Hi, and welcome everyone. Very welcome here to Grev Turegatan in Stockholm, and also very welcome to you on the web. My name is Julia, and I will present the results together with Klaus-Anders and Christer. The results will be presented, and then we will open up for a Q&A session. For those that joined us on the web, please put your questions on the web or directly to me in the email. I hand over to Klaus-Anders that will open up the presentation.
Good morning, and thank you, Julia, and thanks for coming in this morning. Good to see you all, and thank you also for those following this on the web. We have a slightly more comprehensive presentation today on the back of the regulatory changes that I believe most of you now, at least to some degree, are familiar with. I will, as usual, take us through the highlights. Christer will then take us through the financials and talk through operational efficiency initiatives. Of course, capital funding and also liquidity. I will then come back and talk you through thoroughly what's happening with regulations and of course, our mitigating actions. We will also present to you our revised financial targets. We'll wrap things up with a summary and open up for questions and answers.
Let me use the opportunity first then to say that 2018 has been a very good year for Hoist Finance. I'm very pleased with the progress that we are making basically across the board, whether it's investments, our client relationships, implementation of the new strategy. I'm really pleased for the progress that we are making. I'm happy to be able to present on behalf of the whole Hoist organization. We have implemented a lot of changes and there has been a significant heavy lifting during the year. Growth is one common theme across all our quarters. We have expanded into "new asset classes." We have done, for instance, some performing loan portfolios. One in the U.K., as you can see in March. We also did a performing loan transactions in Poland. We're happy with that. Several secured portfolios were acquired.
We were able to acquire a company called Maran in Italy, in Spoleto. Got new colleagues there now. Maran is a reputable firm with really strong client relationships working with servicing. We take an important step into servicing. We also more recently announced that we are in the final stages of closing a significant transaction in Poland. It's a bit of in-market consolidation in one of our prioritized market. We hope to close the GetBack transaction, which is about a third of the company, in the early Q2. I'm also very happy that we have been able to introduce one operating model. That's important for many reasons. Of course, in terms of operational efficiency, their ability to develop once and then deploy all across our markets. I also am very proud to say that Hoist has a very good approach to amicable collection.
I'm very happy to see that our people, our colleagues, are taking those difficult calls with our customers every day, helping people keep their commitments. The financial performance in Hoist Finance is strong. I'm not going to steal Christer's thunder, who comes on stage in a little bit. I would like to say that we are very happy with the growth in portfolio investment. It's a 40% growth, which is of course a significant number in terms of portfolio investments. I'm also very happy that we have a 30% increase in profit before tax. SEK 755 million in profit before tax is the best result ever for Hoist Finance. I'm also very happy to see that our focus on operational excellence is coming through in the numbers, especially, I would say, in collection performance.
For the year, we came in at 105% collection performance, and this is the best year in five years, and it's very close to the best year ever. Paying attention to collection is the most important job that we do. Our ambition as it's laid out in the strategy is of course higher. Our ambition is to be the most effective and the most efficient operator in the industry. Regulation is obviously an important topic for all regulated institutions. That's also why we make that as one of our "highlights" for the quarter. I will come back and talk through those regulatory changes in a little bit. Before that, I will hand over to Christer. I'm sorry, it's one more slide actually, before I hand over to Christer. This is this one, the growth. This is the 40% growth that you can see in 2018.
As it comes through on the graph, 2018, in terms of portfolio investments, were actually more than 2016 and 2017 combined. We're happy to see also the geographical split here in our prioritized markets. Really great to see the significant growth in Italy, our largest business unit, a growth of close to 50%. I think it's equally fun to see the significant step up in France and in Spain during 2018. Now, over to you, Christer.
Thank you. Good morning, everyone, and good morning to those of you following us through the web. 2018 is history, and it's a year when we delivered 16% return on equity, and we did so while growing the portfolio with some 40%. It's a very good year. Two of our most important indicators are collection performance and cost income. Collection performance, as Klaus-Anders said, came in at 105%, which is a very solid level. Cost income came in for the full year at 74%, which is a level which reflects a number of investments for the future. The effective tax rate, which we've had some questions on in previous quarters, came in at 22% for the full year, which is very much in line with previous years. When it comes to profits, this is actually not a fair comparison.
