Earnings Call: Q2 2020

Jul 23, 2020

Ladies and gentlemen, welcome to the House Finance quarter twenty two report 02/2020. Today, I'm pleased to present to your calls and listening to you. Sir, please go ahead. Thank you, and a very good morning to you all, and welcome to this second quarter review for Horzheimers. And long story short, the key takeaways today are that, first of all, I'm very pleased with the way have handled the COVID nineteen situation. Secondly, we have seen improvements week by week, to the quarter. And, as a last message, this leads us to believe in a good recovery for the next quarters to come. So with me today, we have our CFO, Christian Johan Song. Good morning, Christian. Good morning. And our head of investor relations, somebody else, Kim Dombos. Good morning, Andre. Good morning. So, let me then first go to the presentation on page number four. And given the uncertainty of COVID nineteen, one of the priorities of the quarter has been to strengthen the capital enforced. So we left the first quarter with a CET1 ratio of 9.5%. Due to the strong cash flow generation and a very cautious approach to investments, the CET1 now is at 10.1%. Secondly, we are pleased to see that collection performance is kicking up. We expect it to deliver around 90% collection performance, and we are happy to have done so. And there is, as I mentioned, significant improvement during the quarter with several markets now performing at a normalized level, and we expect the positive development to continue. Let me assure you that we are committed to our cost savings targets. When we launched the program, we also made it very clear that there would be some costs, some upfront costs to deliver the necessary improvements. These costs are visible in the quarter, but with a lot of the benefits coming later. What I can say is that underlying cost development is trending the right way. We are becoming more efficient, and we will talk more about this later. In order to continue to simplify and focus operations, we have decided to close our three PC business in The UK, and this will have a positive impact on our cost base from 2021. As we have discussed before, our ambition is to be the digital leader in the industry. And, if you want to succeed in building a true digital value proposition, it is important to think about digital as a business in its own right. Digital cannot be a project, a program, an initiative, or something that the IT department is responsible for. Hence, we are now building on our experience of creating customer journeys that are truly digital, cross border, and our products and services are tailored to our customers' needs. I believe that, our our approach to digital must be called end to end, and that we need to treat digital as a business in its own right. Starts with investments and continues all the way through to collections and helping people back to financial inclusion. This will drive performance, profitability, speed, and innovation and make sure that we better more holistically find ways to help our customers. And we are now recruiting a new member to the executive team to be responsible for this business line, and we are looking forward to keeping you updated on our progress. As far as the financial performance is concerned, I will leave the details to Kristo, but just say that we are pleased to see that underlying profit generation is strong and that we have taken some prudent forward looking write downs to adjust for the timing effect of delayed collections, but more about this later. Moving on then to slide number five. I am very proud of the way we have been dealing with COVID nineteen in the second quarter. We have been protecting the health of our professionals, but also the well-being of our customers. We haven't lost production time, but productivity has been somewhat hampered by working from home. We have to accept that for some of our people, it is not easy to be as productive as normal when the working conditions are less than optimal. As we speak, I'm happy to report that staff is returning to our premises. In Germany and Italy, around 50% of our people are now back in the office. It's also possible that courts are opening up again, and, naturally, when 50% of our collections is through litigation, this makes a difference. And as the courts are catching up with the backlog, we expect to see a positive development from media collections. As you can see from this tornado diagram, The UK has been a bit of a special case for us during COVID nineteen. There is a positive and important improvement on collections through the quarter, but the impact from COVID nineteen on collections is more visible in The UK compared to some of the other markets. From what we understand from our competitors, they more or less observe the same thing. And given the size of The UK book, this consequently has an impact to Horst overall. Courts are now now open in The UK, but they haven't been processing all types of claims as a matter of priority. We are in a very close dialogue with the regulators and expect this to change hopefully already in August, September. The shortfall for mitigation or lack of litigation, I should say, in The UK is around 10% in that market. This has an overall impact for hoist of around 5%. So it's important. Moving to slide number six. And as mentioned, we are committed to our cost reductions and to becoming more effective and more efficient. We have introduced a common operating model