Ladies and gentlemen, welcome to the Hoist Finance Q3 report 2018. Today, I am pleased to present CEO Klaus-Anders Nysteen and CFO Christer Johansson. For the first part of the call, all participants will be in listen only mode, and afterwards there'll be a question and answer session. Speakers, please begin your meeting.
Very good morning to all of you, and thanks for dialing in and spending time with us this day. We are, of course, excited and happy to present to you and discuss with you our Q3 numbers. Here in the office in Stockholm, it's myself, Klaus-Anders Nysteen, and we also have our CFO.
Good morning. Christer.
Our Head of Investor Relations, Michel.
Good morning. Michel.
The team is here, we're ready to go. We will follow our usual structure. I will take the key highlights for the quarter, Christer will take the details around the financial performance, we'll wrap it up with some summary and key takeaways, of course, the Q&A session. Let me start on page number five, the Q3 highlights. If I was to summarize and reflect a little bit on the quarter from, let's say, a high level, I am pleased to see that we are able to deliver on a strategy in a number of areas. At least are indications that we are delivering on our strategy. There are actually quite a few of, let's say, key events or all-time highs in the quarter.
I can mention growth, profit before tax, our ability to raise equity and refinance. Of course, also we are participating in the consolidation of the industry with acquisition of Maran. A number of key events, I would say, in the quarter. Secondly is that our cost savings are coming. There are indications that I think are positive. There's, of course, an obvious thing more to do. Point number three is that I think that Hoist Finance in this current market environment is very well-positioned. I think our business model, our funding model is quite strong, and that will be more and more evident as we look into the future. Also as a point number four, there is a significant potential still for further improvement, that's really our job number one.
In terms of growth, this was an all-time high for us in terms of portfolio acquisitions. Actually, over the last 12 months, our portfolio has grown by 50%, that's of course, a significant number. I will discuss in a few minutes our expansion into, quote-unquote, new asset classes. In terms of financial performance, the total operating income is up by 17% year-over-year. Profit before tax ended at SEK 201, that's the first time we passed the SEK 200 mark, so happy to see that, of course. Return on equity is at 16%, which is, of course, as you will remember, below the 20% target. Collection performance, I would say is quite strong for the quarter. I came in at 105. As mentioned, Christer will come back to this, the income ratio shows some improvement compared to the second quarter.
In terms of outlook, we feel that the market is quite strong, and its outlook is definitely positive, and especially perhaps in these, quote-unquote, again, at newer asset classes. We did new secured NPL acquisitions in France and Italy in the quarter, and we did performing loans in Germany and the U.K. in the quarter. That's promising. Again, as mentioned, we think that our funding advantage will increase relative to competitors with rising interest rates. Again, we see that our cost savings is starting to have an impact. Moving on to the next page number six. It has been a rather busy quarter for us. We are really happy and pleased that we're able to successfully raise SEK 568 million in new equity and to welcome new investors into the book.
I would like to take the opportunity to thank you for the trust. We were also able to refinance and repurchase senior unsecured bond, Christer will come back with the detail. We're also able to issue a new bond which improves our maturity profile and lower our costs. We feel that with this capital raise in terms of new equity, but also the refinancing of the bond in a slightly difficult market, means that we are well equipped to pursue our growth agenda and to capitalize on the market opportunities. Moving to slide seven. There's a couple of messages here, but if you first take a look to the left on the slide regarding asset classes. Just to remind ourselves that the unsecured consumer NPL space is really only 11% of the total NPL universe. There's still growth in the unsecured consumer.
We do see, let's say 5%-6% growth a year in the unsecured consumer. However, as we have discussed in the past also, the banks are now, of course, very comfortable sellers of NPLs, particularly for the unsecured consumer. As this level of comfort has increased, they are also now happy sellers of NPLs from other asset classes. It can be SMEs, it can be secured mortgages, it can be other types of NPLs. We are having a position as the preferred partner to financial institutions in Europe. We think it's a natural step for us. We are most definitely qualified, and we have the great position being close to the financial institutions to take steps into these adjacent asset classes. Hence, we have spent time since 2015 really to build capabilities, systems, structures, teams, know-how.
