Ladies and gentlemen, welcome to the Hoist Finance Audiocast with Teleconference Q4 2021. Today, I'm pleased to present CEO Per Anders Fasth and CFO Christian Wallentin. For the first part of this call, all participants will be in listen-only mode, and afterwards there'll be a question and answer session. Speakers, please begin.
Thank you very much for joining us here at our Q4 results presentation. I'm Per Anders Fasth, and as you heard, Christian Wallentin is here, our CFO since the summer. You can go straight to exhibit four, please. Well, this quarter, I'm happy to announce that our transformation program is starting to show results. We're seeing signs, positive signs in our collections, and we also see increasing portfolio acquisitions. As well as our cost program, which is also starting to show results. I think starting to see signs of what we started on and communicated already in the summer that we would do.
If we summarize the Q4, we had a strong end with the attractive acquisitions towards the end of the year, where of course, the portfolio that we bought from Alpha Bank in Greece at EUR 1.1 billion stands out. What we've also done in this period is that we have strengthened the leadership team, and we've done so throughout the year. We worked quite a bit on our strategy, to focus the company and also to strengthen the whole accountability and responsibility of the leadership. We are still awaiting the EBA or EU decision when it comes to the risk weighting, which Christian will come back to and show a little bit later, which will, of course, have a very positive impact on our capital situation.
On an overall level, our net interest income is slightly lower than last year, or actually significantly lower than last year, but in line with Q3. Our underlying cost level is lower than last year. We have taken some costs related to our transformation program in this quarter. In addition, as courts are opening up, which will have a positive impact going forward on our collections, there's a lag of somewhere between three and 12 months from the court cases are open until collections increase. As courts are opening up after the pandemic, we also see, of course, legal costs coming up. Collection performance, I mentioned, it's particularly towards the last couple of months of the year was very strong. We are now at portfolio volumes an increase of 6%, year-over-year.
Our CET1 ratio, including the portfolio acquisition in Greece, is now at 9.56, which is at the lower end of our ambitions. Return on equity, 6%. Just a quick. If we move to the next page, Exhibit five. You see the last 10 months. You've seen a reduction in our portfolio volumes over the year and in the third quarter. Christian and I mentioned that we saw a bottoming out of the negative development in terms of portfolio volumes. We see that coming up a little bit in Q3 and now with the acquisition towards the end of the year, we also see an increase. 6% growth year-on-year.
If we move to the next exhibit, we also summarize the year for acquisitions, portfolio acquisitions at EUR 4.7 billion, which of course is a very strong and high increase compared to the COVID year 2020. As you can see also in this exhibit, which shows the quarterly development of the portfolio acquisitions, you can see that particularly towards the end, second half of the year, we see significant growth. This 4.7 billion is actually the highest or the third-highest level in Hoist history. Summarizing portfolio on the next page, some portfolio volumes and net interest margin or net interest income. You can also see that, you know, a significant portion of our profits or revenues are related to net interest income, which of course is a balance sheet business.
Volumes are important and margins are important. What this exhibit shows is there has been margin pressure over the last years, particularly as the old previously acquired portfolios are sort of running in run out or run down. The newer portfolios have a lower IRR. As you also can see, there's been a stabilization of the last three to four quarters in terms of margin development. Looking at the cost side on the next exhibit, on Exhibit eight, we see that looking at the bars here, it is quite a flat cost development. If we take into account the restructuring related costs that we have in this quarter and also compare it to what's the underlying cost level in Q4 last year. It's a slight reduction in the underlying cost level.
We are today 90 people less in the group than we were in Q4 2020, and actually 35 FTEs less than we were in Q3 2021. We are in terms of our own plans actually slightly ahead of our plans when it comes to the cost side. Overall, on the net profit on exhibit nine, you can see that we are still at a too low level when it comes to net profit after tax. But what we're also working on hard and what we've done throughout the year is to what we call de-risk our portfolios, our balance sheet, and also our tax legacy issues. A strong ambition for us is to increase the level of profits of course, but also to reduce volatility in the results, which this exhibit illustrates.
