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

Hello, and welcome to the Hoist Finance audiocast with teleconference Q2 2021. [Operator Instructions] Today, I am pleased to present CEO, Per Anders Fasth; and CFO, Christer Johansson. Please begin your meeting.

Good morning, and welcome to the Q2 results of Hoist Finance. I'm Per Anders Fasth, and I'm here in the room with Christer Johansson, our CFO; and also with Andreas, our IR, Investor Relations, who you all know from many years.

Good morning.

Good morning.

Firstly, I'm Per Anders Fasth. I joined the Board of Hoist in mid-April and was appointed interim CEO at the end of May. So I've been with Hoist now for -- as acting CEO for about 7 weeks. In addition, we have had a few other changes, except for the results. We have had Lars Wollung, who has been a Board member for several years. He actually left the Board in order to be able to support management and act as a consultant and adviser to us in our operational improvement efforts. I also want to point out that, unfortunately, this is Christer Johansson's last quarterly results. Christer has done a fantastic job. But we also welcome Christian Wallentin, who's a very good and senior CFO, who will join us here in early August. Coming back to the results, Christer will go more through the tax issue that we published on July 8. But when it comes to the financials for the quarter, our EBITDA, which I would more or less say is our cash flow for the quarter, was SEK 1.17 billion, which is a significant improvement compared to last year. Well, you have to remember that last year, that was the first quarter -- real quarter of COVID. And of course, that was a tough quarter when it comes -- came to collections. Profit before tax was SEK 52 million. And our collection performance was slightly above our planned collections or the anticipated forecast at 102%. And as we will come -- and like we will come back to, our CET ratio was -- is down 9.7% due to the write-downs in -- after Q1 on the portfolio write-downs and also the tax provisioning -- additional tax provisioning that we took here in July. Our acquisitions were at SEK 857 million, which is more or less in line with the replacement value, as we will see on the next exhibit. And total book value of our portfolios is at SEK 21 billion. If we move to next page, Page 5, you can see that our portfolio book value or our volume, our balance sheet has been reduced over these 6 quarters by 15%. And of course, this has a direct impact on our revenues. And our net interest income is down 18%. What this also indicates is that there is a slight reduction also in the margins of the book, but there's also significant FX effects in these numbers. But -- so in order to regain position and strengthen the profitability, we need to increase the acquisitions. We have had cost reduction efforts in the company, as you can see on Page 6. Costs are down by 5% over the same period which, of course, is not enough to counteract the negative impact of the reduced balance sheet. So we need to do more on the cost side, as I will come back to, in order to improve our profitability. What do we then see when we look to the various segments? On Page 7, when it comes to unsecured NPLs, they constitute approximately 85% of our portfolio book values at about SEK 17 billion. What you can see from this exhibit is that we have a quite widespread growth opportunities when it comes to unsecured NPLs, widespread in terms of markets. And we see, foresee and we will -- as you see, we call it visible market opportunities. That's actually processes that we are involved in or that we know will happen within the next 6 to 12 months. And they are approximately SEK 1.3 billion in -- when it comes to unsecured NPLs. Moving then on to secured NPLs on Exhibit 8. They constitute about 15% of our portfolio book value at SEK 3.4 billion. But here, you can see the -- there's a difference in opportunities. It's mainly France and Italy and, to some extent, Spain, where we see good market opportunities. And the processes that we foresee within the next period are around EUR 0.5 billion. You can also see on this exhibit that we've been very strong in our collection performance, even stronger on secured NPLs than on unsecured, also above 100%. Moving on to Page 9, you see Hoist's footprint at this point in time, a well-diversified book both when it comes to values, but also when it comes to revenue generation. And there is, as you can see, particularly for France, you can see the portfolio value is 11%, whereas the net interest income is 9%. That's an effect of that we have a significant proportion of secured assets, secured NPLs in France. And they normally have a lower net interest income, but they also require less equity. So it's very capital efficient and provides us with good profitability even though the revenue as such may be lower. On an overall basis, collection performance is quite acceptable, not as good as we would like it to be, but at least above par, if you would say so, where actually Poland stands out at this point in time as a very strong performance when it comes to collections. Of course, we have -- we are still affected by the COVID situation that as markets are opening up, we are and I am expecting significant improvements in our collection performance because, as we noted in the quarterly report, quite a few countries have had their courts closed. And that makes it more difficult for us to collect when courts are closed because some of our processes are taken to litigation. I will then -- that's my intro. I will come back after Christer has gone through the financials a little bit more in detail and make a summary. Christer, over to you.

