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

Ladies and gentlemen, welcome to the Hoist Finance Q4 reports 2020. Today, I'm pleased to present CEO, Klaus-Anders Nysteen; and CFO, Christer Johansson. [Operator Instructions] Speakers, please begin.

Thank you, operator, and very good morning to this fourth quarter presentation.And with me today, as usual, our CFO, Christer Johansson; and our of Head of Investor Relations, Andreas Lindblom.

Good morning.

Good morning.

So moving then to Page #4, which is the highlights for the fourth quarter. Let me just use this opportunity to say that in a year very much dominated by the pandemic, I am extremely proud of the work and the progress that we made in Hoist China. Of course, most importantly, we have been able to continue to support our customers, where literally all employees working from home in, yes, basically almost 1 year now. We have a lot of personal-best or all-time highs in terms of operational improvements in -- over the last year. And let me just call out a few them. We have a self-service ratio at 20%. And we have increased the productivity and reduced salary cost per FTE. And we have improved employer engagement quite a lot, increasing the score in our Great Place to Work survey from 68% in 2019 to 77% in 2020, and that's actually a significant increase. And we are not only an asset-heavy business, we are also a people business, so I'm very happy and very proud of this improvement. And perhaps needless to say that the most important thing that happened in Q4 actually happened in Q1. And we last week, last Friday, announced our partnership with Magnetar Capital and by that also launching the next phase of our Securitisation Programme. And have in mind that this scope is for new acquisition, so it's forward-looking and pan-European and basically fixed us some cures of regulatory challenges. And I will talk more about this on a separate slide. In terms of financial highlights, you can see to the right on that slide that we mentioned a few things. Our balance sheet is robust, our CET1 is at 10.8%. Our collection performance in the quarter remains resilient at 105% versus active forecast. But with the current pandemic and the slow throughput in the courts, we do find it prudent, nevertheless, to do some extra impairments. But as you will see in a second, the cash flow remains very solid, and also close to all-time high level. The portfolio acquisitions were lower than we expected, perhaps, but the market outlook is very positive going forward. I will comment on this in a separate slide. So moving then to the next page, Page #5, in the deck. I'm not going to spend a lot of time on this slide, I'll just underscore that as you clearly can see, that the first quarter did show strong cash flow generations. Page #6 is kind of a chart that we used before. And on the present slides, you will see profit before tax adjusted for impairments and items affecting comparability. And as you can see, the underlying earnings is very stable. And actually, despite a shrinking book, the fourth quarter is even better than the third quarter. So my view is this is a very robust and resilient picture. Page #7 talks about how we're executing on the 4 pillars of our strategy, and you can see the 4 pillars to the left. And let me just say that in 2019, we made huge strides in France and Poland with significant increased market share in those 2 very important markets. And then it's very good to say that in 2020, we're able to improve our operations in the very important German market, and Germany actually became our most active market in 2020. On effective and efficient, we have ramped up our new showings during the year. And currently, we have 150 competent and passionate colleagues in Romania. In digital, we are certainly getting a housing order as far as infrastructure, simplification, integration and industrialization is concerned. And right now, 85% of our assessments on data is in the cloud. So that's a significant achievement during last year. And on the banking platform, the securitization is, of course, the key achievement. I will talk more about that in a separate slide. Moving on to Page #8, and I think this is an important slide to take in. On the left, you will see the NPL traded volumes in terms of portfolio transactions from the bank sector in Europe over the last few years. And as you can see here, 2020 stands out as a low year in terms of transactions, down to 2013 level. What you can see on the right-hand side is the underwritten IRR is calculated as 12 months' rolling averages. And as you can probably see from the slide 2018... [Technical Difficulty]

Apologies. There appears to be a technical issue with the speaker. I will try and sort it out as quickly as possible for us to continue this call. Please hold.

