Welcome to the Hoist Finance Q1 presentation for 2023. For the first part of the conference call, the participants will be in listen only mode. During the questions and answer session, participants are able to ask questions by dialing star five on their telephone keypad. I will hand the conference over to CEO Harry Vranjes and CFO Christian Wallentin. Please go ahead.
Good morning, everyone, and welcome to this Q1 earnings call for Hoist Finance. It has been a busy quarter. It's my first quarter with Hoist Finance. I started on the first of January, and I've spent a lot of time on getting to know the organization and the business, traveling around, visiting all the offices and meeting clients and investors. It has been a very busy time, and I think we are quite satisfied with what we're gonna go through with you today. If we go to the key highlights, the EBT or the profit before tax, we landed on SEK 162 million , adjusted for the reorganization costs, so the cost reductions that we're doing.
This is an increase of 113% compared to the first quarter 2022. Christian will go through the adjustments as we go through this presentation. In terms of return on equity, our key target, we are at 6%. It is, of course, far from our 15% target. We are following our plan for the year. Additional improvement of this will we will see as the portfolio grows or as the book grows and the impacts of the cost savings program kick in as the year moves on. Of course, adjusted for the normalized capitalization levels, we are then at 10%.
The book excluding the UK increased 29%. The adjusted operated income increased 34%, and the operating expenses driven by the larger book increased by 22% compared then to 2022 or Q1 2022. We have had strong collection performance, although the macro is challenging out there. We don't fully see, we don't see any impact on our collections as of yet. We are, of course, closely monitoring the situation. We have been impacted by a court strike in Spain, there has been a clear impact. Despite that, we reached 105% for this quarter. Now the strike in Spain is over and the courts are slowly starting up and processing claims again.
In terms of investments, we did SEK 1.9 billion during the first quarter, much of that in the Swedish portfolio that we, the back book that we bought from Lowell and that are now being serviced by Lowell, of SEK 1.2 billion . But also, a number of smaller portfolios around our markets. We have a stable funding base with 67% deposit accounts. I think in this environment, as the interest rates have moved quite rapidly, this has become an increasingly competitive advantage.
As we can see from the deposits, we don't see any unusual activity following the Silicon Valley Bank situation. Our deposit customers trust us and we see that there has been no noticeable outflows in the period. We have also issued a bond in the period of SEK 1 billion . In terms of our capital position and liquidity, we are in a very robust situation. We are materially above the regulatory requirements. We're at 15% CET1 ratio, and which is a materially stronger position than we were a year ago.
This, of course means that we have an investment capacity, which is significantly higher than before, and that we of course intend to utilize as the year moves on. I think with that, I'll hand over to Christian.
Thank you, Harry. Good morning, everyone. We can see that our investment strategy is paying off with this focus on larger, more complex and more bilateral investments as part of the pipeline. We have a strong investment quarter in Q1 2023, despite it being normally seasonally slower than, for example, the Q4. It's driven by, as Harry pointed out, the Swedish reentry, you know, of SEK 1.2 billion. If we look forward, we have a healthy outlook for the year from the current pipeline is, as you saw, 22. It can be quite lumpy between quarters. We have more third than second quarter transaction closing expected. This can move around as we move ahead during the year.
The fourth quarter is expected to remain the seasonally strongest quarter as normal. The last year had been a really active investment period. Again, the investment strategy that we put in place now over the last half year and a half is working. We have growth-grown the book almost 30% year-on-year. This means that we have replenished the U.K. book that we sold now a year or so ago. We have done that with higher returns. Also, the margins that we see coming through is much more healthy and less risky than what we had in the book that we divested.
In the collections in 21 and 22 vintages, we see really healthy collection performance as you see in the collection performance for the quarter. We wanted to make it easy to follow our underlying business performance. We have introduced some simple, what we hope is simple adjustments this quarter that we will do during the year as well. We realized that it wasn't that easy to follow us last year, given that we had this successful UK disposal building capital and de-risking the book in combination then with the volatile macro environment, which led to hedging gains. What we've done is that we do a few simple adjustments. You can follow the underlying business. One in Q1 2023, we did two adjustments.
