Hypoport SE

XETRA:HYQ

Earnings Call Transcript 2022-Q2

[Operator]

Dear ladies and gentlemen, welcome to the webcast results Q2 2022 of Hypoport SE. May I now hand you over to Ronald Slabke who will [indiscernible] conference.

[Ronald Slabke, executive]

Welcome from my side [indiscernible] for the half year report of Hypoport SE. As you know, we are on a growth track of digitalizing the credit, real-estate and insurance industry here in Germany. And as always we kept growing in the first half of the year. We mean our multiple entities in the Hypoport network business core presence in the German mortgage market platform for the credit industry was heavily growing to a new record high EUR 120 million in revenue. Same with the private client segment strong growth. Our new segments, real estate and insurance this is an increasing level of dynamic and double-digit growth as well.

So the new record numbers for the first half year they are supported by all segments. We ended up with a plus of 23%, EUR 260 million in total at the new profit record with 38% increase to EUR 30 million for the first half of this year. This all being achieved in a pretty challenging market environment. It was changing a lot. But you can say on a monthly basis things changed. As the total for the first half of this year mortgage volume in Germany grew by 10%. So we outperformed this again as a group by double digit. In general, you can say that in the other markets the residential property transaction volume may have shrinked in the first half of the year. We don't have accurate figures there for now. And last year it was still plus [indiscernible] but we expect a decline for the first 6 months while the insurance business was a stable environment, let's say.

As we are already a little bit in the topic of market environment so what happened around us in the first half year. And then you try to predict the future how may go forward from here. First, to understand and this goes for the first half of the year and hopefully as well for the near-term future, the German mortgage market is not linked to the general economic environment. You can see here the development of the GDP for the last 15 years. Even then the corona crisis where it [indiscernible] heavily, mortgage volume was pretty stable over the whole time. So it's not that German's finance properties because of a prospering economy. They have other reasons.

Another reason, which is not core for the decision to finance in Germany is the interest rate something pretty different from [indiscernible] markets. Even there when interest rate for a long time they’re heavily going down in Germany from somewhere around 6%, 15 years ago to below 1% between 2019 and 2021. Germans didn't lend heavily more. There's an increase more or less on the level of inflation in the mortgage volume. But because of our market structure especially because of the inability to refinance at any moment we don't see an inflated market because of the interest rates. The German don't tend to buy properties because the interest rates are low or in this case then the rate will be low. They have other reasons to buy and finance properties.

So interest rate doesn't trigger buying. It doesn't say we get refinancing. So there is not a strong link between these 2 indicators. Next what you could typically expect is this rising prices mortgage volume goes up. And you can say in general this is true because prices are rising over a period of the last 12 years and mortgage volume went up as well. But as you see here not even as fast as the prices were rising. And the core reason for this decoupling year that it's not that the German price dynamic was fired by more mortgage volume and more and more transactions, something which you typically seen in front of a real estate price bubble. It was justified by exceeding demand and limited supply. And so the rising prices had an effect on the mortgage volume but this declining numbers of transaction over the time because especially the German natives they're hesitating to accept this permanently increasing price levels. While [indiscernible] for a long time the Germany was pretty cheap at mortgages. They bought properties and they just use mortgages to leverage this.

So as well the prices they were not inflating the mortgage market. We are not driven by the mortgage market. And you can turn this around the mortgage market is not dependent on the prices of properties in Germany. So when this is all not the colleague, you may ask what is it then? To understand this, it's important first to notice that we have a pretty stable market structure when you look on what mortgages are used for in Germany. Roughly 1/4 of the mortgages is used for refinancing every year because you're only able to refinance every 10 years in Germany and your new duration will be minimum 10 years. So there are no mortgages below 10 years fixed interest rate [indiscernible] in Germany. And only after this time you were able to refinance it. There's no legal option for you to refinance it early.

