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

Welcome to Hoist Finance Q4 Report 2022. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, Harry Vranjes; and CFO, Christian Wallentin.

So thank you. Good morning, everyone, and thank you for joining this call. I am Harry Vranjes, and I'm here with Christian Wallentin, our CFO. And during the next 20 to 30 minutes, we'll take you through the Q4 and the full year '22. And after that, we leave some time for Q&A. So I've now been with Hoist for a little bit over a month. And I must say, it is a very interesting time for the industry and it's an interesting time for Hoist in particular. I've spent my first weeks a bit of handover and diving into the strategy, and of course, this rejuvenation plans. And I've also started getting to know the organization. I've managed to visit most of the offices by now. And it is clear that it has been a busy 2022 and I think the team has done an amazing job and 2023 will continue in the same pace. Now with regards to the report, apologies for a slightly messy report with many one-off items. However, those one-off items, they spring out of this rejuvenation program where we go through our entire book by market, by asset class, by vintage and portfolio to in detail understand the true return levels per segment. And the outcome of this analysis leads to some optimizations of structure, processes, organization, but it can also mean divestment of that segment, like for instance, in the U.K. during last year. Now this analysis, of course, also tells us what and where to invest next. And I think with the SEK 2.8 billion that were invested in Q4 and SEK 6.9 billion for the full year, Hoist is on the way to refreshing and basically reshaping the book. And we are now halfway through this program. One-off and restructuring will continue into 2023, although the largest issues have now been addressed. In terms of the headline numbers, all of our KPIs are affected by one-offs, and Christian will take you through them in a minute. But before I hand over to Christian, I just want to close with the message that Hoist Finance has made good progress on the new strategy during 2022. Our financial position is stronger. Our sourcing is more focused. And we are now in bilateral discussions to a much larger extent than before. We've grown our share of secured claims, both in terms of share of the book as a whole, but also in geographical distribution. And in order for us to continue focusing on growth, the Board of Directors is proposing not to pay out any dividend for 2022. And with that, I'll hand over to Christian.

