Ladies and gentlemen, welcome to the Hoist Finance audiocast with teleconference Q3 2021. Today, I am 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 will be a question- and- answer session. Speakers, please begin.
Hello. Welcome. This is Per Anders Fasth talking, and welcome to our Q3 results presentation. I'm also very pleased to introduce to you Christian Wallentin, who is our new CFO, and he's been with us since August. A really welcome for Christian as it's his first quarterly report presenting here today with Hoist.
Thank you, Per Anders.
What we wanted to go through here today with you is some key highlights that I will do, and then Christian will go through more details on the financials and the capital and liquidity situation. Then we'll end up with a summary towards the end. Of course, after that, we would welcome any questions that you may have to the two of us. If we move to the first page and to talk a little bit about the key highlights that summarizes what we've done in Hoist in Q3. It's actually the page four in your slide. It's with the heading Key Highlights. What we've done here in Hoist since I joined taking over the position after Klaus-Anders was asked to leave, we've done a performance review.
We've done a performance review and completed that one, and it's quite clear where we are and what we need to do. We need to redirect the company and focus on the core business, and therefore, we have initiated and launched a transformation program to right-size the company in order to adjust to the situation where we're in, improve productivity in the collections performance side, and to have a more clear and focused and increase our growth on portfolio acquisitions. What we have seen and the result we can see is that our NPL portfolio volumes are bottoming out. We actually see a slight increase between the quarters. We've also talked quite a bit about the capital situation.
When it comes to the European Banking Authority's consultation, that one is finalized, and it was finished on the 24th of September. We are now awaiting a decision from the European Commission, which we believe will happen during next year. The positive thing that happened also during this period is that the rating institute Moody's came with an upgrade on our outlook. Moody's got to stable from negative. That's the overall picture. When it comes to the financial results, our result was SEK 82 million, which is an increase compared to the previous quarter. Our net interest income is lower than last year. Of course, since the portfolio volumes are lower than 12 months ago. It's higher than Q2, also because our volumes are higher than they were in Q2.
On the cost side, I would say they are flat, where personnel expenses are lower than previous quarter, whereas the legal costs are higher. Courts are opening up or being more active, and that will lead to increased collection costs, legal costs, that will have a positive effect later down the road. There's a lag in this, the impact of the court activities. Our collection performance more or less in line with our initial anticipations when we acquired the portfolios at 99%. The acquisitions were SEK 1.2 billion , which is higher than our replacement value. Now the book value is SEK 21.4 billion , which is actually slightly higher, as you can see in the exhibit, SEK 300 million higher than it was at the beginning of the year. Our CET1 ratio was 9.78%.
If we move to the next page, you can see the development of our portfolio book value. Of course, several quarters of reducing volumes. We see that bottoming out now in the summer and an increase with about almost SEK 400 million since Q2, which has had an impact on our net interest income, as you can also see in this exhibit. If we move to the next page, you can see the cost development. In this period, the same time period, you can see that our costs have been fairly flat, and that's one of the things that we need to attack. I mean, our revenues have come down, but we haven't done enough on the cost side to adjust to our current revenue situation.
Quickly, before Christian will go more into details on the results. Comparing the quarterly results you can see in this exhibit on the next page that our net interest income is slightly up as you could see before, but of course, lower than a year ago. When you look at the costs slightly better than the previous quarter, but higher than a year ago. Overall, our profit before tax, as mentioned, was SEK 82 million compared to the SEK 52 million a quarter before. Our results for the quarter do include a result from a swap evaluation of SEK 41 million.
Looking at our two key segments, unsecured NPLs and secured NPLs. The unsecured book is about 75% of our total book, and quite well diversified in terms of countries and with a slight underperformance in collections in the quarter, whereas year to date, it's in line with expected collections. If we move to the next page, the secured NPLs. You can see it's France and Italy dominating the NPL book, and here we have had an overperformance in the quarter and also for the year as such. I also want to point out to you the collection over a longer period of time.
On the next page, you can see the monthly collections. These are the actual collections that we have achieved over these almost 10 years. As you can see in the period of the COVID, in the 2020s, 2020 to this year, you can see that the level of collections have been quite a bit lower in the same period. As you saw before, our portfolio book value has been quite flat in this time period. I would say that this is a significant indication of the impact of COVID on our collections. Of course, it's not that you don't have to be Einstein to realize that if courts are not open, and/or are not active, that legal collections are very difficult. Legal collections is of course an important portion of our collections and for our industry.
With that, I would hand over the floor to Christian, who will go through both our results, but also our capital and a little bit more about our balance sheet development.
