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

Welcome to Hoist Finance Q3 Report for 2024. [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 this Hoist Finance Earnings Call for the Third Quarter. I'm Harry Vranjes, CEO of Hoist Finance, and next to me, I have Christian Wallentin, our CFO. And in the room today, we also have Karin Tyche, our Chief Comms and Investor Relations Officer, who joined us just before the Q2 report. As usual, before we dive into the report, I just want to talk a little bit about who we at Hoist Finance are and what we are. And I think in short, we are a performing financial institution working with nonperforming loans. We are different compared to other peers in the industry. Hoist Finance is a regulated credit market institution supervised by the Swedish FSA. We, therefore, have a different regulatory environment than most of our peers and we also have a different funding model. As you know, our main source of funds, some 75% savings accounts from the public. We have savings accounts in Sweden, Germany, Netherlands, Poland; we recently opened up Austria and Ireland and in the U.K; allowing us to match our currencies between the asset and the liability side. Now the remaining 30% of our funds comes from bonds of different character that we've balanced and make sure that we have a sort of reliable access to the debt markets. So this gives us a considerable funding cost advantage compared to the industry and of course this status also gives us stability and benefits going forward. Now many peers in this situation are now going capital lighter, focusing on third-party servicing. We are and we want to be capital heavy. We have the setup, the access and the balance sheet for it. Now as you have all seen, so on the 30th of September, the Swedish FSA Finansinspektionen published a legal position providing guidance on weights that should be applied to deposits taken in via digital platforms when calculating LCR and NSFR. Now we use digital platforms for our savings accounts offerings outside Sweden. You can use digital providers in many different ways. We do not use any services that aggregate deposits or broker deposits and we do individual KYC on each and every one of our savings customers. So based on how we use our digital platforms, we do not see that we need to make any adjustments to the way we report LCR and NSFR as a result of the legal position. Now we have initiated a dialog with the Swedish FSA and it is constructive and ongoing. Now regardless how you count LCR and NSFR, we are above regulatory limits and we are on a good way to meeting our financial goals regardless of scenario. We will still target more than 15% ROE, 15% EPS growth and a CET1 ratio of 2.3 to 3.3 percentage points above regulatory requirements. So with that, now let me take you through the key highlights of the third quarter. So as you've seen, profit before tax came in at SEK 369 million. We made a larger positive revaluation in Poland and we've taken costs for a large transaction that in the end didn't happen. So if you adjust for those positives and negatives, we think a reasonable representation of the underlying business would be some SEK 314 million for the quarter. Christian will take you through the bridge later in this presentation. Return on equity came in at a strong 16% [ driven ] lower by a high tax rate for the quarter and, as we communicated in Q1, we have restructured some of the daughter companies in the group and the tax effect has come through now in Q3. On investments, very strong quarter, record quarter in fact for Hoist Finance. We closed portfolio investments of SEK 4.3 billion with very good geographical spread. And before the questions come in; no, this is not the new normal level. As we buy larger and larger portfolios, the volumes get lumpy between the quarters as we previously communicated. We still see significant activity on the market as we are now 1/3 into Q4. And just last night I had the privilege of signing off our first transaction in Portugal, a medium-sized transaction that we are very enthusiastic about. Now so far during 2024 we've invested SEK 8.7 billion bringing the total book value to SEK 29.9 billion, just shy of SEK 30 billion, after a growth of 25% quarter-on-quarter. We still see fewer participants in the auctions and we see new consortiums forming around Europe sometimes opportunistically deal by deal and sometimes strategically. Now we at Hoist, as we've previously communicated, are also open to co-investing with partners especially if it gives us access to new volume or in cases of really large transactions. We have an ambition to grow our portfolio to some SEK 36 billion by the end of 2026. We do that through combining our internal capabilities with outsourcing partners. We expect direct cost to grow in line with portfolio growth and indirect cost to grow slower. This operating leverage we can see again now in this third quarter where the portfolio grows 25%, profit before tax grows 31%. Now the operating leverage is less pronounced this quarter as most of the portfolio growth was booked at the end of the quarter. But if you look at this on a year-to-date basis, you'll see the trend more clearly and Christian will take you through this in more detail later in the presentation. Collection performance solid at 102%. Q3 is always seasonally slower. But this year it seemed like Europe refused to come back from holidays. It was a slower Q3 than usual. However, this gave our business units time to focus on onboarding this record amount of new portfolios that we acquired. So in the end, it worked out quite well for us. We expect collection performance to bounce back up in Q4. We got a ratings hike from Moody's, very happy about that, moving us 1 notch higher up in the investment grade bracket. We see this of course as a great confirmation from an external source of the way we manage our balance sheet and our risk management in general. We were active in the bond markets during Q3, and we issued senior unsecured or senior preferred for about SEK 1.45 billion and then also a senior nonpreferred, a first for Hoist Finance, at attractive pricing. Our capital and liquidity position remains strong. The high investment volume brought the CET1 ratio to more normal levels than before, still well above our internal limits and significantly above regulatory limits. Now looking at liquidity, it's possibly even stronger. As we are building up to SDR, we're also building up our liquidity reserve and it is now SEK 15 billion, a little bit more than SEK 15 billion, basically half of our NPL portfolio value. So all in all, very happy with this solid third quarter. And now I will hand over to Christian to take you through the quarter in more detail. Over to you.

