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

Ladies and gentlemen, welcome to the Hoist Finance audiocast with teleconference Q3 2021. Today, I am pleased to present CEO, Per Anders Fasth; and CFO, Christian Wallentin. [Operator Instructions] Speakers, please begin.

Hello. Welcome. This is Per Anders Fasth talking. And welcome to our Q3 results presentation. I'm also very pleased to introduce to you Christian Wallentin, who is our new CFO, and he's been with us since August. And so a really welcome for Christian as it's his first quarterly report presenting here today with Hoist.

Thank you, Per Anders.

What we wanted to go through here today with you is some key highlights that I will do, and then Christian will go through more details on the financials and the capital and liquidity situation. And then we'll end up with a summary towards the end. And of course, after that, we would welcome any questions that you may have to the 2 of us. If we move to the first page and to talk a little bit about the key highlight that summarizes what we've done in Hoist in Q3. It's actually the Page 4 in your side. It's -- with the heading key highlights. What we've done here in Hoist since I joined taking over the position after Klaus-Anders was asked to leave, we've done a performance review. We've done a performance review and completed that one, and it's quite clear on where we are and what we need to do. We need to redirect the company and focus on the core business. And therefore, we have initiated and launched a transformation program to rightsize the company in order to adjust to the situation where we're in, improve productivity in the collections performance side and to have a more clear and focused and increase our growth on portfolio acquisitions. What we have seen in the result we can see is that our NPL portfolio volumes are bottoming out. We actually see a slight increase between the quarters. We've also talked quite a bit about the capital situation. And when it comes to the European Banking Authority's consultation, that one is finalized. And it was finished on the 24th of September. We are now awaiting a decision from the European Commission, which we believe will happen during next year. The positive thing that happened also during this period is that the rating institute, Moody's, came with an upgrade on our outlook, moved it to stable from negative. That's the overall picture. When it comes to the financial results, our result was SEK 82 million, which is an increase compared to the previous quarter. Our net interest income is lower than last year. Of course, since the portfolio volumes are lower than 12 months ago, but it's higher than Q2, also because our volumes are higher than they were in Q2. On the costs side, I would say they are flat, where personnel expenses are lower than previous quarter, whereas the legal costs are higher. Courts are opening up or being more active, and that will lead to increased collection costs, legal costs, that will have a positive effect later down the road. There's a lag in these -- the impact of the court activities. Our collection performance, more or less in line with our initial anticipations when we acquired the portfolio, is at 99%. And the acquisitions were SEK 1.2 billion, which is higher than our replacement value. So now the book value is SEK 21.4 billion, which is actually slightly higher, as you can see in the exhibit, SEK 300 million higher than it was at the beginning of the year. Our CET ratio was 9.78%. We move to the next page. You can see the development of our portfolio book value. Of course, several quarters of reducing volumes. We see that bottoming out now in the summer and an increase with about almost SEK 400 million since Q2, which has had an impact on our net interest income, as you can also see in this exhibit. If we move to the next page, you can see the cost development. So in this period, the same time period, you can see that our costs have been fairly flat. And that's one of the things that we need to attack. I mean we're -- our revenues have come down, but we haven't done enough on the costs side to adjust to our current revenue situation. So quickly before Christian will go more into details on the results, comparing the quarterly results, you can see in this exhibit on the next page, that our net interest income is slightly up as you could see before, but, of course, lower than a year ago. And that, when you look at the costs slightly better than the previous quarter, but higher than a year ago. Overall, our profit before tax, as mentioned, was SEK 82 million compared to the SEK 52 million a quarter before. Our results for the quarter do include a result from a swap evaluation of SEK 41 million. Looking at our 2 key segments, unsecured NPLs and secured NPLs. The unsecured book is about 75% of our total book and quite well diversified in terms of countries, and with a slight underperformance in collections in the quarter, whereas, year-to-date, it's in line with expected collections. If we move to the next page, the secured NPLs, you can see it's France and Italy dominating the NPL book. And here, we have had an overperformance in the quarter and also for the year as such. I also want to point out to you the collection over a longer period of time. On the next page, you can see the monthly collections. And these are the actual collections that we have achieved over these almost 10 years. And as you can see in the period of the COVID in the 2020 to this year, you can see that the level of collections have been quite a bit lower in the same period. And as you saw before, our portfolio book value has been quite flat in this time period. So I would say that this is a significant indication of the impact of COVID on our collections. And of course, it's not that -- you don't have to be Einstein to realize that if courts are not open and are not active, that legal collections are very difficult. And legal collections is, of course, an important portion of our collections and for our industry. So with that, I would leave over the floor to Christian, who will go through both our results, but also our capital and a little bit more about our balance sheet development.

