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Edited Transcript of HOFI.ST earnings conference call or presentation 30-Jul-19 7:30am GMT

Q2 2019 Hoist Finance AB (publ) Earnings Call

Stockholm Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Hoist Finance AB (publ) earnings conference call or presentation Tuesday, July 30, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Christer Johansson

Hoist Finance AB (publ) - CFO

* Julia Ehrhardt

Hoist Finance AB (publ) - Acting Group Head of IR

* Klaus-Anders Nysteen

Hoist Finance AB (publ) - MD & CEO

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Conference Call Participants

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* Ermin Keric

Nordea Markets, Research Division - Analyst of Financials

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Hoist Finance Q2 Report 2019.

Today, I'm pleased to present CEO, Klaus-Anders Nysteen; and CFO, Christer Johansson. (Operator Instructions) Speakers, please begin.

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Julia Ehrhardt, Hoist Finance AB (publ) - Acting Group Head of IR [2]

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Thank you and welcome. Thank you for taking your time. Here in this office in Stockholm, we have me, Julia, Head of IR; we have Klaus-Anders Nysteen; we have Christer Johansson; and I would also like to present Andreas Lindblom, our new Head of Investor Relations.

So I will start by handing over to Klaus-Anders and Christer, that will give you a short presentation and then we will follow after the presentation with questions.

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Klaus-Anders Nysteen, Hoist Finance AB (publ) - MD & CEO [3]

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Thank you, Julia, and a very good morning to everybody and welcome to this Q2 earnings call.

We will of course cover the Q2 performance. I would also like to use this opportunity to update you on the work we are doing to mitigate the regulatory -- recent regulatory changes that we are experiencing. And of course go through the securitization that we issued a press release about last night.

But let me then first start off by talking about our second quarter earnings, and I will refer to Page #4, Slide #4 in the presentation. And I'm not going to steal all of Christer's thunder but just say that we are again reporting strong financial performance, all-time high earnings before tax at SEK 230 million excluding items affecting comparability.

And this is actually the fourth quarter in a row with an all-time high financial performance and this is, of course, something we're really happy about.

Collection performance continues to be strong and robust at 104%. Cost/income ratio at 71%, and I'm particularly pleased by the fact that we have strengthened our capital ratio. Our CET1 ratio now is at 9.9%, and we should have in mind that we have absorbed the full change of the new risk weight, at the same time, sustained what I would call a healthy investment level the first half of the year.

The way we look at the market, we still feel optimistic about what we see. The conditions are quite positive with a strong supply out there, it's improved margins and, of course, what we have seen is also that industry consolidation is continuing.

Really happy about our rollout of digital solutions. We are definitely still on track, I will comment a bit more on this later, and of course, now almost needless to say, I guess, that we have good progress in implementing mitigating actions. And of course, very happy and very proud that we have announced our first securitization.

Moving then to Slide #5. I'm not going to spend enormous amount of time on this page but just wanted to reiterate and say that I'm happy to see both the improvements quarter-on-quarter over this time but also the consistency on our earnings and our returns.

Moving quickly to Slide #6 in the deck and the headline there is that 2019 volumes remained strong despite the regulatory changes, and that's actually a pretty precise summary of that slide. The total investment level year-to-date is SEK 2.3 billion. And as you know, of course, most of this is related to the acquisition of the GetBack portfolio that we have discussed in the past.

I think it's a reasonably healthy number to put SEK 2 billion, not least factoring in the fact that we had these regulatory changes that you are so familiar with by now.

So on top of the GetBack portfolios, we had done some smaller acquisitions in most markets and of course, the regular forward flows.

The investment level is lower than what we saw in 2018 but definitely on par with previous years, perhaps even stronger and the pipeline remains very strong and healthy and our previous guidance has been around SEK 5 billion for the full year. That's before taking mitigating actions into considerations. We can share some more thoughts about this a bit later into the presentation.

