Hoist Finance's core business is to acquire and manage NPL portfolios, which is why we are actively exposed to credit risk. Being a regulated company under supervision from the Swedish Financial Supervisory Authority (SFSA) puts further emphasis on a solid understanding and management of all the risks facing the company.
Hoist Finance defines risk as the possibility of a negative deviation from what is expected. This could be a deviation from expected earnings, liquidity levels or capitalisation. Ongoing risk management is a core activity in Hoist Finance and is fundamental for long-term profitability and stability.
Risk management framework
The goal of Hoist Finance’s risk management is to minimise negative variability in earnings and to secure the survival of the Group by maintaining sufficient capital and liquidity levels. This will create and maintain confidence in Hoist Finance amongst stakeholders, thereby achieving sustainable shareholder value.
To fulfil this goal, the Board of Directors has adopted a risk management framework comprised of, for example, policies and strategies for the company’s management, analysis, control and reporting of risks in day-to-day operations.
Because Hoist Finance’s core business and risk strategy is to generate revenue through controlled exposures to credit risk in the form of non-performing loans, we actively pursue this type of credit risk. Other types of risk, such as operational risks and market risks are undesirable but sometimes unavoidable. These risks are minimised as far as is economically justifiable.
Risk capacity (capital and liquidity buffers in place before critical levels are reached) is determined in order to ensure the survival of the Group. Capital risk capacity is the difference between actual capital levels and regulatory minimum levels and shows the capacity to absorb losses before critical levels are reached. Liquidity risk capacity is the size of the liquidity outflow Hoist Finance can manage without breaching regulatory minimum requirements.
The Board of Directors determines Hoist Finance’s risk appetite within the available risk capacity. By weighing potential returns against potential risks, the Board can decide on an appropriate risk and return level for the Group. Hoist Finance’s risk appetite then provides the basis for business decisions and risk limits, which are used in day-to-day business activities and in risk monitoring. The Group’s Risk Control function continuously monitors to ensure that Hoist Finance does not assume any risks that exceed the established risk appetite, risk capacity or limits.
Three lines of defence
Hoist Finance’s risk management is built on clearly defined goals, policies and guidelines, an efficient operating structure and transparent reporting and monitoring. The Board of Directors’ risk management policy stipulates the framework, roles and responsibilities for risk management and the guidelines for ensuring that there is adequate capital and liquidity to withstand economic adversity. Hoist Finance’s risk management distributes roles and responsibilities in accordance with three lines of defence.
| Risk type | Risk profile | Risk management |
|---|---|---|
|
Credit risk |
Credit risk refers mainly to acquired NPL portfolios and the risk that collection on these will be lower than forecasted. Credit risk also includes the risk of credit losses on acquired performing loans. Other credit risk exposures are: (i) cash deposits with banks; (ii) investments in interest bearing instruments; and (iii) counterparty risk related to hedging FX and interest-rate risk. | Credit risk in acquired loan portfolios is monitored, analysed and managed by the management in each country, and by the Group’s Business Control unit. Other credit risks are analysed and managed by the Group’s Treasury function. The Risk Control function analyses and monitors all credit risk exposures. |
| Market riskThe risk arising from adverse movements in foreign exchange rates and interest rates. | The main FX risks arise from the fact that the loan portfolios (the assets) are denominated in EUR, PLN and GBP, while the reporting currency is SEK and the majority of liabilities are denominated in SEK. Interest-rate movements have an effect on net interest income. | Market risks are hedged continuously by the Group Treasury function and are independently analysed by the Group’s Risk Control function. |
| Liquidity riskThe risk of difficulties in obtaining funding, and thus being unable to meet payment obligations when they fall due, without a significant increase in the cost of obtaining means of payment. | Liquidity risk is linked primarily to deposits from the public and the risk of large withdrawals occurring at short notice. Furthermore, increased requirements for funds pledged as collateral for derivative positions, and refinancing risk associated with existing market funding, could potentially impact liquidity in a negative way. | The Group has a significant liquidity reserve to cover potential outflows of liquidity. Hoist Finance also works pro-actively to diversify the number of funding sources. |
| Operational riskThe risk of loss resulting from inadequate or failed internal processes, people, IT-systems or from external events including legal and compliance risk. | Operational risk is present across our operations and come in many forms. Common examples are to failure in our processes due to issues with our IT-systems or lack of or erroneous data to perform tasks. Operational risk category is expanding broadly due to the increasing connection with Environmental Social Governance - ESG related risk such as pandemic, climate change risks, and financial inclusion. The operational risk framework is then updated accordingly. | The operational risk framework is implemented to analyse, control, report and mitigate operational risks Hoist Finance is exposed to. During 2021 the Risk and Control Self-Assessment – RCSA process has considered, for the first time, if any ESG related risks rely on the business process to provide input to a dedicated sustainability risk assessment to conduct in 2022.Hoist Finance has showed good capacity to handle a crisis and adopt the way of working to deal with unexpected changes. Hoist Finance is committed to continuous improvement of such capacity, planning and proper training to get prepared for further crisis. |