A very good morning to all of you here in Stockholm, also a very good morning to all of you following this on the webcast. It's so good to see you all here together with us, with the management team. It makes me a great pleasure to welcome you to this Capital Markets Day in Hoist Finance. I think most of you know me from before, for those of you who don't know me, maybe just a short recap. I joined Hoist Finance now almost eight months ago. Well, I think it's on the day, actually, eight months ago. I'm not new to the industry. I used to be CEO for Lindorff in almost five years. Prior to that, I have different jobs in different multinationals, 10 years as CFO and 15 years as CEO.
I think one of the common denominators between these jobs have been change. I think change is also going to be coming through as a common denominator in Hoist. Let me also assure you that we as a management team, we feel ready, we feel dedicated, we feel committed, and we believe that we have put forward very realistic plans for how to achieve value creation in Hoist Finance. Let me use this opportunity to introduce to you the management team in Hoist Finance. Let's start here with Christer.
Good morning. My name is Christer Johansson. I'm the CFO, and I've been with Hoist for five years now.
Hello, I'm Stephan Ohlmeyer. I'm the Chief Investment Officer. I'm based in London, and I joined Hoist in January.
Good morning. Björn Hoffmeyer, the new CEO in Hoist, 10 weeks in the job. I will tell you later about our operational excellence.
Morning. Emanuele Reale, Chief Sales Officer since six months. I joined Hoist in 2014. I'm based in Rome.
Viktoria Aastrup, heading Business Development and Communication. I joined Hoist just two months ago.
Good morning. Ulf Eggefors, Chief People Officer. I joined Hoist roughly two years.
We also have a head of investor relations.
Good morning. Michel Fischier. I've been with Hoist for almost a year.
We also have Viktor Nykvist. He's filling in for Anders Carlsson.
Good morning.
Anders Carlsson, he is in the picture there somewhere. He is on to your left side. He is at home with his little baby, Maya. He has got paternity leave. Viktor Nykvist is doing his job at the moment. We have this agenda for today, and it kind of follows, I guess, the traditions. I will start off by talking about the market outlook and our strategy. Hoist and Emanuele Reale will take us through sales. Stephan Ohlmeyer will talk about our investments, our investment criteria, different asset classes, et cetera, then we will have a coffee break. Björn Hoffmeyer will take us through one of the most important topics of today, I guess, which is operational excellence. We will have lunch, then Victoria Moström and Ulf Eggefors will talk about our One Hoist approach. Krister Johansson will take us through the numbers, the financial review, and we will have a wrap-up and some Q&A.
There will be an opportunity to ask questions also at different intervals here. We will stop after Stephan Ohlmeyer's presentation on investments. We will pause there for some Q&A, then we will have another Q&A session after Björn Hoffmeyer's intro on operational efficiency. We will even stop after Krister Johansson, I guess, to have some questions there. There will be plenty opportunity to ask questions and interact with us. Use the opportunity well. For those of you who follow this on through the web, there is an opportunity also to ask questions there. There should be an envelope. We will read out your questions in the breaks. Michel Fischier will take care of all your questions later on. This is the agenda. Before I go into the market outlook and the strategy, I feel it is important just to try to reflect back to you how we think about our vision.
Our vision in Hoist Finance is helping people keep their commitments. I think actually that keeping a promise, returning a favor, or sticking up to your commitments is almost like a universal value. If you think about it, repaying your debt is not only an obligation that you have, but it is also the morally right thing to do for yourself, of course, but also for society at large. If people did not repay their debts, the cost of credit in society would be significantly higher. What we do is both relevant and meaningful from different perspectives, from an individual perspective, from a business perspective, and from a society point of view. In Hoist Finance, what we do every day is interacting with people. We influence people's lives. By providing guidance and structure.
I am not sure about you, but I have had both friends, colleagues, and family, at a certain time period in their lives, have had financial difficulties. Of course, having financial difficulties is not only a stressful thing to do, stressful thing to experience, it comes with a lot of personal costs. Being more or less financially excluded from society is a very heavy personal burden to carry. That is why we in Hoist Finance take a lot of pride in our approach to a collection. We have an holistic, amicable approach to collection, trying to find ways for people, helping people keep their commitments. I truly believe that we in Hoist Finance, we are a compass to provide direction, and we are also the navigation to help people through troubled waters. I take a lot of pride in what we do in Hoist Finance.
Let us talk about market outlook and our strategy in this market. I think we have some very clear increased messages today. First of all, we see a very attractive market out there with significant growth. Number 2, Hoist Finance has a business model that represents a unique and sustainable competitive advantage. As you will see many times during the course of today, we have the lowest funding cost in the industry. Point number 3, we see a clear path forward to close our performance gap. Point number 4, you have met the team. They have the right personal qualities and the right professional experience to deliver on our strategy. I'm really proud to be working together with this team. Thinking about the market then, what do we see? What is going on? What is the context? What are potentially the concerns in the marketplace?
What do we observe? Let me try to address this through these five trends. One is the growth that we see. Second point will be consolidation. The third will be the increasing funding cost that we observe now. The fourth, I will talk about regulation. That's definitely an important factor. Last but not least, what's going on from a digital perspective and operational efficiency. Obviously, an important point for Hoist Finance. Let's start by talking about growth. This is the non-performing loan deal volume. 2017, close to SEK 7 billion. We see that the unsecured consumer, the magenta colored here, is a significant portion of the deal volumes, close to 40%. Of course, unsecured consumer is going to be important also the years to come. We still see a healthy growth in unsecured consumer, here estimated at approximately 6% a year. That's pretty positive.
That's the classic core for Hoist Finance. We have definitely moved into other asset classes. The microphone is going on and off, I think, but now it's back on. When you look at the growth from the other asset classes, we see even stronger growth than from the classic consumer unsecured. Here estimated at 17%, 7%, and 24%. We in Hoist Finance, we feel it makes total sense to move into those, in brackets, adjacent asset classes. First of all, this represents a big, almost untapped market potential. Secondly, we only work with other banks. We only do bank-originated non-performing loans. Of course, we would like to increase the share of wallet that we have with our clients.
When our clients are talking with us and say, "We have some secured non-performing loans," or, "We have some SME, are you interested to help us out?" Of course, we want to have that discussion. It makes total sense from a client point of view. Of course, also, although there are differences between asset classes, there are also very many similarities. There are operational synergies internally to work with a broader spectrum of non-performing loans. We will come back to this, Emanuele will talk about sales and what we see in the pipeline. Björn will talk about this also, and Stephan will talk about how you should think about returns in between different asset classes. The next slide talks about industry consolidation, and this should come as no surprise here that there has been significant consolidation in the industry over the last few years.
I wouldn't say that we see this daily, but there is definitely a process towards larger companies. We see that the market share of the top five operators in the space is increasing. I repeat myself, right? We have just listed up here the biggest competitors in the credit management services industry, and we have listed up here the number of M&A transactions that at least we see has been happening. Intrum, of course, the combination between Lindorff and Intrum, perhaps the largest piece of consolidation. Cabot being acquired by Encore, definitely again driving consolidation. Lowell. Permira, as the owner, has been quite active, of course, with GFKL in Germany, Lowell in the U.K., and then RemCo in the Nordics, growing rapidly. Arrow has been quite active too. B2Holding, yes, for sure. Definitely in Central and Eastern European markets.
Even Hoist Finance have been doing some consolidation through acquisitions. Five deals here mentioned, we will speak about the latest one, which is Maran, a servicing platform that we acquired just recently in Italy. To share with you then our thinking around industry consolidation. What is our decision criteria? Let me then first say that we are a specialized and focused company, that goes to the core of the strategy. We would rather be in few markets rather than many markets. We would rather work with one client group rather than trying to be everything for everybody, everywhere. We are following a focused strategy. We work with banks in some markets, we don't really have an ambition to open up new geographies to a large extent. That's criteria number 1.
Of course, since we are regulated as a bank, we want to deploy and use our strong balance sheet. As you know, we have equity, we also are investment grade rated. We have a robust and strong balance sheet. As a point number 3 then, we are looking for synergies. Financial synergies is important for us because we can refinance the target's costly financing with our much more cost-efficient deposit-based funding. We'll be looking to source for financial synergies as well as, of course, operational synergies. I truly believe, and I've seen this in the industry, that synergies in market are much stronger than synergies across markets. In essence, we are looking for specialization, we are looking for how we can build benefits of scale in markets, and we are looking how we can develop our skills. Specialization, scale, and skill.
That's how we think about M&A. If we take one step back and take a look at the market in terms of debt purchase volumes, what's been happening over the last few years? We have just here accumulated non-performing loans purchases of the biggest competitors in this space. Over the years, since 2012, these companies have acquired non-performing loans totaling EUR 10.5 billion, a significant number. There are a number of factors, of course, behind this growth. One obvious is, of course, supply. After the financial crisis, banks had non-performing loans on their balance sheets totaling two and a half times the level it was pre-crisis. I think still the level is about two times the level it was before the crisis in 2008. Supply, obvious factor. Of course, regulators have been keen to see banks divesting non-performing loans and addressing their NPL problem.
They have done. There's also been accounting changes behind this, so there's been a lot of opportunities for companies like ourselves to grow in the market. Do not forget that one of the key drivers on top of what I mentioned also has been availability of funding. Low-cost funding through the bond market. On this page, most operators here work in the high-yield bond market, has had a lot of bond issues through the years, accumulating here SEK 8.2 billion. The high-yield market has been open and provided a low-cost financing to the industry. As you know, that's not really the case any longer. This slide illustrates that since 2016 or beginning of 2017, whilst spreads were still coming down somewhat, you can see from the blue arrow that things have changed. Spreads are coming out. Availability of low-cost funding is significantly more constrained.
This slide talks about, I had to learn this through this presentation, yield to worst. I didn't appreciate that term before. It illustrates yield to worst, how we stack up next to the other ones. It's clear from this slide that relative to competitors, Hoist Finance is in a very good spot. If you see the change, the last 12 months, the spread has come out significantly more for our competitors relative to Hoist Finance. The spread has come out for us probably around 20 basis points, whilst for the competitors, we're talking more than 100 basis points. We think this is a very strong message in terms of where we see that we have a strong and sustainable competitive advantage. The fourth sort of trend I wanted to talk about is regulation.
I will not tire you by going through all the changes in banking regulations. As you can see, there's a magnitude of regulatory requirements that we have to fulfill because we are a bank. Have in mind that Hoist Finance has been regulated as a bank since 1996. We have vast experience in dealing with this kind of "complexity." We have an excellent relationship with the regulators across all our jurisdictions. I think it's fair to say that we as a company, this goes to the heart of our vision of helping people keep their commitments. We have been a strong advocate in the industry of amicable collection. We have been a strong supporter in regulations that have been imposed to push the industry to have more amicable solutions, more amicable approach to collections.
I think if you are honest about things, in some markets, there used to be practices that we today would find unacceptable. Come to think of it, we in Hoist Finance, especially myself, having lived through the financial crisis as a CEO for a bank, learning about non-performing loans the hard way, I actually think that a lot of the regulations that have been imposed on banks to ensure that they are well-capitalized, that they are compliant, that they are protecting the customer data, that they are addressing management. Those regulatory changes are there for a good reason. We are supporters of this. When I think about regulation, I tend to say to my colleagues here that regulation is our friend. We understand regulation. We are used to working with regulation. We're doing that in an effective and efficient manner.
I think there is going to be more regulation for the industry and not less. We are, in that regard, ahead of the curve. Also since we are only dealing with other banks as our clients, we have a better understanding of their requirements as banks, what makes sense for them when they are thinking about collections. We think this is a clear commercial advantage too, to be regulated as they are. I also have to say that, having joined Hoist eight months ago and learning the organization, I have to say that we take on this complexity in a smart and good manner with a very effective approach. Our banking, the cost of running the bank with the license is much less than I thought. We attract talent, we have effective processes, and deal with this in an excellent manner.
Of course, currently, there are, as it always is, discussions around new regulations. Again, we are used to dealing with this. There's always these kind of discussions. I'm not going to go through all of these. I've highlighted two. I think on Brexit, which we tend to get a lot of questions about, we struggle a bit trying to nail down what to say on purpose. We said N/A, not applicable. I think everybody struggles to understand what the purpose of Brexit is. Sorry for being a bit political now. Maybe there will be some resolutions. We are not so much afraid of Brexit, really. This goes back to the resilience that we have observed that our business model has. Stephan will talk you through this, and we're going to show you a slide that shows the impact of macroeconomic changes on the collection.
Our business model is very resilient, it's very robust, and even though there will potentially be macroeconomic changes in the U.K., due to Brexit, we don't really see a significant impact on our collections from this. On regulation, it's too early to speculate what kind of banking regulation changes that might happen in the U.K. The U.K. is definitely our second most important market, and it's a market we like. We like mature markets, and we are quite optimistic, although realistic, about the prospects. The second one I want to bring out then, it's what's called the NPL Backstop. This NPL Backstop is now being discussed, it's a proposal on the table. We're having good dialogues with the relevant authorities on this. We like the NPL Backstop. The purpose of this is good. The purpose is really two things.
One is the regulators wants to encourage the banks to recognize their exposures earlier and to take action faster. This is a good thing from our point of view. That means that more volume will come to the market. Because of this mechanism is to help the secondary market work even better than before, more effective than before. We can tick both those boxes. Right now, we are having a good discussion with the regulators how to interpret this and to understand the full magnitude of the backstop mechanism. We are quite convinced that we will find good solutions for the industry. Let's move on to the fifth trend I want to talk about, and that's digital. I think it's fair to say that the industry overall is really not very sophisticated or advanced in this area.
The industry is definitely behind what we see fintech is doing or the best retail banks are doing. I said I used to be CEO of a bank, and that was actually the first online bank in Norway. It was originated in 1996. We are not an online collector, that's for sure. Our processes are still very manual. If you think it through, and I will not read out all of this, but take a look to the far bottom left, talks about dialers. Having an effective and efficient dialer in the call center industry. We in Hoist Finance, and Björn will come back to this, we're still not there at all our call centers. We need to catch up what we do. Same goes for the customer journeys and the customer portals. Most of the interactions we do with our customers is on phone, via letters, sometimes SMS.
Still at a very basic level. We'll show you where we are today. We are going to be brutally honest about where we are, and I think that's the best for everybody because that shows us what we need to do. I truly believe that we can catch up here. I truly believe we can. It goes back to the core of our strategy of being focused in a few markets, to focus on one type of client group. It makes it easier. Also the fact that we as a company, we are prioritizing to be harmonized, standardized, industrialized in everything we do. Many of the other companies in the sector, they're just too diversified, too fragmented, too scattered, trying to be everything for everybody to be able to succeed in driving through change in the same manner as we will do.
We have chosen an operating model that drives things from the center. Country borders do not justify country solutions where group wide solutions work better. We are going to develop once and then deploy across all our markets. I seriously doubt that our competitors are able to do so, coming from another company in the industry myself. Those of you who know me, that's basically most of you, I guess, you probably know that this is my favorite slide. I've shown it before. I think it's good to show it again because it shows in very clear text, or with a clear picture, I guess, where we are. We are on par profit-wise with competitors. Illustrated here on our earnings before tax margin, 21% 2017, on par with the peer average. The thing is that there are two things going on here.
First of all, there is a significant contribution to the EBT, earnings before tax margin, from our funding model. Significant contribution, the low-cost funding. The problem, however, is that this positive is being eaten up by a big negative, which is the performance gap. I think we have to realize and appreciate the fact that Hoist Finance perhaps didn't quite understand the full benefit of the funding model or the full magnitude of the problem, which is the performance gap. If we can close the performance gap, of course, our profitability is going to be higher. We will keep the benefit, which is the funding model, which is sustainable competitive advantage, and we will close the performance gap relative to the competitors. I hope you understand why I think this is an important slide in this deck.
