Earnings Call: Q4 2017

Feb 13, 2018

Warmly welcome everybody to the presentation of the financial results for the Fourth and Final Quarter twenty seventeen for Horace Finance. We can really summarize a very eventful year and especially a fourth quarter with record investments of nearly SEK2.2 billion, the largest investment volumes in a single quarter ever in Horace Finance history. Our earnings declined compared to the same quarter last year. And the main reason for this are decisions we took during the quarter to increase our operational efficiency. The quarter is also negatively affected by a one off charge in Italy associated with an adjustment to cost accrual. So total items affecting comparability sum up to nearly million for this quarter. So we decided to restructure our German and Benelux operations. We will consolidate our German operations to our Diesburg office and close down our office in Bremen. And furthermore, we will do the same things in Benelux by closing down our Brussels office and run the Belgium operations from our Amsterdam office. And these changes will, of course, increase our operational cost efficiency in the longer term. We have also decided to increase our investments in building our company for the future. Encouraged by the positive response in The UK, where approximately now 30% of all new installment plans are coming in from our self-service portal, we have decided to accelerate our digitalization with increased investments, but also in ramping up our own competence. The market continues to grow in a high pace, and we noticed a significant volume growth in asset classes such as SMEs and secured. We have already invested in these type of asset classes over the years. And looking ahead, we believe that consumer unsecured will continue to show a healthy growth, but will be outpaced by the growth in SME and secured. And during this quarter, we also announced my successor in Klaus Anders Niedstein, who will join us in mid March. So turning to the full year of 2017, we can show yet another strong year. Excluding items affecting comparability, we have a strong underlying profit before tax development of 31%. We have also made significant progress towards our return on equity target of 20%, which reaches 19% excluding IAC for the full year 2017, an increase of two percentage points compared to 2016. Our strong underlying cash flow enabled us to make both gross dividend investments and increase our dividend to our shareholders. For 2017, the Board proposes a dividend of 1.9 per share, up 46% compared to the same period last year. The market is without doubt in a strong momentum. More and more banks are choosing to divest non performing loans and also choosing to divest them at an earlier stage. The catalyst, which we have mentioned in form of IFRS nine, is now in place. And the discussions on EU level with regards to guidance on provisioning levels of underperforming loans are proceeding. We believe that these factors will support an even stronger growth for the years to come. Our outlook is, of course, supported by our fourth quarter investments and our full year investments of SEK 4,300,000,000.0, yielding to a portfolio growth of 19% and the book value that stands now at slightly more than SEK 15,000,000,000. We were also active in the debt market last year, which translated into both lower funding cost and a better currency match. We launched a second deposit taking scheme in Europe, in Germany. And altogether, we are in a very good position to be a relevant partner to the European banking system and to capture growth. I would like to spend some time looking at our investment process and the transactions we executed last year. So we continue to apply a very consistent and diligent investment process. During 2017, at the lower end here, we can see that we reviewed potential transactions with a value corresponding to more than SEK 31,000,000,000. On these approximately SEK 9,000,000,000 was not relevant for us, either not supporting our long term vision or not the kind of debt we would like to put on our balance sheet. So we decided to proceed with 136 portfolios with a transaction value of a bit more than SEK22 billion, of which we won 30 portfolios, either through giving the best offer through bilateral transaction or by adding values to the selling bank which competition couldn't match. Here, our track record, our brand, our amicable approach and status as a regulated financial institution is of great value. Just during the fourth quarter, there was a fair share of transactions where the selling bank decided to proceed with their transactions with us even though we did not offer the best price. Being a fair player and a good corporate citizen is increasingly paying off. The partners that decide to divest portfolios to Voice Finance know that their customers will be treated fairly with the customers' best interest at hand. They will also know that Voice Finance has the highest standards and compliance to rules and regulations. So simply by being a fair player, building a long term business and brand name is also paying off in terms of recurring transactions and a stronger partnership with banks across Europe. So moving on to our view of the market outlook and our agenda for 2018. Starting with the market, we continue to see strong demand from the European banking system to find ways to address underperforming loans. We see healthy growth when it comes to both unsecured loans, but the banks are increasingly open up for discussion when it comes to SME loans and secured type of loans as well. Given the market development and strong momentum, we will continue to build our company towards our vision. This includes establishing a position