ProCredit Holding — Executing its updated strategy

PCB reported a Q224 net income of €24.1m (implying an annualised RoE of 9.5%), down 30.5% yo-y, as the 14.8% y-o-y increase in operating income was more than offset by: higher loss allowances; a higher effective tax rate; and a 27.4% y-o-y rise in personnel and administrative expenses (driven by PCB’s strategic initiatives outlines in March’s strategy update). However, we note that, coupled with a strong Q124 (see our previous note for details), this translated into an H124 net income of €57.6m (down 10.1% y-o-y) and annualised RoE of 11.6%, which is closer to the upper end of management’s FY24 guidance of 10–12%. Both the Southeastern European (SEE) and Eastern European (EE) segments contributed strongly in H124, with annualised RoEs of 16.4% and 17.7%, respectively (with the local bank in Ukraine at 22.6%), while Ecuador posted a net loss of €4.6m (implying an annualised RoE of -19.6%).

PCB group’s operating income was supported by the 12.8% y-o-y increase in net interest income, following the healthy growth of PCB’s loan book of 3.8% in Q224. This resulted in a 6.9% increase in H124 (or 6.7% at constant currency), which is a run-rate ahead of management’s reiterated FY24 guidance of 10% at constant currency. These positive volume effects were accompanied by a continued net positive asset/liability repricing effect. Consequently, PCB’s net interest margin (NIM) remained broadly stable year-on-year at 3.6% in Q224, in line with management’s expectations. It was down 4bp versus Q124, which includes an 8bp negative impact from interest on the recently issued €125m green tier-2 bond. As discussed in our last outlook note, PCB aims to support margins (and offset the impact of the expected decline in base rates) through a more granular deposit base and loan book resulting from the targeted significant medium-term increase in the number of micro, small and medium-sized enterprises and private individual clients of 50% and 150%, respectively.

Net commission and fee income rose slightly by 2.5% y-o-y to €15.3m, while income from FX transactions increased significantly by 16.1% to €7.5m in Q224. PCB’s capital base remains sound, with a CET1 ratio of 14.3% and a total capital ratio of 17.7%, the latter being recently strengthened by the above-mentioned green bond issue. Both capital ratios are well above the regulatory requirements of 9.3% and 14.3%, respectively.

Around 60% of PCB’s loan book growth in H124 came from lower-volume segments (micro, small and private clients, see Exhibit 2), which is in line with PCB’s strategy to put greater emphasis on these client segments, which are higher margin, more capital efficient and offer greater scope for growth (see our outlook note for details).

PCB’s green loan book grew at a slower pace than the rest of PCB’s loan portfolio at 3.3% in H124 to €1.3bn and made up of c 20% of the total loan book at end-June 2024. Management believes that one of the reasons for the slower growth is that, in some of its markets, PCB has provided a high volume of loans to finance rooftop photovoltaic panels in recent years, which saturated these markets (resulting in a lower number of loan applications currently). Moreover, PCB introduced stricter criteria for energy efficiency loans. Finally, no loans to private individuals are classified as green due to lack of local green certifications. That said, PCB’s management is confident that the company is well-positioned to further expand lending for small renewable projects (with a capacity of 3–5MW) and it sees a stronger pipeline for these projects building up. Therefore, it is optimistic about PCB’s prospective green lending growth.

Regionally, PCB’s SEE and EE portfolio grew by 3.9% and 5.3% in Q224, respectively (8.1% and 4.6% in H124, respectively, the latter despite a 3.5% reduction in Ukraine). Notably, average loan book growth across PCB’s smaller banks (Georgia, Romania, Bosnia, Albania and Moldova) was c 12% in H124, with all growing at 10% or more, except for Romania (7% growth). This is important in the context of PCB’s efforts to drive scaling effects at these banks, which PCB’s management considers subscale at present. PCB’s Ecuadorian loan portfolio remained stable in Q224 (and increased slightly by 1.7% in H124), which reflects its ongoing efforts to rotate its loan portfolio from small and medium-sized enterprises (which are subject to lending rate caps that make this business unprofitable) to micro and private clients (for which lending caps are higher). These activities resulted in an increase of the weighted average interest rate on its local loan book by 1pp year-on-year. That said, the bank continues to face significant headwinds from deteriorating macroeconomic and security conditions in Ecuador.

