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

Welcome to Hoist Finance Q1 2024 Report Presentation. [Operator Instructions] Now I will hand the conference over to CEO, Harry Vranjes; and CFO, Christian Wallentin. Please go ahead.

Thank you very much. Good morning, everyone, and welcome to Hoist Finance Earnings Call for the First Quarter 2024. I am Harry Vranjes, CEO of Hoist Finance. And this time, calling in from home, we have a very sick CFO, Christian Wallentin. So we will try to do this not being in the same room for the first time for me, at least. So hopefully, the technology will work out just fine. And together, we will take you through the results and highlights of this first quarter. But before we do that, just like last time, I want to repeat and try to drive home the message about what we at Hoist Finance are about. And we are a performing financial institution working with nonperforming loans. We are a different animal compared to the rest of the industry. Hoist Finance is a regulated credit market institution supervised by the Swedish FSA. As such, we have a different regulatory environment and a different funding model than our peers. As you know, our main funding source, some 70%, comes from savings accounts from the public. The remaining 30% are various types of bonds that we hold to ensure a balanced funding mix and reliable access to the markets. Now this gives us a considerable funding cost advantage compared to the rest of the industry. But of course, the regulated status also comes with, let's say, a relatively high fixed cost. Now our strategy is to grow our portfolio to some SEK 36 billion by the end of '26 and to keep our cost base aligned to that growth. And we do that through combining our internal capabilities with outsourcing partners. So we run a very collaborative model, let's say. Now we expect direct costs to grow in line with portfolio growth and indirect costs to grow in line with inflation or just above. And I think what we will -- what we can see some signs of during this first quarter is that this operating leverage, right, is starting to happen, where we see that the portfolio grows 15%; income, 27%; and costs, 10%. Now so many peers are going capital lighter, focusing on third-party servicing. We are -- as we -- and we want to continue to be capital heavy. We have the setup, we have the access, and we have the balance sheet for it. So now let's start with the highlights of the first quarter here. Yes, profit before tax came in at SEK 284 million, a big improvement compared to the same quarter last year. Now we had some costs related to the rejuvenation program last year, but I would say we have some similar costs this quarter for restructurings that we are doing sort of as business as usual. Return on equity came in at 19%, helped, we should say, by an unusually low tax rate for the quarter, assuming our sort of usual tax rate, and that will even out over the year. Return on equity is around the 15% mark or basically in line with our core financial target. We closed portfolio investments of SEK 2.1 billion in the quarter, a solid investment quarter and one of our better, if not the best, Q1 so far in terms of acquisitions. January did start out slow, I would say, across Europe, but then activity picked up significantly in February, and we see a healthy pipeline for the rest of the year, both in the primary market and in the secondary and while we still see repricing continuing slowly, slowly. And after quarter closing, we signed portfolios of roughly SEK 1 billion, yes, during what is now Q2, I guess. Collection performance, very strong in the quarter. It came in at 106%. Solid performance across Europe. We -- despite impact of Easter, et cetera, landing in the last days of March. And so we still see very limited impact of, let's say, the cost of living crisis and the macro environment around Europe. And we're very pleased to see this level of operational performance around the group. In terms of operations, we continue to work on operational efficiency across the company. We mentioned before that we are bringing home the, let's say, running and maintenance of our IT infrastructure. We're in the middle of that process now. And it's going very smoothly, I must say. But then, of course, we also do initiatives around the markets. The strategy or the modus operandi basically is to keep these initiatives small, local and clearly measurable. So if we have a problem in country X in the scanning department or something, that is a problem that we solve in that country, not by starting a group initiative and procuring new global systems, et cetera. This is a local responsibility, and that's how we want to keep it. During the quarter, the big event was the confirmation from the Swedish FSA on the Pillar 2 guidance at 0.5%. This is within our existing buffers. So it does not lead to any change of our financial targets. We are very happy that this decision came. It removes uncertainty that has been there for quite some time. And we believe that it confirms -- sorry, our screen went black here, but now it's back again, yes. We believe it confirms the way Hoist Finance works with risks and with our balance sheet overall. What else? We launched our share repurchase scheme in the first quarter, where we wanted to buy back shares for SEK 100 million up until the AGM, which is on the 7th of May. I believe this program most likely ends this week or next as we expect to hit the SEK 100 million mark. And then we will see what the AGM has to say about anything for the future in that respect. Now during the quarter, we've also issued senior unsecured bonds at spreads ranging from 325 to 375. And comparing that to the same quarter last year, spreads were significantly higher. And we believe that this sort of shows a greater understanding and confirmation of our model out in the markets. And yes, we have a strong capital and liquidity position, significantly above the regulatory requirements, with a CET ratio of 14.31%. So I think those are the highlights. A lot of stuff has happened in the quarter. There are activities across Europe in the company. But now I'll hand you over to Christian to, with a shaky voice, take us through the details.

