ProCredit Holding — Actively seeking to expand client base

ProCredit Holding (XETRA: PCZ)

Last close As at 23/11/2024

EUR7.84

−0.06 (−0.76%)

Market capitalisation

EUR462m

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Research: Financials

ProCredit Holding — Actively seeking to expand client base

ProCredit Holding (PCB) grew its gross loan book by 4.4% in Q220 by seizing the opportunity that arose from the more subdued activity of its competitors amid the pandemic. As a result, management now expects FY20 growth of 8–10% (we assume 9.3%). However, its net interest margin (NIM) fell to 2.9% in Q220 vs 3.1% in Q219 due to widespread rate cuts by local central banks and higher lending activity in the upper medium segment of the SME market. Cost of risk (67bp in H120) remained in line with earlier guidance, although management now expects the FY20 cost to be at the upper end of the previously guided range at 75bp (vs our unchanged forecast of c 80bp).

Milosz Papst

Written by

Milosz Papst

Head of Content, Investment Trusts

Financials

ProCredit Holding

Actively seeking to expand client base

H120 results

Banks

21 August 2020

Price

€5.95

Market cap

€350m

Total assets (€bn) at end-June 2020

6.8

Shares in issue

58.9m

Free float

35.7%

Code

PCZ

Primary exchange

Frankfurt Prime Standard

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(9.4)

18.4

(17.1)

Rel (local)

(7.8)

3.5

(24.8)

52-week high/low

€7.95

€4.60

Business description

ProCredit Holding is a Germany-based group operating regional banks across Southeastern and Eastern Europe, as well as in Ecuador. The banks focus on Small and mid-size enterprises (SMEs) and private middle-income and high earners. At end-June 2020, the group’s total assets stood at €6.8bn.

Next events

German Fall Conference 1on1 Summit 2020

1–3 September 2020

Conference Zürcher Kapitalmarkt Konferenz

16 September 2020

Analyst

Milosz Papst

+44 (0)20 3077 5700

Anna Dziadkowiec

+44 (0)20 3077 5700

ProCredit Holding is a research client of Edison Investment Research Limited

ProCredit Holding (PCB) grew its gross loan book by 4.4% in Q220 by seizing the opportunity that arose from the more subdued activity of its competitors amid the pandemic. As a result, management now expects FY20 growth of 8–10% (we assume 9.3%). However, its net interest margin (NIM) fell to 2.9% in Q220 vs 3.1% in Q219 due to widespread rate cuts by local central banks and higher lending activity in the upper medium segment of the SME market. Cost of risk (67bp in H120) remained in line with earlier guidance, although management now expects the FY20 cost to be at the upper end of the previously guided range at 75bp (vs our unchanged forecast of c 80bp).

Year end

Net interest income (€m)

EPS*
(€)

DPS
(€)

P/BV
(x)

P/E
(x)

ROE
(%)

Yield
(%)

12/18

186.2

0.90

0.30

0.5

6.6

7.6

5.0

12/19

194.5

0.89

0.30

0.5

6.7

6.9

5.0

12/20e

194.4

0.53

0.18

0.5

11.1

4.0

3.0

12/21e

195.3

0.68

0.23

0.4

8.8

5.0

3.8

Source: ProCredit, Edison Investment Research. Note: *From total operations.

Balance sheet looking healthy

While PCB’s P&L has been clearly affected by COVID-19 (as has the whole sector), its balance sheet remains robust with the 4.4% growth in gross loan book (even if somewhat assisted by the moratoria) and 4.2% growth in customer deposits (with no sign of a widespread liquidity crunch) in Q220. Moreover, we note that PCB’s expenses for loss allowances in H120 were mainly driven by updated macroeconomic assumptions in its credit risk model rather than actual defaults, with its share of credit-impaired loans remaining stable at 2.5% at end-June 2020 vs end-2019 (though again, the moratoria likely played an important role). Both its CET-1 ratio and total capital ratio (TCR) were also unchanged vs end-2019 at 14.1% and 15.7%, respectively (well above regulatory requirements).

