Company description: Leading lender for leading SMEs
PCB specialises in financing SMEs in transition economies, including SEE, EE and South America (Ecuador). Its focus is on impact-oriented financing, which supports sustainable development, employment and social prosperity. In the past, the group offered mainly small-volume lending to micro and SMEs (MSMEs) but has changed its target customer group to growing, well-established SMEs, which foster innovation, local production and a transition to a green economy. PCB also offers banking services to private clients, predominantly to middle-income and high earners (SME owners in particular).
The company provides a full range of banking services. This includes lending to business clients in the form of investment and working capital loans (with a target amount of €50k to €3m) as well as liquidity management and trade finance. Moreover, it offers housing and investment loans as well as overdrafts to private clients. The company also provides current accounts, flexible savings and term deposit accounts.
History: From NGO consulting to own banking operations
Consulting projects in emerging markets
PCB has its origins in IPC, a consulting company founded in 1980 (now Zeitinger Invest, a major shareholder with a c 17% stake in PCB). Initially, the company ran advisory projects with government-owned development banks and credit-granting NGOs in Latin America aimed at providing access to the formal financial sector for MSMEs in emerging markets. In the 1990s, IPC expanded its activities to downscaling programmes in commercial banks in Latin America and the former Soviet Union, which were intended to improve financial services offered to MSMEs by commercial banks.
Starting to set up ‘greenfield’ banks
In 1997, the company established its first microfinance bank in Bosnia in the aftermath of the Bosnian War, which left the country highly disorganised while the economy remained strongly dependent on SMEs. The bank was set up together with international public sector development organisations, including KfW (a German development bank), IFC (a member of the World Bank Group), the European Bank for Reconstruction and Development (EBRD) and the Netherlands Development Finance Company (FMO). Notably, KfW and IFC are still PCB’s major shareholders, with stakes of c 13% and 10%, respectively. At that time, IPC was also granted a management mandate in the Bosnian bank. To raiseaccess more capital, the company was founded in 1998 as Internationale Micro Investitionen (IMI). The initial shareholders were IPC and ipc-investment (now ProCredit Staff Invest) and new investors soon joined, eg PCB’s current shareholder DOEN Foundation (a Dutch entity focused on supporting sustainable and socially inclusive entrepreneurs), and expanded the network of its banks to 17 entities.
The foundation of ProCredit
IMI became ProCredit in 2003, with core shareholders being IPC, DOEN, KfW, IFC and ProCredit Staff Invest, and continued consolidating ownership of the respective regional banks. Meanwhile, it expanded its geographical footprint in Latin America and Africa. In December 2011, ProCredit Bank in Germany obtained a banking licence from the German regulator (BaFin). ProCredit Group has been listed on the Prime Standard segment of the Frankfurt Stock Exchange since December 2016. PCB’s shareholder structure has remained broadly stable, as illustrated in Exhibit 1.
Exhibit 1: PCB’s current shareholder structure
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Source: ProCredit. Note: These are based on the following latest notifications from the respective shareholders: Zeitinger Invest (8 October 2018), KfW (28 December 2016), DOEN (29 December 2016), IFC (27 February 2018) and TIAA (29 December 2016).
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‘Hausbank’ for SMEs in SEE and EE
Focus shifting from microenterprise loans to well-established SMEs post 2008/09
While successfully withstanding market headwinds during the global financial crisis in 2008/09, PCB decided to alter its business focus. Lending practices in the microcap space were aggressive, leading to over indebtedness and little regard for social or environmental factors. At the same time, demand for SME lending was growing. Consequently, PCB moved away from being a product-oriented microfinance provider in 2008 to become a ‘Hausbank’ for SMEs, focused on maintaining long-term partnerships with its clients and providing them with a full range of financial services. PCB highlights that SMEs have a substantial impact on overall economic development in countries where it conducts operations, as they provide c 60–80% of total employment and generate at least half of the value add.
The strategic shift to larger-scale businesses is illustrated by an increase in PCB’s initial loan size over recent years, with the share of loans over €50k at 92% at end-2019 vs 46% at end-2013 (see Exhibit 2). This was coupled with a significant reduction of the branch network (81 at end-2019 vs 645 at end-2013, see Exhibit 3) and staff (c 3k at end-2019 vs 11.5k at end-2013), which translated into an increase in loan book per employee to €1.6m at end-2019, compared with €0.4m at end-2013. SMEs currently account for c 50% of PCB’s customer deposits and 60% of fee income (but 93% of its loan book).