Thank you, Per Anders Fasth. Can you move to the next page, please? On this page, you have the P&L, the quarterly comparison. What's not on here, but what's driving a lot of these numbers is that the NPL portfolio volumes have bottomed out. As Per Anders Fasth mentioned, we have added SEK 1.2 billion now in the quarter, Q3, and that compares with Q2 number of SEK 857 million. In a year ago in Q3 2020, that was SEK 264 million. This in turn drives interest income. You can see on the top line, if you compare Q3 versus Q2, that we now have SEK 757 million in interest income versus the SEK 744 million.
That's driven by us now slightly increasing the book compared with both the end of the year, so end of 2020 and also from the last quarter. We're now above the replacement level rate, which drives the income. If you can see the net result from financial transactions, this is SEK 47 million in the quarter, and this is driven from unrealized gains in interest rate hedges of roughly SEK 40 million. And the interest rates, the value of these have gone up, driven by the long end of the curve. We've seen the interest rates going up since the summer, which this is a hedge position from the capital point of view, and that gives us this gain of roughly SEK 40 million.
In terms of costs, there have been flat development in the quarter, more or less. We have written off a legacy IT system, which is SEK 9 million, which is included in this SEK 580 million, and that is now taken care of. That leads to a net operating profit of SEK 62 million for the quarter. We have share of JVs of SEK 20 million. This is, as you might be aware, a Polish joint venture and also a Greek joint venture, which adds income each quarter to us. Profit before tax, we land on SEK 82 million in the quarter versus 64 in Q2, which is of course an increase and also a result of this bottoming out. Overall, we have a tax cost of SEK 7 million in the quarter, and that leads us to a ROE of 5% in Q3. Next page, please.
Overall, if you compare the years 2020 and 2021 year-to-date, you can see the overall COVID impact and the impairments that are characterized our business in these years. The size of the book has gone down, driving a lower year-on-year interest income level. Both 2020 and 2021 significantly were impacted by write downs of the book, and that was driven by the U.K., Spanish, and French markets. You see in year-to-date 2020, we had a SEK -409 million. This year, of course, in March, we had a large write- down, which is mainly driving the SEK -331 million in the impairment and gains losses line.
The costs are flat. However, if you break it down, the personnel expenses are a little bit lower and the higher legal cost as Per Anders referred to as well, when the courts are more active again. Overall, this is driving a negative ROE for the year, year-to-date 2021. For the quarter, it was ROE of 5%, so it has bottomed out in that sense as well. Next page, please.
If you look at our balance sheet, we have a strong and conservative liquidity position, which provides us with a large financial flexibility. We have managed this to the lower end of our target range. We are very quick to attract deposits. So even taking this into account, we are well above the regulatory ratios. If you look at the acquired loan portfolios, you can see here that NPL volumes have bottomed out, so we have a slight increase since year-end 2020.
In terms of the retail deposits, we have taken those down to optimize for the market situation we're in and the risk profile. Both the composition is changing slightly, which has been a longer-term initiative from our end. Back, if you look at really old figures, it was all SEK, and now it's much more of a well-diversified retail deposit base. Particularly in SEK and euros, but this quarter we have also opened up for U.K. deposit base, which we're testing basically to see how the market can help us as the U.K. is the second-largest market for us.
In terms of the senior debt, there's EUR 150 million, so around SEK 1.5 billion senior debt now maturing in October, so after the quarter close, and that will also impact or has impacted the liquidity portfolio. The reserve has gone down since then. Overall, the regulatory ratios are stable. As you're probably aware, the net stable funding ratio is driving the other regulatory ratios, so the LCR and the survival horizon. Those are well above what the regulatory limits are. In terms of the other assets and other liabilities, they have moved, and that's primarily due to FX hedging and collateral management. Next page, please.
You can see on our funding slide here that we have stable funding situation without any major changes the last quarters. We aim to have a diversified funding base. The retail deposits are the majority of this, so SEK 17 billion roughly. Then we have a senior unsecured of SEK 6.1 billion at the end of the quarter. Subordinated debt, so Tier 2 capital of SEK 800 million. An Additional Tier 1 portion in total of SEK 1.1 billion, and then securitization debt instruments of SEK 400 million. I can highlight that we have opened this deposit scheme in the U.K. We've launched that during the quarter and testing the waters, so the volumes are very low currently, but we see this as a promising development in the funding base. Next page, please.
You can see here in Q3, capitalization levels, we are at our lower end of our target range, and the capital levels have been flat over the last quarters. There's a net impact from earnings building up and then the reinvesting in the portfolios. Then of course, over the year, we have had the revaluation which impacts the capital levels, and also a legacy risk in terms of tax materializing in Q2, which overall have impact on the capital levels. In terms of the liquidity reserve, we are managing that towards the lower end of the range. Also, if you compare it further back, we have a lower book, which is also impacting the size of the liquidity reserve. Next page, please.
