Hello everyone, welcome to the Hoist Finance Q1 2019. Today, I am pleased to present CEO Klaus-Anders Nysteen, CFO Christer Johansson, and Interim Head of Investor Relations, Julia Ehrhardt. For the first part of the call, all participants will be in listen-only mode, afterwards, there will be a question and answer session. Speakers, please begin your meeting.
Welcome everyone. In the Stockholm office, I have Christer and Klas- Anders that will present the first quarter result, I will start by handing over to Klas- Anders.
Thank you, Julia, a very good morning to all of you. Thanks for spending the time with us. Today's agenda will follow the usual structure. I will start and share with you some highlights, talk about strategy and how we're developing against the strategy. Christer will then do the financial review, talk us through the numbers and also give an update on the regulatory issues and how mitigating actions. I will come back towards the end and do a summary and some highlights, I'll talk about the outlook. After that, we will do the customary Q&A session. Let's start then on page number four in the presentation, the Q1 2019 highlights. Let me first of all, clearly say that this is a good quarter for Hoist Finance. Actually, in terms of numbers, it's the best financial quarter ever for the company.
Both the current market conditions and the market outlook are good. That means that we have received progress also in the marketplace in terms of supply and margins, we will revert to that comment later on. We also see, this is very positive, that we are making a lot of progress as far as our own improvement initiatives are concerned. I'm really pleased to see that this is starting to show. The collection performance came in at 105% in the quarter, which I think this shows resilience and robustness in the way we collect. We see that cost savings are starting to bite and cost income is coming down. We did not close GetBack in the first quarter, but we have closed GetBack now. That means that we will see the contribution from GetBack and even the acquisition of Maran from the second quarter onwards.
We had to hold equity, of course, against the potential closing of GetBack in the first quarter. That's also a part of how you should look at the numbers. GetBack closed, as I said, in April. Christer will come back and talk about the work we're conducting to mitigate the negative consequences or the regulatory challenges. We feel confident that we will be able to mitigate these consequences. On slide number four, at the bottom half there on the slide, you will see that we have summarized the Hoist Finance strategy. The four corners or the cornerstones in the strategy is, first of all, growth. We prioritize growth and now prioritize the markets, and with a broader product offering. That's important for us. Secondly, the operational excellence agenda and the work that we're doing to become the most effective and efficient operator in the industry.
Good progress there, Christer will come back and discuss it in more detail. Become the digital leader, again, we are happy to see progress, I will comment on that in a second. We have this unique, low-cost, deposit-based funding model, which gives us the lowest cost of funding in the industry. I will actually touch upon how we are doing on delivering on the strategy with some very concrete and specific case studies and case examples in my part of the presentation. Let's move to the next slide, page number five, and take a quick look at our earnings. As mentioned, it is a very strong performance in the quarter. You can see that the profit before tax ended at SEK 226 million, which is up 22% compared to the fourth quarter in 2018.
Seasonality is part of the collection industry, typically, the first quarter is quite a slow quarter for the industry. When you compare this Q1 in 2019 with Q1 2018, you should just keep in mind that the first quarter of 2018 also was, at that point in time, the best Q1 ever. We are really happy to see that we are coming in a significantly higher level in the first quarter. In terms of our return on equity, we are happy to see that we're delivering 17% return on equity in the first quarter. Particularly because we have, I guess, never had more equity than we have at this point in time in the company based on the share issue we did in September last year and also the full 2018 retained earnings.
In that sense, I think 70% of return equity is a very strong number driven by operations. I will actually take you through and talk about some of the key examples, the key initiatives that we are running to deliver on our strategy. I will move to page number six and quickly talk about growth. For us, growth in the prioritized markets is very important. We believe in being and staying focused rather than being scattered, that the largest scale benefits are found in growing market shares in the well-established markets. Undoubtedly, on top of the scale benefits, scale is also important from a client relevance and a pricing perspective. GetBack acquiring about one-third of the portfolios from a previous competitor in the Polish market, GetBack, makes us very happy and proud.