Exhibit 2: Share of loans with a volume over €50k in PCB’s loan book
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Exhibit 3: Reduction of PCB’s branch and service point network over time
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Exhibit 2: Share of loans with a volume over €50k in PCB’s loan book
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Exhibit 3: Reduction of PCB’s branch and service point network over time
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Optimising its regional footprint
PCB decided to focus on SEE and EE and exit operations in less promising markets, such as Africa and Latin America (except for Ecuador), as well as Armenia. It finalised the consolidation and restructuring of the group in 2019. Finally, it acquired the remaining minority stake in ProCredit Bank Ukraine in January 2020 (and thus holds a 100% stake in each of its regional banks now). The company highlights that most of the disposals were motivated by the group’s long-term strategic vision and it is worth noting that these loan books were not under/non-performing.
Consequently, at end-March 2020, PCB conducted its banking operations in 12 markets (13 if we include ProCredit Bulgaria’s branch in Greece). SEE and EE represented 93% of its gross loan book, up from 46% at end-2013. The largest markets are Bulgaria (20% of gross loan book at end-March 2020), followed by Serbia (18%), Ukraine (12%) and Kosovo (11%), see Exhibit 5. PCB’s banking business in Ecuador was c 6% of the gross loan book at end-March 2020. The company’s German operations are largely focused on providing services to the group, such as efficient payment, liquidity and support functions. They include ProCredit, Quipu (the software subsidiary responsible for developing its digital platform), ProCredit Bank Germany (1% of the group’s gross loan portfolio at end-March 2020) and ProCredit Academy in Fürth (which runs a training centre for the group’s employees). The company has implemented German banking standards across its regional banks and is supervised by the German authorities (BaFin and Bundesbank).
Exhibit 4: PCB’s regional loan book split between 2013 and 2019
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Exhibit 5: PCB’s regional loan book exposure at end-March 2020
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Exhibit 4: PCB’s regional loan book split between 2013 and 2019
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Exhibit 5: PCB’s regional loan book exposure at end-March 2020
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Sustainability and impact orientation as a top priority
PCB’s long-term mission is to contribute to an inclusive, stable and efficient financial system. It focuses on building and maintaining long-term relationships with its clients and employees, offers only simple and transparent products, promotes a savings-oriented culture and puts a strong emphasis on prudent credit as well as environmental and social risk management. This is enhanced by the group-wide code of conduct, which includes an exclusion list, specifying business activities that must not be financed by the group (in fact, no business activities will be established with clients engaged in any of these activities). Additionally, the company has set standards to minimise the environmental impact of its lending operations, supported by the Group Environmental Steering Committee at group level and Environmental Committees in the local banks. PCB’s strategy is aligned with the UN’s Sustainable Development Goals.
Moreover, it has been actively cooperating with European institutions to foster innovation and became one of the largest partners for the InnovFin programme run by the European Investment Fund (EIF). The latter doubled the available financing covered by guarantees provided to PCB through the InnovFin initiative to €1.62bn in July 2019, which extended PCB’s capacity to grant loans to innovative companies. PCB has enabled access to this EU-backed funding to around 2,000 SMEs.
Green loan portfolio represents c 17% of PCB’s total loan book
The company’s sustainability orientation is illustrated by its growing book of green loans, which it started disbursing in 2006 and which represented 16.7% of its total loan book at end-March 2020 (or €807m) compared to 15.4% at end-2018 (see Exhibit 6). These include loans to fund energy efficiency projects that reduce energy consumption by at least 20% (these made up 68% of the green loan portfolio at end-2019) as well as renewable energy (13%) and other green investments (19%), including investments leading to the prevention of air, water and soil pollution, waste management, as well as organic agriculture and production. Interestingly, green loans accounted for c 30% of PCB’s loan book growth in FY19 and Q120, with particularly strong momentum in renewable energy projects (characterised by stable income streams, which is especially important in the current environment). PCB’s mid-term target is to increase the share of green loans in its total loan book to 20%.
Exhibit 6: PCB’s green loan book (€m)
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High MSCI ESG rating of AA
The company is committed to reducing its direct environmental footprint and become carbon neutral in the medium term. In 2019, the group reduced its CO2 emissions by 19% y-o-y, thanks to internal environmental measures in its premises, replacing fleet with electric and hybrid vehicles (c 65% of its car fleet currently), as well as progressive reduction and recycling of waste.