Thank you, Per Anders. Can you move to the next page, please? So on this page, you have the P&L, the quarterly comparison, that's not only here, but what's driving a lot of these numbers is that the NPL portfolio volumes have bottomed out. So as Per Anders mentioned, we have added SEK 1.2 billion now in the quarter, so Q3, and that compares with Q2 number of SEK 857 million. And in a year ago, in Q3 '20, that was SEK 264 million. And this, in turn, drives interest income. So you can see on the top line, if you compare Q3 versus Q2, that we now have SEK 757 million interest income versus SEK 744 million, so that's driven by us now slightly increasing the book compared with both the end of the year, end of 2020 and also from the last quarter. So we're now above the replacement level rate, which drives the income. If you can see the net result from financial transactions, this is SEK 47 million in the quarter, and this is driven from unrealized gains in interest rate hedges of roughly SEK 40 million. And the interest rates, the value of these have gone up, driven by the long end of the curve. So we've seen the interest rates going up since the summer, which is a hedge position from the capital point of view. And that gives us this gain of roughly SEK 40 million. In terms of costs, they have been flat development in the quarter, more or less. We have written off a legacy IT system, which is SEK 9 million, which is included in these SEK 580 million. And that is now taken care. That leads to a net operating profit of SEK 62 million for the quarter. And then we have share of JVs of SEK 20 million. And this is, as you might be aware, a Polish joint venture and also a Greek joint venture, which adds income each quarter to us. So profit before tax, we land on SEK 82 million in the quarter versus SEK 64 million in Q2, which is, of course, an increase and also a result of this bottoming out. Overall, we have a tax cost of SEK 7 million in the quarter and that leads us to an ROE of 5% in Q3. Next page, please. Overall, if you compare the years 2020 and '21 year-to-date, you can see the overall COVID impact and the impairments that are characterized our business in these years. So the size of the book has gone down, driving a lower year-on-year interest income level. Both 2020 and '21 significantly were impacted by write-downs of the book, and that was driven by the U.K., Spanish and French markets. As you see in year-to-date 2020, that is minus SEK 409 million. And this year, of course, in March, we had a large write-down, which is mainly driving the minus SEK 331 million in the impairment gains and losses line. And the costs are flat. However, if you break it down, the personnel expenses are a little bit lower and the higher legal cost, as Per Anders referred to as well, when the courts are more active again. Overall, this is driving a negative ROE for the year, year-to-date, 2021. And for the quarter, it was ROE of 5%. So it has bottomed out in that sense as well. Next page, please. If you look at our balance sheet, we have a strong and conservative liquidity position, which provides us with a large financial flexibility. We have managed this to the lower end of our target range. We are very quick to attract deposits. So even taking this into account, we are very well above the regulatory ratios. And if you look at the acquired loan portfolios, you can see here that we have NPL, the volumes have bottomed out. So we have a slight increase since year-end '20. In terms of the retail deposits, we have taken those down to optimize for the market situation win and the risk profile. So both the composition is changing slightly, which has been a longer-term initiative from our end. So that gives you, if you look at really old figures, it was all SEK and now it's much more of a well-diversified retail deposit base, so particularly in SEK and euros. But this quarter, we have also opened up for U.K. deposit base, which we are testing basically to see how the market can help us as the U.K. is the second largest market for us. In terms of the senior debt, there's a EUR150 million, so around 1.5 billion senior debt now maturing in October, so after the quarter close. And that will also impact or has impacted the liquidity portfolio. So the reserve has gone down since then. Overall, the regulatory ratios are stable. And as you're probably aware, the net stable -- the net funding stable rate -- the net stable funding ratio is driving the other regulatory ratios, so the LCR and the survival horizon. So those are well, well above what the regulatory limits are. And in terms of the other assets and other liabilities, they have moved, and that's primarily due to FX hedging and collateral management. Next page, please. You can see on our funding slide here that the -- we have stable funding situation without any major changes the last quarters. We aim to have a diversified funding base. So the retail deposits are the majority of this, so SEK 17 billion roughly, and then we have a senior unsecured of SEK 6.1 billion at the end of the quarter. And subordinated debt of Tier 2 capital of SEK 800 million. An additional Tier 1 portion in total of SEK 1.1 billion and then securitization debt instruments of SEK 400 million. And also, again, I can highlight that we have opened this deposit scheme in the U.K. We've launched that during the quarter and testing the waters, so the volumes are very low currently. But we see this as a promising development in the funding base. Next page, please. You see here in Q3, capitalization levels, we are at our low-end of our target range. And the capital levels have been flat over the last quarters. So there's a net impact from earnings building up and then reinvesting in the portfolios. And then, of course, over the year, we have had the revaluation, which impacts the capital levels and also a legacy risk in terms of tax materializing in Q2, which have all had impact on the capital levels. And in terms of the liquidity reserve, we are managing that towards the lower end of the range. And also, if you compare it further back, we have a lower book, which is also impacting the size of the liquidity result. Next page, please. If you compare Q2 with Q3, you see a slight increase in the capital, the CET1 ratio from SEK 9.7 million to SEK 9.8 million. And then this is concerning the EBA consultation, and that was concluded the 24th of September. As Per Anders saying, we are waiting the European Commission decision on this, but we do expect that this will come through, and that's why we put it on this page as a pro forma how it would impact us. So our assessment has not changed since the Q2 announcement, so we expect 260 basis points more or less as the gross benefit of this. And this is, of course, part of the initiative, our initiative to improve the maturity and transparency of the NPL markets. So this has been ongoing for the last 4, 5 years on the European level and that's [ all ]. And I think it's important to say that this would reverse the risk weight impact from the changes that we saw in 2018. And this has a potential capital release and the total benefit might be lower due to other regulatory changes as well, but we do see that the net -- and we expect the net to be positive. Next page, please. So now we're going into the summary, and I will leave over to Per Anders again to conclude before we go into questions.