We did work really hard for a long time to be able to do this, and it just shows the strength of our franchise. Also really happy to have acquired the Maran platform in perhaps the most interesting market in Europe, the Italian market. Maran gives us a full product coverage and strengthens our market presence in the very important Italian market. Gives us also a chance to increase operational efficiency and gives us even a presence in Romania. I will touch on this a bit later when I talk about nearshoring opportunities. Going to slide seven. I think it's fair to say, and experience has showed this to me over the years, that one of the key challenges for many organizations is that they are working in silos. In silos, there is very little sharing. There's actually very low visibility and lots of duplications.
Knowledge transfer isn't really happening, and it's really hard to find common ground for developing operational excellence. In Hoist Finance, we have chosen a completely different path. We launched our One Hoist operating model on the 1st of January this year. As an important part of this, we have also established these three centers of excellence for unsecured non-performing loans, for secured non-performing loans, and for performing loans, respectively. The purpose for these centers of excellence is to share, to standardize, and make sure that we are as effective and efficient as we can be. It's good to report to you that there is great traction across our markets. What I've seen in Q1 makes me very confident and very optimistic for what is going to happen in the remainder of the year.
We have embraced a new way of working and it is paying off. Moving to the next slide, page eight. I think going digital is important for several reasons, and let me mention three then. First of all, we think it's important to service our customers better. Being more flexible and to offer better solutions tailored to individual needs. That's one, serving the customer better. Secondly, just helping more customers than before. This is, of course, from a collection standpoint, extremely important. If we can reach new customers, that will definitely be part of how we can push collection performance going forward. We can see this through the digital initiative that we are launching, that we are able to find new customers to help in their way towards financial inclusion.
We should have in mind that having financial difficulties typically is quite stressful and embarrassing, and many customers don't really want to talk to anybody. To have self-service portals and self-service functionality helps when they are trying to get back on their feet. As a point number three, digital and going digital by default also, of course, improve our own operations because digital solutions typically are significantly more cost-efficient and cost-effective than manual work. What we have achieved now in a year's time has actually exceeded my expectations. Because we have implemented a harmonized and well-functioning now operating model with the centers of expertise that I mentioned, we can actually develop once and then deploy our solutions across our markets. We have launched standardized customer-facing solutions and improved our backbone significantly at the same time.
As more of this is coming this year, I believe that we can deliver on our strategy and our ambition to being the digital leader in our industry by 2020. Move to slide number nine, which again talks about the one operating model and how we organize for a more effective and efficient future. We'll talk about our cost savings in a bit, I will just pause at this page 9 and say that we, as the senior team, are very committed to our program, our three important building blocks this year will be, first of all, to ramp up our shared service center in Wrocław in Poland. We're targeting having 50 full-time colleagues there by the end of 2019 to benefit both from scale and skill in a shared service center.
As you're aware, we have been having a lot of focus on how we can optimize our site structure. Site consolidation has happened in Germany and the U.K. We are continuing the work to optimize our site structure for the future. As a point number three, another important building block this year will be nearshoring and acquisition of Maran gave us access to the Romanian market and the Romanian service center that Maran has been utilizing there. We are dedicated to explore ways to expand the current scale scope in this part of our operations. With that, I will hand over to Christer, and he will take us to the financials. Over to you, Christer.
Thank you, Klaus-Anders Nysteen. It's a pleasure to be here and to present a strong quarter. If we turn to page 11, you can see that we delivered double-digit top line growth and improved cost income. In many ways, this is the best quarter ever. On income, which is up 13%, I'd like to comment on three things: portfolio growth, margins, and collection performance. Starting with portfolio growth is amounted to 33% over the last 12 months. On one hand, it is somewhat boosted by the weaker Swedish krona, on the other hand, it does not include the GetBack transaction. Had that transaction been included, we would have had 7% growth in Q1 versus year end instead of 2%.
On margins, one should note that the acquisitions we did complete in Q1 was to a large extent the result of old forward flow contracts or contracts from 2017 and 2018. Based on the new transaction which we have participated in, we continue to see improved margins. Last, certainly not least, collection performance. This is where we spend much of our day-to-day focus. In Q1, this remains steady at 105%. That's the same level as the full year 2018. It's not all about income, of course. Cost matters a lot. Total expenses came in at SEK 561 million, and that is a level which is not containing any particular one-off items affecting comparability. Cost to income, our primary external efficiency target, improved from 74% to 71%. Although that's a step in the right direction, it's worth remembering that we strive towards 65% by 2021.