in Hoist, and we are increasingly relying on our shared service center in Russia and our leaseholding operations in Romania. And the benefits are related to both scale and skill. In a short time period, we have ramped up our operations in Romania, in Romania, and we have now close to 103. They are now both doing back office support and customer calls. To date, our remaining operations cover both Italy, Germany, and France, and we are in the process of expanding this to other markets as well. And the plan is to have around 150 employees by year end. On the next slide, slide number seven, the slide shows our road map in how we're becoming a truly data driven company. I said before, that, in 2018, we had to catch up, and we had to catch up fast. Our legacy is not one of operational excellence, and there was a need, a clear need, to leapfrog into the future. We have done so by fixing the basics and establishing a strong foundation. And when I I look around the industry today, I can hardly see any competitors with a more harmonized approach to digital than we have. And I cannot clearly cannot see that our competitors are offering the same functionality across borders as we are doing. Part of building a safer and better and more cost efficient infrastructure is going to the cloud. And we are well underway, and we expect to move 80% to the cloud by year end. Slide number eight. As you will remember, 2019 was a year where we had to deal with regulatory challenges, both changes in the risk weights and also the introduction of the NPL backstop. We were able to introduce and implement the right countermeasures, and we are obviously very happy to successfully have completed the first investment grade rated securitization structure in Europe based on NPL assets. For Hoist, this has been an important instrument to deal with the regulatory changes, and we are now working on deploying the same structures that we have successfully applied to our unsecured NPL back book, also to the front book opportunities in the various unsecured NPL markets where we are present. What is very important, and we are, of course, proud to report that the assets in the structures in the structure have performed really, really well during the crisis. The performance shows the low risk and the stability in these portfolios as well as the quality of our operations. Cumulative, we are ahead of the forecasts, and the collections held up really well during the most challenging weeks of the second quarter. So let me now hand over to Christo. Over to you, Christo. Thank you, Claus Anders. And on Page 10, before diving into the figures, I would like to put them into context. So the business we run is stable. We collect small amounts month by month. It's very granular, it's predictable, it's diversified across thousands of portfolios. On top of that, we have, over the last few years, implemented significant changes to improve efficiency, and there is no doubt that these measures have worked. So consequently, should be on a steady and increasing trajectory, as it should and because in reality, we have had some things to deal with. COVID-nineteen is one of them, but it's not the only one. We've also dealt with a 50% increase in risk weights, and we've dealt with extending the deposit duration, and we've had to pursue securitization as a way to future proof the business model. So in that context, we are pleased to see the underlying earnings capacity being intact, and we believe that the prudent impairments we are taking now will clear the way for a speedy return to healthy profitability. With that introduction, let's move to Page 11, P and L for the quarter. Top line income is stable, reflecting a book, which is on par with twelve months ago. As we've said many times, front book margins are improving, and this will be more visible when acquisition volumes are back to normal. On interest expense, we have extended the average duration compared to a year ago. This is good from a risk perspective, but longer funding is also more expensive. With that in mind, it's of course also important to not have too much funding. In Q2, we have taken action to manage excess liquidity down, and that is one of the factors which have helped us to push interest expense down by a total of SEK 30,000,000 in Q1. So we're happy with that, and we can reduce liquidity further. Impairments are significant, and they're fully related to COVID nineteen. I will come back to this in a second on the following two slides. First, costs are up 4% versus last year, but it's down 2% versus Q1 twenty twenty. Activity in the courts have not been running at full steam in Q2, which temporarily reduces the level of collection costs. On the other hand, we have been running at full steam when it comes to IT projects and the digital agenda, incurring around SEK20 million of costs on top of the normal level. Make no mistake, these are all projects with a clear link to our 2022 saving target of SEK400 million, so it's money well spent. All in all, and as a direct result of impairments, profit before tax came in at negative SEK 64,000,000. On Page 12, I'd like to comment on the composition of impairments. So we mentioned that collection came in at around 90%. The unsecured part of our book, this translated into a realized shortfall of SEK147 million accounted for on the impairment losses line. Now overall, collection performance was at its weakest in April, but improved to May, and in fact, all markets improved from