I have talked you through these five trends of growth, consolidation, what we see on the funding side, how we should think about regulation, I also talked about our challenge in becoming more digital and more operationally efficient. If you think through this, I think we can hand out some ticks. Of course, we're going to capture our lion's share of the growth. Emanuele will talk about the growth opportunities in our different markets in a minute. We want to participate in the consolidation of the industry using those decision criteria that I talked you through. We see our funding model as being a sustainable competitive advantage. Regulation is our friend, as I mentioned. We have one important priority right now, that is to become much more effective and much more efficient.
The strategy that we have chosen to deliver on this is clear. We want to be top 3 in our prioritized markets. We'd rather focus on a few markets rather than many markets. We like mature markets, but we think it's important to have a meaningful presence in those markets. Scale matters. Secondly, we want to be focused and specialized. We don't want to be everything for everybody, everywhere. We want to focus on bank originated non-performing loans. We widen our asset classes, yes, as I mentioned. That's part of the growth. We believe there are clear synergies between them. Last but not least, we are not where we need to be. We are not where we need to be.
We are working hard, not only to catch up, but potentially even leapfrog the industry to be recognized and the industry leader out there in digital. We can do this because we are focused, because we are specialized, because we have an operating model that allows for this. We believe that following this strategy, we can release significant value accretion. We see 50% EPS growth over the years to come. We see significant buckets of value here. You can see where we are now at 2018, where we need to go, you see how we have structured our approach. One is the growth in new asset classes, M&A, servicing even, Emanuele will talk about servicing. You clearly see here that what really stands out is our activities, our initiatives, our drive to become more operationally efficient.
That's the biggest bucket of them all. To be prudent, we even allowed for an execution buffer. We feel confident that this is something we can do, and we are committed to delivering on this in order to deliver on these financial targets that I'm sure you all already have seen as it was released last night. We are going to deliver to you return on equity at 20%. I mentioned this 50%, which represent a 15% compounded annual growth rate in terms of EPS growth. Cost to income ratio at 65%, which is lower than what we announced at our Q2 reporting. A CET1 ratio of 2.5 to 4.5 percentage points above the regulatory requirements. To pay our dividend of 25%-30% of net profits. That concludes this section as an overview.
We will now hand over to Emanuele. He will talk us through sales, asset classes, and what's going on in our markets. Thank you, Emanuele.
Thanks, Anders. Morning again. My name is Emanuele Reale. I'm Chief Sales Officer of Hoist Finance since June this year. I've been working for Hoist since 2014, when, together with my family, we decided to sell the family business to Hoist Finance, which is actually what is now Hoist Italia. I've been working in the industry for more than 20 years. Since I met the first time Hoist Finance in 2011, I immediately saw a great entrepreneurial spirit in an international company. That's what I thought was a good company to sell our family business to, also because we were asked to work with them. One great message I think I've been giving to the people who've been working for me in sales in the last years, has been that in this market, really never be to be carried away.
The right portfolio will always come at the right price. This is actually what we do in Hoist Finance today. We're growing rapidly, as we will see, in different asset classes, and we are doing so in a very disciplined way. You will hear from me three main messages, which already been going through Klaus-Anders Nysteen. We're focusing only on financial institution. We are expanding into different asset classes, coming from mainly business to consumer portfolios acquisition. We are focusing mainly in six main countries for us. As you would've seen from Klaus-Anders, this is in the next two presentations with my colleague, Stephan. Maybe you can hear me as any way.
Just speak
Okay. Our contribution to the growth.
Use it, yeah.
Yeah, okay. Yeah.
Sorry.
Contribution to the growth by expanding into new asset classes with some potential M&A transaction, we're also entering the servicing arena. We focus purely in financial institution. We've been regulated ourself as a financial institution under SFSA since 1996. Since the first time we bought a portfolio in 1994, was from a financial institution, we're clearly focusing on financial institution. We understand that the regulatory environment, we are ourself regulated, we understand it's not the most friendly and easy environment to work in. With our strategy of collecting all our assets, all our loans, through our internal collection, we really do minimize with amicable collection, reputational risk for our financial institution partner. Going around to talk to clients for quite some time, I've been always asked two main questions. What's happening to my loans once I'm selling to you?
How are you going to treat my customer? Okay, maybe they're not been my best customer, but still my customer, and what's going to happen to them? Obviously my question has been, especially now with Hoist, that we know how to treat customer, and we have our strong compliance on the way we're working in our platforms. The second big question I normally ask is, what was actually happening if you resell my customer again? Focus on what's going to happen to them. This is pretty clear for Hoist. We don't resell our portfolios. We never done so. We are an industrial player in the industry. We want to stay in the industry for a long time. We don't resell the tail of the portfolios. We collect them all the way through. We have a clear strategy to move in a fast-growing market.
We are expanding very rapidly from acquiring only business to consumer portfolio into different other asset classes. After every built-in technology, know our internal, know our people, we think we're now ready, and we've been doing so for the last few months, ready to move into other asset classes. I read lately in the media that our market is not growing anymore. I think already Klaus-Anders Nysteen touched this point. I mean, we are in a very lucky situation. We are in the market that is still growing quite a lot. In the business to consumer, we see a 6%, and this is actually also why we quickly move, one of the reason why we quickly move to different asset classes. You can see a super growth in other asset classes, up to 24% in secured SME.
Let me tell you also why this market is growing more in other asset classes. What has been happening in the last years is that it's been much easier from the bank's point of view, selling the small ticket, the typically business to consumer. They were creating a huge volume in number, but a small volume of gross book value. It's always been, for years and years, almost the only one, not the only one, but almost the only one asset class to be sold in the market. Typically now, with a major pressure from the regulator, this is changing pretty rapidly. The growth is coming from the other asset classes and not anymore only from business to consumer. Hoist addressable markets and volume in the total NPL stock, it's increasing rapidly and drastically.
On the left, you'll see that divided in countries, the total business to consumer stock in the NPL was only around under SEK 30 billion. It was covering only about 13%, slightly less, percent of the total SEK 1 trillion market. This typically, as Klaus-Anders was saying, was not really a very good situation for us. Going and talk to our clients, the bank, we focus on banks, we focus on financial institution, and sitting with them and typically being able to talk only about 15% of their NPLs. Definitely not a nice situation to be in, so for us or for them. By moving to the other asset classes, as you can see, we can now cover and discuss with our great friend, financial institution, 75% of their NPLs. Corporate is something we're not entering yet.
Not say that it's not going to happen in the future, but at the moment, we're not focusing on corporate. We see great values, great volumes, of course. You'll see that more than 30% is there, but it's definitely a bit too far away from us from the moment. We focus on what we're doing, and we leave corporate to next step. We are focusing on 6 major markets. Economy of scale, local presence, all good reason to be focusing in few markets instead of being everywhere. Let me take you through the 6 markets we have decided to be our prioritize one. Italy, you've seen before. I've actually skipped part of the presentation on the left of the previous slides. Biggest country was Italy. Honestly, it's difficult not to say that we need to be in Italy nowadays if we want to work in NPL market.
Italy is the biggest country for NPLs, biggest volumes. Is also actually the biggest country for us. Huge opportunity, quite a mature market, not as mature as U.K., and regulation is following more mature markets like U.K. Best country to be at the moment. U.K., the most mature, the most regulated, the most everything. Not anymore for us, the biggest one, but still very big, and that's a place we really want to be. We've grown rapidly with 3 different acquisition in U.K. in the last 3 years. That's a country where, as Klaus-Anders was mentioning, being very mature, we want to focus even more in the future. Poland, it's another great market for us. They have a solid legal framework that helps a lot in collection. This is definitely the biggest market in the eastern part of Europe.
We have actually lately announced a potential good, interesting deal with one of our competitors, acquiring from ex-competitors, GetBack. Really another place to be. France, I would say funny country. We notice going around Europe, but this is rapidly changing as well, that French bank, where there are actually international, big French bank, they tend to sell more NPLs outside France than in France, but this is changing. Now they're following what they've been doing in other countries, and now the market is really growing up. From 2017 to 2018, we have already seen a big growth. The French market is really opening up. We've been saying so for quite a few years, but now it's happening. We see the numbers in 2018. Germany, difficult market. It was for always the first market for a very long time.
You will see some other slides afterwards. That's, at the moment, a market with the volumes are not so big, but it's a big country, and it's big for us. Spain, this is probably a country where we need to do better. We see great potential. I don't need to say that volumes in Spain is probably the second country after Italy. We're not top of the list for the moment, but we're working hard, and we will get and be one of the top also in Spain. We are present, again, remember economy of scale, we are present where 85% of the volume is on the business to consumer market. You will see next slide, 70% on the SME market. Our strategy is again, on economy of scale.
We don't need to be around and looking for open up in other countries, because we want to focus in the main countries and in the top three players in every on our prioritized markets. These are the volumes of SME, and it's probably worth mentioning in here, which I think comes out very clearly, that Greece it's not our prioritized market for the moment, but it's definitely where quite big volumes are, especially in the SME market. We've been in Greece since 2016, when we been appointed by Bank of Greece to be liquidators of their liquidating bank, 16 of them, for a portfolio of SEK 9 billion. We've been gathering data for a couple of years. We know the market. We have a servicing license. We're bidding on portfolios, and so hopefully we're going to buy. Actually, I'm sure we're going to buy pretty soon a portfolio.
Never be sure in this market, but I'm confident, very confident. As I said before, we started with a strong presence in business to consumer. Clearly, since years, we've been in every country buying business to consumer asset classes portfolios. Germany was already had years ago because, as I mentioned before, Germany has been our first country for a few years. Now we are rapidly growing in different asset classes and in different markets. Some of them they're already been lately covered, some others they will come very soon. I have a strategy, and we have a strategy in Hoist. We want to be close to our customer, to our clients.
This is a bit of geography where our offices are, and you will clearly see that sales office, people reporting to me, it's a bunch of 30 people, well spread around Europe in every market where we are, and they are responsible for the whole market. I truly believe in a central coordinated function, but I want them to be in the market, analyze, and understand the single situation in every market, being close to our clients, understand their needs. This is why we actually spread all over. Of course, we give attention to the biggest international clients, which they may be in one of these countries, but we also look to be close where Hoist has a particular big share of the wallet, the wallet of our clients.
I think it's interesting mentioning here that in 2018, in any of this country, we've done at least one deal, exclusive deal. That means we've been sitting without a tender, without the competitors, talking to a client that wants to sell the portfolio. Actually, in one country, well, actually our biggest country, this number goes up to 50%. There's been one country where we've been able to do exclusive deal with 50% in what we actually bought. That really shows how we are preferred partner from financial institution. We offer a range of solution to our clients. Of course, pretty much as everybody else, we do spot deals. Sit down with the customers, probably a tender to make a price, best price wins, and that's pretty straightforward. We also like to present ourself for committed for overflow.
What I mean for committed for overflow is when we get into an agreement with the client, with the seller, that will last typically from 12-24 months, where they're obliged to sell for a certain amount of period, and we are obliged to buy for a certain amount of period. That, of course, gives a bit of stability in their strategy because they don't have to rush and hurry to do a tender every whatever, and for us as well. It gives a bit of stability, a bit of volumes in the countries where we do for flow, which is almost in every country. What we also like to do is what we call full structural outsourcing, which is when we don't only buy the credit from the loans from our clients, but we are actually willing to buy something more.
It could be typically office space, FTE, Systems, and that's when somebody's typically in a runoff situation. They could be performing in non-performing portfolios, and then the seller wants to have maybe a clear cut with the country and get away, and we're there to buy and help, and to buy the whole lot. We entering quickly in what simplistically I call servicing, what is a third-party collection arena. This is something we're doing lately, not in great volumes, but we are entering because customer have actually asking us to do so, because when we go and talk to clients, there's actually a potential fourth product we can sell to them. When we meet them, this is something is also we can discuss about. There's also great opportunity for origination coming from servicing, because of course you got more chance to talk to the clients.
If you're then able to buy portfolios from their clients, of course you have a little advantage from the competitors because you know your customer and you know the customer of the clients, and that's really increased the chance of winning portfolios. Gives also a lot of economy of scale and operation because, of course, it gives volume and also revenues at a capital light, low revenues. This takes me into what we call the case study of Maran, that Klaus-Anders Nysteen also mentioned before. We have just announced an acquisition of a great company in Italy, a company that I personally know for 20 years, has been in the third-party collection service for more than 20 years with 200 employee, very much focused themself on financial institution clients. They do a great job for a long time.
We see a lot of synergy with them. Remember that Italy is the biggest country in volume and the biggest country for us, and this will strengthen our capacity in the market, and will also strengthen our presence in our first market. In summary, we focus only on financial institution, and we want to be preferred partner. We are expanding quickly into new different asset classes, where bigger volume are coming in the next following years. We are focusing mainly in six major country, where we want to be top three in the industry. With this, I leave to my smiling colleague, Stephan, that is going to take you through the investment presentation.
Can you hear me? Does this work? Hello? Found the right page, okay. Investment approach. Again, my name is Stephan Ohlmeyer. I'm the Chief Investment Officer. We're actually a pretty international bunch here. You had the Norwegian, you had the Italian. I'm the first German. Björn is German as well. He's going to talk about operations after this. Let me give you a bit of my personal background first to start with. I actually have a PhD in mathematical physics. I did Einstein's general relativity, quantum gravity, all that fun stuff way back when, 20 years ago. Decided I was going to move into finance, which was a good decision, I think. Moved to London, where I'm based, where I live with my wife and four kids. In those 20 years, I worked for various investment banks. I worked for Morgan Stanley.
I worked for Goldman for six years until the music stopped in 2008. I started working for funds. I worked for Lone Star, I worked for Och-Ziff. It's maybe worth noting as well that I had the Chief Investment Officer role for Intrum as well a couple of years back. Definitely been involved in a lot of loan portfolio acquisitions in those years and really in all kinds. In consumer unsecured, clearly, which is our historical core business, but also in non-performing secured loan transactions, in performing runoff transactions. All the new asset classes that we're looking to get into at Hoist now. I think that fits quite well. What are we going to talk about and how do we look at investments? We look at it from the perspective of profitable growth, clearly. That's what everyone wants to do, right?
We focus on returns and we focus on volumes in that order. As long as we can get the returns, you want us to grow, really. What I'm going to be talking about is returns from the back book perspective. I want to show you that we have a great track record in projecting cash flows from investments. I want to show you that in the front book, we're seeing a reversal of the margin compression that we've had over the last couple of years, initial good signs of that happening finally. In terms of volumes, I want to show you how we're getting into these new asset classes and the magnificent growth that we get from that. I want to show you that we've invested in people infrastructure to be able to capture the opportunity in those new asset classes.
Let's jump right in. What we're seeing here is really the actual cash collections that we have on our overall back book versus the management forecast. The management forecast is what we expect at any point in time, is our best guesstimate of what the cash flows are going to come out of the portfolio. It's the ERC curve that you all know, comparing against that, the actual performance that we're doing. You can see here over the last couple of years, there's a nice trend upwards, towards an average of around about 105% over the last couple of years. What I would like to say here is that's pretty much our expectation, the 105%. Obviously, 100 is the absolute minimum we're trying to achieve, but really we're trying a little bit more.
You can see we've achieved that over the last couple of years. Hopefully, we will do even better though, once we have all these efficiency improvements implemented that Björn will be talking about. I want to talk about not just the management forecast, because the management forecast is something, as I said, it's the sort of latest and greatest of how we see cash flows. When we make an investment, we obviously have an initial forecast as well. That initial forecast then gets adjusted by revaluations, then to get to the management forecast. Now here, we're stripping all that out and we're just looking at the initial forecast. That's the real benchmark if you want, in comparison to the actual cash flows that we're really achieving. It shows you how well we're projecting cash flows when we do a deal.