Good morning, and starting on Page 11. So as you may have seen from our press release on July 8, Q2 is significantly impacted by tax provisions, and it's a material amount. So let's go straight to some background on that. Our provision was triggered by correspondence with the Swedish Tax Agency, and this correspondence was a preliminary decision from them, which relates to profit allocation between countries and it relates to Polish assets specifically. Here, one may note that the Polish market is a bit different. Assets are typically held in the funds, and that comes with some questions which we don't encounter elsewhere. I'd like to stress that this process is at an early stage, and it may well be a couple of years until this is finally settled. However, in the meantime, we saw a reason to reassess our overall tax provisions, and this included assessing various potential outcomes in this case. On the back of that analysis, we have decided to increase our provisions by SEK 97 million. And as always, we will adjust our positions if new facts arise, although I would not expect significant near-term changes to this position. Now leaving tax aside, we also have a one-off related to changes in the management at SEK 9 million in after-tax terms. Were it not for these 2 items, earnings after tax would have been SEK 58 million. The underlying dynamics there are best described on the next 2 pages, Pages 12 and 13. Starting with Page 12, which is a comparison of the previous quarter, excluding items affecting comparability. Income, which is a product of the book size, is more or less flat compared to Q1. But unlike Q1, this quarter saw no significant revaluations. So the positive SEK 22 million comes on the back of 102% collection performance in the quarter. On the cost side, the total is flat, but the mix is actually a bit better. So compared to Q1, we have SEK 14 million more in collection expenses, mostly legal collection expenses. And we have a similar decrease in admin expenses where some of our saving efforts are targeted. So all in all, the underlying level in Q2 is actually not very different from Q1. Taking a longer perspective on Page 13, the picture is somewhat different. So here, we compare the reported figures year-to-date, so all in, with the same year-to-date period the previous year. Top line impact of a smaller book is evident, as Per Anders highlighted. When it comes to impairments, obviously, the last 18 months have been rather challenging with difficulties in Spain, COVID and shortfalls in U.K. litigation being 3 main drivers. Also adding in the tax item, which also stemmed back many, many years, the total impact on recent return on equity is, of course, severe, as you can see at the bottom of the page. Turning to Page 14, just a quick glance on the balance sheet versus year-end. So core assets are flat. Liquidity has been trimmed down a bit, and we have a bit of movement in other assets and other liabilities, which is just related to our hedging activity. On Page 16, we illustrated funding development over time. And on this front, there's been only limited movement in the quarter. Within the deposit component, we have shifted a bit more towards the euro side, which is a slightly cheaper source of funding at this point in time. Moving on to Page 17 and as Per Anders writes in the CEO letter, our capital ratios have been impacted by the events of the first half year, so that's impairments and tax provisioning specifically. And we are still in the target range, but with a smaller margin than planned. As we look ahead, we are, as you know, targeting growth, and that will add further pressure to the CET1 ratio, but there is also one item which has the potential to support a medium-term CET1 ratio. And that's a topic currently subject to EBA consultation on Page 19 (sic) [ Page 18 ]. Now I should say that for being at the consultation stage, this is an unusually large interest, so let me explain why. In December 2020, the European Commission presented their NPL action plan, and one item in that plan was the removal of impediments for banks purchasing NPLs. Now with that goal in mind, the commission gave EBA the task to review the situation of applied risk weights for purchased NPLs. And remember, this is an area where buying back sometimes needs to apply a higher risk weight than the selling back to 150% instead of 100%, and that doesn't make any sense. Now the EBA is proposing to adjust the risk weights back to 100%. And they have stated that they favor doing so through a so-called RTS, which is the Regulatory Technical Standard. In practice, this means that they are intending to change the guiding documents which they provide to the local regulators, in our case, Finansinspektionen. And that's a much easier route than actual adjustment in the CRR. This EBA consultation is out for review until September. In the hearing that took place on July 13, we have understood that the EBA view it as speed to the FSS. That's also what we hear from the commission. So we believe confirmation could be in place by year-end with implementation to follow at some point thereafter. I should be clear, this is not a done deal. But if it happens, which we expect, it would significantly reduce our capital requirements as indicated by the pro forma CET1 ratio. And it corresponds to a release of a bit more than SEK 500 million in CET1 capital. So on that slightly positive note, I'd like to end the financial review and hand back to Per Anders.