Thank you, Harry. Hopefully not that shaky voice. Let's take it forward here. So Q1 financial summary. We had a strong start to 2024, with Q1 ROE of 19%, and this is based on the foundation that we built the last few years. So we believe that we have a sound and robust credit portfolio. That's both because we invest in the right assets with the right returns on risk. And we also have worked actively with the older book as well. We have also, during the quarter, continued with our continuous improvement efforts, including the IT and also working with some of the markets. We have a high effectiveness and efficiency attention, which will continue. If you look at the -- dive into the numbers, we have book growth of 15% compared with the year ago, with interest income of 23%. And this reflects 2 things, so the larger book and also repricing efforts. So we've been -- a lot of effort on repricing and having higher margins on the books we invest in, and we can see that in the development of these numbers. And that's offsetting -- slightly more than offsetting the increase in funding cost that we've seen, so -- which leads to a net interest margin of growth of 16%, which is higher than the 15% book growth. We also think that interest expense should have peaked in our geographies. We see it in the markets. We hear from the comments from the central banks, and we also see it in our own deposit rate levels that we are offering. So the foundation of our business is the quality of the book, and that's now reflected in the collection performance. So we have collection performance of 106% in the quarter, and that's driven by Italy, Poland and Greece in particular. And that's a much broader performance, as Harry mentioned, which is very positive because it means like the book is gaining momentum across Europe, which is something, we think, is really encouraging. If you look at the gross collections, those are up 25% year-over-year with a 15% book growth, which means that we are getting more out of the same size of book this year than we did last year, which is also encouraging for our operational efforts that we put in the last few years. If you look at the operating income, which reflects both the value of the interest income and also the collection performance, that is up 27% year-over-year. And in the quarter, we have introduced the last hedge accounting in euro. That's now implemented. So the net results from financial transactions in the P&L will be more stable going forward even if the currencies move. And a few things cannot be under hedge accounting, and that's why we see this SEK 16 million here during the quarter. We have a continued sharp focus on cost efficiency, and that will clearly continue going forward. We can see that the rejuvenation efforts that we put in the last few years are paying off. We see that the underlying indirect costs are flat, and that's driven from central costs going down and then some expansion in the markets. For example, we have expanded into -- over the last year and a bit, we expanded into a secured setup in Spain, which is clearly driving some indirect costs as well to support that direct effort in secured. We're also working on -- after the rejuvenation program to go into continuous improvement, and that's exactly what we're doing. The big 2 buckets are reinsourcing the IT, as Harry mentioned, and that's ongoing. We expect to conclude that over the next few months. And then we're working to optimize a few markets that are not hitting our internal hurdle rates. So hopefully, we can deal with this over the next few quarters as well. And we have a share of profit from joint ventures. This is -- we had 2 JVs historically. We're now wrapping up the Polish one that started in Q4, and we see the last benefits coming through in Q1. That's a SEK 7 million. So this, we expect to be the last contribution from the best JV in Poland. And then we have another JV in Greece, so PQH, and that is not yielding benefits on an ongoing basis. We expect that, that will be one payment before it wraps up over the next year or so. It's unclear what the timing and the size of that benefit will be. It depends on the last portfolio that will be sold by the Greek underlying government there. In the quarter, we had a low effective tax rate. And this is due to timing, with the full year expected tax rate to be -- we expect that to be historical average levels. So all in all, if you add this up in the P&L, we see a strong operating leverage in the quarter. Operating income up 27%. And then we have a low cost growth and the book value growth, and that leads to almost doubling of profit before tax. And that, together with a low effective tax rate, gives us an ROE of 19% for the quarter, or if you would apply the historical tax rate, then it would be in line with 15%, in line with our financial targets. Also looking forward, the 15% is where we plan and we're working to be for the full year '24. Overall, we have strong capital and liquidity, which will enable growth and overall flexibility to create value for our shareholders. And we are continuing to have a high pace of change. So overall, it's a very exciting time for Hoist, and we see a lot of interesting and productive developments coming as well. If you look at the portfolio acquisitions, we invested SEK 2.1 billion in the quarter. So it's a steady investment level that's continuing. We have SEK 1 billion, which is closed and/or signed until today in Q2. We also see that the supportive repricing is continuing. So we've seen, over the last 2 years, a steady IRR expansion. And we hopefully -- we can see that rates have peaked now in the -- on the funding side. And we do believe that the industry dynamics is supporting continued repricing. So there's a number of our competitors and colleagues in the industry that has -- have balance sheet topics to work out. And there are also a number of them going for more capital-light strategic models, which means all of this means lower investment volumes on the