ProCredit Holding — Promising Q320 figures

We compare PCB’s Q320 results with our estimates and Q319 numbers in the exhibit below. PCB’s net profit in Q320 reached €11.7m (vs €21.1m in Q319), translating into 9M20 profit after tax of €33.4m (vs €45.9m from continuing operations in 9M19).

Gross loan book up 8.5% ytd, suggesting FY20 growth at the upper end of the guided 8–10%

PCB continued to achieve solid loan book growth with a 3.0% increase in Q320 vs Q220, resulting in 8.5% year-to-date growth. As this is already within the range guided by management for FY20 (8–10%), the company expects the full year increase to be closer to the upper bound (though the second COVID-19 wave obviously constitutes a risk factor for Q420). This was despite the currency headwinds from the depreciation of the Ukrainian hryvna and Georgian lari vs the euro by c 10% during the quarter, resulting in a slight 1% decline in the Eastern Europe loan book in Q320. Some positive impact again came from moratoria (due to suspension of principal repayments), though it was less pronounced than in Q220 given the lower proportion of loans under moratoria (see below).

It is worth highlighting that Q320 growth came exclusively from longer-term investment loans (as opposed to working capital loans), including green loans, with the latter increasing by 9.1% in Q320 (19.9% year-to-date, accounting for 39% of loan book growth so far this year). Consequently, PCB’s green loan portfolio as a percentage of the total loan book increased further to 18.3% from 17.3% in Q220 and 16.6% at end-2019 (well on track to reach the mid-term target of 20%). Overall, PCB’s growth continued to be focused to a greater extent on the upper medium business segment.

Deposit base expansion coupled with a growing number of customers

PCB recorded a particularly strong sequential expansion in deposit base of 6.1% in Q320 (vs our estimate of 2.3%), bringing the year-to-date improvement to 8.9%. Growth came especially from Bulgaria, Serbia and Romania. This has been likely assisted by PCB’s digital platform and has been accompanied by steady growth in the number of customers (contrary to last year when PCB saw a reduction in the number of non-core clients). This, together with an increase in liabilities to international financial institutions, allowed the bank to reduce its reliance on interbank financing, with liabilities to banks declining by 3.5% year-to-date to €218.9m at end-September 2020. The increase vs Q319 came primarily from sight deposits and FlexSave savings accounts, which means that a higher proportion of PCB’s deposit base has lower withdrawal restrictions. At the same however, this had a positive impact on PCB’s interest expense and net interest margin (see below).

Cost of risk below management and our expectations in Q320

Annualised cost of risk stood at 42bp in Q320 (56bp year-to-date), which was slightly below management expectations. Management has now flagged that the FY20 figure may potentially be below the initially guided c 75bp and that the Q420 figure may be in the same order of magnitude as Q220 (when it reached 71bp).

While the market environment remains difficult to predict, especially amid the second COVID-19 wave and the reintroduction of lockdown measures, management does not expect a significant increase in the default rate in Q420 (based on the current loan book assessment). Defaults remained limited in Q320, with the share of credit-impaired loans in the total gross book at 2.3% (down from 2.5% in Q220), including 0.3% in the case of green loans. In Eastern Europe alone, the ratio declined to 2.4% from 2.8% in Q220. At the same time, we note that PCB’s non-performing loan (NPL) coverage ratio stood at a robust 98.5% (vs 89.1% at end-2019). Moreover, PCB had €3.8bn in collateral, mainly mortgages (65%), at end-September 2020.

We understand that there was only a moderate uptick in restructuring processes in Q320 (especially in Ecuador). This trend is especially important as PCB’s portfolio under moratoria continued to decline to 12.6% at end-September 2020 (from c 17% at end-June 2020 and c 30% at end-March 2020) amid expiring moratoria in several countries. As these expired in Serbia at end-September, this number declined further to below 5% as at 1 October 2020 (representing a volume of c €250m). PCB highlighted in its Q320 report that it carried out additional credit analysis to identify any increase in credit risk, especially for loans under moratoria (with the process ‘almost completed’ at end-September 2020). The company did not create additional loss allowances on the back of updated macroeconomic assumptions in Q320, but an update is expected in Q420 following the publication of the new IMF Economic Outlook in October. Consequently, we assume that most of the loss provisions created in Q420 will come from stage 2 provisions and expect that the cost of risk will increase to 85bp in Q420 from 42bp in Q320. In Q320, stage 2 loans represented 6.6% of the gross loan book (up from 5.3% in Q220). However, we do not expect an increase in the ratio of credit-impaired loans (ie stage 3) to gross loan book in Q420.

