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

Warm welcome, everyone, to Hoist Finance Quarter 1 Report. I will make a short introduction, Christian Wallentin will then go through the report. And after that, we open up for questions. So I propose, the beginning of the year illustrates our determination to reach our financial objectives as soon as we can. And as you've seen the report, including U.K., shows a cash EBITDA increase of 26%, return on equity 16% and CET1 ratio of almost 10%. And the drivers of that result is a combination of robust collections, better cost control and also positive contributions from hedging. So the value gain on financial instruments is SEK 98 million, as you have seen. So that contributes a lot to the outcome, the total outcome of the report. And let me describe a little bit what I mean with the illustration of that we're actively executing on our transformation program or rejuvenation program, as we call it, to become a leading NPL player in Europe. So we have announced an agreement to divest the U.K. unsecured business. That represents almost 20% of our total loan portfolio. It releases an investment capacity of around SEK 5 billion if we assume risk weights at 150%. There is a likely change of risk weights back to 100% for unsecured assets in quarter 3. That would mean that the U.K. transaction releases an investment capacity of SEK 8 billion. And both SEK 5 billion and SEK 8 billion is a substantial part of our total group loan portfolio of around SEK 22 billion. So as you can understand, this is a complete refresh of the total Group portfolio that we now are able to do during a period of time. The U.K. business has been a low return business for us during many years. The loss we did 2021 was SEK 169 million. So we've concluded that to run a collection business for unsecured assets in U.K. with the fixed and semi-fixed costs that you need to have in that market requires scale and that we don't have that scale. And therefore, the unit is better managed by someone that has that scale. I think the unit that fits very well into Lowell's strategy and Lowell's position on the U.K. market. So we think it's a very meaningful transaction for both parties. If you then look at the remaining business, so the business excluding U.K., the comparable profit before tax became SEK 80 million compared to SEK 16 million quarter one 2021. So that's a 5x increase due to better portfolio quality, a bit larger portfolio and also improved collection performance. So we are pleased with that improvement and it illustrates that we are on the right way to achieve our objectives. We have a substantial journey to make going forward to reach the objectives, but we are clearly taking steps in the right direction. A few comments on the market itself. The volume of NPL portfolios has improved in 2022 so far compared to a year ago. So the volume situation is good. However, the competition is very aggressive and we -- our objective is to be disciplined when it comes to pricing. So we will be very selective and we will not be carried away to use the investment capacity we have. We will only buy what is attractive to us, and that means high enough IRRs to a lower risk level. But overall, the market is stronger than a year ago. The geopolitical situation, the war in Ukraine has not had an impact on us so far other than that we are helping out in Poland with practical things. But of course, we're following the situation in detail. And the macro situation also with increased inflation, increased interest rates, et cetera, implies changes to the business situation. But so far, we haven't seen any impact -- any material impact from that so far. With that introduction, I'll leave over to Christian to go through the report. But before I do that, I'd like to summarize then the rejuvenation program that we are doing. And it's -- well first of all, I should say, we call it rejuvenation. Can we go to the next page, please. Yes, we call it rejuvenation because we see this as a major change or a major improvement program. After rejuvenation comes continuous improvements every year to become a little bit better every quarter, every year, of course. But what we are executing now since the end of last year is a rejuvenation program, and the goal is to improve the complete business. So the program is broken down into a couple of program areas, which you see on the page here. It's funding. That means to optimize our funding strategy and to ensure that we can invest in attractive portfolios. That box includes, for example, the securitization of unsecured assets. The second box, investments, means a couple of things. When it comes to sourcing of portfolios, we work more proactively now to be a really good problem-solving partner to the banks in Europe. So in addition to participating in portfolio auctions, we seek bilateral situations where we can add more value than just to buy a portfolio. So that has resulted in a couple of bilateral acquisitions, which generally is beneficial for us, but also the selling bank in the longer term. We are also improving our valuation models. So we have a couple of improvement initiatives, both for unsecured assets and secured assets to use data, use data points in an even better way to be more precise when we evaluate portfolios, and that includes, for example, to break portfolios down into many sub-segments and follow the sub-segments in a detailed way, so increased granularity. Then we have the third box, collection performance, which is also what we call or refer to as operations. And that is a number of initiatives to improve our collection productivity. And the final box is about costs. And as everyone can see in the past, we have had 2 costs -- 2 high costs in relation to the revenue level, and we are addressing that. And you can also see that in this report that the improved cost control has contributed to the profit after-tax outcome. The work continues in these 4 boxes. And we try to improve a bit in each one of these 4 boxes every quarter until we reach the position we'd like to have, which is a leading NPL organization in Europe and where we deliver on our financial goals, which, for example, includes an earnings per share growth of 15% per year and the return on equity of 15%. So with that, I'll leave over to you Christian.

