Dear Shareholders, Clients and Colleagues,
With this letter we would like to describe our strategy and achievements.
Our purpose and objectives
Hoist Finance is a performing credit market company for non-performing loans (NPLs). We have embarked on a journey to become the leading NPL asset management company in Europe for consumer secured and unsecured loans. We contribute to our society by being a catalyst for a sound economy, supporting our banks and consumers. This is our purpose.
Our business partners are European banks. We would like to be their preferred partner and support them in optimising their balance sheets by releasing liquidity, reducing capital requirements and their cost of capital as well as reducing operational costs and increasing return on equity. Hoist Finance offers banks and financial institutions extensive support with debt restructuring solutions by solid experience, knowledge of the regulatory environment and presence in thirteen European markets. Our customers are consumers and companies in a debt situation. We strive to become the most innovative organisation to resolve people’s debt in default and to ensure they can be included in the financial system going forward.
Our main financial objectives are:
» Return on equity exceeding 15 per cent
» Annual average earnings per share growth of 15 per cent
» CET1 ratio of 2,3–3,3 percentage points above regulatory level
Sustainable competitive advantages
We believe we serve the European banks in the best way by being a regulated credit market company. We are organised like a bank with three lines of defence, including legal, finance, risk, compliance, security and internal audit group functions. Being a regulated financial institution and publicly listed company at Nasdaq, implies we have the same contextual environment as the banks, including sustainability, ethics and compliance.
Most of our colleagues and competitors are not regulated credit institutions. Thus, we have two advantages and one disadvantage with our strategy:
» We have the lowest cost of debt and cost of total capital in the industry. One of the key competitive variables being an asset investor is the cost of total capital.
» The banks get a partner operating in the same context as themselves, which means lower risk and smoother collaboration.
» Being organised as a bank implies relatively high fixed and semi-fixed costs. Thus, to become optimally profitable, Hoist Finance needs a large total credit portfolio.
Therefore, the goal is to double the portfolio size in five years, from 2022 to 2026, at attractive risk-adjusted returns. This correlates with the goal to grow earnings per share in average with 15 per cent per year. To enable this growth, the Board of Directors proposes that no dividend will be distributed for 2022. The business can be divided into the following three business engines, where the objective for each and one of them is to develop sustainable competitive advantage: Investment Management, Capital Management and Loan Management.
Hoist Finance has a centralised investment unit, consisting of a portfolio acquisition organisation and a portfolio management organisation. Around 40 managers and analysts are allocated throughout Europe. Substantial resources are utilised to continuously improve decision making based on data-driven decisions for example through better algorithms for evaluating loan portfolios, defining risk scenarios and for portfolio monitoring.
Capital and Liquidity Management
Hoist Finance has a stable, low risk and well-diversified funding model. It consists of primarily of 80,000 consumer savings accounts across Sweden, Germany and the United Kingdom. Almost 60 per cent of the deposit volumes are term deposits and around 40 per cent over night deposits. Circa 99 per cent of the deposit volume is covered by the Swedish deposit guarantee scheme.
The balance of the liabilities comprises of bonds, equity like instruments and equity. The bank platform, with the implied cost of debt and debt/equity ratio, generates an NPL industry leading weighted average cost of capital. Our liquidity buffer is well above regulatory requirements and consists of cash and highly liquid and low risk covered and government bonds, with low interest and credit spread risk profile.
Hoist Finance has decentralised loan management organisations in all countries in which we operate. The organisation is divided into strategic and operational loan management. The strategic part focuses on portfolio segmentation, development of collection strategies per segment, and continuous monitoring of all portfolios. Strategic loan management is always carried out internally. Operational loan management, the daily handling of each individual loan, is carried out in a mix of internal collection units and outsourced to partners. In some countries the outsourcing level is 100 per cent. We are strictly focused, in a pragmatic way, to generate highest possible collection level to lowest collection cost.
The year turned out well for us, with substantial achievements in many areas. Hoist Finance has historically had a solid capital cost advantage, but with ineffective operations. Thus, a fundamental rejuvenation journey was launched in the second half of 2021. Below are some examples of improvements carried out during 2022, the first out of two rejuvenation years:
» A new strategy has been defined, see sections above about purpose, objectives and competitive advantages.