Cost of risk weighting on Q220 results as expected

PCB’s Q220 net income was €8.0m, down 33% y-o-y (when compared to its result from continuing operations in Q219). This was primarily due to higher expenses for loss allowances (€8.8m vs 2.0m in Q219), combined with weaker fee income (down 18% y-o-y due to lower money transfers and card transactions) and pressure on NIM. This was in part offset by good cost control (operating expenses were down 3% y-o-y with the cost income ratio (CIR) at 68.5% vs 71.6% in Q219) on the back of the recently completed business streamlining coupled with some lockdown-related savings (transport and travel) and lower marketing expenses. PCB’s annualised return on average equity (ROAE) was c 4.0% in Q220.

Valuation: Remains undemanding

PCB’s shares currently trade at a FY20e P/BV multiple of 0.5x, below the peer average of 0.9x, which we believe is only partially justified by PCB’s lower ROE. Our valuation currently stands at €7.75/share, implying c 30% upside potential.

H120 results: Loan book growth ahead of expectations

Gross loan book up 4.4% in Q220, encouraging management to raise full-year guidance

PCB posted a solid 4.4% increase in the gross customer loan book in Q220 vs end-March 2020 (5.3% in H120 ytd), ahead of its closest peers Raiffeisen Bank International (RBI) and Erste Bank which both reported c 2% growth in the gross customer loan book during Q220 (according to our calculations), highlighting slowing retail and corporate loan demand. After a weaker March and April, PCB experienced a pickup in lending activity from May. According to management, PCB’s lending activity was ahead of its competitors as they toned down their lending operations during the initial phase of the coronavirus crisis. Nevertheless, we note that loan book growth across the banking sector was assisted by credit moratoria introduced in response to COVID-19, which also involved suspension of the principal repayment. Given that 30% of PCB’s loan book was under moratoria at end-March 2020, we roughly estimate that these could have had a positive c 1–2pp impact on its Q220 growth.

The fact that PCB’s loan book expansion was mostly driven by longer-term investment loans rather than working capital facilities should be considered a positive sign. Its green loan portfolio grew by a particularly strong 8.4% in Q220 (with renewable energy projects up 28%), bringing its share in PCB’s overall loan book to 17.3% at end-June 2020 (vs 16.6% at end-2019), closer to its mid-term target of 20%. All the above has encouraged management to raise the full-year guidance for its customer loan book growth to 8–10% excluding any fx impact (compared to management’s previous guidance for low-single digit growth).

Region-wise, loan growth was particularly driven by Southeastern Europe (up 4.9% to €3.6bn in Q220), especially Serbia, Bulgaria, Romania and North Macedonia. Meanwhile, PCB’s Eastern Europe business saw an increase of 2.8% to €1.1bn, with relatively limited fx impact from Ukrainian Hryvnia during the quarter (as per our estimates). Here, it is worth highlighting that Moldova posted solid 14% growth in H120 overall net of any fx impact. Ecuador was up by 4.9% to €0.3bn in Q220.

Customer deposits growing at a similar pace with no evidence of a systematic liquidity crunch

It is also worth highlighting that the group was able to improve its customer deposit base by c 4.2% in Q220 vs Q120 (and 2.6% in H120) on the back of both business and private deposits, which according to the management reflects the attractiveness of PCB’s direct banking offer (the group had completed the onboarding of all clients onto the digital platform at the beginning of 2020). This means that the risk of deposits outflow amid a liquidity crunch triggered by the COVID-19 lockdown has not materialised yet. The share of current accounts and the FlexSave savings deposits increased compared to end-June 2019, which on one hand limits the increase in interest expense, but on the other hand means that a higher proportion of PCB’s deposit base has lower withdrawal restrictions.

