ProCredit Holding AG (PCZ) Earnings Call Transcript

Welcome to everybody on this call for the first half results of '22 for the ProCredit Group. My name is Gabriel Schor, a member of the ProCredit Holding Management Board. And as usual, I'm joined by Christian, Christian Dagrosa, the Head of Finance, Reporting and Controlling of the group. We plan some 40 minutes to cover today's presentation, which has been available since earlier today on our web page. We will, of course, give sufficient time for any questions you may have. Let me also provide you with the usual warning to pay particular attention to the cautionary statements regarding forward-looking comments that you find at the end of the results presentation. Today's call continues sadly, I have to say, under the auspices of the war in Ukraine and the volatility it has introduced globally. You will hear us report again today on the 2 key themes of our performance so far this year. The 2 are on the one hand, very positive risk developments in banks outside of Ukraine. And on the other hand, the difficult situation in Ukraine means significant additional provisions are still being built as we work to assess and respond to the credit risk situation of our clients. Let me begin, therefore, with some opening remarks regarding the overall situation in Ukraine. We are all aware how difficult and dynamic the situation in Ukraine is and what that means in terms of human suffering. In this context, we are reassured that all of our staff remains safe. Most are now working in Ukraine again, either in our offices or in safe, remote locations. Banking operations continue without major interruption, and people adjust to the very demanding operating environment. The conflict continues to be concentrated in the Eastern and the Southeastern regions of Ukraine, a direct and indirect macroeconomic income is severe, also here, the full extent is difficult to predict. It's too soon, for example, to assess whether the tentative opening of Odessa port for grain ships will bring meaningful benefits and when. We are in touch with basically all of our clients, both those inside the conflict zone and those in the western half of the country, and we are getting a clear, much more clear picture of their prospects. Q2 saw some careful growth with our agricultural clients backed by guaranteed, state guarantees and EBRD, as we already mentioned. At the same time, as you would expect, we saw a significant shift to Stage 2 and 3 loan categories for clients in the conflict zones where a significant percentage of the portfolio, particularly of those clients who do not have operations in other parts of Ukraine, a significant percentage of the portfolio is now provisioned for. Christian will describe in greater detail what this means in terms of credit risk and costs and prospects. In the first summary, though, let me mention, we are managing the situation in Ukraine intensively and with greater clarity. Well, great clarity is slowly emerging, but the nature of the situation means that the full impact is still difficult to quantify reliably. With this, let me turn to the performance of the group. As usual, I will cover the highlights of our first half performance before Christian goes more into details of the financial aspects on regional development. Slide 2 summarizes the key aspects of our first half performance. Year-to-date, the group made a profit of EUR 7.7 million, representing a return on equity of 1.8%. The year-to-date provisioning cost, largely associated with our Ukrainian bank, amount to EUR 57.3 million, clearly, a significant increase on Half 1 '21. Very encouraging is that if you exclude our Ukrainian operation, the group results show us 64% improvement on last year, representing a return on equity of 9.5%. Group operating income increased by 24% year-on-year as the loan portfolio grew by 6.2%, and margins steady at 3%. In the second quarter, the net interest margin increased to 3.1%. The cost income ratio improved significantly to 60.1%, reflecting the fact that income is increasing ahead of cost despite inflationary trends which we observed. Group portfolio quality remained at good level in spite of higher defaults in Ukraine, with Stage 3 ratio increasing only slightly to 2.6%. Net write-off remains very low at only 0.1%. The first half saw an elevated cost of risk of 188 basis points, reflecting the significant stage transfer within the Ukrainian portfolio. At the group level, capitalizations level are comfortably above regulatory requirements. Our CET1 ratio at 13.7%, an increase on the Q1 level despite loan growth, largely reflecting the attribution of quarter 4 '21, profit and the reversal of the 2021 dividend growth. Overall, there in Ukraine, fairly normal banking operations are being maintained. This reflects our well digitalized approach as well our good relations with our clients. There is close ongoing cooperation with the National Bank of Ukraine, and the capital and liquidity position of the bank are sound. Uncertainty around the course of the world makes it difficult to estimate year-end provision cost, making clearer guidance on profitability, but still very difficult. However, on other parameters, we have narrowed the guidance as all other ProCredit banks have been successfully focused on growth, portfolio quality and improving financials in the first half of the year. Turning to Slide 3. You can see that customer loan growth of EUR 370 million or 6.2% was strong, reflecting particularly strong demand for working capital loans with maturities below 3 years as clients stock up inventory in this high inflationary environment. Loan growth in first half '22 was mainly driven by regional segments Southeastern Europe and South America. Growth in our Eastern European segment was mainly driven by FX changes. Without positive foreign exchange impacts, the group loan portfolio grew by about 5%. Looking to the second half of the year, we do not anticipate such strong growth given the likely more subdued market conditions. In the lower graphic of this slide, you see the continued strong growth of green loans portfolio, which now stands at EUR 1.2 billion and 19.1% of our portfolio. As you know, we see it as a priority to redouble efforts to accelerate