You can see the picture is very similar and the revaluations we're doing, Krister will be talking about that a little later, are not that significant, actually. We feel we're doing really well in projecting cash flows and that there's not that much adjustment needed. Again, the average sort of hovers over the last couple of years around 105%, which I would say is what we're expecting. I want to look at this performance accuracy in another way. Clearly, what we showed before was for the total back book. Here, what we're trying to do is split out the different years in which we've made investments. Even here, you can see a very nice picture. You can see a dip in 2014, 2015.
That was really due to two larger unsecured NPL investments that we've made, where there was a strategic push to move into two markets, at the time, the U.K. and Italy. That would explain those kind of numbers. It was sort of a strategic point there. You can see in the last three years, we've had some very solid performance on the deals we've originated. Klaus-Anders had mentioned this point. One question we get a lot from an analyst is, well, how does something like a macro shock impact our back book? Here we're showing a chart which shows that, well, absolutely our back book is not immune to those macro shocks. We've taken the financial crisis as an example, which is a pretty severe shock.
You can see that even at the worst of times, the cash flow actual performance against our projection did not dip below -10%. That is a big number, but it's not a permanent thing here. You can see it then lowered to -5%, but in the years after, there was a big recovery, which means that overall, it actually turned out to be more of a delay of cash flows in the end as the impact. Nevertheless, we clearly had to take a write-off at the time, and that book value reduction was 2.6% in 2009. The message here, clearly, even a severe macro shock, whilst it has an impact, the impact is relatively limited. Okay. Here we're getting to my favorite page, actually. I think what we're trying to show here quite nicely is the building blocks of value in our industry.
You can see that obviously the parts of the value that we have is number 1, the back book. That's the portfolios we bought. The purchase price is paid. The asset is on our balance sheet. We have a very good sense for what's coming out of it, the ERC. You take off the collection costs, you discount, and you get to our back book value. Obviously, because we paid the purchase price, there's liabilities that have been generated in that time as well, and it makes sense to take those off to come to the tangible net book value. There's an industry concern out there right now, very clearly, that in our industry, a lot of leverage has been employed and the tangible net book value is actually not that high.
I think on an overall perspective, it is a valid concern and something that needs to be addressed. From a Hoist perspective, we're actually sitting quite pretty in the sense that we're a regulated entity and we are required to have a positive tangible net book value, and we have a CET1 ratio. All that makes us have to have a positive tangible net book value. From that perspective, is a very good starting point. Other players in our industry may have lower numbers, in some cases even negative. Obviously, that is driven also by M&A activity and premia that have been paid on assets that are not part of your back book but are still debt financed.
Obviously, that value can be made up to get to a positive equity value through either a third-party collections business, which generates EBITDA, and then there's a multiple of EBITDA that is value. Then the front book opportunities. Let's remind everyone what that means, the front book value. Front book value is clearly the IRRs you see in the market and the opportunities to acquire portfolios at that IRR. Obviously, they're only valuable if the IRR at which you're buying them exceeds your weighted average cost of capital. Again, that's an industry concern these days. Are there IRRs out there that actually beat the WACC? Well, for Hoist, absolutely yes, because we have the lowest funding cost in the industry. Also from that perspective, we're looking very good. I think that is the main message here.
The main message really is we are different from our industry in many ways, and it shows in these kind of statistics. In terms of the front book value, besides the low funding cost we have, I want to make clear that we're actually seeing the front book IRRs turning around quite a bit. Klaus-Anders mentioned the high-yield markets, all the leverage that's been taken up in that market, the lower funding cost. The funding cost has come down over the years. That, to some extent, has been passed on to sellers in the form of purchase prices. That's going to turn around, and we do feel that that is something which is going to happen, and we do see it even in our bids in the daily life of putting in bids on portfolios.
When we bid on those portfolios, and we have an investment committee, we look at a number of metrics, clearly, in order to be able to determine whether a portfolio is good value and what we want to bid. We look at IRRs, clearly, we look at gross money on money multiples, but we also look at return on equity. What we're showing here on this chart is the way we look at this. Obviously, we have a group ROE target of 20%, and that includes everything. That's the bottom line, right? When we look at a portfolio, though, we're trying to put that into perspective, and we look at the marginal contribution of that portfolio in terms of the ROE.
It's not a perfect analysis in the sense that there are certain costs that cannot be allocated very well, and that's the group overhead and the country overhead. What we then do is we operate with certain targets in the investment committee, where we say, "Here's our group ROE target," and then we have to have a buffer that is meaningful to cover these overheads. That gets us to a portfolio ROE, which we then have in the discussion in the investment committee to make sure that on average, when we do portfolio acquisitions, it meets the hurdle rate for us at a group ROE level. The thing that I can happily say here is that, from the beginning of this year, we've already been able to increase those hurdle rates twice, and without any meaningful impact on our volume.
We're really seeing that reversal of return compression in the markets. We're very open about this, actually. Here you can see Klaus-Anders in Dagens Industri, where he very clearly said that we believe we've passed the low point with regards to margin compression. Very good news on the return front. Moving on from returns to volumes. Our investment levels in the last 12 months have been pretty staggering. We've invested 8 billion SEK, which is a lot more than we've invested in the past. I think argue it's about twice as much as we've done that historically, and every single quarter has been some record of some sort recently. Even in the fourth quarter of 2017, we invested 2 billion SEK, above 2 billion SEK. The first quarter has been more quiet, but still 1 billion SEK, roughly.
Then quarters two and three this year were around 2.5 billion SEK. The first one slightly below, the second one slightly above. Again, adds up to 8 billion SEK. How do we do that? We didn't do that by lowering the IRRs or opening up the tap and the floodgates to get all the portfolios in. What we did is we expanded into new asset classes. This chart here shows quite nicely the distribution of the cumulative investments we made this year by asset class. At the bottom, you see the unsecured NPL contribution, and that actually is somewhere in the range of where we were in the last years before, where we did only consumer unsecured ones. Really what we've done is we've continued to invest in the consumer unsecured space at around the same levels that we did in the years before.
On top of that, we layered on the secured NPL piece and then the performing runoff situations that we're acquiring and that we're very suited to acquiring by virtue of the fact that we have the right capital for it as a bank. To show even clearer the step change that's been happening here, you can see that in 2015, 2016, and 2017, almost close to 100% of our investment were in unsecured NPLs. So far year to date, this only half has been unsecured NPLs, and then we had 36% in secured NPLs and 18% in performing. That is a big number, clearly, but obviously, historically, having invested a lot in the unsecured NPL space, looking at our overall book, we're still at less than 20% on the new asset classes.
There is a change there, but obviously, it feeds through slowly over time into our overall book. We have a very experienced investment team, similar to the sales function that Emanuele runs. We have people across in the different countries. We're actually 2 dozen people overall, and about half of those sit in London with me, where we form, if you want, a center of excellence for the whole pricing. At the same time, the other half of people sit close to operations, they sit close to clients. All the local specificities of those markets get factored in when we look at portfolios. Ulf and Victoria are later on going to talk about One Hoist Finance.
I would argue that our investment function has been One Hoist Finance all along because it's run as a harmonized function across jurisdictions and asset classes, even though people are distributed across Europe. I mentioned the center of excellence for pricing that we're doing. We're obviously doing R&D for new asset classes. We're also responsible for M&A transactions, and we're getting involved in portfolio performance reviews as well. The investment team are not the only ones that get involved. There's local acquisition and management teams working closely with the investment team, and that's particularly important for the new asset classes that we're getting into. I want to explain here that when we get into these new asset classes, we very much focus on certain sectors where we feel we have an edge, and also sectors where we have built up expertise.
The three examples I want to bring up here is the team in Rome around Carlo and Francesco, who are leading our effort on the secured NPL side, doing due diligence, valuation. They have a real estate background as well, and they have a combined over 20 years experience, and they lead a team of 10 professionals. That's our Italian business supporting the investments in the secured NPL space in Italy. We have Marie-Sophie in Paris. I'm going to be talking about the setup of that business a little bit later. She's working on French SME transactions as well as a big secured NPL transaction that we have done. She has over 20 years of experience as well and leads a team of 5. Finally, we have Marius here in Poland. He is our performing loan expert.
He came on board with this performing loan transaction that we did in Poland when a Danish bank exited that market and we took over the portfolio on a run-off basis. Together with the portfolio, we also took over a team of six professionals together with Marius, and they now form the basis of our expertise on the performing loan space. Obviously, as we go into these new asset classes, the cash flow characteristics of our back book are going to change. The ERC curves that you're used to seeing and that Christer will go into a little bit more detail on later, are heavily driven by the unsecured consumer investments that we've made. You can see on the upper left here, it's the typical decaying curve that you expect from an unsecured portfolio.
Especially in relation with the amicable strategies, the costs are very similar, aligned to that as a percentage of that overall gross collection. When we do legal strategies, there is a bit more of an upfront cost, but then in exchange for that, you also have a ramp-up of the gross collections, which then later on decay in a flatter way than what we're seeing in the amicable strategy. These two strategies nicely complement each other in the unsecured NPL space. Now as we go into secured NPL portfolios, what we'll find is that there is a little bit of an activation, if you want. There's some legal procedures.
In particular, in Italy, it takes a long time to actually finally get to foreclosure auction as a last resort. That leads to this hump you're seeing here a couple of years away when all these strategies that you've put in place early on in a secured deal actually pay off. These cash flows are more back-ended. The actual costs are lower because typically one is dealing with larger exposures and one has collateral involved, which is highly valuable, but it's less work intensive. It does require quite a bit of a different person. We're clearly in the unsecured NPL arena, you have lots of collectors sitting in these booths making calls. On the secured portfolio side, you need experts with legal background, with real estate background. It's a different business. It's different people collecting on these portfolios.
Finally, the performing portfolios, which run on a schedule as long as nothing defaults. The cost of servicing those portfolios is very low. I want to show this ski slope diagram. I want to illustrate the key characteristics of these different asset classes with regards to IRR, cost to collect, ROE, and duration. You can see maybe here for unsecured, the magenta curve here, the IRR is the highest. I think we can see the highest returns in those types of portfolios. The cost to collect is also very high. In terms of the secured portfolios, we see slightly lower returns. You have also collateral, which makes it a safer investment. At the same time, I already mentioned the cost to collect is lower.
In terms of performing, that is clearly the ones where the IRRs are the lowest, the risk is also the lowest, but the cost to collect is the lowest as well. What is interesting to then see, though, is that performing loans, I mentioned, how does it make sense for us from a low IRR perspective? It does, because we have to hold a lot less capital against it, because the risk weighting in relation to those assets is much lower. That then in turn leads to this point that the ROE in the end then does match our internal requirements, and that is why you see all these converging here for all these different asset classes. In terms of duration, you can see some very long-performing loan portfolios, whereas unsecured portfolios typically are more upfront, front-loaded and shorter. This is obviously very illustrative.
A portfolio in Greece is expected to have a different IRR than a portfolio in the U.K. This is a very generic page from that perspective. Why does it make sense for us to get into performing loans? I had already mentioned that it is much less capital-intensive for us, so it boosts the ROE. From an ROE perspective, it works, even though the IRRs are lower. Emanuele had mentioned, and Klaus-Anders as well, that when we talk to banks, they are not just interested in selling unsecured non-performing loans, they are also interested in selling secured performing loans. On top of that, they oftentimes have performing runoff situations, certain countries they want to exit, so it is only natural to talk to them about performing loans as well.
Our regulated status and the good reputation. Very clearly there is much more regulatory focus on performing loan portfolios than on unsecured, so that works quite well with our background. Then lastly, I would say that NPL books with payment plans sometimes have very similar characteristics to performing loans, which means that the pricing is actually not all that different a lot of times. Klaus-Anders talked about the decision criteria in relation to M&A. He talked about specialization, scale, and skill. Absolutely, M&A is for us a valuable tool to support the strategy. What I want to distinguish here is those two M&A transactions. One is the transformative deal, and the Lindorff Intrum one is an example of that. That is obviously huge and it creates scale, and it may have industrial logic. A big focus is on synergies, right?
There is the obvious one, which is the reduced costs, reduced fixed costs in particular, where you have an overlap in the geography. That is a clear one for us. Very important is the funding synergies, because of our low funding costs, which we can export to a target. That is a big one. Then in terms of operations, if we see something that has better operations than we have, then obviously there is also revenue synergies in the sense that those operations can work our book potentially better than we do, and we have an uplift there. Synergies are very important in those types of deals. The other type of deal is the bolt-on M&A transaction, and that is the one where you want to add specific capabilities, where you want to broaden our product offering, where you want to strengthen our position.
Emanuele has talked about Maran as one of those where we now have third-party collection capabilities in Italy. I want to show one case study, which is something where we have identified a year ago, the French SME unsecured NPL market as an opportunity. We wanted to go about it in the usual way of, hey, is there a bolt-on transaction that we can do? We look at various potential targets, but discarded all of them because the actual price was way too high. We said, "Look, this is silly. We're not going to pay those prices, but we still want to do this. We want to get into the market because it made sense to us." We said, "Well, how about we just set up an office in Paris?
We hire a bunch of banking and recovery professionals who know what they're doing in that market, we have some back-office synergies as well, we go about it, go find our own deals, instead of taking a portfolio on." Hiring the people and then finding a portfolio to buy. We actually did win this portfolio, we did it in Q2, so it's early days, but it's very much over-performing to date, we have a very healthy pipeline going forward. It's been a real success to add that capability to us without doing M&A, because this platform development that we did here came at a fraction of the cost that an actual M&A deal would have cost us. This is a real success story for us. How to expand our capabilities without the actual bolt-on M&A transaction.
Organic bolt-on, I would call it. What I want to show here is that we've received, in relation to that same transaction, some real positive feedback. You can see a picture here with flowers. This was a thank you note from a customer in a situation where there was an auction date set up, we canceled that auction. We obviously ask for our fees that we had spent before, in order to make that a neutral transaction for us. It made sense looking at it enabled, in the end, an open market sale of the property, which helped everyone because we achieved a better price. The auction didn't happen for the customer, they were very happy. It shows our amicable approach, really, to the situation, which is something that they weren't used to.
We got a lot of positive feedback, not only from customers but also from lawyers representing customers. It was a real validation. It was really nice. Before I finish, I just want to remind everyone again what we've talked about. Emanuele and myself have been talking about the growing footprint. We've been talking about the track record. We've been talking about the gradual increase that we're experiencing in front book returns. We talked about M&A and third-party collections, Björn will soon come up and talk about operational efficiency. At this point, we want to pause for some Q&A, I would like to have Klaus-Anders and Emanuele join me here on the podium for that.
Thank you, Stefan. Thank you, Emanuele. While the sound is in the process of being adjusted, I guess. This is a good time to pause, and I'm sure there will be some questions either to myself or to Stefan or to Emanuele. We're also going to monitor, I guess, questions that comes online.
Okay, thanks. Viktor Lindeberg from Carnegie. A couple of questions from my side. First for you, Klaus-Anders Nysteen, thinking about the improvement in operations going forward from you becoming more efficient, how should we think about that? If you break it up on top line improvement, collection improvement from you improving the business and maybe more OpEx improvement. Is it possible to provide some more flavor on that? If you have a split. I know you press released a SEK 300 million cost saving target. Maybe you will come back to that, but if that split is something you could provide and how that will sort of play out.
Yes, you're right. We have launched that as part of the press release. There will be ample time to understand the magnitude, the initiatives what are the resources for the different cost savings. If I was to guide you on the split, I would say 50/25/25 in terms of the three-year period.
Okay, thanks. Stefan, looking at your slide on the ski slope, the ROE sort of Just thinking about the different asset classes and maybe also geographies, call it risk-adjusted returns. How do you go about this, given that the new asset classes are still, I mean, it's fairly new material and it's many years away from peak collections to secure, for instance. How can you get good comfort in that return profile and how do you go about those from a risk-adjusted perspective?
I mentioned that we're not only looking at ROE, right? ROE is sort of an average measure for us that needs to work. Very clearly when we look at a deal in Greece, for example, right? There we're not even trying to gauge it to this portfolio ROE target. We're actually gauging it to an IRR, which is clearly in the double digits, right? Higher than.