Next comes new construction, new buildings. Roughly representing 15% over a long time of the mortgage volume as well pretty stable because the limiting factor here is land for construction something which is highly regulated here in Germany because we want to keep our municipal area dense especially in the environmental protection law. It's pretty difficult for community to expand and designate new areas for new construction. It takes years if not decades to do this and limiting of this supply of land makes it more or less impossible even with the high demand side to increase construction and because of this the share of new mortgage volume going to new construction. Over a long period there is a huge change in interest rates we [indiscernible]

Yes, the last and major part is the purchase. So existing homes which are sold from a seller to a buyer as well pretty stable with a market volume of roughly 50% over the time. As you know already prices were going up in Germany so numbers of transactions declined. And the reason Germans didn't trust in the price development for a long period even then interest rate were low. So what triggers German and what triggered Germany in the first half of the year to buy properties it's a family issue you can say. So especially buying in Germany you do once in your lifetime. You do this the children’s are there. Maybe you have to do it again if you divorce and both wants new property. Very seldom when you changed your job in a completely new area, in a new city and you were a homeowner, you may acquire again something. This is [indiscernible] for a transaction here in Germany.

And while in earlier days, you could as well easily solve such a trigger events with renting something new. And today half of the society in Germany is still renting properties. It gets more and more difficult to solve it in the renting market because of you can say a lot of renting market overregulated, difficult to adjust to a permanent changing society and a lot of trigger events in the society. So this happened as well in the first half of the year. There's some kicks from the other factors like interest rate and economy and so on. And in some moments people were hesitating to act in some way they're desperate to act. For instance, when the interest rates were rising fast and you had an open project, you wanted to buy something then you were dealing faster with this. At this all we saw in the first half of the year and we ended up with a 10% increase in the market overall.

Looking forward, still that even none of these factors by itself has a determinating effect on the size of the German mortgage market. They all together create right now a huge level of uncertainty how the German mortgage market will look like in the next couple of months. You can say up until mid-June interest rates were rising. So people they’re desperate to close their transactions. Since then came down by roughly 100 basis points a whole percent already again. So now it's again that waiting is beneficial for you because it got cheaper. In June, for the first time in German housing market the prices came slightly down especially for existing homes. New builds still went up. So this may as well trigger some hesitation that people hope for better prices, better deals in the future. And especially the buyer side is leading to wait.

They have this uncertainty about inflation, about energy prices, energy ability. This all creates some uncertainty for all market participants. And for us to predict the near-term future and how the second half of the year will look like. What is important for you as shareholders, the long-term perspective is clear. Long term means in the next couple of years Germany will see a huge net migration because of a huge demand of our industry and at our society for skilled workers. We maybe have again a [indiscernible] Right now, the boomers are leaving the workforce and they need to be replaced. And with the strong German economy the periphery of Europe will supply this worker skills and a couple of hundred thousand young people that migrate every year to Germany. This all happened since the [indiscernible] started and especially the free labor movement in Europe were getting active 11 years ago.

This is the core reason why the whole dynamic in the German housing market changed, why the prices were rising and looking forward this will stay. So we will see this migration. We will see a huge lag on the supply side because of our regulated construction side, construction industry and supply of building land. We will see that the rents will go up. But because of the regulation much too slow compared to the building of construction costs which are heavily affected by inflation. So the renting market is actually getting less and less attractive for now. The return in the renting market is declining for new constructions while on the homeownership or the property price side for home ownership there is no regulation. And so new supply will focus on this part of the market while this [indiscernible] this locked ready market today.

So even for this additional demand side, the only way to supply is their sales occupied homeowner market, the renting market is inefficient to solve this in a near time future and even that future means the next 5 to 10 years. Other regulations sharply changed for renting market here. So this means for the future we expect a stable and slightly increasing volume of transactions. From today's perspective we don't expect sharp price increases anymore. We see that after this long period of dynamic price development we reached a typical European level. Depending a little on how the inflation looks like in Europe in the future German house prices should be in a similar dynamic like the inflation.