Moving to Slide #7. I think it's sometimes important just to remind ourselves what are we trying to achieve here, and Slide #7 just summarizes the Hoist Finance strategy, the key cornerstones at least. And the first one is that we focus on some prioritized markets and aiming for the top 3 position rather than being too geographically scattered. And we are now top 3 in 3 of our important markets. And of course, on the back of the GetBack transactions that we have now, have taken a number 2 position in the Polish market.

Second cornerstone is to become the most effective, the most efficient operator in the industry and I think we are on our way. We have redefined our ways of working. We introduced a much leaner and tighter organization. We have established 3 center of excellences. We have established a shared service center, and we've done site consolidation.

On top of this, harmonizing and standardizing our key work processes are ongoing. We are now managing centrally the [2] campaigns, analytics, business intelligence. So we are very happy with this progress, but the good news is that there is more work to be done so the potential is definitely not capped.

In terms of digital leadership and we, as an industry, we are definitely behind other industries, so we should take inspiration from others. We have set ourselves out to become digital leader, and in the second quarter, 2 additional countries have now introduced our self-service portal to our customers. And that means that only 1 country is remaining and that contractually has a low-functioning payment portal actually.

And then to my knowledge, none of our peers have been able to do anything similar, so that's, for us, at least a testimony that we are moving in the right direction.

If you think about cash collections coming through digital channels, it is increasing rapidly, I would say, and quarter-over-quarter, and it increased by [13%] compared to Q1 this year. So it's going in the right direction, but, of course, the level is still low. The cash collection [weight] through digital channel is at Q2 at 11%, so there's a significant and important potential to increase this number going forward.

The last cornerstone in our strategy is to capitalize on our unique funding model and our regulated status. And I've said this many times, but being regulated at the bank has actually served us really well over time, and I would say that now having announced securitization, we are adding another option to our toolbox to continue to deliver low cost of funding also in an NPL backstop environment.

At the same time, let me also say that we take a lot of pride in our amicable and holistic approach to collection and making sure that our operation is sustainable in all ways and over time and this builds our brand, our reputation and strengthens our position vis-à-vis our clients and our customers.

And this is a good bridge into the next page, Slide #8. We're talking about sustainability because the way we look at this, ethics and sustainability are not separate from the business. On the opposite, to be a truly sustainable and ethical company, these matters need to be integrated, all processes and decisions of the company. And as you know, our vision is to help people keep their commitments.

And if we take a closer look at United Nations' 2030 Sustainable Development Goals, they actually represent like a blueprint to achieve a better and more sustainable future for all. And these Sustainable Development Goals address the global challenges that we all face, including those related to poverty, inequality, climate and prosperity, peace and justice.

This might seem as a rather lofty type of vision or goals to have, but we in Hoist Finance see that we actually have a role to play and through the work that we do, we support a number of these Sustainable Development Goals, and if we think about it, being financially excluded from society is quite a heavy burden to carry for many people. And we are really proud to help people, to help our customers with financial difficulties. We help them back on track.

So let me just pause here then for now and hand over to Christer and he will take us through our financial performance in the quarter. So over to you, Christer.

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Christer Johansson, Hoist Finance AB (publ) - CFO [4]

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Thank you, Klaus-Anders, and starting on Page 10. Our financial performance in Q2 was solid with total operating income closing in on SEK 800 million and with profits before tax of SEK 230 million. This bottom line contribution is slightly better than Q1 2019, which in itself was an all-time high.

Collection performance came in at 104%, cost/income at 71% and ROE at 16%. Now this quarter did not include any items of the sort we would qualify as affecting comparability, but we did, in fact, have and disclosed such items on the cost side for the comparison quarter, Q2 2018.

And for this reason, I suggest that we move to Page 11, where adjustments for those items have been made. To start with on Page 11, one can observe that growth in loan portfolio at 25% ties in well to growth in net interest income at 26%. And this, if you think about it, confirms our previous comments on reduced margin pressure. Cost increased as well that they did so at roughly half the pace of income growth, so 13% versus 23%.

On an aggregate level, cost in Q2 correspond to 71% of income whereas in the same period last year, they amounted to 75% of income, adjusted for items affecting comparability.

