Earnings Call: Q4 2020

Feb 9, 2021

Thank you, operator, and a very good morning to this Q4 presentation. And with me today, as usual, our CFO, Keester Johansson and our Head of Investor Relations, Andreas Bisson. Good morning. Good morning. So moving then to Page number 4, which is the highlight for the Q4, let me just use this opportunity to say that in a year very much dominated by the pandemic, I am extremely proud of the work and the progress that we made in HOIST Finance. Of course, most importantly, we have been able to continue to support our customers with literally all please working from home in, yes, basically almost a year now. We have a lot of personal best or all time highs in terms of operational improvements in over the last year. And let me just call out a few of them. We have a self-service ratio at 20%, and we have increased our productivity and reduced salary cost per FTE. And we have improved employer engagement quite a lot, increasing the score in our Great Place to Work survey from 68% in 2019 to 77% in 2020. And that's actually a significant increase. And we are not only an asset heavy business, we're also a people business. So I'm very happy and very proud of this improvement. And perhaps, needless to say, that the most important thing that happened in Q4 actually happened in Q1. When we, last week, that Friday, announced our partnership with Magnetor Capital and by that also launching the next phase of our securitization program. And have in mind that this scope is for new acquisitions, so it's forward looking, and it's pan European basically fixes and cures our regulatory challenges. And I will talk more about this on a separate slide. In terms of financial highlights, you can see to the right on that slide, just let me mention a few things. Our balance sheet is robust. Our CET1 is at 10.8%. Our collection performance in the quarter remains resilient at 105% versus active forecast. But with the current pandemic and the slow throughput in the course, we do find it prudent nevertheless to do some extra impairments. But as you will see in a second, the cash flow remains very solid and also close to all time high levels. The portfolio acquisitions were lower than we expected perhaps, but the market outlook is very positive going forward. I will comment on this on a separate slide. So moving then to the next page, Page number 5 in the deck. I'm not going to spend a lot of time on this Clyde, just underscore that as you clearly can see that the 4th quarter do show strong cash flow generations. Page number 6 is kind of a slide that we used before and on the green slides, you will see profit before tax adjusted for impairments and items affecting comparability. And as you can see, the underlying earnings is very stable. And actually, despite a shrinking book, the Q4 is even better than the Q3. So I my view is this is a very robust and resilient picture. Page number 7 talks about we're executing on the 4 pillars of our strategy, and you can see the 4 pillars to the left. And that's best to just say that in 2019, we made huge strides in France and Poland with significant increased market share in those two very important markets. And then it's very good to see that in 2020, we're able to improve our operations in a very important German market, and Germany actually became our most active market in 2020. On effective and efficient, we have ramped up our new showing during the year. And currently, we have 150 competent and passionate colleagues in Romania. In digital, we are certainly getting a housing order as far as infrastructure simplification, integration and stabilization is concerned. And right now, 85% of our systems and data is in the cloud. So that's a significant achievement and during last year. And on banking on the banking platform, the securitization is, of course, the key achievement. I will talk more about that in a separate slide. As you can see from Slide number 8 to the left, you can see the transaction volumes from banks in Europe as far as non performing loans is concerned over the years. As you can see, 2020 was really a low year, almost down to or actually below the 2013 levels. We know that, of course, the provisioning and level of provisioning are increasing in banks during the pandemic and the market outlook is quite healthy. To the right hand on the slide, Page number 8, is the underwritten IRRs calculated as 12 months averages. And as you probably can break out from the graph, 2018 was the low point, but there has been an improvement since. And having had the 2 years now in a row with relatively low investment volumes, 2019, of course, with the regulatory headwind and and 2020 with the pandemic, we have to have 2 low years with investments. And consequently, the 2018 vintage is having a heavier impact on our returns and otherwise would have me in the case. And out of our total book, the 2018 vintage accounts for almost 25%. So yes, I would agree 20 20 investments is low. But for us, of course, it is more efficient now to use