And hopefully, if sales comes down and as well the dynamics of the house prices comes down to just a couple of percent. Multiplied both increasing numbers of transaction and stable house prices will lead to a systematically increasing mortgage market on the long run. So we are in a healthy market environment long term and we will keep growing beside this by taking market share. So much about the market environment what happened in the last half year, how it's looking in the second half of the year on what is the long-term perspective. Now how does the different segments of Hypoport performed during the first half of the year? As always, we started the credit platform and our offers and our ecosystem within the credit industry. Of course mortgages, the [indiscernible] besides this [indiscernible] transact as well personal loans and the funding part we have [indiscernible]. We have an approach as well to digitalize the corporate loan business that [indiscernible] in the recent years.

Mortgage business for the first half the year was up 14%. So we took a market share less than usual. Typically, we took a double-digit market share gain. It slowed down because now we have months where there was so much demand that banks prioritized and didn't take too much third-party mortgages to keep their level of support and the level of service for their own sales channel. While in months where it was less business in the market, the demand for brokered mortgages went upset again. But in the first half of the year there were a couple of months where we had too much supply side, you can say. And this slightly slowed us down.

In general, you can say that all sales channels that we support so mortgage brokers and the free banking groups grew in the first half of the year. And together with them we were growing in all 4 segments actually above market. With the broker channel the most dominant one, we reached now a penetration of roughly 60%. As I just described [indiscernible] market share here but brokers were under some trouble when there was too much business in the market. The bank's cooperative savings banks prioritized and as you can see as well in our development in these groups because of their prioritization even in their supply lines, let's say our speed of adoption there slowed down slightly plus 29% for the cooperative banks just 22 for the sales banks. So when there was too much they were slowing down. When there was too less they were not fast enough competitors, they waited to slow.

So in total you can say they lost market share to private banks in the first half of the year. And from our perspective our dynamic was affected slightly. Looking forward if there is volatility in the market, this is a perfect USP to sell our solution because the [indiscernible] in place for all sales channels. You are much more efficient in not switching on and off or delaying certain applications in same channels but to price correct that you always price in an efficient rate for your production line so that your credit officers are not in 1 month overrun and in the next month without work because you are too slow on acting. Plus, when you own sales channel is so strong that even your own branches already over fulfill your credit officer workload, then you can easily switch on some additional product supply from others and pass it through and broke it and you are just more flexible on both sides to brief with the market up and down.

And so this USP, we are able to much easier focus and then sell in a market environment right now with this permanent changes on the supply side then in a pretty stable environment where it is easy for a bank to meet supply resources in their credit office. So next market, personnel lone plus 46% in the first half of the year, strong growth. We are focused on the refinancing side the more complex personal loan business here in Germany not a simple stuff, not the point-of-sale, business or the car financing. And the complex business is a growing market because of the prominent changes in the economic environment.

In good times people take more loans, consume more and then it gets tough and they need to restructuring and EUROPACE is the right tool to do this. The same that EUROPACE keep growing at a price and risk rental for banks. So if they have clients, their risk appetite that doesn't fit anymore or the client doesn't fit to their risk appetite anymore. They can broke it to a third party or if the client doesn't accept the price, the bank ask for it and they can take it through a third party and a [indiscernible] receiving commission. This is a growing offering in this whole personal loan restructuring market and we keep growing here.

Talking about growth, a couple of years ago we entered the corporate finance market. We acquired REM Capital an advice company to initiate our marketplace finding port. REM Capital had a great development in the last couple of years, especially boosted by special programs for energy efficiency for the German Mittelstand by the last government which were affected since 1st of July last year. We are still working on this backlog, had a great second half of last year, had now a great first half of this year. Now we are waiting for the new government to live up to its promises. The big problems of our times especially climate change now even energy crisis linked to this demands, huge programs and huge report by government-sponsored subsidiaries for our industry. And still, we are waiting for key segments from the government side.

So for now, we keep advising our clients, pretend them for what's coming and waiting for the right decisions finally made and I just talked about. In the meantime we started funding part. In the first half of the year, we had our first transaction together with DKB our joint venture partner and [indiscernible]. Now since the 1st of July, funding port is slowly opening for other sales side partners. So step by step, initiating this marketplace for corporate loans here in Germany. Still early stage or it's coming. In total for the credit segment it was a record half year as a result of products like they're going. So no surprise that the total it's a huge success. And we don't expect this to double this in the second half of the year. There'll be a certain level of slowdown from this high dynamic but we expect still like in the beginning of the year that for the total of this year a little bit increase compared to last year's fees. Even then we expect a slowdown in the second half of the year.