Thank you, Lars. If we can go to the next page, please. I will cover a little more in detail the divestment of the U.K. unsecured business and also our capital outlook and then the Q1 financials and some details around operational improvements that Lars was touching on as well. So if we look on this page, we have 2 pie charts, and this is the book value per market. And on the left-hand side, we have the whole book, including the U.K. unsecured business. And on the right-hand side, we have it excluding now in Q1. And as you see, it's a SEK 4 billion difference, and that's approximately 20% of our total portfolio. And this is what we have divested. So we kept a slight part of the secured and the performing, albeit, we kept that in the U.K. as well. And of course, the reason, as Lars has pointed out, is that we want to take a major step in our rejuvenation journey, which we believe this is. And it gives us an opportunity to clean out an area where we've seen low returns and also historic losses which we think is a really good step to both derisk the book and then build capital optionality in terms of opening up for future growth. Then how we've done this to -- we managed to sell the business in an accretive way. So it's an earnings -- positive earnings impact now in '22. I will come back to the capital impact, which is highly positive as well. And then also on ROE, given all the plans that we have in place, that's accretive with 1 percentage point in '22 everything else being equal. And you can see also in the split of secured and unsecured, we're taking a step towards a higher share of secured where we believe we have a competitive edge. We want to grow that as a percentage of the overall book. Equally important, I think it's for us to redeploy the capital in higher return deals going forward. So that's a real focus for us. And we will -- in the U.K., I think it's also important to note that we're not exiting the U.K. We will cover the U.K. in a different way. So we will use it with an outsourced model. And the focus will be, as Lars pointed out before, more towards the bilateral deals. So less no tenders, but more Tier 2 banks where we can make a real difference, and then as a result, be rewarded with higher returns. And also, we're looking into secured investments in the U.K. However, we don't see that as a large part of this. If you go to the next page, please. So this lays out the capital outlook for us. We have 2 major events coming up that we expect. So the U.K. divestment we have announced, and we have an agreement to sell the U.K. unsecured business, and that will generate when it closes, 280 basis points. And then we have the EBA exchanged risk weights that we expect will come during the second half of the year, and that would also generate a similar amount of core Tier 1 of 260 basis points. And this has of course materially increased our investment capacity. So now we're in a position to really grow with attractive risk-adjusted returns. And you can note that this year in '22 with the deals that we have closed in Q1, so the SEK 1.3 billion is -- they're accretive IRRs to date. So it's a better -- slightly better than the average IRRs we have in the book, which is of course, positive. And that, in combination with a healthy pipeline that we see going forward, which consists of a higher share of bilateral deals and also a higher share of larger transactions like the Greek transaction we announced by the end of last year, that helps us to redeploy the capital that we now are in the process of freeing up when the transaction with Lowell closes. And equally important I think is to say that we are very much committed to the return requirements we have. So on the Group, its ROE of 15%, which is our guiding star. We will continue to be very disciplined around this. So that I think is a really strong direction for us that we absolutely want to invest with the right attractive risk-adjusted returns. So that's what this U.K. divestment enable us to do. And overall, the portfolio is a part of the business that are not meeting these required returns. We will review and try to resolve. And that will include, as we did with the U.K. now, structural measures to deal with this, which I think is an important part of that commitment to get to 15% ROE. If we go to the next page, please. This is the portfolio book value development excluding the U.K. unsecured book. And since we haven't been investing in the U.K. the last period, it's been -- the growth in the rest of the book has not been seen. So this is what you see here. Without the U.K. book, we've grown the book 7% if you compare with the last Q1 last year, and this is of course positive. And it's also -- we can also note that the U.K. returns were among the lowest in the Group. So we are now in the process of selling these returns, so to speak, and then reinvesting in other parts of our network with higher IRRs. So the average IRR goes up by selling the U.K. book. And in Q1 2022, we've -- if you compare that with the Q1 '21, the acquisitions -- the closed acquisitions is up 78% to SEK 1.3 billion. And this is also, as I mentioned before, with higher IRRs than the average and also if you compare it with the U.K. book. And if you