our new securitization structure. And with a positive margin outlook in the quarters ahead, that's also important to have in mind. So then let's move on to Page number 9 in this deck. And what I really want to say here is that we are making really good progress on our cost savings. But rather than talking about individual projects, I thought I could bring out the development in 3 markets. And as you can see here, France as a country used to be loss making. Now early before tax, is a strong SEK 106,000,000, strong improvement also in Germany more than doubled the profits. So really happy with those two markets. On the other hand, what is also equally clear is that we are struggling in Spain. We are not alone with the challenges in the Spanish market, but let me also say that we believe in the long term opportunity in Spain And we can turn things around the way we have done with other markets before, which is clearly seen from this page. Let me then move to the next page, which is about helping businesses survive and our commitment to ES 3. We have a partnership with Team U. And Team U is a nonprofit that reports SMEs in preventing bankruptcy and support bankrupt entrepreneurs to rebuild their lives. And this partnership is twofolded. We help reducing the impact from financial exclusion in society, but we're also helping our SME customers by channeling them to t:nu, where they can get specialized support. And the partnership and the commitment to t:nu is for the long term and in Q4 specifically, we supported the development of a Team U online platform. Page 11, I promised a couple of times today that I wanted to talk through securitization. And let me start off by taking you through the time line. In December 2018, the Swedish SSA implemented a new interpretation of how risk weights should be applied for unsecured NPLs, increasing the risk weight from 100% to 150%. And this, of course, wiped out part of the equity. Our CET1 was reduced from 13% to 9.7%. In the 1st week of January 2019, it was announced that EBA was about to introduce a so called NPL Prudential backstop, which, of course, put our growth at risk. A couple of weeks later, we communicated in our Q4 earnings call, basically 2 years from today, that we had identified securitization as a key solution to mitigate the negative consequences are these 2 important regulatory changes. In the Q2 of 2019, we announced our first unrated back book securitization and in the Q3 of 2019, we announced the second in the Q4 last year, the Swedish FSA assessed and concluded that significant risk transfer was achieved in Hoist Financial's Secret Attachments. And now in the Q1 of this year, we are launching our cross border front book securitization structure. And let me be clear, this new structure ticks the white boxes. In my view, this removes NPL backstop challenge. It resets risk weight to around 100%, hence being ROE accretive. Anne, as a point number 3, sets us back to a path to growth. The key elements in the structure should be no surprise. Maganfar Capital Acquires the mezzanine and junior notes and voice finance will retain the senior notes. And Magnetar's €150,000,000 commitment translates into an unsecured NPL purchase price of EUR 1,000,000,000 over the investment period of 2 years. So with that, important news, I hand over to Christer for the next section. Good morning. And turning to Page 13, obviously, as we close out 2020, there's no denying that this year was severely impacted by COVID, not only did our results suffer from impairments amounting to more than SEK 450,000,000, they also suffered as a result of acquisitions being postponed, which mean we closed the year with a book that is 13% lower than at the beginning of Pierre, had the book been flat, we estimate that results would have been around SEK 140,000,000 higher. Although, obviously, a theoretical scenario, one can see that adjusting for this, returns in 2020 would have been more or less on par with 2018 2019. So with that context in place, let's have a closer look at before starting with the P and L adjusted for items affecting comparability on Page 14. I mentioned the smaller book. This comes through on the income line. Despite solid collection levels, the quarter came with impairments of negative SEK 49,000,000 and I will explain this apparent contradiction in a minute. Within net results from financial transactions, we saw a sizable positive effect from FX hedging. This is partly a reversal from previous quarters. On the back of increased legal activity, we did, as expected, see an increase of total expenses versus Q3. But taking a longer perspective, the favorable trend is sustained, as we will illustrate on a later page. All in all, profit for tax in the quarter adjusted for items affecting comparability ended SEK 108,000,000 similar to the full year results, this is a level significantly impacted by COVID-nineteen. Turning to Page 15 and our reported figures. So Q4 was low on acquisitions, but it was quite busy in other ways. And this level of activity