A better comparison is arrived at on slide nine, where we are adjusting for a number of items affecting comparability. For Q4 2018, specifically, these adjustments include adjustments for due diligence cost in Italy in connection with the corporate acquisition of Maran, which Klaus-Anders mentioned. It also includes adjusting for restructuring charges. Those restructuring charges are primarily related to right sizing of support functions, mostly in Germany. After adjusting for those things in Q4 and similar things in the previous quarters, income grew with some 19%, while cost grew with 17%. In terms of profit growth, Q4 picked up to 24%, which should be compared to 9% for the full year. Quite a significant pickup. This pickup is with support from improved margins. To illustrate this, we brought something which we have not shared with you in this much detail before.
Let me just tell you what we have here. On this slide, we illustrate the so-called effective interest rate. This you could also refer to as the gross IRR, so it's a margin metric. The magenta line here is the blended average of the existing book, while the orange line is the margins on the front book, so the newly acquired portfolios. As you can see here, there's quite a significant pickup towards the end of the year, a clear sign of improved market conditions. Turning to page 12 and operational efficiency. I said earlier that we had a cost income of 74% for the full year. If you look at Q4 specifically, it's 73% after adjusting for items affecting comparability. This is up from 71% in the previous quarter.
In this context, I would like to point out that by including and consolidating the business of Maran, which is a servicing business, this alone increased the cost income ratio for the group by some 1.5%. Out of the increase from 71% to 73%, 1.5% is due to consolidating Maran. The residual increase is due to a high level of change, and that change is coming through mostly on the administrative expenses. Now, a high level of change should not come as a surprise to anyone. In the Capital Markets Day, we laid out the improvement potential that we see on the right-hand side and the investments that we need to do to get there. Key components of these investments, they were adding up to SEK 200 million-SEK 250 million , with key components being investments into digital and optimizing sites and staff.
These two topics have, of course, been on top of our agenda in Q4. Specifically, starting with the investment into digital, we are accelerating the rate and we are investing almost twice as much in Q4 as we did in 2017 on average. The incremental investment into IT is around SEK 15 million in Q4. Turning to restructuring, we have in Q4 been completing the closure of the Milton Keynes sites in the U.K., and we have, as I mentioned earlier, also been provisioning for rightsizing of support functions, mostly in Germany. Those are the two highlighted parts of the bars there that you can see. We will certainly revert and report back on the run rate financial impact of this as we go further into 2019. For now, I would like to highlight a few of our achievements in the digital area.
In some aspects, this is actually about catching up. It's about putting the basic stuff in place, things like the ability to receive online payments. On this front, which you can see on the left-hand side here, we've been making good progress in Q4, and we do so by building on standard components which we can deploy rapidly across markets. In the U.K., where the basics is already in place, we can push ahead. With a reasonably well-established self-service platform, we are able to direct traffic in a more diligent way already from the start of the customer journey. In fact, for some of the newly acquired portfolios, as much as 40% of new installment plans are being set up through the self-service portal. Of course, I think there's no reason to settle for 40%.
There should be plenty of room to increase this, even if we were to settle for 40%, this represents a very substantial potential as we roll that into the other markets where we're basically at zero today. It's not all self-serve. Some customer will want to talk to us, and for that segment, the contact strategy is key. In this area, our focus in Q4 has been on two-way communication channels. This is, for example, in the form of web chat and SMS communication, which we use to engage with our customers. All in all, good progress in the digital area, and we look forward to coming back to this topic throughout the year and give you more detail on how this progresses. Turning to page 15, 16 actually. This is a standard slide, and you may have seen it before.
I just want to pick out a few things here. To start with, as you probably know by now, there has been a change in risk weight, as a result of this, we have also revised our CET1 target range. The new target range is 1.75%-3.75% above the regulatory requirement. As per end of Q4, this translates into a range of 9.6%-11.6% for CET1 ratio, the actual CET1 ratio as per end of Q4 is 9.66%, so just within that range. Maybe I should point out that, of course, this is not a number that we can micromanage down to the very last digit. It will always be influenced by transactions, which can be lumpy, and there is also a bit of influence from FX rates since the equity base is in SEK and the assets are held in other currencies.
