same thing. And given the size of the U.K. book, this consequently has an impact for Hoist overall. Courts are now open in the U.K., but they haven't been processing all types of claims as a matter of priority. We are in very close dialogue with the regulators who expect it this change hopefully already in August-September. The shortfall from litigation or lack of litigation, I should say, in the U.K. is around 10% in that market. This has an overall impact for Hoist of around 5%, so it's important. Moving to Slide #6, and as mentioned, we are committed to our cost reductions and to becoming more effective and more efficient. We have introduced a common operating model in Hoist, and we are increasingly relying on our shared service center in Russia and our nearshoring operations in Romania. And the benefits are related to both scale and skill. In a short time period, we have ramped up operations in Romania, and we have now close to 100 employees. They are now both doing back-office support and customer calls. To date, our Romania operations cover both Italy, Germany and France. And we are in the process of expanding this to other markets as well. And the plan is to have around 150 employees by year-end. On the next slide, Slide #7, this slide shows our road map in how we're becoming a truly data-driven company. I said before that in 2018 we had to catch up fast. Our legacy is not one of operational excellence, and there was a need clearly to leapfrog into the future. We have done so by fixing the basics and establishing a strong foundation. And when I look around the industry today, I cannot really see any competitors with a more harmonized approach in digital than we have. And I clearly cannot see that competitors are offering the same functionality across borders as we are doing. Part of building a safer and better and more cost-efficient infrastructure is going to the cloud. And we are well underway, and we expect to move 80% to the cloud by year-end. Slide #8, as you will remember, 2019 was a year where we had to deal with regulatory challenges, both changes in the risk weights and also the introduction of the NPL backstop. We were able to introduce and implement the right countermeasures, and we're obviously very happy to successfully have completed the first investment-grade rated securitization structure in Europe, based on NPL assets. For Hoist, this has been an important instrument to deal with the regulatory changes, and we are now working on deploying the same structures that were successfully applied to our unsecured NPL back book also to the front book opportunities in the various unsecured NPL markets that we are present. While this is very important and we are, of course, proud to report that the assets in this structure have performed really, really well during the crisis, the performance shows the low risk and its ability in these portfolios as well as the quality of our operations. Cumulative, we are ahead of the forecasts and the collections held up really well during the most challenging weeks of the second quarter. So let me now hand over to Christer. Over to you, Christer.