the green transition, with both climate change and the need to enhance energy independence in mind. Slide 4 shows the corresponding good development in deposits, which have increased year-on-year by EUR 720 million or over 14% based on strong client relations and the appeal of our digital approach. Deposits increased by EUR 200 million or 3.6% in the first half of '22 as compared to EUR 123 million or 2.5% in the equivalent period in '21. Year-on-year growth was achieved mostly with business clients, although private client deposits also increased visibly, particularly in the first half of this year, with a year-on-year increase in volume of EUR 114 million. The share of sight and FlexSave deposits increased from 2.1% year-on-year. The group is now putting more strategic management focus on the deposits to loan ratios, particularly in those banks where the ratio is below 100%. A robust deposit base is important as volatility increases. It has supported reduce interest expenses in the past. Whilst we anticipate an increase in deposits expenses going forward, there are good opportunities to respond on the lending side and rate side. Most banks are, therefore, increasing their marketing spend, somewhat to increase our profile as an attractive savings and service bank amongst target private clients. Slide 5 shows that the macroeconomic outlook for our countries of operations remains relatively resilient. Although, of course, uncertainty has been introduced by the war, higher energy prices and inflation. GDP forecasts have not been updated in quarter 2 and continue to foresee growth this year of around 3% with a midterm outlook of around 3.6%. It's likely that 2022, macroeconomic parameter will suffer in the second half of the year as inflation, gas supply and -- gas supply constraint and supply chains disruption impact consumer spending and business confidence. In these terms, our banks in the second half of the year will focus less on loan portfolio growth and more on building deposits and managing margins, thereby also shoring up the financial performance of our banks outside Ukraine. The outlook for the Ukrainian economy, of course, continues to be strongly negative. The IMF foresees a decline in GDP of 35% in '22 without providing a prediction for '23. We expect an update on this outlook in the course of quarter 3. We do not feel strong spillover effect from Ukraine and the Russia inflection in Georgia and Moldova markets yet, but the IMF adjusted downward the strong GDP growth outlook for both countries, also to around 3% for Georgia and flat for Moldova. Inflation is expected to reach an average 8% to 10% this year in our countries, although this is expected to come back down in '23 to the 3% and 4% range, depending on the country. Many central banks have reacted with increased base rates. We are giving significant attention to margin development and prudent credit risk management as our clients respond to this environment. Overall, therefore, 2022 will certainly be characterized by challenging market conditions, which our banks are responding until yet, very positively, I may say. Midterm, we believe the prospect for all our regions to be robust. Our sense is that our regions of operations have gained some geopolitical importance, as evidenced by intensified discussion of EU obsession for many of our countries. And for example, former negotiation having begun in North Macedonia and Albania. In these terms, international investment will continue, we believe, and EU support likely intensify. In achieving improved macroeconomic alignment and integrations, SMEs will play a pivotal role, we believe. And therefore, we see the role of a specialist SME banking group actually grows in importance. If we turn to Slide 6, we show how we have tried to put more clarity around updated guidance, although provisions level in Ukraine remained the most difficult project given the rapidly evolving situation in the country. The loan portfolio grew well in our Southeastern European and Latin American segment, although we expect it to be more subdued in the second half. Lack of growth in our Eastern European segment due to a likely decline in Ukraine, a more muted growth in Georgia and Moldova. For the year, we foresee a high single-digit percentage growth for the loan portfolio. It's still difficult to narrow the guidance price for profitability. Christian will cover the details of how we are working closely with clients in Ukraine to assess and limit credit risk. But the implication for year-end provisions remain largely dependent on the further development of the conflict and development in the agricultural sector, as we will see. Generally, looking forward to Half 2, we are focused on consolidating the improvement in profitability in most banks. We continue to put focus on the income side. And for most of our bank, we do expect some net interest income expansion, at least in the short term. At the same time, we do expect a degree of headwind from high base rate introduced in Ukraine and deposits repricing group-wide. The strong improvement in cost/income ratio of 60.1% with only a modest increase in Q2 relative to Q1 give us confidence to guide for our cost of income range of 60% to 63% for the full year. We can also specify our guidance for our capital ratio. We expect to end the year with a CET1 ratio of around 13% and a leverage ratio of around 9%. Our midterm guidance remains unchanged, targeting a cost income ratio below 60% and a return on equity about 10%. Annual loan growth is, going forward, targeted at a medium to high single-digit percentage rate. In summary, you will continue to hear confidence about the business and financial performance and prospects outside of Ukraine. It is clear that group results would be strongly impacted by prudent provision in Ukraine this year. Strategically, however, the current developments only reinforce our commitment to our way of responsible banking in our regions of operations. We see the role of the ProCredit group of banks as more important than ever, and we have well-grounded confidence about delivering good financial results in the medium term. And on this note, let me hand over to Christian, who will give you much more details on the financial aspects.