Could you provide an estimate for the span that you have on your IRRs looking at the different geographies? Just ballpark. We get a sense. Are we talking 8% in the U.K. and 18% in Greece, for instance?
No, I would say eight to 15 is a good range.
Okay.
Yeah.
Stop there for now. Thanks.
Vegard Toverud from Pareto. Could I also try and then try with two questions? First, you highlight, of course, your competitive advantage being a bank and being regulated. You highlight the opportunities in M&A. Couldn't you also say that there's a competitive disadvantage being regulated as a bank and doing M&A, noting that, for instance, how your intangibles have been steadily building over the last quarters? Question number 1. Question number 2 to Stephan. When you came into the company with your experience, what would you say was the best and the worst thing you saw when you looked over the portfolio?
Those are good questions. I will start with M&A and being a bank. Yes, you're right. There are one disadvantage, and I think Stephan also alluded to the fact that we're not particularly happy to buy goodwill, right? Because goodwill, you need to allocate a lot of equity against that goodwill. You won't find much goodwill in our balance sheet. The Maran transaction happened basically without goodwill. If we do GetBack and we are able to do that, it's almost like an M&A, but we are buying assets. In that sense, we are not attracting any goodwill. That goes to answer your question. We are not really looking for servicing platforms, for instance, because that typically has a lot of goodwill associated with it.
We need to find companies where there are assets, similar companies to ourselves, and with our financial synergies that potentially can help us in financing that goodwill if there is any goodwill or operational synergies. It is possible to do M&A, yes, but it needs to be the right target and for the right reasons. To the best and worst.
Yeah, the best and worst.
Yeah.
The best thing is the enthusiasm. I mean, the people.
Just to be specific.
Yes
I'm talking about the portfolio. Looking at the boring numbers and not the people in.
No, I mean like what was the best portfolio.
Looking at the NPL portfolio you have when you came on board, what was the best and what was the worst surprise?
Well, he's thinking I can start because I came just in. He actually started before me just a few months, but I can start. The interesting thing is that going back to the Intrum in the merger, which of course I was a part of, it was very interesting to see the investment philosophies and the models between the two. They were very close to each other. That was an interesting observation. The same goes for Hoist. If you look at the processes, the models, the way we think, it's very similar. There's no doubt that the professional operators in this industry are gravitating towards similar procedures and processes. That's also why having rational competitors is not a big worry. Having good professional, well-educated competitors, great. That was one reflection. Just give him some more time to think. There you go, Stephan.
Is this working? Okay. When I say worst, I'm struggling here a little bit.
It's okay.
No.
Tricky question.
Look, it's like this. We have an overall portfolio. It ticks like clockwork, right? I think what you do find is with that is that as you break it down further by country, and you break it down further all the way down to portfolio level, you find quite some variance. That's not a big surprise. That has been my experience at Intrum as well. It's like you have certain countries where maybe from a macro perspective, you'd expect that to be safe countries. At the same time, the overlay of the management and the comfort you have of doing deals in that country is a lot more important actually than the macro side of things.
Look, as with anything, we have countries who are very mature, who have best practices, and Björn will be talking about how we will move certain countries up to that level. I think maybe it's the sort of discrepancy you find in quality in individual countries and portfolios. The diversification of the overall book leads to this amazing clockwork then at the end. It is if you're digging into it, maybe the discrepancies you see in the individual deals.
Yes. I'd like to add to that and say that there is of course a spread between portfolios. We have one particular portfolio in Spain that we struggle with which I think is probably around 80% of what we expect. You also find portfolios that are 200% of what we expect. There is that kind of outliers in a couple of 1,000 portfolios, you typically find that. We have that in Lindorff, Intrum has that, and Hoist has that too. Overall, I think it's a very solid and good performance on the portfolio level. That's my clear underwriting on your question.
Yes. Mikael Angert at Danske Bank. I have 2 questions. The first is regarding this performance gap you're showing compared to your competitors.
If you look back for the last 6, 8 years, I guess Hoist is the company that has grown the most in terms of portfolio purchases. I guess that implies that as you won more than your average competitor, that you paid more. I guess that then implies that it would make sense that your margin before the cost of funding would be lower. Am I missing something in that equation?
Yes. I'm not sure if you're missing something in that equation. Yes, we've had good growth in Hoist, but coming from the outside, and Björn will share this also coming from the outside, it's very clear that we as a company have not been able to prioritize working with operational excellence in a very systematic way. It is a very sort of documented now gap, performance gap to our competitors. The good news that this is not hard fixes, it's a lot of low-hanging fruits, things we can do, things that will improve. We feel very confident that we can do better than we are doing currently.
How did you calculate that gap then?
Well, I think exactly very easy. The value of the funding is easy to calculate. It's just come to the same conclusion that everybody else can do by running through the average cost of financing. The gap is really the gap between where we are relative to competitors in terms of profitability, the value of the benefit of the funding, and then you basically have the plug, which is the performance gap. We have been able to evidence that gap through the work we have done. We'll show you that later on where we are on digital, knowledge, processes, technology, et cetera. There are a number of key things that explains this gap.
Okay.
Can I disagree on your equation on that if we buy more and if we pay more?
Yeah.
That's why sales team is in place, actually. We actually disclosed that we've done quite a few exclusive deals. That means we try and find the good deal, not always in the tenders and always buying, overbidding the rest of the people. Even when we are in the tenders, we try to choose the right tender where we believe there is the kind of less competition. We try not to overpay portfolios. It's never been something that Hoist has done. I think that answers as well a bit of your question.
Okay. In terms of the growth potential, back when you were at Lindorff between 2015 and 2017, you did grow strongly on these larger BPO transactions in Spain.
Do you see that as an opportunity for Hoist as well?
No, I don't. The larger BPO transactions with upfront M&A payment and M&A style BPO contracts, I think those days are gone. To be honest, I think they were a good mechanism, a good tool, especially for Spanish banks at that point in time. They desperately needed to get capital. To sell these contracts was a way to get improvement on the capital ratios. That's no longer the situation with these banks. They will need to strengthen their capital, yes, but not through doing that kind of outsourcing contracts. I think outsourcing third-party collection is going to be interesting also for us, but not with this upfront payment that I think you were alluding to.
Yes.
There's one here and there's one back there.
Ermin Keric, Nordea. My first question is, you show this graph on the collection performance, and the collection versus forecast was a bit below 100% for 2014, I believe. You said that was a strategic decision, shouldn't that be reflected in the forecast already?
Well no. The actual is what you can achieve then. Let's phrase it this way. Let's say you have a certain view on a portfolio and a projection, right? If you can buy it for that price, then, well, then you get to the 100%. If you make a strategic decision, hey, we want to be in this country. This deal gives us more than just the performance of itself, but it will get us future opportunities, then what you can say is, we'll put certain premium on top in order to win it. Maybe also because we only develop over time the capabilities to do it. At that point, what you would expect naturally, is that you'd probably get a lower performance on that.
Can I add something to that? A very nice way of starting fresh in the market is to start by servicing, because then you learn the market, you learn more about portfolios, you gather data, that's exactly what we've done in Greece. We do that through a joint venture, PQH. We learn, we observe, we understand the clients, we understand the requirements, your bidding is safer, rather than bid and enter the market through buying portfolios.
Okay, thank you. You also talk about these exclusive deals. Could you give us any more flavor on the financial difference between an exclusive deal and a tender offer? I suppose from the outside, you could just argue you're paying more and therefore they don't really feel the need to have a tender offer.
When I said I think it's important to be local, typically you're not going to have a big and huge international bank to do an exclusive deal with you. That will be always through tenders. As you know that in some of the countries, the banking sector is pretty much fragmented, and there definitely been a lot of situation where you can actually sit and talk to a bank, which could be a small, medium local bank. In many countries, you still have a lot of them, and kind of guide them through an NPL sales. Take your returns definitely higher than when you are bidding against everybody else in a huge tender coming from a big international bank.
The last question I had was, could you give us any more flavor between the delta between the back book and the front book? You're saying the front book margins are coming up somewhat, and you've increased your hurdle rate, but I suppose it's still a bit below your running back book. Is that correct?
I can't give you the number clearly, but yes, absolutely. Our back book has been built over the last couple of years with IRRs coming down. I would say the front book is still below the average of what the back book is. It is catching up at this moment.
Okay. Thank you.
There was one back there, I think. Yep.
Thank you. Ade Ogunade from Morgan Stanley. I have a few questions. In terms of your ROE target of 20%, you said you plan to achieve that in 2021. If you could just give us an indication of does that mean 2019 and 2020, we should expect ROE below 20%? I think your previous target before today was you expected to get back to 20% by 2019. If you could just comment on that. I think maybe I'll just add the second question and maybe pause before I ask my other questions. Second one is relating to your comment on when you say you've gone past the low point of margin compression, what does that actually mean? Does that mean you are seeing lower purchasing prices or you're actually looking at it from an ROE perspective? If you could give specific comments on that. Thank you.
Yeah. I can start, and you can do the low point. On ROE until 2021. Yes, it's correct that we are targeting 20%. We are not at 20% at the moment. From that, it follows that there will be an improvement over time until we reach our target. We haven't laid out or disclosed any sort of yearly targets for ROE, but you should see an improvement year by year. Then maybe you can just talk about the low point.
The low point. I mentioned that we have this system where we have a portfolio ROE that is on top of the group ROE, and it takes into account the overhead cost. We have certain targets that if we buy portfolios at that kind of portfolio ROE in average, then we're very much on our way towards the group ROE target. That threshold we've been able to increase twice already this year without seeing a material negative impact on our volumes. It's literally as practical as we're sitting in committee and we're evaluating if you want that portfolio ROE, then which is again the marginal contribution to the ROE of that portfolio, and we've been able to say, "Look, we want to have it at this level," and we've still been winning the deals. No negative impact on the volume.
That's really good news.
If I get you correctly, in terms of purchasing prices or your purchase prices in the market, there has been no change in that. Is-
Well, no. The purchase prices have gone down accordingly, right? We're paying less. We're paying less, and the impact will be better performance on the portfolios.
My third question is relating to your slide 20 on the target. I think you have a few footnotes there. In terms of your EPS growth target, if we should include the cost of your AT1 capital instruments, what would that imply?
We'll wait with that question. You can hold it because our excellent CFO will go through this later and go through definitions. I will not answer it now, but make sure that you'll get an answer by the end of the day. There will be a good section on financials and also on the targets. We'll just pause that question for later, if that's okay with you.
Maybe a question on your expected growth in your portfolio acquisitions. Basically you have a slide where you expect the markets to grow at 11% in terms of overall industry sales over the next few years. What should we expect for Hoist? Should it be above market growth in terms of do you expect to capture additional market share, or should we expect a level below the 11%?
Right. We're not guiding on specific growth numbers. What we're guiding on is the financial targets. That's what we're guiding at, basically. All right. There's one here, I will actually, in case there's anybody need questions, we'll take it. If not, we'll break after this question and go for coffees, we'll reconvene after I think 30 minutes. There's one here.
This is Vegard again. If it is going to be covered, we could delay it also for later. I was just curious to the rather wide range on the common equity 1 target. How should we interpret that range? Is there anything you foresee or is there any uncertainty to your underlying requirement going forward?
We like to have a buffer, of course, towards the regulatory requirements. We think this is a comfortable level. Right now, we actually being too much capitalized in a way because we did our capital raise in Q3. We think it is a comfortable level to be in, a comfortable zone to be in. I think it makes sense. Maybe Christer can make a better answer later on. That is my CEO comment, and maybe he can expand on it when he present.
No uncertainty to your actual requirement from the Swedish FSA?
No.
Okay. Thank you.
Right. Okay. Thanks everybody. We will have a break. I think it's 30 minutes for coffees outside.
Coffee break is over, Klaus-Anders.
The coffee break is over. I brought mine in here. There was no time to drink my coffee.
No.
There was too many questions.
That's good.
Welcome back after the break. Hope you enjoyed the break. I did, now with my coffee. It's a great pleasure to introduce Björn, our new Chief Operating Officer. A few weeks into the job, I think he's got some exciting messages for us all. Over to you then, Björn.
Thanks, Klaus-Anders, I keep confusing people because, as Stephan already said, I'm actually the second German in the team. Also a Meyer. We're choosing people from Germany by the name Stephan Ohlmeyer, Björn Hoffmeyer. To complete it, my father gave me a Swedish name, which confuses people in Stockholm still. Everybody tends to talk in Swedish with me. I can't speak any Swedish, to be honest. It was just accidentally, my father worked in Sweden, so he thought it was a good idea to give his son a Swedish name. That's all about my connection so far to Sweden. I have a Volvo. That's the other connection. To be honest, listening to my predecessors, I feel a little bit pressurized because there's a high focus on operational efficiency now.
Being 10 weeks in the company, I need to say it was a real sprint in the last 10 weeks. Meeting all the different markets, meeting with the leadership team, preparing for today. I think it was a great kickstart. Normally, you tend to have like a 30, 60, 90 plan. I had more like a 10, 20, 30 plan, I needed to rush already into this new venture. My background is I worked for the last 15 years for American Express, famous cards company. I had different senior roles. The last, I had two jobs. I was country manager for Germany, and I was heading the Nordics hemisphere, let's call it like that. Nordics, Eastern Europe, Benelux, Germany, Austria, for the corporate business. 10 weeks ago, I joined Hoist, and Klaus-Anders keeps saying, "Oh, you're fresh.
Look at it through the fresh eye. You can still be" I think that's brutally honest. Germans are always pretty honest, I think it feels sometimes it's brutally, but it's all meant in a good manner, right? My former colleagues, they keep asking me, I just met somebody who lives next door to a good old colleague, say hello. Keep asking me, "Why have you chosen for this challenge?" I keep saying, "Look, I'm a challenger by nature. I'm a problem solver, so I love challenges." I have a philosophy that every challenge is an opportunity, right? I think that's how we should be looking at it when we go through the deck because the opportunity in front of us is huge. We haven't tackled it.
I need to say, what makes me very confident on the whole plan that we have developed is that there's a really good basis in the company, right? It's not that I joined a company where everything is in turmoil. I think we have a very solid basis. We have had very good performance over the years. I think this is really something to build on. We're not starting from scratch, I think that that's good. In that sense, the challenge and opportunities ahead of us are very promising. The key takeaways from an operational perspective for today is, as I already said, we are on a very solid base. We have an organization that is in place. We have great people. Evenly important, we haven't talked about the customer yet, the customer relationships that we have are excellent.
Not always flowers, but in total, very positive. The challenges in operations or the opportunities in operations are, we cover them in four different buckets. One is in collections to improve our collections efficiency. Analytics plays a big part. Klaus-Anders already talked about digital, which is definitely one of the key cornerstones, then we have an opportunity in the indirect costs. In total, as you have read already, we summed up the whole opportunity to be at SEK 300 million. Here's the only time when I get worried because I'm still not used to SEK. I always have to translate it into EUR then EUR 30 million sounds much better to me then I can relax again. The good thing is that we're building on a strong foundation. We talk about, yes, we have gaps in the operational efficiencies.
To be honest, if you look at it on a market by marketplace, then this company has very good best practices in the different markets. The key to success in the future is to deploy these foundations that we have built in different markets across the whole jurisdiction, that's what I'm going to be talking about. In terms of the operational setup, you have seen that landscape already. We have roughly 800 people in operations. Our frontline people that are in the collections, mostly in amicable. You have seen that we have dedicated specialized teams in the secure piece, but the majority is in the amicable business, you see the different places here with the different offices. My remit goes a little bit further than operations.
When Klaus-Anders first discussed the scope of the job, we came to the conclusion it may be helpful if we combine operations together with IT, because as you are aware, the efficiency is very dependent on the technology. Not to have silos between the two most important functions, not to disregard all the other important functions. We combine them, alongside we also included the analytics part, I will explain later what that is in this, also the responsibility for the indirect cost that we have. Before I go into the optimization, let's talk about the great customer relationships we have. As you can see here, we receive excellent feedback from the customers that we work with. We monitor all the calls that we have. We receive feedback from the different customers.