PCB’s ESG performance, measured by the MSCI ESG rating, was AA at 12 May 2020, which places it in the top 15% of companies rated by MSCI in the banking sector worldwide.
Direct (digital) bank for private clients
Despite its traditional approach to banking, the company is committed to investing in the development of efficient and secure technology. Its app- and web-based functionalities are developed in-house by its software subsidiary Quipu, which PCB believes helps address IT challenges quickly. With respect to the development of PCB’s direct (digital) banking, a major milestone was the introduction of ‘ProCredit Direct’ in 2017, a digital banking platform primarily for private clients. It complemented the existing approach of ‘Hausbank’ for SMEs and allowed it to initiate the digitalisation of financial services to private clients, fully completed in 2018. Since then, all transactions in the group’s banks have been digital (ie PCB substantially abolished over-the-counter and cash transactions in its branches). Currently, PCB is focused on the digitalisation of non-financial transactions, including development of MyDIRECT, an online service that enables clients to confirm their identity digitally via remote video (which was introduced in its banks in Bulgaria and Georgia last year). The company underlines the innovative nature of its IT solutions in the markets it operates in, eg PCB’s bank in Ecuador is the only fully digital and cash-free bank in the country. Interestingly, while the group has largely finalised the shift away from loans with a volume below €50k last year, it treats this market segment as an opportunity for more streamlined lending to private and small corporate clients using its digital platform.
PCB highlights that it can fulfil the needs of SMEs better than its competitors, thanks to its well-trained and long-serving staff, with 75% of the team having more than five years of experience in the group, while managers in local banks have worked for PCB for over 12 years on average. PCB remains focused on targeted recruitment and staff development, which it supports with comprehensive training programmes provided by ProCredit Academy in Fürth, Germany. PCB’s spending on employee training rose from €6.8m to €7.2m in FY19. Notably, the company’s renumeration policy is aligned to its long-term oriented business objectives and does not include any short-term, performance-related bonuses. PCB promotes gender diversity, as exhibited by the composition of the management boards in the group’s banks, with women representing 53% of the headcount. The bank’s response to COVID-19, and in particular the health and safety of employees, has benefited from a focus on digital banking, which has enabled staff to work from home and continue to engage with clients.
Overview of operations by country
We have summarised PCB’s operations by country in Exhibit 7. We note that EE displays higher profitability (annualised return on average equity (ROAE) of 15.2% in Q120 vs 7.1% in SEE), driven by a higher NIM (4.5% vs 2.5% in SEE and 3.1% at group level) and lower CIR (39.7% vs 65.7% in SEE and 64.6% at group level). At the same time, the share of NPLs remains low across regions.
Exhibit 7: Summary of PCB’s operations by region and country
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Gross book at end-Q120 (€m) |
Gross loan book y-o-y |
NPL ratio (end-Q120) |
Cost income ratio (Q120) |
Cost income ratio (FY19) |
Profit after tax in FY19 (€m) |
ROE (FY19) |
Southeastern Europe |
3,414 |
9.9% |
2.2% |
65.7% |
72.0% |
38.4 |
7.8% |
Bulgaria |
956 |
12.7% |
N/A |
N/A |
N/A |
18.5 |
N/A |
Serbia |
854 |
12.2% |
N/A |
N/A |
N/A |
5.9 |
N/A |
Kosovo |
512 |
0.8% |
N/A |
N/A |
N/A |
21.5 |
N/A |
North Macedonia |
376 |
13.3% |
N/A |
N/A |
N/A |
4.2 |
N/A |
Romania |
307 |
17.8% |
N/A |
N/A |
N/A |
-4.1 |
N/A |
Bosnia & Herzegovina |
205 |
8.5% |
N/A |
N/A |
N/A |
-0.8 |
N/A |
Albania |
205 |
-1.2% |
N/A |
N/A |
N/A |
-6.6 |
N/A |
Eastern Europe |
1,064 |
10.5% |
3.2% |
39.7% |
42.3% |
37.7 |
17.4% |
Ukraine |
607 |
16.4% |
N/A |
N/A |
N/A |
24.2 |
N/A |
Georgia |
319 |
-0.7% |
N/A |
N/A |
N/A |
9.0 |
N/A |
Moldova |
138 |
16.5% |
N/A |
N/A |
N/A |
4.5 |
N/A |
Ecuador |
307 |
26.7% |
2.6% |
90.8% |
102.5% |
-1.3 |
-2.3% |
Germany |
54 |
-26.2% |
N/M |
N/M |
N/M |
1.6 |
N/M |
TOTAL |
4,839 |
9.2% |
2.4% |
64.6% |
70.5% |
54.3 |
6.9% |
SEE: Strong loan book momentum and quality, but muted margins
PCB’s loan book growth across countries (except for Kosovo and Albania) has been strong overall in recent years at 10%+ pa, supported by the comparatively low level of loan book to GDP at c 30–55% compared to 70%+ in major Western European economies (see Exhibit 8). In Kosovo, PCB has a leading position in a rather saturated market and thus focuses on retaining its high market share.
