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

Good day, and welcome to the Hoist Finance Third Quarter 2022 Earnings Call [Operator Instructions] Please note this event is being recorded. Today on the call from the company we have CEO, Lars Wollung; and CFO, Christian Wallentin. I would now like to turn the conference over to Lars Wollung, CEO. Please go ahead.

Thank you, and warm welcome, everyone, to Hoist Finance quarter 3 report. So I will make a short summary and then I will -- then Christian Wallentin, our CFO, will go through the numbers and the development in the quarter. And after that, we open up for questions. So we can go to Page 3 to start with. And the total group loan portfolio is now at SEK 19.4 billion. That is an increase of 13% since quarter 3 a year ago. These numbers exclude the divested U.K. portfolio, where the transaction was closed yesterday. So except that sold U.K. back book, the portfolio on the remaining business has increased with 13% during the year -- or during the last year. Return on equity, 12%. So that's a bit more than a doubling of the ROE level we had a year ago. Earnings, we report profit before tax of SEK 116 million for the continuing business. That should be compared with SEK 23 million a year ago, quarter 3 last year. If we adjust for gains and losses on financial instruments like hedging contracts, et cetera, the profit before tax became SEK 140 million this quarter to be compared with minus SEK 15 million a year ago. So the way I look at this company now is that it's SEK 140 million profit before tax company per quarter. And we have a double-digit portfolio growth. The released capital from closing of the U.K. divestment means a substantial investment capacity, extraordinary investment capacity going forward. So it means we have the capital, both to be at a healthy CET1 level, but also to the capital needed for solid growth in the coming years. So that's the short financial summary of the quarter. So we can go to Page 4. So the fundamental improvements of earnings this quarter compared to a year ago is driven by a much better credit portfolio than we had a year ago. We have -- every quarter since then, we have derisk the portfolio. We have written down assets. We have also sold assets and we follow the portfolios better and we changed the collection strategies where needed to improve collections. So that's -- it's a combination of a better quality of the credit book and the better management of the portfolios. The acquisition level in the quarter was low, partly driven by the quarter 3 is a quiet quarter typically. And half of all NPLs are sold in quarter 4. So that's one reason, the usual seasonality effect. But however, we invested less this quarter than we did at quarter 3 a year ago. And that is due to our price discipline that we have a long-term focus. We have a strict return of equity and IRR objective that we follow. We think the current macro environment, et cetera, should be reflected in portfolio prices. We're convinced that, that will be the case longer term. But this quarter, we've not seen the current macro kicking in into the market prices of the non-performing loan portfolios. And that's the reason why we have not invested so much in this quarter. We buy -- for us, fairly large portfolios. So every quarter will be lumpy like that, that some quarters will be -- we invest more than expected, some quarters less. So first half year, we invested a lot more than planned and then more than ever for being a first half year, this quarter was a quiet quarter. And you can expect that this variability, you will also see the coming years. The operational program is going very well. We think about our business in 2 buckets, basically: asset management and loan management. On the asset management side, we have become more proactive in doing more complex bilateral transactions with European banks. We have also improved our valuation models. On the loan management side, we're working intensively to improve both effectiveness and efficiency. So just to take a couple of examples, we look at how we do scheduling of case managers. We look at scoring models to determine what collection activity to do next on a loan level and et cetera. So we are going through turning around every stone to improve the business. And yes, that goes really well. In quarter 3, we haven't seen any material impact on increased inflation or increased interest rates. And we see -- we have indications in some markets now in October that there may be an impact this winter because of lower affordability for consumers given increased energy prices and food prices, et cetera. So we follow that very closely. Yes, as you know, the reduction in risk weights took place in the beginning of this quarter. The SFSA has started the process to evaluate the Pillar 2 guidance. We have no information yet. The process has started, but no indication or no outcome so far. And so with that summary on key events and what we've been working with this quarter, I'll leave it to you, Christian, to go through the numbers.

