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

Welcome to the Hoist Finance Q1 Presentation for 2023. [Operator Instructions] Now I will hand the conference over to CEO, Harry Vranjes; and CFO, Christian Wallentin. Please go ahead.

Good morning, everyone, and welcome to this Q1 earnings call for Hoist Finance. It has been a busy quarter. It's my first quarter with Hoist Finance. I started on the 1st of January, and I've spent a lot of time on getting to know the organization and the business, traveling around visiting all the offices and meeting clients and investors. It has been a very busy time, and I think we are quite satisfied with what we're going to go through with you today. So if we go to the key highlights, the PBT or the profit before tax, we landed on SEK 162 million adjusted for the rejuvenation cost, so the cost reductions that we're doing. And this is an increase of 113% compared to the first quarter 2022, and Christian will go through the adjustments as we go through this presentation. In terms of return on equity, our key targets, we are at 6%. It is, of course, far from our 15% target. And -- but we are following our plan for the year and additional improvement of this will -- we will see as the portfolio grows or as the book grows and the impacts of the cost savings program kick in as the year moves on. And of course, adjusted for the normalized capitalization levels, we are then at 10%. So the book, excluding the U.K., increased 29%. The adjusted operating income increased 34% and the operating expense is driven by the larger book increase by 22% compare that to 2022 -- or Q1 2022. We have had strong collection performance. Although the macro is challenging out there, we don't fully see -- we don't see any impact on our collections as of yet. We are, of course, closely monitoring the situation. We have been impacted by a court strike in Spain. So there has been a clear impact. But despite that, we reached 105% for this quarter. Now the strike in Spain is over and the courts are slowly starting up and processing claims again. In terms of investments, we did SEK 1.9 billion during the first quarter, much of that in the Swedish portfolio that we -- the back book that we bought from Lowell and that are now being serviced by Lowell, SEK 1.2 billion, but also a number of smaller portfolios around our markets. So we have a stable funding base with 67% deposit accounts. And I think in this environment, as the interest rates have moved quite rapidly, this has become an increasingly competitive advantage. And as we can see from the deposits, we don't see any unusual activity following the Silicon Valley Bank situation. Our deposit customers trust us, and we see that there has been no noticeable outflows in the period. And we have also issued a bond in the period of SEK 1 billion. In terms of our capital position and liquidity, we are in a very robust situation. We are materially above the regulatory requirements. We're at 15% CET1 ratio, and which is a materially stronger position than we were 1 year ago. Now this, of course, means that we have an investment capacity, which is significantly higher than before and we, of course, intend to neutralize as the year moves on. I think with that, I'll hand over to Christian.