So our next segment, private clients as well mortgage business here in Germany. In this case, a franchise system with roughly 200 franchisees operating branches. We acquire leads online for them. They have physical advisers which are using EUROPACE to advise the clients and transact mortgages on our behave. [ Dr. Klein ] was growing by 18% in the first half of the year. It had pretty busy times when there was a lot of business in the market. And the challenge there was to find banks who were keeping their service levels. In the other months when there was not so much business in the market it was more challenging in the competition. All in all, Dr. Klein outperformed the market by I could say 8%, 10% market, 80% of the client.

So keeping the growth rate which is impact now for 20 years and our 5-year average, we met exactly our 5 yeas average in the first half of the year. A little bit minus of this environment to acquire new advisers got more difficult. When there's a lot of business in the market advisers are too busy to switch to a new employer, to a new franchisee. In a time where there's not enough business in the market some hesitate because they fear the risk of a change. So this plus 2% is below our long-term average. Usually, we were growing by 10% every year. We will try to ramp this up in the second half of the year but the environment in the first half was not good for the acquisition of new talent. You can say that a lot of competition is there to.

As a result, Dr. Klein provided record numbers plus 40% in revenue slightly less dynamic on the profitability side. Here you can see that the cost savings linked to a pretty digital business which easily could adopt adjust to this pandemic environment and operate to sell remotely. They are declining. So we had our gatherings again with our franchises to be more emotionally connected, people are advising more and visiting each other more. This just cost money in such a system. And we feel this on the probability side slightly. So we are getting now close to 50% profitability rate. And we expect to the disability decline in the future still farther back to a normal level of something around 35% to 40% in a next couple of years. So let's see this is heavily linked to the cost of physical interaction within the franchise network. We will try to keep as much of digital interaction as possible and then we may see even profit levels still above the history.

So now we come to our growth segments. First, real estate. We are targeting here two types of home occupied private residential properties, their owners and what’s linked with this. And the institutional housing sector which is responsible for the social housing renting market here in Germany. The core strategy in their homeowner occupied area is to use our strong position in mortgages and expand along the value chain by integrating more and more relevant in the purchase market and the transaction side itself. Plus adding the value proposition of property valuation which is needed for every mortgage and supplying this integrated in our ecosystem. While this information is very valuable for that purchase perspective.

In the first half of the year on the property sales side we saw a strong decline of transaction volume of our clients which are usually real estate agents, brokers linked to banks. So they lost market share because the total market may have been down but not as strong as they lost volume. You can see here that their approach is too off-line. They are not online enough plus consumer-to-consumer transactions gained as well in relevance in the first half of the year. We with our services helped them to compensate both their delay in the digitalization in the online world and as well their fixation on brokerage and not on supporting different types of transactions. And because of this approach we were growing by 10% in the first half of the year. So we are more and more needed by our clients to compensate their struggling position in the market.

And especially when the market gets tough and this was true for the residential housing market here in the first half of the year then our services are even needed more. On the valuation side, we keep staying on the growth track. Volume went up by 17%. We're still adding clients and increasing the intensity of working together with each of these clients resulting in the double-digit growth of value. So we are on track you can say. We keep taking market share here.

And with each step of integration with the EUROPACE system it gets more and more value-added service for everyone, for our clients and for us. Unfortunately, in the second quarter the German authorities [ Barton ] decided that virtual inspectors of properties are not allowed anymore. For the last 2 years they were approved within the corona adoption package for the industry. Now they hold back the whole package and more or less accidentally rolled back as well the ability for virtual inspections as well. So since 1st of June we now again need to physically inspect all properties while we were up to 30% in the first half of the year just actually expecting. This is a big issue for us. We really hope that Barton will consider its decision soon.