Thank you, Christer. Yes, let me just sum up where we are and where we're going forward. I would say that these last quarters have been more or less similar, quite stable results, but not at the level that we expect to be at. So what we need to do here now in Hoist and that we have started the transformation program in order to -- first of all, we need to simplify our organization and to focus our efforts on the core business in order to improve performance. That means that we, in order to be successful, we need to accelerate our portfolio acquisitions to grow our business in order to generate more income. But we also need to, at the same time, focus on our performance, increase our productivity, our collection performance, and our cost to collect needs to come down, and the overall cost level also needs to be reduced. So we have a good basis for a good journey ahead, but we need to be more focused, more proactive when it comes to portfolio acquisitions, but also work on our cost base. So that is what the route that we are embarking. And I hope to hear from you, and you will hear from us again in Q3. Thank you. And with that, operator, we are ready for questions.

[Operator Instructions] The next question comes from the line of Ermin Keric from Carnegie.

The first one could be where you left off here, Per Anders. So on the transformation, I mean Hoist has obviously been undertaking transformation now for a few years. So what is it that's going to be different in the execution plan from what we heard at the CMD earlier this year? And also with regards to the financial targets, should we think about them as still being relevant? Or are they under review? Or how should we think about that? And then also lastly, on the same subject, you talked a bit about accelerating the portfolio investment. But at the same time, in the CEO statement, you mentioned that you see quite a high pricing level. So how should we square those 2 to each other?

Well, let me start with the first thing. I think, one, I mean I agree with you that Hoist is working on a lot of things over the last couple of years. And I think that, that is maybe one of the problems that we have been doing too much, too many things at the same time. And if you do -- and if you have an organization with scarce resources on the crucial areas, it's important to prioritize and choose the efforts where it gives the best bang for the buck. I think the organization has been too unfocused and trying to achieve too much. And if we can try too many things at the same time, you don't finish them well enough. We even had one of our members of the -- of our executive management team, when we had a Board meeting in -- already in the mid of June, she phrased it, "We have to stop starting and start finishing." I think that's one of the key things that we need to focus on our core, get better things that we are really good at and to deliver and focus much more on the achievements than activities. So that, I think, is what will be different. Then when it comes to the pricing, it is true that there's been quite a dry year last year. So it's not -- we are not the only player in this field who has had the same development of its balance sheet as we have, as you saw on one of my first exhibits. This is, of course, caused some of our competitors to be very active. And so far, mainly, I would say maybe because of COVID, maybe because of other reasons, but there's not been as much supply in the market as there has been demand, I would say. And that has caused some of our competitors to be very, very eager to buy. And we have refrained from going that route, I mean, because we don't want to buy at any price. We need to grow profitably. So that's why we have not acquired as much as we had hoped. We do, however, believe maybe towards the end of this year that there will be more volumes coming out in the market. And I also showed you that in, for example, in unsecured portfolios, we see now EUR 1.3 billion in processes that we are involved in or are coming out and about EUR 0.5 billion in secured. So there is activity. So far, the demand has been stronger than supply. Yes, when it comes to the financial targets, I think it's very key. I mean we -- our financial target for return on equity is 15%. Will we reach it this year? No, not with this half year. But our financial target for return on equity is still 15% and will be so. Then you could -- I mean I've been in banking more or less -- not all my entire life, but at least 30 years. But so -- and of course, cost/income is a good indicator of cost efficiency, so it's a good target. It's not a target that creates shareholder value in itself, whereas return on equity and growth are the key things. So profitability growth -- or profit growth and return on equity are our key financial targets.

Okay, that's very clear. Then a question on the collection performance, you mentioned that you expect it to kind of return to around pre-COVID levels going forward. When should we start to expect that kind of performance? Is that the coming quarters? Or are we talking come mid next year? Because obviously, every 10 -- or a couple of [ SEK 10 million ] debt coming through in the impairment against losses is quite a big difference for your capital level at this point.