Cost of risk in line with management expectations; FY20 guidance now 75bp

PCB incurred expenses for loss allowances of €15.7m in H120 vs €4.1m in H119, translating into an annualised cost of risk of 67bp, in line with management’s earlier guidance of 50–75bp in FY20. Importantly, the €11.6m y-o-y increase was mostly a function of updated macroeconomic assumptions in PCB’s credit risk models triggered by the pandemic (€8.0m, see Exhibit 1). The €15.7m in provisions for credit losses include just €2.7m related to stage 3 loans, with PCB’s share of credit-impaired loans rising only marginally to 2.5% at end-June 2020 vs 2.4% in Q120 (and remaining stable vs end-2019). The default rate in the company’s green loan portfolio continues to be visibly below the group level at 0.3%. Expenses for loss allowances for stage 2 loans stood at €4.7m in H120 and at end-June 2020 these loans represented 5.3% of PCB’s gross loan book (up from 4.5% in Q120). The increase was a function of continuous individual assessment for all exposures and restructurings.

Exhibit 1: Breakdown of PCB’s expenses for loss provisions in H120

Source: ProCredit

Consequently, PCB’s ratio of allowances to credit-impaired loans rose to 93.6% vs 89.1% at end-2019 (though this was slightly down from 95.5% in Q120). We note that PCB’s total loan collateral at end-June 2020 stood at €3.8bn, covering c 75% of its total gross loan book, and generally consistent with the €3.7bn shown at end-2019. This includes mortgages (c 66% of collateral), financial guarantees (12%) and other (22%, of which 2% is cash). It is worth highlighting that all investment loans disbursed by PCB are backed by collateral, while working capital loans (with no collateral) are only granted to existing clients that PCB knows well.

Management now expects the FY20 cost of risk to be at the upper end of previous guidance ie at 75bp (compared to our forecast published in the initiation note at 80bp). We understand that the primary reason for this is PCB’s revised outlook for stage 2 loans (and to a lesser extent also stage 3 loans). Management expectations remain broadly in line with RBI (guidance maintained at 75bp) and Erste Bank (65–80bp after a slight upward revision from 50–80bp previously).

Net interest margin under pressure from recent rate cuts

PCB’s NIM declined to 2.9% in Q220 on an annualised basis from 3.1% reported both last year (Q219) and in Q120, with H120 NIM at 3.0%. This is largely attributable to the recent rate cuts in Eastern Europe, in particular Ukraine, where the central bank’s main interest rate was gradually cut from 17.5% in Q219 to 6% at present (down 750bp ytd, of which 200bp was in June 2020). We assume that some additional pressure came from the recent US Fed rate cuts given that part of PCB’s loan book is denominated in US dollars (11% at group level at end-June 2020). Consequently, annualised NIM in the Eastern Europe segment was down to 4.2% in H120 compared to 4.5% in H119 (and was c 3.9–4.0% in Q220, according to our estimates).

Meanwhile, NIM in the SEE region declined somewhat as well to 2.4% in H120 vs 2.6% in H119 and was also slightly down sequentially as PCB reported 2.5% in Q120. As Bulgarian rates were at 0% even before the pandemic and in several countries a large part of PCB’s portfolio is likely denominated in euro (eg Kosovo, Serbia or Bosnia and Herzegovina), the impact from local central bank rate cuts has probably come from North Macedonia (rate lowered in January, March and May by an aggregate 75bp to 1.50%) and Romania (down 100bp ytd to 1.50%, with the most recent cut by 25bp in August). Given Serbia represented 25% of PCB’s Southeastern Europe loan book at end-June 2020, the local rate cuts (down by 50bp to 1.25%) likely constituted an additional drag on margins.

Management highlighted that as its competition retreated somewhat during the crisis, it was able to price new loans more favourably in some regions. Having said that, at the consolidated level this was largely offset by PCB’s greater emphasis on the upper medium loan-size segment in some countries (eg in Ecuador or Kosovo), which is characterised by lower margins.

Fee income lower due to weaker volumes of money transfers and card transactions

PCB’s net fee and commission income stood at €10.6m in Q220 and fell 18% y-o-y (11% q-o-q) on the back of lower fees from money transfers and card transactions due to COVID-19. However, management highlighted that in June 2020 it experienced an upward trend in the number of transactions by 10% vs May 2020, though these are still below June 2019. Some part of the y-o-y decline most likely came from reduced account maintenance fees due to the departure of non-core customers with low account balances following the full migration of customers to PCB’s digital platform.