Nevertheless, of course, the decline from 11.7%-9.7% might look as a sharp decline, this is in fact completely driven by the regulatory changes. To illustrate that, on the next page, you can have a look at the pro forma Q4 CET1 ratio as if the risk weights had not changed. With risk weights at 100, what would the CET1 ratio had been? That number is 13.0%, which compares then with previous quarter of 13.1%, which is actually well above the level seen a year earlier. The same thing can also be seen if you compare tangible equity to book value. This is perhaps not the standard KPI, but if you were to run the numbers, you would see that in comparison with our industry peers, Hoist comes out very strong on this front.
Taking a step back, it's of course also worth to remember that the business mix that we have, our underlying business, has not changed as a result of the regulatory changes. In that sense, there has been no change in risk. In fact, Klaus-Anders will come back to the future business mix, so I won't say much more about that right now. Turning to the funding side, we have continued to attract euro deposits and as of today, they make up almost a third of our total deposits. Partly as a result of that, we have had a strong liquidity position all throughout Q4. With that, there has been no reason for us to utilize the RCF that we have in place.
Obviously, it comes with a cost to have it in place, and also with that cost included, the interest expense in relation to the book value has stayed at around 2%, as you can see on the bottom there. This clearly underscores the resilient funding model that we have, and this is of particular interest when you compare it to industry bond deals. In fact, on the next page, you will see that they have picked up quite a bit. The average yield to worst has increased from around 3% to around 6% over the last 12 months. An increase of 300 basis points. In that same period, our funding cost went from 2.1% to 2.1%. Quite a big difference.
With that, I'd like to wrap up the piece on financials, and I will hand back over to Klaus-Anders , who will cover the regulatory side.
Thank you, Christer. Here we go. Hoist has been regulated as a bank since 1996, and the banking model has served Hoist Finance really well. We have, first of all, been able to tap into a source of really competitive funding. Being a regulated institution also helps in many commercial discussions and situations. As a point number three, being regulated as a bank also allow us to invest into other asset classes that many of our competitors cannot invest into. I also think that having the banking license give us an opportunity to develop even new products based on having this regulated status. In banking, as many of you here present know, there is at all times discussions around regulations. Right now there is one change that we have adopted to, as Christer just told you, on the risk weights.
There is one potential change that might impact us in the future that I want to share with you today. I will come into the details a bit later on. I think it's also important to point out the purpose of the new regulations. The way the regulators see the industry is that on the bank's balance sheets in Europe, the level of NPLs is still two times the level it was pre-crisis. The banks have not really sold off their non-performing exposures. The regulator really wants the banks now to divest more of their non-performing loans. The regulator also wants to see and make sure that the secondary market for NPLs is well functioning. We as Hoist Finance, we agree with both of those purposes from a regulator's standpoint.
This is good news for the industry because there will be more non-performing loans coming to market. The regulator wants the banks to sell more and faster. That means more NPLs will come to market. Even though we support the purpose of the new regulation, and despite the fact that the regulator really wants to see a better functioning secondary market, the new regulation comes with some unintended and counterintuitive consequences. This is really, really important for us to say very clearly, there are mitigating actions. We have identified those mitigating actions, and we are implementing those mitigating actions now. Despite this, despite these challenges, referring back to what Christer just talked about in terms of where the high yield bond market is going, we think it's clear, crystal clear. We see the banking model as the best option for us going forward.
I stated many times that in our industry, the winners will be those companies that have the lowest cost of funding and the best operations. On this picture, on this slide, we have listed some of the key drivers for value in the industry. Maybe you can just make it a bit simple and say, okay, there are two models. It's the banking model and it's the non-banking model. We obviously is in the category of having a banking model business. For companies with the banking license, the key advantage would be to have access to funding and of course, access to low cost funding. In many ways being "insulated" from the high yield market and the volatility that we have seen in the high yield market. For us, for the companies working in the banking regulated model, regulation is there.