Thank you, Christian. Very good review of our results. I just want to sum up what we have seen and what we're doing, if we move to the next page. Our key levers are important to attack in order to reach our overarching target, which is the increase our return on equity and generate profitable growth. So what we are doing with our transformation program, we actually have 3 initiatives. One is to be more clear on where to invest and in what asset classes, what countries and how to be more successful in our acquisitions. That's what we call the profitable growth. And that effort, of course, attacks both the volumes, but also the margins, which is crucial for our revenues. Another initiative is debt collection performance and debt collection productivity increase, which is, of course, aiming at improving our collections, but also attacking our costs to collect. And the third initiative, actually led by Christian, is focusing on reducing our nonoperational costs in order to reduce our total cost level over the next year. So our transformation program attacks all the levers that actually provide an impact on the return on equity, which is our overall target. And of course, with a little bit of help from our friends, we may have a positive impact or we expect a positive impact on the equity side, also providing us then with the capital to accelerate growth. So overall, as a summary, what I would like you to take away from this quarter is that we've seen a stabilization of the markets and also of our own operations. We see volumes bottoming out. We have done the review. We know what we need to do, and we need to be more focused in our approach and focus on our core business, NPLs, on unsecured and secured NPLs. And we have launched a transformation program where we have already done and implemented several activities. One is to put our retail banking efforts on hold. We direct our digital or focus our digital efforts more closer to the business. We've also halted our IRB efforts in order -- awaiting the EBA and EU -- European Commission decision. But our transformation program is ongoing. And as I mentioned before, it focuses on reducing the absolute cost level, improve productivity and to focus on profitable growth. So that's the summary of our Q3. And thank you for listening in. And we are happy to answer any questions you may have. Thank you.

[Operator Instructions] And we have our first question from Jacob Hesslevik from SEB.

Yes, I just wanted to have a quick question regarding the CET1 target. In the last report, you said the management target was 9.6%. And in this presentation, you say 9.7%. So just wondering if you could comment on this, and if it's due to the increased portfolio size or why? And also, if I remember correctly, I think you said the release would be roughly SEK 500 million in capital when the change goes through, is this still true? Or has this changed?

Results are 9.8%, and that's in the lower range of our own internal goals, the goals that we set for ourselves. What Christian also showed was the regulatory requirement, which is around 8%. So we are significantly above the regulatory requirements. But then we have -- we both have internal limits, but we also have internal goals. And our internal goals are around -- at the bottom end, it's around 9.7%.

And the slight differences have been driven by the interest rate risk in the banking book. So there is a net change, slight change as you pick up.

And then when it came to your second question, that's correct. It's the capital impact is slightly above. I think if you calculate it at this point, it would be SEK 560 million. And I will say that -- and for us, that's not -- of course, it's a Board decision when it comes to dividend, but for us, it's not a capital release that would go out as a dividend, but it provides us with the purchasing capacity of approximately SEK 6 billion to buy portfolios.

All right. Another question I have is you mentioned U.K. is your second largest market. But in the last quarter, you said it's difficult to acquire portfolios there, and the trend seems to continue as the book continues to decline in the U.K. And now you're also right, something that you have stopped with third-party collection services in U.K. So I just wanted to know do you plan to diversify away from the U.K.? Or does it still remain a focus area for you going forward?