Cost income ratio below last year amid growth in interest income and a lower cost base

PCB’s CIR amounted to 68.5% in Q220 (66.5% in H120) which marks a visible decline vs the Q219 ratio of 71.6% due to a c 3% y-o-y reduction in operating expenses combined with a c 4% increase in net interest income from loan book growth (despite the lower NIM as highlighted above). The lower cost base is partially due to one-off COVID-19-related factors, including lower expenses for transport and travel (down €1.2m in H120), as well as reduced marketing expenses and depreciation of fixed assets. While CIR was up vs Q120 (64.6%), this is mostly due to a seasonal factor as the Bulgarian deposit insurance expense is normally incurred in Q2 (this year it represented €3.5m or 5.8pp in terms of CIR). Management continues to guide to a FY20 CIR of around 70%.

Capital base remains solid with a CET-1 ratio of 14% vs the regulatory requirement of 8.2%

Group net profit reached c €8.0m in Q220 (€21.7m in H120) vs €11.9m in Q219, translating into an annualised ROAE of 4.0% (5.5% in H120). While PCB’s operations in Ecuador again posted a net loss (€0.4m in Q220), it was close to break-even if expenses for loss allowances are excluded with its CIR at c 94%. Management continues to expect ROAE in FY20 to be positive, but below the FY19 figure of 6.9% (we now assume 4.0%, see below).

PCB’s CET-1 ratio in Q220 was broadly stable at 14.1% (vs 14.0% in Q120) and similarly, its total capital ratio (TCR) was 15.7% (vs 15.6% in Q120). These ratios remain well above PCB’s regulatory requirements of 8.2% and 12.6%, respectively. Its risk weighted assets (RWA) also remained largely unchanged vs Q120 despite the loan book expansion, which is mostly due to the partial recognition of the new SME support factors (see our initiation note for details) which reduced the RWA by c €140m as their introduction was pulled forward from 2021 to Q220. Management maintained its CET-1 ratio guidance of above 13% at end-2020. PCB’s liquidity coverage ratio was 142% at end-June 2020 compared to 181% at end-March 2020 and the regulatory requirement of 100%. The decline vs Q120 was mostly due to a slight increase in volume of maturing liabilities over the next 30 days.

Forecasts revisions

Following PCB’s solid loan book growth in Q220 and the upgrade to management guidance for FY20, we have revised our forecast for PCB’s gross loan book growth in FY20 to 9.3% from 2.1% previously (see Exhibit 2). For Q320, we now expect sequential growth of 2.6% (see Exhibit 3), driven especially by the Southeastern Europe segment (3.1%), as growth in the Eastern Europe segment may be dampened by negative base effects from the Ukrainian Hryvnia (assuming the exchange rate remains stable until end-2020) given the strong appreciation in H219 and subsequent depreciation since March 2020. Given that in some countries, moratoria have been introduced for a period of 6 months soon after the pandemic outbreak and recently some of them were extended in selected regions, this should assist loan book growth in Q320 and to some extent also in Q420. PCB’s customer deposit growth in H120 has also encouraged us to raise our forecast for the remainder of the year and we now expect deposits to increase by 5.2% in FY20 (vs a 2.2% decline assumed previously).

Meanwhile, we have reduced our NIM assumptions for FY20 and FY21 on the back of continued central bank rate cuts and PCB’s broadly flat spreads over market rates so far. Consequently, we now expect both FY20 and FY21 group NIM to stand at 2.8% (vs 3.0% previously) and we have also reduced our fee and commission income expenses forecasts given that June 2020 fees has not fully recovered to levels seen last year, according to management. Nevertheless, as PCB’s operating cost base seem to be under control, we still expect a CIR below 70%. We have kept our ROAE forecast unchanged at 4.0% and we continue to pencil in a cost of risk of c 80bp in FY20 and c 60bp in FY21. With respect to risk weighted assets (RWA), we have reflected the remaining positive impact from the SME support factor over the next 12 months, which according to management should be c €110–120m (on top of the €140m recognised in Q220).