Thank you, Gabriel, and welcome everybody. Now also from my side, our H1 presentation. We appreciate your interest in our group. The next slide will serve to take a closer look at the financial performance of the group in the first half year 2022. As always, I will also cover the major risk indicators as well as our group's capitalization metrics. And like in previous quarters, we also prepared a special slide to give you insight on our bank in Ukraine and situation on the ground. But let's start with a year-on-year view of the P&L statement and its major underlying key performance indicators. Our net interest income shows a strong increase of EUR 21.6 million with respect to the previous year. That's more than 20%. This is driven by substantial volume effects but also higher interest rates, which are in part related to climbing base rates in most of our countries. These developments helped lift the net interest margin in quarter 2 by 20 basis points to a level of 3.1%. Net fee income stands EUR 2.2 million, above the previous year figure. That is approximately 9% fee income from transactions and cards, particularly, continue to grow steadily, and are the major driver behind this positive development. Other operating income increased by EUR 7 million. This reflects a temporarily high positive result from derivatives of approximately EUR 3 million but also a write-down of goodwill on our investments in Ukraine in the amount of EUR 800,000. Otherwise, it is worth reminding that the previous year figure included substantial expenses from the litigations in the Serbian banking sector of almost EUR 3 million. We covered this topic in previous calls, and as reported in our quarter 3 '21 call, the underlying legal issue has since been resolved by the Serbian Supreme Court, ruling in favor of the Serbian banks. Personnel and admin expenses are up by about EUR 13 million with higher staff expenses, solid expenses on IT and marketing being the major drivers. This position also includes one-time expenses of approximately EUR 3.7 million, which are mostly related to the war in Ukraine. The increase in operating expenses have been more than offset by a strong increase in operating income of EUR 30.9 million which, all in all, resulted in a significant improvement in the cost -- in the group's cost efficiency indicators. Of course, we booked substantial provisions for our Ukrainian portfolio as the war is taking its toll on the country's economy. In quarter 2, we moved most of our portfolio in occupied areas into distressed risk categories or even default. Our total provision expenses amounted to EUR 57.3 million, which corresponds to an annualized cost of risk of 188 basis points, and almost the entire amount is related to our Ukrainian operations. Loan loss provisions in our other 11 banks amounted to only EUR 800,000, which corresponds to an annualized cost of risk of 3 basis points. Given the substantial level of provisions, which is somewhat unique in our history, the consolidated result of this half year was at EUR 7.7 million. Overall muted, but better than in quarter 1. The ROE is at 1.8%. The cost income ratio improved by 4.3 percentage points as operating income increased by 24% on the back of higher net interest, net fee and other operating income. With only a few exceptions, all banks show for, in part, even significant improvements in both underlying and absolute profitability. Let's move on to the details of the most relevant developments. Starting with net interest income, which increased visibly quarter-on-quarter due to positive volume, pricing and base effect by EUR 4.5 million. That's a 7.5% jump. Base rates in most of our countries have increased since the beginning of the year, which for the most part still has a positive effect on most of our bank's margins. With respect to quarter 2 '21, we see a 20% increase in the net interest income on the back of higher loan volume and a 27 basis point improvement in the net interest margin. An important driver of the good net interest margin development remains the continued optimization of our bank's refinancing structure as a steadily increasing share of site deposits is positively affecting the group's average cost of funds. All ProCredit banks, with the exception of PCB Ukraine, show some level of year-on-year improvement or at least steadiness in the net interest margin, which is the major driver behind our group's steadily improving cost efficiency. Moving on to provision expenses. You may recall that in quarter 1, we booked an amount of EUR 35.6 million to reflect the impact of the war in the