This has been an investment we have taken, we are successful now growing into these asset classes this year. You can see the composition of the different asset classes too on the slide, where the unsecured consumer is 43% of the total volume acquired this year, while secured is 38%, and even performing loan now is in our book of 19%. We feel that this is a really good opportunity, and we are happy and looking forward to be discussing the details, the dynamics, the characteristics of these portfolios at the Capital Markets Day, just a short month from now on the 15th of November. As we also have been discussing in the past, one of the key trends in the industry is consolidation.
I think one of the drivers behind it is just that we need to find, or the industry need to look for ways to become more effective, more efficient. We are happy to announce that we, half of the quarter though, entering into an agreement to acquire Maran, which is an Italian credit management company that was founded in 1993 and has a good sort of set up, a good position in the Italian market, and this will strengthen our capabilities, our capacity and competence in one of our prioritized markets. Happy to see that's happening. With that, I will hand over to Christer, and he will take us through the details in the quarter.
Thank you, Klaus- Anders. Turning to page nine, starting with our total operating income. We report an increase of 24% year-on-year, excluding items affecting comparability, the increase amounts to 17%. This increase is driven by growth in acquired loan portfolios, primarily in Italy, Poland, and the U.K. During the quarter, we have seen solid collection performance in most of our markets, in total corresponding to 105% of projected cash collections. In Germany, however, we've seen weaker performance than anticipated, and I will get back to that on one of the later slides. Q3 financials were positively impacted with SEK 42 million in items affecting comparability attributable to a modification gain in connection with the repurchase and the issue of senior bonds. This impacts the net financial transaction line, which is part of income.
Total operating expenses have increased with 19%, but have decreased slightly compared to the last quarter despite our strong portfolio growth. We are thus seeing scale benefits and initial efficiency improvements starting to materialize. Profit before tax increased with 34%, but adjusting it for items affecting comparability, the increase is 10%. Return on equity ended at 20% during the quarter and 16% adjusted for items affecting comparability. Acquisition volumes in the quarter were strong and exceeded SEK 2.5 billion, which is up more than 100% compared to the same period last year. This translates into a portfolio growth of nearly 50% over the last 12 months and 30% since the beginning of the year. This also takes us to a carrying value on acquired loan portfolios of SEK 19.2 billion.
On page 10, we show the same lines as on page nine, but adjusted for items affecting comparability in all periods. When doing that adjustment, it is highlighted that profit before tax is only up 2% versus previous year on a year-to-date basis, which is certainly disappointing given the strong balance sheet growth. In relation to this, we are, however, somewhat more happy to see that Q3, with an increase of 10% versus the same period last year, is picking up pace, and this is the result of our stronger focus on operational efficiency. Turning to page 11. The cost-to-income ratio, excluding items affecting comparability, amounted to 71%, which is the lowest quarterly figure during 2018.
This is driven by initial cost savings starting to materialize. Looking at expenses, we see an increase of 12% in personnel expenses, which is mainly driven by portfolio growth and also by our shift towards in-house collections in Poland. Collection cost increased with 26% year-on-year, which is also a consequence of our strong portfolio growth, primarily in Italy. The increase in administrative expenses is mainly explained with increases in central functions and specifically strategic initiatives such as our digital transformation. Part of the increase is mitigated through cost savings in other areas. This brings our total operating expenses to SEK 499 million, up 19%, and as mentioned, a slight decrease compared to last quarter, driven by initial efficiency improvements such as site consolidation. Turning to page 12, which illustrates the development in our segments and starting with acquired loan portfolio.
The strong growth over the last 12 months continues to be in the Italian and Polish markets. Both these markets continue to develop favorably and a large part of our expansion into newer asset classes stem from the Italian and Polish markets. On the same theme, one should also mention France, which is part of other segments where we have completed a significant investment into a secured non-performing loan portfolio, basically doubling our French book. Italy and Poland, the markets where we've seen the strongest growth are also the markets where we've seen the most positive development in net operating income and profit for tax. We are indeed very happy with the development in these two markets, and we are also satisfied with performance in our large U.K. operation. In short, our three biggest markets are performing well.
When it comes to Germany, we are not at all satisfied with the development. Quarterly numbers in a single market will, of course, always exhibit a bit of volatility, and for Germany, the Q3 figure includes a bonus payment to a DCA of SEK 16 million. Nevertheless, also adjusting for this, we are significantly less profitable compared to last year. As you may expect, we are in the process of reviewing options for how to improve performance in Germany. Let's turn to page 13. As Klaus-Anders mentioned in his initial part, during the quarter, we issued a new four-and-a-half year EUR 250 million senior unsecured bond with a coupon of 2.75, and at the same time we repurchased EUR 186 million of our senior note with maturity in 2019.