Thank you, Klaus-Anders. And on Page 10, before diving into the figures, I would like to put them into context. So the business we run is stable. We collect small amounts month by month. It's very granular. It's predictable. It's diversified across thousands of portfolios. On top of that, we have over the last few years implemented significant changes to improve efficiency, and there's no doubt that these measures have worked. So consequently, earnings should be on a steady and increasing trajectory, as they should, because in reality we have had some things to deal with. COVID-19 is one of them, but it's not the only one. We've also dealt with a 50% increase in risk weights, and we've dealt with extending the deposit duration and we've had to pursue securitization as a way to future-proof the business model. So in that context, we are pleased to say that underlying earnings capacity being intact, and we believe that the prudent impairments we are taking now will clear the way for a speedy return to healthy profitability. With that introduction, I'd like to move to Page 11, P&L for the quarter. Top line income is stable, reflecting a book which stays on par with 12 months ago. As we have said many times, front book volumes are improving, and this will be more visible when acquisition volumes are back to normal. On interest expense, we have extended the average duration compared to a year ago. This is good from a risk perspective, but longer funding is also more expensive. And with that in mind, it's of course also important to not have too much funding. In Q2, we have taken action to manage excess liquidity down, and that is one of the factors which have helped us to push interest expense down by a total of SEK 30 million in Q1. So we're happy with that and we can reduce liquidity further. Impairments are significant and they're fully related to COVID-19. And I will come back to this in a second on the following 2 slides. First, costs are up 4% versus last year, but it's down 2% versus Q1 2020. Activity in the courts have not been running at full steam in Q2, which temporarily reduces the level of collection costs. On the other hand, we have been running at full steam when it comes to IT projects and the digital agenda, incurring around SEK 20 million of costs on top of the normal level. With no mistake, these are all projects with a clear link to our 2022 saving target of SEK 400 million, so that's money well spent. All in all, and as a direct result of impairments, profit before tax came in at negative SEK 64 million. On Page 12, I'd like to comment on the composition of impairments. So we mentioned that collection came in at around 90%. That unsecured part of our book is translated into a realized shortfall of SEK 147 million, accounted for on the impairment losses line. Now overall, collection performance was at its weakest in April, but improved in May. And in fact, all the markets improved from May to June. We have also revised our predictions for future collections, and these changes which I will illustrate on the next page in a second came with a SEK 91 million impact. Also this accounted for against impairment losses line. So both parts are a direct result of COVID-19, adding up to a SEK 238 million impact. And finally, just to be clear, we had no net impairment on secured portfolios in Q2. That was dealt with already in Q1. So for further transparency, let's turn to Page 13. In connection with the Q1 release, we were clear about the challenging outlook, and we also felt that there wasn't really an updated conclude on far-reaching implications for a book whose cash flows extend over 15 years. I think had we at that time insisted on a conclusion, chances are we would have overreacted. Today, we find the situation much more clear and are confident in our ability to stay open. We can see how the courts are managed, and we see collections improving month by month. And I should add that July is trading in line with this development. So with these observations and data at hand, we have updated the predictions for our portfolios, and we've done so in a detailed and prudent way, reflecting a continued gradual recovery. As it's clear from the graph, we saw shortfalls in Q2 and we've also lowered our expectations somewhat for the coming quarters. Now our aim is certainly to recover all of that, even if it's with a delay. However, the amount of pandemic uncertainty we have in our revised predictions, taking a more prudent approach, and only assume that we will recover about 50%. As a final comment, I want to stress that this adjustment is now accounted for. The coming quarters and years are measured against that revised target. So in practice, performance which meet the solid line will come with several impairments and will come with profits similar to the steady green bars illustrated on Page 10. Turning to Page 14, and counting on cost, so our work to reduce long-term costs has not at all been put on hold. On the contrary, there has been a high level of activity in Q2, and I'll give 3 examples. To start with, we decided to discontinue our third-party collection in the U.K., as Klaus-Anders mentioned. The reason is poor profitability and turning that around would have required investments, investments that we could not leverage elsewhere. The associated cost base amounts to circa SEK 30 million annually, and we expect this savings to reach full run rate by end of Q4 2020. So it's not in the aggregated numbers just yet. There is no significant restructuring charge related to this. Second example, moving on we see good progress in Romania, and we have expanded our shared service center in Poland. Those 2 combined currently include 150 employees, and that will exceed 200 by year-end. Thirdly, I mentioned that we are running with a high level of investment into IT in Q2. These investments are key to push digital collections up from its current 19%. Taking a somewhat wider perspective, one can note that when it comes to cash-to-achieve, we are roughly halfway. When it comes to realization of benefits, we have 2/3 to go. And this is best understood by looking at some of the key workstreams in our savings program. So let's turn to Page 15. These are all workstreams where we've done most of the work and we've taken most of the costs. On some, we've also captured most of the benefit, for example, site optimization. On others, we are only halfway. With regards to the shared service center we have established it from a legal and managerial position. We've done a lot of recruitment and training, but migration of tasks is still in progress. We also have some where most of the benefits are still to be realized, so on digital collections, we have the portals in place. The functionality is expanding to capture more and more use cases. And a key aspect from here and onwards is to truly integrate this in our onboarding of new portfolios. On IT outsourcing, the benefits are very tangible. They stem from contractually agreed prices. But right now, transition costs which are temporary, mean you'll not see it. So in short, knowing that the work is done gives us a lot of confidence in the realization of benefits. Turning to Page 17 and funding, interest expense to book value is coming down from 2.6% to 2.3%, so very attractive levels. And the strength in the banking world is that we can adapt to the current funding needs. With lower acquisitions, we need less funding. And in Q2, we have taken decisive actions to reduce excess liquidity. This helps, of course, and in total funding costs came down by SEK 30 million versus the previous quarter. There's still room to do more. We could reduce liquidity by another SEK 2 billion and still be within our internal target range. Within our capital market funding, there's been no rate change in the quarter. As you will have seen, Q2 was a busy quarter also for the rating agencies. The banking sector has seen its fair share of downgrades. On our side, we note that on July 1, Moody's affirmed their investment-grade rating for Hoist, although with a negative outlook. And we've had a close dialogue with Moody's throughout the crisis and we are committed to maintain our rating, and plan accordingly. Continuing to capital and liquidity on Page 18, so despite exceptionally difficult circumstances, we come out of Q2 with capital ratios which are higher than we had coming into the crisis. This is the result of us having taken a very selective approach to new acquisitions in the quarter, with additional support from a stronger Swedish krona. Looking ahead, we see interesting market opportunities, and I expect acquisitions to go back to normal towards the end of the year. In past years, Q4 acquisition has been around SEK 2 billion to SEK 3 billion. That is within our capacity also for this year. Over to you, Klaus-Anders.