Thank you, Harry. Good morning, everyone. Quarter 3 was a really strong quarter for us, we had record investments and solid returns on top of that. So we had invested SEK 4.3 billion in the quarter. We saw that ROE was above 16%. The year-to-date ROE is above 18% and we are good -- we are well on track to beat the financial target that we have for the year on 15% plus. If we look at the P&L overall, we have strong growth across all key metrics. We have 33% interest income and that's driven by the larger books of 25% and given that the interest income is growing quicker than the book growth, that indicates that the pricing that we've done is really supportive. So we've been seeing higher returns than we did a year ago and 2 years ago. So it's highly supportive pricing in the market currently for us. If you look at the collection performance, it's continued to be stable and strong. It's 102% for the quarter and year-to-date it's roughly 104%. There was a slight drop over the vacation months and this is normal. This happened last year as well. And we see, as Harry pointed out, things bouncing back to more of a steady state in Q4 as well. Cost growth has been 14% versus the 25% portfolio growth and I'll get back to the underlying growth of the book in a later page for earnings before taxes bridge to see the like-for-like growth year-over-year. Net profit, SEK 257 million and that led to the 16% ROE. When we look at for the full year, we expect an effective tax rate of 22% to 24%. As mentioned, this was the highest quarterly volumes on record with SEK 4.3 billion during the quarter and this is leading to a book value of SEK 29.9 billion, so almost SEK 30 billion. This will likely lead to the highest year in Hoist history for the full year. And we have invested across most markets; mostly in Spain, France and Italy, that's where we've seen the largest volumes, but this has been across many of our geographies in Europe. The pricing has been really supportive. And if you look at the last 2 years return levels, we haven't seen these returns since pre-2015 levels, which is highly encouraging. During the last 3 years, 2/3 of the book has been -- the last 2 years, 2/3 of books have been invested. So we have essentially repriced the asset side the last 3 years, which is great because we have moved into a new interest rate environment. We are not deviating from our risk profile that we want so it's all granular risk. We have no single risk exposure, which is relevant to the size of the book. It is still only roughly SEK 20 million the largest exposure we have in the group and that's compared with almost SEK 30 billion of total book value. So we've been really disciplined and this year in Q3, we had a really strong investment quarter. Last year we had a slightly weaker one when things didn't go fully our way and this quarter we've seen that we've been managing to win all of the opportunities that we almost wanted. When we look forward into Q4, we have a strong outlook. We believe that it's continuing to be a really supportive market. And seasonally, Q4 tends to be the strongest of the year. We don't see a level of SEK 4 billion, however, we do see a strong quarter. The last few years we've been working very actively to diversify the book across geographies and assets and now we see that we have a nice mix across geographies. There's no country above 20%. If you look back a few years, we saw that Italy had a weight of 25%. Now we have almost, let's say, 4 between 15% and 20%, which is exactly where we want to be. And on the secured side, we keep growing the share of the secured book so now it's 34%. It's been hovering for a while around 30%. This is not a goal in itself, but we do want the diversification effects between assets as well. We are very pleased that we are now -- which is classified under the region. However, this is not reflected in Q3 numbers because this happened in Q4. We're really pleased that we have now entered into Portugal as a new market and we look forward to having a coverage of the full Iberian Peninsula. This is a page that we also presented on our Capital Markets Day a month or so ago and it's updated for Q3 numbers. And in this you can see that our growth journey is very well on track and this is combined with attractive risk and attractive return, which is really, really pleasing. We've been really focused on getting the right returns and always looking for this granular risk that we really like backed by consumer or a clear asset side. You can see that we wanted to grow starting end of '21 with SEK 18 billion to the end of '26 and we are 66% on the way of that. So 66% of the SEK 18 billion growth we have now achieved in Q3 '24 and this is taking us to 83% of the SEK 36 billion overall goal, which is encouraging to us. And we are not growing at the expense of profitability. We are very disciplined. So it is a good situation where we see right risk and return and also very sound and healthy growth. You can also see on the geographies for example in Q3 '24, it's a really nice mix between the different markets in Europe. We have now new markets if you compare with 2 years ago; Sweden, Portugal and a few others. This leads to a larger pool of deals and we have taken on really strong people that are leading the new markets. So we're very pleased with the expansion to new markets in Europe. These are core markets, they are very close to home and they make