as a trustworthy partner coupled with strong capabilities in other asset classes. Our agenda for 2018 is therefore to continue to building our capacity outside the unsecured consumer loans. Looking at risk reward, the selling banks have become more experienced over the years and are better at packaging and sharing data on the assets they wish to divest. We have also improved our data use as well and are running under one data warehouse across Europe. This enables an even higher certainty when it comes to making the right assumption of pricing and collecting on a portfolio. So given this evolution, we will invest in the next generation of data analytics and valuation models during 2018 in order to secure stability and certainty in our portfolio investments. Turning to gross returns, the combined effect of improved risk reward and lower cost of funding has increased what we and the market are willing to pay for portfolios. The investments we make at these levels still support our return on equity target, but to stay competitive, we have accelerated our work to further strengthen our cost efficiency. An example during the fourth quarter was the consolidation of the German and the Benelux operations. Looking into 2018, we will review initiatives to further increase our cost efficiency. We will also accelerate our digital transformation by introducing self-service portals in more restrictions, thus reducing cost to collect over time. These initiatives are associated with cost, as said, and we would like to give you some guidance on the next slide for 2018. We continue to see a strong transaction market. First Finance as one of the leading companies across Europe, will continue to capture this market growth. So for 2018, we targeted 15% to 20% portfolio growth in both unsecured consumer loans but also in new asset classes. The increased costs associated with an accelerated digital transformation and the strength and capabilities in new asset classes will lead to return on equity below our 20% target in the range of 17% to 18% during 2018. But after 2018, we will continue to lever towards our 20% target. Our accelerated agenda will also drive a flat development of expenses across cash collections and the effect of both restructuring initiatives and investments will come in 2019 and onwards. And with that, I would like to welcome Pontus to the stage to present the Q4 financials. Thank you, Jurgen. So let's turn to the financial summary. Looking at our core business, revenues from acquired loan portfolios, they're up 13% year on year, which is a solid increase. It's primarily driven by portfolio growth in the Italian market, Spanish market and the Polish market. If we come further down in the P and L and look at fee and commission income, it declines 46% year on year, which is an effect of us discontinuing our servicing activities in the Polish market as we've been commenting on earlier on in this year as well. And with respect to profit and shares from participating in joint ventures, which is which are two things, it's the Polish joint venture and it's the Greek joint venture. We improved our performance and we're up 40% year on year, which is driven by the by us receiving a performance fee for the work that we have supported the Bank of Greece with during 2017. As mentioned initially, we have substantial cost or items that affect the comparability in this quarter, stemming from both the restructuring charges and the Italian cost accrual issue. We have also in the quarter, as you've heard, accelerated our activities in terms of moving in the direction of digitalization, strengthening our abilities in other asset classes, etcetera. And also, as you've seen, it has been a very busy quarter in terms of we concluded a high volume on these, and obviously, we saw even greater opportunities. So we've had a lot of costs associated with assessing these opportunities. And unfortunately, you're not going to win all the deals, which means that some of these costs have also come into the P and L for the fourth quarter. So when you bring all this together, it translates into an EBIT that shows only a slight increase of 3% when you adjust for items affecting comparability on a year on year basis. Then turning to the financial items. We see a continuous improvement of 8% or down than 8% year on year, which is mainly an effect of us having further improved our funding efficiency market rates and our ability to fund ourselves has strengthened. And this is in spite of us having raised SEK 3,000,000,000 of additional debt during 2000 or during the fourth quarter in comparison to previous quarter. If we look at some of the key metrics, the return on book stands at 10.1% for the fourth quarter. I think what is worse when you adjust for items affecting comparability, obviously. What's worth mentioning here is that we've seen throughout the year, as you've heard, we've seen a very strong performance from our back book that has continued and supported us in a good way also in the fourth quarter. And also what we said is that we have throughout you could probably say last 1.5, we've seen a harmonization of return on book levels across the different countries and the different regions, which you will see when we move on to the regional development as well. And then finally, again, the return on equity, we delivered 19%, which is close to our financial target. If you adjust for items comparability and slightly stronger than what we saw same period last year. So if we then move on to the three regions, and we start with Region West. We've seen a very good portfolio growth in West Region, 25% up, which is primarily driven by The UK market followed by Spain. The solid growth in portfolio has