PCB’s NPL ratio (2.2%) is below local sector levels as banks continue to deal with legacy assets. It is below the ratio reported by Raiffeisen in SEE (3.3% at end-March 2020), as well as its two listed Romanian peers (BRD at 3.3% and Banca Transilvania at 2.83% at end-March 2020), although it is also worth highlighting that these peers had a significantly higher ratio a few years back (at c 10–15%). PCB’s NIM in the region stood at 2.5% in Q120 (annualised), below the c 3.3–3.5% for some of its listed peers, with the lack of meaningful consumer lending being likely one of the key reasons. PCB faces competition from European banking groups in the region, which means margins are likely to remain moderate.
Overall, profitability in SEE was dampened by PCB’s bank in Romania, which posted a €4.1m loss in FY19 amid high financing costs as the bank is still in the process of building critical mass. On the positive side, we note that the bank tax announced in Romania in 2019 was abolished at the beginning of 2020. Moreover, Albania recognised a loss of €6.6m in FY19, resulting from restructuring costs as well as the earthquake in November 2019. Key positive earnings contributors in SEE were Bulgaria (profit after tax of €18.5m in FY19) as well as Kosovo (€21.5m).
EE: Solid growth and margins, with NPL ratio well under control
The EE region’s performance in recent years was characterised by a gradual recovery in corporate funding in Ukraine (57% of PCB’s loan book in EE at end-March 2020) from the ongoing conflict with Russia, which started in 2014 and triggered a wave of bank closures (with their number down from c 180 in 2014 to 76 in June 2019, according to the German Advisory Group Ukraine). Similarly, Moldova has been recovering from the 2014 banking crisis induced by the collapse of three local commercial banks (Banca de Economii, Unibank and Banca Socială). Like SEE, loan book momentum was further supported by low banking sector penetration (see Exhibit 8).
With respect to competition in the region, it seems to be somewhat weaker compared to SEE due to the more limited presence of international banking groups and thus higher market share of local/regional players. For instance, the two largest banks in Georgia (TBC Bank and Bank of Georgia) have a combined market share of c 70% by total assets. While the presence of international (non-Russian) banks is slightly higher in Ukraine, all local banks (in particular state-owned) hold c 70% of the market. Consequently, PCB’s interest rates on loans, and hence NIM and profitability, remain solid in the region. The company’s NIM in Q120 stood at an annualised 4.5%.
It is worth highlighting that the NPL ratio in the Ukrainian banking sector was 48.4% at end-2019 according to the IMF (vs ProCredit Bank Ukraine at 3.7% at end-2019). The NPL ratio in Georgia at end-September 2019 stood at around 4.4% based on local central bank data (vs PCB at around 3.0% at end-2019), whereas in Moldova it was c 8.5% at end-2019 according to the IMF (vs PCB at 3.1%).
Ecuador: Healthy margins, but a particularly weak macro environment
Ecuador is PCB’s only exposure to Latin America (c 6% of its total loan book). While the NIM in the region has been favourable for PCB at 5.2% in Q120, the local economy has experienced a ‘perfect storm’ in recent years with headwinds from 1) political instability and social unrest triggered by, among other things, the fuel subsidy cut, 2) the impact from Fed rate hikes up to end-2018 (as the US dollar is its official currency), 3) a significant drop in oil prices lately (Ecuador is a major regional exporter) and 4) COVID-19. Consequently, the country recently defaulted on its bonds and requested IMF funding. Competition in the banking sector is predominantly from local market participants. While PCB’s operations in Ecuador have been profitable in the past, they are yet to return to break-even since realignment of the business model.