a lot of sense to enter. Here we're trying to give you a view of the underlying profitability quarter-over-quarter. So we have seen a robust underlying performance and the key message is at the center of this page with the 59% underlying earnings before tax growth and this is the SEK 197 million to the SEK 314 million. We have on the left and on the right items that you could call more nonrecurring in nature. So starting from the left. Last year we had a SEK 282 million EBT and we had a joint venture income, which we do not have anymore, we don't have that joint venture anymore and then we also had nonfinancial transactions in the P&L. And clearly we did rejuvenation, which ended last year at this time, and that led us to, if you would normalize for these numbers, SEK 197 million underlying EBT in Q3 '23. The book has grown and also the profitability of the book has grown and that leads to the growth to SEK 314 million. And then we have a positive revaluation in Q3. I think we're slightly unfair to ourselves. This is part of the core business. We do see that our healthy book will lead to or potentially could lead to revaluations as well and this is what we see here as well. This is the Polish revaluation. It's one of our best performing markets currently and when we have such strong collection performance, it's also necessary at some point to take positive revaluations. We don't see that this will impact collection performance anyway. We see that this will continue very strongly. So this is a really strong addition from the healthy book. And then the minus SEK 22 million is a project cost that we had for an investment project that we canceled during the quarter so we take that as well in this quarter. And that leads to the reported number of SEK 369 million for the quarter. Now zooming out slightly to year-to-date, so January to the end of September. The year-to-date numbers look equally strong in our view. So we've been growing the portfolio book value by 25% year-over-year. That has led to operating income growing by 27%. It's driven by repricing, growth of the book and also the underlying health of the book, which adds collection performance above management expectations or management forecasts. We are continuously incredibly focused on cost discipline and that has resulted in that underlying indirect cost so the central cost; the asset management team, IT has been very stable year-over-year. So we're not growing that in any significant manner. If you look at the numbers, we have some slight growth, but that's largely driven by this SEK 22 million of project costs that I pointed out on the previous page. Direct cost on the other hand grows with the book and this is where we get the operating leverage. So the total cost base is not growing in line with the book. It's only the direct cost base that does that. So total cost grows slower than operating income and that gives operating leverage and a profit growth of 37% year-over-year in the reported numbers. Looking at the capital. We have clearly deployed capital in new investments during the quarter. It's a record investment quarter. That said, we still have a very strong capital position. We're significantly above regulatory requirements and also above our own target range that we have set out and this enables continued high investment capacity, which we intend to use. It is a really attractive investment market currently and we see a lot of attractive investment opportunities going forward as well. An update on the SDR and liquidity. So we have a strong buildup of liquidity. So NSFR is long-term liquidity and LCR is short-term liquidity. So the buildup of liquidity overall to qualify to become a specialized debt restructurer is ongoing. We see that the liquidity portfolio have more than doubled last 12 months, which is SEK 7 billion to SEK 15 billion, and this is in relation to the NPL portfolio of SEK 29.9 billion. So it's an exceptionally strong liquidity position that we have currently. This is exactly in line with our role in society that we should be very stable and predictable in terms of being there in ups and downs in the economic cycles. Net stable funding ratio is increasing in line with the plan to meet SDR requirements of 130%. So we're now at 128% and we see that we are increasing steadily and in line with what we wanted and thought. The liquidity coverage ratio is exceptionally strong. You don't see really how strong in the 750%. It's already there strong, but that's an average of the last year on LCR. NSFR is more of a quarterly spot rate because it's long term, but the short term we use as per the template from EBA, a yearly average. So if you only look at the Q3 number, we have almost 1,200% of LCR, which is incredibly strong if you compare that with 100% regulatory requirements. We're really pleased to note during the quarter that Moody's upgraded us to Baa2 so 1 notch up in the investment-grade bracket. We are the only investment-grade rated company in the industry. We were also very active issuing market funding in the quarter so SEK 1.65 billion. We have a very stable funding base that now consists of 77% of the funding overall. And we are in the market, as some of you might have noted this morning, with a 4-year floating rate note senior unpreferred SEK 500 million. We're testing that market now after the Q3 report. Now handing back to Harry again to sum things up before we go into Q&A.

