Earnings Call: Q2 2021

Jul 21, 2021

Good morning, and welcome to the Q2 results of Hoist Finance. I'm Per-Anders Fasth, and I'm here in the room with Christer Johansson, our CFO, and also with Andreas, our IR, investor relations, who you all know from many years. Good morning. Morning. Firstly, I'm Per Anders Fasth. I joined the board of Hoist in mid-April and was appointed Interim CEO at the end of May. I've been with Hoist now as Acting CEO for about seven weeks. In addition, we've had a few other changes except for the results we've had Lars Wollung, who has been a board member for several years. He actually left the board in order to be able to support management and act as a consultant and advisor to us in our operational improvement efforts. I also want to point out that unfortunately, this is Christer Johansson's last quarterly results. Christer has done a fantastic job, but we also welcome Christian Wallentin, who's a very good and senior CFO who will join us here in early August. Coming back to the results, Christer will go more through the tax issue that we published on July 8th. When it comes to the financials for the quarter, our EBITDA, which I would more or less say is our cash flow for the quarter, was SEK 1.17 billion, which is a significant improvement compared to last year. You have to remember that last year, that was the first real quarter of COVID, and of course, that was a tough quarter when it came to collections. Profit before tax was SEK 52 million, and our collection performance was slightly above our planned collections or the anticipated forecast at 102%. As we will come back to, our CET1 ratio is down 9.7% due to the write downs after Q1 on the portfolio write downs and also the additional tax provisioning that we took here in July. Our acquisitions were at SEK 857 million, which is more or less in line with the replacement value, as we will see on the next exhibit. Total book value of our portfolios is at SEK 21 billion. If we move to next page 5, you can see that our portfolio book value or our volume, our balance sheet, has been reduced over these six quarters by 15%. Of course, this has a direct impact on our revenues. Our net interest income is down 18%. What this also indicates is that there is a slight reduction also in the margins of the book. There is also significant FX effects in these numbers. In order to regain position and strengthen the profitability, we need to increase the acquisitions. We have had a cost reduction efforts in the company, as you can see on page 6. Costs are down by 5% over the same period, which of course, is not enough to counteract the negative impact of the reduced balance sheets. We need to do more on the cost side, as I will come back to, in order to improve our profitability. What do we then see when we look to the various segments? On page 7, when it comes to unsecured NPLs, they constitute approximately 85% of our portfolio book values at about SEK 17 billion. What you can see from this exhibit is that we have quite widespread growth opportunities when it comes to unsecured NPLs, widespread in terms of markets. We see foresee and as you see we call it visible market opportunities. That's actually processes that we are involved in or that we know will happen within the next 6 to 12 months. They are approximately SEK 1.3 billion when it comes to unsecured NPLs. Moving on to secured NPLs on exhibit 8. They constitute about 15% of our portfolio book value at SEK 3.4 billion. Here you can see there's a difference in opportunities. It's mainly France and Italy, and to some extent, Spain, where we see good market opportunities. The processes that we foresee within the next period are around half a billion euros. You can also see on this exhibit that we've been very strong in our collection performance, even stronger on secured NPLs than on unsecured. Both though, above 100%. Moving on to page 9, you see Hoist's footprint at this point in time, a well diversified book, both when it comes to values but also when it comes to revenue generation. There is, as you can see, particularly for France, you can see the portfolio value is 11%, whereas the net interest income is 9%. That's an effect of that we have a significant portion of secured assets, secured NPLs in France, and they normally have a lower net interest income. They also require less equity, so it's very capital efficient and provides us with good profitability, even though the revenue as such may be lower. On an overall basis, collection performance is quite acceptable, not as good as we would like it to be, but at least above par, if you would say so. Where actually Poland stands out at this point in time as a very strong performance when it comes to collections. Of course, we are still affected by the COVID situation. As markets are opening up, we are and I am expecting significant improvements in our collection performance because as we noted in the quarterly report, quite a few countries have had their courts closed, and that makes it more difficult for us to collect when courts are closed because some of our processes are taken to litigation. That's my intro. I will come back after Christer has gone through the financials a little bit more in detail and make a summary. Christer, over to you. Good morning, starting on page 11. As you may have seen from