put a historical perspective on the Q1 closed volumes, then it stands out positively and it's seasonally a slow quarter for the market and also for us. That said, this quarter in '22 is the highest we've had if you look backwards. If we go to the next page, please. So we wanted to give you some insight and comfort that our underlying business is improving, and this is adjusted numbers that Lars was also referring to. We compare quarter one 2022 with quarter one 2021. So we have the reported profit and loss on the left-hand side. So it's for Q1 '21. It was minus 108 million, and this is excluding the U.K. unsecured business where we had the largest write-downs last year. And if you then adjust for these forward-looking non-cash impairments to take that out of the equation, and that's what we do in the next column. And then for the -- we also do the same for the hedging in order to get to the underlying collection business as we can compare those profit and loss for the relevant periods. And here you see the numbers that Lars was referring to. So the SEK 80 million for Q1 '22 and the SEK 16 million for Q1 '21, which is a 5x multiple of -- if you compare this year with the last year. And of course, this is an indication that we've been growing the book, as you saw on the previous page. We also have derisked the book, which makes it easier to collect better on the book, meaning collection performance is improving. And then overall cost side as well has improved, and that is pointing in the right direction. So we don't see that -- this is -- clearly is not the end game, but we see this as a step forward on our journey to get to the right profitability level. And another equally -- operational important perspective is, this is the risk profile of the book. We can clearly say that our credit portfolio's current risk profile is fundamentally better than a year ago. So this means in practice that we have a much lower risk for impairments. We also have a higher share of positive collection difference going forward. If we go to the next page, please. So this is the financial summary, and most of these numbers exclude the U.K. unsecured. We've had the net profit for the discontinued operations on the -- at the bottom. So when I talk about the comparisons, most of those exclude that what we have agreed to divest now. So if we start from the top, the net interest income has grown by 8%, and this is a reflection of the Group is growing and also that the IRRs are slightly better than what we've had before. And the dynamic is of course stronger now, excluding the U.K. unsecured business. We've also seen during the quarter that we have robust collections across all major markets with total collections growing. We can see that in the positive collection differences, which is in impairment gains and losses. We also see it in the cash EBITDA growing 26% versus previous year. And then we have this SEK 98 million during the quarter, which is a positive contribution from hedging. And that's mainly interest rates backing up during the quarter as part of the macro environment. The overall cost side, we've worked -- we are working and we'll continue to work very hard on cost control and cost reduction. And we can see that the overall costs are flat, while the net interest income has grown, which is a good leverage, of course, DFPs, if you compare with a year ago, are down 7%. This has been slightly eaten up by negative FX impact and also wage inflation, and that's why we call it cost control at this point. We hope to show cost reduction of course in the relevant markets later on. We've also had a pickup in legal collection costs now when the legal systems are continuing to work on the backlog and opening up. And all of these measures have resulted in profits combined with capital efficiency measures that increased the core Tier 1 to 9.9%. And then we have the ROE of 16% for the quarter. If we go to the next page, please. Here is the balance sheet. There's no major differences here. It's stable as you would expect. We've broken out the assets for disposals, but that's basically the key message of this one that we're selling the U.K. unsecured. If you go to the next page, you see that the core Tier 1 is at 9.9%, which is in the lower end of our target range. And looking outwards, as we -- as I discussed before, we will see a material buildup that's what we expect from these levels. And that's due to the U.K. divestment and the EBA risk weights, of course. And on the right-hand side, you see the liquidity reserve, which we are working continuously to optimize on an ongoing basis. Next page, please. This is the funding. There's no major changes in our funding profile during the quarter, which is a good thing, because as you're aware, the interest rates have backed up. We can note that deposits in this sort of environment is an increasingly attractive funding source, and that's of course our majority of the funding. So when interest rates are coming up then in the deposit interest that we have to pay as a credit institution is not going up in the same speed of course, but the banking system is holding that back. And with that, I will leave back to Lars to summarize the quarter and what he want to say.

