Investor Update

May 2, 2018

Ladies and gentlemen, welcome to the Hoist Finance Audiocast Press Conference twenty eighteen. Today, I'm pleased to present acting CFO, Christa Johansson and Head of Investor Relations, Michele Fischer. For the first Speakers, please begin. Hello, and welcome to this analyst call on Hoist Finance new segment reporting and our adaptation to new reporting reporting standards. The agenda for today's call is found on slide number two. I, Kristian Wasson, acting CFO, will, together with our Head of Investor Relations, Michel Fischer, lead you through changes in our reporting structure ahead of our Q1 report, which will be released on May 15. And before we go into details, I'd like to reiterate our communication in the year end report. The adaptation to new reporting standards will not have any significant impact on our balance sheet. It will not have any significant impact on our capital adequacy, neither will it change our expected profitability going forward. The adaptation will, however, lead to adjustments in how we present the income statement, and I will get back to that in a little while. In this call, we are going to cover five topics. Michel will cover our new segment reporting. I will cover the reclassification of loans held at fair value. I will also cover our implementation of the effective interest rate method and effects on presentation in the income statement. Finally, we will cover the very limited transition effects. Over to you, Michel. And turning to Page number three. Thank you, Kristor. As we communicated on March 27, we have implemented a new organization in hoist finance. We have done this in order to create a more integrated company to increase operational efficiency and also better capture market growth going forward. We have thus moved from regional organization to a functional organization. The previous regions have now been separated into segments based on countries for all segments except for Germany and Austria, which are classified as one segment since our Austrian operations are managed from Germany. Furthermore, in the fourth quarter, we consolidated our Belgian and Dutch operations to Amsterdam, and our operations in Belgium and The Netherlands are thus also classified as one segment. In terms of segment reporting, our segments reported going forward will be The UK, Italy, Germany, Poland, central functions and all remaining countries will be reported as other segments. And this segment consists of Spain, France, Belgium and The Netherlands and Greece. With regards to our new segment reporting, we have today also published an updated fact book on our website. Here, you will be able to see the financial development over the last four quarters and after our Q1 report over the last five quarters. With that introduction on our segment reporting, I'll now hand over to Kristor, who will take you through our adaptation to the new reporting standards, commencing on Slide number four. Thank you, Michel. Topic number two, the reclassification of loans held at fair value. To set this in context, I wish to mention that at year end 2017, less than SEK1 billion percent of the total carrying value. That said, as one step in our adaptation to IFRS nine, this part of our loan portfolio previously measured at fair value will now be reclassified and measured at amortized cost. Since it is impractical for us to apply this method retrospectively, the initial amortized cost amount under IFRS nine will equal the fair value of the portfolio at year end 2017. As a result, this reclassification does not correspond to a change in value. Just as an illustration, let's turn to Slide five, which contains an extract from the year end report. In this extract, is is the portfolio on the right hand side, which is subject to reclassification. And consequently, going forward, all of our acquired loan portfolios are measured at amortized cost. With that said, let's move on to the next topic and flip side to Slide number six. Implementation of effective rate method. When looking at IFRS nine and the effective interest rate method, this is mostly a matter of new terminology. The basic principle as such does not change. IFRS nine defines acquired nonperforming loan portfolios as purchased credit impaired financial assets. This means that hoist finance NPL portfolios are recognized at amortized cost according to the effective calculate the credit adjusted effective interest rate, an anticipated fifteen year lifespan is used. And the credit adjusted effective interest rate as implemented within Horst Finance does not take collection cost into account, which means that the effective interest rate is a gross measure rather than the return on investment. As part of our adaptation to IFRS nine, our projected cash flows for existing portfolios have been extended and the credit adjusted effective interest rate for the corresponding portfolios has been recalculated. If this sounds a bit complicated, then let's turn to Slide number seven, which will add some color to this. As illustrated, interest income is based on the effective effective interest rate and the carrying value. It is not directly impacted by revaluations and neither is it impacted by the fact that actual collection in a period of time may be less or more than projected. Those two components will instead be presented on a separate line. On the next slide, number eight, we have included an overview of the back book as per year end. On the top of this slide, you can see the combined gross cash projections for our back book as it looked per year end. And as you can see, this extends over fifteen years and the one hundred and eighteen month estimated remaining collection adds up to portfolios run with an average