We adjust for the reorganization cost, which drive further cost optimization. The second is that we normalize for capital levels. You can see if we were at the mid-range capital target ratio, what would our ROE then be? We have this fortunate situation with the capital. We want to grow, but we also want to show the normalized return. This shows a illustrative normalized ROE level for 2023, which we'll come back to. If we move to Q1 2022, we adjust for the U.K. operations and then the hedge accounting as if it was in place the first of January. What does these two mean? In 2023 Q1, we have items affecting comparability, so reorganization cost of SEK 18 million, which we've taken out in the adjusted profit before tax.
We have also a normalized ROE to 10.9%, which is in the middle of the range that you see on the page. In the comparative period, Q1 2022, we have taken out funding related to the UK disposal of SEK 39 million on interest expense. We've added back group staff cost of SEK 15 million. This was staff that was sitting in the local entity that we legally had to move to the branch in the UK because they service the group. We've taken out the net financial transactions, SEK 103 million, given the unrealized hedging gains. We would take out the net profit from the discontinued operations of the UK divestment.
For ease of comparison, we do not adjust capitalization for 2022, given that I think that would probably just confuse more than it helps, given that we saw the risk reversal and a lot of movement in the capital. Moving on to the actual underlying numbers. Overall, we start to see the results of the reorganization in the underlying performance. The total operating income is growing 50% quicker than the cost base. This provides operating leverage, and this leads to a profit before tax growth of 113%, and then a normalized ROE of 10% for the quarter. If we dig into the details slightly more, we see that operating income is up 34%.
This is driven by the book growth of circa 30%, and also the strong collection performance of 105%. This collection performance is driven by what we think is a really healthy book that we are having today. The interest expense is slightly higher growth than the book. We have higher funding rates as the industry overall, and that is we see that coming through. Of course, we were much less impacted because of our funding funding platform than the rest of the industry. We also have support from the liquidity buffer and interest income from interest rate swaps. That's SEK 42 million interest income for the quarter. Overall the higher book also drives higher total costs.
We also have a slight mix change in between direct and indirect, driven by that we have more outsourced business today than what we had a year ago, driven by the UK and Greece. We also changed the performance management internally to drive the local business on ROE, which sometimes drives higher costs, but in the end it drives much higher profits, so it's accretive to the return on equity. As we all know, inflation is part of this picture as well. That has been driving the particularly the people cost if you compare with a year ago. These total higher costs are compensated partially by low indirect costs, which we will get back to in a bit. Overall, we see strong growth, collection performance material.
We have really strong collection performance that contributes to earnings outpacing the costs. This leads to a healthy and normalized ROE closer to our financial targets. Also for reference, you can find this income statement in the report on page six, where we also outline all the adjustments, so you can follow them in an easy way. Since the beginning of 2021, we have taken down our indirect cost base by 17%, including inflation, however including the reorganization costs and FX. This chart is showing that development since early 21, so Q1 21. The indirect costs are a broad cost base for us. This is the part of the cost that should see limited growth when the growth of the book continues.
This includes IT, includes the investment team, includes the central functions, and also the indirect support functions in the markets. If you break this down further, you would see that we have invested into the asset management organization. That is the investment team and deal related expenses. We've kept the local platforms flat while we've grown the book. The cost reduction that you see here is led by the central functions, which is leading to this overall 17% cost decrease since Q1 2021. We are looking to find more cost saves in 2023 before the end of the reorganization. We aim to find another SEK 85 million annualized cost saves in indirect or more.
That translates to roughly SEK 20 million per quarter impact run rate. The associated reorganization costs will be around SEK 100 million, depending on the final level of savings. If we find more savings, then it'll likely be slightly higher. If we find slightly lower, then it will be likely lower than that. After reorganization has concluded, then we will focus on continuously improving the business and the productivity that we want to see. If you look at the direct cost development, it's driven by the book, as I mentioned, and also the mix between insourced and outsourced, this ROE focus.
Then if you then break down the cost increase as well, the indirect cost you would see that we spent more in legal than we did a year ago because of things normalizing overall. This is, of course, as we grow the book, direct costs will grow in proportion that, but slower than the overall cost base. The income will grow quicker than the cost base, of course. Also you can note that the book size is roughly the size of before we disposed the U.K. again now. We replenished the book and the direct cost level is roughly in line with that, but with higher profitability clearly, as you can see in the profit generation.
If you look at our book, the asset class mix, we believe we have an overall healthy and well-diversified book, which is in a much better position to withstand any potential macro market shocks that could come our way. If you look at on the left-hand pie chart, you can see that we've grown the secured proportion. Last year it was 20, now it's 29, 27%. You can also see that the geographical and asset class diversification has improved. We've broken out Sweden and Benelux and the UK in this chart in contrast with the report to be able to show that Italy is slightly smaller.