If you compare Q2 with Q3, you see a slight increase in the capital, so CET1 ratio from 9.7% to 9.8%. This is concerning the EBA consultation, and that was concluded the 24th of September. As Per Anders saying, we are awaiting the European Commission decision on this, but we do expect that this will come through, and that's why we put it on this page as a pro forma, how it would impact us. Our assessment, this has not changed since the Q2 announcement. We expect 260 basis points more or less, as the gross benefit of this. This is of course a part of the initiative, larger initiative to improve the maturity and transparency of the NPL markets.
This has been ongoing for the last four or five years on the European level. I think it's important to say that this would reverse the risk-based impact from the changes that we saw in 2018. This has a potential capital release, and the total benefit might be lower due to other regulatory changes as well. We do see that the net we expect to be positive. Next page, please.
Now we're going into the summary, and I will hand over to Per Anders Fasth again to conclude before we go into questions.
Thank you, Christian. We're good to review our results. I just want to sum up what we have seen and what we're doing. If we move to the next page, our key levers are important to attack in order to reach our overarching target, which is to increase our return on equity and generate profitable growth. What we are doing with our transformation program, we actually have three initiatives. One is to be more clear on where to invest and in what asset classes, what countries, and how to be more successful in our acquisitions. That's what we call the profitable growth. That effort, of course, attacks both the volumes, but also the margins, which is crucial for our revenues.
Another initiative is debt collection performance and debt collection productivity increase, which is of course aiming at improving our collections but also attacking our cost to collect. The third initiative, actually led by Christian, is focusing on reducing our non-operational costs in order to reduce our total cost level over the next year. Our transformation program attacks all the levers that actually provide an impact on the return on equity, which is our overall target. Of course, with a little bit of help from our friends, we may have a positive impact, or we expect a positive impact on the equity side, also providing us then with the capital to accelerate growth.
Overall, as a summary, what I'd like you to take away from this quarter is that we've seen a stabilization of the markets and also of our own operations. We see volumes bottoming out. We have done the review. We know what we need to do, and we need to be more focused in our approach and focus on our core business, NPLs, on unsecured and secured NPLs. We have launched a transformation program where we've already done and implemented several activities. One is to put our retail banking efforts on hold, focus our digital efforts more closer to the business. We've also halted our IRB efforts in order awaiting the EBA and European Commission decision.
Our transformation program is ongoing, and as I mentioned before, it's focused on reducing the absolute cost level, improve productivity, and to focus on profitable growth. That's the summary of our Q3. Thank you for listening in, and we are happy to answer any questions you may have. Thank you.
Ladies and gentlemen, if you have a question for the speakers, please press zero and one on your telephone keypad. We have our first question from Jacob Hesslevik from SEB. Please go ahead.
Hi, everyone. Good morning. Yeah, I just wanted to have a quick question regarding the CET1 target. In the last report, you said the management target was 9.6%. In this presentation, you say 9.7%. So I just wonder if you could comment on this and if it's due to the increased portfolio size or why. Also if I remember correctly, I think you said the release would be roughly SEK 500 million in capital when the change goes through. Is this still true, or has this changed?
Results are you know 9.8% and that's in the lower range of our own internal goals, the goals that we set for ourselves. What Christian also showed was the regulatory requirement, which is around 8%. We are significantly above the regulatory requirements. We have a we both have internal limits, but we also have internal goals. Our internal goals are around at the bottom end is around 9.7%.
The slight differences have been driven by the interest rate risk in the banking book. There's a net change, slight change as you picked up.
When it came to your second question, that's correct. It's the capital impact is slightly above. I think it's if you calculate it, you know, at this point, it would be SEK 560 million. I would say that for us, that does not—o f course, it's a board decision when it comes to dividend. For us, it's not a capital release that would go out as a dividend, but it provides us with a purchasing capacity of approximately SEK 6 billion to buy portfolios.
All right. Thank you. Another question I have is, you mentioned U.K. is your second-largest market, but in the last quarter, you said it's difficult to acquire portfolios there, and the trend seems to continue as the book continues to decline in the U.K. Now you also write something that you have stopped with third-party collection services in U.K. I just wanted to know, do you plan to diversify away from the U.K., or does it still remain a focus area for you going forward?
No, I think what we said is that the U.K. is our largest or second-largest market. It still is, but the competition as you mentioned that we also mentioned last time is that we've not been able to acquire portfolios this year, really. What we are doing is that we're focusing more on what we call the second-tier financial institutions, where the competition is lower. On the broad auctions that have occurred, all the competitors have been there and some have been, I would say, quite desperate and acquired portfolios at levels which when we calculate would give almost no return. We've avoided going into those auctions.