As you may remember, we had a significant write down in Q1 this year of EUR 350 million and more than EUR 100 million in tax provisioning in Q2. We had a rough start of this year, old legacy issues hitting the net profit. If we look at Exhibit 10, where we are today, we have approximately EUR 22 billion, as I mentioned, EUR 22.4 pro forma, including Greece, in portfolio values. We have approximately 80% unsecured and 20% secured. Secured portfolios are mainly in Italy and in France. We've had some write downs in France, U.K. and Spain throughout the year, and we have had significant or very strong collection performance in Poland and Germany as well as Italy.
Of course also Belgium, even though it's a fairly small portion of the portfolio, also shown strong performance, and we see improvements in Spain. Greece shows a very strong return on equity. On an overall level, our secured performance is very strong. With that introduction, I will now leave to Christian, who will go a little bit more into the overall financial side of our results, and then I'll come back towards the end and summarize.
Thank you, Per Anders Fasth. If we move to page 12, the financial summary. Q4 marked the positive ending of the challenging year for us. The challenges brought during the summer a high sense of urgency and pace of change. We're all overall now executing the plans developed and detailed during the autumn, and we believe that we have strong momentum internally. Q3 NPL portfolio volumes were bottoming out, and now in Q3, we see that we have returned to growth. We grow 6%, including the Greek transaction that we announced by the end of Q4. As Per Anders Fasth mentioned, in this difficult year, 2021 marked the third largest investment volume year for Hoist, including the signed Greek transaction.
Worthwhile to point out on the capital side, the Greek transaction ties up 44 basis points, while the interest income is expected in Q1 when we're closing the transaction. This of course will create a strong foundation for Q1 investment volumes and also drive interest income for us in the year ahead. If you look at the quarter-on-quarter operating income, it grew 4% and also increased compared with Q4 2020. During the last month of 2021, we reached significant improvements in collection performance. Overall, we had 101% collection performance for the quarter and also for the year. It's also driven by more net impairment gains and losses versus Q4 2020.
As in Q3, we have an unrealized loss from change in value from interest rate swaps, and that's driving the EUR 45 million you see on this page. In Q4 2020, the positive result was mainly driven by FX change results. Overall, the costs are slightly up in the quarter. However, underlying costs are lower than compared with Q4 2020. It's driven by legal costs being increased as the court system is now catching up. This is, as Per Anders Fasth also mentioned, 3- 1 2-month lag before we see the benefits of this. We also have some transformation costs in the quarter of -EUR 27 million, and we have reversed variable pay as well. Positive as well, we don't see a Q4 effect, which we've seen over the last few years on the cost side.
That's also a slight sign that we are now seeing the transformation gaining momentum. We have a profit from JV contributing positively EUR 12 million during the quarter. Net profit is slightly up over the quarter 3% and then 60% year-on-year driven by tax differences mainly. Profit before tax is EUR 73 million and overall tax EUR 4 million in the quarter. This tax for the quarter is driven by our quite a complex structure with a lot of different legal entities. The DTAs, et cetera, are driving positive tax when we have a lower overall yearly results. Overall, we see in the ROE that we have a positive trend and the transformation is starting to contribute positively.
We have also taken down the number of employees during the quarter, it's minus 2%. Should we go to the next page, please? Here you see we have a strong liquidity position providing a large financial flexibility. We are managing this liquidity to the lower end of our target range. We know that we're quick to attract deposits, so we don't need to have a large liquidity portfolio. It's driven by the NSFR ratio mainly. The NPL portfolio volumes bottomed out in Q3 and returned to growth in Q4. It's performing 6% growth including the Greek. It's also worthwhile to mention that if we compare with the 2020 acquisitions, we more than doubled the volumes in 2021, including the Greek transaction with Alpha Bank. Could we go to the next page, please?
We continue to have a solid and diversified funding position with a diversified maturity structure. As you are aware, we mainly raise this funding in the form of deposits from the public and also complement that with capital market issuance of senior secured and own funds instruments. Our main source of funding tends to be sticky, meaning the public deposits. I think I want to particularly point this out since we're in a rising interest rate environment. That of course, if this would continue, that would benefit ourselves given that we have a large share of deposits in our funding. Could we go to the next page, please? CET1 ratio is slightly lower than our internal target.