of course been a clear driver, while our EBIT has increased 71% year on year. Worth mentioning here is that it's in the fourth quarter last year, we had negative revaluations that affect the comparability. But even if you would adjust for those, you would see a very strong and solid increase in the EBIT line as well. And then turning to return on book, that is of course then suppressed by the negative revaluations if you compare last year. But again, also if you would adjust for that, you would see a solid and good increase in the return on book in this region as you will see here as well throughout the year. And the primary driver for this is a combination of us being able to kind of grow our book in the region, but also improving our cost efficiency quite substantially here. And also, as mentioned, we've seen encouraging results from the early days of the digitalization and the self-service platform that we launched in The UK and will accelerate those efforts now into further jurisdictions into this year. So if we move on to Region Mid. In Region Mid, we've also had a very strong portfolio growth. We're up 21% seen over the last twelve months. This is primarily sorry, I should change slide to Region Mid, my excuse. So I said portfolio growth were up 21% seen over the last twelve months. This is mainly driven by portfolio investments, as you might understand, in the Italian market and to quite some extent happening late in this year as well, which means that the contribution from quite to quite a large extent, the investments that we've done in the fourth quarter in portfolios happened very late in the year just before Christmas, meaning that they don't support the P and L substantially in this year, obviously. And then if we turn to EBIT margin and return on book, they remain on a similar level as compared to last year if you adjust for the items affecting the comparability as we touched upon earlier in the Italian market. Then if we move on to region Central East, we've had the strongest quarter of the year in terms of portfolio acquisitions. They amounted to SEK466 million compared to SEK180 million last year, which also meant that we closed the year with a higher book value than end of last year. The decline in EBIT margin and return on book that you see in the quarter is primarily or is driven by the fact that in this region last year, we posted quite substantial revaluations. In this region, they were in the positive direction of SEK55 million. So if you would adjust for those, we could say that return on book and the margins remained stable. So if we then move on to the next slide, our funding structure. As mentioned, we continue to improve our funding structure with a better currency matching and also a better duration matching. The transactions that we've done in the third quarter, where we bought back EUR 100,000,000 and issued EUR $250,000,000 closed early in the fourth quarter. That is the item that is affecting the outstanding debt when you look the year end numbers. The increase in senior debt, that's driven from that activity. Also, we launched a while back our deposit offering in the German market, and we have to date raised close to or we have raised SEK1 billion equivalent of SEK1 billion in deposits in the German market. And they today make up 7% of our total deposit base. And this is another element of improving our currency matching then obviously. And as you've seen, we've continued to improve our funding cost and funding cost then in the context of us measuring our funding cost in relation to the portfolios that we're acquiring is now down to 1.7%. So if we then turn to the next slide, our capital and liquidity ratios. Given the strong finish of the year in terms of portfolio acquisitions, it meant that we levered ourselves down on the CET1 ratio. So we are now in the targeted range of 2.5% to 4.5% above the regulatory requirement. We maintain a very strong liquidity position, not the least from the activities that we did on capital markets early in the quarter where we raised additional senior unsecured debt down. So we remain, again, with a very strong balance sheet and a very strong liquidity position to continue to grasp opportunities into this year. And then finally, before I hand back to Jurgen, let's talk about our operational efficiency then. Measuring our expenses in relation our total expenses in relation to gross cash collections, have been trending down, as you've seen before. Obviously, they've soared quite substantially in this quarter, if you don't adjust for these items that affect the comparability. So they were up. If you adjust for those items, they remained on par with what we've seen previously, 37%. To further improve this cost efficiency, we need to invest. We need to invest in digitalization. We need to improve our efficiency. And you've seen signs of of us executing on this by launching self-service platforms. You've also seen signs of this by doing the restructuring in both the Benelux region and the German region. These investments, of course, they will not have an immediate payoff time. It will feed in rather in 2019 than 2018. So therefore, we believe that our ratios will kind of stay on this level when you look into 2018. Yes. And I'll stop there. With that, I'll hand back to Jurgen for some concluding remarks then. Thank you, Pontus. So to summarize this morning's presentation, I would like to pinpoint three things. So we continue to see and capture a very strong growth momentum in the transaction market. We will also continue to build on our brand name as a fair and transparent partner, which is increasingly paying off. In the near term, during 2018, we will make sure to make the necessary investments in