Thank you, Lars. Can we go to Page 5, please. So the divestment of our U.K. unsecured operations in back book is a highly positive event for us. Even if we close it after Q3, we want to spend some time on it here. So we want to revisit the transaction rationale, why we're doing it and then also the impact financially of this. So the first one was collection derisking. So if you look at the U.K. unsecured book, we have had some underperformance historically. And we also had -- of the write-downs we did in 2021 and 2020. A material part of these were in the U.K. And of course, past performance is by no means a perfect indicator of future performance, but we did see some risk in this area. So that was a major part of the rationale is to pursue this divestment. And then the second one, capital management. We wanted to strengthen our capital base overall. We knew that the EBA risk weights were coming. We knew that we will have a Pillar 2 guidance process with the Swedish FSA. However, we did not know the timing of this. So we wanted to strengthen the capital base in expectation for this, which is what we've done. Also importantly, on the capital management side, we wanted to build purchasing power for what we will see and what we see as a supporting market over the next few years. We will -- we are convinced to see good opportunities to deploy this capital over the next 2 years or so. And then the next one is reinvestment with higher IRRs. So a year ago or so when we started to pursue this divestment, we were worried about us and the overall economy going into a new paradigm, meaning that higher inflation and higher interest rates would come. And this has been accelerated by the war in Ukraine and all the macro developments during 2022. But the matter of fact is that we were worried already then, and it's been worse. So what we've done is to sell our lowest IRR portfolios, and now we can reinvest those in this new paradigm as I think about it with expected higher levels. And we also see already that the investments we've done in 2022 are at a much higher level than what we sold in the U.K. It's also part of a structural rejuvenation of the optimizing of the indirect cost base and direct cost base. So we didn't see that we had the -- had enough predictive volumes, meaning enough portfolios coming to market that we could count on being able to buy. So we didn't see that an in-house platform were supported by that at scale that were supported in the market from our point of view. And this means that we've sold the operations, of course, and this is in meaning for the group that we have one platform cost less to carry as a group. And then the last point, transform U.K. operating model. We like the U.K. market overall, but we wanted to readapt the operating model to be an outsourced model, which we think is the right model for us in the U.K. And then the financial impact, they are very supportive for us. So there's a positive contribution on all key metrics from closing. So we sold it at more or less 110% of the book value of the portfolios at signing, and we have a SEK 200 million earnings after tax impact, and then that will lead to 260 basis points Common Tier 1 impact. What we will face now when we're going forward is a slightly higher capital levels in the time coming here now. So until we have reinvested this, we will see the onetime benefits contributing to all our financial indications for the 2022. And then, of course, we need to reinvest the capital that we have released from the U.K. Next slide, please. Page 6. We are transforming the business in quite a messy and volatile macro environment. So this is an attempt to draw out the underlying operational development. If you can look at the maroon bars on the page, so it starts with minus 15%, leading to SEK 140 million. So these are normalized numbers. We start with profit before tax, which is excluding the U.K. profits. And then we add back the net results from financial transactions or deduce given if it's a positive or negative number in order to take that away from the core normalized earnings. Then we have joint ventures, which are not explicitly part of the balance sheet. So we exclude those as well, even though they are contributing on an ongoing basis. And then the internal interest expense is the expense for the funding for the U.K., which was 42 in this quarter. And then we've moved group staff from the U.K. legal entity that we sold to the branch that we now have in the U.K., and that's an adjustment as well. And that we did during the Q3, which is why it's 0 in this case. And you can see that we have moved a year ago, Q3 in 2021 from minus SEK 15 million underlying EBITDA to SEK 140 million in this quarter, which is a really strong testament to that the operational development and improvement program that we're doing is working. Next page, please. So Page 7. So this is a one key focus area in the regulation program is to take down indirect cost levels. And we have been receiving quite a few questions on how things are going. So we wanted to give you a little bit of a snapshot of what we have achieved until now. So the indirect cost are the functions, including IT and the investment team. And while we've highlighted Q2 2021 is that we use that quarter as a baseline for this development. And at that point in time, a little bit less than 50% or around 50% of total cost proceeding in this indirect cost bucket with the direct operational costs being the rest. And as you can see, we've taken down the indirect cost 18% since Q2 in '21. And now we have -- so this is despite FX headwind and then also implementation costs on the way. So there's one-off items in these numbers as well, which we don't see continuing all of them. But as you know, one-offs are very difficult to see if they are true one-offs or that was replaced with others. So we have not taken that into account in this minus 18% decrease. The operational rejuvenation is counting roughly half of this improvement and the structural rejuvenation, meaning the U.K. divestment is the remainder. So this development is encouraging, and we are continuing to work very hard to take down our cost levels going forward as well. There's an ongoing plan and ongoing execution that's in process. And now with inflation coming much higher than what we expected a year or so ago. That, of course, presents a real challenge. So that's an ongoing task to see how we can mitigate those that negative impact on -- from wage inflation and overall inflation. And as a reminder, the other areas of the rejuvenation program or operational rejuvenation, where we're working both with efficiency and effectiveness. So doing the right things in the right way. And the key measures of this is cost to collect overall, and that's developing well and then, of course, the collection performance. And we've seen some really nice progress during the year as well. Then in the investment, as Lars touched on, we have changed focus on way of working. We are much more structured and disciplined and that's yielding results. So we see much more bilateral transactions, both what we've closed year-to-date and also in the pipeline. And that has yielded a growth of 13% in the continuing business and also higher returns in those portfolios than we saw a year