Thank you, Harry. Good morning, everyone. As Harry laid out, we believe we have made substantive headway on our journey to become the leading NPL asset manager in Europe during 2022. I'm not sure if you see the slides, we don't hear from our end, but we'll try to sort it out in the background. So we believe we have made substantive headway during 2022. We've gone through successful structure efforts, most notably, the U.K. divestment during the year, and the operational improvement plan is well underway. We're not done, as Harry pointed out. However, we have gotten a fair bit on this. And we have left -- that has left us materially in a better financial and risk position than when we came into 2022. So I'll walk you through Q4 and also the full year. So the investment activity, the profile of the book, the P&L and the key items on the balance sheet. Then we'll go into a cost of view as there's quite a few one-off items, and that will include some indirect cost development. And hopefully, you're seeing a slide, which is portfolio acquisitions currently for the year -- for the last 3 years. So regarding the investments, you see that 2022, our structure and focused investment has yielded results. So this is one of our most active years to date in the history of Hoist. We invested NOK 6.9 billion during the year, which is almost twice the number of the volume of investments in '21 and clearly a strong growth from 2020. It's also higher returns in '22 than what we saw in '21. And notably, you can see that these are lumpy investments in 2022. We are focusing on slightly higher and bilateral transactions, and that can make us draw into different quarters. So you saw that in Q3, there are a few investments that go into Q4, and that made Q4 become really successful versus on the back of quite a low investment level in Q3. So now we -- during this year, we've been much more proactive and structured. We know what we aim for and we go proactively to find it, which has meant that we are having a higher secured mix and more bilateral transactions, meaning one-on-one discussions where we can add real value to the sellers, so the selling banks. And also, we tend to have -- we've tended to have a larger number of larger sized deals in '22. And we believe we have invested a good vintage this year. So we see strong performance in both the '21 and '22 performance so far. We particularly invested into Spanish secured investments -- secured portfolios in Q4. So we have established a third secured market in addition to France and Italian markets. So now we have 3 real secured markets, so France, Italy and Spain. Of course, we have secured investments in other geographies, but not to the large extent that we have in these 3 markets. If we go to the next slide. I hope that you see the slides. I still don't see it on our screen, but I'll speak to this and describe the slide as we go as well. So this is a slightly laying out the continuing operations portfolio book value. You see that we've grown the like-for-like book, 26% continuing operations. So this is excluding the divested U.K. unsecured portfolio. So in Q4 '21, we were around SEK 17 billion and now we're at roughly SEK 21 billion. And that is like-for-like, so excluding the unsecured book. Next page, please. This is the asset class mix. So we believe we have acquired a solid vintage in '22. So the overall size is SEK 21.6 billion. This has been led by large investments in Greece, U.K., France and Spain during the year. And that's also, of course, taken down the divestment in the U.K. So now we are on Page 6 in the pack. It's a higher share of unsecured. We have now 29% versus 21% last year. The win rates in the deals that we've been looking at has been consistent over the last years with regards to value. And this is in our mind, something we track to not become too aggressive, but disciplined regarding risk return, which we absolutely believe we have been. And overall, the IRRs we invested in '22 are slightly higher than in '21. And this is a combination of our focus where we're looking for deals. So the bilateral situation where we can add more value than what we can do in tenders. And then also what we see is a sign as the industry is starting to move to reprice as well. We have addressed 3 specific issues in the book in Q4 with negative impact in the quarter. So one, there was operational issues. The key drivers was not getting legal documentation, which has caused the shortfall in collection for this particular portfolio. The second one is [indiscernible] books. The key driver was that we prematurely positively re-evaluated a few years ago. We now had to reverse this. And the third one is that a legal process is taking longer for a large secured book. So the value is unchanged. It just takes a longer time. So there's a timing difference in this. So this is not driven by significant macro impact, but it does have a negative impact for the quarter. So we are continuing to deal with the risk and issues we encounter in the book with the aim to build a conservative value book that delivers stable collections over time. In general, we've been highly conservative regarding positive revaluations. We haven't done any in the quarter, particularly with a number of [ unclarities ] we're all living through. So which we see a large, as we call it, positive tilt in the book. And of course, we have to deal with the issues that we see as well, but we haven't positively re-evaluated these during the quarter. If we go to Page 7, which is the P&L. So quarter 4 wraps up the first rejuvenation were the number of one-off items in the P&L. So it leads to an overall '22 ROE of 17% and the Q4 ROE of 20%. So the net profit for the year is approximately SEK 800 million coming from a loss in '21. So structurally, we believe that we are materially better off financially in risk, and then the operational improvement has improved during the year. I'll talk you through the details of the P&L now. So this is the continuing operations of the P&L and the main impacts of the U.K. divestment is in discontinued operations, but however, there's some in the P&L as well. So overall, we started '22 investing a lot. So the healthy investments in '22 is around SEK 7 billion. So it takes the book to SEK 21.6 billion overall, as I mentioned. So this is the underlying book growing 26%. This yields -- this results in income growing mainly from that portfolio growth, but also slightly higher IRRs. So the Q4 sees also higher interest expense. So this is overall rising interest rate levels and also the deposit volumes increasing given the high investment volumes we had in Q4. Net interest income is up 27% quarter-over-quarter. And we had overall stable collections. We have not seen any material macro impact and we are closely monitoring this. As we mentioned previously, unemployment has historically been the best indicator for the industry to this. And this is, as you probably have picked up elsewhere holding up. So