our press release on July 8th, Q2 is significantly impacted by tax provisions. It's a material amount, let's go straight to some background on that. Our provision was triggered by a correspondence with the Swedish Tax Agency. This correspondence was a preliminary decision from them, which relates to profit allocation between countries. It relates to Polish assets specifically. Here, one may note that the Polish market is a bit different. Assets are typically held in funds. That comes with some questions which we don't encounter elsewhere. Now, I'd like to stress that this process is at an early stage. It may well be a couple of years until this is finally settled. However, in the meantime, we saw reason to reassess our overall tax provisions, and this included assessing various potential outcomes in this case. On the back of that analysis, we have decided to increase our provisions by SEK 97 million. As always, we will adjust our positions if new facts arise, although I would not expect significant near-term changes to this position. Now, leaving tax aside, we also have a one-off related to changes in the management. That's SEK 9 million in after-tax terms. Were it not for these two items, earnings after tax would have been SEK 58 million. The underlying dynamics, they are best described on the next two pages 12 and 13. Starting with page 12, which is a comparison with the previous quarter, excluding items affecting comparability. Income, which is a product of the book size, is more or less flat compared to Q1. Unlike Q1, this quarter saw no significant revaluations. The positive SEK 22 million comes on the back of 102% collection performance in the quarter. On the cost side, the total is flat, but the mix is actually a bit better. Compared to Q1, we have SEK 14 million more in collection expenses, mostly legal collection expenses. We have a similar decrease in admin expenses where some of our saving efforts are targeted. All in all, the underlying level in Q2 is actually not very different from Q1. Taking a longer perspective on page 13, the picture is somewhat different. Here we compare the reported figures year to date. All in, with the same year to date period previous year. Top line impact of a smaller book is evident, as Per-Anders highlighted. When it comes to impairments, obviously the last 18 months have been rather challenging. With difficulties in Spain, COVID, and shortfalls in U.K. litigation being three main drivers. Adding in the tax item, which also stem back many years. The total impact on recent return on equity is of course severe, as you can see at the bottom of the page. Turning to page 14, just a quick glance on the balance sheet versus year-end. Core assets are flat. Liquidity has been trimmed down a bit. We have a bit of movement in other assets and other liabilities, which is just related to our hedging activity. On page 16, we illustrate the funding development over time and on this front, there's been only limited movements in the quarter. Within the deposit component, we have tilted a bit more towards the euro side, which is a slightly cheaper source of funding at this point in time. Moving on to page 17, as Anders writes in the CEO letter, our capital ratios have been impacted by the events of the first half year, so that's impairments and tax provisioning specifically. We are still in the target range but with a smaller margin than planned. As we look ahead, we are, as you know, targeting growth, and that will add further pressure to the CET1 ratio, but there is also 1 item which has the potential to support the medium-term CET1 ratio. That's a topic currently subject to EBA consultation on page 19. I should say that for being at the consultation stage, this is of unusually large interest. Let me explain why. In December 2020, the European Commission presented their NPL Action Plan, and one item in that plan was the removal of impediments for banks purchasing NPLs. With that goal in mind, the Commission gave EBA the task to review the situation of applied risk weights for purchased NPLs. Remember, this is an area where a buying bank sometimes needs to apply a higher risk weight than the selling bank, so 150% instead of 100%, and that doesn't make any sense. The EBA is proposing to adjust the risk weights back to 100%, and they have stated that they favor doing so through a so-called RTS, which is a regulatory technical standard. In practice, this means that they are intending to change the guiding documents which they provide to the local regulators, in our case, Finansinspektionen. That's a much easier route than actual adjustment in the CRR. This EBA consultation is out for review until September. In the hearing that took place on July 13th, we have understood that the EBA view speed to the assessments. That's also what we hear from the Commission. We believe confirmation could be in place by year-end, with implementation to follow at some point thereafter. I should be clear, this is not a done deal. If it happens, which we expect, it would significantly reduce our capital requirements, as indicated by the pro forma CET1 ratio. It corresponds to a release of a bit more than SEK 500 million in CET1 capital. On that slightly positive note, I'd like to end the financial review and hand back to Per-Anders. Thank you, Christer. Let me just sum up where