As I mentioned, the Greek portfolio is tying up capital from signing 44 basis points, so this has impacted the capital ratio in the end of December. The interest income will come from when we settle the transaction in Q1. On the right, you see that we've been managing down our liquidity reserve, so pre-funding with lowering pre-funding, given the volumes of deposits we can attract, and also it's a result of a lower book since Q4 2020. We're well within our range, target range, and we are meeting all the regulatory requirements with significant buffers. Just to remind you, the NSFR ratio, which is in this quarter, 116%, that drives a lot of the liquidity buffer. That's our binding constraints.
Could we go to the next page, please? Just quickly on the year, we're leaving a challenging 2021 behind with a positive Q4 momentum, both operationally and also being back to growth in the overall book. The net interest income was impacted by low volumes and margins during the year. Also mostly defining 2020 and 2021 is the significantly impacted impairment losses, and these are mainly from the 2016 to 2018 vintages. We've also seen when COVID has, the lockdowns have receded from societies, we've seen an acceleration in legal collection costs as markets have been reopening. During Q2, you probably remember that we had almost EUR 100 million tax risk provision due to also legacy issues from 2014.
Overall, I think it's pleasing to see that the Q4 was a positive momentum. We stopped the year, or we ended the year on a positive note. Overall, we were reducing our fees on the cost structure, and that's mostly in the non-op side with 5% over the year. We're hopeful for the momentum that we see in the transformation program. Could we go to the next page, please? This will just remind you of the impact of the EBA risk weights that are reversing from 150 to 100.
This is a process that is ongoing, and we believe that it will be implemented during the year, of course, during Q3 and Q2, and then we'll see the benefits most likely in H2. This is a highly uncertain process that is politically driven, but that's the expectation that we have. Now we go back to Per Anders Fasth to summarize our focus going forward.
Thank you, Christian. Yes, let's go to Exhibit 19. As you may remember, we communicated also before that we started the transformation program right after the summer, towards the end of the summer. The transformation program focusing on all the aspects that impact our profits, and then with some help from EBA also will have a positive impact on our equity so that we can focus on our key financial target, which is return on equity. We want to grow, and we want to increase return on equity. Let's go to the next page. We are running a program to reduce our non-operational costs, and we now have detailed plans and targets in each entity in what you would call the budget, what we try to call as the financial forecast.
We see that this will impact our absolute cost levels. We expect that two-thirds of the impact will come on the run rate basis in Q4 this year, and we will see a full impact of the cost reduction in Q4 2023. Another area is of course what we're working on is the collection side, which as you can see on page 21, where we work on improving our collections, increasing the collections of the portfolios that we own, and also reduce the costs to collect in order to increase productivity. On an overall basis, if we look at page 22, we today are in a situation where we have approximately 80% unsecured and 20% secured portfolios.
Our ambition is to be at least twice the size where we are today, and we believe that we will grow in the secured to a higher degree than in the unsecured. In the secured portfolios, we have a higher competitive advantage. Our funding cost advantage is stronger in secured portfolios than it is in the unsecured portfolios that are hit by the backstop rules that are in place after the changes in 2018, 2019. The way for us to reach our ambition to grow is to reduce costs and improve collection performance in order to generate profit.
We need this cost spiral to move in the positive direction because it's profit that can generate capital, which in turn increases investment capacity about 10 times. Net profit is, if we make EUR 100 million in net profit, we can invest approximately EUR 1 billion in order to stay at the same capital ratios. With the investment capacity increase, we can generate higher revenues, which in turn will increase profits, which in turn will generate more capital. In a position where you are capital constrained, the starting point needs to be to improve profits through cost effectiveness and collection performance. We cannot grow ourselves out of this situation, so we have to start where we have started. Of course, cost reduction has a quicker impact on P&L than other measures.
To summarize this quarter, if you go to page 24, what we have seen, and as you have heard from both Christian and myself, it's a quarter where we have seen the transformation program showing positive signs and signals of that we are on the right way when it comes to improving profits, and we see higher collections and higher acquisitions. We have also throughout this year or since the summer, done significant changes in order to strengthen our core business, which is NPL portfolios, unsecured and secured. We are also going through strategic reviews of our portfolios and of our entities in order to ensure that we are the best owners of those portfolios and those entities. We have also seen or we tried to communicate that our transformation program, that is the enabler for profitable growth.
