Ladies and gentlemen, welcome to the Hoist Finance response to Swedish SFSA interpretation of new risk weights. Today, I am pleased to present CEO, Klaus-Anders Nysteen, CFO, Christer Johansson, and Julia Ehrhardt , IR Investor Relations Officer. For the first part of this call, all participants will be in listen only mode, afterwards there will be a question- and- answer session. Speakers, please begin.
Thank you, welcome everyone. I will now hand over to Klaus-Anders Nysteen, our CEO, that will give you a summary of the news that came out from the Swedish FSA this morning, he will give you a bit of a Hoist view on those changes, after that, we will open up for questions.
All right. Thank you, Julia, good morning. The Swedish FSA has, as you have obviously seen this morning, confirmed that it supports the interpretation of the EBA as regards risk weights for purchased defaulted assets. As you have seen from the press release, this means that a defaulted unsecured exposure is written down by more than 20%, the risk weight should be 100%, otherwise 150%. However, only write-downs made by the institution itself can be accounted for, not previous write-downs made by previous owners of the exposure. In practice, this means that Hoist Finance will need to apply 150% risk weight on unsecured non-performing loans, compared to the practice of 100%, which has been in line with the previous model approved by Swedish FSA. The new risk weight will have to be implemented with immediate effect.
Let me make it clear that Hoist Finance considers this new interpretation by Swedish FSA to be counterintuitive and in stark contradiction to the intended purpose of the CRR. This means that if a bank has written down its NPLs with more than 20%, it's allowed to apply 100% risk weight. If the NPL portfolio thereafter is sold to Hoist Finance, which by the way specialize to manage and extract value from these NPL portfolios at an even lower price, for instance, the portfolio is further written down, the applicable risk weight becomes 150%. We think that if anything, it should be the other way around. As of our Q3 2018 numbers, this increase in risk weights reduces Hoist Finance CET1 ratios with estimated 3.7%. This will be done as CET1 ratio at 9.4%, below management targets, but 1.6 percentage points above the regulatory requirements.
Let me just summarize with some few key messages. Let me first say that the regulated status has served Hoist Finance well over the years, and that our funding model is unique and represents a strong competitive advantage relative to competitors. As we stated at the Capital Markets Day, conceptually and strategically, we believe in regulation, and we think regulation for the industry as a whole will increase over time for a number of reasons. Being a regulated institution also represents, in many ways, a competitive advantage. Our market position is strong, and we are a well-reputed long-term partner to European banks across our various jurisdictions. As you've seen, Hoist Finance is among the most well-capitalized companies operating in the secondary market for NPL. We have an investment grade rating.
Let me also make it equally clear that we are disappointed by the new interpretation of the risk weight requirements. We have operated under a model approved by Swedish FSA. This is a new interpretation from SFSA, communicated this morning. Have in mind that the purpose of the new EBA interpretation, now confirmed by Swedish FSA, is to encourage the banks in Europe to recognize non-performing exposures faster and to deal with the problems more decisively. Unfortunately, this change in interpretation to be implemented now, has the unintended negative effect that it raises equity requirements for some of the companies operating in the secondary NPL market, and Hoist Finance included them.
We clearly don't see the rationale for this change. It is important to note that the revised CRR interpretation does not affect the underlying risk associated with the NPLs acquired. Again, let me just make it clear that we are committed to maintain our strong position, to improve our operations, and to capture the investing opportunities that we see in growing markets. We are confident that we will be able to implement the necessary measures to ensure that the real risk in our assets is reflected in the risk weights. Let me assure you, we do see specific solutions that will address this issue. Introducing IRB, more sophisticated risk modeling, is one obvious solution, but there are also other ways to address the concerns. We are also confident that these consequences that we now are experiencing are temporary and not permanent.
We are, of course, working to ensure that our business model correlates with the new risk weight requirements put forward. We are reviewing, of course, all our options. For further details and updated financial targets, we will come back to you no later than or in conjunction with the year-end report on the 12th of February 2019. With this, I will open up for questions from you. The moderator?