We see good opportunities actually in the, what you call more on a bilateral efforts with more Tier 2 banks.
Okay. Thank you.
On the third-party servicing, that was something that was decided several, you know, a long time ago. We haven't done that for quite some time.
All right. Perfect. Thanks.
We have another question from Ermin Keric from Carnegie. Please go ahead.
Good morning. Thanks for taking the question. Perhaps if we start on the potential risk weight change, it sounds like you're a bit more confident now that it'll actually go through. How stringent are you on your internal capital targets, given that you expect this reduction going forward, the capital relief coming through? Can you already now start being a bit more active on investments with that in mind, basically?
I think, I mean, of course, the capital situation is something we follow all the time. I mean, so far, the capital situation has not limited our acquisition opportunities this year. That has not been an issue at all. I think, it's more driven the —our overall over the last year level of portfolio acquisition is more driven of what type of portfolios and at what prices we've seen. Of course, the market has been very much subdued in 2020 and still the volumes that the industry expects has not come through, really. The capital has not been a restraining factor for us.
I think like Christian saying that the volumes have been lower than anticipated for the entire market. There's a lot of competitors out there that have been willing to pay quite high prices because they've had sort of a drought in their inflow. We are very selective and we focus on the portfolios where we know that we can get good returns and avoid buying for the sake of buying.
Got it. Thanks for the color. Moving on to your transformation program, could you give us any more color on how long this will take to fully implement, if there will be any additional one-off costs, et cetera, associated to it? Also, if you could quantify the net effect that you expect on the cost.
First of all, we will see some impact already in Q1, I expect, or during the spring. The full impact of the program will be during 2023. Then on the final question you asked, if we had some. Could you repeat that final question?
Yes. Specifically one of this—
The one off—
Yeah. One-off and net effects.
About whether there will— I would expect I've done a lot of these things in other situations. Normally, there are some one-off costs, particularly related to personnel. We don't foresee any one-off cost when it, you know, in this program, one-off cost in terms of investments. Likely, there is likely to be some one-off costs when it comes to personnel reduction. Then on the net target, I know you always liked us to go out with, you know, targets, but I don't or we don't want to come out with any sort of targets at this point. We of course have very clear targets internally, but I don't want to provide you with any targets before I feel really comfortable almost 100% sure that we will achieve them.
Got it. I had to try.
You will have to wait. Yeah, you had to try. You will have to wait.
Perfect. Thanks for taking the questions.
Thank you.
We have another question from Borja Ramirez from Citi. Please go ahead.
Hello, good morning. Thank you very much for your time. I have two quick questions, if I may. The first related to the EBA consultation. I would like to ask if you could kindly provide more details on what are the next steps that need to happen for this to be approved and also any indications on the potential timing.
Yep.
And then—
[You were too, you said?] Yeah.
Yes. Please. My second question would be regarding the portfolio acquisitions. You mentioned that you have seen the bottoming out of the acquired portfolio. I would like to ask if you could kindly provide more some details on what would you see for the portfolio acquisitions going forward. Any indications for the rest of the year and maybe 2022. Thank you.
Very good. The EBA consultation, the consultation in itself, we input to EBA now was concluded the 24th of September. We see this as a part of a larger initiative. We don't have any firm feedback on next steps, but we do know that they will have a meeting in December. We don't expect a final decision to be made at that, but some sort of guidance might come out of it. The final decision, we expect during the first half of next year.
One could add that there's been, you know, the reason for this EBA consultation has been that it's been very strong political pressure on changing it back to make the more competitive level playing field. Because as you know, these changed risk weights were introduced in late 2018, and there's a driving force to take it back to the 100% risk weighting. When it comes to the portfolio acquisitions, we've seen a slight increase in supply, and we are quite active. I would say we are participating and looking at all things that are coming out, but we're also proactively pursuing opportunities with our partners, the banks.
We see at this point, I would say we've seen quite a bit of activity in Italy. We've seen there's some interesting portfolios in Greece and Poland. I would say Italy, Greece, and Poland has been sort of where we've seen the most activities opening up. We've also been just, you know, quite successful on some acquisitions in Germany.
Very clear. Thank you.
There are no further questions for the moment. I remind you that if you want to ask a question, you will have to press zero and one on your telephone keypad. We have—
Okay.
No, no further question. Sorry.
Okay. Well, if there are no further questions, Christian and I thank you for listening and also asking, thanking you for putting the questions. We will come back with more clarity. We expect to see you or hear you again in February, when we have the Q4 results. Of course, we are always available for questions in between, to Christian or to myself, or also as things are opening up, also available for in real life meetings if you feel like you need some more clarity and additional information. Thank you. Thank you very much for joining.