I apologize for that technical issue. I don't know where I broke off. But I will actually start over again on Page #8 to make sure that there wasn't a bigger problem. So as you can see from Slide #8, to the left, you can see the transaction volumes from banks in Europe as far as nonperforming loans is concerned over the years. And as you can see, 2020 was really a low year, almost down to or actually below the 2013 level. We know that, of course, provisioning and level of provisioning are increasing in banks during the pandemic and the market outlook is quite healthy. To the right -- on the right-hand side of this slide, Page #8, is the underwritten IRR calculated as 12 months' averages. And as you probably can see -- break out from the graph, 2018 was the low point, but there has been an improvement since. And having had 2 years now in a row with relatively low investment volumes, 2019, of course, with the regulatory headwind and 2020 with the pandemic, we have had 2 low years with investments. And consequently, the 2018 vintage is having a heavier impact on our returns and [indiscernible] return. And out of our total book, the 2018 vintage accounts for almost 25%. So yes, I would agree, 2020 investment is low. But for us, of course, it is more efficient now to use a new securitization structure. And with the margin outlook in the quarters ahead, that's also important to have in mind. So then let's move on to Page #9 in the slides. And what I would also say here is that we are making really good progress on our cost savings. But rather than talking about individual projects, I thought I could bring out development in 3 markets. And as you can see here, France as a country used to be loss making, now earnings before taxes are at a strong SEK 106 million. Strong improvement also in Germany, more than double the profit. So really happy with those 2 markets. On the other hand, what is also equally clear is that we are struggling in Spain. We are not alone with the challenges in the Spanish market. But as we also say that we believe in the long-term opportunity in Spain, and we can turn things around the way we have done with other markets before, and which is clearly seen from this page. Let me then move to the next page, which is about helping businesses survive and our commitment to ESG. We have a partnership with TEAM U. And TEAM U is a nonprofit that supports SMEs in preventing bankruptcy and support bankrupt entrepreneurs to rebuild them back. And this partnership is twofolded. We helped reducing the impact from financial exclusion in society, but we're also helping our SME customers by channeling them to TEAM U, so they can get specialized support. And the partnership and the commitment to TEAM U is for the long term. And in Q4, specifically, we supported the development of a TEAM U online platform. Page 11. I promised a couple of times today that I wanted to talk through securitization. And let me start off by taking you through the time line. In December 2018, the Swedish FSA implemented a new interpretation of how risk weight should be applied for unsecured NPLs, increasing the risk weight from 100% to 150%. And this, of course, wipes out part of the equity and our CET1 was reduced from 13% to 9.7%. In the first week of January 2019, it was announced that EBA was about to introduce a so-called NPL prudential backstop, which, of course, put our growth at risk. And a couple of weeks later, we communicated in our Q4 earnings call, basically 2 years from today, that we had identified securitization as a key solution to mitigate the negative consequences of these 2 important regulatory changes. In the second quarter of '19, we announced our first unrated outlook securitization. And in the third quarter of '19, we announced the second structure. In the fourth quarter last year, the Swedish FSA assessed and concluded that significant risk transfer was achieved in Hoist Finance's securitizations. And now in the first quarter of this year, we are launching a cross-border front book securitization structure. And let me be clear, this new structure ticks the right boxes. In my view, this removes NPL backstop challenge. It resets the risk weight to around 100%, tends being ROE accretive and as a point #3, sets them back to a path to growth. [indiscernible] in the structure should be no surprise, it means our capital acquired in mezzanine and junior notes [indiscernible] will retain the senior notes. And Magnetar's EUR 150 million commitment translates into an unsecured NPL purchase price of EUR 1 billion over the investment period of 2 years. So with that, important news, I hand over to Christer for the next section.