ago. And then the last part of the rejuvenation program is a very active asset and liabilities management to optimize our funding structure. So to the next page, please, Page 8. As you see on this page, the portfolio acquisition has been quiet in this quarter, and Lars touched on it. It's seasonal and it's also pricing discipline. So we were close of buying a few larger portfolios, but we missed out because of not having higher return requirement than what the market was dictating at that point. However, we see improved volumes overall. So if you look back a year and half, it's much better volume overall in the market, and returns are also increasing. However, there's still intensive competition. Looking forward, we see a healthy pipeline, and our focus is on 3 areas. So the ongoing tenders that we've always been very active in, we continue to pursue those with the right returns and right risk. And then the new thing for the last year is that we are focusing much more on bilateral deals and larger deals, including more advanced deal structuring and problem solving, which are leading to higher value creation for both our partners as banks and for ourselves because it's much less prices as a result. Page 9, please. If you look at the overall book a year ago, it was SEK 17.2 billion. And today, it's SEK 19.4 billion. So it's a growth in book value of 13% compared with a year ago. And this is also taken into account that we are on an ongoing basis, derisking all the issues that come up and all the risks flagged in our internal revaluation process. So we've been very proactive on managing the risk we see in the horizon, and we are dealing very actively with all the issues that we see currently as well. And just to give a sense of the risk profile in the portfolio currently, we are very -- we have a higher share of portfolios with positive deviations and negative deviations being flagged in our own revaluation process. So we call this having a positive tilt in the portfolio, meaning that we have much more positive on performance than negative underperformance in portfolios. Next page, please, Page 10. So this is the mix of secured and not secured on the left. So we have 77% unsecured portfolios currently and 23% secured portfolios. We do want to grow the secured part where we see that we have a higher competitive advantage given our funding structure with majority being deposits. And we see that after the divestment of the U.K. unsecured operations, Italy remains the largest market, and Poland has now set up to become the second largest market. You see that the remaining business in the U.K. is 7%, which are both performing and then the new portfolios we invested into in Q2. Overall, we've seen solid performance across most markets in Q3. As Lars mentioned, after Q3 closing, we've seen some indications of financial pressure for our consumers. And we're, of course, watching this very carefully, and we'll see how that develops over the next quarters. Page 11, please. So the key takeaways on this is that during the quarter, we saw the reduced unsecured NPL risk weights being affected from level of July, which added 265 basis points to our core Tier 1 capital. And then now at the quarter end, we saw the U.K. divestment close, which is adding another 260 basis points over Q4 in both as a capital gain and then the capital release from the sold portfolios. We're starting with Pillar 2 guidance process with the Swedish FSA. So we'll see and we work when we have the outcome of that process as well. Page 12, please. If you look at the financial summary, we have growth in interest income due mainly to the higher book value versus prior year. And we also see that we have lower interest expense driven by active asset and liabilities management. This is a very complex line, particularly when it moved -- when the macro environment is moving. However, if you look at the top down, it's very simple. It is the size of the book that drives this line together with the interest rate level. So the average funding rate that we have on our liability side. However, when things are moving, then of course, we are managing both the term structure of the funding. And also in this quarter, we've been managing down liquidity in anticipation to for the U.K. sale to close. If we look at collection performance, it's, as I mentioned, good across most markets. We have SEK 42 million of positive impairment gains and losses. And then the net results from financial transactions is slightly negative due to FX. Also very, very much worth mentioning is that we have introduced hedge accounting of interest rate swaps during Q3. In previous years, we didn't see this volatility in this line. So we thought it would be very sensible to introduce this hedge accounting, which takes away the volatility from the interest rate swaps. And of course, as you're probably most probably aware, the interest rate books, we have as part of our IRB approach, a portion of the NPL assets we have hedged the interest rate risk with paying fixed interest rates and then receiving a floating rate. So that's what's been paying off in the first half year, and then that's not what we're now introducing hedged accounting. So we don't expect to see at all the same volatility on the net result from financial transactions going forward. Overall, we have a return on equity of 12% in the quarter, which is leading to a year-to-date 15% return on equity. Go to the next page, please. So 3 points on this one. We see that we have managed down liquidity, so the cash and interest-bearing securities ahead of the U.K. secured divestment. We also see that the underlying portfolios are growing and then the retained earnings has also growing in a healthy way during the year. Next page, please. So we have just finalized our internal capital adequacy assessment process, and we are updating the core Tier 1 target range to be under normal circumstances, 230 to 330 basis points above the core Tier 1 requirement specified by the Swedish FSA. And this is a change from the -- what you see on the page, which is 175 basis points to 375 basis points above the regulatory requirements. So this is a result of our ICAAP that we just concluded internally. We will be clearly above these levels until we know what the Pillar 2 guidance will be and have reinvested the capital from the U.K., the investment and the reversal from the risk weights. So you can expect us to be above this target range for some time, well, in the medium term until we have some clarity on the P2G and then also time to reinvest. Page 15, please. So our overall, the average funding cost is trending slowly up. We have introduced a Tier 2 capital this year at a higher level, although quite attractive, given how the markets have developed after issuing that Tier 2. We also see that the deposit level is trending up in the market. We have managed down our deposit base in anticipation for the U.K. closing. So we haven't seen this fully, but it's slowly trending up for us as well. That said, the deposit pricing is, of course, much more sticky than the senior unsecured used more broadly in the industry. So we do expect that our funding advantage as we think about it from having a deposit base will relatively grow over the next year. And back to you, Lars, Page 16.