we are and where we're going forward. I would say that these last quarters have been more or less similar, quite stable results, but not at the level that we expect to be at. What we need to do here now in Hoist and that we have started a transformation program in order to, first of all, we need to simplify our organization and to focus our efforts on the core business in order to improve performance. That means that in order to be successful, we need to accelerate our portfolio acquisitions to grow our business in order to generate more income. We also need to, at the same time, focus on our performance, increase our productivity, our collection performance, and our cost to collect needs to come down, and the overall cost level also needs to be reduced. We have a good basis for a good journey ahead, but we need to be more focused, more proactive when it comes to portfolio acquisitions, but also work on our cost base. That is the route that we are embarking on, and I hope to hear from you, and you will hear from us again in Q3. Thank you. With that, operator, we are ready for questions. Thank you. Thank you for holding. The next question comes from the line of Armin Carrick from Carnegie. Please go ahead. Your line is open. Good morning, thanks for taking the question. Perhaps the first one could be where you left off here, Per-Anders. On the transformation, Hoist has obviously been undertaking transformation now for a few years. What is it that's going to be different in the execution plan from what we heard at the CMD earlier this year? Also with regards to the financial targets, should we think about them as still being relevant, or are they under review, or how should we think about that? Also lastly, on the same subject, you talked a bit about accelerating the portfolio investment, but at the same time in the CEO statement, you mentioned that you see quite a high pricing level. How should we square those two to each other? Let me start with the first thing. I agree with you that Hoist has been working on a lot of things over the last couple of years, and I think that is maybe one of the problems, that we've been doing too much, too many things at the same time. If you have an organization with scarce resources on the crucial areas, it's important to prioritize and choose the efforts where it gives the best bang for the buck. I think the organization has been too unfocused and trying to achieve too much, and if you try too many things at the same time, you don't finish them well enough. We even had one of our members of our executive management team, when we had the board meeting already in the middle of June, she phrased it, we have to stop starting and start finishing. I think that's one of the key things, that we need to focus on our core, get better at things that we are really good at, and to deliver, and focus much more on achievements than activities. That, I think, is what will be different. When it comes to the pricing, it is true that there's been quite a dry year last year. We are not the only player in this field who has had the same development of its balance sheet as we have, as you saw on one of my first exhibits. This has, of course, caused some of our competitors to be very active. So far, I would say maybe because of COVID, maybe because of other reasons, but there's not been as much supply in the market as there has been demand, I would say. That has caused some of our competitors to be very eager to buy. We have refrained from going that route because we don't want to buy at any price. We need to grow profitably. That's why we have not acquired as much as we had hoped. We do, however, believe, maybe towards the end of this year, that there will be more volumes coming out in the market. I also showed you that, for example, in unsecured NPLs, we see now EUR 1.3 billion in processes that we are involved in or we know are coming out, and about half a billion is secured NPLs. There is activity. So far the demand has been stronger than supply. When it comes to the financial targets, I think it's very key. Our financial target for return on equity is 15%. Will we reach it this year? No, not with this half year, but our financial target for return on equity is still 15% and will be so. I've been in banking more or less, not my entire life, but at least 30 years. Of course, cost income it's a good indicator of cost efficiency. It's a good target. It's not a target that creates shareholder value in itself, whereas return on equity and growth are the key things. Profitability growth or profit growth and return on equity are our key financial targets. Okay. That's very clear. Thank you. A question on the collection performance. You mentioned that you expected to return to around pre-COVID levels going forward. When should we start to expect that kind of performance? Is that the coming quarters, or are we talking mid-next year? Because obviously every SEK 10 million or a couple of SEK 10 million coming through in the impairment gain losses is quite a big difference for your capital level at this point. Collection performance is something that we're focusing on, and I've focused quite a bit on since I joined. For me, it's too early after 7 weeks to say when we will come back to collection performance. I think there's 2 things why I believe that we should come back to