It's always going to be there. We are working every day dealing with those regulations. On the 18th of December, we implemented the new risk weights, the 150% risk weights for our unsecured non-performing loans. Following a decision from the Swedish FSA to support the new interpretation of the European Banking Authority as to how risk weights should apply for non-performing loans. Pre-mitigating actions, before we implement mitigating actions, this, of course, influence the capital requirements for the unsecured NPLs. It's important to say that the new risk weights are for the unsecured segment only, unsecured NPLs, does not apply for secured NPLs nor for performing loans. It does, however, impact both the back book and the front book. We have, over the last few quarters, talked about the discussions in the EU regarding the so-called NPL Prudential Backstop.
We discussed this in our third quarter report. We also touched the topic on the Capital Markets Day. With the compromise just recently being published, we have reasons to believe that if this is approved by the European Parliament, we need to treat the capital requirements for NPLs differently in the future. Let me make it crystal clear. This is not an immediate issue. It does not affect the back book, and there are mitigating actions to deal with this. I will explain more in a second. Let me first take you through the risk weight issues. On this graph, you will see our book values our portfolios to the left, the total book value towards the end of 2018.
Of course, pro forma, before new risk weights were to be applied, based on the fact that we predominantly have unsecured NPLs, the risk weight was around 100%. With the new risk weight regulation, the new average risk weights on our portfolios is at around 150%. If we apply the new risk weights on the purchased volumes in 2018, where we actually acquired a lot of portfolios that were not unsecured, 40% of what we acquired was already outside unsecured space, the blended risk weights on the purchased volume would have been 125%. I mentioned that we now have to assume that the new NPL Prudential Backstop will be approved by the European Parliament and implemented in the second quarter. Again, this is not approved yet, but we have to be prudent and assume that so will happen.
On this slide, we try to outline how this backstop actually will be implemented, how it works. Let me again reiterate the key points. This does not affect the back book. It's a future issue, and there are ways of mitigating negative consequences. Going back to the timeline. If this is approved and implemented, and the implementation date, let's say, is 1st of April, the backstop would only apply for new originated debts. That's why it only applies for us in terms of the front book and not the back book. It's also so that with this Prudential Backstop, when one of those newly originated debts goes into default. The bank needs to write down the value to zero after three years. Of course, our collection curves are much longer than three years.
Hence, without mitigating actions, this might have an impact on how we need to treat capital for unsecured consumer loans. Again, I've said it a couple times already that this is a future issue. What we are showing on this slide is exactly that. What you have here is really the curves, if you like, or the book value on our different vintages, portfolios acquired from pre-2018, 2018-2021, which is the gray area on top, and the light area is the secured and performing portfolios acquired 2021. Then this magenta color area, which is in the future, is then the unsecured portion that might be subject to potential Backstop. Have in mind that typically, the portfolios within the unsecured segment that we acquire typically have an average age of four- five years.
That's why we see this as a problem in the future and not now. This is also a challenge where there are mitigating actions. Let's then take a look at these mitigating actions. What are they and how will they work? We have mentioned before that we are assessing utilizing so-called fund structures. We are also now in the process of executing on securitization. I will talk you through IRB, but also changes in our business mix. Let's start then with the two first ones, fund structures and securitization. They are kind of related, so it makes sense to talk through them in one go. Fund structures, how does that work? In a fund structure, we would hold the NPLs in a fund managed by an external fund manager, where Hoist operates as the servicer.
I have to say that it remains to be verified that it actually addresses the risk weight issue, but it does address the backstop. It's also important to say that the fund structure is more relevant for the front book than the back book. Securitization, which is the second mitigating action here, is a well proven concept commonly used by banks. There is an established practice. There are clearly defined processes and pathways as to how to do it, how to get there. NPLs will then be held in a special purpose vehicle and will be applied, which is important, both for the back book and for the front book.