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad. The first question comes from the line of Adedapo Oguntade from Morgan Stanley. Please go ahead.
Yeah, thank you for taking my question. Just two or three questions from me. I think you've mentioned the alternative of introducing an IRB model in measuring your provisions. I was just wondering, what other alternatives are you considering to mitigate the negative impact of the change? Would you maybe also consider cutting your dividends to retain some capital? Any comments on that will be useful. Secondly, I was also interested in maybe your potential implications on the covenant on your bonds and other securities, given the reduction in the buffer. Has there been any covenants broken as a result? What are the specific provisions in those covenants? I think lastly, you've indicated you will provide further details in terms of the impact on targets next year.
Could you just comment on if there is no change in the underlying model being applied, could this have any impact on your growth targets going forward in terms of the amount of NPLs that could be acquired? What are measures that you would consider to maintain some of the targets you've previously enumerated? Thank you.
All right. Thank you for a number of important questions. I will at least give some comments, perhaps not answer it as specifically as you'd like. As I said, IRB introducing more sophisticated risk model is definitely one obvious solution because, as we have stated, the underlying risk that we see in our portfolios has, of course, not changed. I can share here that we did a pre-study introducing IRB some time ago. That pre-study looked positively. We are optimistic in that regard. We think that is definitely one solution that will mitigate this risk. There are, as I said, also other alternatives to look at, and it's perhaps too early to indicate what they are. There are different ways to organize how we account for NPLs in other structures that we currently are using within the same regulatory framework.
We also see as an opportunity. Of course, what we need to do now, let's just have in mind that this is disappointing news for us. We need to go through our business plan again, if you'd like, to take a look at the growth pace. We need to consider our product mix going forward, obviously because this is affecting unsecured NPLs. As you've seen from the 2018 numbers, we have been investing significantly more into other asset classes than unsecured consumers. That's something we know well and have seen very promising results from. That's something to consider. We need to look at internal buffers in the capital requirement calculations, obviously, based on this. We need to go through again our operational agenda and operational improvements to see if we can speed up things even further. There are things to do here.
Dividend, you asked about dividend. Of course, we need to look at that too, but it's too early today to say exactly what kind of changes potentially that will be made. You asked me also about rating, I believe, and covenants. I'm not sure if I have that in front of me now, but I see no consequences for any of our bonds at this point in time. If I'm mistaken, I have to correct that, but I don't see any consequences at this point in time. We believe that our rating agencies know our business really well. Again, have in mind that this regulatory change has nothing to do with underlying business. It is decoupled from, let's say, the underlying NPL and exposure, the risk weights that we apply. I hope that was at least to some degree answering your questions.
Just a follow-up question on that. In terms of the IRB model, how long do you think it would take to implement if that's the alternative you decide to embark on? Speaking to some of our colleagues, it kind of suggests that it might take quite some time, like six to maybe 12 months to move to such a model. Secondly, just to confirm, will you consider maybe issuing equity we get back to the profiles that you would like to be at?
Yeah. We need to consider all options, obviously, to make sure that we are where we should be. I mentioned a few things, product mix, growth rates, internal buffers, and the current calculations, cost savings, operational improvements, other structural measures to make sure that we can continue our operations to the best of our ability and within these new constraints. That's what we're set out to do. I see that we have a number of things we can do, and I look confident to the future here. Yeah.
Okay. Thank you.
The next question comes from the line of Rickard Hellman . Please go ahead, your line is open.
Thank you.
Maybe before I take that question, there was a question about IRB and time. I didn't really answer that, but I'm sure some others have that question, too. Let me just say that introducing IRB measures is also dependent on the time that the Swedish FSA needs to review the models. It's not only in our hands and to control the timeline. I think we on our side can be quite quick. We are a data-driven company. We got data left, right, and center, and we know our business intimately, so it's not too complicated for ourselves to do this. I cannot guarantee or promise any time that the Swedish FSA needs to use here. We just observed from the market in Sweden that typically this will take around two years. That's really the only guidance I can give.