building the company for the future to reach an increased cost efficiency and also stronger offer across other asset classes to our banking partners. Beyond 2018, we will see the effects of the investment being made today and we will continue to progress towards our financial targets. So this will be my last quarter presentation before handing over to Claus Anders Niesdin, who will join us in mid March. And we very much look forward to welcoming him to the company, and I know that he's truly excited to start with us. With that said, you very much for listening to me during these last 12 quarterly presentations as a public company. It has been my pleasure presenting the evolution of a very solid and value driven company. During my first presentation in May 2015, we stood at a book value of SEK9 billion and we are today at SEK15 billion, up some 66%. We also posted some total revenues of SEK1.7 billion during 2014, up 70% to SEK2.8 billion last year. We have made a solid progress in our strive towards our vision to become a leading debt restructuring partner to international banks and financial institutions. But the journey has only begun and you should expect us to carry on at a strong pace going forward as well. Thank you very much for listening. And I would now like to open up for the Q and A and welcome Hermione Kerec from Nordea. Thank you very much, Jurgen. So I thought I'll start up the Q and A with some questions of my own. And then I'll hand over if we have some questions here in the audience and on the telephone conference and on the webcast as well. So starting with your win ratio, you mentioned that you won approximately 15% of the portfolio you actually bid for. And you also mentioned that this drove up your cost somewhat as you have a lot of portfolios you evaluated, but eventually didn't actually get. How has this ratio developed over the years? Do you see anything from the at least speculated about price competition that's been in the markets last couple of So over these last six years, when we have showed this strong growth, we have been quite constant on a 20% hit ratio, which now in the fourth quarter has come down. You could see this both on the positive and negative side. On the positive side, you can see that despite that we have a low HIT ratio, we still can acquire for $2,200,000,000 So it's a very strong underlying market. But on the negative side, it is associated with higher costs. You have due diligence costs, I mean, which we don't mention in the report, but a lower hit ratio includes a higher cost then for transactions that we participate in with high intensity, but which you lose out on them. And then, of course, to refer to your last sentence there, it continues to be a very competitive market. Prices are going up, but to some extent due to that the sector as such is everybody is enjoying this lower funding environment. We have a few new industrial players as well coming up to the market and that combined with the traditional private equity and hedge funds, of course, continues to make this a very competitive market. And then also moving on to you mentioned that your gross collections sorry, your expenses or gross collections will move below 35% in twenty nine nineteen. And given the the larger investments you're taking digitalization over the coming year or this year, how much is due to digitalization efforts, and how much is due to scale simply becoming larger? It's it's a combination of both, obvious. But I think what we're saying is that we've we've we've we've we've been able, as you've seen, I mean, we've been able to prove our cost efficiency to a certain level. And to take it out to the next level, we do need to invest in digitalization to bring them down even further. So I think scale is an element of it. Mean, there is, of course, as you know, there's a few markets where we recently entered. I mean, take one example is, of course, the Spanish market, another is the Greek market. But of course, we see that we should have further scale opportunities, whereas some of the other markets is more driven by us. It's the fine tuning and doing using modern technique and things like that. Do we have any questions in the room? Two questions, if I may. You you write in the outlook that, next generation of analytics and evaluation models. Can you elaborate on what that is? It it's also part of, you know, digitalization is probably a bite. But as you know, I mean, we use data to invest into our assets and assess our assets, and we invest on a very long term basis. And whatever we can improve whatever we can do to improve that capability in terms of data analytics and using sources that are available and also making the use of the data even more efficient. That's in essence what it means. So you have to invest in new analytics tools in order to be more efficient when you bought a portfolio, when to analyze the portfolio and to use the data in order to collect in a more efficient way. But basically, you invest in new brand names and new analytical tools in order to get more out of the book value that we have acquired. And then second question on margin pressure. You write in the report that it has increased. You've said, I think, several quarters that it's been about the same. Is it worse now than previously? The $2,200,000,000 that we acquired for in the fourth quarter, basically everything was signed and closed after on or after December 15. It was an extreme concentration at the end of the year. So besides that, what Ponta pointed out, we did not get any contribution at all on the revenue side. But it also showed another side that we made debts for portfolios, in a constant pace during out the quarter, but many portfolios were outbid