Exhibit 8: Domestic credit to private sector by banks as percentage of GDP in 2018
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Prudent credit risk management and good loan book quality
Sustained low NPL ratio historically
The current downturn is likely to cause a deterioration of corporate asset quality, with SMEs and micro-companies being normally most vulnerable to this kind of shock given their more limited capacity to absorb a drop in revenue and withstand a liquidity crunch (even if this is somewhat mitigated by initiatives similar to the EIB’s described earlier). Having said that, we note that PCB has shied away from aggressive lending and continuously focused on deep, long-term relationships with high-quality SMEs. Moreover, as a reminder, PCB does not offer any meaningful volumes of consumer loans, with 93% of its portfolio in SME lending and 6% in housing loans to private customers.
Consequently, PCB was able to report a low NPL ratio (reflecting Stage 3 loans under IFRS) historically, which stood at 2.4% in Q120 and 2.5% at end-2019 (compared to 3.1% in FY18 and 3.9% in FY17, see Exhibit 11). Previously, PCB reported the ratio of loans over 30 days late (vs 90 days for NPLs currently), which stood at a relatively low level between 3.7% and 4.9% in 2010–16. It is also worth noting that PCB’s green loan portfolio is characterised by even better quality, with its NPL rate at end-2019 of just 0.6%. We forecast NPL ratios at group level of 2.8% in FY20e and 2.7% in FY21e.
Exhibit 11: PCB’s historical and forecast NPL ratio at group level
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Source: ProCredit, Edison Investment Research
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In this context, we note that PCB has never sold NPL portfolios, which means that its historical NPL ratio development may be largely considered organic (and supported by low net write-offs through the cycle), except for the business disposals in South and Central America as well as Africa. However, the NPL ratios for these businesses (except for Africa, which was slightly higher) did not differ materially from its current portfolio and their disposals were based on the evaluation of their long-term prospects rather than due to inferior loan book quality. PCB highlights that its focus on SMEs with strong payment capacity through economic cycles is reflected in its outperformance against local markets in terms of NPLs (see Exhibit 12). The bank considers its low NPL ratio one of the key long-term profitability drivers in the current low interest margin environment, particularly given that (as discussed earlier) it does not intend to enter the higher-margin consumer lending market.
Exhibit 12: PCB’s NPL ratios (FY19) vs local banking sector NPLs
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Source: IMF Financial Soundness Indicators, ProCredit. Note: Country ratios are last available (at end-Q219, Q319 or Q419). *NPL ratio for Georgia based on local central bank’s methodology. Based on IMF data, this would be 2.7%.
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Strict loan collateral policy and NPL coverage ratio comfortably at c 95%
PCB has consistently emphasised strict, formalised collateral requirements compared to many other local players that were relaxed about their requirements to fuel growth until February 2020. PCB’s total loan collateral at end-March 2020 was €3.7bn and included commercial and residential mortgages (66%), financial guarantees (12%) and other (22%). Financial guarantees are largely provided by the EIF through ProCredit’s regional banks to SMEs as part of the InnovFin programme, which in the case of PCB was increased from €800m to €1,620m as announced in July 2019 (making PCB one of the largest programme participants). These guarantees normally cover 50% of potential credit losses, translating into a lower loss allowance requirement for PCB (although loss allowances would not be much higher without the guarantees according to management). It is worth highlighting that the InnovFin SME Guarantee COVID-19 measures recently announced by the EIF, which include an increased 80% cover of credit losses for new working capital facilities (as discussed above), should help PCB grow its loan portfolio while allowing it to maintain its collateral standards. Despite the solid collateral for PCB’s loan book, the group retained a robust NPL coverage ratio, which in Q120 was 95.5% (vs 89.1% at end-2019 and 90.8% at end-2018).
No elevated risk from sector exposure
It is also important to note that PCB has relatively limited exposure to sectors most affected by COVID-19, such as hotels and travel (c 4% of loan book) or transport and logistics (5%). Furthermore, PCB has an insignificant exposure to automotive production and supply, as well as the oil & gas sector (although it still has exposure to the broader manufacturing sector at 23%). In total, the most affected sectors (horeca, transportation, construction, as well as arts and entertainment) made up c 15% of PCB’s loan book at end-March 2020, according to the company.