I will come back to those costs a bit more on the next page, but first, I'd just like to make a quick comment on the line related to profits from joint ventures. The low profit from joint venture in this quarter is explained by a negative reevaluation on portfolios held within the Polish JV. And this came with a negative SEK 11 million P&L impact. Despite that headwind, profit before tax came in 39% higher than Q2 last year.

Moving to Page 12 and costs. As mentioned, there are no particular one-off items in Q2 2019, so what you see here is a fair reflection of the underlying cost level.

And I'd like to comment on 3 things. First, the increase in personnel costs, so this is partly explained by the acquired entity Maran, which we consolidate since Q4 2018 and this entity has some 150 FTEs located in Spoleto, Italy so, of course, it makes a bit of a difference here.

Secondly, a comment on collection expenses. So we carry out most of the collection activities ourselves and that's also our preference. Nevertheless, we do incur external variable costs and that can present in the shape of court fees and those are accounted for as part of collection costs. Q2, their nature, they will vary a bit from quarter-to-quarter and the levels seen in this quarter I would rate as normal.

Thirdly, just as a reminder, IFRS 16 is not a major topic for Hoist, however, it does move some SEK 13 million from administrative expenses to depreciation.

Turning to Page 13. As outlined, we are today at cost/income 71%, and as you will probably know, we target 65% by 2021, so it should come as no surprise that we have more work to do. There has been no change in our assessment of what can be achieved and no change in our assessment of what it will cost, and current completion adds up to around 17% of the savings target.

And as you would expect, our action list includes both short-term fixes and some more far-reaching changes to the way we operate, and we are progressing initiatives in both categories. In the short-term category, just as an example, I can mention that travel cost is down 29% per employee when comparing H1 this year with the same period last year.

Now that kind of incremental change does not require much investment. In the category of more far-reaching changes, actions often take longer and come with upfront costs and we will update you as certain milestones are passed in the coming quarters.

Turning to Page 15. On capitalization, I mentioned in our Q1 earnings call that we entered into the year within our CET1 target interval and that we expect to end the year within that interval. That's improved but unlike our position a quarter ago, we are now also within that range. So that's great.

This is the result of accumulating profits at a reassuring pace that also there is, of course, a holding back a bit on acquisitions in Q2. We could have invested more, that acquisitions we did complete still amount to decent growth rate in core assets so 7% up versus year-end 2018.

Our liquidity position remains strong, which makes us well-equipped for the second half of the year and normally, the second half of the year is the busy season in debt purchasing.

Turning to funding on Page 16. In fact, interest expense in relation to NPL book value is coming down slightly to 1.9% and this is a very, very competitive level. As illustrated in the graph, the proportion of funding sources has not changed much, and remember, the securitization, which we will come back to in a second, is not in place as per end of Q2.

Within the retail, the cost component, we have during 2019 adjusted our pricing to the benefit of longer-term deposits. We've also launched new, longer external accounts in the German markets and those have been well-received.

When combined, those 2 measures of course, come with a cost since overnight deposits are cheaper but in exchange, helps our asset and liability management.

This can be seen if you turn to Page 17. As shown on the left-hand side, when we came into 2019, fixed-term deposits constituted 35% of total deposits. As per end of Q2, the corresponding figure is 48%. While realizing this significant change, we have reduced our interest rate risk, and by extension, this allows us to manage capital requirements that build on such risk exposures.

And with that, I'd like to hand the call back to Klaus-Anders, who will continue on the regulatory front.

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Klaus-Anders Nysteen, Hoist Finance AB (publ) - MD & CEO [5]

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Thank you, Christer. I will spend a bit of time on Page #19, trying to talk to the background also of what's going on. So please, bear with me.

So as you have seen from our announcement yesterday, we have taken one important step in the plan to adapt our business model to this new regulatory environment. And our announcement yesterday is an important milestone for us, and I believe that this is proof that we have a viable business model going forward.