Thank you very much, Christian. Thank you all for listening in today and before we open up for questions, just let me add some final commentary. Our goal is to become the leading investor and manager of nonperforming loans to consumers and SMEs and this is not some lofty goal or vision statement on a PowerPoint, this is our sincere ambition and we are working very, very hard to make that happen. With the whole industry repositioning, substantial changes are happening across Europe, actors are trying to find their optimal positions, we have found our position, a capital-heavy institution with solid industry experience and track record. Now investing in NPLs is a long-term business. Portfolios generate cash flows for 10, 15, 20 years and this is also the way we are building up Hoist Finance. We will gradually grow our portfolio. From quarter-to-quarter, it can be a bit lumpy, but we will constantly keep looking at the returns so that the back book will support us in good times and in bad going forward with sensible investments, solid loan management and an iron grip on the balance sheet. We strive to deliver increasing shareholder value for many years to come. And with that, thank you for listening and let's open up for questions.

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

Maybe the first one would be on this clarification from the FSA. But just how confident do you feel about your interpretation that it's only if you have aggregation or brokerage via platform that you should have an impact?

Well, thank you, Ermin, for the question. We feel very confident about that interpretation.

Okay. That's super clear. Then could you give us any indication to how much you've signed so far in Q4? You've done that in the last few quarters and so a continuation on that a little bit. I mean if you have such a high win ratio currently, do you consider it to be even more opportunistic and increase the return requirements further when you're pricing? And maybe lastly, given the very strong market activity, very attractive returns, why do a dividend deduction at all? Why not say we'll wait for dividends until the market stabilizes at a lower level because currently this is a land grab, which Hoist is very well positioned to benefit from?

Yes. So well, if we start with the dividend deduction, I think it is a Board decision and of course we have a policy that we are sticking to. Any decision on that will of course be communicated later. With regards to Q4, yes, the activity is very high and typically what we communicate is for signed deals. So we have a number of transactions that are won, but not signed yet and that's why we haven't given out numbers. The number of signed deals is like SEK 0.5 billion or something like that, but we expect that to tick up as the quarter passes. And in terms of investment strategy, yes, we had a high win rate in Q3 and if we compare it to last year, we had almost similar pipeline; maybe a little bit smaller, but a very large pipeline in the quarter. We placed bids on IRRs that are lower than the IRRs that we bid on this quarter. Last year we walked away with very little. This year even on higher IRRs, we landed a number of deals. So I think for quarter 4, I mean we will always be looking at the returns. We are always selective in our investments. We don't go sort of shooting with, what do you say, a shotgun. It's more a pinpoint and so we'll see what comes out of Q4. But the activity is out there and we are selective and very disciplined going through here.

And I can just add too on the returns, I mean that we are seeing very attractive returns. So we want to invest steadily and I think given there's such a strong market, we do expect that it will be a record year in terms of volumes. And also with that said, it's not at expense. On the contrary, it's actually higher than what we expected for the year in terms of returns. So we're very happy to deploy more capital than what we initially might have thought this year because of both the granular risk that we're bringing on and also the higher returns than expected.