At the same time, one of its top sector exposures is agriculture, forestry and fishing (20%), which is likely to prove more resilient in the current overall adverse market conditions (although this may change if the drought unfolding in the region turns out to have a significant impact). Together with other relatively defensive sectors (food and drinks, waste management and health services), this represents around 40% of PCB’s portfolio. This also includes PCB’s renewable energy loans portfolio (c 2% of the group’s loan book at end-2019, according to our estimates). Finally, it is worth noting that PCB states its single largest client exposure represents just 1.5% of the group’s CET-1 capital.
Cost of risk likely to increase
Management has guided to a cost of risk (defined as loss allowances to average gross loan book) of 50–75bp in FY20, which is broadly in line with recent management guidance at Raiffeisen Bank International (75bp) and Erste Group (50–80bp based on a V-shaped recovery assumption). This will come from loans moving to Stage 2 (significantly increased credit risk) and Stage 3 (non-performing). Hence, although the cost of risk has already increased in Q120, this was not accompanied by a spike in NPL ratio. The latter should be largely back-end loaded (Q420 in particular) as defaults should materialise with a lag because: loans are considered non-performing if they are 90 days past due; credit moratoria of three to six months have been a common response across PCB’s countries of operations (as per ESMA guidelines, moratoria do not increase credit risk); and some distressed loans will go through a restructuring process in H220 first. Importantly, in a statement released on 27 April, management highlighted that it has not experienced strong pressure on loan quality to date. We have factored in cost of risk at 80bp in FY20e, followed by 62bp in FY21e as we still assume elevated default rates in early 2021.
At end-March 2020, the share of PCB’s loan book under moratorium was c 30%. However, this is distorted because (as mentioned earlier) Serbia has introduced moratoria in an opt-out setup (ie borrowers have to apply to not be subject to a moratorium). Excluding Serbia, 20% of PCB’s loan book (or €0.8bn) is under moratorium, with the breakdown presented in Exhibit 13. The company has also disclosed the share of portfolio in moratorium by sector, with hotel, retail and catering (horeca) unsurprisingly at the top of the list (see Exhibit 14). We note that PCB (in line with standard sector practice) continues accruing interest income on its P&L from these loans despite the fact that actual cash inflow is being postponed.
Exhibit 13: Breakdown of PCB’s loan portfolio under moratorium by sector
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Exhibit 14: Share of portfolio in moratorium by sector
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Source: ProCredit. Note: Excludes Serbia.
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Source: ProCredit. Note: Excludes Serbia.
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Exhibit 13: Breakdown of PCB’s loan portfolio under moratorium by sector
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Source: ProCredit. Note: Excludes Serbia.
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Exhibit 14: Share of portfolio in moratorium by sector
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Source: ProCredit. Note: Excludes Serbia.
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Prospective loan book growth muted as SMEs curb investments
The adverse macro environment will limit SME investments significantly but may also increase demand for bridge/working capital funding. Consequently, while the current environment is characterised by elevated risk, it may also prove an opportunity for PCB to expand its business. Nevertheless, risks seem to significantly outweigh opportunities at this stage. Moreover, predictions in the current environment are obviously subject to significant uncertainty. Still, our base case scenario assumes that, while a recessionary environment is likely to persist into early 2021, we may see some gradual recovery in the second half of next year (and technically also in Q221 given the low base effect). Consequently, we forecast PCB’s net loan book growth at c 2% in FY20e and 7% in FY21e (see Exhibit 15). The FY20e assumption is broadly in line with company guidance of low single-digit growth in loan book. Management’s mid-term target is to grow the loan portfolio by around 10% pa and our FY22e assumption is in line with this.
Exhibit 15: PCB’s historical and forecast net loan book evolution
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Source: ProCredit, Edison Investment Research
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Maintaining a diversified range of funding sources
High emphasis on growing the customer deposit base
Last year, management put strong emphasis on customer deposits base expansion to diversify its funding sources and reduce average funding costs. This is important given that PCB’s ratio of customer deposits to loans stands at a moderate 88% (at end-March 2020) compared to c 113% for Erste Bank, 102% in case of Raiffeisen Bank and 125% for OTP Bank. This translated into solid deposit growth in FY19 of 14.2% y-o-y (vs 7.1% and 2.8% in FY18 and FY17, respectively), assisted by both private and SME customers. This has been achieved despite PCB’s continued execution of the ‘ProCredit Direct’ strategy in its private customer business (involving, among other things, abolishing cash transactions and migrating customers to its digital platform), which resulted in the departure of non-core clients with low account balances (which led to lower fees from account maintenance), particularly in Kosovo.