So as you are aware then, in December 2018, the Swedish FSA changed its practice and interpretation of the CRR in respect of risk weights for purchased secured NPLs. And this revised interpretation forced us overnight to apply a risk weight of 150% rather than the previous 100% that was used for those assets.

And also, that the European parliament and the Council approved and opted the NPL backstop regulation, which in many ways is more important in this matter. And this NPL backstop regulation came into force in April this year but is only a forward-looking problem; it doesn't really affect the back book because it applies only to loans originated after 26th of April 2019.

This NPL backstop is a so-called prudential regulation which effectively forces institutions like Hoist and other banks to fully deduct nonperforming loans from its CET1 capital according to a specific time line that you can see from the graph, which then, from a regulatory capital perspective, essentially it's the same thing, as a sort of write-down to 0 after 3 years for unsecured NPLs, and as you are fully aware of, our curves are much longer than 3 years.

I also think it's important to mention then that the NPL backstop was introduced to incentivize banks to offload NPLs into well-functioning secondary markets, that's really the purpose of the whole regulatory change. And while Hoist Finance has an important role in the secondary market, we are also [regulated] at the bank and therefore, subject to the backstop regulation even though it wasn't designed with us in mind.

So the NPL backstop consequence is unintended, but obviously, it's something that we need to adapt to, and that's exactly what we are doing.

So over the last few months, we have worked intensively together with financial and legal advisers, and we have gone through and evaluated many different alternatives, and we have developed securitization structures while NPL assets are transferred out of Hoist Finance prudential balance sheets, sheets so that assets are derecognized from a risk and capital adequacy perspective, that's the important point.

Again, if you look at the underlying purpose of the regulations that are addressing NPL issues, again, 2 main features. One, to shift the risk of nonperforming loans out of the balance sheets of the banks, which is a good thing; and two, establish a well-functioning and competitive secondary market and market participants that are able to handle those nonperforming loans. And we are very confident that we are fulfilling both these objectives by establishing securitization structures.

We will be transferring the NPLs from the balance sheet from a risk perspective and, at the same time, continue to be an active responsible debt purchaser on the secondary market, helping our banking partners to clean up their balance sheet as well as finding amicable and good solutions for our customers.

So I would like to emphasize at this point in time, that we are not circumventing irrelevant regulations or setting up a structure which is contradictory to the purpose of the regulation. We are merely adapting our financing model to the new regulatory environment.

So even though this backstop regulation is new, there is a well-established securitization framework in the CRR, which clearly addresses capital treatment and, for example, requirements to achieve "significant risk transfer," and this is something that is done by banks all over Europe.

In the process, we have received significant appetite or interest from a number of investors, and we are looking forward to developing these relationships further in the future. There is, of course, more work to be done, but going forward, we see securitization as a very viable route.

As again mentioned, being a bank has historically served us well. We have by far had the lowest cost of funding in the market and Christer alluded to that when he went through the numbers. Securitization structures will increase our financing costs to some extent. And we do expect to fund ourselves well below where our predominantly high-yield bonds finance peers currently finance themselves. Consequently, we will be well placed to compete in our chosen and prioritized markets.

So before discussing the securitization that we announced yesterday, let me first explain how we think about potential features of a securitization program in the context of the NPL backstop regulation.

I realize this is a long speech, but let's now move to Slide #20. So on this slide, in this picture, we tried to get across how 2 different types of securitization structures actually work. And we kind of call it Step 1 and Step 2 because, in essence, you're moving from Step 1 towards Step 2.

So the unrated securitization structure, it's what you see to your left on this picture, and this is the structure that we announced yesterday and Christer will go through the key financial aspects and details in a couple of minutes.

So this structure does not require a rating process and can therefore be implemented in a fairly short time frame. The securitization structure that we announced relates to our back book and being able to move at the speed of implementing a securitization is not particularly -- will be particularly important as we move toward securitization on the front book and the new purchases.

This unrated securitization can be a short-term step to facilitate transfer to a potentially more efficient rated securitization, which is the Step 2 then.