Good morning. And turning to Page 13. Obviously, as we close out 2020, there's no denying that this year was severely impacted by COVID. Not only did our results suffer from impairments amounting to more than SEK 450 million, they also suffered as a result of acquisitions being postponed, which mean we closed the year with a book that is 13% lower than at the beginning of the year. Had the book been flat, we estimate that results would have been around SEK 140 million higher. Although, obviously a theoretical scenario, one can see that adjusting for this, returns in 2020 would have been more or less on par with '18 and '19. So with that context in place, let's have a closer look at Q4, starting with the P&L adjusted for items affecting comparability on Page 14. I mentioned the smaller book. This comes through on the income line. Despite solid collection levels, the quarter came with impairments of negative SEK 49 million, and I will explain this apparent contradiction in a minute. Within net results from financial transactions, we saw a sizable positive effect from FX hedging. This is partly a reversal from previous quarters. On the back of increased legal activity, we did, as expected, see an increase of total expenses versus Q3. But taking a longer perspective, the favorable trend is sustained, as we will illustrate on a later page. All in all, profit before tax in the quarter adjusted for items affecting comparability ended at SEK 108 million. Similar to the full year results, this is a level significantly impacted by COVID-19. Turning to Page 15, and our reported figures. So Q4 was low on acquisitions, but it was quite busy in other ways. And this level of activity came with a few items affecting comparability. So adding to my comments on the underlying results on the previous page, I want to highlight 3 such items, which are included in the reported numbers. First, we have a SEK 22 million negative impact in connection with restructuring the 2021 bond. Well, I've used this as good cost because as you will see, this sets us up well for 2021. Secondly, we took a provision of SEK 9 million related to a legal dispute in Spain. And thirdly, the signing of our partnership with Magnetar, which Klaus-Anders described, mean that we currently don't expect to pursue further securitization of the back book. And we had accumulated SEK 9 million of costs on the balance sheet related to such efforts, thanks to the good progress on our front book program, those costs now seem redundant and they are being written off. This adds up to SEK 40 million in negative items affecting comparability. With those included, reported profits before tax amounted to SEK 68 million in the quarter and SEK 82 million in the year. Moving on to Page 16 and looking at collection performance. The gradual recovery has continued for the unsecured book, which is what we show here. Q4 collection corresponded to 103% measured against the active forecast. The total book came in at 105%. In many countries, December was actually the strongest month in the quarter, and this is normally not the case, given holidays, so I read this as a good sign for 2021. As you remember, over performance, it's accounted against the total impairment line. Collection's at 105%. You would, all else equal, expect to see, say, SEK 70 million on that line. The other component, which is also accounted against the total impairment line as portfolio revaluations, and those reflect changes to the future projections. With a net amount of SEK 49 million for those 2 items combined, you will understand that we have a negative contribution from revaluations in the quarter. And this is more about timing of collections than the total amount of collections with legal throughput being a key factor. We had anticipated that the court systems would be operating at close to full speed by now. Unfortunately, that is not the case, as illustrated on Page 17. And I should mention that legal throughput is not an area where statistics are easily found. But as one of Europe's biggest DP companies, we can obviously monitor how our own cases progress through the various legal systems. And taking that approach, we estimate that the throughput is still some 40% below normal levels. This obviously means a delay in future collection, and this is particularly true for secured assets. So considering the time value for money, those delays translate into impairments, which in Q4 amounted to a total net amount of negative SEK 49 million. Turning to Page 18. In the cost program, Q4 has not been about starting new initiatives. We have a large number of projects going, more than enough probably. Our focus in Q4 has, therefore, been to extend the rollout across the group and to capture benefits there from. To give 2 examples, we have, in Q4, ramped up the staffing in Bucharest, allowing for a further shift of workload. We've also expanded the functionality within our self-service portal, and we've rolled this functionality out to additional markets, supporting the good improvement in digital collection rates that Klaus-Anders mentioned. And these are both topics that we will come back to in our Capital Markets Day in a few weeks. Turning to Page 19. Expenses in Q4 totaled SEK 592 million and SEK 570 after adjusting for items affecting comparability. As mentioned already in the Q3 earnings call, a pickup in legal expenses was expected, and legal expenses came in SEK 24 million higher versus Q3. Had all courts been fully operational, this would probably have been even a bit higher. Now, leaving legal expenses aside, the underlying costs remain close to Q3 levels, and we see a continued favorable development in staff cost, where our mix of staff is moving towards lower cost countries. In the quarter, that saving was partly offset by SEK 5 million temporary increase in depreciation. Moving on to Page 21. When it comes to funding, a key event in the quarter was the new issue, which we did in November. And the primary purpose of this exercise is not to add funding, it's about proactively managing the maturity profile. So we issued EUR 200 million under our EMTN program. This had a 4-year duration and this was done at par with a 3.375% coupon. This issue attracted a good mix of European investors. And although yields have come up since our previous issue, we note that few, if any, of our peers can issue at this level. In connection with this new issue, we also tendered a bit less than half of the 2021 bond, and that triggered a bit of cost, as mentioned. So with this exercise done, we are all set for delivering on the 2021 business plan. Zooming out 1 sec on Page 22. We illustrate the complete funding, including the deposit side. And as you can see, total funding volume is flat. The increase in cost that will stem from the larger share of market funding, which of course, cannot match the very low cost of deposits. On the other hand, we see great value in having a broad toolbox, and this gives us a lot of flexibility in matching assets and liabilities. At the bottom of the page, it may seem contradictory that interest expense to book was flat. But one should remember that the new issue was done late in the quarter, had we had a full quarterly effect, the interest expense to book would have been around 2.7%. Finally, a word on capital and liquidity on Page 23. So as Klaus-Anders commented upon, new volumes in Q4 were low. That boosted the current capital and liquidity position somewhat. That's fine. We have good reason to remain confident on future supply, and we are well positioned to capture our fair share of those opportunities. So with that, I hand back to Klaus-Anders for summary comments.

Thank you, Christer. So let's go to the summary page and key takeaways. So 2 years ago, I shared with you the tough news that 2 regulatory changes were wiping out parts of our equity and questioned the validity of our business model. We have now established robust and sustainable structures that show that our business model is intact, relevant and competitive. We have improved our operations for the last couple of years, and we are leading the way in digital. Now we are using the tools that the banking license provide and are offsetting the negative consequences of these regulatory changes. In short, we remain the company in the industry with the lowest cost of funding, and we are embarking on a path of growth at a point in time where the market outlook is the most promising that I've seen as a CEO in this industry over the last 7 years. So with that, we are so much looking forward to talking to you again shortly and showing you our developments at our Capital Markets Day on the 25th of February. So with that wrap-up, let's then move on to Q&A. Over to you, operator.