Exhibit 2: Forecast revisions summary

 

2019

2020e

2021e

 

Actual

Old

New

Change

growth
y-o-y

Old

New

Change

growth
y-o-y

Net interest income

194.5

199.9

194.4

-2.8%

-0.1%

205.1

195.3

-4.8%

0.5%

NIM (annualised)

3.1%

3.0%

2.8%

-0.1pp

-0.3pp

3.0%

2.8%

-0.2pp

-0.1pp

Expenses for loss allowances

-3.3

39.1

41.1

5.2%

N/M

31.2

32.4

3.9%

-21.1%

Cost of risk (annualised in bps)

N/M

80

81

1bp

N/M

62

60

-2bp

-21bp

Net fee and commission income

52.0

51.1

46.9

-8.2%

-9.7%

54.1

52.1

-3.7%

11.0%

Pre-tax profit

76.9

40.3

38.5

-4.4%

-49.9%

52.1

50.0

-3.9%

29.9%

Net income

61.5*

31.7

31.5

-0.5%

-48.8%

41.4

39.8

-3.8%

26.3%

CET1 ratio

14.1%

14.1%

14.2%

0pp

0pp

14.3%

14.5%

0.2pp

0.3pp

TCR

15.7%

15.8%

15.8%

0pp

0pp

15.9%

16.1%

0.2pp

0.3pp

CIR

70.5%

68.7%

67.8%

-1.0pp

-2.7pp

68.3%

67.6%

-0.7pp

-0.2pp

Gross loan portfolio

4,797.3

4,897.6

5,245.0

7.1%

9.3%

5,236.8

5,612.7

7.2%

7.0%

Customer deposits

4,333.4

4,239.4

4,560.6

7.6%

5.2%

4,438.2

4,703.9

6.0%

3.1%

Source: ProCredit, Edison Investment Research. Note: *Profit from continuing operations.

Exhibit 3: Q320 forecasts summary

 

Q320e

Q319

growth y-o-y

Net interest income

47.1

51.0

-7.6%

NIM (annualised)

2.7%

3.2%

-5pp

Expenses for loss allowances

11.9

(1.7)

N/M

Cost of risk (annualised)

93bp

N/M

N/M

Net fee and commission income

11.8

13.1

-9.4%

Pre-tax profit

6.9

25.5

-72.9%

Net income

5.6

21.5*

-73.6%

CIR

68.5%

64.2%

+4.2pp

Gross loan portfolio

5,184.4

4,710.0

2.6%**

Customer deposits

4,548.5

4,143.0

2.3%**

Source: ProCredit, Edison Investment Research. Note: *Profit from continuing operations. **Growth vs Q220.

Valuation

We have made only minor changes to our post-tax profit forecasts for PCB and consequently, our PCB fair value estimate changed only slightly from €7.50 to €7.75 due to a lower discount factor associated with bringing the valuation forward.

While PCB has one of the lowest FY20 ROEs in the group (c 4% based on our forecasts), it is also trading at one of the lowest P/BV ratios (0.5x) and as a result is positioned slightly below the regression line in our P/BV-ROE landscape (see Exhibit 4). 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. We believe this may be due to a number of non-financial factors, such as the political risk perceived by investors.

Exhibit 4: P/BV vs ROE – ProCredit and its peers (2020e).

Source: ProCredit, Edison Investment Research forecasts for PCB, Refinitiv consensus at 21 August 2020

Exhibit 5: Financial summary

Year ending December, €000s

FY17

FY18

FY19

FY20e

FY21e

FY22e

FY23e

FY24e

INCOME STATEMENT

 

 

 

 

 

 

 

 

Net interest income

204,664

186,235

194,533

194,432

195,309

213,672

239,614

268,686

Net fee and commission income

45,834

52,172

51,972

46,911

52,062

57,793

61,164

64,733

Loss allowances (-)

4,819

(4,714)

(3,327)

41,090

32,424

15,318

13,409

12,568

Operating income

248,414

245,394

252,603

205,797

222,079

264,760

297,917

333,547

Operating expenses

186,265

167,866

175,737

167,282

172,033

182,715

196,011

210,480

PBT

62,150

77,528

76,866

38,516

50,046

82,046

101,907

123,068

Net profit after tax

48,104

54,479

54,305

31,508

39,781

66,641

83,201

100,844

Reported EPS (€)