I mean collection performance is something that we're focusing on and I have focused quite a bit on since I joined. But it's, for me, it's too early after 7 weeks to say when we will come back to collection point. I think there's 2 things why I believe that we should come back to the collection performance levels when markets are the way they are. And the court systems are open. The sort of the backlog from the court systems are through. That's more prediction. But I also believe that we ourselves can do significantly better when it comes to collection performance once we get our different efforts sort of to work out. I mean we work a lot with the digital efforts more and more on data analytics, but we haven't really seen the benefits of those in the numbers yet.

Perfect. And just one last question. In terms of the expenses, you saw the collection cost come up a bit. Is that already an effect from courts opening up? And have we then already seen the impact on collections in Q2? Or is that something that comes with a delay?

I can give to Christer, but that it is -- like you're saying, it is the legal collection costs are coming up, and they will probably increase. We hope they will increase because it's very positive. But Christer can drill a bit more on that.

No, yes, you're absolutely right, I mean, so this is legal throughputs picking up pace, which is good. This is money well spent, and it will support collections over many years. So it's not sort of EUR 1 spent now is EUR 1 in collection in Q3. It supports the overall recovery projection, you could say.

Yes. The only negative thing is, of course, you have the legal collections this quarter. But like Christer said, the legal costs this quarter, but you have the collection increases over many, many quarters to come.

The next question comes from the line of Joakim Svingen from Arctic Securities.

The first one is just a follow-up on Ermin's question with regards to what you plan going forward and focusing more, as you said, Anders. Will this be related to portfolio classes, i.e., focusing more unsecured than secured, perhaps? Could be some divestments of portfolios? Or is it more related to geography? And I also wondered how retail banking fits in this context.

And I think you will see our focus when it comes to growth in all the 3 asset classes, but mainly unsecured and secured, but also performing loans. So we actually -- whereas the performing loans, I would say, are a bit more ad hoc and more irregular. They come out once in a while, where sort of the portfolios for unsecured NPLs and -- secured NPLs have more of a steady flow. But you also had a question on the retail banking. I think you will see more focus on our core, which is actually the NPL side, and less focus on some of the more longer-term, at this point, longer-term growth ambitions when it comes to, for example, origination of -- on consumer lending, et cetera. I think we need to focus more on the short-term, medium-term profitability in order to get the -- form a solid ground for future growth within a couple of years.

Okay. And then I was just wondering, I agree with Christer that the EBA consultation is promising. But unless you get a successful conclusion to that process, what other measures are you considering to strengthen investment capacity going forward?

I mean we, of course, we cannot just sit and wait and hope for EBA. We are focusing on our capital situation, what we can do on our own. And of course, one important part in increasing our CET ratio is, of course, our profitability. It's crucial to be able to generate capital on your own. The other one is, of course, another effort that we are doing is the securitization efforts, which are capital effective. However, of course, they do, which is important to stress out, they do reduce revenues because the net interest income is being reduced, but we are very ROA -- ROE accretive. So they're very capital efficient, maybe not earnings addition. But of course, we do also look at other activities in order to strengthen our capital ratios should not EBA come through because growth is important in order to ensure success for Hoist. And nothing is holding. We look at everything that is, from a shareholder perspective, positive.

I see. Okay. And then just finally, with regards to OpEx and the longer term. As you said, you're focusing on bringing costs down. But if you look just into the second half, do you foresee quite stable OpEx? Or could you shed some light into that, please?

I think what we've seen in Q2 was legal collection consistently picking up. That is something we would expect to continue into the second half. That is money well spent, so not losing sleep over that. When it comes to the overall savings program, we are continuing down that route. Some of the previous activities will start to materialize in the second half of the quarter. Hopefully, we will also be able to grow the book, which will come with some operational costs, which is according to plan should we not be able to realize that growth. And of course, we need to look again at the cost base then. And now in the couple of months I spent here together with Anders, we have, of course, come back. We've reviewed some of the existing cost activities. You see that the full benefit is taken out. We don't leave any money on the table. We are also considering additional options that we could pursue to bring costs down. So that's been the focus of our 2 months together.