gross effective interest rate of 19.2 on an annual basis. The lower graph shows how the amortized cost value will develop based on the principle we have just described. And of course, if cash projections would be revised as time goes by, this will then also change the amortized cost trajectory. If we take 2018 as an example, we expect to collect billion on the back book, and this SEK4.5 billion could be seen as payment of accrued effective interest and a net reduction of the outstanding balance. Let us now move to Slide number nine to discuss the next topic, which is presentation of the income statement. Our adaptation to new reporting standard will have an impact on how our income statement is presented. Our previous presentation took collections and amortization as its building blocks, which meant that net revenue from loan portfolios included both effects from strong or weak collection and so called revaluation effects from changes to future cash flows. Going forward, forward, interest income will be recognized as a separate income line and income statement. Simultaneously, a new line, impairment gains and losses, is introduced, and this line will include both deviations versus expected collections and effects which are triggered by changes to to future cash flows. As before, there will, of course, be additional disclosures explaining movements in the balance sheet. On the next slide, number 10, we provide you with our new income statement. This slide illustrates how our income statement will be presented going forward. It is aligned with IFRS nine, and it is also aligned with the way we, as a regulated financial institution, present our statutory accounts. Consequently, we will no longer present a separate P and L based on our so called management accounts. The gray cells highlight the changes, which we have now covered in some detail. And these cells will remain empty also when the Q1 report is released since we are not restating previous periods with respect to how interest income is calculated. To reiterate, interest income from acquired loan portfolios is based on the effective interest rate, and this line is not affected by revaluations nor is it affected by shortfall or excess collections. Deviations, also known revaluations of portfolios will be reported under the line of impairment gains and losses. All in all, our view is that this new format of the income statement will provide a greater level of transparency. And as referenced, it can be mentioned that in 2017 as a whole, our actual gross collections corresponded to 104% of projected collections. It may be worth worthwhile pointing out that while total operating income and the whole expense side and profit for that sake is fully comparable with previous periods, that is not the case for net interest income. The explanation for this is, of course, that part of what was previously reported within net revenues from acquired loan portfolios is now presented on a line which is not part of net interest income. For further guidance, let's turn to Slide 11. In the tax book, we have added three examples of how the income recognition works. There is one case, which serves to illustrate how the effective interest rate is calculated and how the interest income is arrived at. In this example, collection is exactly as predicted. There is also a case where collection exceeds the predicted level, and this illustrates how overperformance will be seen in the P and L. Finally, there is one example which has both a bit of deviation from the projected level of collection and, after a while, an adjustment to the future cash projection, so called revaluation. These are not simplifications. They are actual one hundred and eighteen month representations with account level detail and calculation formats are visible for potential modeling purposes. In addition to looking to those examples, you are, of course, welcome to reach out to us individually or if you wish to discuss further. With that, I'd like to move on to the last topic, which covers transition effects on Slide 12. And as you can see, I will not spend much time on this topic. As of January 1, the transition effects were positive SEK16 million, whereof the majority relates to portfolios. This effect corresponds to a change in the opening balance in consolidated equity, and hence, it is not an item you will find in the Q1 income statement. With that, I'd like to move on to Slide number 13 to summarize this session and open up for Q and A. So in summary, we have now implemented a new structure for segment reporting based on countries instead of regions. The new segments will be The UK, Italy, Germany, Poland, Central Functions and other segments. Other segments consist of our countries, which contribute 10% or less to combined revenue, and this includes Spain, France, Belgium, Netherlands and Greece. Regarding the adaptation to new reporting standards, there will be no significant impact on the balance sheet and capital adequacy. Our new income statement will be adjusted to better reflect the effective interest rate method as described in IFRS nine. The income statement will also be aligned to the way we, as part of the banking industry, compile our statutory reporting. With that said, I'd like to turn to Slide 14 and open for Q and A. Operator, we are ready to take questions. Thank you. Thank you. There appear to be no questions at this moment. I'll return the conference back to you, speakers. Okay. Thank you very much for listening to us. And as mentioned, please reach out to me if you have any further questions on today's presentation. Thank you. Thank you. Ladies and gentlemen, this does conclude today's conference call. Thank you very much for attending. You may now disconnect your lines.