Earnings before tax at SEK 226 million corresponds to 17% return on equity. Turning to page 12. I mentioned the income growth of 13% year-on-year. Cost growth for the same period is well below that at 9%. In fact, if we instead compare with the previous quarter, costs are actually down 3%, despite being translated at a somewhat weaker SEK rate. That's a development that we are happy with. I would also like to comment on IFRS 16, these are new accounting rules for leased assets. This has been a big thing for many companies going into 2019. For Hoist Finance, that's not really the case. We are mostly affected through rental contracts for office space. Under these new rules, a certain portion of what was previously accounted for under administrative expenses will now instead be recognized under depreciation and amortization.
This shift in between lines, which has no net effect, amounts to SEK 10 million on a quarterly basis. It is also the case that these so-called right-of-use assets add to the balance sheet, as such, they impact the capital coverage calculation, which I will get back to later on. In case you are really interested in IFRS 16, there is more information in the appendix and in the report. Turning to page 13. Even though it's true that Q1 was a busy quarter, it's of course encouraging to see cost income coming down to 71%, it's worth remembering that we have embarked on a much longer journey towards cost income of 65%. To get there, we are pushing ahead with a number of initiatives in cash cost terms, the initiatives that we have completed correspond to some 15%.
The total estimated investment of SEK 200 million-SEK 250 million. Still plenty of work ahead of us. Nevertheless, we can see benefits of completed initiatives starting to materialize. When we, by end of Q1, added things up, we were at some 12% of the total target of SEK 300 million in run rate savings. You may remember that these savings were coming from a number of different categories. On page 14, I would like to give some color to recent examples in each category. Starting with Collection Excellence. In Spain, we have brought a lot of activity in-house, this has been possible by a significant ramp-up in our own capacity and our own skills. This is certainly translating into savings on external commission fees then.
We have also revised our approach to so-called field collection in Poland, this is about door-to-door collection, which we expect to be a smaller piece of our future collection strategy. We have adapted accordingly. On digitalization, we did in Q4 give an update about payment portals, those are, of course, important, but a true self-serve platform offers much more. We have called this our 2.0 platform, this is live in the U.K. It's now live also in France. We have other markets coming on board during 2019. This allows us to run the business with less staff, that's how those savings materialize. Within Collection Analytics, it's of course a lot about data and two particular areas where improvements have been realized is within so-called skip tracing in France and within so-called scorecards prioritization in the U.K.
Both searching for contact information, which skip tracing is about, and initiating legal processes come with significant external costs. These savings materialize in the form of reduced excessive spend or avoiding excessive spend. Finally, Klaus-Anders spoke a little bit about site consolidation, and this is a topic which we've been quite engaged in over the last years. We've also seen that the actions we have taken have materialized into substantial savings and as such, makes a lot of sense for us to continue to assess those opportunities. Klaus-Anders also mentioned the expansion of the shared service center in Wroclaw, where the typical cost for an employee is less than half of what we would see in other markets. Clear there are some benefits to be had by organizing ourselves in a better way. Turning to page 16.
Coming back to the topic of capital and liquidity, changes since the beginning of the year are in fact relatively small, but still justify a few comments. If I start on the right-hand side, the liquidity reserve increased to almost 8 billion SEK, and that's a bit more than we would normally aim towards. This position was adapted to the payment of the GetBack transaction, which amounted to almost 1 billion SEK. That transaction, of course, then took place in April. Turning to capitalization and the CET1 ratio, you will see that we are just below the target range. I want to be clear here that we entered into 2019 within the target range, and I expect us to leave 2019 within the target range.