May to June. We have also revised our projections for future collections, and these changes, which I will illustrate on the next page in a second, came with a SEK91 million impact. Also, this accounted for against the impairment losses line. So both parts are a direct result of COVID-nineteen, adding up to SEK238 million impact. And finally, just to be clear, we have no net impairment on secured performance in Q2 That was dealt with already in q one. So for further transparency, let's turn to page 13. In connection with the q one release, we were clear about the challenging outlook, but we also felt that there wasn't really an update to conclude on far reaching implications for a book whose cash flows extend over fifteen years. I think had we at that time insisted on a conclusion, chances are we would have overreacted. Today, we find the situation much more clear. We are confident in our ability to stay open. We can see how the courts are managed, and we see collections improving month by month. I should add that July is trading in line with this development. So with these observations and data at hand, we have updated the predictions for our portfolios, and we've done so in a detailed and prudent way, reflecting a continued gradual recovery. As it's clear from the graph, we saw shortfalls in Q2, and we've also lowered our expectations somewhat for the coming quarters. Our aim is certainly to recover all of that, even if it's worth a delay. However, given the pandemic uncertainty we have in our revised projections, taking a more prudent approach and only assume that we will recover about 50%. As a final comment, I want to stress that since this adjustment is now accounted for, the coming quarters and years are measured against that revised target. So in practice, performance which meet the solid line will come with zero impairments and will come with profits similar to the steady green bars illustrated on Page 10. Turning to Page 14 and commenting on cost. So our work to reduce long term cost has not at all been put on hold. On the contrary, there has been a high level of activity in Q2, and I'll give three examples. To start with, we've decided to discontinue our third party collection in The UK, as Cosandis mentioned. The reason is poor profitability and turning that around would have required investments, investments that we could not leverage elsewhere. The associated cost base amounts to SEK 30,000,000 annually, We expect the savings to reach full run rate by end of Q4 twenty twenty, so it's not in the aggregated numbers just yet. There is no significant restructuring charge related to this. Second example, moving on, we see good progress in Romania, and we have expanded our shared service center in Poland. Those two combined currently include 150 employees, and that will exceed 200 by year end. Thirdly, I mentioned that we are running with a high level of investment into IT in q two, and these investments are key to push digital collections up from its current 19%. Taking a somewhat wider perspective, one can note that when it comes to cash to achieve, we are roughly halfway. When it comes to realization of benefits, we have two thirds to go. And this is best understood by looking at some of the key work streams in our savings program. So let's turn to page 15. These are all work streams where we've done most of the work, and we've taken most of the costs. On some, we've also captured most of the benefit benefit, for example, site optimization. On others, we are only halfway regards to the shared service center, we have established it from a legal and managerial position. We've done a lot of recruitment and training, but migration of tasks is still, in progress. We also have some where most of the benefits are still to be realized. So on digital collections, we have the portals in place. The functionality is expanding to capture more and more use cases, and a key aspect from here and onwards is to truly integrate this in our onboarding of new portfolios. On IT outsourcing, the benefits are very tangible. They stem from contractually agreed prices, but right now, transition costs which are temporary mean you don't see it. So in short, knowing that the work is done gives us a lot of confidence in the realization of benefits. Turning to page 17 and funding. Interest expense to book value is coming down from 2.6 to 2.3, so very attractive levels. And the strength in the banking model is that we can adapt to the current funding needs. With lower acquisitions, we need less funding, and in Q2, we have taken decisive actions to reduce excess liquidity. This helps, of course, and in total funding costs came down by SEK 30,000,000 versus the previous quarter. There is still room to do more. We could reduce liquidity by another SEK 2,000,000,000 and still be within our internal target range. Within our capital market funding, there has been no real change in the quarter. As you will have seen, Q2 was a busy quarter also for the rating agencies. As the banking sector has seen its fair share of downgrades. On our side, we note that on July 1, Moody's affirmed their investment grade rating for Hoist, although with a negative outlook. We've had a close dialogue with Moody's throughout the crisis, and we are committed to maintain our rating and plan accordingly. Continuing to capital and liquidity on page 18, so despite exceptionally difficult circumstances, we come out of Q2 with capital ratios which are higher than we had coming