As you can see, 76% of our customers are really satisfied with the outcome of our discussions with them. There's an overall 74% positive feedback. If you look at it's a five scale, it's the top two boxes. I need to say, in conjunction of one of the question was what your biggest surprise? That was my biggest positive surprise. That we have such a good, excellent relationship with the customer. Because as you can imagine, these discussions with a customer are not easy, right? You discuss financial situations with people that have outstanding debt. It's a tricky discussion, then still receive such a great feedback, has my full respect for the organization. That's really something that we can build on. That's also an area in the operations where we are very good already.
Talking on the areas where we are maybe not so good. As I said already, there's four different buckets, collections efficiency, collections analytics, digitization, the indirect cost, partly the organization. These are the key themes that I will talk you through now, in terms of how to improve. Most important for you is to understand what is the financial impact and maybe a bit of the breakdown so you get a bit more of a comfort level of what we're tackling. In terms of the breakdown, the SEK 300 million, as I have outlined. All right. As spread around the different buckets, the biggest portion sitting in collections efficiency, with SEK 100 million equally in indirect cost. Also digitization and analytics kicks in with roughly SEK 50 million on each of the different pillars. How did we come to this number?
Because we did an extensive exercise on that. We assessed the market, where we are, where we stand together with our peers. As you can see here, we are behind the industry average, right? There's categories where we're doing great. Litigation is one of these, where we feel very comfortable, which is actually that we sometimes feel too comfortable because we go too quickly through the funnel into litigation because we know we're great there. That's something we can change and save cost there. On the organizational structure frontline, we are okay. That's not an immediate attention. I think immediate attention really comes with technology, it comes with analytics. How we segment the portfolios we have, how do we tackle it, how do we approach the customers, targeting the right customers with the right messages. Not a lot has been done across the markets there.
It really deteriorates. Digital, we say is our highest priority, but we are far from great. The good side is we have a market where we already launched this, which is the U.K., where we're doing excellent. We just now need to deploy it in the other markets. Policies harmonization in terms of indirect cost is another angle to tackle, bring more discipline into the organization to stick with our policies, our preferred suppliers, et cetera. We are on the way in transforming the organization. A lot of the times, I got the question already yesterday, "Oh, yeah, we have heard this. We optimize operations. Normally, it's all back-end filled. It's a ski slope," et cetera. Our focus was really on looking at the short-term wins and the low-hanging fruits in the first instance.
We're not first building perfect foundation, then we build on this, because that can take ages, especially when you deal with technologies. The goal is really to apply the different best practices we have across the market, then roll it out across the jurisdiction, and also leverage the great people we have. I give you an example in collections analytics, for example. We are doing great stuff in the U.K., where I have an analytics team that has developed very sophisticated models around segmentation and targeting. We haven't applied these to any of the other jurisdictions. What we do now is we take that team, roll out the modeling across the whole region, to apply the techniques there, because models we create for the U.K. are not very different than for the other markets.
We do the same on the collections efficiency, when we look at call center setups, performance management, how to improve really to cover a larger share of the book, because that, Christer will elaborate on this is really where a lot of value sits. Klaus-Anders is nodding. There is not a simple meeting that he doesn't reiterate. We are sitting on this gold mine. We need to dig harder. We can get much more out of it. You will see later that actually we have already done that in the past, but I think we can even do better. Digitization, as I said, I go into more depth in this. On the indirect costs, I already elaborated there. Policies harmonization is a lot.
When Ulf talks about the new organization, you will also see that we reveal a lot of duplication that we have currently because we have a market-led organization, which we are transferring now into a more functional organization. That has led to a lot of duplications in the different jurisdictions that we can eliminate and where we can definitely see some gains for the near future. All of these things that we are going to do is improving our collection funnel. This is really the heart of operations, right? The collection funnel is how you measure your performance. The collection funnel describes what's happening with the cases that we buy from the banks, from the start to the end. At the end is the conversion. That's where the money gets collected. The good news is we are good there.
We have had a lot of focus on this in the past. We have deployed psychologists, trainings, et cetera. Our frontline people are really good in converting our customers into paying. I think where we can do much better is in the start. Get all the intelligence around into data. We have a lot of data, and it's all in-house. We're just not leveraging enough. As you have heard many times already, data is the new oil. We sit on this oil pumping field, but we just need to reveal it. We need to combine different data sources to become much better, because our penetration rate, which describes the number of cases we can contact, is below industry average too.
In improving there using other data sources than today, we will be able to reveal much more out of the book than we have today. All what we do is really tackling this, and analytics is a big chunk of this. That's where we have an immediate focus on. I touched base already on a little bit of this. Analytics will help us really to get better data in place in a more structured way, and in a way that we can target more customers. We reactivate all the sleeping files with new techniques that we currently have in the book. By that, we're going to be collecting much more than we potentially have expected at times, and Krister will elaborate on this. We will also be identifying better segments how to tackle customers. Today we go very broadly, we say, okay, we target this segment.
We're calling people frequently, but most of the times, maybe at the wrong time, right? It doesn't make any sense to call somebody who is at work in the middle of the day. We should be calling them in the evening hours or on the weekends. That's something that we need to better elaborate on. The other thing is we need to get more sophisticated in the messaging. We should be giving our call center agents better guidance on what is the key message to target the people, what is the trail of thought that you go through so your conversion is actually even getting better. Last but not least, what analytics will do help us is guide better the traffic that we have in terms of communication. Klaus-Anders said it already at the beginning.
Today, our operations is very much focused on, he calls it manual, I call it people interaction with our customers. I think there is more efficient ways to do this, and this will form a big part of our operations excellence program to transform the way we act from a very people-focused into a very much more balanced people versus technology-focused organization. That was maybe the second surprise that I had when I arrived. I need to say, I was like, Klaus-Anders telling me, "Oh, we do this and this," and I thought, "This is core, and I think they should have been more sophisticated," right? For example, in some of the call centers, we're not deploying yet dialers. By the end of the year, we will.
This, you would imagine, is a call center technology you have already in place when you run 800 people in the operations. Coming to this, we really look at the transformation of our collections business in terms of how we tackle the cases throughout the funnel and really moving from manual to more digital low-cost solutions. At the moment, as I said, over 90%, we deal what I would call like a more high risk, high value base type of environment. Very highly skilled collectors. We don't make very good use of them, because you have collectors that sit on the phone, they have negotiations with large ticket items, very sophisticated negotiations. At the next moment, there is a call coming in, and they're answering a phone call to tell the people what their balance on the account is. That's not efficient use of people, right?
People cost is very high. We need to implement technology there, like interactive voice response. Nobody likes them, they are very efficient in operations. Those of you who have an online banking account know you call, and then you have this endless, oh, give your number, and for this service, 1, for that service, 2, for that service, 3. It helps guiding the flow, and it helps guiding the people to low-cost channels. That's something we're also deploying at the moment. Definitely as time goes by, digitization and not just with self-serving platforms, but also with the employment of robotics will play a major role. I personally, and we had the discussion, think the technology's not yet there, that there's only any robotics where we can make the switch from human to robotics.
That definitely is not the case, we are already preparing that for the future, because if you're not there yet, you will be not there in three years when it really kicks in. That's got to be a big part. Digital is the one that excites me super much. It was one of the things that was really close to my heart at Amex, and it is now close to my heart here too, because that offers great potential. We have laid our mission, in terms of where we want to be in the next three years. Take it as a mission, it's what we're striving for. We really want to get to an 80/20 ratio, so 80% done in low cost solutions, being either low cost environment in call centers or be it digitally.
That's an ambitious target, we see good signs that we can get there. In terms of the collections, we are striving for 30%-50% in digital collections. Today we are at 3%, so long way to go, but the good news will be coming in two slides. It's achievable. Last but not least, we will continue with our effort to do site consolidation, and we are looking at near shoring options in terms of call centers. In the old world I lived, call centers were mostly not in the market, where we were active. They were somewhere in Buenos Aires or Brighton or New Delhi. You don't need to go that far, I think that's definitely an option also for this industry to move, and see cost efficiencies. The cost efficiencies, everybody seems to have a favorite slide.
This tends to be mine because it tells a lot about the story where we're heading with cost, right? If you look at the pyramid, digital, taking as a baseline with a cost of one as an index, goes all the way up to legal. Legal is the most expensive. That's why I say we also need to make sure in the future we collect more in the amicable phase and less in the legal. Take a little bit of time before we move. We're not in a hurry. If you compare digital channels to high value, high risk environment that we're currently operating, the cost there is like 15 times higher than in a digital space, which is a significant chunk of cost. On the digital space, this is not just vision and future.
I think we need to act now and get our act together. What you can see here is on the upper side, you see online banking, which we have taken as a reference, and how it has moved. This is people engaged in online banking. It is 25% on a European average. Has rapidly grown in the last four years, like 10%. If you look at the U.K., you're already at 40%. This will vary by market. I would assume that the Nordics are even higher than the 40% than the U.K. because you're much more digitally advanced than anybody. This is definitely happening, and I keep telling the people, I think the internet will be there somewhere, in the near future everywhere. Because I still keep getting feedback, "Oh, the internet is different here," and it works.
In moving there, we have done it the first step with Hoist Finance in the U.K. We have started last year, the journey. One year later, 20% of our collections in the U.K. is digital. 20% of the volume that we have manually worked on in the past is now done on a self-service platform, and that was in one year, which is really great. We see, especially with the newly boarded portfolios, that even the pickup rates are higher. We see already adoption rates of 35, 40% there. It's definitely something that the people want, and it's very logical. You don't always want to have a discussion with somebody on the other side about your financial situation. Some just want to pay off their debt. Why would they talk to somebody?
Why would you need to call a call center if you just want to know what your outstanding balance is? It is a lot of the same mechanisms that each of us who has an online account apply. I don't want to talk to a bank clerk, just asking him, do I have enough money in the moment in my bank account? There's very simple other ways to do this. Because U.K. is the only one where we have it right now, the overall penetration is very low. We are 3%. The journey we have started is we're now rolling this out. Target is by mid of next year, we want to deploy the platform in every other market.
At the same time, we are developing more capabilities for the U.K., so we can really level up, so we can achieve the 30%-50% within the next three years. Just very practical, how does it look like? It is really not rocket science, right? You get your simple account, you log in, you get your balance, you have a payment function. It is really very simple first steps that we have done. It really pays off immediately, which I think is great. Clearly, at the end, there will always be a touch point with our call center if needed. But yes, clearly avoiding that will improve costs quite significantly. That will come at a much lower cost from a setup perspective, from a running cost perspective, and also from a customer engagement perspective.
Because once we get the people digitally, we can save tons of money on communication, which is we print a forest every year, I think. So we can get rid of this. These are all things that are definitely not new to any of the businesses out there. It is a very logical step. We just need to go it now, and we need to do it in a very efficient manner, making sure that we can deploy the platform we have quickly, even though we have a very scattered infrastructure sometimes in terms of our collection systems. That we have a good footprint on this. People tend to forget, it was interesting when I joined Hoist, this may be the third observation. We have this great funding source.
We look at it as a funding source, but from an operations perspective, it is even much better, it more or less run by itself. So we have the deposit accounts, and we have them in Sweden, and now we brought them into Germany. So we are managing SEK 15.5 billion in deposits, and we have three people on this. If you come from operations, that is a great model, right? You manage that much of volume with that little of people. So there is definitely DNA in the company that is digital. We just now need to transfer it to the other side of the business. So from that perspective, great job there. The last bucket is the indirect cost, and that is also where I think there is very low-hanging fruits.
Remembering where we come from, market-led organization, we have applied best practices in the markets, but we have never applied them across the markets, and the same is for indirect costs. Most of the preferred suppliers we have are market led. We have very little contracts with suppliers that are across the whole organization. So that is definitely an early short-term win that we can generate. We also need to be more disciplined and robust about the policies that we deploy. Simple things, also coming from Amex, being a little bit educated in travel. Travel policies, very quick wins that you can gain there. The same in other areas of the business that we can apply. From a purchasing, making sure we buy at preferred suppliers, no maverick buying, et cetera.
Very simple techniques, but with a big impact. In terms of timelines, to give you a bit more comfort, this is not all December 2021. Just give a little bit of outline about the approach that we're running here. What we have said as a principle is we need a good balance between building foundation, but delivering at the same time for shareholder value. Right. Make it very tangible and give also the ability to generate short-term wins. That is important for the balance sheet. That is also important for the journey we have in front of us because we need to get all the people on board that we now, as a group, deliver collectively.
Therefore, you can see, and I don't read through it because we have gone through it already, a lot of the short-term things that we do and very easy tangible things. Deploying dialers into the markets, having digital platforms out there. Deploying analytics skills that we have already in the company, just making them available to the different markets. Rolling out policies and key suppliers across the jurisdiction. Why we do that. We still need to definitely develop further and professionalize in a lot of areas that will then kick in at a later stage. I talked about machine learning in terms of analytics. I talked about the overall collection setup that we are looking at. We are piloting some nearshoring activities as we speak. That's definitely then something that isn't rolled out for the whole company overnight. Clearly something for the next three years.
Also eliminate on the organization some of the duplications that we might see in the different jurisdictions. I hope by now everybody has slightly understood why I'm feeling comfortable. If not, I have a slide on it again. If we just do what we have done in amicable collection in the U.K. and deploying this across all the markets, we will be done with 50% of the target. Right. Out of SEK 300 million, if we just do the best practice correctly across the different markets, we will have done half of it. I think that's a very good starting point. It also gives you a feel of how quickly we can gain some wins there. Clearly, yeah, it's only half the way.
Half the way is already a good chunk, we have time in the meantime to level up and get the other half through the more midterm solutions that we have described here. Far so good from my end. Klaus-Anders, you're going to join me for some Q&A?
I will. Thank you to Björn. I hope that was clear. Happy to take some questions. There is one there at least, then over here afterwards.
When you look at competition in U.K., do you think you are ahead of them in terms of this digitalization process?
The competition is broad. I would say we are good average.
Okay, the reason I am asking is when you look at the return on purchased debt in U.K., it is below the group average. What does that tell us about the incremental effect from these savings in other markets then?
I think the important thing is what Björn was saying, that the U.K. is not standing still. We have expectations that the U.K. will continue to improve, and there are improvement projects that are specific and relevant also for them. When I look at the U.K. and I know some of our competitors quite well, I would say that there are a couple of companies that are better than us. There are also some that are worse, and we will take inspiration from the best ones and become better. Then there's one more or no, Viktor?
Thank you, sir. Ermin Keric from Nordea again.
Yeah.
First off, do you see any trade-off between more digitalization and lower customer satisfaction that could impact your P&L negatively as well?
Say again the starting?
I mean, you have quite a high customer satisfaction currently, and you're saying that you will implement more maybe robotics. Maybe when you call, you have to dial through a long menu before you actually get to human contact. I suppose that could impact your customer satisfaction negatively. Could that have a negative effect on the P&L to sort of offset the effect?
Actually, it's the opposite. It impacts the customer satisfaction positively, the digital interaction. There's a lot of people out there that don't want to have that human interaction anymore, and they react very positively to that. I wouldn't say you have a negative correlation. If so, then we need to find out why and need to be more sophisticated in how we target people. We are not forcing people to go digital, right? It's not like you sometimes have the experience, you need to look for the phone number of a contact center at the 20th page of the internet site, and you can't find it, right? It will still be also human touch if you like it. In general, what we have seen, the performance on satisfaction is better. Actually what was surprising to me, even the collection performance has improved slightly.
A follow-up question as well on the slide with U.K. If you could do that in the whole of Europe?
Do you think all markets are mature for that sort of technology to get the same adaption, so to speak?