This is not really in our hands completely. We also dependent on, let's say, the speed to implement and review this from Swedish FSA. At least that gives you some guidance and direction in terms of timing. We see that we can do this, and we think this will be addressing the issues. That makes me also very confident about saying that this is not a permanent problem. It's a temporary problem. All right. Now I take your question.
Thank you. It was actually around this, what you called temporary problem or temporary change. What do you mean by that? Do you believe that this will revert, or is that you will fix it?
Exactly. It's the fixing I'm reverting to here. There's no way I think that this change in regulatory requirements is changing. That's permanent. I can support that to you, of course. The financial consequences, we believe is temporary, not permanent.
Okay.
We can address the issues. We can fix it.
I see. Thank you. Secondly, you mentioned a little bit about Moody's. Have you been spoken with Moody's around this change?
Yeah. We have, maybe you, Christer, want to quickly comment?
Yes. Good morning, everyone. Christer Johansson here. We're always in contact with rating agencies, also in this particular matter, as recently as this morning, of course. Other than that, I don't want to comment their view on this.
Okay. My final question is, we've followed this company for a while. I know the former management view the license as something that more or less part of the DNA of Hoist. To you, Klaus-Anders , as a new CEO, are you of the same opinion around this?
Yeah. I am. I think I alluded to this also at the Capital Markets Day that going in and joining Hoist, one of the key question marks I had or things I had to grapple with is to come to terms and really understand the benefit of the banking license and the funding model. I see it as a clear competitive advantage. I certainly do. Our blended cost of funding being around 2%, I think is really hard to beat. It is quite unique. I also think that being regulated, as a regulated institution, also brings a lot of commercial benefits in specific commercial situations. It's good to be on equal footing with our clients. I see that as a benefit too. Again, as I'm trying to get across to you, this is a very big disappointment. We didn't expect this at all.
Of course, it's not something we had on our radar screen as something that would happen. Now it's there. We need to address this, and we see ways to fix it. That's also why I'm saying that this is something we believe is temporary, not permanent.
Okay. Thank you very much.
Thank you.
Just as a reminder, if you do wish to ask a question, please press zero one on your telephone keypad. The next question comes from the line of Jan Erik Gjerland from ABG. Please go ahead.
Hey, good morning. It's Jan Erik Gjerland from ABG. I just wondered your interpretation about your business model versus your competitor's business model onto this proposal. Is it so that it matters less for a non-bank entity than yours? Secondly, the pricing on unsecured NPLs in the marketplace, how do this will affect the pricing? Thank you.
Okay. Thank you for your question. I think it's clear that this regulatory change impacts regulated institutions, and we are a regulated institution. That means that it affects us. Those who are not regulated as we are, will not be affected by this. This is what I try to call such an unintended effect here. What you see out there is that the regulators really want the banks to recognize the problems faster than before. Many, many banks have too high non-performing exposures. This is really positive from our side of the business. We work with NPLs, that's what we do every day of the week, so to say. From that point of view, it's a positive, right? Unfortunately, there's no carve-out, to use that word, for Hoist Finance or companies with similar regulations when this is being introduced. We get a direct hit from this.
Until we have our solutions in place to mitigate the consequences, this will have an impact, no doubt about that.
this is sort of the flip side of having the low funding situation and being a bank?
You can say there is regulatory risk, right? We try to get across to you also at Capital Markets Day that at all times there are regulatory changes that are being discussed for banks, right? Being a bank, in essence, has the inherent risk of regulatory changes. I would agree with you on that topic. The benefits of the funding model, I cannot see any competitors out there being even close to finance themselves at a rate at around 2% blended-
No, not at all
all in. I think the business model is viable. I think it's good. I think we have proven that we can be effective in running the banking license. The actual cost of running this license is very low. We are very effective in running this operation. Now, as you also know, we have very specific actions to address, I would say, the operational performance gaps that we pointed out clearly at Capital Markets Day. yeah, this is in many ways a big disappointment, but we are ready to take on this challenge and deal with the consequences.
