FY25 outlook largely confirmed but with higher risks

Management reiterated its FY25e outlook for ROE of around 10%, loan book growth of c 12% (excluding fx) and a CET-1 ratio of around 13%, although it flagged increased risk factors to its guidance stemming from macroeconomic uncertainty and revised its cost-to-income ratio (CIR) guidance to c 70% (from around the FY24 level of 68.1% previously). The company reiterated its medium-term objectives of growing its loan book above €10bn and reaching an ROE of c 13–14% (with additional 1.5pp upside potential from Ukraine’s reconstruction), which we view as achievable.

Valuation: Shares offer 38% upside

We cautiously reduce our sustainable return on tangible equity (RoTE) assumption for PCB from 11% to 10% (to account for the short-term macroeconomic uncertainty) but maintain our assumption that PCB will reach its ROE target in the medium term (with our FY28e ROE forecast at 13.0%). Therefore, there is further valuation upside from PCB’s achievement of its medium-term ROE target (reflecting this in our sustainable RoTE assumption would bring our current fair value to €16.70–17.50 per share), as well as the reconstruction of Ukraine following an end to the war with Russia (which would add another c €1.30 to our fair value estimate). Here, we note that PCB is well-positioned for Ukraine’s reconstruction via its Ukrainian bank, which is well-capitalised, well-staffed and highly profitable. Downside risks come from PCB’s Ecuadorian exposure. Our lower near-term forecasts and RoTE assumption are partly offset by a re-rating of peer multiples since our last update note in May, resulting in a current fair value estimate of €14.00/share (from €14.60 previously).

NIM remains under pressure, higher costs largely absorbed

PCB reported a 9.3% y-o-y decline in net profit to €21.8m in Q225, implying an annualised ROE of 8.3% (vs 9.5% in Q224, see Exhibit 1). Region-wise, its major profit engines remain Bulgaria (including Greece), Ukraine, Kosovo and Serbia, all of which reported double-digit annualised ROE in H125 (see Exhibit 2). Ecuador continues to be a significant drag on performance, reporting a €5.4m loss in H125, amid macroeconomic headwinds, social instability, regulatory lending rate caps, as well as tight liquidity in the local banking sector. That said, PCB’s management signalled that market rates for deposits have come down lately in Ecuador, somewhat easing the margin pressure (the local bank’s net interest margin (NIM) was 2.3% in H125 versus 2.2% in Q125), and the liquidity situation in the banking sector has improved (assisted by measures from the International Monetary Fund).

PCB’s lower net profit primarily resulted from a 4.5% y-o-y fall in net interest income (NII) to €86.4m (a slight moderation versus the 5.7% y-o-y decline in Q125) amid NIM compression (3.2% at group level in Q225 versus 3.6% in Q224), driven by negative year-on-year asset repricing effects coupled with only a marginally positive effect from downward repricing of liabilities (despite European Central Bank and local rate cuts) (see Exhibit 4). This more than offset the positive impact from higher asset volumes (see below). PCB management highlighted that high deposit rates remain sticky amid macro-driven liquidity constraints across its markets of operations. An important driver of the negative year-on-year asset repricing effect of €29.4m in H125 was the €13.4m impact from lower interest income from cash and cash equivalents (most notably central bank deposits). That said, we note that NIM levelled off sequentially at 3.2% in Q225.

PCB’s net fee and commission income (which now includes income from fx transactions) reached €24.5m, up 7.6% y-o-y. Key contributors to year-on-year growth in H125 included fx transactions (€2.8m) and payment services (€1.6m), while cards and other had a €1.9m negative impact because of higher fees charged by card providers (see Exhibit 5), although income from cards contributed positively in Q225.