Thank you, Harry. Good morning, everyone. So we can see that our investment strategy is paying off with this focus on larger, more complex and more bilateral investments as part of the pipeline. We have a strong investment quarter in Q1 '23, despite it being normally, seasonally slower than, for example, the Q4. It's driven by, as Harry pointed out, the Swedish re-entry of SEK 1.2 billion. And if you look -- if we look forward, we have a healthy outlook for the year. The current pipeline is -- as you saw, '22, it can be quite lumpy between quarters. So we have more third than second quarter transaction closing expected. But this can move around as we move ahead during the year. And fourth quarter is expected to remain the seasonally strongest quarter, as normal. The last year had been a really active investment period. So again, the investment strategy that we put in place now over the last 1.5 years is working. We have growth -- grown the book almost 30% year-on-year. And this means that we have replenished the U.K. book that we sold now 1 year or so ago. And we have done that with higher returns. And also the margins that we see coming through is much more healthy and less risky than what we had in the book that we divested. And in the collections in '21 and '22 vintages, we see really healthy collection performance as you see in the collection performance for the quarter. We wanted to make it easy to follow our underlying business performance. So we have introduced some simple -- what we hope is simple adjustments this quarter that we will do during the year as well. And we realized that it wasn't that easy to follow us last year, given that we had this successful U.K. disposal building capital and de-risking the book in combination then with the volatile macro environment, which led to hedging gains. So what we've done is that we do a few simple adjustments, you can follow the underlying business. One in Q1 2023, we did 2 adjustments. So we adjust for the rejuvenation costs, which drive further cost optimization. And the second is that we normalize for capital levels. So you can see if we were at the mid-range capital target ratio what would our ROE then be. So we have this fortunate situation with the capital. So we want to grow, but we also wants to show the normalized return. And this shows a illustrative normalized ROE level for '23, which we'll come back to. And then if we move to Q1 '22, we adjust for the U.K. operations and then the hedge accounting as if it was in place the 1st of January. So what does these 2 mean? So in '23 Q1, we have items affecting comparabilities, so rejuvenation cost of SEK 18 million, which we've taken out in the adjusted profit before tax. And then we have also normalized the ROE to 10.9%, which is in the middle of the range that you see on the page. In the comparative period Q1 '22, we have taken out funding related to the U.K. disposal of SEK 39 million of interest expense. We've added back group staff cost of SEK 15 million. This was staff that was sitting in the local entity that we legally had to move to the branch in the U.K. because they service the group. And then we've taken out the net financial transactions, SEK 103 million given the [ unrealized ] hedging gains. And then we don't see any -- we would take out the net profit from the discontinued operations of the U.K. divestment. And then for ease of comparison, we do not adjust capitalization for 2022, given that -- I think that would probably just confuse more than it helps given that we saw the risk reversal and a lot of movements in the capital. So moving on to the actual underlying numbers. Overall, we start to see the results of rejuvenation in the underlying performance. So the operating -- the total operating income is growing 50% quicker than the cost base. So this provides operating leverage. And this leads to a profit before tax growth of 113% and then a normalized ROE of 10% for the quarter. And if we dig into the details slightly more, we see that operating income is up 34%. This is driven by the book growth of circa 30% and also the strong collection performance of 105%. And this collection performance is driven by what we think is a really healthy book that we are having today. Interest expense is slightly higher growth than the book. So we have higher funding rates as the industry overall. And that is -- we see that coming through. But of course, we're a little less impacted because of our funding platform than the rest of the industry. We also have support from the liquidity buffer and interest income from interest rate swaps. So that's SEK 42 million interest income for the quarter. And overall, the higher book also drives higher total costs. And then we also have a slight mix change in between direct and indirect driven by that we have more outsourced business today than what we had 1 year ago, driven by the U.K. and Greece. We also changed the performance management internally to drive the local business on ROE, which then sometimes drives higher costs, but in the end, it drives much higher profit, so it's accretive to the return on equity. And then as we all know, inflation is part of this picture as well. So that has been driving the -- particularly the people cost, if you compare with 1 year ago. And then these total higher costs are compensated partially by lower indirect cost, which we will get back to in a bit. So overall, we see strong growth, collection performance material. We have got a really strong collection performance that contributes to earnings outpacing the costs. And this leads to a healthy and normalized ROE closer to our financial targets. And also for reference, you can find this income statement in the report on Page 6, where we also outline all the adjustments, as you can follow them in an easy way. Since the beginning of 2021, we have taken down our indirect cost base by 17%, including inflation, however, including rejuvenation costs and the FX. So this is [ started ] showing that development since early '21, so Q1 '21. The indirect cost are a broad cost base for us. So this is the part of the cost that should see limited growth when we -- when the growth of the book continues. And this includes IT, includes the investment team, includes the central functions and also the indirect support functions in the markets. So if you break this down further, you would see that we have invested into the asset management organization. So that is the investment team and deal-related expenses. We've kept the local platforms flat, while we've grown the book. And then the cost reduction that you see here is led by the central functions, which is leading to an overall -- is overall 17% cost decrease since Q1 '21. And we are looking to find more cost saves in 2023 before the end of the rejuvenation. We aim to find another SEK 85 million annualized cost saves in indirect or more and that translates to roughly SEK 20 million per quarter impact run rate. And the associated rejuvenation cost will be around SEK 100 million, depending on the final level of savings. So if we find more savings, then it's likely to be slightly higher. If we find slightly lower, then it will be likely lower than that. And after rejuvenation has concluded, then we will focus on continuously improving the business and the productivity that we want to see. And if you look at the direct cost development, it's driven by the book, as I mentioned, and also the mix between insourced and outsourced, this ROE focus. And then -- if you then break down the cost increase as well indirect cost, you would see that we've spent more in legal than we did 1 year ago because of things normalizing overall. And this is -- of course, as we grow the book, direct costs will grow in the proportion of that, but slower than the overall cost base. So the income will grow quicker than the cost base, of course. And also, you can note that the book size is roughly the size of -- before we dispose the U.K. again now. We've replenished the book and the direct cost level is roughly in line with that, but with higher profitability, clearly, as you can see in the profit generation. If you look at our book, the asset class mix, we believe we have an overall healthy and well diversified book, which is in a much better position to withstand any potential macro market shocks that could come our way. If you look at -- on the left-hand pie chart, you can see that we've grown the secured proportion. Last year it was 20%, now it's 29% -- 27%. And you can also see that the geographical and asset class diversification has improved. So we've broken out Sweden and [ Bremen ] and -- in the U.K. in this chart in contrast with the report to be able to show that Italy is slightly smaller. U.K., of course, has shrunk. And we are much more diversified across Europe, which is good, of course, when the macro is as uncertain as it is. And then we're very excited to be back in Sweden after 20-plus years with the re-entry, with the portfolio that we bought from Lowell. If we look at the capital and liquidity position, it's robust there -- those -- both of those are robust and they're materially above their regulatory requirements. And the capitalization, as Harry pointed out, enables us to grow and continue to invest in attractive portfolios. We also see that this is particularly in -- but it's a strong position to be when the macro environment is uncertain and particularly when there have been significant disturbances in the banking sector around the world. So we stand strong and we have seen no material impact from the turbulence. We have a large liquidity portfolio, and we also have continued to invest in this period, of course. And also worthwhile noting is that we are on a completely different regulatory regime than the banks in the U.S. For example, we don't have any part of the liquidity portfolio that is not mark-to-market, for example. On the same theme, the funding base is highly granular and under deposit insurance scheme. So we have 80,000 deposit customers that has trusted us with their savings. We've seen no significant outflows outside the usual activity. And also, the -- these deposits are 99% roughly deposit guarantee -- on the deposit guarantee scheme, so the Swedish deposit guarantee scheme. We have also issued a senior unsecured bond of SEK 1 billion in 3 tranches, what we thought were competitive rates during the quarter, which is also a testament to that we stand strong in this. I think when the interest rate environment moves up, we stand stable and we become increasingly competitive. So we are up, as you see, for -- on the average cost of funding, however, much less than what we see the industry moving according to our assessment. This is, of course, driven by our credit market institution status and having a funding or deposit part of -- significant part of the funding. So 67% of the funding base is based on the deposits. With that, I will leave over to Harry to wrap up the presentation.