No, there will be difference in the adaption, right? I would say the adaption with us will be going alongside with the market trends. Yeah, too bad we had a slide where we had all the markets, but it was very confusing. You would expect that in the southern cultures, you maybe have less so of an adoption at this time. I think that will be gradually also shifting.
Thank you.
Great. Thank you.
Thanks. Thinking about the part of the collection strategies now, and when you're going more digital, how do you go about this? Are you more reliant on external data now, going forward? Do you set the strategies internally and then try to push that out in the digital channel? That's my first question. On going digital, do you develop this internally or do you procure and purchase these sort of digital services externally?
Yeah. On the first part, in the moment, we are doing the digital strategy very much on our own data. I would expect going forward, we do a lot more with data management from outside sources too, to enhance the data we have, because it's still going to be much cheaper to target people through this channel, than wherever we don't have the details, contact them on a different channel. That will definitely be one part of the strategy. It will increase potentially slightly the cost, which we have factored in, by the way. That's definitely a way to go. If you look at skip tracing, which is an important part to cover more of the book, that's definitely one of the area where we can most improve and where we have a gap. On the second question, that was on, remind me.
When you go digital, do you develop the platform?
Oh, yeah. It's a mix of two. We have our own development in-house, but I'm also a big believer in buy strategies, so where we can leapfrog because there is technology out there. Why would you do it yourself, right? If you can get good stuff out of the shelf, then we're looking at it. Definitely we have a two-way strategy there.
All right. Maybe a follow-up for Klaus-Anders then on this one. Thinking about the business model from barriers to entry perspective.
Taking into account that you go more digital, maybe you have a bigger legacy than some, let's say, greenfield players that would just start up using standard off-the-shelf data, safeguarding your business, just to understand it from a barrier to entry. Are we heading in the wrong direction from that point of view, or how do you think about that?
Yeah. I don't think so. The potential to go digital is great. I think that's clearly the route forward. Then you can discuss, okay, will this lead to more disruptors? Will we encourage disruptors to take our place? Is there a reason to think that the banks will take it quite back and do it themselves? I don't see that. The more we develop and sophisticate and industrialize our solutions, the better suited we are, the better positioned we are. The more competitive we will be, the more efficient we can be. The better data we have, the better collection strategies we have, the more we're able to match our agents' competence with the requirements and needs of the debtors, our customers, I think the better position we are going to be.
By driving our operational excellence agenda, I think I add one more competitive advantage to our skill sets. Now it's the funding base, clear tick, I think that's unquestionable. Then I think that over the years now, we will see that we can not only catch up, but potentially even leapfrog a little bit relative to competitors. The good thing, again, the premise for this, the premise you have to believe in, is that being in fewer markets rather than being scattered is a positive. I think it's a tick. Only working in one client segment, the banks, rather than working for everybody. We don't do fitness centers, municipalities, dentists, insurance companies, retailers, what have you. We don't do that. We only work with one client segment. That makes it easier. We collect our own portfolios.
I really strongly believe that this is doable, is actionable. We'll prove it to you. Yeah.
There's some questions back there.
Thanks. Ade Ogunade from Morgan Stanley again. Just a few questions. In terms of achieving these cost savings, would there be any additional costs that are being incurred in terms of investment-
Yeah
in the digitalization process to achieve these savings? If you could be clearer on the starting point for cost in terms of what should we be using as the base cost to measure these cost savings? 3, in terms of when I look at slide 69, I think when you look at legal costs, that accounts for the greatest proportion of cost. As you move more into new asset classes like secured NPLs, which will likely involve some additional legal costs, what does this mean in terms of your cost targets? What's the implications? Finally, in terms of the 300 million SEK target, would that be achieved by the end of 2021? Or would you fully realize the benefits of these savings by 2021?
In that sense, are we likely to see a spill over into 2022, or you already have the full benefits of the savings by 2021? Thanks.
Should I start? Or do you want to start?
Yeah, please, go ahead. Otherwise, I would have diverted it to Christer's section.
Yeah
He's going to be deep-diving to this. I saw him taking notes already. The last slide or something like that on his presentation where we will be discussing that, you go ahead.
Very quickly, Christer will elaborate. I think it's good to repeat even. The cost to achieve is estimated to be SEK 200, right? SEK 200 million. That's the cost to achieve. That's the cash to achieve. Some of this is investment, and some of this is cash or costs. Christer will explain the difference. The starting point is next year, 2019. The end of this year is the reference point. Over the next three years, so its full run rate will be achieved at the end of 2021. I think that was basically it, there was something about legal costs, and I can assure you that sort of the portfolio mix changes are embedded in our targets. That's already reflected.
All right. Seems to be no further questions at this point in time. Nothing to the web, apparently. Michel is just double-checking. Nope. If you have questions, if you follow this on the web, please forward through that mechanism on the homepage, and we will answer your questions. We will break. We'll pause for some lunch. I think there are some wraps outside. Please just find a place outside here now and enjoy your lunch, and see you after the break. Thank you.
Thank you.
Welcome back from lunch. Hope that was fine with wraps. I shied away because they're so difficult to eat. What's going to happen with my suit? I hope it was fine with you. We're going into the last phase of today's Capital Markets Day. We are going to do a piece now. Stephan will click for me, on the people side. I mentioned that I've been working a lot with change, and change require leadership skills. We know from experience that soft issues can be very, very hard issues if they're not dealt with in the right way. What we wanted to get across to you now is really a section that talks about the change, our new operating model, what we're trying to internalize, and how we deal with communication and sustainability. Happy to welcome on stage Ulf and Viktoria.
Over to you guys.
Thank you, Klaus-Anders. My name is Ulf Eggefors, and I'm the Chief People Officer. I will walk you through the One Hoist Finance strategy. I have more than 25 years of international leadership experience, both from the banking sector as well as being a CFO at a large global trading company. To my left is Viktoria.
Yes, that's me. I'm Viktoria Aastrup. I'm the new Head of Business Development and Communication. I've been at Hoist for two months. Both me and the unit is still under development, you can say. I have a background in the financial industry. I've been working for a little less than 10 years in Nordea. I've been running retail banking businesses. I've been implementing new operating models, including or adjusting to a more digital way of working and interacting with customers. I've also been material when it comes to the compliance change journey in the same company, and that was a change journey. All new processes, operating models, IT systems, you name it. Prior to that, I worked with the Swedish Government Offices, with state-owned enterprises, primarily, serving in total eight ministers.
You can hear that I have a red thread of change and implementing operating models. I really love operating models, and I will get back to why a little bit later on. I've learned one thing, and that is during these change journeys, communication is key for success. Ulf, what are we now doing?
Well, you will hear from Viktoria a little bit later on. When I joined Hoist roughly two years ago, I started off as being Head of CEO Office. I worked with projects and strategy. Later on I was appointed being a Regional Director for Region West. That was U.K., Spain, and France. Now I'm the Chief People Officer. That's my third position in less than two years. It's very exciting. I had a mentor at one of the Swedish banks. She was Head of HR. This was some 22, 23 years back, and she said to me that, "One day you should really try HR." Today I'm here, and it's a privilege to run the Hoist Finance people team. It's an excellent team we have in place.
I will give some reflections, giving my background about the old and the new, and what has changed. On this slide to your right, you have the organization we have in place, and to the left, you have some of the actions that we have already now implemented during this change journey. Instead of going through a number of charts, I will talk a little bit about how it was in the past and what it is now. When I joined us as this, I think it was early August last year, I became regional director. I quickly realized that the organization was growing independently. We were fighting about internal resources and we were building up support functions. This was quite easy to understand from the geographical perspective.
It was also quite easy for me to understand that this is an organization that we need to change. Now we have a functional organization in place, and this functional organization has a lot of advantages. One is that it's clear reporting lines. We have got rid of one layer of management and also some support functions. This organization is ready for growth, for delivery, and has a clear structure. Considering the industry, I was quite surprised when I joined that we didn't have a shared service center in a low-cost country. In my previous positions, I had developed shared service centers, both in Asia and in the Baltics, where I have to say, even if I'm a bit honest, with excellent result. Now we have started to near-shore certain processes to a shared service center in Wroclaw.
Besides the obvious salary arbitrage of doing this, we also will see major improvement in efficiency and quality. I have experienced that myself in the past. As you have heard from Björn, this has already started. We have some 20 staff in the new shared service center. We started just recently, and we have very high ambitions going forward. In the old geographical structure, where the countries were not held together, we could have certain processes that were different in how it was carried out. Four, five, six different ways for the same function and for the same process. Let me give you an example. Procurement. We are now centralizing procurement into one central unit. In the past, we had six, seven, or eight different ways of handling procurement. This will change, and it will change now. Currently, all functions are harmonizing its processes along the countries.
A legal process will look the same in Lecce as in Duisburg. This will, of course, be more efficient and will create the best practice along the group. Besides the harmonization of processes, we are developing a number of centers of excellence. One example, this is within my area, we are starting up a Hoist Finance Academy for leadership training. The leadership training will be aligned all across the markets instead of being developed in each country. I'm sure you can understand the efficiencies that we will achieve. This leadership training, it will also help us to deliver on our plans because we will have a leadership training for all our leaders that is aligned with the One Hoist strategy to avoid duplication, to promote collaboration, performance management, and execution.
This will be an enabler when we are going through these years until 2021. I believe that the total implementation of the new organization, it will take us well into 2019, if I'm humble. I'm already today convinced that this organization will be able to deliver on the high ambitions we have. Victoria.
Yes, I will tell how this unit, the new function, business development and communication, will support on delivering on the strategy. As you can see, the new unit consists of three parts, business development, sustainability, and communication. Sustainability is at the core also together with our vision, helping people keep their commitments. Business development and communication are enablers, and we are supporting not only our vision, but also all the function within Hoist Finance on communication and business development. I will talk you through, give some examples on how I see that this new function can support our journey. Starting with communication and brand and brand positioning. 30% of the European households are today lacking a buffer for unforeseen expenses. Unforeseen expenses is one of the most common reasons why people end up in debt.
Hoist has of today approximately 10 million customers, but we're not interacting with all of them, far from all of them. Only in U.K. we're sending out 8.4 million customer letters last year. How come that we don't get in touch with the customers to the extent that we want to? There can be a lot of reasons, of course, very personal and very individual. We know that shame is a big one, shame of being in debt, shame of not being able to cope with your own private finances. As we said earlier, and Klaus-Anders pointed out, that helping people keep the commitments is our vision. Perhaps it's not widely known that we're actually providing help. By working with our brand and the brand perception can make us improve our interaction with our customers.
When a letter arrives from us or when we reach out, the customer will feel that they will get help from us. Moving on to business development. We have talked a lot about digitalization earlier today, I will not dwell very long on that, but I will add some views from my point of view working with business development, because it will be very much on the digital side and customer interaction and from the customer's point of view, how we interact with them on that part. We said that the customers don't get in touch with us because perhaps we're unknown or our brand doesn't feel well when you receive that letters from us. Perhaps we're a little bit complicated or complex or cumbersome to get in contact with.
We need quite a lot of customer data still from our customers in order to support them and help them. That can be cumbersome or complicated to gather that data. My experience is from working with know your customer processes within the banks, that when gathering this data, specifically through onboarding or self-service channels and onboarding new customers, we have a high dropout rate because it's so much information that we need and the customers doesn't know what to fill in in the different fields. Working with, for example, data aggregation, as Björn mentioned earlier, our own data, but also from open banking, PSD2, third party data, will enable us to pre-populate fields. When we onboard customers, we just need their consent and one click, and we have all fields pre-populated, and that will be a super efficiency gain for us as well.
With a more complete set of data, we will be able to be more personalized and more relevant to the customer when it comes to how to give them help. We should be easy to deal with. We want to meet customers wherever they want to interact with us, and we should be personalized and relevant in all touch points. Still being a little bit new to Hoist, I take the liberty to, well, make some identifications or reflections on Hoist and that in my view is that Hoist has been a little bit of an introverted company, perhaps not with a full focus on what's going on outside the Hoist walls.
I think that we need to raise our eyes and see what's going on on the market as of today in order to capture things that are already developed when it comes to solutions, especially technical solutions. We are looking into a range of them already today. By exploring different solutions, including partnerships and collaborations, we increase our ability to leapfrog on the technical development, not doing everything by ourselves. We know that the customers that we get in touch with, the ones that we set up a plan with, are more likely to make the payments. If we can improve the interaction rate through our brand and interaction points, we will increase our collection performance, which Christer will talk about a little bit later on. Finally, on the business development part.
A typical customer within Hoist stays as a Hoist customer for approximately 10 years. That's quite a long time, and that gives us a unique possibility to get to know our customer and help them throughout the customer journey together with us. Their needs may vary during that journey. That gives us also possibilities. We have a banking license, and today we're offering deposit accounts, but we will look into to broaden our portfolio when it comes to products. Closing the loop, I will talk about communication again and our brand. We want our employees to be proud of our company. We want to be a company that is keeping up with development or even be in the forefront of development with high ethical standards. A well-known company with a strong brand. Brand is everything, and everything that we do is actually reflected in our company brand.
By having a strong brand, our ability to attract and retain skilled people will increase. That's crucial in order to develop Hoist further and to create a great place to work. Talking about great places to work, Ulf. Yeah, got it. I said that I've been working with operating model and change journeys, I love those. In those companies that I've been working with it, I am drawn to this part, operating models and change journeys. I really love it. Why do I love it? It brings clarity. An operating model brings clarity to the organization, how to run the company. It brings clarity on roles and responsibilities, and hence also expectations and accountabilities. Exactly as Klaus-Anders said in the beginning in the strategy part, if you recall that. It brings safety. People and employees can focus on the working tasks.
Leaders can focus to be leaders and not defending blurry functional borders. Leaders can set the standard for the corporate culture. We know that there is a strong link between corporate culture and financial performance. The link operating model together with leadership, strong corporate culture, financial performance. That's why I love operating models. I am so happy to be working with One Hoist Finance operating model. Ulf.
Our key takeaways are, first of all, we have a new operating model in place, we have already concluded several changes in line with that model. Brand and business development will improve operation and collection efficiency, but it will also support financial inclusion in society. Thank you for listening. Christer.
Do you want a glass of water? Yeah.
Thanks to Ulf and Victoria. Now we're moving into the next and final section of today's Capital Markets Day presentation. We will do a wrap-up. While you are getting your microphone, I just wanted to welcome you on stage, Christer.
Hi.
Christer has a long experience from Hoist Finance running business controlling. He's an excellent wingman for me now in Hoist Finance. Over to you, Christer.
Good afternoon, everyone. I guess by now you know that there's a CFO and his name is Christer, and he's going to answer all the questions. That's me. I've been with Hoist Finance for 5 years. I've been the CFO for the last 7 months. Before joining Hoist, I was working in management consulting and retail banking for 10 years. Within Hoist, I've been working with finance and controlling, and I was also part of the team that took the company through the IPO. It's fair to say that I know this company pretty well. During the day, you've heard about the opportunities that we see and the plans that we have. In this session, I will try to draw that together. I will link it to the financial targets. I'll try to pick up some of those questions that were thrown out.
I will also highlight three things which gives me, as the CFO, a lot of confidence. That's the predictable top line, it's the efficient funding, and it's the potential we see in operations. I will go into each and every one of those, but first I'd just like to give you my perspective on the historical financial performance. We've seen strong volume growth all the way since the IPO. In the early years, this growth helped us to get cost income down and profits up. In these years, we expanded in Italy, Poland, the U.K., this growth, we benefited from pure scale, and we benefited from improvements in funding. This improvement in profitability was not so much about integrating the company or running our processes in a more efficient way. In later years, volume growth continued, but profits lagged behind.
Why is that? Is it margins? Yes and no. It is true that margins converged towards the levels we've seen in more mature markets. It is also true that we took a hands-off approach to integrating the company and towards group-wide cost efficiency. Profits grew, but not as much as I think they should have. I think by end of 2017, some of you would actually agree that something had to change, and that change is what we've been working on now for the last six months. Klaus- Anders, the team here, and I. That's history. Of course, there's a number of strengths that we can build upon going forward, and the stability of income is just the first one. I'd like to start there. Because in fact, some three-quarters of our income for next year, some 75%, is already in the bag.