U.K. of course has shrunk, and we are much more diversified across Europe, which is good of course when the macro is as uncertain as it is. We're really excited to be back in Sweden after 20+ years with the re-entry with the portfolio that we bought from Lowell. If we look at the capital liquidity position, it's a robust, those both of those are robust, and they're materially above regulatory requirements. The capitalization, as Harry pointed out, enables us to grow and continue to invest in attractive portfolios. We also see that this is particularly in...
Oh, not in sync, but it's a strong position to be when the macro environment is uncertain, and particularly, when there have been significant disturbances in the banking sector around the world. We stand strong. We have seen no material impact from the turbulence. We have a large liquidity portfolio, and we also have continued to invest in this period, of course. Also worthwhile noting is that we are on a completely different regulatory regime than the banks in the U.S. For example, we don't have any part of the liquidity portfolio that is not mark to market, for example. On the same theme, the funding base is highly granular and under deposit insurance scheme. We have 80,000 deposit customers that have trusted us with their savings.
We've seen no significant outflows outside the usual activity. And also these deposits are 99% roughly under deposit guarantee scheme, so the Swedish Deposit Guarantee Scheme. We have also issued a senior unsecured bond of SEK 1 billion in three tranches, what we thought were competitive rates during the quarter, which is also a testament to that we stand strong in this. I think when the interest rate environment moves up, we stand stable and we become increasingly competitive. We are up, as you see, on the average cost of funding. However, much less than what we see the industry moving according to our assessment.
This is of course, driven by our credit market institution status and having a funding or deposit part of significant part of the funding. Sixty-seven percent of the funding base is based on the deposits. With that, I will leave over to Harry to wrap up the presentation.
Thank you, Christian. In summary, it has been a quarter of high activity, not just for me personally, but for the whole organization. There is a lot of activity in the market, and I think the high, the rapidly changing interest rate environment is causing a lot of actors to consider their positions and that generates opportunities, and I think especially for us. We've had a high investment level in Q1. As Christian mentioned, we are generally going after larger and larger deals and that makes it lumpy. For Q2, we expect a modest investment level as the deals we're working on right now indicate third quarter closing.
The strong collection performance we're really happy with. We will keep tracking obviously the macro. As of yet, in our markets, we don't, we haven't noticed any significant impact. Of course we will stay vigilant there. The underlying result will continue to improve based on the healthy book that we have, right? It's, we've replaced and gradually we keep replacing older portfolios, or we keep amortizing older portfolios and replacing them with fresher books. The vintages over the last two years are performing really well as we are happy to report it. On...
In terms of the return on equity, yes, adjusted for the normalized equity levels, we are at 10%. We expect to improve that as the year passes, especially with the reorganization program savings kicking in, and of course also the growth of the book. Our funding base has been really stable throughout this turbulence we've seen in the markets and is turning into an increasingly competitive advantage for us. When it comes to the reorganization, we will work on cost. This will carry on throughout 2023. We want to close the program by the end of Q3.
We're making a push now to do the last parts of the program in terms of the cost reductions that then will be executed in Q2 and Q3. We will of course, continue our active asset management.
As you may have seen in the report, we have in France, one of our absolute key markets in the quarter, refreshed the portfolio or refreshed the book with a brand new portfolio that is collecting very well. Just after quarter closing, we divested our, let's say, low yielding back book of unsecured claims in France. This is another example of this active asset management, and we will continue to look for those opportunities. We will continue our disciplined investment strategy. This is why we are also investing in the investment team. We are really growing that nicely and have a fantastic team of people there following up on the investments as they develop.
Yeah, on the collection performance, we will continue working on that. Tuning collection strategies, etc. Sometimes, the cheapest strategy might not be the most efficient. You know, we are ROE driven, as Christian Wallentin mentioned before. We will at certain stages take higher collection costs to in the future, collect more money. I think with that. Now we lost the screen here. I think with that, I think we'll open up for Q&A.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Ermin Keric from Carnegie. Please go ahead.
Good morning. Thanks for the presentation and for taking my questions. Maybe if we start on the reorganization program, could you just confirm that I've understood it correctly? You're having SEK 100 million in execution cost, of which SEK 80 million was taken Q1. Essentially the rest is Q2, Q3. Just for me to understand, if we would assume just for the sake of it, that you don't grow anymore, your business is flat from here. Would that mean you have SEK 85 million on an annualized basis in lower net cost? Or is this just making your indirect costs more scalable?