aggregate coming from players that historically have invested a lot into this industry. The demand is, on aggregate, not as high as it was a few years ago. Here, you can see the significant operating leverage during the quarter. This is leading to an almost doubling of profit before tax. This is depending on the growth, clearly, from the portfolio book values of 15%. And then the health of that book -- so a sound portfolio will always lead to strong collections. And we also see that over time, when there's a strong book, we both can and we need to do cautious positive revaluations. We hope that, that will support us over the next few years as well. The total cost, they include, both in Q1 '23 and this quarter, some exceptional costs. We didn't label them as items affecting comparability, neither in Q1 '23 nor in Q1 '24. We've chosen only to do that, meaning breaking them out as items affecting comparability, if they're material and also clear that they will not reoccur. And that -- we had a few examples. So we had 1 large example in '23, which were rejuvenation costs. And those -- the majority of those came in Q2 and Q3. We didn't have any items affecting comparability in Q1 because they were slightly smaller than in Q2 and Q3. And the reason behind this is clearly that continuous improvements will always be a part of our business. So we'll have some minor restructuring, reorganization costs every quarter, we would expect, over the long term. And then this quarter, it was SEK 9 million of exceptional cost that was including for the IT dual running, and then also, we're restructuring our operations in Romania as well. If you look at our book and the composition of it in Q1, as I mentioned, we see that the repricing in all markets is continuing, so that's ongoing. And we'll see if this [ stops ] with interest rate peaking. We believe and we hope it will continue. The vintages, '22 to '24, they now make up 55% of the current credit portfolio. And the reason why this is important is that they are very strong vintages, so the strong collection performance in these recent vintages. And as we've discussed in previous quarterly updates, early performance is a clear indicator for future performance. If it's poor performance, it's even stronger indicator. If it's positive, it's slightly less strong correlation with future performance, but it's still very strong. So this is very encouraging. And then the rest of the book, the 45%, which is older, we've done a material cleanup over the last few years of those older vintages. So those are also in good shape and supporting our overall collection performance. It's worthwhile to say also that we're working very hard to ensure we're managing the book in a prudent and cautious way in order to remain healthy and to ensure that we have a stable and predictable collection performance. Overall, Harry was mentioning this in his introduction as well, we have a highly diversified book. It's across geographies. If you would look back 8 quarters or so, you would see that we have -- we would have larger concentration in certain markets. Now it's more spread across Europe, which we're very pleased with. On top of it, we have no single exposure risk. So we invest in consumer unsecured and secured. There are very small claims spread across a number of portfolios. We're talking about thousands of portfolios. So there's no single exposure risk in these portfolios. We have a few ones that are larger in relative size, and those large are very small. So they're around SEK 20 million. We have a few of those that is in the book, with highly granular exposures, and it's also invested over time. So we're very pleased with the diversified book that we are holding currently. We received our Pillar 2 guidance during the quarter. This was 50 basis points, which is covered within our management buffer. So this means that all financial targets remain unchanged, so including the minimum core Tier 1 target. We believe that this reflects an understanding from the SFA that our business risk is well managed and also low, which we're happy with, and we spent a significant time talking with our regulators to explain how our business works, and we think they have a really solid outstanding of Hoist Finance these days. We continue to have a strong capital and liquidity levels. This clearly can enable growth. It also gives us flexibility around capital repatriation. And we have the AGM, as Harry mentioned, next week, so we will understand how the shareholders think about these priorities, and we will revert if and when necessary to these topics. Overall, the interest rate environment has been strengthening our funding advantage. We still have a very, very stable funding base, and it has become increasingly competitive over time. We still see that that's the case. We have deposits at 74% of the overall funding mix currently. So we're trying to run the deposits at the right level, which is roughly here. So we expect it to be around 70, slightly above, percent of the overall mix going forward as well. Overall, we believe the regulators and our banking partners think it's beneficial for us to be banking regulated. We operate within the same and high regulation, which is a real benefit. We have 3 lines of defense. We have the highest possible consumer protection in the market. And clearly, it gives us access to deposits, which brings competitive pricing to the table, and the regulators see this as supporting the secondary NPL markets clearly because we can offer good prices to the banking partners. On top of it, I think it's important to also mention that it's a -- provides a regulated balance sheet. So for example, we cannot borrow as much as we would not being regulated. And we cannot have -- and if we would buy companies, for example, then the goodwill be -- would be deducted in our regulatory capital as well, which is a benefit because it provides stability to the balance sheet. That, I will leave over to Harry to take us through the last slides.