we don't see unemployment rating going up at this point. The underlying collection performance has also improved materially during the year. To give you a sense, if we include the U.K. for 9 months, which was the case last year, the book was roughly flat, so more or less SEK 21 billion. And during the year, direct costs or direct collection cost was up to SEK 0.2 billion. That was including legal fees increasing and also one-off items that I will come back to. And then with that flat book and increasing costs of SEK 0.2 billion, of which half was the increase in legal fee, collections were up SEK 0.9 billion. So we have seen real collection performance improving during the year. And then we have addressed issues, as I said in the book, which impacts the quarter negatively. The net results from the financial transactions is affected by the U.K. divestment and FX. We locked in gains from the U.K. interest rate swaps. So we had a positive value in those. And of course, we closed them down as we divested the U.K. unsecured operations. We also have some positive and negative FX impacts in the liquidity portfolio, the AT1 and other items. So all of those are netted in that line. And as you -- we pointed out in Q3, we now have hedge accounting on the interest rate swaps. We don't expect large swings from the interest rate swaps going forward. We also have some positive and negative one-off items. The cost increase is due to higher collections and one-time costs. So legal spend during the pandemic slowed down, as you all know. And this year, so 2022, was the first more normal year of legal collections. So compared with '21, legal collection costs were up 26%. And underlying indirect costs are down year-on-year, which we will come back to on a following page, also read these one-time costs on the next page. And of course, the U.K. divestment has a material positive impact in the quarter. So again, to summarize, the ROE for the quarter is 20% and for the year is 17%, backed by a strong investment year, stable collections and then successful structural efforts during the year. Next slide, please. As headline costs have gone up, we want to spend some time explaining these numbers in more detail. So this is operational expenses in Q4 compared with a year ago, the quarter a year ago. So on the furthest to the left, you see a number of 15, which is SEK 50 million cost of U.K. employees that were sitting in the divested entity and we moved them into the Group because they were working with the Group. So this was not part of last year. So we've added that for comparison purposes. In the first box on the right, on the collection costs, the variable collection costs have gone up, and this is primarily legal spend normalizing year-over-year, so after the pandemic. And we also have legal provisions related to loan portfolio, in which we have a dispute in court with the seller regarding actions that happened before we own the portfolio. We have now provisioned for the compensation for something we don't believe we are responsible for. So hopefully, we can get back some of this once the court case is closed. However, we have now provision for it. And then the second point is in the personnel costs. This is a variable pay increase in Q4. We're in the middle of the rejuvenation, so we didn't expect to land successfully on the ROE as we did. So due to the [ real ] ROE or [ splitting ] the ROE target, we have taken up the [ value composition ] for the year. And this will, of course, not happen if we don't have a ROE meeting the targets. We also have taken a number of operational decisions in the rejuvenation work, which entails clean-up and write-off a number of smaller balance sheet items. The largest is a write-down of Polish IT platform, which is roughly 1/3 of the admin costs. Apart from this, we have some consultancy costs. We don't expect to come back related to the rejuvenation work as well and also some other IT costs we don't expect to come back. So overall, the underlying costs see some growth due to mainly higher legal spend and then we have a number of rejuvenation-related one-off items during the quarter. Next page. So we want to give you a sense how our indirect costs are developing overall and also pro forma for the U.K. unsecured divestment. When we started our rejuvenation work, we used Q2 2021 as a baseline. And back then, roughly 50% were direct and roughly around 50% were indirect costs. So direct costs or operational costs, meaning collections used in collections. And the rest is indirect, including IT, central ops, investment team and the other group functions. And if you analyze that Q2 number in '21, it was around SEK 1.2 billion. So we did -- we performed some savings in the second half of 2021. And the yearly number, as you can see on this page, landed on SEK 1.125 billion for the year. In 2022, we have a number of SEK 1.65 billion. And if we normalize for FX, then we're down 8% year-over-year. And also normalized for one-off items, as discussed on the previous page and a few others earlier in '22 as those I discussed previously was just in Q4. For example, the decommission of a system, a U.K. lease write-down, we moved offices, then we would be at 11% down. And then the last pro forma adjustments we do in order to illustrate the impact of the U.K. sale is if we clean out the U.K. platform costs, but we don't carry any longer now in Q4, then the year-over-year impact would be down 13%. And we continue to work really hard to optimize and take down the indirect cost going forward as well. It's a central part of the rejuvenation program that we are running. Next slide, please. As you can see here, the capital development on Page 10. So we are much -- we're in a financially much stronger capital position now. We continue to build capital in the quarter. And we believe we are well positioned for continued growth with significant purchasing power. We also initiated the dialogue with the Swedish FSA regarding Pillar 2 guidance in the quarter. We'll let you know when we get formal feedback for this. Next page, please. Here, you can also see that we have a strong capital level enabling growth for us. We also see that the U.K. divestment built significant liquidity in the quarter. And then we did invest a large volume in the quarter as well. So that's taken it down towards the end of the year as well. If we go to the next page, please, and this is Page 12. We believe we have a really competitive funding model, particularly in an environment when the interest rates are trending higher. So as you are probably aware, we are 71% deposit funded. We're not depending on capital markets to the same extent as the overall industry. We managed down liquidity ahead of the U.K. divestment. And therefore, you can see that the average funding rate went up in Q4 when the funding levels required us to take in fresh deposits in Q4. With that, I would like to leave back to you, Harry, for a summary, and then we go into Q&A.