into the crisis. This is the result of us having taken a very selective approach to new acquisitions in the quarter with additional support from the stronger Swedish krona. Looking ahead, we see interesting market opportunities and I expect acquisition to go back to normal towards the end of the year. In past years, Q4 acquisition has been around billion to SEK3 billion, That is within our capacity also for this year. Over to you, Lars Anders. Thank you. Thank you, Christian. Let me just summarize with a few important takeaways before we turn to q and a. We're glad to see collection performance trending towards normal levels in most markets. That's important for us, of course. Hoist has a strong and robust capital situation and definitely strong liquidity as Chris just alluded to, and we are well prepared for the second half of the year. I mentioned legal collections is important for us, around 15% of total collections, and, of course, these are claims that we expect to to to bring back to collections. We also mentioned operational improvements and cost savings. We are committed to deliver on this. And, as a point on the tree, which I think is also very important, we are creating digital as a business line for unsecured collections. So we, in short, we stand ready to support our clients and share balance sheet across Europe and to help our customers keep their commitments. So with that, we are ready to engage in the q and a sessions. So to the operator. Thank you. Our first question comes from Eamonn Kuresh. Please go ahead. Thank you, Eamonn. Good morning. Thanks for taking my questions. So first, just on the third party collection that you are closing down in The UK, do you expect any income effect on closing that unit down? There there will be a little bit of income impact. Yes. But let's put it this way that we don't believe that this business was actually adding any profits. Okay. So I was just thinking what what we should think about the net because you said some 30,000,000, I believe, in in cost savings. I I'd say that the net would be at least half of that. Okay. Thank you. And then on the liquidity portfolio, I mean, we we already saw interest expense coming down quite substantially quarter on quarter. Should we expect that to trend further downwards? Because I believe that the liquidity portfolio is still sort of at elevated levels compared to what you've considered to be optimal historically at least. That that is correct, and I do expect liquidity to come down further. However, the the 30,000,000 sec impact is also the result of other factors, so you shouldn't you shouldn't take that times two. Understood. Then lastly, just on the SPV. It looks like cumulative with the the headroom sort of to to your business plan has has been reducing somewhat over the month. Could we just get some kind of update on how the, let's say, June collection were in relation to to forecast isolated? Are you now actually trending on run rate for for the last couple of months where you're close to 100% as well, or I I would expect you've been at some kind of underperformance, but you had some headroom coming into COVID. Yeah. If I understood you correctly, you're asking about collection performance. And if so, there has been an improvement week week after week. As I've in my section, most markets are now almost back or basically back to normalized levels. And it's also important to understand what Chris is here Chris has showed, right, that there's a reset in in what they expect in the quarter. So so that's also an important thing to have in mind. I will clarify I will answer your question now. Yeah. Happy for for you to to make care to clarify. Sorry. So what I referred to was was the SPV in Italy, more specifically, on slide eight. Oh, marathon. Yeah. When you show us the sort of collection for this business plan. And there, it looks like the cumulative collection ratio, but the headroom there is decreasing relative to to your business plan, and it's sort of approaching a 100% in in in June. So just wondering, so how how does June stack up versus its original forecast? Should we expect the SPV to actually trend cumulatively under a 100% the coming months before it starts to recover? Oh, yeah. No. We don't expect that. But but, of course, it's it's yeah. I wouldn't guide too too strongly about this, but we don't expect it to go below cumulative 100% now. Okay. Perfect. That's all for me. Thank you very much. Thank you. Thank you. Our next question comes from Wakara Neluz, Citi. Please go ahead. Hello. I am Pajar Ramirez from Citi. Thank you for your time. I have two quick good morning. I I have two quick questions, if I may. The first one is if you could kindly provide some guidance on on the financial performance into the second half of twenty twenty, for example, collections or the portfolio acquisitions? And my second question is, given the all of the the the the fact that we have low low rates in Europe and also there's been some optimism in in with the recent European recovery fund, do you think that maybe banks will be will will be more eager to to to sell NPLs in the in the in the rest of the year? Thank you. So thank you, Borja. I think, you know, we we don't really guide too much. That's something that we do as you as you're aware of. But I think there's a one slide that kind of answers a lot of your questions, I believe. It's the one that Christa showed with the the green bars. I don't have the slide number in front of me, but, maybe you think Christa can help me. It's slide 12, is it? Slide number 10. 