The true reason why we are doing the transformation is to improve profits, which we do through cost reduction, where we have implemented have detailed plans in each entity in order to reach our absolute cost reduction. We have done significant, what we call country deep dives, where we go through with each country on the operational side on collections and work for three weeks very intensively and identify significant, collection improvement potential. We have throughout the year now a more clear roadmap on where we want to prioritize our investment when it comes to asset classes and markets and how to work with our clients in order to be more successful in the acquisition process.
With those words, I think we are finished with our part of the show, and then we open up for questions. Thank you.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. Our first question is from Jacob Hesslevik of SEB. Please go ahead.
Hi, good morning. My first question is on the appetite for secured assets. Has it increased as a result of the new board's background within real estate? Will you also mainly grow in France and Italy, where you have your main secured portfolios today, or are you planning to go into new markets?
On the first question, I don't think that has any implication from the board composition. I think it's been quite clear that we have a competitive advantage when it comes to funding on secured, and we've had a very good experience on the secured portfolios. Of course, we want to grow in areas where we feel that we have a competitive advantage. We feel that we have that in secured, and the competition is also slightly different in secured compared to unsecured. Then on your second question was related to. Could you just repeat it quickly?
Yeah, I was just wondering, are you then focusing on growing more in France and Italy, where you already have secured portfolios, or are you planning to go into new markets and new countries?
I think it's clear, like we have unsecured. In all the markets where we are today, we have unsecured operations. I think the strong markets for secured are more in the southern parts of Europe, which actually is Italy and France, and to some extent, we expect also Spain to increase in secured.
All right, thanks. If we looked at the, I mean, cost, you had EUR 27 million taken as a transformation cost in this quarter. Should this be viewed as a one-off, or should we expect more transformation costs for, you know, 2022 and 2023?
More or less a one-off. I would say. I mean, we have not taken major one-off costs, I would say, in our transformation program. I think it's you shouldn't expect any major transformation costs going forward.
Okay, that's good to know. Also, could you tell me what the length is on the hedging contract that you, Christian, mentioned earlier?
Yes. It depends on the type of hedges. We have FX hedges and the interest rate hedges. We're rolling these on a monthly and quarterly basis depending on what the purpose of it is.
Okay, thanks.
The reason for having this is both to hedge the business but also for regulatory purpose, for capital purposes.
Okay, perfect. Thanks for the clarification.
Thank you. Our next question is from Ermin Keric of Carnegie. Please go ahead.
Thank you. Good morning, and thanks for taking the questions. If you could maybe start with just going back to the slide 20, could you just give us some kind of flavor on how much is non-operational costs as you see it today in absolute terms? And also, when you talk about the run rate being 65% impact basically until Q4 next year, that's on a reported basis. Kind of going back a little bit to Jacob's question, we shouldn't expect any transformational costs necessarily to be in there.
The reason why we have left these numbers not spelled out the numbers right now is that we, of course, have a very clear plan, and we have a very clear baseline for this. We want to, you know, it's quite likely that we will have a new composition of the board within 10 days, and we want to go through these plans and these targets with like a new board before we communicate any external numbers in the market. It is of significant size.
Got it. Thank you. Actually, a follow-up on where you end up. Do you see any or do you expect any changes in the strategy given the possible board of director reshuffle in the coming week?
It's a little bit. I mean, of course, one way you could say it's premature for me to talk about if the strategy would change with the new board. As you may remember, we also communicated in the summer that Lars Wollung would act as an advisor to us or to me in our change program. Lars has been part of this and supporting this, what we call the transformation program throughout the fall. We have no indications of any major changes in our strategy. It's clear that we need to focus on where we are more competitive. We need to reduce costs, we need to improve collections, and grow in the areas where we can add significant value.
Maybe Christian want to add something.
Yeah, for clarity, I mean, as you probably have seen, Lars Wollung is proposed as the new chairman.
Yeah.
Okay. And then perhaps just moving over to the investment side. You've previously talked about competition being quite fierce. Have you seen any change in the competitive landscape, sorry?