On the deposit side, we continue to improve our currency matching and euro deposits have increased with some SEK 3 billion since the beginning of the year. They now represent 27% of total deposits. Furthermore, we entered into a revolving credit facility amounting to EUR 150 million, and this is a good complement to existing funding sources. It strengthens our overall funding flexibility. To summarize, our funding position remains very competitive. We have interest expenses in relation to book value which is well below 2% and we have the capacity to grow. Let's turn to capital and liquidity ratios on page 14. Following the quarter's equity raise amounting to SEK 568 million, our pro forma CET1 ratio now stands at 13.1, which is a bit above our targeted range.
I wish to clarify, we need to have a formal approval from the SFSA before the new equity is included in the reported CET1 ratio. Hence this slide illustrates pro forma ratios. As you can see in the second chart, the equity raise of course also means an increase in Tier 1 capital ratio as well as our total ratio. Our liquidity reserve remains strong and has increased somewhat since the beginning of the year, and in this context it's also worth mentioning the introduction of the RCF which is a very useful tool in terms of liquidity planning. All in all, we have a position which allows us to go after the interesting business opportunities we see and that concludes our brief financial review and I hand the presentation back to you Klaus-Anders.
All right. Thanks for that, Christer. We are on page number 15 in terms of summary and key takeaways. Happy to see the development in the quarter. Growth is strong and healthy. We see that we are continuing to expand into the new asset classes and that we are building our offering in the Italian market. Of course, the raise of new equity and refinancing our bonds is important to chew and really happy to see that behind us and that done.
Point number 3, yes, as Christer mentioned, we could see the early indications that we are improving operational efficiency and rest assured to become more effective, more efficient is definitely very much on our agenda in Hoist Finance these days. We are so much looking forward to our Capital Markets Day, where we will be able to share more details and be more granular about both the portfolio characteristics, but also how we are addressing operational efficiencies and effectiveness. That concludes really our Q3 presentation, I will hand back to the operator, we are moving into the Q&A session.
Thank you. Ladies and gentlemen, if you do have a question for the speakers, please press 01 on your telephone keypad now. The first question is from Ermin Keric from Nordea. Please go ahead. Your line is open.
Thank you. Good morning. My first question is, we've heard quite a number of debt collectors say that they're seeing front book returns starting to come up slightly. Could you give us any flavor if there's any difference between the different asset classes, if that's driving your sort of shift to also invest more into the secured and performing loans? Thank you.
Right. Thanks also for that question. I think we can confirm that there is less price pressure in the market now. Of course, what we have seen over the years is that the access to very low-cost funding has been driving competition quite a lot. With the turning of the cost of financing and access being very limited now for a lot of our competitors, they also have high leverage. We see that there is easing price pressure, which of course is positive from the front book profitability perspective. In terms of different asset classes, I can say that we have basically the same earn rates for all our assets. In that sense, they all qualify in terms of our internal thresholds. We will share more light on this at our Capital Markets Day and go through the dynamics between the different asset classes.
I understand. Thank you. My second question is on the performance in Germany. Could you comment if this has anything to do with the sort of site consolidation, which you also say has been accelerated to extract the cost efficiency measures?
Sure. Okay, thank you. I will hand you to Christer to take this one.
Yes. As you've noted, we are in the process of consolidating our sites in Germany, and potentially that has had some impact on collection performance, but it's not limited to this. The options that we're looking into are certainly wider than just completing the site consolidation.
Yeah, I think Germany is an interesting market. It used to be the biggest market actually for Hoist Finance. I think we lost a bit of momentum in that market. We are putting in place the necessary action to turn things around.
Perfect. My final question was regarding the comments you gave that you are planning to place a bid on the assets of GetBack. Could you give us any more flavor on this? You've tried to brand Hoist as a company which doesn't want to take on what you call disputable assets. There has been some talks about some of the assets in GetBack's portfolio being perhaps somewhat disputable. Do you see any sort of reputational risk from acquiring these assets potentially?