came with a few items affecting So adding to my comments on the underlying results on the previous page, I want to highlight 3 such items, which are included in the reported numbers. First, we had a SEK 22,000,000 negative impact in connection restructuring the 2021 bond. And I view this as good cost because as you will see, this sets us up well for 2021. Secondly, we took a provision of SEK 9,000,000 related to a legal dispute in Spain. And thirdly, the signing of our partnership with Magnetar, which as Anders described, mean that we currently don't expect to pursue further securitization of the back book. And we had accumulated SEK 9,000,000 of costs on the balance sheet related to such efforts. Thanks to the good progress on our front book program, those costs now seem redundant and they are being written off. This adds up to SEK 40,000,000 in negative items affecting comparability. With those included, reported profits before tax amounted to SEK 68,000,000 in the quarter and SEK 82,000,000 in the year. Moving on to Page 16 and looking at collection performance. The gradual recovery has continued for the unsecured book, which is what we show here. Q4 collection corresponded to 103% measured Against the active forecast, the total book came in at 105%. In many countries, December was actually the strongest month in the quarter, and this is normally not the case given holidays. So I read this as a good sign for 2021. As you remember, over performance is accounted against the total impairment line. Collection is at SEK 105,000,000 you would all as equal expect to see say SEK 70,000,000 on that line. The other component, which is also accounted against the total impairment line as portfolio revaluations, those reflect is to the future projections. With a net amount of SEK 49,000,000 for those two items combined, you will understand that Cork Systems would be operating at close to full speed by now. Unfortunately, that is not the case as illustrated on Page 17. And then I should mention that legal throughput is not an area where statistics are easily found that as one of Europe's biggest DP companies, we can obviously monitor how our own cases progress through the various legal systems and taking that approach, we estimate that the throughput is still some 40% Below normal levels. This obviously means a delay in future collection, and this is particularly true for Secured assets. So considering the time value of money, those delays translate into impairments, which in Q4 amounted to a total net amount negative SEK 49,000,000 Turning to Page 18. In the cost program, Q4 has not been about starting new initiatives. We have a large number of projects going, more than enough probably. Our focus in Q4 has therefore been to extend the rollout across the group and to capture benefits there from. To give two examples, we have in Q4 ramped up the staffing in Bucharest, allowing for a further shift of workload. We've also expanded functionality within our self-service portal, and we rolled this functionality out to additional markets, Supporting the good improvement in digital collection rates that Tras Anders mentioned. And these are both topics that we will come back to in our Capital Markus Sey, in a few weeks. Turning to Page 19. Expenses in Q4 totaled SEK592,000,000 SEK 570,000,000 after adjusting for items affecting As mentioned already in the Q3 earnings call, a pickup in legal expenses was expected and legal expenses came in SEK 24,000,000 higher versus Q3. Had all courts been fully operational, this probably been even a bit higher. Now leaving legal expenses aside, the underlying costs remain close to QT levels, we see a continued favorable development in staff cost, where our mix of staff is moving towards Lower cost countries. In the quarter, that saving was partly offset by SEK 5,000,000 temporary increase in depreciation. Moving on to Page 21. When it comes to funding, a key event in the quarter was the new issue, which we did in November. And the primary purpose of this exercise It's not to add funding. It's about proactively managing the maturity profile. So we issued EUR 200,000,000 under our EMTN Rem, this had a 4 year duration and the issue was done at par with a 3.375 percent coupon. This issue attracted a good mix of European investors. And although yields have come up since our previous issue, we note that few, if any, of our peers can issue at this In connection with this new issue, we also tendered a bit less than half of the 2021 bond, and that Trigger a bit of cost, as mentioned. So with this exercise done, we are all set for delivering on the 2021 Business Plan. Zooming out one step on Page 22. We illustrate the complete funding, including the deposit side. And as you can see, total funding volume is flat. The increase in cost that will stem from the larger share of market funding, which, of course, cannot match the very low cost of deposits. On the other hand, we see great value in having a broad toolbox, and this gives us a lot of flexibility in matching