by others. So and we are all continuing to apply a very disciplined investment strategy. So the large result was actually an outcome of that we got volumes at the continued levels that we would like to invest on. So we have a firm Pontus and me to express to the market that we could well, all the performance we've made will support our financial targets of a return on equity on or above 20%. Thank you. How are you looking at the market in Asia? Are we going in the market or So we have said before that since our banking partners, many of our banks have a global presence, like HSBC, for example, is that big in Asia, We of course shall look at the development of the market outside of Europe. So far, we can participate in conferences to follow developments in the Asian or South America and The U. S. Market. But so far, we have not done more than that. And of course, we are in discussions with our banking partners, but there's nothing that we have as a live cost driven project. And I think we have a question from telephone conference. Thank you. And And our our first question comes from the line of Adidas Pogentaday from Morgan Stanley. Please go ahead. Your line is open. Thank you. Good morning. Just three questions. The first one, given the record level of acquisitions this quarter, I was just wondering maybe if you could give some form of guidance for next year. I mean looking at the portfolio growth guidance you provided, it seems to suggest that you might be planning to make opportunities of between SEK 34,700,000,000.0 to SEK 5,500,000,000.0 for next year. So maybe if you could maybe comment on this and also in terms of what do you think will be driving this level of acquisitions? Would it be consumer, unsecured or secured or SME? So we can approximately confirm the volumes outlook that you mentioned. We said that we will foresee a portfolio growth of 15% to 20% for 2018. So it will be on the same level or slightly higher levels than this year. We foresee the vast majority to be unsecured consumer claims for next year as well. But the SME and secured are increasingly quarter by quarter. Cannot guide on a specific percentage because as you know, it becomes a bit black and white when you acquire portfolio, which portfolio you actually win and which portfolio you don't win and at what composition. Juan, did you want to give any more flavor to that? No. I think it's like we're saying, we want to strengthen our position obviously in other asset classes. Going forward, of course, we should expect a larger portion of the book and the purchasing to be there in the direction of SMEs secured and potentially also performing assets down. But again, as Jorgen is saying, it's a bit black and white. I think then you could say, I mean, there are we are in two very large markets in Europe, the Italian and The UK market. And also, as I commented earlier, we're in a few other markets that are sizable, but we are not very sizable, the Spanish and the Greek market. It's an early phase for us there. So I think to give some kind of color how you should think of of sourcing in terms of those asset classes and and your restrictions, that's that's probably what I'd say. Okay. But just in terms of the guidance for loan purchase, would that be above 5,000,000,000 for for next next year for the for 2018, I should say? Well, to summarize the 15% to 20% in numbers, we'll give you a guidance of between SEK 4,000,000,000 to 5,000,000,000 for 2018. Okay, thanks. And my second question, given your plans to expand to new asset classes, just looking at the cost structure between those asset classes, is there any significant difference, For example, in the cost of collection and you particularly, does it do you have the same return profile across these asset classes? If if maybe if you could expand sheet on any difference there. No. Yeah. I mean, of course, you know, every asset class would have their own features in ways of connect or or collecting, of course. So you you take one extreme being performing books, then, obviously, you have a very low cost to collect. It's more about maintaining and running all such a book, whereas if you look on the other extreme and say secured portfolios, we have very different elements to it than the unsecured. And again, I mean, it's hard to it's hard for us to give a guidance on exactly how will the composition of number around $5,000,000,000 in acquisition, how will that composition look, what it cost going to be. But what I'd say is, I mean, the way we think of other asset classes is, of course, the same way as the normal kind of unsecured. So when we look at sourcing and underwriting this on a risk reward basis that will kind of support our our financial target of our real 20%. If that was answered to your question. Yes, that's fine. And then lastly, last question, just in terms of your cost guidance. If maybe you could elaborate on the nature of the investments management is making, particularly given that you're investing in digitalization, you've been doing that for some time now. So just wondering what is driving this sudden increase going forward? It's of course, as we say, I mean, we saw absolutely an uptick of cost now in the fourth quarter. It's of course a mixture of a lot of things. Mean, there are, as we commented earlier, I mean, are projects ongoing in terms of merging the two Swedish entities. There are IFRS initiatives on our side, etcetera. Then there's, of course, another bucket is when we're moving into new asset classes and new jurisdictions, of course, our capabilities are not as great as they are in the more established market, which means, again, then we won't win all the deals and we're to have costs associated with understanding, learning