This was coupled with a slight increase in operating expenses of 2.4% y-o-y to €76.4m. PCB made significant investments in staff (with a focus on front-office functions and IT), branch network, IT and marketing as part of its new strategy in FY24. This included an expansion of its headcount by 803 or 19%, as well as the opening of six new branches and 41 service points (with an additional six branches/service points in H125). PCB continues to develop its IT infrastructure; an ongoing project is its new mobile banking platform, which was rolled out in Kosovo and which will be gradually rolled out across its other local banks. Nevertheless, management confirmed that the increase in PCB’s cost base related to the execution of its new strategy was largely absorbed by H125. There was no net growth in headcount in H125 and no increase in PCB’s marketing budget and the budget of its in-house IT unit Quipu. This is reflected in PCB’s minor year-on-year increase in personnel expenses of 0.5% in Q225, and a slight sequential decline. Administrative expenses increased in Q225 versus Q125 by 6.8% (and rose by 4.2% y-o-y), but this was mostly due to one-off consulting expenses. Consequently, the CIR was up only slightly from 70.8% in Q125 to 71.1% in Q225. This represents a run-rate ahead of management’s FY25 guidance of a broadly stable CIR versus FY24 (68.1%). Therefore, management now guides to an FY25 CIR of around 70%, broadly in line with our previous forecast of 69.6% (which we have revised slightly upwards to 71.3%).

Loan portfolio growth on track, deposit growth slowing

PCB posted strong loan book growth at constant currency of 7.2% in H125 (on track to meet management’s FY25 guidance of 12%), supported by good momentum across all client segments and a continued high contribution from lower-volume clients of more than 70%. As a result, PCB’s lower-volume loan portfolio has expanded by 30% overall since end-2023 (ie when it launched its updated strategy – see our April 2024 outlook note for details) and at end-June 2025 represented 46% of PCB’s total loan portfolio, up 1pp versus Q125 and 4pp since the launch of the updated strategy. It is therefore on track to reach management’s medium-term target of c 50%. After accounting for negative currency effects (primarily in Ukraine, Ecuador and Georgia), PCB’s loan portfolio grew by a still robust 2.4% in Q225 and 4.9% in H125. In Romania, Georgia, Bosnia & Herzegovina, Albania and Moldova (ie its subscale banks where PCB’s priority is to grow strongly to realise economies of scale), growth was at a similar solid rate of 7.0% on average (fx adjusted). Headline growth was broadly similar, except in Georgia, which saw a negative impact from the depreciation of Georgian lari against the euro (see Exhibit 7). We note that PCB Ukraine is no longer contributing negatively to PCB’s growth in loan portfolio, with the local loan book up 2.0% in H125 despite negative fx effects, following the €20m capital increase PCB carried out for its Ukrainian bank in December 2024, with PCB’s investment insured under the umbrella of the German investment guarantee scheme by the Federal Government of Germany. Ecuador remains a drag with a c 11% decline in H125, which came from a combination of negative fx effects (US dollar depreciation) and the above-mentioned headwinds. PCB reported that, due to covenant breaches by the Ecuadorian bank with respect to return on average assets and the tier 1 capital ratio, €10.8m of liabilities to banks and €6.0m of subordinated debt of the bank have been classified as short term. The bank is in negotiations with lenders to obtain waivers to these covenants. PCB does not expect early repayment of the above liabilities.

PCB’s deposits were broadly unchanged sequentially (down -0.2%) in Q225, translating to a 0.9% decline in H125, affected by currency effects and the seasonal decline in business deposits. We note that the fx-adjusted growth of 1.5% in H125 is still below the average headline growth of 3.1% in PCB’s deposit base in the first half of the previous five years. Growth in private client deposits remains solid, and their share in total deposits increased by 2pp in the year to date to 45%, translating into a low-single digit percentage increase in H125 (including fx impact), according to our calculations. The slowdown came from business deposits, with possible reasons indicated by PCB’s management including the broader macroeconomic uncertainty, as well as greater appetite of small and medium enterprises (SMEs) for investments and working capital as a way to hedge against a potential future increase in inflation. Consequently, PCB’s deposit-to-loan ratio fell to 111.7% at end-June 2025 versus 114.7% at end-March 2025 and 118.3% at end-2024, bringing PCB further away from its medium-term target of a deposit-to-loan ratio at the level of the respective local banks above 120%. We note that the company made substantial progress in improving the ratio and raising the share of customer deposits in its refinancing mix in recent years (see Exhibit 8). However, given the current uncertain environment and recent fx headwinds, we now conservatively assume slower deposit growth in FY25e and FY26e of 3.9% and 9.7%, respectively (vs 11.6% and 12.4% assumed previously).