I think it's, we are in the early phase of executing this, of course. It is absolutely, we're aiming for 85. We want to overshoot that, and that is real savings, so to speak. That should lead to net savings if you would disregard any growth of the direct cost. Yes. That's on annualized basis.
Perfect.
Of course, the SEK 85 million.
Yeah. On the execution cost?
Sorry. Yeah, it's SEK 100 overall that we roughly see, and SEK 18 of those were taken in Q1. The final number will depend on the size of the savings.
Got it. Thanks. Just your collection performance held up, good now in Q1. Could you give us what that would've been underlying if we adjust for the court strike in Spain? Also generally of your collection, how much is on payment plans and how much is more one-off settlements on the unsecured side?
The Spain, we invested quite a lot in Q4 in secured. Then we have the unsecured book. This court strike, given that we're onboarding the secured book, it's mostly hitting the, if not exclusively hitting the unsecured book. That would be more or less performing in line with expectations, slightly below if the court strike wouldn't have been there. I don't have top of mind what that would mean in millions, but it of course would add to the 1.5% collection performance.
Got it. Thanks. Just a final question. Could you to any extent quantify the impact you've seen on underwriting returns now compared to, let's say, a year ago or so?
Slightly difficult. We see our own returns creeping upwards. It's both how we price, IRRs, those are going up and also the ROEs. We are developing nicely and we saw that the IRRs bottomed out, so to speak, mid last year in terms of we had a really profitable back book way back in time, and then we had 17, 18, 19, which was much less profitable. That impact of the portfolio moving through time, so to speak, it bottomed out. We see that our average IRR is moving up from the low that we saw in, well, probably mid 22. That's helped of course by the U.K. divestment. If it's a market thing or not, it's slightly difficult to say.
We believe that the market's moving upwards. We obviously see indications of this. The change in our investment strategy, meaning focusing on more bilateral, more large deals, more complex deals, that also drives IRRs and ROEs, because there's much more value we provide in these situations. Both those dynamics drive returns higher. It's a little bit slow, slower than we would hope, but it's clear trend upwards. I don't know, Harry, if you have any other comments on that one.
No, I think, yeah, as we mentioned, I think sellers and buyers primarily in the primary markets, have very different expectations, now with the rising interest rate environment. There we see that transactions are, well, getting slower, take longer simply. In some cases, we've seen sort of deals being taken off the market. We believe that these are sort of the signs that this is rebalancing now. With the interest rate and the financing costs increasing, the returns should continue to climb.
Also in addition to that, Harry mentioned it is that the primary market is more slow to move in our experience over the last quarters. Meaning that the originating banks have higher or they are more sticky price expectations than the secondary market where, for example, hedge funds are quicker to adjust to real financing costs, et cetera. There's slightly divergence in the primary and the secondary market.
Sorry, just one last follow-up on the end there of your answer. When you're talking about the secondary market, is it mainly among, as you alluded to now, hedge funds or is it credit funds, or is it actually industrial peers of yours that you're seeing coming to market to dispose of assets?
I think it's a little bit, all of the above. You know, for various reasons. You know, we are happy to take those discussions and to sort out those issues. We see, I mean, specialization is increasing. As one example is this, French book that we just divested. We divested that, over our book value, because somebody else believes that they are better set up to handle that type of claims, right? I think these discussions are ongoing across the industry, I would say.
Very helpful. Thank you.
The next question comes from Maths Liljedahl from SEB. Please go ahead.
Yes, good morning. Just some small follow-ups here. On the deposits, how do you see? We know there's a fight for deposits, so to say, in the market. How do you see pricing developing? Have you seen any movements between, you said 99% is covered by or under the deposit guarantee scheme, but has there been any move in sort of size? What's the average size of a deposit holder? That's the first question. The follow-up perhaps on the liquidity book. You have a lot with banks. Is that just on accounts, or is it invested in short-term instruments? Thanks.
The deposit pricing is creeping up with the overall interest environment. It is stickier, of course. Well, not of course, but it is stickier in a banking sector. The banking industry tends to keep those margins for itself, as you've seen it in the for the larger Nordic banks as well. In terms of the size of deposits, it's slightly different in different geographies. Germany, where we have a large part of our deposits, there you have large, larger savings into deposits. That means larger deposit holders as well. In Sweden, it is, it's slightly smaller and, but there are very few above SEK 1 million.