In the unrated structure, Hoist retains junior tranche and the external investor holds the senior tranche. Under existing CRR securitization rules, Hoist will deduct, retain its junior tranche in full from the CET1 capital. In other words, this reduction will cover Hoist's entire risk exposure relation to the securitized portfolio.

As the senior tranche is [placed] with an external investor, the securitized portfolio will not be treated as risk-weighted assets by Hoist, which, in turn, will achieve capital release.

To the right on this slide is the Step 2, rated securitization. And the structure that we are envisaging is aimed at achieving so-called significant risk transfer through selling the majority of the junior and mezzanine tranches and achieving derecognition from a prudential perspective.

The senior tranche was rated and retained by Hoist, funded by our deposits of course, and depending on the rating, the risk weight applied by Hoist on this retained tranche is lower than holding the NPL directly. For example, a BBB rating would have a risk weight of 105% under CRR regulation, which is lower than the 150% applicable to unsecured NPL assets, comprising majority of our current book. And we believe that we can implement such a structure subject to finalization of the rating process and conclusion of our dialogue with other stakeholders, including the regulator and investors.

This rated securitization takes longer to implement given the rating process, but we are well underway and hope to deliver and expect to deliver this during the next few months.

Step 1 and 2 while different in structure, both achieve capital relief. However, we expect that Step 2 will be slightly more efficient from a funding cost and capital relief perspective. Due to the different time lines to implement, we expect both these securitization structures to form an increasingly important part of our financing structure in the future.

As you know, the backstop is not in scope for our assets today since it applies only for loans originated after April 2019. So the importance of having these structures in place is gradually increasing and, of course, it's going to be very important from 2021 and '22 onwards.

So having spent quite a bit of time on these 2 slides, I now hand over to Christer for him to explain for us the financial implications of the unrated securitization. Over to you, Christer.

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Christer Johansson, Hoist Finance AB (publ) - CFO [6]

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Thanks. And turning to Page 21, where we have provided a somewhat simplified summary. The transaction is an unrated securitization of EUR 225 million with underlying assets being Italian unsecured NPL portfolios.

As outlined, Hoist Finance would retain a junior tranche representing, in this case, 5% of the overall portfolio book value. The senior tranche, representing 95% of the overall portfolio book value, will be held by the external investor and come with an initial coupon of 3.5%.

As made public, we have a firm commitment from a fund managed by CarVal to subscribe to the senior tranche, and we are expecting to close this transaction in August.

From an accounting perspective, our assessment is that the securitization vehicle will be fully consolidated, and the senior tranche will be recognized as a liability. The assets in question will not be derecognized in accounting terms but just to be clear, this does not mean that the assets will be consolidated from a risk and capital adequacy perspective, and that is the key consideration in relation to the backstop.

As I will outline in a while, this securitization frees up around 60 basis points of CET1 capital, which, in turn, enables us to make at least EUR 100 million of additional portfolio investments.

Upon closing the transaction, we will, of course, strengthen not only the capital position, but we will also strengthen an already strong liquidity position then. We will adapt the use of other funding sources accordingly in order to offset parts of the additional funding cost.

In net terms, funding cost will still rise but over time, this increase will be more than offset by us targeting SEK 6 billion in acquisitions instead of the previously targeted SEK 5 billion. Or put in other terms, we expect a marginal return of those additional portfolio investments to exceed the marginal cost of the securitization.

As this structure is the first of its sort for Hoist, we have had to carry out substantial preparations, as you can imagine, and this has, of course, involved also external advisers, which comes with some cost. We anticipate that most of this cost will be accounted for as part of the financing cost over time. Hence, the financial instrument will, in our books, run with an effective interest rate which is somewhat higher than what the coupon alone would suggest.

Turning to Page 22, which illustrates the capital impact of an unrated securitization. So as a result of the securitization, there is an RWA relief, as Klaus-Anders outlined, and this comes from the fact that the portfolio is deconsolidated for prudential purposes. However, on the capital side, the junior tranche will be deducted in full as it is retained by Hoist, and the net capital impact of the transaction we are announcing today or yesterday amounts to improving the CET1 ratio by approximately 60 basis points. So as said, that frees up at least EUR 100 million of additional investment capacity for us.