Given that we can transfer risk, which is the whole point, this is a very relevant mitigating action for Hoist, both for the front book and the back book, and addresses both the risk weight challenge and the backstop challenge. It deals with both problems in one solution. Let's take a closer look at the two structures. This is a schematic of how a fund structure would work. Hoist Finance operates as a servicer and has ownership in the fund, a fund managed by an external fund manager. Conceptually, in the fund structure, the key issue is transfer of control, hence the need for an external fund manager. These structures do exist in the market, and we are definitely looking into how this can be applied also in Hoist Finance. The second structure looks like this. This is the securitization structure.
Conceptually, in securitization, the key issue is transfer of risk. By holding the NPLs in a special purpose vehicle, Hoist will retain ownership in the senior tranche, and the NPLs will have a rating, and hence, the backstop does not apply. We will divest the majority of the junior tranche. By this, we can keep our low-cost deposit funding, which is funding then the portion of the senior that we own, of course, and also the portion of the junior. Let me make it also clear that we are in the process of securitizing NPLs right now. We have had the first conversations with investors, rating agencies, auditors, investors, and also the first initial conversation with the regulator. We have mandated investment banks to carry out securitization. We strongly believe that this is going to work.
It's common practice for banks, of course, predominantly in the performing loans in Italy, also for non-performing loans. I mentioned that we had four mitigating actions, and I've talked you through two of them. Let's then finish off this discussion with the last two. One is IRB, and the other is change in business mix. I think regarding those more sophisticated risk modelings or models that can make risk rates come down, we are still positive about IRB. We have carried out a pre-study. That's done. Let's also just make it clear then that the IRB addresses the risk weight issue and doesn't really imply or help regarding the backstop.
To be realistic and also to be prudent, we need to be prepared for a two-three year implementation period to get IRB approved by the regulator, despite the fact that we have plenty of data to assess the risk in our portfolios. As you have seen today and as we talked about before, Hoist is changing our business mix. When we did the work on strategy, we saw the benefits of broadening the scope, moving into the adjacent asset classes, not only addressing the classic core for Hoist, the unsecured consumer. This was, of course, done because of the data, because of the graph you see to the left. Because to the left, you see the total NPL, the NPLs sitting on banks' balance sheets in Europe.
What comes out is that the B2C unsecured portion of the NPL market is only, let's say, 10%-11% of the total addressable volume, I guess. What you can see here clearly is that the B2C secured is more than twice the size of the unsecured market. This is a large market potential to address. That's also we decided to move into these asset classes. Why should we only stay in the 10% portion of the market where we have competencies, knowledge, operational leverage? What you see to the right then are a lot of boxes. The gray boxes represents a presence, a coverage, if you like, in 2017. Then you have the purple or whatever it is, magenta colored, which is the recent expansions into secured in particularly, but in performing.
The green represents the future potential for approaching more asset classes. To be more of a one-stop restructuring partner for European banks. That was the piece on mitigating actions. The last section today will then be our revised financial targets. What we have done here, to be prudent, to be conservative, is that we have based our financial targets on our base case. The base case assumes no positive impact from mitigating actions. That's a very conservative view. That is not our best judgment, but at this point in time, we think it's prudent to come forward with financial guidance where none of the positive effects of the mitigating actions are included.
In this base case, the assumption is that the annual investment volume for portfolios will be around SEK 5 billion a year. This is obviously lower than 2018, still higher than what we saw in 2017 and 2016. Around SEK 5 billion. This is a run rate investment capacity we have given the new risk weights and not allowing for any positive effects from the mitigating actions. Again, we strongly believe in our mitigating actions and that they will improve investment capacity, help our growth, and boost our earnings. Let's take a look at the revised base case financial targets. In terms of return on equity, we have revised the targets down from 20%-15%. We have revised the EPS growth down from 15%-10%. We have kept the cost-income ratio at 65%.
As you already have seen from our December disclosure, we have changed the internal limits somewhat on the CET1 core capital calculations. The buffer above regulatory requirements is now 1.75-3.75 percentage points. The dividend policy remains the same as before, but with the caveat that dividend will not be paid out for the fiscal year 2018 and 2019. These are the base case assumptions and the base case financial targets. We strongly believe we will be able to improve CET1 through mitigating actions. We believe strongly that we can free up investment capacity through our mitigating actions, which will increase investment capacity and give us more operational leverage. At our Capital Markets Day, our ambition was to increase earnings per share by 50% over three years. That was the ambition level. The key buckets for that value creation are listed on the graph to the left.
