ProCredit Holding AG (PCZ) Earnings Call Transcript

Ladies and gentlemen, welcome to the ProCredit Holding AG H1 Q2 2026 Results Conference Call. I'm Holz, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Eriola Bibolli. Please go ahead, ma'am.

Good afternoon from Frankfurt, and welcome to our call to discuss ProCredit Group's results for the first half and second quarter of 2026. My name is Eriola Bibolli. I'm the Chairperson of the Management Board of ProCredit Holding, and I'm joined today once again by Christian Dagrosa, our Chief Financial Officer. The slide deck accompanying this presentation is available on our website, and a recording of this call will be made available in the coming days. Before we begin, let me draw also your attention to the customary disclaimer regarding forward-looking statements, which is included at the end of the presentation. We expect today's earnings call to last approximately 30 minutes. Following our presentation, we will, as always, be happy to take your questions. I will focus on the key developments of the first half of 2026 and provide an update on the progress we are making against our strategic road map. Christian will then take you through the group's business and financial results in greater detail, and he will provide an overview of the key risk and capital indicators. Overall, our business performance over the first 6 months was in line with our expectations. Our loan portfolio grew by a strong rate of 8%, crossing the EUR 8 billion mark for the first time in the group's history. At the same time, our active client base increased by around 27,000 customers. This development was particularly strong in the micro customer segment, where our active clients went up by nearly 18% and in retail, active client numbers increased by 8%. Growth in both loan and deposit volume as well as number of active clients is increasingly supported by ongoing improvements in our operating model and the early benefits of our digital initiatives. Operating income has shown an overall encouraging development, increasing by 7%, driven in particular by higher net interest income. The profit of the period amounted EUR 38.5 million with a cost-income ratio at 71.2%. Finally, our inaugural AT1 issuance of EUR 150 million in May was an important step in supporting the group's capital structure optimization, delivering on the strategic objectives that we first outlined at our Capital Market Day 2 years ago. This slide rather serves as a snapshot of our most important KPIs, most of which I just covered. Let me just add that loan portfolio quality remained broadly steady compared to the beginning of the year. Of course, one of our main objectives remains to strengthen net interest income through volume and margin expansion. In this regard, we recorded an encouraging increase of net interest income by 11.6% year-on-year, equivalent to almost EUR 20 million. Christian will walk you through the key drivers in more detail shortly. Lastly, let me remark that due to our AT1 issuance, we will report return on tangible equity going forward, which takes into account the accrual for the AT1 coupon. For the first half of 2026, return on tangible equity stood at 7.3%. Also, let me note at this point, we have not yet performed the IFRS 5 reclassification of Ecuador. We expect this to happen in the second half of this year. Turning now to our geographical footprint and recent developments across our markets. Loan growth in the first half of the year was broad-based across our network, particularly strong in Georgia, Kosovo, Bosnia, Bulgaria, Romania and Ukraine. This confirms the strength of our local franchises amid overall favorable market conditions and the increasing relevance of our retail banking value proposition. Moving on to the broader economic outlook, though I'll not dwell as the most relevant geopolitical risk factors are widely known and reported on. Overall, the macroeconomic outlook for our region remains more favorable than for the Euro area with GDP growth expected to average around 3% per annum compared with just over 1% in the Euro area. However, as the war in Ukraine and the tensions in the Middle East continue, downside risks have certainly increased since the beginning of the year. While the direct impact on our markets and clients has remained rather limited so far, indirect adverse effects are becoming increasingly more apparent through higher energy costs, persistent inflationary pressures and weaker external demand. These challenges are not confined to energy-intensive sectors as supply chain disruptions can affect businesses across the economic landscape. We monitor these developments closely. We remain close to our clients, and we regularly assess potential implications for the customers, for our portfolio and for our markets. Let me now turn to the progress we are making on strategy execution. As mentioned earlier, one of the highlights in the first 6 months of this