10. Yeah. Slide number 10. The underlying earnings capacity is intact. I I think that should give you a lot of comfort. Alright? And and it shows the stability. It shows the impact from impairments. And, of course, the the slide that also shows the the wise talk of the and and thinking that question performance should be in line with the new line. We shouldn't expect any impairments, basically, and that kind of gives you the answer, doesn't it? Right? So so I think that's the way best way to think about, you know, what they're going to deliver in the next two quarters. So, that's that's you really give you some some comfort. On the market opportunity, yep, I think what we see is that a lot of banks are surely taking a lot of loan provisions, which is necessary due to the crisis. And and we expect that it will be local NPLs coming to market both in the third and in the fourth quarter. So, from that point of view, there is a significant opportunity. Understood. Thank you very much. And maybe add, Borja, on in terms of investment volumes. As I said, we expect things to go back to normal towards the end of the year. And in a typical year, we've been able to acquire between 2 and 3,000,000,000 SEK in q four. So that would sort of bring us towards replacement rate level. That is very clear. Thank you. Thank you. Our next question comes from Samikoya, SB India. Please go ahead. I think that was me. Ramil here from SEB. Thank you for the presentation. A few questions, if I may. Starting off on Slide five here. Is it Surface Italy really back up 100% of original forecast levels? Or am I missing anything here? And and perhaps tying into that, how's your, assets split between secured and unsecured in Italy, and and does that include the SPV? Well, if I can start and Chris can fill out the details. So so generally speaking, we are actually very happy with the Italian performance. I can see that some competitors are having a different experience than we have, but Italy has held up pretty strong through the whole second quarter, and and the Italian market is our largest market, so it's important. It's not like it's been completely at a 100%, but it's not far away. And there's been improvement improvement basically every week, and and we are very close now to, let's call it, a normalized level also in Italy. So that's evidently very, important. But but, Christa, do wanna add something? I think what I can add is just so the the majority of our book is the unsecured portfolio, of course, and then we have secured investments primarily in Italy and in France. And then on these portfolios, we revised our projections already in q one. It seems we were actually a little bit too pessimistic on delays. So in the quarter, we collected better than we had anticipated on the secured portfolios. So that's a good thing. It doesn't sort of change the net contribution to the P and L a lot, but it seems like there's no reason for worry on the secured portfolios. Okay. Then tying into Borja's previous question about investment levels I had, I mean, you aim at replacing your deteriorating book in 2020. Could you provide us with any flavor about how you reason about potential book expansion in the years beyond and perhaps, you know, how you reason around the capital situation as well currently. Yeah. So in reality, we haven't changed our long term financial targets. So so we we still want to grow our business, right, going forward, try to to come back to to normalized earnings, which I think we can reasonably quickly. So when we have more to say about long term financial targets, we we will communicate, of course. But but for now, we we see that what we have done in the past is around six to eight to eight billion Swedish in the reference per year, and and I see no reason why we cannot return to those levels. I think our CET1 is is certainly a strong amount, and it was at the end of q one. So I we are in a good position now. I think we've been really, really prudent. That's important. I think we have acted on the on the information that we have at hand, and that gives us a a good place to to continue the growth. That's clear, Frasandis. And then you're obviously closer to banks and PL departments. What are you hearing from them in terms of timing? You've mentioned Q4 being a big quarter for you. Have you seen any sort of postponements of potentially closed deals that you were expecting pre pandemic? Also in terms of pricing, are you seeing any deals being closed? Could you address anything in numbers here as well on the pricing situation? Yes. So the quarter, the second quarter was a bit softer than than what we typically see. It wasn't a lot of volume. And and also, you know, we see from reports of competitors that everybody has been really cautious, which I think was the prudent thing to be in this quarter. On on the on the sales side, volume is is there. Some some deals were approved naturally, but these volumes are coming back in the in the third and the fourth quarter for sure. And the reason for this is that the regulator is seeing what they are seeing when the banks are seeing themselves that the loan provisioning that is necessary will expand the the NPLs again on banks, and the regulator is not really keen to see that happening. So they are pushing the banks to keep on selling whatever was left from the from before as their their their nonperforming exposures