Management believes that the increased investments in working capital should at some stage translate into a pick-up in SME deposits as businesses drive up their sales. Deposits at PCB’s Ecuadorian bank declined by 2.5% in H125 (ie less than the contraction in its loan book), resulting in an improved deposit-to-loan ratio of 117.7% (up 9.8pp vs end-2024). Management considers PCB’s banks in Serbia and North Macedonia as being at an advanced stage, with emphasis on further growth but also optimisation of balance sheet structure to drive profitability. These banks posted robust loan book growth of 7.4% and 8.6% , respectively in H125, while their deposit base remained broadly flat, resulting in somewhat lower deposit-to-loan ratios, both year-on-year and versus end-2024.

Credit quality consistently robust

PCB’s credit quality remains robust and continues to further improve with the share of stage 3 loans at 2.1% at end-June 2025 versus 2.2% at end-March 2025 and 2.3% at end-2024. This, coupled with further solid recoveries of written-off loans of €3.2m in Q225 (€6.1m in H125), resulted in a moderate cost of risk of 6bp in Q225 and a very low 1bp in H125. Region-wise, the low cost of risk was supported by net releases in Eastern Europe, while cost of risk in South-Eastern Europe stood at 15bp in H125 (still a moderate level) and in Ecuador PCB reported 44bp. There was no impact from the semi-annual update of macro parameters, and the stock of management overlays remained stable at €59.2m (or 33% of provisions), representing a sizeable buffer. That said, the group transferred €72.6m worth of credit exposures that are more sensitive to the impact of tariffs to stage 2 loans in H125. Credit quality in Ukraine is solid with the share of stage 3 loans at 3.3% at end-June 2025 and a €4.5m net release of loss allowances in H125. Meanwhile, the share of stage 3 loans continued to increase in Ecuador to 9.3% at end-June 2025 (vs 9.0% at end-March 2025 and 9.2% at end-2024) and H125 cost of risk was 44bp.

RWA efficiency measures and/or AT1/AT2 capital raise ahead

PCB’s CET-1 ratio was stable in Q225 at 13.1%, well above the current regulatory requirement of 9.9%. That said, as discussed in our previous notes, the recently increased regulatory requirements coupled with the weakening in risk-weighted assets (RWA) density (67.5% in Q225 vs 66.4% in FY24 and 63.5% in FY23) will result in quite narrow regulatory buffers at the Tier 1 and total capital level (we currently assume c 0.9pp and 0.4pp for FY26e excluding any new Tier 1 or Tier 2 issuance, respectively). Therefore, we consider it likely that PCB will intensify its RWA efficiency measures and/or consider raising additional capital beyond CET-1 capital. Meanwhile, PCB’s German holding company issued €100m debt securities in H125 as part of its regular financing/liquidity management (which does not have an impact on PCB’s regulatory capital).

Forecast revisions

We have slightly reduced our gross loan book assumptions for FY25e and FY26e, mostly due to this year’s currency effects, but remain of the view that PCB will stay on course with respect to loan portfolio growth. We have, however, lowered our deposit base forecasts by 6.9% in FY25e and 9.1% in FY26e to reflect the above-mentioned tighter liquidity across PCB’s markets of operations. Although we maintain our NIM assumptions at a broadly unchanged level, the expected lower deposit volume may constrain growth in PCB’s total interest-earning assets in the near term, which has driven a reduction of our NII forecast by 3.7% and 4.9% in FY25e and FY26e, respectively. This is partly offset by lower cost of risk assumptions given the continued solid credit quality of PCB’s portfolio, including the provision reversal in Ukraine. Consequently, we have reduced our net income forecasts for FY25e and FY26e by 10.7% and 6.7%, respectively. Despite the near-term headwinds, we still expect PCB to reach its medium-term goals of a loan book in excess of €10bn and ROE of 13–14% (we have pencilled in the lower end of the range for FY28e). We assume a FY28e CIR of 58.7%, somewhat above management’s medium-term target of 57%. PCB’s RWA density has not improved so far this year, with RWA to total assets at 67.5% at end-June 2025 versus 66.4% at end-2024. In our opinion, this increases the probability that PCB will issue new AT1/AT2 capital. At the 2025 AGM held in June, PCB’s shareholders authorised PCB’s management to issue profit participation rights (‘Genussrechte’) of up to €200m, structured as Additional Tier 1 capital. During the H125 earnings call, management highlighted that it does not have immediate plans to conduct an issue. We therefore now assume that a €150m issue will take place sometime in FY26e (compared to FY25e, as previously assumed in our forecasts).