In other European countries it’s pretty normal to virtually expect properties we learned in the last 2 years that it's not riskier virtually expected that it's actually as safe as a physical inspection and that banks and consumers like this fast and flexible approach of a virtual inspection. So we hope that this is soon allowed anymore up until then. We have quite an amount of additional costs on the execution side where we had to hire 40 people. We need 40 more cars to do the all traditional valiant visit each property and inspect the property physically. So this is a setback for us especially on the probability side because this is already an area where we have heavily invested digitalization and such regulatory changes are just unnecessary when they are backwards. But it can't stay long like this. Even the authorities can't stop the digitalization of the credit industry here at this point.

So now we switch to the other side of the property market, the housing market today institutional business. Here, we saw a strong first half of the year. Housing associations were lending a lot of money in this time of increasing interest rates to finance new construction and renovations. New record level for Dr. Klein from 38% to EUR 1.3 billion in the first half of the year. And because of the product mix and attractive products that we could offer with a long [indiscernible] revenue went even up stronger to EUR 11.1 million for the first half of the year which is it's an amazing performance. When you think about this that the whole industry still is not still hesitating to fulfill the political goal to build 100,000 new social homes every year. We are far from this because the current subsidy structure for social housing is just not in line with the construction costs and their regulated rents. So whole industry is waiting for the government to find a finance the gap between the construction cost and the regulated trends.

And as soon as this comes up this industry is ready to build tens of thousands of houses. But as long as it is right now without the necessary subsidies, they are just waiting and let's say focusing on other tasks than new social housing. As a result, the segment delivered a strong growth at 34% organic growth here. Step-by-step it shows that it's able to be one of the growth drivers of Hypoport in the future. Still we are in a heavy investing phase. So this minus EUR 0.9 million is positively affected by the strong profitability of the financing platform for the housing industry. In all other product areas here we are heavily investing to ramp up our market position and integrate this, especially the mortgage world to be in the perfect situation and provide a streamlined solution for our clients.

So last segment, insurance. As you know, we are providing a platform for the insurance industry. In the meantime now 3 insurance areas private insurances. So consumer, broker and insurance companies integrated industrial insurances. There is usually a corporate [indiscernible] again, a broker and a specialized insurance company. And the third market, the employer linked insurance market where there are even 4 participants, the consumer, the employer, the broker and the insurance company which needs to be integrated. In all 3 markets we have existing solutions out there.

In the private insurance market and in the industry insurance market there of on-premise with a track on migration. And in the employer linked market we have already fully online digital solution there. In the private side insurance business, our platform [ SMART INSURTECH ] they’re growing by 23% in the migrated volume from our existing solutions. Let's say, the total share of migration increased. But still, this is a pretty slow process and let’s say lot of IT projects permanently heavily delayed to migrate the on-premise volume which is still roughly EUR 5 billion to our centralized solution.

And when it's migrated to the centralized solution, then we link this contractual information to the core systems of the insurers. And if we are able to successfully link them by interfaces we have a validated data set in our platform. And by now, 35% of all contracts and the SMART INSURTECH database are validated up from 80% a year ago. Both processes are crazy slow how they go forward. And in a certain way you can say it keeps being disappointing. It's hard work, high investments from our side to force this industry step by step on the platform. And for now, we are focusing on our existing clients which are using our solutions where the migration path is clear and repetitive. So from client to client we are getting better in the migration. But still, we are struggling to speed up this process. We are looking for a silver bullet to change this.

So permanently, we change our tactic here but still we didn't find it. And yes, keep working in this muddy area in a hard work to come forward. One way to improve is that we are right now in the process of spinning off the industrial business out of SMART INSURTECH. In this market, we have a pretty high market share from a perspective of the total market. Our partners are highly dependent on us and very interested in bringing their competencies and our on-premise solution together and create a platform. We are in intensive talks with them to create a solution which all is benefiting. And this project is going pretty well could be faster as well. But we expect in the second half of the year to start a new marketplace or start the development of a new marketplace here. So that we address a very special market here with a premium volume of EUR 30 billion and very interesting partners of us.