Thank you, Christian. So in summary, it has been a quarter of high activity, not just for me personally, but for the whole organization. There are -- there is a lot of activity in the market. And I think the high -- the rapidly changing interest rate environment is causing a lot of factors to consider their positions, and that generates opportunities, I think, especially for us. So we've had a high investment level in Q1. As Christian mentioned, we are generally going after larger and larger deals, and that makes it lumpy. So the -- for Q2, we expect sort of a modest investment level as the deals we're working on right now indicate third quarter closing. The strong collection performance, we're really happy with. We will keep tracking, obviously, the macro. But as of yet in our markets, we don't -- we haven't noticed any significant impact. But of course, we will stay digital there. The underlying result will continue to improve based on the healthy book that we have, right? So it's -- we've replaced -- and gradually, we keep replacing older portfolios -- or we keep amortizing older portfolios and replacing them with fresher books. And the last -- the vintages over the last 2 years are performing really, really well as we are happy to report. In terms of the return on equity, yes, adjusted for the normalized equity levels, we are at 10%. We expect to improve that as the year passes, especially with the rejuvenation program savings kicking in and, of course, also the growth of the book. And our funding base has been really stable throughout this turbulence we've seen in the market, and is turning into an increasingly competitive advantage for us. So when it comes to then the rejuvenation, we will work on cost and this will carry on throughout 2023. We want to close the program by the end of Q3. So we're making a push now to do the last parts of the program in terms of the cost reductions that then will be executed in Q2 and Q3. We will, of course, continue our active asset management. And as you may have seen in the report, we have in France, one of our absolute key markets, in the quarter, refresh the portfolio -- refresh the book with a brand-new portfolio that is collecting very well. And just after quarter closing, we divested our, say, low-yielding back book of unsecured claims in France. This is another example of this active asset management, and we will continue to look for those opportunities. We will continue our disciplined investment strategy. We -- this is why we are also investing in the investment team. We are really growing that nicely and have a fantastic team of people there following up on the investments as they develop. And yes, on the collection performance, we will continue working on that and tuning collection strategies, et cetera. Sometimes the cheapest strategy might not be the most efficient, and we are ROE driven, as Christian mentioned before. So we will, at certain stages take higher collection costs to in the future collect more money. And I think with that -- now we lost the screen here. I think -- with that, I think we'll open up for Q&A.

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

So maybe if we start on the rejuvenation program. Could you just confirm that I've understood it correctly, so you're having SEK 100 million in execution costs, of which SEK 18 million was taken in Q1. So essentially, the rest is Q2, Q3? And also just for me to understand, if we would assume just for the sake of it, that you don't grow anymore, so your business is flat from here, would that mean you have SEK 85 million on an annualized basis in lower net cost? Or is this just making your indirect costs more scalable?