There's a gray shadow behind it. You can see it. That's the exact same presentation that we had at our Capital Markets Day. Increase earnings per share from 2018 to 2021 by 50% through creating value through growth and selected M&A, new asset classes, operational efficiency for sure. We believe in that strategy. Nothing has really changed to make us rethink that strategy. It still holds water. However, the new regulations comes with a cost. To implement the mitigating actions comes with some costs. That's why we now are talking you through the consequences of these regulatory changes. The base case scenario, the base case financial targets reflect a 10% EPS growth per year. We are committed to implementing mitigating actions that can deliver more. That's what you see to the far right, with a value creation above the 10% EPS accretion per year.
Let me just summarize with today's key takeaways. We are in a very attractive market, the market fundamentals are right. For the first time in years, the IRRs on the front book are higher than IRRs on the back book. We haven't seen that for a long time. New regulations will increase volume, increase supply of non-performing loans. We can do more. We have identified mitigating actions to deal with regulatory changes, and they will work. Hoist Finance has a diversified funding model based on the banking license. There is a lot of room between our cost of funding, which Christer talked about, which is 2.1%, and the industry average. There's a lot of room. Even if you then add back the cost of the mitigating actions to our current blended cost of financing, we will still have the industry's lowest cost of funding.
The banking license remains a key strategic advantage for Hoist Finance. We have shown that we can do more, we can collect more, we can bring down costs. We are committed to deliver on our cost savings and our operational excellence program. We are prudent. That's also why we present to you a base case financial target scenario. We do see upside from implementing our mitigating actions. That concludes our presentation today, and we are, of course, happy to take your questions. It's possible to ask questions, I think, on the web or directly via email. Maybe I can invite Christer and Julia to the stage then. There's a question here.
We start with Ramil.
Thank you. Ramil Koria, SEB Equity Research. Thank you very much for that presentation. A few questions, if I may, specifically one for each mitigating action. Starting off at the fund structure. Given that price pressure seems to be abating and to some extent driven by, as indicated by one of your Italian peers yesterday, by PE funds to some extent leaving the market and looking elsewhere, how do you view the availability of co-investors to partake in your investments, but also bear in mind that third-party servicing hasn't been core business for Hoist, at least not in recent years?
It's a good question. I think to start with your last premise of the question, our core business has not been third-party servicing. That's fair. We are doing some third-party servicing in the U.K. Maran is giving us new capacity, new knowledge in Italy. There is a big difference between classic third-party servicing and co-investments, I would say. Because when you do a third-party servicing in a classic interim way, it's almost like business process outsourcing. When you do a co-investment, it's different. You keep your own systems, you run your own processes, your own procedures, et cetera. You don't have to use the client's systems or the client's procedures, the client's collection practices, et cetera. It's much, much simpler. That kind of addresses that point of the question. Regarding appetite, I think it's fair to say that the people we are meeting these days are quite positive.
I feel confident that there will be investors with an appetite to co-invest with us. Either through classic co-investments, through fund structures, or definitely through securitization.
Thank you. Looking onwards to the securitization mitigating action, have you looked into the potential effect on your returns if conducting this?
Yes, we have. We looked at many scenarios, but if we do a securitization of the back book, let's say EUR 500 million- EUR 600 million, we believe that this will be EPS accretive. We believe it'll be ROE accretive. What you free up is, of course, significant capital to reinvest in a very profitable market.
Thank you. Thirdly on the You mentioned that you have a positive outlook on the implementation or the potential implementation of IRB models. Speaking from history, we know for a fact that the Swedish FSA is rather, call it shorthanded with information before actually coming with a statement. What is actually the positive outlook here? What kind of indications have you received?
From the Swedish FSA, we have had initial discussions, it's way too early to say. We carried out a pre-study. We think that what we see is positive. It's not going to be a walk in the park. This is a long process. But there are good commercial reasons also to introduce IRB. In a securitization structure, we can potentially use our IRB modeling rather than the rating. It makes sense, it makes business sense to carry out this project. But I'm not going to state or say that this is going to be a quick fix. It takes typically two to three years.