Yes, the last segment, the area of employer linked insurance products especially pensions. It's on growth track 41% up to a year ago. It's a huge market opportunity for us. Heavily under digitalized in this complex world between these 4 participants. Still a lot of the market is manual information transfer between the 4 parties with a lot of errors and step by step we convince. Especially employers that working with pension is a much more efficient solution for their HR department then dealing with all the insurance companies the manual way. We gave some pretty interesting client here in the first half of the year with the huge numbers of volume pension schemes behind this. And this is an ongoing process of migration then so that we have a pretty well visibility that this growth will continue in the next couple of years.

For the segment in total, it means a growth of 24% top line. This includes some inorganic growth from an acquisition of a small broker pool in last year. Without this the pure organic growth is slightly below 10%. This is still below our expectation. We want to see double-digit growth in every entity organically. And we are still struggling, especially in the SMART INSURTECH work with the technical complexity of this insurance market. But let's say, all in all, we see a progress our relevance in these 3 markets is increasing heavy-quarter and with our approach of heavy investments in long-term B2B business models, we choose to right difficult market to be the next to be digitalized by us.

So in a summary, a record year because if you have 4 segments with new record numbers, it automatically sums up to a great start of the year. On a long-term perspective, you see dynamic we are growing and that this half of the year is just a prolongation of what we did in the last more than 20 years now. Especially on the profitability side, be aware that we keep heavily investing in the development of our platforms and the acquisition of additional transaction volume there heavily in the credit industry in all product areas there but as well in insurance and in real estate. These investments are the P&L-relevant investments is EUR 45 million last year. So the first half of this year will have been in a similar level. So something close to EUR 35 million in the first half of the year we invested already again.

So outlook, when I talked about market environment I think I made it clear already that it's really getting difficult right now to predict the near-term future. What is certain even for the near-term future is that we will have a net migration to Germany. So the stress in the housing market will increase. And if it will lead directly to more transactions. Or if there are other reasons overall lapping this fundamental approach with some short-term developments it's difficult to predict in an environment where you have war, where you have a potential upcoming recession, where you have a lack of energy, where you have an inflation and European Central Bank trying to counter this.

Where you have declining interest rates, again and then you have an uncertainty about the development of house prices shot up in [indiscernible]. What is certain is that because of the higher interest rate level and the regulated rating market that home occupation will go up in Germany. Especially renting a newly built home or a newly acquired home is just not attractive anymore from the investor side, landlord side. And especially because of taxation issues that after 10 years you can realize capital gains without taxes. There is an incentive as well for existing landlords to de-invest in a certain moment.

What stays pretty uncertain is how much our new government is willing to live up to the promises and bring efficient subsidiaries and programs to the market which help German Mittelstand to counter the different challenges right now out there. And what is absolutely uncertain is how the Russian aggression against Ukraine will affect via its dependencies at German economy here and what we actually will create. What is certain from our side is we keep heavily investing in our future projects. We keep fully digitalizing the mortgage market and automating their credit investment process that one click we keep expanding our network and our reach in the personal loan business, funding part launch, and we will keep bringing this marketplace to life in the second half of the year.

We will integrate there and there's a property market from the transaction via the mortgage under valuation even more and we will spin off the industry insurance in the second half of the year from SMART. INSURTECH. So we have a lot of things to do. Market is volatile about us and because of this we just stick with our forecast for this year from the beginning of the year. Even then first half of the year was very strong and above expectation. And let's say we don't expect right now that the second half of the year will be so easy. But it'd be fair we didn't expect at the beginning of the year as well that the first half of the year will be so far.

So looking forward, there's a lot of things to do for us, a lot of chances to take. And with our culture, our digitalized structures, we are pretty well able to use a lot of these chances that are offered right now to us.

[Operator]

[Operator Instructions] There are currently no questions from the audience.

[Ronald Slabke, executive]

Let's assume I answered all questions already. We will meet us again here in 3 months after the third quarter finalized and we know what happened in the German market. We will deliver via digital progress and we expect to gain market share. However, the market will look like in the next couple of months. And we will set the basis for a great year 2023 as well in the next couple of months. So thank you guys for listening.