the collection performance levels when markets are the way they are, and the court systems are open, the backlog from the court systems are few. That's more prediction. I also believe that we ourselves can do significantly better when it comes to collection performance once we get our different efforts to work out. We work a lot with the digital efforts, more and more on data analytics, but we haven't really seen the benefits of those in the numbers yet. Perfect. Just one last question. In terms of the expense that you saw the collection cost come up a bit, is that already an effect from courts opening up? Have we already seen the impact on collections in Q2, or is that something that comes a bit delayed? I can give to Christer. It is like you're saying, the legal collection costs are coming up, and they will probably increase. We hope they will increase because it's very possible. Christer can go a bit more on that. No, you're absolutely right, Armin. This is legal throughputs picking up pace, which is good. This is money well spent, and it will support collections over many years. It's not 1 EUR spent now is 1 EUR in collection in Q3. It supports the overall recovery projection, you could say. Yeah, the only negative thing is, of course, you have the legal collections this quarter, but like Christer said, the legal costs this quarter, but you have the collection increases over many, many quarters to come. Got it. That's all for me. Thank you very much for taking the question. Thank you. Thank you for showing the interest. Thank you. The next question comes from the line of Joakim Svingen from Arctic Securities. Please go ahead. Your line is open. Yes, good morning. Thank you for taking my questions as well. The first one is just a follow-up on Armin's question with regards to what you plan going forward and focusing more as you have said on this. Will this be related to portfolio classes, i.e., focusing more on unsecured than secured, perhaps? Could we see divestments of portfolios or is it more related to geography? I also wondered how retail banking fits in this context. Thanks. I think you will see our focus when it comes to growth in all the three asset classes, but mainly unsecured and secured, but also performing loans. We actually, whereas the performing loans, I would say, are a bit more ad hoc and more irregular, they come out once in a while where the portfolios for unsecured NPLs and secured NPLs have more of a steady flow. You also had a question on the retail banking. I think you will see more focus on our core, which is actually the NPL side, and less focus on some of the more longer term, at this point, longer term growth ambitions when it comes to, for example, origination of on consumer lending, et cetera. I think we need to focus more on the short term, medium term profitability in order to form a solid ground for future growth within a couple of years. Okay, thanks. I was just wondering, I agree with Christer that the EBA consultation is promising, but unless you get a successful conclusion to that process, what other measures are you considering to strengthen investment capacity going forward? Of course, we cannot just sit and wait and hope for EBA. We focus on our capital situation, what we can do on our own. Of course, one important part in increasing our CET ratio is, of course, our profitability. It's crucial to be able to generate capital on your own. The other one is, of course, another effort that we are doing is the securitization efforts, which are capital effective. However, of course, they do, which is important to stress out, they do reduce revenues because there's net interest income is being reduced, but they are very ROE accretive. They're very capital efficient, maybe not earnings efficient. Of course, we do also look at other activities in order to strengthen our capital ratios. Should not EBA come through because growth is important in order to ensure success for Hoist. Nothing is holy. We look at everything that is from a shareholder perspective positive. I see. Okay. Then just finally with regards to OpEx and the longer term, as you said, you are focusing on bringing costs down. If you look just into the second half, do you foresee quite stable OpEx or could you shed some light into that, please? I think what we've seen in Q2 with legal collection expenses picking up, that is something we would expect to continue into the second half. That is money well spent. I'm not losing sleep over that. When it comes to the overall savings program, we are continuing down that route. Some of the previous activities will start to materialize in the second half of the quarter. Hopefully we will also be able to grow the book, which will come with some operational costs, which is according to plan. Should we not be able to realize that growth, of course we need to look again at the cost base then. In the couple of months that I've spent here together with Anders, we have of course come back. We've reviewed some of the existing cost activities to see that the full benefit is taken out. We don't leave any money on the table. We are also considering additional options that we could pursue to bring costs down. That's been the focus of our two months together here. Great. Just to make sure I understood the answer relating to CapEx that Ermin also focused on. The