Excellent. And then if I may, just one last question. On the collection performance, have you seen any uptick now early October or so that's giving you confidence that it would step up even though Q3 was still on a good level, but that it would step up as you expect for Q4?

The short answer is yes, we have seen an uptick. We haven't finalized the number. Well, October is not over yet. But yes, we have seen an uptick.

And also to add to that, we have a central team that is doing a fantastic job of creating transparency on both the health so the quality of the book and also the collection performance and we track this with quite both details so meaning bottom-up models and also from different perspective. It's a classical way of Excel and -- now I forget the name of the system that we use, but Tableau based and then also more machine learning and AI and risk does their own analysis from a second line perspective. And all of these point to both collection performance as we see it in October and also these models are indicating that we will get back on what we see as a more ongoing basis and not during vacation time so to speak.

The next question comes from Gustav Larsson from Arctic Securities.

Just a follow-up there from Ermin on portfolio pricing and competition. Do you see less competition in auctions in the sheer number of bidders this year compared to last in relation to this and peers going for capital-light business models? Is this a structural shift that leads to higher competition on servicing as well that would potentially make use of third parties in servicing more attractive for you?

Thank you, Gustav, for the question. Well, yes, I think we do see fewer bidders per auction typically and we do see this combination of new consortiums being formed with, let's say, industry player plus financial player. We see the American funds actively entering Europe and then typically together with an industry player. Now from our point of view -- from a seller's point of view, it is typically easier to sell to a single bidder than to a consortium especially if you have consortiums that are regulated by both European and U.S. regulations. So for us, we think this is a sort of positive development. And where this leads on the capital-light side going forward, I guess we'll just have to see. We see that there is a strong interest of course from our peers around Europe to collaborate with us on servicing and it's a great setup for us to be able to either combine that with our internal capabilities or fully outsource to one or more players in the market. And basically we use these options differently in different markets depending on what we feel is the best mix.

We also see when more financially driven players are entering back into the purchasing together with the industrial players that the financial discipline tends to be higher, so they have more outspoken hurdle rates when it comes to returns, which we think is beneficial for the market overall.

Okay. One question on operating leverage. But how should we think about operating leverage as you grow the book towards your target of SEK 36 billion? If we look at profit before tax adjusted for one-offs in this quarter and adjusted for the rejuvenation program last year, the portfolio is growing more than profit underlying. Is the operating leverage we should expect based on fixed cost? Can you improve collection efficiency or do you see any other benefits just from sheer scale?

I think the profit is increasing higher quicker than the book. I mean given that we are repricing and -- well, third-parties have been growing the book and then on top of it, we are repricing so we have better returns now than what we used to have. So that's driving the net -- or the interest income. And then we're also seeing we're working very actively with the funding mix and that is more or less as expected, I would say. And the collection performance of the health of the book adds then to operating income, which tends to grow quicker as well over time. And then the costs, we are very focused on keeping those down. And those 2 combination meaning costs growing slower than the top line leads to that profit is then being levered up by this as well. And we see that this will continue. And clearly as we grow, then we won't be able to keep the indirect cost flat for forever, but we do try to do that as long as we can. And we see that the underlying indirect cost currently is flat. We have a lot of cost in Europe where we only have 70 people here in Sweden and the rest is sitting out in Europe so mostly in euro and the SEK has been depreciating against the euro over the last few years. So FX is not favoring that comparison as we are booking all our reports in SEK. So overall, we see that the operating leverage is playing to our favor meaning that the profits will grow quicker than the book.

I can just do a short follow-up on that. So as we communicated before, I mean we insourced our IT, which is part of the indirect central cost, and had a saving about SEK 40 million a year on that. This has basically enabled us to finance growth in the investment team. Considering I mean with all this activity out in the market and new markets coming in, et cetera, basically the insourcing of the IT maintenance has basically financed the opportunity to address more portfolios, which is a great way of allocating the internal costs.

And also I would add to that actually that we believe that having it insourced is the right way of doing it and also the cheaper way of doing it. So we're trying to do things in the right way with high quality clearly and the right cost level.