Interim report Q2 2018

Continued expansion into new asset classes and good progress with the operational agenda

April – June 2018

• Total operating income increased 22 per cent to SEK 648 million (530).
• Items affecting comparability before tax totalled SEK -24 million. Items affecting comparability attributable to a cost linked to the take-over of a previously externally managed loan portfolio as well as provisions for proposed restructuring to consolidate the British operations to Manchester.
• Profit before tax excluding items affecting comparability totalled SEK 165 million.
• Profit before tax increased 36 per cent to SEK 141 million (104).
• Diluted earnings per share amounted to SEK 1.12 (0.83).
• Return on equity excluding items affecting comparability was 15 per cent.
• Return on equity was 12 per cent (10).
• Carrying value on acquired loan portfolios totalled SEK 17,763 million (15,024).
• The total capital ratio was 17.96 per cent (17.71) and the CET1 capital ratio was 11.13 per cent (11.70).

Figures in brackets refer to the second quarter of 2017 for profit comparisons and to 31 December 2017 closing balance for balance sheet items.

Events during the quarter

• Single best quarter in terms of portfolio acquisitions. Portfolio acquisitions totalled SEK 2,341 million; well diversified between both countries and asset classes.
• Hoist Finance issued EUR 40 million in Additional Tier 1 capital and repurchased SEK 100 million AT1 capital issued in 2013.

Development after the quarter

• Hoist Finance acquires portfolios with non-performing secured loans in France.

Continued expansion into new asset classes and good progress with the operational agenda

Introduction

It is now nineteen weeks ago since I joined Hoist Finance. Now, reporting my first full quarter as CEO, the timing is good to share some of my thoughts on the business and our priorities going forward.

Industry dynamics

The Credit Management Services (CMS) industry has an important role to play in society. Now, ten years after the financial crisis, the level of Non-Performing Loans (NPL) on the bank’s balance sheets are still 2.5 times the level it was pre-crisis. New regulations have been put in place, and more regulations are under way. To bring the level of Non Performing Exposures (NPE) down is a very important objective for the regulators of the financial systems.

The market for divesting NPL has become more professional and harmonised. Today, most banks have sophisticated sales processes and the data quality of the portfolios is better than ever. This means that the risks are reduced and the sellers are more certain that they will achieve the correct market price. Having started divesting defaulted unsecured consumer loans, the banks are now comfortable sellers of other kinds of NPL. The CMS companies are in the process of building advanced, industrialised and “fit for purpose” processes also for these assets classes.

As the CMS industry has matured and developed, it is clear that the industry adds value to the financial value chain. The buyers of NPL are of course providing capital, but on top of this, the most professional companies are now deploying best practices across borders, they can use sophisticated IT-systems and have an approach to collection that is more advanced than most banks have themselves. Having an amicable approach to collection that has the best interests of the customers as the highest priority is the very foundation for having a relevant and sustainable value proposition. We strongly believe that the importance of our services will increase in the years to come.

Hoist Finance is regulated as a bank and consequently has first-hand experience in the regulations impacting the financial institutions in our markets. New regulation is coming, and we welcome more regulations. At Hoist Finance we take pride in being a relevant partner for other banks, and we abide by the highest possible standards as far as ethics and compliance are concerned.

At this point in the time, the key factors impacting profitability are the cost of funding and the cost of operations. At Hoist Finance we are confident that our business model of having a diversified funding structure with retail deposits as the most important contributor, represents a strong and sustainable competitive advantage. Now, our most important priority is to bring cost of operations down.

Q2 – outpacing the market growth by further expansion into new asset classes

The long-term growth outlook is strong, and in the second quarter our acquisitions of SEK 2,341 million was all time high. Hoist Finance identified the growth in adjacent asset classes already some time ago, and has spent time and resources to invest in people and systems to be ready to capture this growth. During the quarter we announced an acquisition of a performing retail mortgage loan portfolio in Poland and shortly after the quarter ended we announced an acquisition of a secured non-performing loan portfolio in France.

Job number one – operational efficiency

Several steps have already been taken in the second quarter to bring down costs. We have internally launched a cost savings programme that will address our challenge, and we are already seeing the very first positive effects.