I think it's been well, I mean, two things, of course, drive competitiveness in terms of on each acquisition. One is I would say that there was a lack of supply in 2020, which sort of quite a few competitors needed to invest. With supply being quite low in 2021 for quite some time. Of course, there was, you know, a gap between the demand and supply. What we see now is that there's been an increase in the supply towards the end of the year. We're also seeing positive increase in the supply for the pipeline, what we expect for this year. So will that have an impact?
I think also that will be having an impact is like Christian was mentioning, interest rate levels are likely to increase. I think we have an advantage, because since we're deposit funded, some significant portion of our competitors are market based funded and spreads tend to increase as interest rates increase.
Thank you. One final question just on the capital. Now you're slightly below your own internal target. Does that put any restrictions on you in how you're planning your investments during the year? Also, have you heard anything new regarding the Pillar 2 guidance about the timing and expectation of the impact?
I can start on the. Well, I mean, first of all, this, it's the internal target. It's of course significantly above our internal limits. Of course, as Christian showed, significantly above our regulatory limits. You know, our target is more a what we on a long-term basis plan for. But of course, we need to be, and we are continuously and on a regular basis updating our pipeline and prioritizing our pipeline in relation to our capital situation. But so far we haven't had any. We haven't said no to any acquisitions due to our capital situation. Then maybe Christian, you want to go a little bit more into the Pillar 2 and EBA guidance.
Sure. I mean, just one thing, I mean, when we look forward in the pipeline, we don't see any capital restrictions in terms of the number of deals that we want, that we looked at. I mean, if we roll that forward, we're not going to be restricted by the capital levels that we have. With regard to the changes coming forward. The EBA, we see that this will most likely be implemented in the second half of this year. With regards to the Pillar 2 guidance, it's difficult to say. The Swedish FSA is working through the banking landscape, and we're a Category 3 bank, and we haven't initiated that dialogue with them yet.
We foresee that that will be pushed a little bit further than what we believed last year. We see that this is more in line with the implementation of EBA risk weight as well, more or less. Of course, we haven't initiated a dialogue, so it's an uncertain process as well.
Perfect. Thank you.
Thank you. Our next question is from Matt Sillerud of SEB. Please go ahead.
Yes, good morning. A few questions, if I may. If we look at you have quite a lot of deposits, NII sensitivity for, let's say, a raise of 100 basis points. Do you have an updated number for that?
Our sensitivity is to interest rate hikes, you mean?
Yes.
No, we haven't. I mean, we've been living in such a low interest rate environment for so long, so we don't have any internal good benchmark for how that would play out. The expectation is that the banking system overall will use its pricing power to keep deposit rates down. If the lending margins go up, we don't expect to see that the deposit rate will go up at the same pace. It is sticky. The elasticity is much lower on the deposit side.
Okay. Thank you. Then, on funding, how do you see funding need going forward and also subordinated? Is there a need for that? In relation to that, on the dividend policy, do you believe that you are on track to pay a dividend for next year or how do you see that, or for this year?
On the market funding, we have a diversified funding profile now, and we've been issuing it mostly in euro. We have a new head of treasury and him and I are working closely together how to optimize both the funding structure in terms of currency and also size. There's different pros and cons of having it in euro and versus having it in SEK. We're reviewing this. In terms of the Tier 2, we have a call date now in May. Normally, people would expect that to be called overall in the market, the Tier 2 in general. When it comes to-
Do you refinance it or?
We see benefit of having a Tier 2.
Yeah. Okay. Thanks.
When it comes to dividend, of course, the board has an ambition to pay dividend to its shareholders. I think it's at this point in time, as you've seen last year and this year, it's not been any room for that. However, I mean, it's a bit premature to talk about the dividend for 2023, but there will be no dividend proposed for this year's AGM.
Okay, thank you.
Thank you. Our next question is from Joakim Svingen of Arctic Securities. Please go ahead.
Good morning, and thanks for taking my questions. I'll just start with the Greek portfolio Christian mentioned. Do you expect a full effect on NII in Q1? Also how do you expect costs to be affected by onboarding the Greek portfolio?