Yes. So in summary then, interest income increased 23%. We show the profit before tax of SEK 116 million, but the underlying adjusting for hedging contracts and all those sorts of things. Profit before tax, it became SEK 140 million, which is substantially better than a year ago. And as Christian said, we have a solid capital level now, which means we can have a good CET1 ratio longer term, but also invest material amount. I think the release investment capacity is something around 30% of our total credit book. So it's a substantial growth opportunity we have. But we will stay disciplined and search for the attractive credit portfolios with an appropriate return characteristics. But we have good hopes to be able to deploy the capital we want to deploy within the next number of quarters. And regarding this winter, we see some indications of financial pressures not in quarter 3, but now in October, we see some pressures in the market. So we have to be open for a scenario where European consumers will have a tough winter. So we will try to do the best we can to mitigate that. If you see it in a bit longer term, the outlook is very good. As we see it, the current non-performing loan level in Europe is again very high. It is growing. And also recession times means more NPL volume. So it looks like the market supply side will be attractive in the coming 5 years for us. We see when it comes to cost of capital, that cost of debt to be specific, we see that we have, by far, lowest cost of debt of all players in the NPL industry in Europe. And because of the way we -- the funding structure we have, also taken into account securitization or other solutions for the backstop issue. We have, by far, the lowest cost of debt. And if you look at the refinancing rates for the industry, it's on a much, much higher level than historically. And so it looks like we have 2x or 3x competitive advantage when it comes to cost of debt, which should mean that we have a sustainable competitive advantage in Europe for the asset classes where we have the objective of becoming a leading asset manager, which then is consumer secured and consumer unsecured asset classes. So if you take a longer horizon, it looks very good both in terms of external market situation then, but also our internal rejuvenation program that makes good progress every quarter. And so it may be a tough winter, let's see. But longer term, it looks good, I guess, is the summary. With that, I think we open up for questions.