That said, the Q1 figure is influenced by a number of items, and I'd like to comment them in a bit more detail on page 17. To start with, I mentioned earlier that the introduction of IFRS 16 increases our recognized assets. That increase is some 242 million SEK. In reality, we have not changed any-In how we rent office space, et cetera. But this still translates into a technical impact on the CET1 ratio by some negative 0.1 percentage point. Secondly, the GetBack transaction was, as William said, not closed by end of Q1, but negotiations had come long enough for the anticipated purchase price to attract capital coverage, and that alone impacts the CET1 ratio by some 0.4 percentage points.
As per today, this transaction is, of course, closed, which means that it is now also contributing to income as opposed to only contributing to capital consumption. Thirdly, as you may be aware, the Swedish krona has weakened quite a bit also in Q1, and Hoist uses a so-called equity hedge against the FX movement. Even so, the risk exposure amount is largely denominated in foreign currency, while our equity is SEK-based. As a result, we see what you could call an inflation of assets as measured in SEK. On one hand, this means that future income from foreign assets will translate into a higher amount in SEK, so that's all good. On the other hand, it translates into a circa 0.2 percentage point decrease in the CET1 ratio as per end of Q1.
In this context, it is worth recalling that the buffer between the regulatory limits and our target range is designed to absorb most other things, FX variation and, of course, the retained earnings add quite a bit. You can see the impact of the Q1 profits there, 0.5%, so quite a strong recovery all else equal. On page 18, our funding position has not changed much. It remains well-diversified and at low cost. The increase that we do have is from funding volume, primarily in German retail deposits. During the quarter, we have done some adjustments in our deposit pricing, so adjustments to our offered interest rate with the ambition to gradually increase the average duration of deposits a bit. That comes with a slightly higher cost, but it also brings benefits when we model different interest rate scenarios.
If we are to believe the Sveriges Riksbank, the most likely scenario is continued very low interest rates. That is great, but we are certainly prepared also for other scenarios. Turning to page 20. Despite the operational agenda being quite busy, my top priority in Q1 has in fact been our so-called mitigating actions. Just to recall, these are the actions which we pursue in order to counter negative impacts from recent changes in regulation. Specifically, this relates to the increased risk weights on acquired NPL assets and the so-called prudential backstop. We said in connection with the year-end results that many of these actions would take six to nine months to implement, and the progress that we have made in the first three months is consistent with that guidance.
We are indeed pursuing several tracks with securitization being the work stream where we have invested most time and resources in Q1. On securitization specifically, we have identified suitable portfolios in our two biggest markets, so that is Italy and the U.K. We have been drafting the relevant structures, and the documentation is now at an advanced stage. Actually, it looks ready to me. We have had discussions with several potential investors, and some of them have already visited the sites where we are servicing the assets in question. We are also aligning key assessments with the auditors, and we have had dialogue with the regulator on certain aspects. We have also kicked off the rating procedures. Although we have not yet signed any securitization transactions, we are making good progress and progress which is very tangible.
On other forms of co-investments, which includes fund structures, we are in advanced stages of discussions with investors. We have selected a specific asset for a pilot, and we are now defining the various mechanisms around governance, ownership, and risk-sharing. More advanced risk modeling is something that we believe will make a lot of business sense, and we do acknowledge that IRB methodologies will take time to establish and get approved. We have set things in motion, and one of the important aspects in Q1 had been to review our internal capabilities and to recruit certain specialist skills for the benefit of the longer journey. Finally, we are on the topic of changing the business mix.
We are exploring market potential for a number of products and services which we could potentially offer based on our banking regulated model. With that update on the mitigating actions, I'd like to hand over back to Klaus-Anders Nysteen.
Thank you, Christer. We go on page 22 then, the outlook and today's key takeaway. First of all, I think it's good to just establish the fact that we see attractive market conditions. The regulatory changes that Christer just discussed, they are pushing banks to direct more of their debt. Supply is going to be strong also in the next quarters to come from financial institutions in the biggest markets in Europe. We see here that the margin improvement that we experienced towards the end of last year is continuing into this year, so that's also helpful. The theme, which we also have discussed in the past, namely industry consolidation, is also continuing to be a force and a topic and a theme that will impact the industry going forward. We have been prioritizing operations, and that comes through in the numbers in the first quarter.