Thank you, Christian. So just to repeat what have been said. The ambition for us is to become a leading institution for management of non-performing loans in Europe. We have a rejuvenation program covering funding, investments, collection performance and costs. So we work on all those dimensions to continuously improve and rejuvenate the firm. The divestment of the U.K. where we are now able to replace lower return assets with higher return assets is a great opportunity for us to refresh the total Group book. The remaining business has good progress, both in terms of the portfolio growth and the collection performance. A lot remains to be done though, since we would like our quarter one report to look like this one, but where the SEK 98 million from financial transactions are coming from the business -- the core business in the future, which would then be more sustainable, of course. And finally, on the market. We see a better market volume-wise, but very intensive price competition. So it may take some time until we deploy the capital that we now have or will have available after the U.K. transaction closing in quarter 3. That's the summary. And I think now we'll open up for questions.

[Operator Instructions] The first question is from Mr. Jacob Hesslevik from SEB.

So my first question is, do I understand you correctly that if risk weights are changed to 100% then you get SEK 8 billion from the U.K. divestment on top of the SEK 3 billion to SEK 3.5 billion you get from the increase in CET1 ratio?

Yes, that's correct. And these investments room, so to speak, is of course, depending on which assets we divest -- we invest in. So we would only invest in secured, that will be a different number than if we only invest in unsecured. So that SEK 5 billion to SEK 8 billion that we're referring to in the report is to -- applied to the U.K. disposal and the capital release from that one. And then the 260 is another, let's say, in that range as well in terms of SEK 5 billion, something like that.

And when -- what do you see in the market then going forward? I mean, the last management believed that we will get a tsunami of new portfolios in 2022. And you say that there's better supply, but very aggressive competition. Is it similar in all of Europe or is it -- or where is the competition coming from? Is it on secured or is it unsecured and are key buyers back in the game or is it specialized debt collectors or can you please describe how you view the environment?

So the improved supply side is, I wouldn't call it a tsunami, we can still swim. So it's not the tsunami, but it's better than last year volume-wise. And that goes for most of the countries. I can say, all the countries we're in, have an improved supply situation. But yes, competition right now is very intensive. And I believe that is driven out of the fact that a number of organizations have under-invested for a while in the last 2, 3 years and there is a need to invest. And that -- in that -- in those circumstances, it's easy to be carried away and compromise on your IRR walkaway levels to get volume. So I think the market is characterized by that situation. That will not go on forever because we -- everyone has a certain cost of capital. So in the longer term, everyone needs to live with that. And to make good returns then you have to buy portfolios which you can accommodate with the cost of capital you have. And no one in the industry has lower cost of capital than what we do. So longer term, that should work well for us. And so -- and the competition comes from -- is primarily the industrial factors in the industry that are very active. So in other words, companies that have collection units themselves and they, to some extent, I guess need to feed the machine. But I see that as not sustainable level and that will improve and the volume will very likely improve further in the next couple of years. The NPL volume is extreme in Europe. The pandemic situation has also added to that. So I mean most analysts and bankers believe that the NPL market will volume-wise be very attractive during the next 5 years. The timing of that, how much comes out, what year, is difficult to say. So -- and I don't think '22 will be a tsunami year. But if you rather take a longer term, a 5 year period, I think we'll see that Hoist Finance will have a very good volume development. And we think the goals we have are very realistic to reach. And that means, in average of 15% earnings per share growth. And that means then you double the business in 5 years' time, and we think we'll be able to do that given the supply side of the business.

That's very clear. And if I look in your annual report on Page 194, do I understand you correctly that the 100 basis points increase in interest rate will yield minus SEK 13 million in NII, but you will get the SEK 127 million in derivatives instantaneously. Or have I misunderstood this? And are they all linked to SEK or do we need to see a shift in interest rate in another currency, too, for example, euro or something?

I think it's a complex -- I mean, hedging is a complex topic. So I would prefer to be more specific, so we can take it offline if you prefer that. So we can give you some more details on how that will develop.

Yes, please. That's good. And then just a last question then. If you have -- you have a Tier 2 bond reaching first call in a few weeks of time. And I mean, given your increased CET1 ratio following the U.K. divestment, are you willing to wait with refinancing or what's your thought there?

We are looking at the market overall and then of course overall funding needs. So we will adjust to those. And given the ambition to redeploy the capital that will be released from the U.K. disposal, then we don't see any -- we want to redeploy that at attractive risk-based returns as soon as possible, I would say. And then we will be very disciplined. So the -- we're adjusting with deposits for the overall funding. And then as you noted also, I'm sure that the senior secured that we have outstanding is reaching its limit. So that will drive some changes as well.

Your next question is from Mr. Ermin Keric from Carnegie.

If we start on the investment levels, obviously, 1,300 is quite high for Q1. But if we take into account that, about SEK 1.1 billion of that is the Greek portfolio you already announced in Q4. It seems like it's been a very quiet quarter. Is that purely due to the market or has it anything to do with the kind of internal review that you talked about on your investment process?