0.86

0.90

0.89

0.53

0.68

1.13

1.41

1.71

DPS (€)

0.27

0.30

0.30

0.18

0.23

0.38

0.47

0.57

BALANCE SHEET

 

 

 

 

 

 

 

 

Cash and balances at Central Banks

932,744

963,714

1,081,723

1,052,615

876,009

886,324

899,536

916,569

Loans and advances to banks

195,552

211,592

320,737

205,190

209,294

209,294

209,294

209,294

Investment securities

353,568

297,308

378,281

384,514

392,204

392,204

392,204

392,204

Loans and advances to customers

3,756,776

4,267,829

4,690,961

5,113,793

5,475,238

6,032,461

6,645,461

7,322,423

Property, plant and equipment and investment properties

142,347

130,153

138,407

140,901

140,901

140,901

140,901

140,901

Intangible assets

21,153

22,191

20,345

20,858

20,858

20,858

20,858

20,858

Other assets

79,659

73,396

67,106

71,403

71,403

71,403

71,403

71,403

Total assets

5,481,799

5,966,184

6,697,560

6,989,274

7,185,907

7,753,446

8,379,656

9,073,652

Liabilities to banks

359,477

200,813

226,819

268,153

273,516

289,927

307,322

325,762

Liabilities to customers

3,571,237

3,825,938

4,333,436

4,560,609

4,703,879

5,145,464

5,633,761

6,173,104

Liabilities to international financial institutions

549,598

813,369

852,452

917,676

936,029

992,191

1,051,722

1,114,826

Debt securities

183,145

206,212

343,727

308,929

308,929

308,929

308,929

308,929

Subordinated debt

140,788

143,140

87,198

86,175

86,175

86,175

86,175

86,175

Other liabilities

37,714

33,076

50,436

59,801

59,801

59,801

59,801

59,801

Total liabilities

4,841,961

5,222,549

5,894,068

6,201,342

6,368,329

6,882,487

7,447,710

8,068,596

Total shareholders' equity

639,839

743,634

803,492

787,931

817,578

870,959

931,946

1,005,056

BVPS (€)

11.8

12.5

13.5

13.4

13.9

14.8

15.8

17.1

TNAV per share (€)

11.4

12.1

13.1

13.0

13.5

14.4

15.5

16.7

RATIOS

 

 

 

 

 

 

 

 

NIM

3.80%

3.30%

3.10%

2.84%

2.76%

2.86%

2.97%

3.08%

Costs/Income

73.6%

69.7%

70.5%

67.8%

67.6%

65.2%

63.0%

60.8%

ROAE

7.1%

7.6%

6.9%

4.0%

5.0%

7.9%

9.2%

10.4%

CET1 Ratio

13.7%

14.4%

14.1%

14.2%

14.5%

14.4%

14.4%

14.5%

Tier 1 ratio

13.7%

14.4%

14.1%

14.2%

14.5%

14.4%

14.4%

14.5%

Capital adequacy ratio

16.7%

17.2%

15.7%

15.8%

16.1%

15.9%

15.8%

15.7%

Payout ratio (%)

31.4%

33.3%

33.7%

33.3%

33.3%

33.3%

33.3%

33.3%

Customer loans/Total assets

71.3%

73.6%

71.6%

75.0%

78.1%

79.5%

80.9%

82.2%

Loans/deposits

109.5%

114.8%

110.7%

115.0%

119.3%

119.8%

120.3%

120.9%

Source: ProCredit accounts, Edison Investment Research


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Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by ProCredit Holding and prepared and issued by Edison, in consideration of a fee payable by ProCredit Holding. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Hepion reported a loss from operations of $4.8m in Q220, compared to $4.2m in Q120, along with R&D costs of $3.0m, compared to $2.6m in Q120. We believe strained pharmaceutical supply chains as a result of the pandemic have contributed to the increase in drug supply costs that pushed R&D expenses higher for a second consecutive quarter. As such, we have increased our FY20 R&D forecast from $9m to $10.3m.

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