All right. No, thanks for that. I think, this is of course, a very interesting opportunity for Hoist Finance. It's in one of our prioritized markets. It is an acquisition that not everybody frankly is able to do. We think that we of course need to find a structure that works for us. We don't want to take any risk that we don't understand. We don't want to take assets we don't understand or assets that are not really fit for what we do. It's too early to be specific here. What I can say is that of course, structure and reputation is definitely part of the decision criteria alongside profitability, of course. I think I'll stop there.
Perfect. Thank you. I will get back in line.
Next question is from Rickard Hellman from Nordea Credit Research. Please go ahead. Your line is open.
Hi, guys. Thank you. I just have one question regarding the RCF, if you could give any flavor about the terms of this RCF and also if anything was utilized as of Q3. Thank you.
Yes, thank you for the question. We've just put this in place, and we've done so after having worked on it for quite some time. We're happy to see it in place. It has not been in use yet, and as far as the commercial terms go, I'm not so keen on commenting those.
Okay. Thank you anyway.
Thank you.
Next question is from Maciej Onoszko from Bloomberg News. Please go ahead. Your line is open.
Hello, gentlemen. This is Maciej from Bloomberg News in Warsaw. You were already asked about your plans to make a firm bid for GetBack assets, I just wanted to follow up on this. I was wondering how you look at those assets compared to their book value, which I believe is at around PLN 1.3 billion. Whether you see it drastically below that number or anywhere near it. Maybe you could provide a bit of information on the potential timing of this potential transaction, plus whether you'd be interested in buying the whole of those GetBack assets. Thank you.
Right. Thanks for the question. Really, I'm sure you appreciate that we're not in a position where we really want to comment on the details here at all. What I will refrain myself to saying or repeating, if I may, is that this is an important opportunity in one of our prioritized markets. Of course, we need to take a close look at this. It's a competitive process. I think the fact that we are a regulated institution, that we have long experience in the Polish market, that we have a strong brand name in the Polish market and the European market, that we have the highest possible level in terms of compliance and ethics and having a micro approach to collections are all good reasons for why we should be a preferred partner or buyer of these assets.
We need to find the right structure, we need to take the right risk, and it needs to be a profitable transaction. I think I'll close there.
Thank you.
Ladies and gentlemen, as a reminder, if you have a question for the speakers, please press 01 on your telephone keypad now. The next question is from Adedapo Oguntade from Morgan Stanley. Please go ahead. Your line is open.
Hello. Thanks for taking my question. I just have two questions here. Just looking at your pipeline for purchases, obviously, given the strong level of acquisitions you've made here to date, you are above your previous guidance of SEK 4.5 billion-SEK 5 billion for the year. Just wanted to maybe get a feel for what you are seeing or what you expect in Q4, which is traditionally your strongest quarter, and if we should expect the same level of acquisitions we've seen in the second quarter and the third quarter. Secondly, my second question is, with respect to the ERC on your portfolio, given that you've expanded into new asset classes including secured assets and also performing loans, how should we be thinking about your ERC going forward?
Should that just be applied to your non-performing leg of your portfolio, or should we be applying this to the entire portfolio, including the new assets being acquired?
Yes. Thanks for your questions. Just here, I'll start with the first question then. As you rightly point out, traditionally Q4 would be the busiest quarter in the year, and in that sense, I guess you can say that Q3 was surprisingly strong. We think that there's still a strong pipeline going into Q4. We don't think there's anything which would stop us from having a successful Q4 in terms of portfolio acquisitions. At this point, I don't know if there's much point in giving sort of a full year guidance. It's an interesting pipeline, and we have a position where we are able to acquire. We have a strong capital base, we have a good liquidity position, and of course, we are participating in a lot of opportunities. Klaus-Anders mentioned one, and there are other opportunities as well, of course.
I think that answers question number one. Question number two, the ERC figures that we disclose, ERC standing for estimated remaining collections. This will include collections on unsecured non-performing loan portfolios. It will also include collections on secured non-performing loan portfolios. It will, however, not include interest and amortization on performing loans, which are different in their nature. It's not really a collection as such, it's more a payment of interest and amortization. That is not included in the ERC figures we've disclosed.
Okay. Just to follow up on that, in terms of the ERC, how does it kind of fit all between your secured non-performing loans and the unsecured? The ERC multiple, sorry.
It can be quite different from portfolio to portfolio. I would say typically the cash on cash multiple on a secured asset would be lower. It can also vary quite a bit depending on the quality of the portfolio that we acquired.