Perfect. On pricing, any insight to that?
Yeah. In terms of the market, I think the market looks really, really good and really, really healthy. Don't forget that these regulatory changes that has this unintended negative effect for us, has a positive effect for the market. There will be more supply, there will be more portfolios, there will be more out there. In that sense, we feel that those companies with the best operations, the best compliance, and the lowest cost of funding all in, will be the most competitive in this marketplace. We are quite optimistic in what we see in terms of supply. We also see, as we said at Capital Markets Day, that the margin pressure is easing off and prices are coming down.
Just a final follow-up. You said there will be more supply due to this. Is it because the banks are forced to sell too as well, not just having the same kind of risk-weighted assets of 150% or?
Yeah, exactly. This is one of the things that will be pushing banks to deal with the issues faster than before. You want to add something there, Christer?
No, in a similar way that it drives equity consumption up for us, it would do the same for banks.
Yeah. Thank you.
We think this will contribute to increased supply as well.
Yep. That's my thinking too. Thank you.
All right. Thank you.
The next question comes from the line of Amro Korea from B. Please go ahead.
Thank you, good day, Klaus-Anders and Christer. A brief question from my end. In regards to, first off, you announced a acquisition of some Italian assets, and then secondly, in Poland, in which you are talking to Let's leave it that it's in Poland. Does this, in any way affect today's announcement, in any way affect your view on these, especially regards to the Polish assets, which effectively, correct me if I'm wrong, should affect your capital position?
No. We are still very enthusiastic about these opportunities. We believe that these changes, it does not impact our appetite for those assets.
In a scenario where this Polish transaction is materialized, when should we expect it to materialize, and could you say anything about the effects or on your capital position, or is it still early days?
No, as mentioned, we have the appetite. We believe it's within our capacity to do this. I think timing now, it was in press out yesterday in Poland, I believe, that speculated that this is running into Q1. I think I can confirm that from our side, that's very likely, that it's not going to be a Q4 closing. It is definitely an interesting process for us.
Thank you.
Thank you.
Just one final reminder, if you do wish to ask a question, please press zero one on your telephone keypad now. There'll just be a brief pause while any other questions are being registered. The next question comes from the line of Nicola Mansari.
Hello?
Hello.
Hello. Hi.
Yes.
Just if you could give some more details about the new risk model, how this will affect your accounting, and walk us a little bit through the mechanics and how do you expect the process to get into that position will play out. You said, of course, it is a temporary effect, but it would be useful to get a timeline or some kind of guide on how to follow this. Thank you.
Yes. On the topic of IRB, it would not change the accounting as such. It would change the risk weight. It is too early for us to walk you through the mechanics of that yet to be approved model.
The timeline, you confirm up to two years, as you said earlier. Is there any milestone in between from here and two years?
Well, I will not promise anything today, I guess. I think what we have observed is around two years. Plus or minus, I guess. This is not in our hands, that we control all the timeline ourselves completely, right? We are dependent on the regulator here. We will do our best, of course, to be as efficient and effective as we can.
Perfect. Thank you.
Thank you.
We have a follow-up question from Rickard Hellman, from Nordea. Please go ahead.
No, actually, it was answered. Thank you.
All right, thank you.
As there are no further questions, I'll hand back to the speakers.
All right, thanks everyone for participating here this morning. I hope that you feel more comfortable. We are, as I said, quite disappointed about this news. We don't see the rationale. We don't see the logic. It is what it is. We are dealing with the consequences in a very decisive way. We see that we will be able to tackle this. Thank you, everybody, and I wish you a great day. Bye-bye.
This now concludes the conference call. Thank you all for attending. You may now disconnect your lines.