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

So my first question is on NII. I heard just that the high deposit rate you offer would lead to higher average cost of funding, which we also can see on Slide 15, would lead to higher interest expenses, which in turn would come first and that the interest income would lag. But I seem to be wrong here. So maybe you can help explain how the mechanics work, if we start there?

Yes. I think it's overall, it's -- of course, you're right. So in a market where interest rate goes up and we are growing, then the interest expense will grow. So this quarter is -- or this year, I'd say it's a little bit special in the sense that things are moving quite rapidly in terms of interest rates, of course, and then also expecting to close the U.K. divestments. So we've been managing down liquidity in anticipation of this. We also have because of the interest rate environment change the term structure of some of the deposit platforms we have. So we have more overnight in anticipation of this as well. So it's a complex picture. But if you take the top-down perspective, you're completely right. The size of the portfolio and then the interest rate, average interest rate overall, that drives interest expense of this.

If we move over to collections, how do you see collection has developed in October and what input has made it worse? I mean, electricity bills haven't moved up that much. Gasoline and petroleum prices are almost down this quarter -- this month, sorry. So is it just higher food prices or what are you seeing being the main issue for collecting post the Q3?

It's not a material change we see yet, but we see some indications. So we want to flag for that. And then it could be that consumers now are preparing for the winter and are more cautious in actually paying back their loans and then saving more money for a possibly tough winter with again increased, for example, energy prices. So at this point, it's probably on a psychological level and could also be that for a while, you can -- if your affordability goes down, you can still amortize your loans, but at a certain point in time, it may be tougher. So it could be also a lagged effect. What we see is the -- for the consumers where we have an amortization plan, we don't see an increased breakage of amortization plan in October. It's more the other type of payments like one-off settlements, we'll see in some countries like Poland, that the settlements -- the average settlement is on a lower level than before. This is a minor part of total income and cash flow. Most of the incoming cash flow is regular amortization plans. So number wise, it's not a big thing, at least not yet. But it's an indication of what may come this winter. I don't know, Christian, do you want to comment on that?

Yes, I can add that. I mean, it's more of a real uncertainty that we're seeing indications of coming through. And on the flip side, of course, you have now energy support programs in a number of markets as well. France, Germany has announced support for the energy prices, which are highly, highly substantial. I think in France, it's 2%, 3% of GDP. So of course, this will support consumers as well. So it's a high uncertainty and we can see overall that things are just moving. And then in that case, it is difficult to foresee how things will happen. But as we mentioned in previous quarters, the unemployment is the key driver for repayment plans being broken or not.

So do I understand you correctly that the consumers with amortization plan have not requested to pause to lower their payments during the last month then? It's just a one-off settlement?

Yes.

And maybe one last question from my side then. Could you tell us what the average collection ticket prices or the average amortization price? Do customers on average pay, I don't know, SEK 250 per month or are we talking about SEK 2,000 a month?

It's very difficult to say a good average. I mean, it's a little bit like comparing standing one foot in the fire and one in ice. On average, it doesn't mean anything because they're so -- the different type of claims are quite different in the different markets. For example, Italy, we have much higher claims on average than we had in the U.K. where it was the lowest ticket ones. So it's not really meaningful to say an average amount, I'd say. But it's worthwhile saying that the repayment plans are often by -- I mean, it's regulatory enforcement as well to a high degree. So it's not a complete choice to continue to repay either.

But you don't have -- that you pay a percentage of your disposable wage or something or your salary. So it's 2% of your salary that you calculate and then that is how much they are motorized?

I don't have -- we can calculate that. We don't look at that on the total level since the countries are so different, et cetera. But in general, you can say that the amortization of loans in default is a minor part of a families or an individual's budget. You can and we saw that also in the Corona period when that kicked in, that people prioritize to keep on. Even those who lost income, like people working in restaurants, et cetera, they still kept on amortizing their loans and the impact we saw was limited as we know. So it's a minor part of the budget. In some countries, there are also regulations for that it should be that way. So we always look at affordability and assess how much consumer actually can pay not yet one single-month, but it should be a sustainable amortization plan that over several years. And that means that it can't be massive amounts in percent of the disposable income.

The next question comes from Maths Liljedahl with SEB.

Just one follow-up or one remaining question from our side. If we look at the Pillar 2 guidance there, have you gotten any indications on or what do you expect and how well capitalized will you be past that? Have you got any indications on that?

No, we have no indications from the Swedish SFA. So what we think is that when we will buy, NPL portfolio has been written down. And it's quite easy for us to stop buying. That's completely in our control. So we can -- and that means that we can rebuild capital very, very easy. And we see that this has a real impact if we will do that. And therefore, I think and I stress that we are doing in our internal capital assessment process, we don't see any material need to have a Pillar 2 guidance. But of course, there's a qualitative assessment from the Swedish FSA as well, which they are doing more on a holistic well level. So we don't have an indications to begin with that part.

The next question comes from Ermin Keric with Carnegie.