I think it's -- we are in the early phase of executing this, of course. It is absolutely -- we were aiming for SEK 85 million. We want to overshoot that and that is real savings, so to speak. So that should lead to net savings, if you would disregard any growth of the direct cost, yes. And that's -- on annualized basis it would be the SEK 85 million.

And on the execution costs?

Sorry. Yes. So it's SEK 100 million overall that we roughly see and SEK 18 million of those were taken in the -- in Q1. And the final number will depend on the size of the savings.

Then just your collection performance held up good now in Q1. Could you give us what that would have been underlying if we adjust for the court strike in Spain? And also, generally, of your collection, how much is on payment plans and how much is more one-off settlements on the unsecured side?

So the Spain, we invested quite a lot in Q4 in secured, and then we have the unsecured book. And this court strike, given that we're onboarding the secured book, it's mostly hitting the -- it's not exclusively hitting the unsecured book. And that would be more or less performing in line with expectations, slightly below if the court strike wouldn't have been there. I don't have top of mind what that would mean in millions, but it, of course, would add to the 105% collection performance.

And then just a final question. Could you, to any extent, quantify the impact you've seen on underwriting returns now compared to, let's say, 1 year ago or so?

Slightly difficult. So we see our own returns creeping upwards. So it's both how we price IRRs. So those are going up and the -- also the ROEs. So we are developing nicely. And we saw that the IRRs bottomed out, so to speak, mid last year in terms of -- we had a really profitable back book way back in time, and then we had '17, '18, '19, which was much less profitable. And that impact of the portfolio moving through time, so to speak, it bottomed out. So we see that our average IRR is moving up from the low that we saw in probably mid '22 and that's helped, of course, by the U.K. divestment. And if it's a market thing or not, it's slightly difficult to say. We believe that the market is moving upwards. We see absolutely see indications of this and the -- this change in our investment strategy, meaning focusing on more bilateral, more large deals, more complex deals, that also drives IRRs and ROEs because it's much more value we provide in these situations. Both those dynamics drive returns higher. And it's a little bit slower than we would hope, but it's clear trend upwards. I don't know, Harry, if you have any other comments on that one?

No. I think -- yes, as we mentioned, I think sellers and buyers, primarily in the primary markets are -- have very different expectations now with the rising interest rate environment. So there we see that transactions are getting slower, take longer simply. And in some cases, we've seen sort of deals being taken off the market. And we believe that these are sort of the signs that this is rebalancing now. And with the interest rates and the financing costs increasing, the returns should continue to climb.

Also, in addition to that, Harry mentioned it, the CEO, that the primary market is more slow to move in our experience over the last quarters, meaning that the originating banks have higher -- or they are more sticky price expectations than the secondary market where, for example, hedge funds are quicker to adjust to real financing costs, et cetera. So we've this slightly divergence in the primary and the secondary market.

And sorry, just one last follow-up on the end of your answer. When you're talking about the secondary market, is it mainly among -- as you alluded to in our hedge funds or the credit funds or is it actually industrial peers of yours that you're seeing coming to market to dispose off assets?

I think it's a little bit all of the above and for various reasons. And we are happy to take those discussions and to sort out those issues. We see -- I mean, specialization is increasing as -- one example is this French book that we just divested. We divested that over our book value because somebody else believes that they are better set up to handle that type of claims. And I think these discussions are ongoing across the industry, I would say.

The next question comes from Maths Liljedahl from SEB.

Just some small follow-ups there. On the deposits, how do you see -- We know there's fight for deposits, so to say, in the market. How do you see pricing developing? And have you seen any movement between -- you said 99% is covered by or under the deposit guarantee scheme, but has there been any move in sort of size? What's the average size of a deposit holder? That's the first question. And the follow-up perhaps on the liquidity book. You have a lot with banks. Is that just on accounts? Or is it invested in short-term instruments?

The deposit pricing is creeping up with the overall interest environment. And the -- it is stickier, of course -- well, not, of course, but it is stickier in a banking sector. So the banking industry tends to keep those margin for itself as you've seen us in the -- for the larger Nordic banks as well. And in terms of the size of deposits, it's slightly different in different geographies. So Germany, where we have a large part of our deposits, there you have large -- larger savings into deposits. So that means larger deposit holders as well. In Sweden, it's slightly smaller. And -- but they're very few above 1 million. So normally, in Germany, we see around -- towards the upper end of the deposit guarantee scheme and then in Sweden, it's lower. Another difference between the market is that we have our own deposit brand here in -- well [ with the ] -- we have the own -- our own platform in Sweden. So which means that it's slightly stickier in Sweden. So we are on a racing platform in Germany, so bit easier to move things there as well. In terms of liquidity, it's on deposits side.