That's what I expect from the back book. On our balance sheet, we have non-performing loans for SEK 18 billion, and on those loans, we expect to collect some SEK 31 billion over 15 years. You can see the distribution here. Of course, in a business like ours, collections is center stage. When we agree on an installment plan with the customer, when we help them keep their commitment, it translates into gross collections. I'm the CFO, so for me, it's really about income. How much income will the back book generate? The short answer you would have at the bottom of the graph here, that's how much income the back book will generate. The somewhat longer answer justifies going into three topics. That's accounting policies, portfolio revaluations, and collection performance.
By having transparent accounting policies, modest revaluations, and solid collection performance, we are able to maintain a highly predictable income. Let's start with accounting policies. Actually, it's very simple. There's no black box here. I will walk you through a little bit of the theory for non-performing loans. First of all, our business model is hold to collect. We are not in the business of trading NPL portfolios. We acquire, and we keep, and we collect, as Emanuele told about earlier on. Based on this, we account for our portfolios according to amortized cost as defined in IFRS 9. In practice then, what does that mean? It means that when we go out and acquire a portfolio, there will be a purchase price, so nothing's for free, I guess. Let's say it's 100. There will also be an expectation of gross cash collections over 15 years.
Let's say it's 170. Those two combined will define the so-called effective interest rate, and the effective interest rate is the rate which exactly discount expected future gross collections to the purchase price. With the numbers I gave you, this would be typically in the range of 15%-20%. For the back book that we have as a whole, it's 17.1%. When the effective interest rate is defined, it plays into the balance sheet and the P&L. It plays into the balance sheet in the sense that the valuation of the portfolio is the NPV of remaining gross cash collections discounted with the effective interest rate. Plays into the P&L in the sense that interest income recognizes in the period is the value of the portfolio times the effective interest rate. Very straightforward actually. I'll give you an example in a second here.
Just a few comments first. We apply these principles to all our NPL portfolios. It applies to secured, unsecured, front book, back book, all markets. Very easy for me to manage and very easy for you to follow. Secondly, we account for collection cost as it is incurred. Collection costs includes, for example, litigation fees, which can vary a little bit up and down, as we've commented upon in some quarters. Nevertheless, we account for it as it is incurred, which is also very easy for us to manage and easy for you to follow. Finally, performing loans. These are loans which have not yet defaulted. They may never default. We have a few of those investments, and I want to just point out that those loans are accounted for in a different way.
In one of the appendices, we've given you a lot of data which is meant to help you model that. I hope it will be helpful. I won't go through it here, but I'm happy to take questions on that as well, of course. I promised you an example. In this example, we've assumed that we are acquiring a portfolio for EUR 100 million. Balance sheet, opening balance, EUR 100 million. That's what we pay. On the cash flow side, there will be a collection forecast. This would extend for 15 years. In this example, we assume that actual collections differed a little bit from the forecasted collections. There is a little bit of a difference there.
In the income statement, you will have the interest income as I covered on the previous slide. On top of that, you will have any potential difference that you will have in terms of collection. That's the SEK 1.3 there. Those two combined add up to the total operating income, SEK 16.8 in year one. I guess that sort of settles it for year one. Moving into year two, as you can see, the opening balance will be lower. Remember, the value of the portfolio is the discounted residual cash flow. Now there's one year less in the cash flow, hence the book value is lower. Other than that, basically year two is just the same thing over again. For those of you like Ermin here, who prefers spreadsheets to PowerPoints, you should have a look in the financial fact book, which you will find on our homepage.
There we have some very specific examples with formulas and stuff, which I think should help you. Predictable income is not only about accounting policy, of course. One other component that plays in here is portfolio revaluations, and we touched upon it somewhat earlier today. Historically, our portfolio revaluations have been modest, as you will see on the left-hand side of this graph. Remember, revaluations are triggered by changes to future cash collections. Those changes can be small or large, they can be positive or negative. Either way, it will feed into the impairment losses and gains line, which is part of income. You will notice that back in 2015, the revaluations as a % of book value was a little bit higher. Since those years I've been highly involved in improving our routines, and this includes routines to identify and deal with outliers early.
It also includes routines around governance. The decisions regarding future collection predictions, how are those decisions made and who signs off on them? Today, it's signed off by Stephan and the investment committee, the centralized investment committee. It is also reviewed by our risk and audit committee and of course by our auditors as well. By having these routines in place together with a well diversified portfolio, we are able to avoid surprises. Accounting policies and portfolio revaluations, that's covered. Collection performance. Of course, collection performance is very important. Stephan spoke about this earlier. In recent years, we've had solid collection performance around 104%-105%. That's good, but it gets more interesting when you drill into the different vintages here. Let's do that. This is a very content-rich slide.
Let me spend a little bit of time here to explain what we have here. I'll use the pre-2008 vintages as an example. In the years up to and including 2008, we acquired portfolios for SEK 2.5 billion, expecting to collect SEK 6 billion. That's a good deal. SEK 2.5, SEK 6. Actually year to date, sorry, to date, we've collected SEK 6.5 billion on those portfolios. That's even better. Here's the interesting part. We expect to collect another SEK 1.5 billion on these portfolios. SEK 1.5 billion. How can that be? Is it inaccurate pricing? Stephan got something wrong in his spreadsheets? No, it's not. This is improvement in collection operations that has taken place since those acquisitions were made. This is better use of data, better use of system, better performance management. Fast-forward, let's take 2012.
We acquired for some SEK 1.5 billion in that year, expecting to collect SEK 3 billion. These are more recent vintages, so we have not yet collected that full amount. In fact, we expect to collect SEK 3.5 billion. You can see the pattern is pretty much the same. Let's move back over here. 2017, a year when we acquired quite a lot, SEK 4.5 billion, if I remember correctly. Of course, very recent vintages. We've not yet collected all of that. In fact, we are very committed to implementing improvements in collection operations, as you've heard during the day. As those efforts materialize, it will benefit not only the 2017 vintage, but all of the other vintages. This is why I take a lot of comfort in our ability to sustain a solid collection performance.
Before I turn to the balance sheet and the funding, I want to touch upon cash generation. This is a topic which attracts some interest in the industry, I figured I might as well bring it up here. The question that is sometimes asked is, how does cash generation look like in steady state? That is in a state where purchases are exactly at the level where it replaces the ERC, it keeps ERC flat. Let's talk about that. As you know, we collect cash. That's what we do. Over the last 12 months, we collected SEK 5.4 billion over on the left-hand side there. There is a little bit of servicing income, not that much yet. Those two combined should, of course, cover cash expenses. It should cover cash interest. We are happy to pay our fair share of taxes.
It should also cover maintenance CapEx. This leaves some SEK 3 billion. Based on the average 120-month gross money multiple, we estimate the current replacement purchases to be SEK 2.6 billion. Out of the SEK 3 billion, SEK 2.6 goes towards reinvesting, which leaves some SEK 400-SEK 450 in free cash flow. That's a healthy level, but I have to say that this is a bit of a theoretical exercise because in fact, as we've told you multiple times during the day, these expenses are really too high, and by the way, margins should come up. Even though we do not have a specific growth target, we're certainly not aiming for a standstill state. A theoretical exercise, but nevertheless. With that, let's turn to the balance sheet and funding. This is not a theoretical exercise. Here the facts may speak for themselves.
We have a very tangible advantage in funding. On the left-hand side, you will see the weighted average cost of debt for Hoist and some of our peers, and clearly a very strong position here. This position is not due to us having a very different leverage. On the right-hand side, you can see that on leverage, we're sort of on par. Obviously there is something else that we do differently. Let me share a few aspects on that. We have a very well-diversified and liquid balance sheet, unlike any of our peers. To start with, a fair share of our funding comes from retail deposits, and most of this retail deposit sits with a 0.7% interest rate today. 0.7%. Those are mostly SEK deposits and also EUR deposits, and we attract these deposits through online offers.
Secondly, we have a very strong balance sheet, which allows us to maintain an investment-grade rating, Moody's Baa3. This rating is, of course, very helpful when you issue senior unsecured bonds, which we do, the middle part here. Furthermore, we operate with a very large liquidity buffer, and this gives us the opportunity to go after investments with a lot of confidence. You've seen us do that in Poland, for example. We're always operating from a position where we can do investments with short notice. This liquidity buffer is invested into very low-risk assets, and we could deploy roughly half of that. If we wanted to deploy more than that, we could, because we could, for example, utilize the RCF, or we could issue commercial papers. There's a lot of flexibility in our funding model.
Overall, I am, of course, very satisfied with the setup that my treasury team has built over the years, and it's a very rigorous model. We do what is called ICAAP and ILAAP. This is a lot of stress testing. We monitor counterparty risk, FX risk. We monitor and hedge interest rate risk. We monitor operational risk, and all of this with three lines of defense, just like any other bank. Obviously that's a lot of work, but it's worth it. Our competitive advantage on the funding side is, as you can see, very material. I mentioned leverage earlier on, and I was sort of brief about it because, in fact, we think that capitalization is a more relevant metric to look at for us, and specifically the margin towards regulatory requirement.
I will try to pick up one of the questions that came earlier on here. Today, we are at 5% margin towards the regulatory required level. That is a very strong level. Actually, it is a little bit too strong. It is above the range of 2.5%-4.5% that we have set ourselves. That target has been the same over the recent year. We have not changed it this time. It aligns very well with having an investment-grade rating. I believe the question earlier here today was, why is it so high? Why do you need to have that much of a buffer? Well, it aligns very well with having an investment-grade rating then, which is, of course, useful. You can ask then, why are we above the target range? This relates to the fact that we raised equity very recently.
Give us some time, and we will work on that. Strong balance sheet, strong capitalization. Let us go into the last part, which relates to our potential in operations. We have set ourselves a target to get cost income down to 65% by 2021. 65%. This may not be a smooth quarter-by-quarter development. Things like Maran or GetBack could certainly move this around a little bit. The direction of travel is clear. Broadly, there should be a gradual improvement towards these levels. This target is definitely doable. It requires decisive actions. You have seen us consolidate sites in Germany. You have seen us consolidate sites in the U.K. You have seen us simplify management structure. As you have heard from Björn during the day, we have very specific plans for what to do next. This includes digitalization, it includes nearshoring, et cetera.
Definitely a doable target. It requires decisive action. I wish to put this target into context by touching upon three questions. The first one is, why is the current cost income so high? The second one is, how should the future state look like, the end state? The third question is, what will it cost to get there? How much do we need to invest to get there? I will take those one by one. Maybe that will answer some of the questions we had earlier today. Starting with the current cost base then. This is costs expressed in relation to income. It adds up to the cost income metric. As you will see, this is a fairly people-intensive business. Roughly two-thirds of our employees are within operations, Björn's area. You will also notice that there is a considerable spend on external servicing.
This would be typically then DCAs, debt collection agencies. It also includes information services, a considerable spend on that. There is also what we perceive to be above peer level spend on indirect cost, professional services, other things in that category. 6% of income goes towards professional services. 6%. Finally then, on depreciation. This relates primarily to capitalized IT investments at 2% of income today. Not something I would perceive to be very high. Maybe it is even too low. With that said, on the starting point, how should the end state look like then? On this slide, you will have on your left-hand side the last 12 month. You have the 2021 go-to state. Let me give you a little bit of some highlights on this one. Staff costs should come down.
As Björn spoke about, we are aiming to have an increased share of collections in low-cost channels, and we will nearshore certain functions. Staff costs should come down. Collection cost. This is actually not the largest improvement lever, but there is certainly potential. For example, in terms of how we use DCAs, the debt collection agencies. Maybe we could do more ourselves. There is also potential in how much litigation we do. If we can be more selective in litigation, there is potential in this area. On the administrative side, you've heard during the day that we are taking action here. This action is about improving governance around professional services and procurement in general. There is also potential in how we cooperate within the company. If we can cooperate in a more modern and sustainable way through less travel, there is also savings in this area.
Finally then, on the theme of depreciation and IT. You will understand why I get back to this in a second. 2% is probably a little bit too low. I think that this may even need to come up. Of course, when we look into investments now, we do so with a group wide perspective, and we aim to develop once and deploy many times. There should not be a radical increase in capitalized IT depreciation. Nevertheless, I expect this to go from 2%-3% of income by 2021. If that's the future state, then how much do we need to invest to get there? Klaus-Anders has already given away the number, SEK 200 million. SEK 200 million-SEK 250 million, actually. That is how much we need to invest to take those SEK 300 million in cost savings out.
Let me give you a little bit of color to this. First off, this is for the three-year period in aggregated terms, over three years. It is cash to invest, so it doesn't necessarily translate into cost, and you will see why. Starting with IT investments, as you will understand, these will, to a large extent, be capitalized. A lot of our investments will be capitalized over five years. The investments we do into IT will not hit the P&L. In fact, the investments into IT is the biggest part of this SEK 200 million-SEK 250 million. I want to stress as well that these investments into IT are on top of what I would call normal maintenance level. There will always be a certain level of IT investment. If you go back in our finances, you will see roughly what that is.
This is on top of that. The normal spend will carry on, but on top of that, we need to do more. Moving on to the second piece, this relates to site consolidation and nearshoring. You could call it restructuring. This would typically not be capitalized, and the timing of it is, of course, related to our speed in implementation. Finally, there will be costs associated with making this change happen. That could be costs to acquire certain skills. It can be costs associated with speeding up or accelerating the change, and other things. That's the last component there. All in all, adding up to SEK 200 million-SEK 250 million in cash to achieve over three years. I'm sure I will get many questions on that later. Timing-wise, how will this play out in terms of timing?
Well, I think as you've heard during the day, we're very eager to get going in this change journey. I would expect the timing of these investments to be 50/25/25 over the coming three years. 50% year one, 25% year two, 25% year three. This morning, Klaus-Anders spoke about the financial targets, and I will repeat them, and maybe I will answer some of the questions we had early on today. To start off, we aim to generate a 20% return on equity by 2021. Over the coming three years, with 2018 as our starting point, we will generate 15% compound average growth rate in EPS. Cost to income should hit 65% by 2021, and we will do these changes while keeping the CET1 ratio in the range of 2.5%-4.5% above the regulatory level.
We will also pay out a dividend in the range of 25%-30% of net profits per year. One of the questions that were asked earlier on was on EPS growth. What about the AT1? Maybe I should just clarify that. In the EPS definition that we have used over the last year or so, there is an adjustment for AT1 cost. What we mean here is just that the number that we are tracking is the one that you will find in the report, and that number happens to be adjusted for the AT1 cost. In fact, if you were to pull this out, then we could have the same target for the unadjusted metric. It's nothing strange going on there. That said, I don't want to end up by finishing my presentation in the footnote here.
Rather than that, I'd like to take a step back and just say that given the starting point that we have and the actions that we are taking, these targets are very achievable, and it's a commitment that we intend to keep. With that, I'd like to open up for questions and welcome Klaus-Anders onto stage as well.
Thank you. Thanks, Christer. I hope that clarified quite a lot. It was an important section, so thanks for that, Christer. We're happy to take questions. Please feel free. Should we just start over here, yeah? Yeah, doesn't matter. That's fine. Go ahead.
Sure. Ermin Keric, Nordea. Just going back to slide 90, I'm not sure I understood it correctly, everything overshooting your initial forecast, have you already done revaluations for that or?
The slide 90, was that the vintage slide?
Yeah.
Okay. Of course, we update our predictions for the portfolios on an ongoing basis. Whenever we see that there would be a deviation from what we expect on the plus side or negative side, we would adjust for that. Yeah, the valuation of the book is adjusted based on our most recent projection for the cash collections.
Does that include sort of the new investments you're expected to do in data analytics or technology?
If we can improve operations, we should be able to do more than we expect currently.