[Operator Instructions] Our first question comes from Borja Ramirez from Citibank. Our next question comes from Ermin Keric from Carnegie.

Anders, my apologies, it's not only you having technical issues, so I also dropped out for a while, if any other questions are coming back that you think you've already touched upon. But my first question was the deployments you expect for 2021 and partly 2022, do you expect to deploy more than the EUR 1 billion over the coming few years? And how much to come in 2021?

Right. So I guess, what I can say there, I mean is that, of course, the program with Magnetar is for unsecured NPLs. On top of that, of course, you got secured NPLs and performing loans. In 2018, we invested for about SEK 8 billion, and I see no reason why we cannot get back to a level quite similar to that level.

And do you expect to see a pickup toward the start of the year? Or do we need to wait until the second half of 2021 before we see a pickup?

Yes. So the market outlook going forward is very promising. I think everybody is seeing that. And I can see that our competitors are sharing the same view. So the market opportunity is there. I think it's a little bit hard to gauge exactly when more of the volume is coming to market. I think the Q4 was a low quarter or a slow quarter for us in many ways. We require a new formal replacement CapEx. But with the knowledge that we were about to get in place our securitization structure, we didn't push it too hard because we thought it was more efficient to use that new structure. Currently, I would say the market is all right. Some of the deals that were pushed out from Q4 were pushed into this quarter. So hopefully, this -- during this half year that we now will be better than what we saw towards the end of last year.

Got you. Then on the cost side, when you presented the Q3 numbers, you also gave us an outlook of how much restructuring charges you would book for the full year 2020. And I just noticed you didn't book the residual now in Q4. Should we read anything in that, that things are progressing a bit slower? Or is it the cost from -- you won't require as much [ recession up ] in total?

I think long term, we've not changed our assessment of the potential in the program or the cost associated with it. In Q4, our focus was to leverage the work that we had already done. So there wasn't a lot of sort of new items coming on to the agenda. But for 2021, surely, we have a lot of work to do, and some of that will come with one-off costs.

Okay. Got you. Then on the Magnetar agreement, could you share any color on how much the transaction cost will be in Q1 related to that one?

Yes. That's a good question. So obviously, this partnership, we've just entered into this partnership, and we are looking forward to deploy it as fast as possible. To what extent that will be the case in Q1, I think that's a little bit early to tell. And one should remember that a fair share of the transaction costs associated with this would also be capitalized on the notes. So it's not necessarily that it would all hit the P&L immediately.

If I could add something here, Christer. I mean, of course, this is a significantly more cost-efficient structure than the previous one. I mean, the first one was more expensive. It was the first. And now we have been able to build on our knowledge and expertise and use our own team to a much higher degree. So the costs here are significantly lower, and the structure is much more cost-effective than the previous one.

Okay. Then perhaps just one last question. You mentioned 20% self service level. Is that on the group? And you also mentioned some promising digital collection strategy from U.K. and France to be rolled out. Is that in excess of the previous self-service quarter we've been talking about?

Yes. So the digital collection or the self-service ratio, as we prefer to call it, is 20% for the group. But it's, of course, for the amicable unsecured NPL portfolio. So it's not for secured NPLS, and I think we have showed you that side before. So we are really happy about this improvement, specifically because this is the year -- 2020 was a year we acquired much less. And it is harder to convert, call it, analog customers to become digital when they haven't built from the beginning. So it's actually -- what we see is that we are acquiring new portfolios, it's easier to start off with the customers going digital from the very beginning. So we see some very promising, call it, all-digital portfolios in the U.K. specifically. And U.K. is certainly our most advanced and mature market. And basically, what you mean by that is that it's basically digital-only. There's basically very little manual work at all for the -- for those portfolios. So we are definitely looking forward to share more about this at the Capital Markets Day, and I'll keep some of the goods for until then and looking forward to share.

Our next question comes from Rickard Hellman from Nordea.

Rickard Hellman here. One question. It's perhaps a little bit of clarification around your Magnetar SPV. The initial investment is stated to be 24 months, does that mean that you have a mandate to invest in 24 months? Or does it mean that you need to refinance in 24 months?

So it means that a capital commitment is expected to be deployed within that time frame, so there's no need to refinance it after that. But sort of like a lifetime perspective on the investments.

Yes. Okay. That's great. Makes sense as well. But on back of debt, I mean if you would pursue with your internal risk weights and gets approved from the Swedish FSA, will not this be a drag to have this setup?