Thank you, Christian. So in summary, we will continue to execute on our current strategy. We are in a better financial and risk position. Rejuvenation activities will carry on into 2023, which means that we will continue with active asset management. And that in turn means that if we find a segment or an asset class which we believe -- where we can deploy capital better in other areas, we will take action on that as well. We will continue to be disciplined in our investment strategy, working constantly with improving our collection performance and also working on reducing the indirect cost as part of this rejuvenation program. And the higher interest rate environment we believe makes our funding mix or funding model very, very attractive. So I think we'll close with that and hand over to the operator.

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

Good morning, everyone. So maybe we could begin to go through the one-offs, please. On net results from financial transactions, you're right that the greater part is attributable to the closure of U.K. Could you give us a more exact number? And do I understand it correctly that we won't have any future income from this contract going forward?

These are contracts that we closed down because they were related to the assets that we sold. And they had a gain when we closed them down. And that's driving -- that's the key driver behind that number of -- I think it is 1 of 5. And then we have some -- this has been -- we saw during the first half of the year that when we didn't have hedge accounting, this was moving quite a lot when interest rates moved during the year. We want to avoid this. So we implemented hedge accounting, which previously, we haven't seen a need for this because of the volatility not being there. So going forward, we don't expect this to be a volatile post meaning the interest rate swaps. We will always have some FX volatility coming from liquidity portfolio and then also the AT1 where we cannot have hedge accounting.

Sorry, one more time. So the SEK 105 million is completely attributable to the closure of the U.K. contract or did you...

The key driver is the closing down the interest rate swaps in the U.K. and locking in [indiscernible] And then we have some FX in there as well from the liquidity portfolio in AT1. So they're both ends of the spectrum. So for example, the -- if you have SEK assets, then you will have a positive FX impact and vice versa if you have a euro. So it's a net position. But the key driver is the closing down of the U.K. interest rate swaps.

And Slide 8 is great to see as well. I mean, just a question on admin expenses. It came in at SEK 191 million for Q4, but you highlighted SEK 58 million of this to be a one-off. So it's underlying actually SEK 133 million in this quarter or how should I see it?

Yes, that is correct. I mean, we have taken a number of operational decisions to change the operating model. One of them, the largest one is that we are not going with an IT system in Poland that we prepared and we had capitalized a large amount on the balance sheet, and that we're now writing off since that we've taken that decision. And there's a few others like that as well. So it is rejuvenation actions yielding to this.

Moving over to interest expenses. I mean, it increases following the rate hikes, as you mentioned. But how sticky is your deposit base if, for example, [ researcher ] or collector hiked the deposit rate. Do you see a slowdown in inflow or do you see capital being transferred?

This is the [indiscernible] we are building matched funding throughout Europe. We come from a history of being funded in SEK deposits. And over time, over the last 10 years, we gradually moved away from being only a SEK deposit base. So we now have in U.K. sterling, euro and SEK. So they're quite slightly different characteristics of it. So we have run our own deposit platform in Sweden, which makes it slightly stickier, so to speak. And then in Europe, we are using a provider called Raisin, and that's a more transparent marketplace. So it becomes quicker at repricing if we move our prices. So this, of course, we have term deposits, which are what they are. And then you have overnight deposits, which move when we move our base rates or the interest rate that we want to offer. So that reprices whatever we have in overnight, that reprices the whole book if we raise or take down the deposit rates. And that is -- it's a very deep deposit market in Germany, in particular, because of savings patterns and they're quite sensitive to changes in this. So it's both if we raise interest rates or deposit rates, then we can attract a lot of deposits in the short to medium term and vice versa if we take down interest rates, then we will push out deposits.

Could you also share the split between overnight deposits and locked in?