We are definitely committed to deliver on our cost savings and operational excellence program. Really pleased with the work on addressing the regulatory changes and the consequences that we experience from this through mitigating actions. We are on the path towards a sustainable business model post introduction of the NPL backstop. We believe strongly that the Hoist Finance diversified funding model based on the banking license remains very attractive. With that summary, we close the presentation and we open up for questions.
Thank you. If you do wish to ask a question, please press zero one on your telephone keypad now. The first question is from Emilie from Nordea. Please go ahead. Your line is open.
Good morning, thanks for taking my questions. The first one is, GetBack. I'm thinking given the size of the deal, could you give us any flavor for how to think about in terms of return dynamics? Should we expect it to be sort of in line with the group trend currently on interest income and also in terms of maybe a ramp-up phase and so on when it comes to the actual cash flows, the cash collections on the portfolio?
Good morning, Emilie. Christer here. The GetBack transaction closed in April, we are recognizing income as of April. Of course, the income will not always reconcile with the cash flows. Even though the cash flows will pick up over time as we engage in the various collection activities, we will be recognizing income, you can say, at sort of full run rate from Q2. In terms of margins, you should think about this deal as being better than the transactions we've done in 2017 and 2018. I think that's a very good sign for our expectations going forward as well in the Polish market.
Okay, thank you. On Maran. They already had an impact in Q4 and also now in Q1. Could you just give us some flavor on how to think of the impact from the part you actually acquired now in Q1? What's the delta, is that still mainly on the field collection as it's servicing? I don't know if I followed 100% on the exposure you got to Romania. Is that only sort of a back-office service center, or do you actually get exposure to the Romanian market? If that's the case, could you give us something on the logic behind wanting to expand in the Romanian market? You've previously said that you want to focus on those core markets you've seen a lot.
Thanks, Emilie. If I take the first piece of the question Klas-Anders take the second piece. The acquisition of the Maran entity in Italy has been quite an extended process in time, this is due to Italian regulation. Even though we've been running the company since Q3, we've been consolidating it in the numbers since Q3, it hasn't actually been completed until very recently, or it's in the process of being completed. If you look at Q4 and the run rate at that point, you will capture sort of the impact of the Maran the fact that we are closing the transaction now in any day now, it doesn't really change the run rate much from what you've seen in Q4 then. That's how you should think about that.
With regards to the Romanian market, maybe Klaus-Anders Nysteen can comment.
Good question, and thanks for asking that. This is just a back-office facility serving the Italian market at this point in time, which I think is quite beneficial. They have proven their worth for Italy for over the years. There's no exposure to the Romanian market, and we don't plan to expand into the Romanian market either. We will of course use this as an excellent platform to build mutually capabilities from. That's all.
That makes it much more clear. Thank you. Just one final question that's maybe more philosophical in one way. You write in your CEO statement that you expect, or at least hope to see Hoist being the leader when it comes to digitalization, and be best in class by 2020. At the same time, the collection system, the FICO system, isn't that quite off the shelf and what's preventing your peers from then closing that gap by just acquiring the same collection system? I know there's other parts to it, of course, as well, but more in terms of the actual collections.
That's again, a good question. I mean, I agree with you. The backbone system in its own right doesn't necessarily give you a strategic advantage. The advantage is just, I would say, the interface. I mean, if you can standardize the backbone, which is the core collection platform, to develop once and then deploy all across market is much faster, much more easy, and of course, much more cost effective and efficient. If you have 10, 20, up to 50 or more core collection platforms that you have to make an interface towards, it's going to slow you down massively. By having one system across all markets, we can be much more agile, much more flexible, and much faster in acquiring new solutions and systems and processes. That's where the competitive advantage is coming from.
Understood. Thank you. That's all for me.
All right. Thank you.
Just as a reminder, if you do wish to ask a question, please press zero one on your telephone keypad now. Next question is from Ramil Koria from SEB. Please go ahead. Your line is open.
Thank you very much. Good morning. A few questions from my end. If adjusting for FX, it seems like most of your investments in this quarter, albeit being quite small, looks to be in the U.K. Is that simply due to forward flow agreements being there, or is it simply so that pricing environment has improved? That was the first one. Thank you.