assets and liabilities. At the bottom of the page, it may seem contradictory that interest expense to book was flat. But one should remember that the new Issue was done late in the quarter. Had we had a full quarterly effect, the interest expense to book would have been around 2 point 7%. Finally, a word on Capital and Liquidity on Page 23. So as Claus Anders commented upon, new volumes in Q4 were low. That boosted the current capital and liquidity position What? That's fine. We have good reason to remain confident on future supply, and we are well positioned to capture our fair share of So with that, I hand back to Claus Anders for summary comments. Thank you, Christer. So let's go to the summary page and key takeaways. So 2 years ago, I shared with you the tough news that 2 regulatory changes were wiping out parts of our equity and questioned the validity of our business model. We have now established robust and sustainable structures that show that our business model is in fact relevant and competitive. We have improved our operations for the last couple of years, and we are leading the way in digital. Now we are using the tools that the banking license provide and are offsetting the negative consequences of these regulatory changes. In short, we remain the company in the industry with the lowest cost of funding, and we are embarking on a path of growth at a point in time where the market outlook is the most promising that I've seen as CEO in this industry over the last 7 years. So with that, we are somewhat looking forward to talking to you again shortly and showing you our developments at our Capital Markets Day on the 25th February. So with that wrap up, let's then move on to Q and A. Thank you, operator. Our first question comes from Borja Ramirez from Citibank. Please go ahead. Your question. Apologies. Our next question comes from Erik Tarrant from Carnegie. Please go ahead. Good morning and thanks for taking my questions. And Aure, now apologies if it's not only you having technical issues, so I also dropped out for a while, if any other questions are coming back to things you've already touched upon. But my first question was on the deployment you expect for 2021 and partly 2022, do you expect to deploy more than the EUR 1,000,000,000 Over the coming 2 years and how much will come in 2021? Right. So I guess, what I can say there, I believe, is that, of course, the program with Magnetor is for unsecured NPLs. On top of that, of course, you got the secured NPLs and performing loans. In 2018, we invested for, call it, SEK 8,000,000,000. And that's the reason why we cannot get back to a level, call it, similar to that level. And do you expect to see a pickup already in the start of the year? Or do we need to wait until the second half of twenty 21 before we see a pickup. Yes. So the market outlook going forward is very promising, and I think everybody is seeing that and I can see that our competitors are sharing the same view, so the market opportunity is there. I think it's a little bit hard to gauge exactly when more volume is coming to market. I think the Q4 was a low quarter, a slow quarter for us in many ways. We were kind of aiming for replacement CapEx, but with the knowledge that we were about to get in place our securitization structure, we didn't push it too hard because we felt it was more efficient to use that new structure. Currently, I would say the market is all right. Some of the deals that were pushed out from Q4 were pushed into this quarter. So hopefully, this even this half year that we're in now will be better than what we saw towards the end of last year. Got you. Then on the cost side, when you presented the Q3 numbers, you also gave us an outlook of how much restructuring charges you would book for the full year 2020. And I just noticed you didn't book So the residual now in Q4, should we read in anything in that, that things are progressing a bit slower or that The cost won't we won't require as much restructuring costs in total. I think long term, we've not changed our assessment of the potential in the program or the cost associated with it. In Q4, our focus was to because it leveraged the work that we had already done. So there wasn't a lot of sort of new items coming on to the agenda that for 2021, surely we have a lot of work to do and some of that will come with one off Okay, got you. Then on the Magnetar agreement, could you share any color on how much the Transaction costs will be in Q1 related to that one. Yes, that's a good question. So obviously, this partnership, we've just entered Into this partnership, and we are looking forward to deploy it as fast as possible. To what extent that will be the case in Costs associated with this would also be capitalized on the notes. So it's not necessarily that it would all hit the P and L Immediately. If I could add something here, Christer. I mean, of course, this is a significantly more cost efficient structure than the previous one. I mean, the first one was more expensive. It was the