No, I think what we said is that the U.K. is our largest or second largest market, and it still is. But the competition, as you mentioned that we also mentioned last time is that we have not been able to acquire portfolios this year really. And what we are doing is that we're focusing more on what we call the second-tier financial institutions, where the competition is lower. On the broad auctions that have occurred, there's been all the competitors have been there, and some have been, I would say, quite desperate and acquired portfolios of -- at levels which, when we calculate, would give almost no return. So we've avoided going into those auctions. But we see good opportunities actually in the, what you call, more on bilateral efforts with more Tier 2 banks. And on the third-party servicing, that was something that was decided a several -- a long time ago, so we haven't done that for quite some time.

So we have another question from Ermin Keric from Carnegie.

Perhaps, if we start on the potential risk weight change, it sounds like you're a bit more confident now that you'd actually go through. How stringent are you on your internal capital target, given that you expect this reduction going forward, the capital relief coming through? Can you already now start being a bit more active on investments with that in mind, basically?

I think, I mean, of course, the capital situation is something we follow all the time. But I mean, so far, the capital situation has not limited our acquisition opportunities this year. So that has not been an issue at all.

I think it's more driven the overall over the last year level of portfolio acquisition is more driven on what type of portfolios and at what prices we've seen. And then, of course, the market has been very much subdued in 2020 and still the volumes that the industry expects has not come through really. So the capital has not been a restraining factor for us.

And I think, like Christian is saying, that the volumes have been lower than anticipated for the entire market. And there's a lot of competitors out there that have been willing to -- because of they've had sort of a drought in their inflow, they've been willing to pay quite high prices. And we are very selective, and we focus on the portfolios where we know that we can get good returns and avoid buying for the sake of buying.

Got it. Then moving on to your transformation program, could you give us any more color on how long-term this will take to fully implement, if there will be any additional one-off costs, et cetera, associated to it? And also if you could quantify the net effect that you expect on the costs?

First of all, we will start to see -- we will see some impact already in Q1, I expect, or during the spring and fully -- the full impact of the program will be during 2023. And then on the final question you asked, if we have some -- could you repeat that final question?

Yes, one-off and net effect?

Yes, about -- there will -- I would expect -- I've done a lot of these things in other situations. And normally, there are some one-off costs, particularly related to personnel. We don't foresee any one-off costs in this program, and not, of course, in terms of investments. But there is likely to be some one-off costs when it comes to personnel reduction. And then on the net target, I know you always like us to go out with targets, but I don't or we don't want to come out with any sort of targets at this point. We, of course, have very clear targets internally, but I don't want to provide you with any targets before I feel really comfortable, almost 100% sure that we will achieve them.

Got it. So I have to wait. So you would have to wait, yes, you will have to wait. You have to.

So we have another question from Borja Ramirez from Citi.

I have 2 quick questions, if I may. Firstly, related to the EBA consultation, I would like to ask if you could kindly provide more details on what are the next steps that need to happen for this to be approved and also any indications on the potential timing? Yes, please. And then my second question would be regarding the portfolio acquisitions. So you mentioned that you have seen the bottoming out of the acquired portfolio. I would like to ask if you could kindly provide more -- some details on what you see for the full acquisitions going forward? Any indications for the rest of the year and maybe 2022?

Very good. So the EBA consultation in itself, so input to EBA now was concluded the 24th of September. And we see this as a part of a larger initiative. And we don't have any firm feedback on next steps, but we do know that they will have a meeting in December. And we don't expect the final decision to be made at that, but some sort of guidance might come out of it. And then the final decision, we expect during the first half of next year.

One could add that there's been -- the reason for this EBA consultation is that it's been very strong political pressure on changing it back to make the competitive -- more competitive -- level-competitive field, level field. So -- because as you know, these changed risk weights were introduced in late 2018 and the likelihood or the driving -- the driving force to take it back to the 100% risk weighting. When it comes to the portfolio acquisitions, we've seen a slightly -- I would say slight increase in supply, and we see we are quite active. I would say, we are participating and looking at all things that are coming out, but we're also proactively pursuing opportunities with our partners, the banks. We see, at this point, we see, I would say, we have seen quite a bit of activity in Italy. We've seen -- there's some interesting portfolios in Greece and Poland. I would say, Italy, Greece and Poland has been sort of where we've seen the most activities opening up. We've also been just quite successful on some acquisitions in Germany.

[Operator Instructions] So we have no further questions, sorry.

Okay. Well, if there are no further questions, Chris and I, thank you for listening in and also asking -- thanking you for putting the questions. And we will come back with more clarity, and we expect to see you or hear you again in February, when we have the Q4 results. And of course, we are always available for questions in between, to Christian or to myself. And also, as things are opening up, also available for in real-life meetings, if you feel like you need some more clarity and additional information. Thank you.

Thank you very much for joining.