main reason why you see high competition now and basically a dry 2020 leading to eager competitors, but you expect supply to increase considerably in the second half and then that should make you or enable you to increase CapEx and keep your profitability targets unchanged. Is that correct? I think the industry and also Hoist believe that there will be more supply coming out after COVID already this first half year. We haven't really seen that. There's been more in the second quarter than what it was in the first quarter and then more than in 2020, maybe that. We believe that there will be more supply. Will it start? We expect it to increase more towards the end of the year. We don't not really hope for. We plan for a modest increase during the second half and then hopefully a further increase in 2022. We don't foresee that the flood of new portfolios coming out already in September, but we see continued growth. We wouldn't mind if there was a tsunami of portfolios to be out there. Unfortunately that will probably not be the case. Yeah, that's great. Thank you. Thank you. The next question comes from the line of Rickard Hellman from Nordea. Please go ahead. Your line is open. Thank you and good morning. Just to follow up on the pricing on portfolios, if you could give some flavor, if you see any particular areas where prices have increased more than others in terms of assets classes and also geographies. Thank you. Yeah. We have seen, and of course it varies among markets. I think we have seen some that we've been able to look at quite attractive ones in I'll also look at Christer because we looked at it further, but Poland has been quite good. We have seen extremely, I would call it, since I was also as a board member, I was member of the board investment committee before I joined as CEO. We saw some extremely strange pricing in the U.K., which is portfolios were not prices that we could never go to our shareholders and say that this was a good deal if we would have bought them at those prices, extremely unfavorable prices. Christer, you have been here for the whole time. We've been quite successful in Poland, I must say. I think the pipeline in Italy also looks good. Yeah. As Anders said, the U.K. has been a tough market. Of course, we're not willing to invest at substandard returns, then we'd rather invest nowhere else then. That's what we've seen in Q2. Thank you. Thank you. The last question comes from the line of Borja Ramirez from Citi. Please go ahead. Your line is open. Good morning. Thank you for taking my questions. I have two questions from my side. Firstly, on the competition, I would like to ask if the competition that you mentioned in portfolio acquisitions in Q2, I would like to check if it's coming more from the secured or the unsecured side, and also if this comes more from the private equity buyers or maybe more specialized debt collectors. My second question is on regulatory capital, and I would like to ask if you could just provide indications on the timing of the implementation of the internal models. Thank you. When it comes to the competition, I believe we see more competition on unsecured portfolios than on secured. The pricing has been more out of the ordinary on the unsecured. Secured has been quite acceptable. We note that in 2020, almost all the industry participants acquired at the low replacement level. You could say that everyone came into 2021 a bit short, which has also affected the behavior in the market. We've mainly seen industrial players. It's not been that the private equity firms or the hedge or the funds have been destroying the market. I wouldn't say that. It's been mainly industry players that we have been fighting against. When it comes to the regulatory capital, you're asking about the IRB, right? Yes. Yeah. We have an effort, but we also, of course, are affected or not affected, but we take into consideration the potential impact of the EBA. Maybe you want to dwell on that a bit more, Christer. Yeah, absolutely. Just to take one step back, of course, this effort was initiated following the increase in risk weight, which we felt was an unjustified increase, and we felt that the underlying risk was low, and we were keen to prove that. If the risk weight would be reset to 100%, and that's not a done deal, to be clear, but if that were to happen, then obviously that changes the equation a bit there, and that's something that we would have to take into account as we proceed on this front. Yes, correct. It's very clear. Thank you. Thank you. Just a reminder that if you would like to ask any final questions, please press 01 on your telephone keypad. We have no further questions, I will pass back for any closing comments. Well, thank you. This is Per-Anders here again. Thank you all for listening. I think it was good to have this opportunity to discuss and maybe explain a bit more. We are, of course, always open for further meetings and discussions if there are things that need to be clarified or reviewed. You should, of course, contact Andreas, and we can set up a meeting or a phone call or whatever. Unless we have the opportunity to meet in the meantime, we will see you again in October at the Q3 results. Thank you very much for listening in. Thank you, Christer and Andreas. Have a good summer. Have a good summer. Thank you. Thank you.