year has been the strong dynamic in client acquisition, reflecting a sharpened growth focus in micro and retail client segments. This development is supported by the continued rollout of our new mobile banking platform. During the first 6 months of this year, we launched our new retail banking apps in North Macedonia, Albania and Romania, bringing the total number of banks offering new apps to 7 out of 10 banks. In addition, we developed and launched a dedicated mobile banking app for legal entities tailored in particular to the needs of micro and small businesses. The solution is already live in North Macedonia and Bosnia and Herzegovina. And in North Macedonia, we onboarded nearly 60% of micro clients in the new mobile banking app in the first 2 months of the rollout. Further, we introduced end-to-end digital client onboarding in Ukraine, Albania and Romania, meaning that this important functionality is now available in 8 banks. Overall, we remain firmly on track of our digital agenda. Our rollout enhance the scalability and the efficiency of our operations. They strengthen customer experience and support our ability to acquire, serve and retain customers through digital channels. The new digital banking apps are a core building block of our mobile-first retail banking strategy. Today, customers expect to be able to manage their finances conveniently through digital channels. Our focus is, therefore, on providing a reliable and intuitive mobile banking experience that enables customers to complete their most common banking activities quickly, efficiently and securely. Our digital banking app support the key customer journeys from account opening and payments to savings, personal finance management. By making these services easily accessible through a seamless digital experience, we aim to meet customers' evolving expectations and make ProCredit a natural choice for their everyday banking needs. Although the rollouts are still progressing across our markets, the initial customer responses have been very positive. We are seeing encouraging engagement levels and a willingness among customers to incorporate the app into their everyday banking activities. While there remains significant potential ahead of us, these early trends reinforce our confidence that the new mobile retail banking apps will play an increasingly important role in expanding our retail customer base, deepening customer relationships and supporting operational efficiency and medium-term profitability. Moving to another strategically important project. In May, we successfully completed the inaugural issuance of additional Tier 1 capital instruments with a volume of around EUR 150 million. The transaction was met with strong investor demand with an order book more than 3x oversubscribed. It resulted in a broadly diversified investor base and pricing below the respective benchmark. The initial coupon rate is 8% and will reset at 5-year intervals starting in December 2031. As a result of the transaction, the group's Tier 1 capital ratio increased by around 2 percentage points pro forma as of March 2026. The transaction was an important milestone in supporting group's capital structure optimization. Once again, I would like to thank all investors for their commitment and for the trust they place and continue to place in us. Finally, let me briefly reiterate our outlook for 2026. The first 6 months of this year provided a solid base for our ambitious plans for business expansion. We continue to expect loan growth in the range of 12% to 15% in our core markets, where we continue to see attractive profitable growth opportunities despite the global challenges. We confirm our outlook for a 7% return on equity this year, which includes the developments mentioned earlier, particularly income growth, cost from investments in digitalization and capital optimization measures and a number of short-term effects, including the impact related to the anticipated divestment of our subsidiary in Ecuador, elevated tax rates in Ukraine and Romania as well as reduced fee income due to the euro introduction in Bulgaria. In the medium term, our objective remains to grow the loan portfolio beyond EUR 10 billion while significantly increasing the number of customers across all segments. At the same time, we aim to improve profitability to an RoE of around 13% to 14%, supported by scale, digitalization and a more granular balance sheet with higher average rates on assets and a more efficient refinancing structure. Operationally, this should translate in a structural improvement in the cost efficiency with the cost-income ratio moving towards the 57% mark. The first half provides further confirmation that we are on the right path with accelerated client growth, continued balance sheet transformation, steady progress in our digital rollouts and most importantly, with key line items in the P&L improving strongly, to which Christian now will provide further details.