Before I hand back to Klaus-Anders, who will do the summary and open up for Q&A, I just want to mention that on Page 23, we have illustrated how the capital treatment will differ in the case of a rated securitization, and as said, that is not the transaction we have done, we will not go into details on that today, it's more for future reference.

With that said, back to Klaus-Anders.

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Klaus-Anders Nysteen, Hoist Finance AB (publ) - MD & CEO [7]

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Thank you, Christer. So we're now on Page #25. So regarding outlook, we definitely still see attractive market conditions. The regulatory changes that we have discussed in detail today will increase supply of NPLs from financial institutions in the years to come. The mark -- market is still developing favorably and margins are improving. We're seeing that from the work that we are making and industry consolidation is continuing and in all those things, we see are positive elements.

And regarding strategy, let me first say that we are committed to our cost savings and operational excellence program and to become a digital leader in our industry. There is, as we discussed, good traction, and the good news is that there is more to be done.

All of the regulatory changes that recently were introduced is positive for the industry and the market dynamics. They certainly gave Hoist some specific challenges being regulated at the bank. Now with yesterday's announcement, we are taking the first step in implementing the relevant mitigating actions.

We see yesterday's announcement and the transaction together with CarVal as an important milestone on the path towards a sustainable business model, post the introduction of the NPL backstop.

Let me round off by saying that I am very proud of the work my team has delivered, and I'm very optimistic that we can emerge and develop an even stronger Hoist Finance despite the recent challenges.

And today, I think we show that Hoist Finance is a flexible, competent and agile organization, and I believe that we have a sustainable and competitive business model fit for the future.

And let me also say that I'm excited about working more closely with investors as strategic partners going forward, and I'm encouraged by the strong interest in working with Hoist Finance.

So for now, I recognize that we have covered a lot of ground and that you may have questions, which we, of course, are happy to answer. So by this, we open up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Ermin Keric of Nordea.

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Ermin Keric, Nordea Markets, Research Division - Analyst of Financials [2]

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So not so unexpected perhaps, but the first questions are regarding the securitization. So you say that you free up around EUR 100 million under 250 -- or, sorry, EUR 225 million you are securitizing right now. Is that a fair assumption that you'd get something similar in other transactions? Or how should we think about that? And also, approximately how much would you expect to free up if you get it rated, so if you're in a Step 2 situation?

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Christer Johansson, Hoist Finance AB (publ) - CFO [3]

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Yes, Christer here. So as I think Klaus-Anders touched upon this briefly, we would expect a rated securitization to be somewhat more efficient. So in that sense, it should be somewhat better but for the transaction that we've announced today, the numbers that we've given will give you a good understanding for how much capital we can free up in this transaction.

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Ermin Keric, Nordea Markets, Research Division - Analyst of Financials [4]

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Okay. But somewhat better, you can't provide us with any ballpark estimate on how much more efficient it would be in a Step 2?

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Christer Johansson, Hoist Finance AB (publ) - CFO [5]

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So the Step 2 is still a few months out in time, and as we complete that step, we can give you more details on that and, of course, amongst other -- on the rating and -- yes.

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Klaus-Anders Nysteen, Hoist Finance AB (publ) - MD & CEO [6]

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This process is well underway as I've said, and the feedback from the rating agencies and then more than 2 is very positive. So we expect the rated transaction to be more effective than the unrated one.

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Ermin Keric, Nordea Markets, Research Division - Analyst of Financials [7]

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I understand. And you've previously said that you aim to do maybe SEK 5 billion to SEK 6 billion in securitization. What are you expecting to do with the rest of the portfolio when it starts getting sort of affected by prudential backstops and so on? Are you still working on other solutions as well? Or have the sort of experience with securitization now been so good that this is the main track you will continue to pursue?

