ProCredit Holding — Management expects ROE of c 10% in FY24

PCB delivered sustained strong loan book growth of 9.0% in the first nine months of 2024 (9M24) to €6.8bn (of which 1.9% was in Q324), with more than 60% coming from lower-volume segments (micro, small and private clients), supporting the diversification of its loan portfolio. This was despite the €50m reduction in Ukrainian and Ecuadorian loan books in 9M24. PCB’s smaller regional banks grew their loan portfolios by around 15% in 9M24 and continue to outpace group growth, in line with management’s strategic objective for these banks to reach critical mass and realise economies of scale.

PCB’s net interest income (NII) remained broadly stable in Q324 at c €90.0m compared to last year and the two preceding quarters in 2024, as loan portfolio growth was coupled with a gradual, moderate NIM compression to 3.5% (9M24 NIM was up 4bp y-o-y). The latter stemmed from lower income on cash and cash equivalents (including central bank balances) amid falling base rates, especially in Eastern Europe (primarily Ukraine and Moldova). We calculate that in Southeastern Europe (SEE), NIM remained stable year-on-year at c 3.6%, supporting a 10% y-o-y increase in NII (and 18% in 9M24). In Ecuador, PCB faces continued margin pressure due to regulatory lending rate caps on SME loans, as well as a higher cash position held on the balance sheet amid tight liquidity in the local banking sector. Finally, Q324 NIM at group level reflects the first-time full-quarter recognition of interest expense on PCB’s €125m green tier-2 bonds placed in April 2024 (on which it pays a 9.5% coupon, or c €3m per quarter). We note that this temporary pause in NII growth at group level followed a quite dynamic increase since early 2022 (see Exhibit 1).

We also note that PCB’s deposit base grew significantly by 3.6% sequentially in Q324 (and 7.8% in 9M24), bringing the deposit-to-loan ratio to 115.3% at end-September 2024 (up from 111.4% at end-September 2023). The higher relation of deposits to loans offset part of the NIM compression as it allowed for a c €150m y-o-y reduction in expensive non-customer funding. Around 60% of the 9M24 deposit growth came from private clients, which supports PCB’s objective to improve the granularity of its deposit base.

With net fee and commission income up by a modest 2% y-o-y to €14.7m, PCB’s total operating income was also broadly in line with last year (up 1.4% y-o-y to €111.0m). This was coupled with a significant increase in both personnel (up 18.3% y-o-y) and administrative (up 26.6% y-o-y) expenses amid headcount expansion (the average number of staff was up by 13% or by more than 500 employees in 9M24), an average 4% salary increase in 9M24, as well as higher external IT costs, marketing expenses and depreciation to drive PCB’s new strategic agenda. As a result, PCB’s CIR reached 68.8% in Q324 (65.7% in 9M24) compared to 57.1% in Q323 (58.7% in 9M23).

PCB’s bottom line was assisted by the release of €10.4m in management overlays (mostly outside of Ukraine), with a further €51.6m remaining on PCB’s books (of which €21.9m was in Ukraine). Together with €9.6m in recoveries of written-off loans, this offset most of the €24.1m loss allowances in 9M24, which were mostly driven by loan book growth and stage transfers. Consequently, net provisions were at a limited level of €4.1m in 9M24 (representing 8bp of annualised cost of risk), while Q324 alone saw a net release of €1.6m. Encouragingly, the share of credit-impaired loans in PCB’s loan book fell to 2.3% at end-September 2024 (from 3.0% at end-September 2023) and is now back to levels seen before the war in Ukraine.

With a higher effective tax rate (24.9% in Q324 vs 22.3% in Q323), PCB’s net profit decreased by 9.1% y-o-y to €27.2m in Q324 and represented an annualised ROE of 10.7% (vs 12.5% in Q323) (see Exhibit 2). PCB’s CET-1 ratio of 14.1% and total capital ratio (TCR) of 17.3% at end-September 2024 remain well above regulatory requirements of 9.3% and 14.4%, respectively, with the TCR strengthened by the above-mentioned green tier-2 bonds issue. The CET-1 ratio at end-September 2024 does not include PCB’s Q324 results (if these were accounted for, the ratio would be 14.4%), though it is adjusted for the one-third dividend accrual from the H124 profit.

While the frontline and macroeconomic situation in Ukraine remain tense, PCB’s local bank (the loan book of which made up 6.9% of PCB’s portfolio at end-Q324) has been performing well recently, with a €7.9m net profit in Q324 (€19.2m in 9M24), representing a healthy annualised ROE of 39.5% (33.7%). The Q324 results were supported by a c €2.2m net provision release, coming primarily from organic loan book reduction. The local bank retained a solid balance sheet at end-September 2024, with a deposit-to-loan ratio of 157% and a local capital buffer above 5pp. The share of its credit-impaired loans stood at 4.8% in Q324 (vs 10.5% in Q323), with a stage 3 coverage ratio of 83%.

