Risk management

Risk is an inherent part of any business operation. Without taking risks, it is impossible for a business to achieve long-term profitability. Hoist Finance acquires and manages consumer receivables and thereby actively exposes itself to risk. This is the core business of Hoist Finance, a business where we have been successful for the last 20 years.

What is risk?

Hoist Finance defines risk as the possibility of a negative deviation from an expected development within the company. This could be a deviation from expected earnings or from an expected liquidity or capitalisation level. Ongoing risk management is a core activity in any banking or financial services operation and it is fundamental for long-term profitability and stability.

Goal of the company’s risk management

The goals of Hoist Finance’s risk management are to minimize negative variability in earnings and to secure the survival of the company by maintaining sufficient capital and liquidity levels. This will create and uphold confidence in the company amongst stakeholders, thereby creating the conditions to achieve and further develop sustainable shareholder value.

How are the goals of the company’s risk management achieved?

To contribute to fulfilling the goal, to minimize negative variability in earnings, a framework for how risks shall be managed has been developed throughout the years. This risk management framework has been adopted by the Board of Directors on advise from the Executive Management Team and The Group Risk Control Team.

The risk management framework consist of, amongst other;

  • Clearly defined strategy with regards to which risks the company actively pursue in order to generate a significant and heathy risk adjusted return and which risks shall be minimized.
  • Clearly defined risk capacity, risk appetite and risk limits and principles for how these shall be evaluated through analysis, controls, reporting and stress testing.
  • Continuous education on risk management throughout the organisation and a continuous strive to improve and further develop the company’s risk management.
  • Continuous oversight and evaluation of the tools used to manage risk.
  • Implemented routines, processes and plans to ensure continuity in all critical business and operational processes.
  • Adopted policies by The Board of Directors with regards to how risk management shall be performed. These are continuously reviewed in order to make certain that they are effective with regards to the goal of the company’s risk management.
  • Clearly defined set of responsibilities for the company’s risk management through structuring the organisation according to the established principle, the three lines of defence. This entail control functions to ensure duality and independence in relation to business units in risk considerations.

To ensure that Hoist Finance continuously maintain sufficient capital and liquidity levels the company work according to a model where the company’s risk capacity and risk appetite is evaluated, analysed, stress tested and reported monthly to the Board of Director’s and the CEO. Hoist Finance’s risk capacity is determined by assessing the size and quality of the company’s capital and liquidity position. The capital risk capacity is the difference between actual capital levels and regulatory minimum levels and shows the ability to absorb losses before critical levels are reached. The liquidity risk capacity is the size of the liquidity outflow the company can manage without breaching the regulatory minimum requirements.

Based on the company’s capacity to assume risk, the risk appetite is determined by the Board of Directors. By weighing potential returns against potential risks in the business plan, the Board can decide on an appropriate risk and return level for the company’s risk appetite. Hoist Finance’s risk appetite then provides a basis for risk limits to be used in the day-to-day business activities and in monitoring of risks. The Group’s risk control team continuously monitor the risk development to ensure that the company does not assume any risks that exceed the established risk appetite, risk capacity or limits.

Which risks exist within Hoist Finance and which risks does the company target to actively expose itself to in order to generate an attractive return to investors?

Hoist Finance’s core business is to earn money through controlled exposures to credit risk in the form of previously defaulted credit loans. The company has been successful in this line of business for the last 20 years why this form of controlled credit risk exposure constitute a long term viable and profitable business model. Other types of risk, such as operational risks and market risks are undesired but sometimes unavoidable. However, they are minimized as far as is economically justifiable.

Below the risk exposures which exist in the company’s line of business is visualized.

Conclusion from the internal risk, capital and liquidity assessment

Hoist Finance continuously identifies and quantifies the relevant risks its business. Given the capital and liquidity requirements according to the Basel III accords and with consideration to Hoist Finance’s internal risk assessment, the conclusion is that company is well capitalised, even in the event of a severe economic recession.