That's great. And then just to make sure I understood the answer relating to CapEx that Ermin also focused on. So the main reason why, I mean you see a high competition now and basically a dry 2020 leading to eager competitors. But do you expect supply to increase considerably in the second half and then that should make you -- or enable you to let the -- or to increase CapEx and keep your profitability targets unchanged? Is that correct?

I think the industry and also Hoist believe that there will be more supply coming out after COVID already this first half year. We haven't really seen that. I mean there's been more in the second quarter than what it was in the first quarter and then more than in 2020. Maybe that -- and so we are a bit -- we believe that there will be more supply when it starts. We expect it to increase more towards the end of the year, but there could be -- we do not really hope for. We plan for a modest increase during the second half and then, hopefully, a further increase in 2022. So we don't foresee that the sort of the flood is -- flood of new portfolios is coming out already in September, but we see continued growth. We wouldn't mind if there was -- no, it's an army of portfolios to be out there. But unfortunately, that would probably not be the case.

The next question comes from the line of Rickard Hellman from Nordea.

Just a follow-up on the pricing on portfolios, if you could give some flavor if you see any particular areas where prices have increased more than others in terms of asset classes and also geographies.

Yes. We have seen -- and of course, it varies among markets. I think we have seen some that we've been able to look at quite attractive ones. And I will also look at Christer here because I haven't -- we look at this for the full year, but Poland has been quite good. We have seen extremely, I would call it -- since I was also a Board member, I was a member of the Board Investment Committee before I joined as CEO, we saw some extremely strange pricing in the U.K., which is prices -- portfolios more on the prices that we could never go to our shareholders and say that this was a good deal if we would have bought them at those prices, extremely unfavorable prices. But Christer, you have been there for the whole time.

I agree. We've been quite successful in Poland, I must say. I think the pipeline in Italy also looks good. And as Per Anders said, the U.K. has been a tough market. And of course, we're not willing to invest that at substandard returns, and we'd rather invest in a lot of them. So that's what we've seen in Q2.

And the last question comes from the line of Borja Ramirez from Citi.

I have 2 questions from my side. Firstly, on the competition, I would like to ask if the competition that you mentioned in portfolio acquisitions in Q2, I would like to check if it's coming more from the secured or the unsecured side and also, if this comes more from the private equity buyers or maybe more specialized debt collectors. My second question is on regulatory capital. And I would like to ask if you could just provide indications on the timing of the implementation of the internal models.

Okay. So on the first -- when it comes to the competition, I believe we see more competition on unsecured portfolios than on secured. That's been -- the pricing has been more out of the ordinary on the unsecured. Secured has been quite acceptable. And we note that in 2020, almost all the industry participants acquired at the low replacement level. So you could say that everyone came in to 2021 a bit short, which has also affected the behavior in the market. And it's mainly -- we've mainly seen industrial players, so it's not been that the private equity firms or the hedge or the funds have been destroying the market. I wouldn't say that. It's been mainly industry players that we have been fighting against. Then when it comes to the regulatory capital, the -- you're asking about the IRB, right? Yes? We could -- but we, of course...

Yes.

Yes. And we have an effort and -- but we also, of course, are affected -- or not affected, but we take into consideration the impact of -- the potential impact of the EBA. And maybe you want to dwell on that a bit more, Christer?

Absolutely. So I mean just to take one step back, of course, this effort was initiated following the increase in risk weight, which we felt was a justified increased. And we felt that the underlying risk was low, and we were keen to prove that. If the risk weight would be reset to 100%, and that's not a done deal, to be clear, but if that were to happen then, obviously, that changes the equation a bit here. That's something that we would have to take into account and as we proceed on this front.

Yes. Correct.

[Operator Instructions] We have no further questions, so I will pass back for any closing comments.

Well, thank you. This is Per Anders here again. Thank you all for listening, and I think it was good to have this opportunity to discuss and maybe explain a bit more. And we are, of course, always open for further meetings and discussions if there are things that need to be clarified or reviewed. And then you should, of course, contact Andreas, and we can set up a meeting or a phone call or whatever. But unless we have the opportunity to meet, in the meantime, we will see you again in October at the Q3 results. Thank you very much for listening in. And thank you, Christer and Andreas. And...

A good summer.

And have a good summer. Thank you.

Thank you.

Thank you for attending. You may now disconnect your lines.