Ukrainian economy. The amount booked in quarter 2 of EUR 21.7 million is mostly a result of updating the risk classification of specific clients, above all those with operations in the East and Southeast of the country. We'll get into the details later on. In our remaining banks, the cost of risk has remained at low levels with an aggregate amount of provisions of just around EUR 800,000. In light of the fast-changing macroeconomic environment, with inflation at high levels and disruptions in food and energy supply chains that could potentially still get worse towards the end of the year, we maintain our IFRS 9 model parameters on a prudent level and retain most of the provisions that have been built during 2020 at the onset of the COVID-19 outbreak. We do this by factoring in the GDP decline of 2020 into our current macroeconomic assumptions. This results in a total management overlay on provisions of more than EUR 16 million. Similarly, we also applied a management overlay on provisions for our Ukrainian portfolio by overriding our historical loss given default indicator with a higher amount that corresponds to the average loss given default that we observed between 2014 and 2015 in our Donetsk portfolio during and shortly after the last confrontation with Russia. We applied this higher loss given default from the Donetsk conflict region to our entire Ukraine portfolio, which adds some EUR 14 million in provisions. Moving on. Quarter 2 net fee income increased by EUR 1.1 million against quarter 1 as quarter 1 is generally more muted with regards to transactions. Against the second quarter of 2021, we see an even more marked increase of EUR 1.6 million or 13%, which is a reflection of the steady expansion of our client base. Personnel and administrative expenses increased with respect to the previous quarter by EUR 4.4 million, while operating income grew with EUR 8.2 million almost twice this amount. This has helped the cost/income ratio to continue consolidating itself around the medium-term target level of around 60%. Personnel expenses remained broadly stable in quarter 2. However, quarter 1 includes the one-off effect of approximately EUR 900,000 due to one-time salary payments in the Eastern Europe segment, above all related to giving staff the means to take preparation for invasion in Ukraine. Excluding this one-off effect, we do see that salaries have indeed increased structurally in our group as many of our institutions adjusted salaries in light of increasing inflation. In the increase in administrative expenses of EUR 4.1 million, we see a one-off of approximately EUR 2.9 million of audit, legal and consulting fees related to the war in Ukraine and its broader impact on the group. We also invest more in marketing, specifically to increase our visibility as a bank for savers and depositors in our countries and move forward with important IT projects. Otherwise, we do see inflation driving increases in various expense items. As always, in quarter 2, there is a seasonal increase related to deposit insurance contributions of approximately EUR 1.5 million, which is reflected in the net other operating income and therefore leads to a small quarter-on-quarter surge in the cost income ratio. The next section provides a more differentiated view by regional segment that aims to visualize the strong underlying developments we have achieved in basically all our banks, with the obvious exception of Ukraine. Let's take a look at the contribution of the individual segments to the Half 1 results. Our banks in Southeastern Europe achieved a very good result in the first half year of 2022. Their contribution to the consolidated result almost doubled with respect to last year from EUR 20.9 million to EUR 36.4 million as the return on equity improved significantly to a sound double-digit figure and the cost/income ratio dropped by more than 7 percentage points, well below the 60% mark. For our 2 Eastern European banks in Georgia and Moldova, the contribution to the consolidated result also increased by a strong 27% from EUR 7.3 million to EUR 9.3 million. This corresponds to an annualized return on equity of 15.4%. Cost/income ratio was at around 50%. South America, or our Ecuadorian Bank achieved a small profit of EUR 1.1 million after breaking even in the previous year. The cost income ratio improved by almost 20 percentage points to 80%. Now the group performance, excluding the negative contribution from ProCredit Bank Ukraine was overall strong. The return on equity of 9.5% is 0.4 percentage points above the consolidated ROE of the first half year 