Good morning, Ramil. Yes, you are correct in the sense that most of the acquisitions we did in Q1 are the result of existing forward flow contract, and it happens to be the case that some of the bigger contracts we have are in the U.K. market. Of course, we did a lot of work on the GetBack transaction. In my mind, that's a Q1 transaction, even though in the numbers, you will see it in Q2. In that sense, I would maybe think about Poland as being the most active market.
Maybe you said it, Christer, but if you add back in GetBack transaction into the Q1 investment and assume that it closed in Q1, actually the investment level in Q1 would have been the highest first quarter ever for Hoist Finance. In that sense, if you adjust for that, it was actually a very good quarter from an investment point of view.
Got you. Just a clarification on that. Under your commitments line in this quarter, the GetBack transaction is included. Is that correct?
Yes, that is correct. That corresponds to roughly 1 billion SEK.
Okay. Thank you. Moving on to the cost side, perhaps, if looking at the FTE development, it's down roughly 2% sequentially. If looking at, say, average personnel expense over FTEs, it seems like you've had quite an improvement there. I mean, you could argue it's a pure timing effect or whatnot, but is it simply so that line could include nearshoring feeding through as early as in Q1, or should we expect that nearshoring should instead be evident coming quarters?
We are indeed spending a lot of time on topics such as nearshoring, but I don't think you will see much of that in the numbers yet. In fact, the changes that you do see in the numbers are relating to, say, a relative change in mix of employees. We've been reducing staff in Germany, and we've been reducing staff in the U.K. over time. The buildup that we have had been mostly in Poland and Italy. That will have changed the mix of the employees a little bit.
Should we expect this to increase on the back of Well, cost income seems like it's the highest in the U.K. and also Germany. Given the site consolidations, should we expect that the mix in personnel should favor your personnel expenses moving forward as well?
We are certainly adding more people in Poland to deal with the GetBack transaction, and that will be employees who, on average, are at a lower cost than the existing ones. There will be some impact of that. I think in the longer term, which maybe matters more, it's about rolling out the digital platforms and making sure that we direct traffic in that direction. That's what's going to matter long term.
Nearshoring, in a sense, helps them to the local jurisdictions are there to replace more costly salaries in the most costly jurisdictions, of course. It makes sense to think along the lines that you think of, I believe.
Thank you. Then just one final question, looking at the collection cost side, you mentioned that the legal costs, I don't know if you said that they decreased, but at least that's where the positive beat is coming from on our numbers. We know by now that secured is a very lumpy business by nature, as we've seen with some of your peers, presumably most of the legal costs come from there, correct me if I'm wrong. How should we model this going forward given the lumpiness of the business?
Yes. Legal expenses are not necessarily related to secured business. It can also be on the unsecured business. For example, in GetBack transaction, we will be engaging in those activities as well. As you point out, this will vary a little bit over time, it's also relating then to which particular portfolios we acquire. For that reason, it's very hard to guide on the exact level quarter by quarter. I don't think that this quarter is exceptional in any sense.
Thank you. Just one final question, if I may. One of your peers mentioned that there is a change to the Polish bailiff structure. Have you looked into that? If so, do you expect that to impact your business in Poland in any way?
Over the last year or so, there's been quite a few changes in the Polish regulatory framework, actually. We've been taking a proactive stance. We've been adopting to those regulations. Actually, part of the reason why we've had such a strong increase in employees in Poland is that we are shifting our focus towards amicable collection versus going down the legal route. That is a result of us being ahead of the changes in this area.
Yeah. The same goes for reducing the exposure to field collection in the Polish market a little bit along the same route. I think we're ahead of the curve there.
Thank you very much.
Next question is from Anil Sharma, Morgan Stanley. Please go ahead. Your line is open.
Good morning. Two questions, really. Just want to try and understand slide 8 versus slide, gosh, where has it gone? Slide 13. It looks like a lot of the initiatives you have are going to come through this year and next year, and that this sort of cost save of SEK 300 million. What's the phasing of this? I see what you're saying in terms of by 2021, you expect to have delivered it all, but should we be thinking 50% done this year, 30% next year, and then the balance in 2021, or how do we think about that phasing? Obviously the business has got relatively large now. I know you used to provide, but I can't see anywhere here the collection curves by vintage or how the performance is in terms of ERC multiples over time.