I think the NII, as Christian mentioned, it will come in June, the quarter, which means that we will not get the full net interest income impact in Q1 because it's not signed, you know, closed from January 1. We will see some positive impact on the NII, but we'll have a full impact in Q2. There are some costs related to this, but not in the size that is material in that sense. Christian, maybe you wanna add something?
Yeah. I mean, in Greece we have an outsourced model, and then that is very cost efficient and a high return business. That's why we see this portfolio acquisition as highly attractive.
Okay, that's great. Given your complex tax structure, is there anything new regarding the expected tax rates or could you give some guidance on 2022 tax rates?
Yeah, in a normalized year we will be around the 2022 mark. That's the overall expectation that we have. Then when profits are lower and we're running a loss that comes a little bit out of whack, I would say.
Just to follow up on Jacob's question around OpEx. I guess it's difficult to give any guidance for perhaps towards the end of 2022. Q1, could you give some flavor on how you expect the trajectory to be from Q4?
Well, I think it's back to what Per-Anders said about the board. We would love to inform you more, but we need to refrain from guiding. We will of course come back and track these developments going forward.
For now it is. Yeah.
Our ambition is to be, you know, transparent and for you to be able to follow up on this, which I think the company has lacked historically. We want to make sure that you can actually see what, in the numbers, that what we also deliver on what we have said. We don't want to do that at this point because of the situation with an incoming, most likely, new composition of the board.
That's fair. Okay, just one final thing from me. With regards to the agreement with Magnetar, is there anything new? I mean, how much have you drawn, and how much is co-invested so far? And is there any new status with regards to that agreement? I don't think it was mentioned in the report.
No, there's nothing new in that agreement. We have drawn very little on that so far, but we expect to draw more on it during this year.
It's approximately 3%-5%. I don't have the number in front of me, but that's the range that we have in the unsecured portfolio in securitization that is owned by external parties.
How much was that, Christian? Sorry.
Three to five percent. But, uh-
3%-5%.
We can come back on the exact number.
Okay. That's great. Thanks-
That's on the unsecured, which is then the only relevant part of it. We don't securitize the secured.
Okay. That's fair. Great. Thanks.
Thank you. Our next question is from Borja Ramirez of Citibank. Please go ahead.
Hello. Good morning. Thank you very much for taking my question. Two quick questions, if I may. Firstly, during the presentation on slide 22 on the evolution in five years, I would like to check if there was anything mentioned regarding the evolution of the overall size. I apologize, I didn't fully understand. Then my second question would be if you expect to increase the portfolio acquisitions during the year. Thank you.
Our ambition is to grow Hoist and so that Hoist would be at least twice the size of what it is today in five years. That's the overall ambition. We also then, what this exhibit shows is that we expect it to have a higher growth rate in the secured so that the composition will move more towards slightly more balanced than we have today, where we only have approximately 20% secured of the total portfolio. When it comes to the portfolio acquisitions for this year, as we mentioned earlier, we see a more positive outlook and a significant higher volumes in coming into the market than what is in our pipelines today than we have seen in quite a few years.
We are optimistic on that side and believe that we will, you know, see good growth this year.
Thank you. One follow-up if I may, and thank you very much for your detailed answer. If I could ask on the outlook for your markets, where in the short term would you see the best opportunity for portfolios? Thanks.
Well, the thing is that during this year, we have had, of course, with the Greek portfolio, significant growth in Greece. We also mainly seen good growth in Italy and Poland. We also saw some positive growth in Spain. What we see now is some of those markets that we haven't really seen for quite some time showing very strong supply in Germany and also actually France. To some extent, we see a little bit more volumes coming into the market also in the U.K. Of course, Poland and Italy is still being strong.
Also, to add to that, I mean, as you hear, it's more of a balanced pipeline this year we see now than the previous year.
Yes.
Very clear. Thank you very much.
Thank you. There are no further questions at this time, so I'll hand back over to our speakers.
Okay. If there's no further questions, both Christian and I thank you for joining us in this Q4 presentation. Of course, if there are further questions and things you want to ask, you can always call, of course Christian, myself, but also Ingrid Östhols, who's our new Head of Investor Relations and Communications. With those words, thank you very much for joining us, and until next time.
Thank you very much.