are increasing again. So I I see nothing else than than than nonperforming those coverage on market in in in in big volumes. That that's a positive. We see that competitors are are somewhat financially, restrained, pretty pretty high leverage. So I expect a rather irrational competition, and I expect margin improvements. So from that point of view, it's a pretty good picture for us. And just on the volume side before going into price, what are you seeing the non listed competitors doing mainly, you know, the big credit funds buying large ticket items, but also terms in competing with with you guys? Have they stopped buying as well? Or Good question. I think they are active, but they are typically active in in on portfolios that we are not really head on head in competition. They typically they typically buy sort of the portfolios of over 200, 300, €400,000,000, and and we are definitely below that level. If if we do a 100, that's that's a high number for us. So we are not so much head on head with the with the credit funds. So I don't have a lot of adequate information to give you, So sorry for that. No worries, Klasannis. Helpful anyway. And then finally, just on pricing, and perhaps you've mentioned it, but could you address the reasoning in numbers here? What are you seeing in terms of pricing volume pricing coming up or coming down, gross IRR levels coming up? Have you seen any spread that you could quantify so far away? We we have seen spreads, of course, and and and the improvement is significant, but I don't think I will comment on specifics, but it is a good improvement. Crystal clear. Thank you. And then finally, just on on the cost situation here. I mean, you have a decent run rate of cost savings going into the quarter. On top of that, you have some legal savings from court systems being shut, etcetera, etcetera. Yet Yes, the cost trend isn't magnificent. I mean, down 2% quarter over quarter and was it up 4% year over year. What am I missing here? Should you've mentioned that earnings should gradually come up over time, etcetera, etcetera. I mean, presumably, there shouldn't be a massive step down in OpEx in Q3. What am I missing in reported figures so far? And perhaps, how should we reason moving forward? Is it indeed a gradual improvement on the OpEx side, or should we expect any lumpiness on on that side? Yeah. I I can start, and Griff, you can fill me out. So so what I would say there is that I I recognize this this issue. Right? It's not like we're trying to shy away from this. We we we've been very clear that we want to to improve efficiency and effectiveness and to reduce our cost and and our cost saving target is we are fully fully committed to deliver the 400,000,000. And and what gives me a lot of comfort is that the projects are to win. The projects are are specific, and the savings are tangible. Everything we do around site consolidation, around, new shoring, shared service center, digital, all those things are specific, and and even the things are contractual, as Chris has said, for instance, on the IT outsourcing. So costs will come down. Unfortunately, in the first and second quarter, there are some, call it, cost investments to bring down costs and and the benefits are coming later. When you're you're training fifty, sixty people to to start doing back office support in in Romania, that takes cost and effort to to do. Right? You have to recruit. You have to train. They don't get any benefits. Those benefits are coming later when you're you're reducing the the number of FTEs in the in the the other markets. And that's coming. There's no doubt. Alright? So so the and and and the three fifty business in The UK is not being closed. That that hasn't has has a benefit. So we are taking full costs, but the benefits are coming later. So I realized that the the proof is in the eating, and and we have to have to to show that this actually happened, and we will. But, Christian, maybe you wanna add something? I I can say that, of course, with income taking quite a hit here in in the first few quarters, it's tempting to to hold back on on investments which we need. We have not done so to any significant extent. We have continued to execute on the plan we have. It hurts us a bit right now, but I'm sure it will pay off over time. A follow-up to that. Thank you both. Final follow-up, Christy. Stripping out the collection cost, which naturally should should follow, you know, the book trajectory, but and give some takes and, of course. But on the personnel and admin side, what's the underlying cost inflation on a sort of like for like basis? I can imagine that's a difficult question, but any any flavor is helpful. I I don't know from the top of my head, to be honest. Okay. That's fair. No worries. Thank you so much. I would would figure that salary inflation is 3%. But So we are shifting people out. Right? I mean, have few people in Stockholm that are used to be friends just because we replace the more expensive FTS paid lower expensive FTS and in shared service centers to mention one. So so we will we will see improvements also in the admin line now. That's for sure. Thank you. That's very clear. Ladies and gentlemen, as a reminder, if you wish to ask a question, please press 01 on your telephone keypad. There are no further questions at this time. Dear speaker, back to you. Okay. Thanks for your questions, and thanks for spending the time with us today. And I wish you all a great day. Bye bye. Bye for now. Bye