Could you give us a feel as to how the performance has been, please?
Yes. Good morning, by the way. Starting with the phasing of the savings, what we've said in the capital markets day is that we expect this to be a gradual improvement over the whole period, over the three years. I think the start we are off to is in line with what I was hoping for. We are on track, but there's going to be a lot of work ahead of us, and it will take the full three years to get all the way to the SEK 300 in cost savings. In terms of collection curves, it is, as you rightly point out, that we will, from time to time, give a little bit more extensive disclosure than we do in the normal quarterly reports.
By year-end, we disclosed the collection profile of the curves, and the changes that we've done in Q1 are actually very small. Basically, you can say that the long-term expectations on the back book are not changed in relation to what we disclosed by year-end.
Okay. That's helpful. Thank you. Just one quick follow-up. In terms of pricing for new portfolios, how's that developing?
Again, I think I didn't get that. I'm sorry. Please repeat.
Yeah, just wondering, pricing on new portfolios, is it getting more competitive or is pricing getting better?
Right. Okay. I tried to say that we see that the margin improvements that we experienced towards the back of 2018 is continuing into 2019. There's less price pressure now than it has been, and it seems like the key companies, the key competitors are quite disciplined. As you are aware of, there are lots of competitors out there that are in need of deleveraging at this point in time because the leverage ratios are just too high. That is benefiting us at this point in time because funding is for us in many ways "easy." We got access to funding, and it's low-cost funding. In that sense we are in a good spot.
Okay. Just to check, it's not because the number of competitors has come down, it's just that there's more rational pricing behavior.
It's actually both, I would say. In the long term, of course, consolidation markets are a good driver for improving, I would say, the professionalism in the marketplace and the discipline. At the same time, I think what we're seeing is that cost of funding has gone up significantly for many companies, and the access to funding is also very low for many companies. When you combine that with high leverage ratios, some companies have been more disciplined, I guess, than before.
Okay. That's helpful. Thank you.
All right. Thank you.
There are currently no further questions registered. I'll hand the call back to the speakers for any closing comments. Please go ahead.
Thank you. We have some questions from the web.
Here with them out, [Susanne], yeah.
In addition to the CET1 requirement, what is your total capital requirement?
In terms of capital requirement, the report has quite a bit of information. On page 28, for those who are really interested, you will see that the total own fund requirement is some SEK 4.3 billion, and we are currently at SEK 5 billion.
The next question is, what is the expected trajectory of your CET1 over the next 12 to 18 months?
Yes. What I said earlier on was that we entered into 2019 within the target range, and I expect us to leave 2019 within the target range. On a month-by-month basis, it will, of course, be impacted by anything from acquisitions to FX movements. I think the important thing to remember here is that the underlying business is doing very well, and there is a lot of profits being generated, and that will add to equity, of course, as you can see in that bridge.
Yeah. On top of this, of course, the mitigating actions that we are planning to introduce should also benefit the capital ratios.
The last question. What is the low end of your buffer target, and what actions would you take if it fell below?
The target range, which is illustrated on page 16 in the presentation, is 9.7 to 11.7. As noted, we are just below that range. The actions that we take as a result of this is, of course, that we need to hold back a little bit on acquisitions to get into the target range.
There are no regulatory requirements because of being below this limit, right?
This is a management target range.
Exactly. It's a management target range. In that sense, we are taking management ordinary course of action.
Thank you. As you just mentioned that this was Ibrahim from [Goldman] that posted those questions.
Yeah.
Thank you for that.
Yeah. The three last ones. All right. Thanks a lot then for staying on this call with us today. We are obviously satisfied with the quarter. We're glad to see the operational activities and improvements are kicking in, and we are working hard to launch the mitigating actions that we discussed. Thanks a lot, and have a great day. Bye-bye.
This now concludes the conference call. Thank you all for attending. You may now disconnect your lines.