Thank you. Finally, the fourth potential mitigating action was increasing servicing revenues. Also referring back to the first question, to some extent, given that you're unable to add too much goodwill as well, how will you go about to increase servicing revenue?
Thanks for asking that last question. That was very important. I probably didn't make myself clear enough then. Because with business mix, I really talk about our portfolio investments moving from, as we've done in 2018, from unsecured only more into secured asset classes with low risk weights, even performing loan with much lower risk weights. We can continue that trend. Servicing comes on top, I would almost say. I think your classic third-party collection, the typical decision making time for any 3PC contract could be 12-1 8 months. I have no big hopes for 3PC to become a very significant portion of our earnings in the near term. That's a longer term ambition.
Thank you.
The operator, do we have any questions on the phone?
Ladies and gentlemen, if you wish to ask a question, please press zero one on your telephone keypad. We have one question from Ermin Keric, Nordea. Please go ahead.
Thank you. Just starting with the regulation, have you had any comments from rating agencies, both in terms of your reduced capital buffer, but also on the mitigating actions and your investment grade rating?
I think as I outlined earlier, our balance sheet is even stronger now than it used to be a year ago. In that sense, I think there's no negative change here. With regards to the future outlook, we should probably not comment upon their view. I don't think this should be a concern.
Okay. Just a follow-up question also. On the initial proposals for the Prudential backstop, I believe there was actually a carve-out made for debt collectors with a banking license. That appears to have been taken out now. Do you have any view on why this has occurred?
Yeah. Of course, I think the NPL backstop. Going back to the purpose. The purpose is to push or motivate banks to divest more of the non-performing loans. The one thing that the regulator doesn't want is that the banks sell NPL loans to each others. If you have a situation where two Italian banks were to swap bad assets, that doesn't really help. I guess that is the only explanation I can find. We think it would've been very easy, extremely easy to have a carve out or an exempt from those rules so that they wouldn't apply for the secondary market operators for NPLs like ourselves. We see this as an unintended, unnecessary, counterintuitive effect, and we are, of course, very disappointed. It is what it is. We have to expect that this will be implemented.
The good thing is that there are mitigating actions to deal with this when and if it occurs a few years out.
Thank you. Just also on the Prudential backstops, previously the plan has been to introduce this also on secured assets. Do you see a risk of needing to take actions there as well? The securitization would of course work there as well, but the changed business mix would not be so effective if we see similar regulation introduced there as well.
That's a fair question, Ermin. Let us be clear then. The backstop applies to secured assets as well, but it does so with a different timeframe, and that difference in timeframe is quite big. For the secured asset, our assessment is that this has actually no real impact on how we would need to treat it in our capital calculations. Whereas on the unsecured part where the timeframe is shorter, the three years, there it makes a bigger difference.
Okay, thank you. Sorry for a lot of questions now, but it's sort of a special situation. Also on the investments, you mentioned in the call that we should expect around SEK 5 billion going forward if we see no sort of mitigating actions coming into effect. While in the report, it's stated that it's SEK 5 billion for 2019, and then we expect the investments to recover. Which one should we expect going forward?
Without mitigating actions, our capacity is in the range of SEK 5 billion, and as we grow the business, there should be the ability to grow this number. That said, of course, the number in 2018, the SEK 8 billion is a bit of an outlier here.
Perfect. Thank you very much for taking all my questions.
Sure. Thank you.
Okay. I believe we have one more question on the phone. Yes. Our next question from Victor Lindeberg. Victor.
Hi, Victor.
Thank you. Couple of questions from my side. Starting on GetBack. You now quantify it being a PLN 400 million portfolio or company. Can you give us any flavor on how we should model this, and go about this in terms of P&L and balance sheet contribution, given that it's likely to hit your P&L already starting in Q2 this year?
Yeah. I wouldn't say that it's likely to hit the P&L. I would say it's going to contribute to the P&L. It's actually not the company as such we're buying, we're buying a third of the portfolio. In this sense, you should model it as you would with any other portfolio. We've been quite helpful then, since we've given you the size of the investment, and from a margin perspective, we find this to be a very attractive deal. That's how you should think about it.