Thank you, Eriola, and good afternoon also from my side. Let us start, as always, with a closer view on the development of loans and deposits. Our loan portfolio grew strongly in the first half of the year, particularly within the targeted higher-yielding segments, retail, micro and small. Loans to small enterprises grew by almost 10%, while our micro client portfolio grew a strong 23%, contributing now very visibly to the top line growth figure. Retail loans, which grew by 14.5%, also added around 25% to total growth, especially in the form of higher-yielding non-purpose loans. Year-on-year, we have now achieved a 17% growth in small enterprise loans, 29% in retail loans and a very strong 46% in loans to micro enterprises. The share of these higher-yield segments in total loans, which is our key metric for balance sheet transformation on the asset side, has consequently grown now by 3 percentage points year-on-year and 8 percentage points since the end of 2023, which marks the starting point of our updated business strategy. This ratio now stands at 49%. More importantly, this balance sheet transformation is now materializing more and more into meaningful earnings effects, visible above all in the positive development of net interest income that Eriola already highlighted. Moving to deposits. Our deposit base grew by 2.2% in the first half of '26. Micro enterprises were a key driver of this growth, contributing around 1/3 to this increase, predominantly in the form of sight deposits. Expanding our retail and micro client deposit base remains a strategic priority as these segments provide a stable and attractive source of funding. Year-on-year, retail deposits increased by more than 13%, while deposits from micro enterprises grew by a strong 37%. And we also continue to focus on improving the overall funding mix. Nearly 70% of the more than EUR 1.1 billion increase in deposits over the last 12 months came from sight and savings deposits, supporting lower refinancing costs and reducing the share of more costly term funding. Operating income showed a robust increase in the first half, EUR 14 million, supported mainly by the expansion of net interest income. Net interest income grew by 11.6% year-on-year, driven by the gradual margin consolidation efforts we are undertaking and of course, the consistent business expansion that helps drive meaningful volume effects. Net fee and commission income declined year-on-year as expected, reflecting the effects from the euro introduction in Bulgaria as well as the growing adoption of SEPA payments across many of our markets. Operating costs increased by around EUR 10.6 million with a cost-income ratio at the expected level of the previous year. All in all, the underlying earnings trajectory is improving with profit before tax and loan loss provisions increasing by almost 6% year-on-year. Let us now take a more closer look at net interest income in the second quarter of this year, the net interest margin improved visibly by 18 basis points with respect to the first quarter and now stands at 3.4% on a quarterly basis. This is in part driven by a favorable day count effect, of course, but it also reflects the gradual margin consolidation, especially through the increased share of higher-yielding segments in total loans that support higher weighted average interest rates on assets. As a result, net interest income grew visibly by more than 7% with respect to the first quarter and now stands at a new high of EUR 99 million. That is EUR 12.6 million or almost 15% higher than in the second quarter of 2025. For the first half of the year, net interest income grew by EUR 20 million or 11.6%, as already highlighted earlier. This reflects strong volume effects across the group, partly offset by a mixed pricing environment across our markets. The net interest margin increased by 6 basis points year-on-year, supported in particular by the margin recovery in Ecuador. More importantly, however, the underlying quarter-on-quarter margin trend is broadly consistent, both including and excluding Ecuador, indicating that the improvements now are driven rather granularly by developments across our entire Eastern Europe and Southeastern Europe region. Moving on, net fee and commission income amounted to EUR 22.4 million in the second quarter. This represents a modest increase compared to the first quarter, reflecting client number growth and a favorable calendar effect. However, it remained below the second quarter of the previous year. And on a year-on-year basis, net fee and commission income declined EUR 3 million, broadly in line with the expectations communicated at the beginning of the year. The decrease was primarily driven by the introduction of the euro in Bulgaria, as already mentioned, which reduces and has reduced any income opportunity for foreign exchange transactions. In addition, the continued rollout and adoption of SEPA across several of our markets in '25 and '26 has lowered fee income from international payment transactions. While these developments create headwinds for fee income, they also reflect the ongoing integration of our markets into the European payments infrastructure and the associated benefits for our clients. Moving on, personnel and administrative expenses amounted to EUR 83 million in the second quarter. Personnel expenses increased moderately, while administrative expenses rose a bit more strongly, mainly due to higher expenses for software and marketing. For the first half of the year, the cost base increased by 7% year-on-year. This increase was primarily driven by higher personnel expenses, including staff increases in central functions in Germany related to the execution of our retail and digital transformation strategy, which is driven centrally. Depreciation also increased due to IT and software investments made in prior periods. As outlined earlier, the quarter 1 and quarter 2 cost-income ratios include new underlying hedging expenses as well as the negative effects from lower net fee income following euro introduction in Bulgaria. The stable cost-income ratio demonstrates that the aggregate mid- to high single-digit million euro headwind from these 2 factors has been fully absorbed through underlying revenue growth and disciplined cost management. Moving on to loss allowances. In quarter 2, '26, loss allowances amounted to EUR 6.4 million, corresponding to a cost of risk of 31 basis points. This figure includes additional portfolio level provisions in the amount of EUR 2.7 million, reflecting the more challenging global macroeconomic environment driven by the continued war aggression against Ukraine and the prolonged conflict in the Middle East. Especially higher energy prices weigh on the growth outlook of our markets and across all economies of the world. To date, our clients have continued to demonstrate a high degree of resilience, which has through the cycle always been a key strength of our group. At the same time, we remain mindful that potential disruptions to supply chains, trade flows and energy markets could adversely affect certain client segments. Given the uncertainty around the duration and intensity of these conflicts, we continue to monitor developments closely and we assess risks on an ongoing basis. For hypothetical downside risks from a further escalation of the war against Ukraine, we maintain a very prudent approach to provisions. The total stock of management overlays to address these risks remained broadly steady at around EUR 48.8 million, accounting for approximately 25% of the total stock of provisions. In this context, and despite this exceptionally challenging environment, our Ukrainian portfolio continues to demonstrate strong resilience. The default rate as of June 30, '26 stood at a low 2%, broadly returning to pre-war levels. I will not dwell on credit risk indicators as they remain broadly stable. Year-to-date, we have some increase in Stage 2 as we cautiously transferred exposures of around EUR 115 million related to SMEs operating in sectors with high sensitivity to oil and gas prices. As the risk profile of these exposures has not changed, the impact on provisions of these transfers was largely immaterial. The share of defaulted loans reduced slightly from 3% to 2.9%. Turning very briefly to segment performance. I would highlight only the improved results of ProCredit Bank Ecuador, which has returned to positive contribution after a prolonged period of underperformance. For the segment Southeastern Europe, the RoE was 10.6% and the growth of the loan portfolio more than 7%. Similarly, we see positive dynamics in Eastern Europe with an RoE of 12.2%, of course, affected negatively by the higher tax rate in Ukraine as well as a strong loan growth of 11.7%. And finally, let me say a few words on our capital position. Our risk-weighted assets increased in the first 6 months, mainly due to an increase in credit risk, reflecting the strong loan growth as well as an updated treatment of guarantees. As of June 30, our CET1 ratio stood at 12.7%. Our Tier 1 ratio, positively impacted by the inaugural AT1 issuance, now stands at a comfortable 14.7% and total capital at 17.8%, all well above regulatory requirements. And with that, let me conclude today's presentation and open the floor to your questions.