2021, to which PCB Ukraine still had contributed around EUR 10 million. Excluding this contribution from PCB Ukraine, also from the previous year profit, we see a 3 percentage point improvement in the ROE year-on-year. The cost income ratio, excluding Ukraine, of 63.9% is higher than on a consolidated level, but it also shows a marked improvement against the previous year of more than 5 percentage points. At last, our Ukrainian bank contributed negatively to the group result with EUR 34.3 million due to the aforementioned provisioning expenses. Moving on, let us take a deeper look into the performance of our segments and the banks they're in. As I mentioned, profitability for our largest segment, Southeastern Europe, improved visibly, both structurally as well as in absolute terms. Higher net interest income on the back of overall stable margins helped achieve a 22% increase in operating income year-on-year. With costs increasing only slightly, the cost-income ratio improved by more than 7 percentage points to a level of 57%. Credit risk costs remained at almost routinely low levels, and the return on equity of the segment increased from 7.4% in 2021 to 12% now. We see the return on equity and the cost/income ratio per bank in the little table in the bottom right-hand table. Both these indicators improved or stayed at the previous good levels in all banks of this segment. In Eastern Europe, here on this slide now, including our bank in Ukraine, we've seen even more marked increase in operating income of 26% or EUR 9.7 million. Operating costs increased by around EUR 3.8 million, leading to a EUR 5.9 million increase in the operating result before provisions and taxes. The cost income ratio only improved slightly by 0.3 percentage points. Our bank in Georgia is showing results that are slightly below the previous year, but still with a good return on equity of 14% as well as a cost income ratio of around 50%. In Moldova, our smallest bank of the group, results improved visibly with respect to last year as scaling effects continue to materialize and credit risk costs remain low. Also, the bank is temporarily benefiting from higher base rates in the country. Needless to say that the segment's result of minus EUR 25 million was heavily influenced by the substantial provisions that were built for the Ukraine portfolio in the amount of EUR 57 million. Now with regards to Ecuador, I already highlighted the improved cost income ratio as well as the minor profit of just above EUR 1 million. The improvement in operating income of 42% is remarkable, driven above all by higher net interest income on the back of steady margins and substantial volume effects. Moving on to our special information slide on our Ukrainian bank. There is indeed not much new to report on the level of operationality of our bank. Since the onset of the war, all banking operations have been maintained at a steady level and at no point have we experienced any major disruptions. 95% of our staff is currently working normal hours, an increasing number even no longer from remote locations, but from our premises in Kyiv, Odessa, Lviv or Dnipro. Maintaining communication with our clients, both loan and deposit lines has been a key priority for our bank in the last month. Our contact center has been operating uninterruptedly and has thereby proven to be an important tool to reassure private individual clients as they grapple with questions on what the war means for them and their savings. Our business client advisers are in a constant exchange with our loan clients, with many of them even on a weekly basis. This helps us get a clearer picture of the situation on the ground in what remains obviously a very dynamic and fast-changing environment. Our portfolio in Ukraine increased in quarter 2 by some EUR 69 million. This growth came almost entirely from loans to agricultural clients, who we know very well, and which have been disbursed under the guarantee framework from the Ukrainian Central Bank and the European Bank for reconstruction and development. Positive FX effects further supported the growth figure in euro terms. Martial law in Ukraine has been extended until the end of August, which means that loans in the country remain an automatic moratorium. Nonetheless, repayments have been accelerating lately, and at this stage, we recover a large part of all outstanding interest payments. Moving to our slide to the graphic in the top right corner of this slide, it maps our loan portfolio to the various regions in Ukraine. Areas in which fighting is currently ongoing are highlighted in red. The colors