and assessing some of these portfolios That hopefully going forward will decrease as you bring your hit ratio up and you're able to bring some of that knowledge and capacity in house. The third bucket is more again than investing into technology. In terms of building self-service platforms. We talked about data analytics and things. But of course, these are investments that require everything from building the systems as well as taking on people that can support on that journey. And this is of course nothing that translates into efficiency in the next quarters. We expect we have ramped up this activity throughout the year and we expect to continue at a very high pace into 2018, thus holding back the kind of the if you look at cost to gross cash collections on a fairly flat level in 2018 and then expect it to further kind of come down as we go forward. Finally, maybe also worth mentioning, then of course, you also see that we've taken initiatives in restructuring or reorganizing the operations in a few countries. It's the same there. That will take a period of time before that comes through the P and L in full effect. We estimate to see the first signs of that late twenty eighteen, but mostly the full year run rate will be in 2019 and onwards. And as there are no further questions registered, I now hand back to you speakers. Thank you. We actually have some questions from the webcast. So the first is, what's driving the CET1 ratio move quarter on quarter? But it I mean, basically, the growth in the balance sheet. So I think it came down now or yeah. It came down and it came into our targeted range for the reason that we invested ahead of 2,000,000,000 set in the fourth quarter. Then it's a question on the return on book that is still compressing. Are you comfortable giving any output on that for the coming years? No. We we wouldn't give a guidance on the return on book. We we we draw the give the guidance that we've done now where we say that we we believe or we see that our return on equity will will not come all the way up to the targeted range in 02/2018. It will sit a little bit below. It did close a little bit below this year as well. And the final question is on the restructuring you're doing in Germany, will we see more of that in other geographies? As a growing company that wants to stay ahead and aligned with the competition, you will always have work in progress in different ways. And of course, we will make sure that we will be continued a preferred and a leading player in this market. And we don't have any such actions going around the corner. But we look every quarter, of course, for ways to further increase our operational efficiency and by doing then effectivization. But we do we don't have anything around the corner to on the cost side to further restructure the business. So we took two big steps here within Benelux and German operations. Then I actually have a question myself on the financing cost. So it's down to, I think, 1.3% in q four, which is exceptionally low compared to peers. Do you see any scope for that going even further down? And also, in terms of the speculation on interest rates moving up, being funded that much on deposits, how much of that is hedged and how much would be an immediate effect if if we see interest rates on that? I mean, the first question, I guess, is that, of course, you know, funding cost is as important as operational efficiency for us. So I mean, every basis point we can find, we will continue to strive to find that. I think should you expect it to drop another 100 basis points from this level, most likely not, right? But I think we are continuously working with that and seeking opportunities. So I mean by every basis point counts here. So I think that then on the other side, if rates are starting to pick up, as we said, we do protect ourselves for up to three to four years by interest rate swaps basically in the market. And then one final question from my side. Both of you are actually leaving the company, and we are seeing this rather big investments for the coming years. How do you think about the timing of this transition? So you know that I'm not leading the company. I'm moving on to a position as Vice Chairman of the Board and I'll continue my role as a major shareholder as well in the company. And I will be a very caring owner and an active Board member as well from that perspective. I'm extremely happy for our choice of Klaus Anders Nieszdin, my favorite candidate. And we have a very good relationship today even though he's not starting until mid March. Every decisions that I've taken, every move that I'm making since we got him on board, of course, I've done that in in close agreement with him. So he understands and are with me and and and what what he will continue to to drive. So there there will not be any gaps or or jumps because I'm leaving my role as as CEO. It is also the case that, you know, that we have a very strong value driven culture in this company, with a x or have less strong foundation in terms of our countermanagers and business unit sets. So, of course, they are not unaffected by changes in the top management, but this is not a a company where where it's solely dependent on on the top management. It's actually driven by by the different jurisdictions and the very strong business unit managers. So whatever decision I get to summarize, whatever decision I'll take is very aligned with the organization and will be continued to be capitalized upon by the new management team. Were there any additional questions in the room? No. That doesn't seem so. And thank you very much. And I'll hand back over to you. Okay. So with that, I just thank you, all of you for listening to us. Thank