Okay, perfect. Then also on the liquidity buffer, could you give us any more guidance on when you're saying that you need SEK 3.5 billion in a buffer in relation to what you come to this SEK 3.5 billion? I mean-
Is it just half the buffer or how does it sort of grow when you have more liquidity?
The liquidity buffer is there for a number of reasons. First of all, when you have a substantial funding through deposit, you need to have the ability to manage in and outflows. Of course you need to have a bit of buffer there. There's also, since we are hedging, for example, FX risk, there could be some in and outflows on derivatives which we would also hold liquidity for. It's not half of the liquidity buffer as such. You should think of it more as SEK 3.5 billion. That leaves another SEK 3.5 billion that we could deploy with short notice.
Okay, perfect. A final question also. In one of the first slides you showed that you actually included sort of a management execution buffer in your targets. Could you give any more flavor to what the main risks are?
Maybe it's a question for-
Yeah. No, that's a good question. We are talking a lot about change today, right? I think the most important factor is to have the right people in place to run the change process and you've seen the team today. I think we have the right people. Secondly is to break down this into tangible specific initiatives that you follow up. They're a rigorous process, but a strong PMO that's also in place. You never know how things are, right? That something might go wrong or you get more benefits there and less there. We thought it was prudent also to get across to you that we understand this, and hence also we have set aside a bit of execution buffer.
Thank you.
Yeah. Vegard Toverud. Just continuing then on the very interesting slide 90.
Yeah.
I have at least two questions there and then maybe I can have the microphone back again later. If we compare this to the slide on vintage years that Stephan showed earlier.
You have an increased estimate in remaining collection for 2014 and 2015, compared to the initial forecasts, whereas he had an underperformance compared to what you expected.
Could you just help us understand how that is?
I think to start with these graphs really show two different things. Stephan's graph shows to date. How much have we collected to date in relation to what we expected to collect to date? Whereas the graphs that I showed showed how much have we collected to date, adding on what we expect to collect for the future. If you have a portfolio where collection has been delayed, it would in Stephan's graph show up as being a disappointment. But if you are able to make up for that over time, it could still sort of add up to what you set out to collect in total.
Just to understand the impact of that comment. If you have then collected less than you have hoped for this far, but still expect that to collect that in the future, you wouldn't have taken any negative revaluation on that, right?
You could absolutely have because the value of the
Have you?
We would have. The portfolio is always valued on the discounted future collections.
This means if you were to push collections out into the future, it would have a negative impact on the value of your portfolio and that value we would have taken into our P&L.
Unless you increase what you expect to collect later, just to follow the-
If you collect, in theory you could collect exactly the same amount, which means that at the end of the portfolio you will be equally good off. If you do it with a later facing from a return perspective, it would be worse. Did that answer the question?
I can follow up on this.
Okay.
On 2017, how sure are you? How do you go about so early increasing the expected remaining collection?
That's a good question. I don't know, maybe if you picked that up on Stephan's slide, but actually the 2017 vintage has been very strong. It's the strongest vintage of all the ones that were on the slide. We've been very positively surprised by the quality in some of those portfolios. That is what Stephan showed is realized collections. We can already see that this upside is very tangible and that sort of explains why we've also then increased the expectations on those portfolios a bit.
There is no prioritization in that? You're not getting the collection earlier, you're just getting more than you've hoped for?
Yeah. This would be typically could be higher contact rates, less fallout in installment plans, better credit quality.
Thank you. Just then last question on that slide. The pre-2018 the remaining SEK 1.5 billion.
Yeah.
Is it fair to assume that that will be collected now over the next five years? Is it very long-term tailed or is it remaining after 10 years?
It would be the first one. It's fair to assume that the majority of this would be within the five years.
Okay. Thank you.
Just Brad, one annex to your question about our procedures for the revaluations. Remember that we have, of course, the internal management processes. Then you have an independent risk review that reports to the risk and audit committee. Then there is the auditor's responsibility to audit our work. There are several processes, several stages to ensure that we have the correct view on these portfolios. We take that very seriously.
Yeah. I think you understood my question, because the devil's advocate would say that you could compensate-
Of course
for a lower performance by increasing expected-
Yeah
Thus compensate even though you're discounting it.
Yeah. Then trust in what we are doing and the stringency between the different silos, if you like, when we assess this. I'm very impressed. Coming into the company from the outside, I'm very impressed by this work. It's diligent, it's accurate, it is clear procedures. I'm very confident that this is done correctly.
Okay. Thank you.
Maybe I can just add, we do disclose collection performance and revaluation separately. It's not that we just blend them together and give you the total. We actually give you the collection performance, which is realized gross cash collections, 105%. Then we will also give you the change in net present value of the portfolios.
Great. Back there, I think there's one, or wherever. Yeah. Michel? Yep.
Thank you. Ade from Morgan Stanley again. Just three questions from me. In terms of, one, the reinvestment or the investment cost you forecast going forward in terms of SEK 200 million-SEK 250 million.
Yeah.
Just wanted to clarify that that is all one-off. How much of that is recurring?
It's one-off. Yes.
Okay.
The investment you would see this as a bit of catching up. On the restructuring side, if it relates to site consolidation or stuff like that, it's not something we would do year after year.
Okay. The second question is just looking at slide 94, where you provide the margin to regulatory requirement in terms of your CET1 ratio.
Yes.
Currently 5%. In terms of your target, you're looking at 2.5% to 4.5%.
Yes.
That doesn't give you, in my own estimation, in terms of legroom for growth. Does that suggest that you may be raising equity again in the future?
I think it's quite obvious that we're very well capitalized in relation to our target. The way you should think of this is that we need to acquire SEK 2.6 billion to replace the stock. SEK 2.6 is sort of no growth, basically. On top of that, we're generating profits, so retained earnings will increase the capital base. That will allow us to grow, say what? In between 10% and 15%. In relation to the book that we have, that would be another SEK 2 point something billion. You're at SEK 5 billion in investments annually without having any deteriorating CET1 ratio. On top of that, since we are now actually a bit above the target, it means that we can have an investment rate exceeding that level for some time before we would get into anywhere close to the bottom range of this target.
Just to follow up on that, you are kind of comfortable getting to the lower end of that target for some time. I guess your 2.5% buffer, you'd be comfortable with being at that level for a certain level of time.
Ask one more time. Sorry.
The lower end of your target, the 2.5 percentage points buffer. How comfortable will you be to stay at that level for an extended period of time?
Perfectly fine.
Then just one last question from me. On slide 86, you provide your gross money multiple on a 180-month basis. Can you give maybe the corresponding figure for over 120 months?
What you could do is if you look in the quarterly report, we give you both the ERC over 180 month and the ERC over 120 month. Actually, if you just take the difference, you have the amount to be collected beyond 10 years. I think the difference would be somewhere around 8% today. If the 180 month is 100, then some 90, 92%, something would be in the first 120 months.
Okay. Thank you.
Yeah.
Thinking about the EPS target setting the level from 2018 and onwards. What EPS do you expect for 2018? No, joking aside, but just to think about you having a dilution also, just maybe sort of a theoretical approach. Could we use approximate rolling 12 months from where you are today as a decent proxy, and maybe add something on top of that you should grow earnings year-over-year in Q4 as well? There is no funny stuff behind the dilution from more number of shares in the calculation or something like that.
The way we calculate the earnings per share number is that we take the earnings, we adjust it for the AT1 cost, and we divide it by the average number of shares. With the shares being issued then in September, the full year number will have a part of the dilution in there, but not the full dilution.
You're talking one-fourth or 50%?
One-fourth.
Okay, good.
One-third maybe.
Yeah.
Depending if they were issued in September.
Late September.
Yeah.
You've talked a lot about your collection performance, 105%. Is that also incorporated in your EPS target, that you will be at that level? Or are you budgeting for 100%?
No, of course, we have that expectation. I think that came across quite clearly, from all the different sections. That's basically what we believe we can achieve. As such, you can think about this as being reflected in the numbers.
Okay. A question for you, Christer. Thinking about the fully or almost fully amortized vintages. Just from a profit recognition perspective, I guess those should be almost fully amortized every quarter, and then you also need to revise up the value. How is this impacting your P&L? Is it a very high margin contribution or is it a very low margin contribution? Just to understand that dynamic.
All our portfolios have a 15-year cash flow projection, even if they were bought way back. Of course, that would be a very small amount. You can say that the value of all portfolios is fully reflecting our expectation on those portfolios going forward.
That's-
There is no future reval-- If we just collect what we expect, there will be no revaluations on those portfolios.
Okay. Thinking about the return profile over the lifetime of those 15 years, if we think about ROI or ROE.
In those terms.
Yeah.
Differing from accounting earnings and cash flow earnings. You have a higher amortization level the longer out in time you go. Amortizations as share of gross collections is increasing and depressing the margin, but you should also have a lower cost to collect.
After a few years in time, are you at negative earnings contribution but still a very positive cash flow contribution in your way of accounting? How is this playing out?
To start with maybe our way of accounting. We're implementing IFRS, so there's nothing special there. What that means is that the effective interest rate is calculated at time of purchase and it stays fixed. The book will always generate its effective interest rate as income. That's fixed over time. You will always have the value of the portfolio times the effective interest rate. That will be the interest income which is recognized.
Which I understand, but then you have a cost to collect.
Yeah.
That is, you're talking gross ERC?
Yeah.
Not-
If the cost to collect would exceed the collections, we would just stop, right?
Yeah. Okay. There is no way we can see cash flow contribution being positive, but earnings being negative, the way you're saying it?
No.
Okay. Fair. Maybe I should stop. I have a few more, but I can follow up.
Thank you.
Going back to the organizational slide and really the formal presentation. Could you just remind us with the focus areas you have now why you have an office in Benelux?
Yeah. To be discussed. To be followed up.
Okay. Thank you. On the capital target-
Having said that, the Benelux area is profitable. It's not like it's a worry, but I agree with you from the strategy. It's not really one of the prioritized markets, and that comes through.
Yeah.
Yeah.
If I'm to be funny, I could say that also nearshoring things to Russia will help the digital and self-service pick up, but that's if I'm funny. A question then on the capital requirement there. To understand the rating, is it so that at the bottom range there around 12.5 would be where you will be potentially changing your rating?
I guess to start with, we're not the ones determining the rating. The rating agency would do that, our assessment is that the current targets for CET1 ratio aligns well with having an investment-grade rating. That's our assessment.
Okay.
I would think that they agree, that's really for them to say.
Okay. Thank you.
Thanks. Thinking about GetBack, I just have three questions on GetBack. Firstly, reading about the book value from GetBack, it has naturally been revised down. I think it was PLN 1.3 billion now. You have commented that you have placed a bid at PLN 1 billion plus. Just to understand the haircut, the PLN 1.3 billion of face value seems to be not too distant from the bid that you have put on that asset.
Second question on that, can you comment on if you have been able to look into that portfolio and maybe how many of those portfolios that you have been bidding for as well, where you have a fairly good sense of what the actual value is, if you have like a percentage or so of that? Finally, if you win this, would it, and in what way, alter your financial targets in the shorter term?
Right. Thanks for that. We find the GetBack situation very interesting. Of course, it's in our prioritized markets. It's in-market consolidations. It's assets. It is adding financial synergies, if you like, and operational synergies. It ticks all the decision criteria for M&A. We think it's a perfect situation to be in. I think Stefan, maybe you can clarify some of the technical things around the bid-
Sure
and also the portfolios.
I guess the first question was around the book value, the 1.3 billion PLN. We completely ignore that book value. That's irrelevant to us. We made our own assessment. We came up with a number and, well, it led us to being appointed the preferred bidder, and have exclusivity from the perspective of management. There's a lot of other stuff still to be happening, and the deal can fall over because the creditors don't agree ultimately with the solution and decide to run off the book themselves. I would think that's pretty risky, but, well, up to them to decide. On the percentage of portfolios that we know. We're very active in the Polish market. Absolutely, we've seen GetBack in a lot of auctions, and competed against them.
It's a good thing for us that they're not there anymore but we have that positive benefit and now also the ability to buy their portfolios. I would say roughly half of those is who we've seen before. There's also a number of portfolios in there that we haven't seen, but they're mostly from financial services sellers, they fit right into our strategy.
From a financial targets perspective, this is like a portfolio acquisition. It's big, but we regard it as that.
Okay, thanks.
All right. Yep.
Thank you. Just following up on that, you say that the majority is from financial institutions. The rest of it, does that mean you're going to resell it, or what do you do with those assets?
I think I'll hand over that to Stephan here. No, you do it, Stephan. Maybe you better stay on stage.
Yeah. I'll stay here. Yeah, the percentage is not that big, and it's something to be figured out. It's not like we have 0%. It's not like 100% is financial services for us. We have a small portion outside of financial services. We could potentially deal with it ourselves. It'll also be an option to sell it. We've been approached by other guys who've been involved in this process, and they've already said, "Look, we're very interested in the utilities and telecom side of things, and we're happy to provide a bid to us." It's absolutely an option.
Think I'll stand there.
No.
Okay. Just stay here.
Also just to follow up on your funding. With the deposit funding, you have a shorter duration than most peers. Would you find it fair to assume that initially if we see rates going up, you would actually be hit first, over time when your peers need to refinance in the bond market, they'll catch up and you'll see the effect on rising IRRs on portfolios?
Well, I think actually some of the graphs shown here today indicate that it's the other way around. So far we haven't seen much of a pickup in the interest rates on deposits. In fact, if you see the high yield interest rates, they've already gone up. It seems like that is actually not the case. I'd also like to add that we do hedge part of the interest rate risk to give us a little bit more time to adjust. Up to a third of our interest rate risk is hedged, which will give us more time as this plays out over time.
How easy would it be to, for instance, shift more towards EUR deposits if it's Swedish market rates coming up?
The EUR deposit offer has been in the market for a year, and we've attracted some EUR 400 million in deposits. We're very happy with that. I think that's a pretty good pace. I wouldn't necessarily count on us being able to swiftly shift things around here. It's a big number of depositors. Right?
Thank you.
All right. I think we're approaching the end of the Q&A sessions. Are there any burning issues out there? Is the web active now? I don't think the web is very active either, Michel is shaking his head. If not, I will thank Christer, of course, and we will move into the wrap-up session. I hope it's clear that today we are trying to get across to you that we see the market as very attractive, that we see big growth opportunities, and particularly in these "newer" asset classes. We also try to get across that our business model provides us with a unique and sustainable competitive advantage, having the lowest cost of funding in the industry.
I hope that the whole sort of common theme has also come across to you, that we see great potential to improve our operations, that we have specific actions now in place to deliver on this and to close in on that performance gap. That we have a great team in place, committed, dedicated, professional, enthusiastic, and we are also very committed to delivering on our promises. I think our strategy is clear. You heard us say this over and over again. We are in few markets rather than many markets. We want to be top three in those markets. We like mature markets. We think it's a great place to be. We are focused, we are specialized. We do financial institutions in those few markets while trying to be everything for everybody, everywhere. We need to take those big steps in digital.
We are behind, but it's not rocket science. It's bringing about the basics, introducing that into the organization, taking the best practices that we have, for instance, in the U.K., and employing that across our markets. We have in place now an operating model that Victoria and Ulf talked about, which we think is fit for purpose. I strongly believe that what we're doing now is the right thing. We are going to be different than the rest of the industry because of this, and I'm convinced that it will pay off, so that we can deliver on the value equation. We see EPS growth over the years to come now in the order of magnitude 50%. The buckets are identified where the sources of value really is. Everybody here in the team have presented how they will deliver on this.
I think we have a balanced set of financial targets. We've gone through it a few times already. Return on equity at 20%, annual EPS growth of 15%, cost to income down to 65%, strong capital ratios, and dividend payout 25%-30% on net profit. With that, I would like to thank everybody here in the audience here in Stockholm and thank everybody also that followed this on the webcast. Wish you a great afternoon and a safe journey home, and hope to see you soon. Thank you, and goodbye.