NIM stable sequentially in Q320 at a level management deems sustainable

It is particularly worth noting that PCB’s NIM stabilised sequentially in Q320 at 2.9%, which has been supported by solid deposit and loan book growth, with most repricing on the asset side offset by a repricing on the liabilities side in Q320. PCB highlighted that it experienced a stable or upward trend in NIM across the majority of its countries of operations (with Ukraine being the main exception due to strong rate cuts recently). We understand that management believes the current NIM level is sustainable.

PCB’s net fee and commission income stood at €12.1m, down c 8% y-o-y from €13.1m in Q319, but visibly recovering from Q220 (€10.6m) as customer activity in terms of transaction volume normalised. Fee income from account maintenance increased slightly on the back of the expanding customer base.

CIR now expected slightly below previous FY20 guidance of c 70%.

The bank’s cost-income ratio (CIR) came in at 66.7% in Q320 (first nine months of 2020 (9M20): 66.5%) compared to FY20 guidance of c 70%. This is the result of stable operating expenses and improving operating income. Personnel expenses remained flat during the quarter and we understand that the budgeted increase in headcount has already been completed, with no major expansion planned in the near term. We note that PCB’s net other operating income and administrative expenses in Q420 will be negatively affected by a goodwill write-off (in Romania and Ecuador) and restructuring costs in its bank in Romania (including severance payments and costs of branch closures). These will amount in aggregate to a single-digit million euro amount. According to management, these resulted from COVID-19 prolonging the recovery in the bank’s profitability. PCB’s management now expects the group CIR to be slightly below the original full-year guidance.

Capital base remains robust

PCB’s capital ratio remained solid, with the CET-1 ratio at 14.1% and a total capital ratio (TCR) of 15.7% (both stable vs end-2019). CET-1 capital includes profits for Q120 and Q220, but at the same time was calculated after deduction of the assumed dividend payout of one-third of 2019 and H120 profits representing €25.0m in total. No incremental positive impact on risk weighted assets (RWA) was recognised in Q320 from the introduction of new SME parameters, with €140m already reflected at end-June 2020 and a further €110–120m expected by the company in the subsequent 12 months. The bank’s liquidity coverage ratio (LCR) improved slightly to 149% at end-September 2020 vs 142% at end-June 2020 (and the regulatory requirement of 100%).

Following the release of what we believe are robust Q320 figures, we have made some changes to our PCB forecasts. We have reduced our FY20 cost of risk assumptions to 64bp from the previous 81bp, and also lowered our FY21 estimate to c 52bp. Moreover, we have slightly increased our gross loan book growth forecast for FY20 to 10.2% from 9.3% earlier. We have also made an upward revision to PCB’s deposit growth in FY20 (given the year-to-date rise of 8.9%) and FY21. We now expect a NIM of 2.9% in FY20 (vs 2.8% earlier). We have reflected c €5m of one-off charges in Q420 related to Romania and Ecuador in line with management guidance. Nevertheless, our CIR forecast for FY20 declined slightly to 67.3% from 67.8% earlier. As a result, we now expect the bank’s FY20 net profit to reach €41.3m (vs €31.5m previously), implying an ROE of 5.2% (4.0% previously). We currently assume no dividend payment from FY19 earnings in FY20 (in line with management’s declaration a day before publication of the Q320 results).

Following our FY20 forecast revisions and bringing the valuation forward (resulting in a lower discount factor), our PCB fair value estimate increased to €8.00 per share from €7.75 previously.

While PCB has one of the lowest FY20 ROEs in its peer group (c 5.2% based on our forecasts), it is also trading at one of the lowest price to book value (P/BV) ratios (0.5x) and as a result is positioned below the regression line in our P/BV-ROE landscape (see Exhibit 3). It is worth keeping in mind that the group is quite scattered across the P/BV-ROE map (eg Georgian banks are traded at quite low P/BV compared to their ROE) making the regression line somewhat less reliable.