Having worked with cost savings in various industries over the last 20 years, experience has taught me that we need to have the necessary willpower and stamina to deliver. There are obviously different sources for cost savings, and some can be labelled as quick wins while others require changes in systems and structures. As our work is ongoing, it is too early for us to lay out the full details of the scope and timeline at this point, but let me assure you that we are committed to do what it takes to bring costs down to a significantly lower level. However, I would like to take this opportunity to mention a few of the decisions already taken:

Organisation and operating model

• Removed regional level and moved towards functional organisation
• Implementing revised legal structure and converting subsidiaries to branches
• Started process to establish shared services in low cost jurisdiction
• First steps taken to identify savings from Procurement

Projects

• Reviewed project portfolio and cancelled a number of initiatives

Site Consolidation

• Faster shut-down of Bremen site and consolidation to Duisburg, Germany, with full cost savings moved forward from Q4 to Q3
• Evaluated closing Milton Keynes and consolidating all operations in the UK to Manchester

Digital

• Installed new cloud-based dialer system in Poland, and additional markets will benefit from same system already in 2018
• Ramped up self-service portal in the UK
• Decision to close down a number of functional systems and to standardise to one platform

Even though we will bring our costs down, and consequently improve our Cost/Income ratio, we also recognise that we will sometimes need to take on new costs for business reasons. This can for instance be related to new skills or capacity as was the case for preparing for new asset classes. Later this year we will hold a Capital Markets Day where we look forward to present our ambitions and long-term plan.

Strengthening of the Executive Management Team

During the quarter and shortly after the quarter ended, I had the pleasure of announcing three new names to be part of our Executive Management Team and drive our agenda of continued growth and increased operational efficiency: Christer Johansson as our new CFO, Viktoria Aastrup as our new Head of Business development and Communications and Emanuele Reale as our Chief Sales Officer. Together with the rest of our team we are ready to take on our intense agenda for continued growth and increased efficiency on all levels.

Financial development

During the quarter we issued Additional Tier 1 capital (AT1) to promote further growth of our business. EUR 40 million was issued at a coupon of 8 per cent which demonstrates our investors’ positive view of our solid financial position and growth opportunities going forward. Furthermore, to strengthen and diversify our funding structure we also launched a commercial paper programme and issued nearly SEK 1 billion with maturities of three, six and nine months.

During the quarter we also took over the management of a buy and leave portfolio acquired in Poland 2013. By managing the portfolio in-house we will have better control and improved servicing capabilities. For that reason, a fee amounting to SEK 16 million was payed to the seller to exit the existing contract. Furthermore restructuring cost associated with the consolidation of UK operations together with other restructuring charges amount to SEK 8 million affecting the quarter negatively but will make it possible to realise approximately the same amount in lower costs on an annual basis. These costs sum the items affecting comparability to SEK 24 million in the quarter.

Excluding these items, profit before tax amounted to SEK 165 million. Our costs in relation to our income are too high end and we will continue our work to increase operational efficiency during the second half of the year.

Outlook

The market outlook is positive, with strong underlying market growth and our ambition is to outpace this growth over the coming years. We remain committed to our financial target of a return on equity of 20 per cent but this will require additional efforts. As mentioned, returns have declined over the last few years and therefore our highest priority is to become more effective and efficient. The restructuring of our UK and German operations will have a positive impact on costs during the second half of 2018 but our work will not stop there. In terms of harmonised ways of working, digital processes and automation we still have much work to do. Our initial review indicates cost saving in the range of SEK 150–200 million over the next three years taking us to a C/I ratio below 70 per cent.

Klaus-Anders Nysteen

CEO

Hoist Finance AB (publ)

A teleconference for investors, analysts and media will be held at 09.30 AM (CET), to listen in to the conference live, please dial:

SE: +46856642697 UK: +442030089808 US: +18558315946 

The presentation will be held in English and can be followed here: https://tv.streamfabriken.com/hoist-finance-q2-2018

Hoist Finance AB (publ) (the “Company” or the “Parent ”) is the parent company of the Hoist Finance group of companies (“Hoist Finance”). The company is a regulated credit market company. Hence, Hoist Finance produces financial statements in accordance with the Swedish Annual Accounts Act for Credit Institutions and Securities Companies.

This information is information that Hoist Finance AB (publ) is obliged to make public pursuant to the EU Market Abuse Regulation and the Securities Markets Act. The information was submitted for publication by Michel Fischier at 08:00 AM CET on 27 July 2018.

About Hoist Finance

Hoist Finance is a trusted debt restructuring partner to international banks and financial institutions. We are specialised in serving banks in handling non-performing loans, and supporting individuals in becoming debt free. Through expertise and rigorous compliance we earn the banks’ trust. Through respect, honesty and fairness we earn the trust of our customers. For further information, please visit hoistfinance.com.