first. And now we have been able to build on our knowledge and expertise, use their own team to a much higher degree. So the costs here are significantly lower and the structure is much more cost effective than the previous one. Okay. Thank you. Then perhaps just one last Question, you mentioned the 20% self-service level. Is that on the group? And you also mentioned some promising digital collection strategies in UK and France to be rolled out. Is that in excess of the previous self-service portal we've been talking about? Yes. So the digital collection or the self-service ratio, as we prefer to call it, is 20% for the group. But it's, of course, for the amicable unsecured NPL portfolios. There's no for secured NPLs, and I think we have showed you that funnel before. So we are really happy about this improvement, specifically because this is the year 2020 was the year that we acquired much less and it is harder to convert, call it, analog customers to become digital when they haven't been digital from the beginning. So it's actually what we see is that we are acquiring new portfolios. It's easier to start off with the customers going digital from the very beginning. We see some very promising, call it, all digital portfolios in the UK, specifically. And I mean, the UK is certainly our most advanced in mature markets, and basically what we mean by that is that it's basically digital only. There's basically very little manual work at all for those portfolios. So We are definitely looking forward to share more about this at the Capital Markets Day, and I'll keep some of the goodies for until then, and looking forward to share. Great. That's all for me. Thank you very much. Thank you. Thank you. Our next question comes from Victor Hellmann from Nordea. Please go ahead. Hi, Richard Hellmann here. Thank you. One question, and it's Perhaps a little bit of clarification around your Magnetar SPV. The initial investments is stated to be 24 months, that does mean that you have a mandate to invest in 24 months? Or does it means that you need to refinance in 24 months? So it means that the capital committed is Expected to be deployed within that time frame. So there's no need to refinance it after that. Okay. The numbers are done with sort of a like a lifetime perspective on the investments. Yes. Okay. That's great. Makes sense as well. Yes. But on back of that, I mean, if you would pursue with your internal risk weights and get approved from the Swedish FSA. Yes. Will not this be a drag to have this set up? Yes, good question. So sophisticated risk modeling will always make sense for us. And specifically for IRB, we do believe that there is a great upside on the back book, so on The risk weights apply to the existing portfolios. That said, we don't see IRB as a solution to the backstop regulation in itself and hence the workforce to get the securitization structure up and running is really key for Okay. So in that sense, it's a little bit targeting different problems. Exactly. Yes, you can share that. Yes. Yes, great. Thank you. And my last question is about your rating currently on negative. You have earlier been quite clear on the importance of having an investment grade rating. Is that the same? Correct. So there's been no change in our view on that. And I think the year of 2020, of course, has been a challenging one. But as we look into 2021, I think There's reason to be optimistic for the business in general, which at some point should also come through in the rating outlook. And if I can add one thing there, Richard, is that with this announcement that we made last week with the Magnum 4 transaction, I mean, it significantly reduces the risk with OIST. So with that transaction, basically, in my view, leave regulatory risk behind. That is the importance of that transaction. Yes. I totally agree, at least the current regulatory regime, but we You know credit analysts. We are the best equity analysts. So Yes, yes, that's true. You'll probably see more regulatory changes going forward. But I agree on the current. Thank you very much for your questions. Very clear. Thank you. Our next question comes from Joakim Svevan from Arctic Securities. Please go ahead. Good morning and thank you for taking my questions. I have 2 questions as well. The first one is related to CapEx. How soon can you invest is through the announced SPV with Mann Nattar. How large a share of CapEx in 2021 do you think we'll go through that SPV. Yes. So soon means now basically. So we will start using that portfolio investments into that structure basically immediately. So there's nothing stopping us there, but apart from formalities to setting up the legal SPVs in the different markets, etcetera. So that's immediate. So that will be used right away basically. And when will we be deploying CapEx this year? I think it's a bit tough to give a guidance on that. I tried to comment on the total CapEx in a previous question. I think I will just refer to Okay. And then I was wondering if you could shed some light on the