Thank you, Christian. Let's see how your voice manages through the question session later. Yes, so to manage the backstop, we've had -- or we have 3 options. Basically, we have implemented securitization vehicles, which are currently live. We have been working on co-investment as a way of managing the backstop. Now I think co-investment, we see more as a strategic product going forward. So it will not primarily be used for managing the backstop. Our main alternative for managing the backstop is the SDR. So with the regulation now moving through chambers, basically, there was a vote that passed in the EU Parliament on the 24th, taking it one step further. And I guess it will be published in this official journal during early summer, basically making it law. And then it will go into force on January 1 next year. So we are in discussions with the FSA on how this will be implemented in Sweden. And those discussions will go on. But basically, the main message is that this is moving on through the process. And it looks -- well, basically every month that passes, increasingly attractive and increasingly likely that this will kick in from the 1st of January 2025. Yes. So to then recap the quarter here. I'll try -- I'll be brief here. SEK 284 million earnings before tax, 19% ROE, SEK 2.1 billion investments, strong collection performance, good acquisitions. And I think we see very good sort of response from the internal organization on these operational efficiency projects that we are running across the group, which is very pleasing to see. We are working on collection strategies, et cetera, and so on and increasing the level of, say, legal collection, which will also show in the numbers of years to come. Now and the share purchase scheme that commenced in the first quarter, we believe, is ending around now. And yes, on the financing, the issuances we've done so far this year, we're very happy to see the spreads coming down and the strong interest from the debt markets to invest in our instruments and a strong capital and liquidity position still remaining significantly above the regulatory requirements. With that, I think we'll open up for questions. There is a possibility to do written questions. We've never tried this before, but -- so we'll see if we find these questions once you post them. But as far as I understand, we will be starting with the phone queue.