Well, primarily, that has to do with the market that we have stayed very disciplined when it comes to price. And so we're not necessarily looking at having a great P&L in 2023, but having a great long-term business and to double the business in 5 years' time. So we don't want to set ourselves in a position where we are stressed to invest if we don't think it's attractive. So that's the key driver of those SEK 300 million in addition to the Greek billion. And overall, it's as you say, it's a record for us for being a quarter one investment level and the market is also a bit volatile up and down. So quarter one is not the best quarter for acquisitions. So there are many more months left in during this year. And we think we -- the pipeline looks good. So we have good opportunities to have a solid investment year this year. So we're not stressed by the investment level of SEK 1.3 billion in quarter one.

That's very clear. And then on the impairment gains and losses, perhaps 2 questions on it. Do you now feel confident with your current portfolio valuations or do you think the derisking of the portfolio is still ongoing? And at the same time, I mean, excluding for the revaluations, you have quite a nice over-collection contribution. Do you feel the current collection performance is kind of sustainable given the macro output we currently have?

I think the -- as I mentioned, the derisking of the book, we need to do this on an ongoing basis. And this is -- we have a really solid process for this monthly process that is signed up by the auditors and we don't have really a choice in this matter. We need to deal with it as the issues pop up. And the major derisking or I would say we're done with the derisking. We are very much back on a normal level now. So that implies that the risk is much -- we have a much better risk profile now than a year ago. And also, as I mentioned, that means that the risk for impairment is much lower now than a year ago and also the opportunity for collection performance. So positive collection performance is much better. And then that -- if you marry that with where we've had a lot of impairments and also less attractive performance, meaning the U.K. unsecured business, which we're now divesting, that sets us up for a easier future than in the last year, I can say that of course.

And just generally, I mean, on the collection outlook given the macro environment you're currently in, it seems like it hasn't really impacted Q1. Do you expect to see any material impact from inflation rates and so on?

Well, I guess, a variable that we are dependent on is the employment level. So if increased inflation would lead to a recession and increased unemployment, that could impact our collection levels in a negative way. But so far, we haven't seen any effect of that.

Next question is from Mr. Joakim Svingen from Arctic.

I think a couple of them has already been answered, but I have 2 more. The one is relating to the transaction in the U.K. Given Lowell's position, is there any risk of approval from the competition authority? And the second question is just regarding deposits whether the moves by Riksbanken today, means you'll have to increase your SEK deposits?

I think we don't see any -- the FCA is the approving body. So we don't see any competition risk in this. The NPL market is very large in the U.K. And we are -- I mean, if you compare with the stocks what we're selling to Lowell is not that large. So we don't see any major risk in this. And with regards to the interest rate hike, I think this was expected and let's see how things play out. But normally in the banking sector with the deposits, the banks as a market are very hesitant to give interest rate hikes back to the public. So I don't expect the interest rate we need to pay for deposits to go up at the same rate as the underlying rates.

I think both SEB and Handelsbanken got that question in connection with their reports. Will the savings account interest rates go up now? And they said that no, not for the moment at least. So they kind of -- that will support to what Christian has said that there doesn't seem to be a clear connection. And if our interest rates are higher than what the large banks' interest rates are on savings accounts and we have the money flow go our way. So I guess, it depends on what the large banks do.

Next question is from Mr. Rickard Hellman from Nordea.

First question is on the backdrop of Moody's negative outlook yesterday. And I know that earlier management has been quite clear over the importance of having an investment-grade-rated rating on the senior unsecured level. Do you share that view? And I mean, how important is it for you?

Yes, we do share that it's important. We're the only investment-grade-rated firm in the industry. And I think the -- it's important to note that Moody's affirmed our rating and then had a negative outlook, which doesn't really mean anything in economic terms for us.

No, no, not at this moment, of course, not.

I mean just a quick comment there. It's -- if you read the press release, you can see that a lot of the things that we are doing and executing currently are exactly the things that they want us to see. And then we're quite confident about that we are on the right track to achieve those, of course.

Yes, yes, I agree on that. Secondly, about a follow-up on the upcoming call on the subordinated bond. Is there any other things that you consider about that regarding the call? I mean, is it important to have these kind of instruments in the market, not only looking to risk weights?

So the question if it's important for us to have a Tier 2?

Yes.

The short answer is, yes, it is important for the capital structure.

Finally, also, just on the back of your rejuvenation. I just wanted to hear it from you at least. I mean, does the overview of the funding also include potential change of not having deposits anymore?

No, deposits is a core element of our funding strategy.

We have no other questions. [Operator Instructions] It seems that we have no other questions.

Well, then I guess we come to an end. So thank you very much for your interest, and wish you a good day. Thank you very much. Bye-bye.

Thank you.