green, yellow and orange categorized areas by the likelihood that business clients could be affected by the war, whereas orange is more likely to be affected and green, less likely. In dark red, we highlighted those areas that have been occupied by hostile forces since 2014. In these occupied regions, our bank has no outstanding exposure. What is highlighted in red, we have about EUR 80 million within this area that stretches from the outskirts of Kharkiv in the Northeast of the country down to Kherson in the Southeast, we transferred 94% of all exposures to either stage 2 or stage 3. These stage transfers were the major driver behind the provision expense in quarter 2. Year-to-date, our provision expense in Ukraine amounts to EUR 57 million. Determining the right level of provisioning under the current circumstance is, of course, not a straightforward exercise, but we are confident that our approach is both prudent and sensible. Small table in the center bottom of this slide demonstrates that with an annualized cost of risk of more than 12%, we are well ahead of many of our Ukrainian when it comes to building provisions. In spite of the substantial level of provisions, the bank's capital situation remains sound. As of July 31, and thereby already taking into account the adverse effect from the pronounced reduction in the Ukrainian FX rate of approximately 25%, the bank continues to account for a CET1 buffer of approximately 4 percentage points. Now, let us finish the presentation with credit risk on the group level as well as our capital position. This slide is familiar to most of you. We will not -- well, it shows the high level of diversification on our loan portfolio, both in terms of geographic coverage and industry sector. There have not been any material movements in this pie chart over the past years, which is a reflection of our stable business strategy. Of our total loan portfolio, some 40% are to agricultural enterprises and companies involved in local production. Consumer loans do not play a strategic role in our business model. On Slide 21, we see the development of our default loan portfolio and our Stage 2 loan portfolio. Defaults -- the default loan portfolio increased since the beginning of the year by 0.3 percentage points to a level of 2.6%. This increase is entirely driven by stage transfers in Ukraine. As in quarter 2, we moved some EUR 28 million of portfolio into Stage 3. And the remaining banks, the share of stage 3 loans slightly decreased. Our Stage 2 portfolio increased visibly since the beginning of the year as we moved 35%. That is more than EUR 250 million of our Ukrainian portfolio into stage 2. In our other banks, Stage 2 loans decreased both in absolute and relative terms. With respect to quarter 1, the share of Stage 2 on a group level reduced by some 50 basis points in part because of organic improvements in the banks outside Ukraine, and in part because most of the aforementioned transfers into default within the Ukrainian portfolio came from Stage 2. The coverage ratio of default loans increased visibly to 55.6%. This reflects the management overlay I explained earlier, which causes a higher average level of provisions for defaulted loans in Ukraine. Moving on to capital. As of June 22, our CET1 ratio stands at 13.7%, so well above the regulatory requirement of 8.2%. Our core capital increased by EUR 55 million, mainly due to the attribution of profits in 2022 -- sorry, of 2021 and the reversal of dividend accruals. Risk-weighted assets increased more markedly than usually EUR 561 million since the beginning of the year. Besides the portfolio growth of EUR 360 million, this development is also impacted by the sovereign downgrade of Ukraine, resulting in higher risk rates of 150% for all exposures against the Ukrainian state. That also includes our balances with the Ukrainian Central Bank. Let's move to Slide 23, where we see the major effects on our CET1 ratio in this second quarter of the year. Effect from loan portfolio growth and higher levels of liquid assets have been fully offset by the recognition of quarter 4 profits, and we just mentioned reversal of dividend accruals from 2021. On top, positive FX effects have increased the group's regulatory capital by some EUR 17 million. The previously mentioned reduction in the Ukrainian FX rate of some 25%, which happened on July 22, will only have an immaterial impact of 3 basis points on the group's capital adequacy ratios. With this, I conclude the assessment of our group's performance in the first half year '22. Gabriel and I will now take your questions.