challenges you see in Spain. What is the main issues you're encountering there? Yes. So I think I've said that for that, we did made an acquisition in a platform back in 2015, and we have basically struggled. So with my experience, payment experience in the company in Ben, I like the Spanish market. I think it's a credit market, it's professional sellers, pretty consolidated several banks that know what they're doing. So the market dynamics in Spain, I like. Having said that, it's not like the industry is making a lot of profit in spend these days. I think basically all competitors are feeling a bit of the competitive pressure that's been around in Spain in recent years. So what we are doing now is turning things around, basically. We are turning every stone. We have changed the full team there. We are introducing new collection processes. We are shifting our best practices to the market. And we are always starting to see if there are portfolios to acquire. But it's down to the basics, and that's also why I wanted to show today that we have done this already successfully in some other markets. France from a loss making position to a very profitable position Germany from being very slow and to now being very dynamic and again, at a totally different level in terms of profitability. And that's what we set out to do also in Spain. But I happen to think it's better to know where the problems are and deal with those than to have problems all over the place. And that's also why I wanted to bring that out today to say that, okay, there are a couple of issues. We know where they are, and we're dealing with those. That's great. And the final question is just which of the markets you see you show the graph showing The front book IRR increasing and which markets do you see Portfolios and attractive IRRs at the moment? Well, the good thing is that we are diversified over the markets that we are in, that means that we have 12 markets to acquire in and we are diversified across asset classes. So that means that there is enough diversification to always be able to do the best deal. So we see that there is attractive opportunities within, I would say basically all jurisdictions and also across asset classes. And I cannot single out 1 or 2 countries that are more interesting than others. But if I was to pick if I was to force me to pick 1, I would pick France. I would take secured because that's where we've been really successful in the last couple of years. And and certainly if we can deploy more money that way, we will do so. Sounds great. Thanks very much. Thank you. Thank you. Just Our next question comes from Porger Ramirez from Citibank. Please go ahead. Hello, good morning. Thank you so much for your time and for taking my questions. I have two quick questions, if I may. Firstly, on the agreement with Magnetar, Congratulations on the announcement. If I understand well, the IRR for Magnetar is 14% on the junior and methionine tranches. I would like to check if you could please provide more details on the potential return for Hoist Finance on the potential investment in these Secretizations. And my second question is, if it could be possible to provide any details for potential capital return in 2021, for example, if there could be any potential for dividend or or share buyback? Thank you. So maybe I can comment on the first question and Anders Can I add to the second? So the portfolios that we expect to invest into with the structure, they're similar to the That we would invest in elsewhere or that we've invested in 2020 for that sake. So the underlying return level, you should expect that to be similar. Now obviously, in the structure, there is a mess note. And as you correctly point out, The return is 14%. But one should remember, and this is quite important, that this structure is more efficient from a capital consumption perspective, and that actually more than offsets the additional cost involved with the mesonauts. So from an ROE perspective, it will be as efficient or probably even more efficient to invest in the structures than to invest in the Way that we've done historically. So from an ROE perspective, the structure is accretive. Yes. Thanks, Chris. And on your second question about capital returns, I think I will just refer to our financial targets and the dividend policy that we have there. And of course, we are going to give you an update on this Tata Capital Markets Day. So if you could save your question until the 25th, we can discuss it further. Of course. Thank you very much for your time. Thank you. Thank you. There appears to be no further questions. So I'll hand back to the speakers for any other remarks. Thank you, and thank you all for participating on this call. 2 years ago, we had bad news. Today, I feel that we have a lot of good news. And it feels good to leave regulatory challenges behind and may be able to concentrate on the business profitably. So with that, thank you for your participation and your engagement, we will talk to each other soon again. Bye bye.