ProCredit Holding — On track to meet FY23 ROE guidance of 8–10%

PCB reported a strong €34.6m net income in Q223 (vs €9.4m in Q222, see Exhibit 1), translating into a 15.0% annualised ROE in Q223 and bringing the H123 annualised figure to 14.2%. This is well above PCB’s current FY23 guidance of 8–10% (raised in May 2023 from 6–8% communicated earlier this year) and ahead of the medium-term guidance of around 12%. Encouragingly, most of the regional banks contributed to the healthy profitability, with all Southeastern European (SEE) banks reporting an annualised ROE of 11–13% (except for Kosovo at 23% and Albania at 7%), while banks in Ukraine, Georgia and Moldova reported ROEs of c 40%, 19% and 20%, respectively. Ecuador was again an outlier with a slight loss in H123 (see more details on Ecuador below).

The solid set of results was assisted by a continuously high NIM (3.6% in Q223 vs 3.1% in Q222) amid interest rate normalisation across most countries of PCB’s operations (despite some rate cuts in the Eastern European countries), see Exhibits 2 and 3. It is worth noting that almost all local PCB banks contributed to the sequential NIM expansion. The stronger interest income was driven by customer loans, but also by central bank balances and investment securities.

NIM was also assisted by the improving deposit-to-loan ratio (104.9% at end-June 2023 vs 91.2% at end-June 2022 and 103.1% at end-2022), on the back of a 2.7% increase in customer deposits, as well as the fact that customer deposits are yet to fully capture the base rate hikes (see Exhibit 4). Together with a slight sequential increase in the loan book (up 0.8% during H123, down c 2.2% yoy due to targeted loan book reduction and local currency devaluation in July 2022 in Ukraine), this resulted in a 24.1% y-o-y rise in net interest income to €80.2m in Q223. In Q223 alone, the loan book rose by 1.6% as PCB experienced gradually improving sentiment among SMEs to pursue new investments.

PCB’s earnings were further driven by 9.1% y-o-y growth in net fee and commission income to €14.9m (assisted by a focus on adding private individual and non-loan business clients), translating into an 18.8% y-o-y improvement in operating income in Q223 to €98.0m, outpacing the 16.3% yoy growth in operating expenses to €58.6m. This allowed PCB to keep the cost income ratio (CIR) under control at 59.7% in both Q223 (vs 61.0% in Q222) and H123, ahead of the 62–64% management guidance for FY23. After adjusting for extraordinary items, PCB’s CIR was 58.3% in H123, 1.5pp below H122 and close to PCB’s medium-term target of c 57%.

PCB booked a €1.3m net release of loan loss provisions in Q223 (or 9bp of the gross loan book), resulting in an H123 cost of risk of 2bp. The H123 net provisioning was driven by €6.7m in recoveries of written off loans and a €6.2m positive impact from model parameter updates. This has more than offset new loss allowances from stage transfers (€11.0m) and some minor incremental management overlays (€1.5m). Total management overlays for macroeconomic risks as at end-June 2023 reflected in PCB’s loan loss provisions stood at €41.0m (of which c €11.1m was attributable to ProCredit Bank Ukraine). The share of credit-impaired loans in PCB’s loan book outside of Ukraine stood at a moderate 2.3% at end-June 2023 (12.4% in Ukraine, with a 130% coverage ratio of the default portfolio).

PCB’s CET1 ratio stood at 14.2% at end-June 2023 versus 13.5% at end-2022 and the current regulatory requirement of 9.2%, assisted by the full attribution of FY22 profit and continued improvements to risk-weighted asset (RWA) efficiency (see our last outlook note for details). Two-thirds of the H123 result will be attributed to the CET1 capital in Q323, which on a pro-forma basis translates into a CET1 ratio of 14.8%.

PCB’s Multilateral Investment Guarantee Agency (MIGA) collaboration was broadened to include an additional agreement for Ukraine (signed in June 2023), with the latter resulting in a €35m RWA release, bringing the combined MIGA collaboration effect to €140m (or 25bp in CET1 ratio improvement year-to-date). Moreover, PCB embarked on a securitisation project with the European Investment Fund in Bulgaria, with a positive RWA impact of €180m (or a 32bp contribution to the year-to-date CET1 ratio improvement). PCB’s total capital ratio reached 15.3% at end-June 2023 versus 14.3% at end-2022 and the current regulatory requirement of 14.2%.

PCB achieved an important milestone on its carbon neutrality agenda (see the key takeaways from PCB’s Impact Report 2022 in our previous update note for details) by commissioning its 3MW photovoltaic park in Kosovo, which will compensate for 85–90% of its stage 1 and 2 emissions. We also note that PCB’s 2023 AGM resolved with a large majority to change its legal form to a stock corporation (with conversion expected to be completed in Q323).

Ecuador successfully completed the Sixth Review under the Extended Arrangement under Extended Fund Facility of the International Monetary Fund (IMF) in December 2022 and the IMF expects the economy to grow by 2.9% in 2023 with consumer price inflation at a moderate 2.5%. However, the country has been experiencing a challenging internal situation marked by political instability and criminal gang violence, culminating recently with the assassination of a presidential candidate.

The associated uncertainty is likely to weigh on SMEs’ willingness to commit to new investments and in turn on demand for PCB’s loans. This applies especially to larger SMEs and therefore PCB shifted its focus to small SMEs (with an individual loan size of c €100k vs PCB’s general focus on €50k to €1.5m), also because the lending rate caps imposed by the government are higher in this segment (PCB’s NIM in Ecuador declined to 3.2% in H123 from 4.6% in H122). The share of credit-impaired loans at PCB’s local bank stood at 6.6% at end-June 2023.

While PCB managed to grow its customer deposits in Ecuador by 12.8% y-o-y in Q223, these have remained broadly flat year-to-date (lagging behind other regional banks), which was partly due to local liquidity being moved to safer jurisdictions (the US in particular), a phenomenon typical in periods of rising US dollar interest rates. That said, as the local loan book declined slightly in H123, PCB’s deposit-to-loan ratio improved slightly to 69.4% at end-June 2023, versus 68.9% at end-2022 (and 62.8% at end-June 2022), though below management ambitions in this respect. The local bank posted a slight €0.4m loss in H123.

We estimate that, following the strong H123 results (14.2% ROE), the management’s current FY23 ROE guidance of 8–10% implies an H223 annualised ROE of c 2–6%, which at first glance looks conservative. However, there are several factors that may lead to lower profitability for PCB in the second half of the year:

However, given the encouraging H123 results, we have raised our FY23 net income forecast by 7.6% to €91.2m, primarily on the back of higher net interest income assumptions, especially for assets other than customer loans. This implies an FY23 ROE of 10%, which is at the upper end of management’s FY23 guidance (vs our previous forecast of 9.3%) and also translates into an FY23 CIR ratio of 63.8% (ie within management guidance of 62–64%). We have slightly reduced our longer-term ROE assumptions though, as we now cautiously do not assume that PCB’s Ecuadorian bank will return to sustainable profitability in the medium term. Therefore, our FY27 ROE forecast is now 11.4% versus 11.5% previously and management’s medium-term target of around 12%.

Our revised forecasts, together with new country risk premiums (based on updated data published by Aswath Damodaran in July) and updated FY23e P/BV-ROE peer analysis (see below) now imply a fair value in our base scenario (assuming a 10% sustainable ROE) of €11.40/share. Assuming an RoTE in line with management’s mid-term guidance (12%), PCB would be valued at €13.40/share. Finally, in a worst-case scenario of the full write-off of the local bank in Ukraine, we would value PCB at €10.00/share.