Kind of on a composite basis, would that be Sorry. In terms of the multiple, would that be closer to 1.5 times now, or what should we be looking at for that part of your portfolio?
Yeah. I think going back a step, as Klaus-Anders said initially, typically we would apply the same kind of return hurdles to all of these asset classes.
You might have a cost situation which is different. Typically, secured assets would come with a lower cost to collect. They would also then have a lower cash on cash multiple. In terms of returns, they can still be equal then.
Okay. Thank you.
Next question is from Sheharyar Malik from CQS. Please go ahead. Your line is open.
Morning. Thanks for the call and the presentation. I had a couple of questions. First question was around your portfolio acquisitions in the U.K. Interesting to note that you've been buying more performing loan portfolios in the U.K., as you mentioned in the call on the report as well. Would love to hear your thoughts on why that's the case, whether that is something that we should expect going forward. Is that more due to you seeing a shrinking opportunity set or you think the risks in that market are high on the unsecured non-paying side? That's question one. Question two is on Germany. Obviously, performance a little bit affected by the consolidation efforts that you have over there. Would be interesting to hear if you see any weakness in the market as well, perhaps affecting results.
Third, not that you need to go to high-yield markets anytime soon, but there's a lot of talk in the market about negative sentiment on that. Would be great to hear your thoughts on that.
Right. I can start answering, and thank you for your questions. Regarding performing loans, performing loans is part of the strategy for us. Performing loans make a lot of sense for us from a return perspective. As Christer and I also have said, we basically have the same hurdle rates, but there's no doubt for us that performing loans make sense. There have been a few sort of performing loans opportunities around U.K. for sure, and we haven't been able to acquire these at the right levels. Happy to do that, of course. Also we should have in mind here that even though it's performing, it is in many circumstances underperforming. We have the sort of skills, capabilities to do this in a way that makes a lot of sense for us.
Typically, these portfolios could be like a tail of some bank leaving the market, or it's no core for a market for a banking and engineering market. It makes sense for us to do this. In terms of the U.K. market, just relevant also for Germany, I guess, is that we appreciate mature markets. We like the characteristics of mature markets. We find them rational. We find competition rational. We can sort of deploy our deep knowledge, our benefits of scale and skill in those markets. We see that we have good returns in this market given the right size of our operations, and we are there in terms of what we do in the U.K. In terms of Germany, nothing new to report on the market dynamics. Germany is a mature market. It's quite consolidated.
At least there are, let's say, three to four big operators in that market. It's competitive, but that's fine by us. It's a rational and competitive market situation, no worries about that. I think we are hopeful to see more portfolios coming to market. It's slightly conservative, I guess, in terms of what German banks are doing at the moment. I'm not sure if I got your last question. It was something about high-yield something, but I didn't quite get it. If you can repeat the last question, I'll have to try to answer.
Sure. Among the high-yield issuers, there's a lot of negative sentiment whether the high-yield markets are prepared to finance the debt collected sector in the near term, near to medium term. Would love to get your thoughts around that.
Yeah, I think you're right. I think I tried to allude to that point in my opening statement that the high-yield market, the high-yield bond market doesn't really work for a lot of our competitors at this point in time. I think we see that competitors are struggling to tap into the market at rates that make sense. I think there are some key investor concerns out there for the industry. I think one is the sort of declining asset returns on the front book. For us, we are working hard to become more effective and more efficient. We are addressing that in our strategy. Another key concern for investors would be leverage. Of course, with our funding model, having an investment-grade rating and with our business model, we are very comfortable in that regard.
The last portion or the last piece maybe that some investors are worried about is increasing costs. I can guarantee you that we are doing our utmost to bring costs down to become more effective, more efficient. I think we have put in place a new operating model. We're going to go more digital. There are promising indications that this is working. I feel that we are in a really good spot from a strategic point of view with Hoist Finance.
Thank you.
Thank you.
There are currently no further questions registered, so I'll hand the call back to the speakers. Please go ahead.
All right. Thank you for participating on this call. It was great to speak to you and to get your questions. We so much look forward to see you soon. I just want to remind everybody about our Capital Markets Day on the 15th of November. Have a great day everybody, and goodbye.
This now concludes the conference call. Thank you all for attending. You may now disconnect your lines.