Thank you. Now, we will begin our question-and-answer session. [Operator Instructions] The first question from line of Marius.

That's me? I wasn't sure. That's my name.

Yes, Marius. I think it's you.

Perfect. First question from my side would be Southeastern Europe. You showed quite a good improvement in the cost income ratio there. Was it basically a result of economies with scale? And given the rather challenging environment or economic environment currently with high inflation rates, how would you expect wage inflation to affect the income ratio going forward? The second question on the situation in Ukraine, obviously. On the assumption that going forward, the situation remains as it is with the occupied area. Should we then expect the risk provisioning to even increase or to remain at the same level? There are basically no further additions. And how would this -- how will this change if the situation remains as it is? And third question also on the cost side, you mentioned that the legal and advisory costs, that you had a one-off cost there for advisory services in Ukraine. Should we expect this to remain elevated as long as the war is ongoing? Or is this -- or what is rather the one -- really, one-off that is concluded by now?

Thank you, Marius, for your questions. So let's start with the first question on wage inflation and, how this will affect our cost income ratio going forward. So wages, taking out the one-off from quarter 1, which was, again, also related to the war in Ukraine. We already saw a quarter-on-quarter increase in personnel expenses. We expect personnel expenses to continue increasing in the second half of the year as we are making a group-wide effort to adjust salaries to the new inflationary reality. And it has a bit to do also with our guidance for the cost income ratio, which you saw is between 60% and 63%. Right now, as of the half year, we are at a very lower end of this guidance, at 60%, but we do see rather more downside risk than upside potential for the cost income ratio. Nonetheless, we would expect that the cost-to-income ratio should still improve compared to last year. Last year's level was just about 64.5%. On the second question on Ukraine. I think it's a very big caveat that you yourself are expressing as in -- will, let's say, will the war -- the constraint to the areas as it is currently or sort of will the red zone that we displayed in our map, not expand. There is another caveat to this assumption, and that is really -- it's the macroeconomic fallout from the war, currently adequately assessed and predicted. So assuming this, of course, further provisioning will much depend on the further development of the war with potential impact on individual client provisions and also its impact on economic forecast. But assuming the fighting will indeed be contained to the currently-contested areas and assuming that the macroeconomic impact of the wall in the country is currently estimated, adequately estimated. We think that a very large share of the credit losses arising from this conflict will, first of all, be reflected in '22 rather than in '23. And we also think that the provisioning expenses of half year 1 in such a scenario represent a prudent base for the second half year. So under these caveats, under these constraints that we mentioned, we would say that half year 2 provisions should not exceed half year 1 provisions. But again, this is forward-looking statements with a lot of uncertainty attached to it. Lastly, on the legal and advisory costs. Indeed, these are one-offs. So for 2023, our current expectation is that they would not reoccur. In the second half of the year, we would expect some of these effects to continue. So we will report in quarter 3 probably a slightly higher amount of year-to-date negative one-off effect.

Okay. Could you give me a quick reminder how much is the current equity in the Ukrainian bank?

In terms of equity, we have EUR 95 million as of June 30, 2022, and the remaining debt exposure group has against the bank remains at the same level of the year-end, that is EUR 48 million.

Okay. And hard to tell, but there is not yet a situation where you could imagine like shutting down the Ukrainian business because losses are exceeding the equity by too much?

No, Marius. It's like I said, as in -- as of right now, the CET1 buffer is still very healthy at 4 percentage points. At this stage, we do not expect, also based on the planning of ProCredit Bank Ukraine, that the group would need to increase its exposure against the bank in the next few quarters. So both capitalization and liquidity are at least, as of now, stable and satisfactory, and we do not plan to increase this exposure that I just mentioned, EUR 95 million equity, EUR 48 million debt. The bank foresees that it will manage without an increase of these numbers.

We will take the next question from line Milosz from Edison Group.

Firstly, I wanted to hear your thoughts on the potential impact of temporary credit moratoria, which may be introduced for vulnerable, well, to individuals and SMEs, I guess, similarly to what was introduced in Romania recently? And what the impact could be across different regions on your operations, if there are any other regions where you feel that such credit moratoria might be introduced? Secondly, I'm curious if you are able to provide an update on the process of amending the terms and conditions of your outstanding bonds? Of course, you've published an announcement, but not sure if you can provide an update whether the investors accepted this -- the additional fee for demand months? Or when can we expect some update on that? And maybe finally, if you could share any thoughts on the current situation in Kharkiv from the ground in terms of your customers, et cetera, right? I mean, the region is currently classified as orange. It was reclassified, I believe, on your heat time in June because, of course, of the Ukrainian -- the advancement of Ukrainian forces in the region, but if you can share any thoughts or insights from what's happening on the ground, that would be helpful and necessity.