[Operator Instructions] And the first question comes from Milosz Papst from Edison Group.

I have three, if I may. The first one is on your deposit growth. Do you consider double-digit deposit growth as achievable in FY '26, given that H2 tends to be seasonally stronger? And maybe a little bit in this context, do you plan to increase your marketing budget to attract deposits at a faster pace to facilitate stronger medium-term loan book growth?

Thank you, Milosz. Yes, we are confident we will achieve double-digit growth in the customer deposit volume in the second half of the year. We see typically much stronger growth in the second half from SME customer funds, which reflects to their cyclicality of the business. And at the same time, we have seen an exceptionally strong growth in the customer deposit base from micro customers exceeding our target for the year, and we anticipate a much stronger growth in the second half of the year as well. And we see the planned targeted volume growth from retail customer deposits as well across the group. So we stay optimistic that we will achieve the target. With regards to the marketing budget, let me say that we are more and more diverting from a product-driven, marketing-driven strategy to acquire customer deposits and in particular, costly customer deposits. Instead, what we are already implementing, it is a customer-focused acquisition strategy that it is built around, let's say, 4 value streams that will drive customer growth and customer engagement that -- at the end of the day, we have seen already in the first half of the year that we were able to grow a number of retail customers by 8%, which translates to 8,000 retail customers. And already with the rollout of the new mobile banking applications, we are able to progress in the monthly active users, which is more than half of our customer base, and it is progressing to higher numbers already. And I repeat that our strategy forward will be staying centered in retail banking, in particular, around a funding-driven digital-first retail banking strategy that has a very clear customer focus, which is mass and mass affluent payroll customers around which we are deploying now the value proposition, where we aim primary relationships based on which we can build both revenue streams from balance sheet and from the fee income from the daily transaction banking, and then we don't depend on a direct deposit focused marketing strategy further on. To then summarize what does it mean in terms of the trends, the marketing cost per retail customer are going to go down moving forward. Marketing cost per every euro of retail deposit funds are going again slightly to go down and then stabilize and normalize in the years to come. So we don't foresee per customer or per euro deposit fund an increase in marketing costs.

Perfect. That's very detail helpful. Now sort of related questions on the other side, let's say, of the balance sheet. What loan-to-deposit ratio do we expect over the medium term compared to current levels? And is there any particular upper level you have in mind which you would accept at the individual bank level to facilitate loan book growth?

I'm going to take this one, Milosz. Look, as a general principle, we seek to fund our lending activities predominantly through local customer deposits as this remains the most stable and strategically attractive funding source for our business model. But that said, we do not manage the group against a specific loan-to-deposit ratio target nor do we have a predefined upper threshold that automatically would constrain growth on the asset side. Our focus is increasingly on the quality and structure of funding rather than on a single nominal amount or ratio amount. And particularly, we continue to work on improving our funding mix by increasing the share of operational current accounts, savings deposits while reducing our reliance on the more expensive term deposits. In addition, we benefit from long-standing relationships, both with international financial institutions as well as established access to the capital markets and where wholesale funding represents the economically more attractive option compared with raising additional term deposits, we are prepared to act rather opportunistically. Ultimately, our objective is to optimize the overall funding structure while maintaining a conservative liquidity profile and supporting the continued growth of our loan portfolio.