PCB booked €5.4m loss allowances in Q224 (representing an annualised cost of risk of 33bp, with €3.3m in Ukraine), bringing the H124 figure to €5.7m (18bp). This is ahead of the very limited provisioning in H123 of €0.5m (2bp) but remains moderate and well within management’s FY24 guidance of up to 40bp. PCB’s management highlighted the continued high stock of management overlays of €66.0m at end-June 2024, of which €25.8m was in Ukraine (mostly booked in 2022). Stage 3 loans at group level stood at 2.5% at end-June 2024 (0.2pp down vs end-2023), including PCB’s Ukrainian portfolio at 5.9% (with an 83% stage 3 coverage ratio in Ukraine). The Ukrainian bank remains well-capitalised, with a local capital buffer in excess of 5pp and a deposit-to-loan ratio of 156% at end-June 2024. In the context of Ukraine’s ongoing sovereign debt restructuring negotiation and the recently signed law allowing the government to suspend foreign debt payments until 1 October, we note that PCB does not hold any Ukrainian foreign currency sovereign debt on its balance sheet.

PCB continues to put an emphasis on expanding its customer deposit base, which grew 16.9% yoy to end-June 2024, enabling a €100m year-on-year reduction in expensive non-customer liabilities. As a result, PCB’s deposit-to-loan ratio increased by 8.5pp y-o-y to 113.4%. Growth in H124 reached 4.1% versus end-2023 (with 1.3% growth in Q224 alone) and was primarily driven by the 8.6% growth from private clients (which accounted for 90% of the H124 deposit growth), supporting PCB’s efforts to increase the diversification of deposits. The number of clients rose by 5.0% in H124, with private clients up by 5.5%. Although the deposit-to-loan ratio declined versus the 116.5% at end-2023 (as loan growth outpaced deposit growth in SEE), PCB’s management underlined that deposit growth tends to be stronger in the second half of the year and that it remains confident in its ability to increase the ratio going forward (it targets 120% in all its entities in the medium term). Moreover, it highlighted that recent growth in deposits was ahead of its expectations.

The 28.7% y-o-y growth in personnel expenses to €37.1m in Q224 came from a combination of a c 600 (or 14%) year-on-year increase in average headcount and salary hikes (which in H124 amounted to 8% y-o-y on average), reflecting an inflationary catch-up but also high competition for skilled employees in the local markets. That said, PCB’s management highlighted that the company is ahead of its original plan in terms of hiring pace and it remains confident in the quality of the new staff, supported by PCB’s extensive employee training programme. PCB targets a total headcount increase of 25% within its revised strategy.

Administrative expenses increased by 26.2% y-o-y to €37.6m, on the back of a 15% increase in expenses for internal IT development (related to its subsidiary Quipu), as well as higher expenses for marketing and branches. As a result, PCB’s CIR reached 66.3% in Q224 (vs 59.5% adjusted for one-offs in Q223) and 64.1% in H124 (vs 60.8% adjusted CIR in H123), which is slightly higher than PCB’s management had originally expected. The company reiterated its FY24 guidance of 63% (with a possible deviation to the upside or downside by up to 1pp ), although it highlighted that it will closely watch the development of operating expenses throughout the rest of the year. H124 operating expenses do not include any major one-off factors, though they reflect the usual seasonal impact of the Bulgarian annual deposit insurance in Q224.

We have slightly reduced our net income forecasts for FY24 and FY25 by 4.5% and 2.7% respectively, mostly due to higher CIR assumptions of 65.0% and 67.1% in FY24e and FY25e, respectively (vs 63.5% and 65.8% previously). Consequently, we now assume RoEs of 10.7% in FY24e (broadly in line with management guidance) and 10.4% in FY25e. Our forecasts for FY26 and beyond remain largely unchanged, as we still consider management’s medium-term objectives as achievable.

Despite the moderate near-term forecast reduction, we have raised our fair value estimate for PCB’s shares by 6.6% to €15.25 on the back of higher peer multiples as we now use a blend of FY23 and FY24e multiples for the first time (with the latter being higher than the FY23 actuals, see Exhibits 6 and 7). While the r-squared for our regression analysis based on FY24e RoE and P/BV multiples is below that based on FY23 figures, we still believe it is justified to use the FY24e figures as we are now well into 2024.