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Klaus-Anders Nysteen, Hoist Finance AB (publ) - MD & CEO [8]

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Yes. So as you're rightly saying, we -- 6 months back we announced 4 mitigating actions. One was securitization alone was to establish fund structures; the third was to work with internal rating, IRB; and the fourth would be to work with the business mix. Now we have announced our first securitization, which I think is a very important step. We are still working with the other mitigating actions in both fund structures and IRB. We know IRB takes a longer time, but we are working with it. Fund structures, we hope to do "sooner rather than later" because I think that's interesting to have as a tool in the toolbox. So the work is ongoing also with the rest of the mitigating actions.

And as far as securitization in terms of volume and issuance, I think it's fair to say that it was important for us now to get this well underway, to take away as a shadow that's been hanging over the share price and the questions around the viability of our business model. I think we have done that now and that gives us more time to maneuver, to say it that way.

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Ermin Keric, Nordea Markets, Research Division - Analyst of Financials [9]

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And finally, is there anything that could be said about how regulators have been sort of -- been positioned regarding this transaction and overall the different initiatives you have taken? Have they said anything that you could share with us? Or is it more just informal discussions you have with them?

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Klaus-Anders Nysteen, Hoist Finance AB (publ) - MD & CEO [10]

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Well I can start and Christer can elaborate. But the point here is that the regulators will never give you any preapproval, that's important to know, but we have, of course, worked extensively with advisers through this process. So we feel very confident that this works in a cost backstop environment, which is very important for us of course. But of course, we also had a number of meetings with the Swedish [regulator] that were really well aware of the transaction. But Christer, do want to shed some more light on this?

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Christer Johansson, Hoist Finance AB (publ) - CFO [11]

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No. I think of course, preapproval would be the best thing. The second best thing would be to do your homework, and I think that's what we have done.

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Klaus-Anders Nysteen, Hoist Finance AB (publ) - MD & CEO [12]

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Yes.

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Operator [13]

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Our next question comes from the line of [Nicolo Misardi] of Barclays.

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Unidentified Analyst, [14]

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Sorry, more questions about the securitization. Are the -- the senior notes, are they issued at par and is there like a deferred purchase price for the portfolio?

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Christer Johansson, Hoist Finance AB (publ) - CFO [15]

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Yes, so the senior notes are issued at par, correct.

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Unidentified Analyst, [16]

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And there is like -- there is -- obviously Hoist is getting the entire proceeds right away or there is a deferred purchase price so that you'd get the proceeds from the securitization over time?

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Christer Johansson, Hoist Finance AB (publ) - CFO [17]

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We will get it upfront.

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Unidentified Analyst, [18]

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Upfront. So the true IRR, I would say, of the investment into the senior is the 3.5% you're guiding to?

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Christer Johansson, Hoist Finance AB (publ) - CFO [19]

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So as I said, there will, of course, always be some cost associated with this, even more so when you do it the first time. So the effective interest rate in our books will be somewhat different for the...

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Unidentified Analyst, [20]

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No, no. I'm sorry I was meaning for the investor, for CarVal. Is CarVal investing at 3.5% into the senior note like a debt through IRR?

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Christer Johansson, Hoist Finance AB (publ) - CFO [21]

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For the period of time that we expect this transaction to be live, I'd say that that's a correct reflection of the return.

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Unidentified Analyst, [22]

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And are there, I would say, repurchase or similar obligation on Hoist? Or is it completely, I would say, obligation-free on your side of like moving from this structure into a new structure?

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Christer Johansson, Hoist Finance AB (publ) - CFO [23]

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I think the only sort of relevant mechanism to mention here is that as we outlined, there's a Step 1 and there's a Step 2 and we've done -- taken some steps to sort of prepare the ground for Step 2. But other than that, it's a cash securitization. It's a true sale and nothing strange in that sense.

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Unidentified Analyst, [24]

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Got it. And 2 last questions. Sorry, if I abuse your time. What's the ERC associated to this portfolio?

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Christer Johansson, Hoist Finance AB (publ) - CFO [25]

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I'd say that the portfolio that we have securitized is similar to our overall book, so if you use the overall figures between book value and ERC, you should get an ERC, that's roughly right.