While PCB’s SEE and Eastern European segments grew their profits by c 2% and 19% y-o-y, respectively, in Q324, the results of the Ecuadorian bank weighed on PCB’s group results. The difficult macroeconomic and sociopolitical situation persists in Ecuador, further exacerbated by a recent drought that significantly affected the local hydro-power-reliant energy sector. There is no major improvement in sight in the short term, with the International Monetary Fund forecasting GDP growth of 0.3% in 2024 and 1.2% in 2025. This situation, together with the corporate lending caps imposed on local banks, resulted in ProCredit Ecuador posting another quarterly net loss of €3.3m in Q324 (bringing the 9M24 loss to c €8.0m, ie a -23.7% ROE). The bank continues to rotate its lending book into smaller enterprises (for which lending caps are higher), while reducing its overall loan portfolio by €20.3m or c 4.2% year-to-date (the bank still represents c 7% of PCB’s loan book). The share of credit-impaired loans increased to 7.9% versus 6.9% at end-2023, and the 9M24 cost of risk reached 79bp (annualised).

ProCredit Bank Ecuador’s equity declined to €40.5m at end-September 2024 versus €48.9m at end-2023. In its quarterly report, PCB highlighted that due to covenant breaches by the Ecuadorian bank with respect to return on average assets, the loan loss reserve ratio, the solvency ratio, open assets exposure and tier 1 capital ratio, €18m of liabilities to banks (c 3% of the bank’s total assets) were classified as short term, though PCB does not expect early repayment of these liabilities. The corresponding waiver agreements had not been concluded by the time PCB’s consolidated Q324 accounts were prepared. That said, the local bank’s capital ratios are still more than 2pp above regulatory requirements, according to PCB’s management, which also noted that the bank’s funding includes a subordinated loan with a long maturity that can be converted to strengthen the bank’s equity. PCB’s management highlighted during the Q324 earnings call that PCB provided some group funding to its local bank in Ecuador, which, while significantly reduced recently, remains at a mid-two-digit million euro amount. We estimate that PCB’s total capital exposure to ProCredit Bank Ecuador is the equivalent of c 10% of our current PCB valuation.

PCB’s management recently updated its FY24 guidance and now expects loan book growth of more than 10% (previously around 10% excluding the impact of fx), an ROE of c 10% (vs 10–12% previously, based on up to 40bp cost of risk) and a CIR of 66% (previously 63% ±1%). Management also reiterated its CET-1 guidance of more than 13.0%, and expects a leverage ratio of 9% and a dividend payout ratio of one-third (in line with its dividend policy).

We now expect loan book growth for FY24e of around 11.0% (vs 11.6% previously), with c 11% pa on average thereafter until FY28e. While PCB has seen some moderate NIM pressure in recent quarters, this is well within our expectations, and we maintain our mid-term assumptions of c 3.5–3.6% (broadly in line with management’s earlier comments). This is underpinned by PCB’s strategic focus on: 1) increasing the diversification of PCB’s loan and deposit base through growing the number of clients in the micro, SME (with particular emphasis on loan exposures of €100–750k) and private segments; 2) a shift to higher-margin customer groups (micro and small enterprises); and 3) increasing its deposit-to-loan ratio (we conservatively expect 116.7% at group level by FY28e vs 115.3% at end-September 2024 and management’s target of 120%). That said, we acknowledge that recent rate cuts across the SEE region have been moderate so far, and the possibility of strong and fast rate cuts across countries where PCB operates represents a near-term downside risk.

While part of the recent CIR increase was due to bringing some growth investments forward, we conservatively assume FY24e and FY25e CIRs of 66.6% and 67.7%, respectively, followed by a gradual improvement to c 60% by FY28e (somewhat above management’s mid-term target of c 57%). We have reduced our FY24e ROE expectation to 10.1%, from 10.7% previously, mostly due to the temporarily higher corporate income tax rate in the Ukrainian banking sector, as discussed above (even if the law raising the tax rate is yet to be signed by the president). Accordingly, we estimate FY24e EPS of €1.74, which at a one-third payout ratio implies a dividend per share of €0.58, and which at the current share price represents an attractive dividend yield of 7.4%. We maintain our mid-term expectations of c 13%+ ROE by FY28e. Importantly, these forecasts already factor in a continued profitability drag from Ecuador (with the bank’s potential turnaround providing some upside opportunity).