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

Maybe starting on the collection performance, which was obviously very solid in Q1. How should we think about that for the coming quarters? How much visibility do you have? And do you think this is a reasonable level to extrapolate for the near term? Or do you see macro having a risk of kind of hurting it a little bit going forward?

I think I don't -- I mean 106% is very strong. So I don't think we should expect that to be the new normal. But we -- as I mentioned before, I mean, we have been keeping track, and we have been monitoring sort of the impact of the cost of living crisis on the repayment patterns. And we haven't seen anything significant there. And I think that continues. So if anything, maybe a small positive, but I wouldn't extrapolate 106%.

But maybe just to continue. If we look on your money multiple, that's actually down a little bit. Or if we look at the ERC, it's growing less than the book. Is this just that you've kind of been able to front-load collections? Or is it the composition of the portfolios you're buying that has a lower money multiple?

I think the -- I mean we will always look at the returns. So -- and that's a combination between the IRRs and then the funding cost with the -- leading to the ROE on each individual book. So [ first of all ], we're investing in slight, I mean -- NPLs are one name, but it consists of a number of different sub-asset classes. So some are much more stable and more almost like performing, and some like nonpaying portfolios, you need a much higher return on. So it's quite difficult to draw a line across all of them. But we are seeing that over the last 2 years, we are increasing both money multiple and the IRRs and also clearly the ROEs on the portfolios that we book. But there's no easy rule to draw across all geographies to say that X money multiple is right or wrong, so to speak. And it's also, to be frank, quite difficult to compare against competitors sometimes because, for example, forward flows, which is a large part of many of our competitors now because they've signed up for this, tend to be much riskier and, therefore, higher returns as well. And then if you mix in telco and energy into that, then it's even more [ difficult ]. But we are pricing very competitively. So we're having a win rate to -- win ratio, which is reasonable in our view. We don't win too often because then we would push too much, and we don't lose too often, so to speak. So we have a balanced win ratio, which is in line -- which is something we track really carefully because we don't want to overbid or underbid on the margin. I don't know, Harry, if you want to add something to this.

No, I think you covered it. Thanks.

Great. And then, I mean, if we continue on that, that you're seeing a good win ratio, it seems like you're seeing an even increasing activity, especially in the secondary market. If we would also put in a potential buyback program into that, how do you see the opportunity to actually deploy the capital without doing any sort of extraordinary dividends or buybacks? Do you think you could still be at 15% ROE for the full year without continuing to do something actively on capital?

That is the plan. We will plan to have 15% for the year. And clearly, if we would buy back more stocks, then that would lead to a lower number of shares. So that would help ROE everything else being equal. But it's not depending on share repurchase because that's out of our control. So we try to plan -- we always focus on planning what we can control and impact. And this one is for the shareholders, clearly.

Great. And then one last thing, if I may. Just on cost. So on one of the slides, you mentioned that you had about SEK 9 million for the IT insourcing and then some local initiatives. I think previously, you've talked about roughly SEK 50 million for the IT insourcing. So should we expect that whole delta to come in Q2, and then from there on, you start to see the savings from H2? Or how should we think about the phasing of costs?

I think it's -- I mean we're always trying to be realistic. Internally, I tried to use the metaphor of driving a car. So we always want to keep our eyes open, and we look at the road ahead. And the IT insourcing, the dual running, the estimate that we had when we said this, it was also SEK 50 million. I think it was SEK 50 million for the benefit of SEK 40 million of cost. And we are always trying to beat what we set out as a realistic target. So hopefully, we can beat that. I don't have any detailed insights into Q2, but it was cheaper than what we expected in Q1. And hopefully, we can beat Q2 as well, but that remains to be seen.

And the savings are still to be the same regardless?

We hope to beat those as well, but those are the numbers that we put out there for now.

And in terms of progress on that. So basically, it's a contract with 6 modules. I think we've done 3 of the modules we've insourced by now. So there's 3 remaining. And so there will be additional costs in Q2. But as Christian says, we hope to beat the SEK 50 million one-off cost.

The next question comes from Rickard Strand from Nordea.

Can you hear me?

Yes.

Rickard, yes, we can hear you.

So I thought I'll start with question on your funding costs, given that sort of you have a fair share of fixed or term deposits, but we also see that the rates are peaking. So I just wanted to hear if you could give an indication when you expect your funding cost to peak from your deposit base?