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Unidentified Analyst, [26]

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Got it. You mean on the average of your book or the -- or any other, so 1.6 I would say, is the money market that's embedded?

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Christer Johansson, Hoist Finance AB (publ) - CFO [27]

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The portfolio that is being securitized is not very different from our overall book.

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Unidentified Analyst, [28]

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Got it. And so very last question. How do you choose the assets to securitize? So was there a random selection in your Italian unsecured? Was there a particular portfolio?

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Christer Johansson, Hoist Finance AB (publ) - CFO [29]

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One of the considerations that we have taken into account is the originator because it makes things a little bit easier. So it's -- the assets are predominantly from 1 originator. Other than that, they're, I would say, similar to other assets.

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Operator [30]

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(Operator Instructions) And we have 1 further question coming through. It's a follow-up from Ermin Keric of Nordea.

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Ermin Keric, Nordea Markets, Research Division - Analyst of Financials [31]

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So I was thinking we could also maybe speak something about the Q2, which was actually quite strong. So when you say that you also see that margins continued to improve, do you now see that margins on new acquisitions are actually better than your back book blended IRR?

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Klaus-Anders Nysteen, Hoist Finance AB (publ) - MD & CEO [32]

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Yes. So thanks for asking about Q2. So -- and I agree with you, it was a very robust and strong quarter. So we showed you previously a slide which shows that the front book profitability now has been on par with the back book average, and we continue to see healthy improvement in margins.

Having said that, of course, and we're referring back to the slide on investment volumes, we haven't done that many transactions this year. So our point of reference is slightly lower than it usually is because we have concentrated our money to get back to acquisitions, portfolios we'll get back and some forward flows.

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Christer Johansson, Hoist Finance AB (publ) - CFO [33]

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And the forward flow was instead, we acquired, I would say, that they typically reflect the price levels seen in previous year.

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Klaus-Anders Nysteen, Hoist Finance AB (publ) - MD & CEO [34]

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Yes, unfortunately.

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Christer Johansson, Hoist Finance AB (publ) - CFO [35]

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When those contracts were entered into, so in a sense, that also plays into the overall development.

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Ermin Keric, Nordea Markets, Research Division - Analyst of Financials [36]

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Okay. And I suppose, based on what you just said, that would also explain the reason we've only seen unsecured so far this year is merely that the number of transactions have been quite few, so it's more a coincidence than a shift in trend so to speak?

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Klaus-Anders Nysteen, Hoist Finance AB (publ) - MD & CEO [37]

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Yes.

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Christer Johansson, Hoist Finance AB (publ) - CFO [38]

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Yes.

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Klaus-Anders Nysteen, Hoist Finance AB (publ) - MD & CEO [39]

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And looking at the pipeline, it's well diversified in various asset classes.

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Ermin Keric, Nordea Markets, Research Division - Analyst of Financials [40]

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Okay. Perfect. And then on the collection performance. It remains quite strong at 104%, but we've actually heard some of the banks in Spain talk about recovery rates being somewhat lower in recent time. Have you noticed anything from that in any of the geographies?

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Christer Johansson, Hoist Finance AB (publ) - CFO [41]

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Again, what I can say is that, of course, 104% is the combined figure for the overall group, and we will always have some differences across countries. In Q2, we've seen very strong performance in Poland and Italy and its impact has been a bit weaker on the Spanish side, which maybe goes to what you're saying.

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Ermin Keric, Nordea Markets, Research Division - Analyst of Financials [42]

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Yes. I think that coincides well with which banks have been saying those comments.

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Operator [43]

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(Operator Instructions) Okay. There seem to be no further questions coming through, so I'll hand back to our speakers for the closing comments.

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Klaus-Anders Nysteen, Hoist Finance AB (publ) - MD & CEO [44]

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All right. Well, thanks a lot for participating in the call and let me use this opportunity to thank Julia for her time in Hoist Finance and as, actually, we have [our] reservations. And also to welcome Andreas in this role permanently. So he's the one you can always call.

So again, thank you for participating on the call. I wish you a great day and also, a great summer. Goodbye.