Normally in Germany, we see around towards the upper end of the deposit guarantee scheme, and then in Sweden it's lower. Another difference between the market is that we have our own deposit brand here in Well, we have our own platform in Sweden, which means that it's slightly stickier in Sweden. We are on a raising platform in Germany, so it's easier to move things there as well. In terms of liquidity, it's on deposits side.
Okay. Thank you.
The next question comes from Rickard Hellman from Nordea. Please go ahead.
Good morning. Thank you. First question, a little bit of a follow-up on collection performance, given that, I mean, Spain underperformance with this quarter strike. Is there any particular portfolio or market that saw very strong performance or was it broad-based?
I think, we've seen, I would say strong performance with the exception of Spain then, actually across, all our markets. It's been, yeah, it's been broad-based.
Yeah. In all asset classes as well?
In both asset classes, yes. Yeah.
Okay, great. Great, thank you. I have a couple of other questions as well, starting with costs. You pointed increased cost owing to the larger book, which I do understand of course since, I mean, you do preparations and things like that. Looking at actual collections, it is actually down, and still you have a pretty sharp increase in collection costs. You also mentioned, I mean, increased outsource. You also mentioned of course, wage inflation. Is there other things or? Also, are you able, you know, to broadly quantify the different factors for the increased collection costs?
You pointed to the drivers. One that I would add as well for collections is that in the... We have timing differences as we point out in the report of SEK 77 million, and those are the two types I would argue. One is that we have early collections in the secure portfolio, so we need to then adjust further out in the curve and take that out, and then we have the timing benefit. Then it's also early collections where we see that we are having such a strong performance in new portfolios that we wanna take out collections later in the curve as well, so we don't burn the book early. Those two. Both of those are of course driving collection costs, right?
It's real collections, but you don't get the collection differences through the collection performance. That I would add to the other factors that we discussed.
Okay. Yeah. If you would try to broadly quantify the different factors.
We haven't broken it down. It's broadly the book, right? It's legal, I think, was up. Yeah, it was up, quite a lot over the year-over-year. The growth of the book was the large driver of this.
Okay.
If you would go back to old reports, I think you can see that direct costs are more or less in line with when we had the U.K. disposal, but with higher margins, so to speak. We are seeing the benefit of those additional direct costs in the, both in earnings and in collections.
Yeah. Yeah, thank you. On cash flow, you do have, or weaker operational cash flow owing to the line, I think you call it other factors or, sorry, increase or decrease in other asset and liabilities. This is usually, or at least historically, this has been related to hedging. Is it the same this quarter as well?
I'm not quite sure which line you're referring to, the liquidity has moved in a few different places. One is of course the investments that we've done, then we've issued a bond during the quarter. There's a lot of other in the balance sheet that moves as well, which might be the one that you're referring to. The FX versus Polish zloty SEK to FX has moved quite a lot. The way we see that, there's a move in the FX swaps in OCI, but that also could be explaining what you're referring to.
Okay. I think you call it increase/decrease in other assets and liabilities, or it is about the, you know, or within the operation activities, so. Okay. Can you give any indication on, you know, how your hedging look like in terms of share hedged, duration, mainly through the interest rates?
On the interest rates, we've hedged for the interest rate based in the banking book. That is, does serve us well, of course. I mean, not all industry participants have that sort of bank treasury interest rate swaps. We have hedge accounting from this now. We're benefiting from that in the interest income line because we're Paying fixed and receiving floating, and that will continue to do so over hedges will gradually roll off, course. Some of them are a little bit longer and some are shorter, of course.
It's a little bit complex to go into the technicalities of how we were hedging, but it's according to the regulatory side of this.
Okay. I'm not familiar with the regulatory, but we can take this bilaterally.
Nothing is easier, so we can go into the details of it.
Yeah. Okay. Okay. Well, thank you very much.
Thank you.
As a reminder, if you wish to ask a question, please dial star five on your telephone keypad.
Any more questions out there?
There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
Yes. Thank you all for joining this call. Yeah. Q1 has been high activity. There is a lot going on in the industry at the moment. We believe that we as Hoist are very well positioned for those activities that are currently ongoing. With that, yeah. Thank you very much and talk to you soon.
Thank you very much for joining. Have a good day.