» A three-dimensional matrix organisation has been disassembled. The steering of the organisation has been simplified and more focused on financial performance.
Decentralised profit and loss responsibility with key focus on return on equity was launched. Compared to the previous key focus on collection performance (which can be achieved by taking on higher costs than revenues), the decentralisation implies alignment of interest between shareholders, board, group management and country management teams.
The UK business, constituting around 20 per cent of the group, which with all costs included had poor profitability in the last seven years, was divested at a transaction price of 108 per cent of the asset book value. The transaction was completed in October 2022. The investment organisation has been rejuvenated, including a new management team, substantial recruitment of top analysts and portfolio investment managers, improvements in portfolio evaluation methods and models as well as investment decision procedures. The investment ambition is to become a more active investor, seeking true bank partnerships and bilateral, more complex transactions in addition to the straightforward auction acquisitions. The investment outcome of the year was the second highest investment level in our history, SEK 6.9bn, whereof a solid share was bilateral transactions. Excluding the divested UK portfolio, the remaining loan portfolio growth amounted to 26 per cent. It also meant that the sale of around 20 per cent of the total portfolio was compensated in full during the year.
Another strategic ambition is to not only own portfolios, but also sell portfolios which have a higher value for someone else, i.e. being an active asset manager. The divestment of a large UK portfolio and at the same time acquisition of two new portfolios, is one example of this more active approach.
In Spain, we have grown the business fivefold towards the end of 2022. In Italy, we have a new management and have established a major rejuvenation program, including widened bank relations, external partnerships and re-organisation of operations. We have also grown substantially in Greece and launched an effectiveness program in France. In Germany, we have found some portfolio segments with sufficient returns in an otherwise competitive market. Overall, collections came out better than expected, direct costs are reasonable and indirect costs are undergoing optimisation.
Actively integrating sustainability and ESG across our business is essential for us to deliver on our strategy. Social responsibility is where we have the largest impact, by contributing to an inclusive financial ecosystem. As an asset manager, we collaborate with recognised financial institutions that source their receivables responsibly and ethically and we support them in meeting regulatory requirements and freeing up resources. As a loan manager, the customer dimension is central, and we are strongly focused on customer protection, customer privacy and supporting customers in creating sustainable repayment plans. We also partner with external organisations to contribute to financial inclusion and improved financial literacy. In 2022, we made significant progress in enhancing the customer experience with improved digital solutions, with the digital share of collections increasing by 26 per cent as a result.
In summary, a number of deliverables has been completed in 2022. However, many deliverables are under execution and will be completed during 2023, the second and final rejuvenation year. Towards the end of 2023, the plan is to move to the next development phase which we call continuous improvements. The mindset is that almost everything can be improved, almost always. That is a continuous flow context for a learning organisation. The difference to the 2022–2023 phase is that rejuvenation is a bolder change phase, including restructuring and one-off measures to transform a low-performing company to a very successful company. Thus, we aim to enter into 2024 in a much better position.
The financial outcome 2022 landed at a return on equity of 17 per cent, the portfolio size back to almost SEK 22bn, although SEK 4bn was divested, and a net profit of SEK 801m. The underlying business earnings, excluding one-off items, was around SEK 500m. We are pleased with that level as a step towards our objectives, but not satisfied and the work to reach all financial objectives as fast as we can continues.
Finally, we would like to thank all our business partners for the collaboration and look forward to deepening the relationship going forward. We also sincerely would like to thank all our colleagues throughout Europe. Our culture of being nice and determined contributes to a fun and developing environment. We truly believe we are building an amazing company, and you are in parallel carrying out rejuvenation and running the daily business. Thank you!
We had a late bar burger at a London hotel some weeks ago. The food came in late, but the waiter said in an elegant British way: “your patience has served you well”, and the burger was truly exceptional. We are looking forward to the day when we can say to our shareholders: “your patience has served you well”. We are working intensively to reach that day.
Stockholm, March 2023
Harry Vranjes, Chief Executive Officer, and Lars Wollung, Chair of the Board