Yeah. Okay. That's clear. Thinking of this regulatory change, it seems that the regulator are highly determined to remove these toxic assets from the banking system overall, and you're now potentially pursuing IRB models. Can you quantify costs associated with this in the coming two, three years? Even if you incur these costs, how certain are you that this is actually something that will be approved at the end of the day?
In terms of cost, our assessment is that it would cost roughly SEK 10 million per year in a running mode and probably some SEK 15 million to set it up. In the context of things, that's very manageable. How confident are we that it's going to work? I think we have the data to do the work, but it's not going to be a quick fix, as we said.
Yeah. On your financial targets then, you have an unchanged cost income ratio. Thinking about the, call it incremental margins coming from your portfolios, adding to the utilization or so in the organization, you will not, given the new landscape, be able to acquire as much and get that incremental uptick. Have you found other new cost-saving potential, or why is this ratio kept intact?
Yeah. It's always a good question, right? Can we do more? Of course, we can do more. We can always do more. We can always run faster or jump higher. It's definitely possible. We are committed to delivering our cost-savings targets, and that's also why we kept it at the same level.
Okay. From a timing perspective, thinking about this 10% growth rate, is it something we should start to pencil in already starting 2019, or you think this growth is coming very back-end loaded in your business plans when it comes to realizing this?
Mm-hmm. Obviously, we come into 2019 with a portfolio which has grown quite a lot during 2018. With regards to 2019, that will, of course, be quite helpful. The target is for a three-year period, that's how you think about it.
Yeah. Final two from my side then. One on Q4 specifically. You have a SEK 16 million, one six, portfolio revaluation. It's a bit confusing reading the text. This is a negative SEK 16 million or a positive SEK 16 million revaluation that you have?
Yeah. Sorry for the text not being clear enough then. It's a negative revaluation, it's actually not that negative because it relates to delays in collection on primarily French portfolios where the secured part is behind this. Those are objects which were planned to be sold in Q4 and which are now planned to be sold in the coming quarters.
Okay, got it. My final one was on your comment on securitization being EPS and return on equity accretive. I do understand the part on the return on equity, but just on EPS, as you're now sharing the earnings from a portfolio with the co-investor, how is it EPS accretive? Just if you could clarify that for me, being a newbie on that area.
The purpose of the securitization is to free up capital. The assumption that we have here is, of course, that capital is going to be used to reinvest into new portfolios. As we've shown here, we think that we're going to be able to reinvest this at very attractive margins. That's how it's going to be EPS accretive.
Yeah, the assumption is-
That's basically just from-- Yeah.
Yeah, it's just freeing up-
I understand
okay, freeing up capital, reinvesting, but not assuming. The assumption is not that the new higher margins is the key driver. It's just that buying at-
At these margins.
At these margins. Yeah.
Yeah. You're basically able to add more volume-
Correct
is what I was looking for. Perfect.
Correct.
Thanks. That's all from my side for now. Thank you.
Thank you.
Thank you. Do we have any more questions in the room? I have one question on the web. Well, it's actually three questions coming from Owen of Barclays. Does the NPL backstop do anything to change your collection approach?
No. That was easy.
That was quick. Have you spoken to any of your debt investors with regards to the potential SPV approach? What has the feedback been?
For the securitization you're talking.
Securitization.
I think we have met with almost 10 investors that are active in the space. Very positive feedback is what I would like to say. In a way, it's early days, right? Initially, people would tend to be positive, but we have a high degree of confidence that this is possible.
You've been in contact with investors?
We have spoken to almost 10.
Under the revised financial targets, where do you see leverage going over the coming years?
Leverage for us is something we guide on in relation to the capitalization targets, and we've given that target range, so that is where you should expect us. That's where we're coming into the year, and that's where we expect to leave the year, so to speak, in that range.
Before mitigating actions.
Which should improve it then.
Which should improve it.
Yeah.
Thank you. Any more questions in the room or the operator? Okay, thank you all for coming, and thank you for joining us today.
Thank you, and have a very good day.
Thank you.