Thank you. Thank you, Christer. Let me now just summarize with a few important takeaways before turning to Q&A. We are glad to see collection performance trending towards normal levels in most markets. That's important for us, of course. Hoist has a strong and robust capital situation, and a strong liquidity, as Christer just alluded to. And we are well prepared for the second half of this year. I mentioned legal collections is important for us, around 15% of total collections. And of course these attempts that we expect to bring back to collections. We also mentioned operational improvements and cost savings. We are committed to deliver on those, and point number 3, which I think is also very important, we are creating digital as a business line for unsecured collections. So in short, we stand ready to support our clients balance their balance sheet across Europe, and to help our customers keep their commitments. So with that, we are ready to engage in the Q&A session, so over to the operator.

[Operator Instructions] Our first question comes from Ermin Keric.

So first just on the third party collection that you are closing down in the U.K., do you expect any income effect on closing that here [indiscernible]?

There will be a little bit of income impact, yes. But let's put it this way. We don't believe that this business was actually adding any profits.

Okay, so I was just thinking what we should think about the net. Because you said some SEK 30 million, I believe, in cost savings.

I would say that the net would be at least half of that.

Thank you, and then on the liquidity portfolio, I mean we already saw interest expense coming down quite substantially quarter-on-quarter. Should we expect that to transfer downwards? Because I believe the liquidity portfolio is still sort of at an elevated level compared to what you've considered to be optimal historically at least.

That is correct, and I do expect liquidity to come down further. However, the SEK 30 million impact is also the result of other factors. So you shouldn't take that times 2.

Understood. Then lastly just on the SPV, it looks like cumulative the headroom sort of to your business plan has been reducing somewhat over the months. Can we just get some kind of update on how the, let's say, June collection were in relation to the forecast isolated? Are you now also trending on run rate for the last couple months, where you’re close to 100% as well? Or I would expect you've seen some kind of underperformance, but you had some headroom coming into COVID?

Yes. If I understood you correctly, you're asking about collection performance. And if so, there has been an improvement week after week, and I've mentioned in my section most markets are now almost back, or basically back to normalized levels. And it's also important to understand what Christer said, right, that there is a reset in what we expect in the quarter. So and that's also an important thing to have in mind. I mean, if I were to answer your question now, you’re happy for -- you to make -- to clarify?

So what I referred was the SPV in Italy more specifically on Slide 8, when you show us the sort of collection for the business plan. There is just like the cumulative collection ratio. But the headroom there is decreasing relative to your business plan, and it's sort of approaching 10% in June. So just wondering, so how does June stack up versus its original forecast? Should we expect SPV should actually trend cumulatively under 100% in the coming months before it starts to recover?

Well, yes. No. We don't expect that. It's -- I wouldn't guide to stronger. But I still don't expect it to [come back] up cumulative 100%, no.

Our next question comes from Borja Ramirez, Citi.

I have 2 quick questions, if I may. The first one is if you could kindly provide some guidance on the financial performance into the second half of 2020, for example, collections or the portfolio acquisitions. And my second question is given all of the fact that we have low rates in Europe and also there is an optimism with recent European recovery fund. Do you think that maybe banks will be more eager to sell NPLs in the rest of the year?

So thank you, Borja. I think we don't really guide too much, that already what we do, as you are aware of. But I think there's one slide that kind of answers a lot of your questions, I believe. It's the one that Christer showed, with the green bars. I don't have the slide number in front of me. But maybe Christer can help me with that number.

It's Slide #10.

10, yes. Slide #10, the underlying earnings capacity is intact. I think that should give you a lot of comfort. And it shows the stability. It shows the impact from impairments. And of course, the slide that also shows the revised forecast, and I'm thinking that collection performance should be in line with the new line. We shouldn't expect any impairments basically. And that kind of gives you the answer, right? So I think that's the best way to think about what we're going to deliver in the next 2 quarters. So that should really give you some comfort. On the market opportunity, yes, I think what we've seen is that a lot of banks are surely taking a lot of loan provisions, obviously as necessary, due to the crisis. And we expect there will be not plenty of coming from market, both in the third and the fourth quarter. So from that point of view, there is a significant opportunity.