For this year, we assume the company may face some deposits outflow amid the liquidity crunch triggered by the COVID-19 lockdown. We understand the deposit outflow may be more pronounced in economies that rely on cash payments and where remittances from diaspora (which are likely to diminish) represent a large part of GDP, including many SEE/EE countries such as for instance Kosovo (remittances represent c 15% of GDP according to the OECD). That said, this should be partially offset by PCB’s focus on digital banking for middle-income and high earners in the private customers segment, as well as the high level of client confidence its regional banks enjoy, which is underpinned by the German reputation and PCB’s track record (eg it remained one of the last banks to stay open in several countries during the global financial crisis in 2008/09 as well as the military conflict in Georgia, according to the company). Although we understand that c 55% of PCB’s deposit base consists of sight and savings (FlexSave) accounts (with limited or no withdrawal restrictions), the remaining 45% represent term deposits, which predominantly have a maturity longer than 12 months.
Based on all the above, we have conservatively assumed a 2% decline year-on-year in customer deposits in FY20e, followed by a 5% rebound in FY21e. Nevertheless, we acknowledge that (as per the company’s statement dated 27 April) apart from some usual seasonal drop, PCB’s deposit base has remained resilient so far (and was down c 2% in Q120 vs end-2019).
Other funding sources: Backed by international financial institutions
PCB’s remaining external funding is a combination of financing provided by international financial institutions to the regional ProCredit banks (€838.5m at end-March 2020), as well as debt securities issued at holding level (€446.7m), including subordinated debt (€89.3m). Liabilities to international financial institutions comprise funding from development banks and funds such as, among others, the EIB, Council of Europe Development Bank, EBRD, Black Sea Trade & Development Bank, the Global Climate Partnership Fund, European Fund for Southeast Europe and responsAbility (a Swiss-based asset manager focused on development investments).
A noticeable part of PCB’s debt securities at holding level is the US$90m green bond issued in May 2019 in a private placement with IFC, which as mentioned earlier is part of the World Bank Group and one of PCB’s major shareholders. The proceeds will be used to further fuel growth in PCB’s green loan book. The issue was followed by a number of smaller placements amounting to €50m with commercial investors (bringing the total proceeds to c €130m).
Exhibit 16: PCB’s funding sources at end-March 2020
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Capital ratios well above regulatory requirements
PCB’s regulatory capital structure is relatively simple, with no additional Tier-1 capital, meaning that its €742.3m CET-1 capital at end-2019 also represented all of its Tier-1 capital. This is supplemented by Tier-2 capital in the form of subordinated debt (€83.7m at end-2019 after early repayment of c €56m during 2019).
The bank’s risk-weighted assets (RWA) of c €5.1bn at end-March 2020 were largely related to credit risk (€4.1bn), with its market risk (€565m) predominantly associated with currency risks arising from the value of its equity stakes in regional banks (with their changes reflected directly in equity). Furthermore, its operational risk stood at €436m at end-March 2020 and has been visibly reduced (from €800.7m at end-2015). The credit valuation adjustment risk was a minor €2m given the low value of derivatives on PCB’s balance sheet.
The company’s CET-1 ratio (fully loaded) at end-March 2020 stood at 14.0%, well ahead of the regulatory requirement at 8.2%. Similarly, its Tier-1 and total capital adequacy ratio (CAR) stood at 14.0% and 15.6% versus the company’s minimum regulatory levels of 10.1% and 12.6%, respectively. These ratios are broadly comparable with its three closest international peers – Raiffeisen, Erste Group and OTP Bank – which at end-March 2020 reported CET-1 ratios at 13.0%, 13.1% and 13.9%, respectively (slightly below PCB) and CAR at 16.8%,17.7% and 16.2% (somewhat ahead of PCB), respectively.
There are a number of factors that will provide relief to PCB’s capital requirements in 2020 and 2021 through lower regulatory capital ratios as well as reduced RWA. Firstly, the group’s CAR requirement in 2020 already declined on the back of a reduction in the SREP add-on from 2.5% to 2.0% announced by BaFin (the German regulator) in February 2020. Secondly, PCB is benefiting from the European Banking Authority’s equivalence acknowledgement of Serbian banking regulation (alongside South Korea) in January 2020. As a result, the company’s cash holdings in the Serbian Central Bank are assigned a 0% weight for the purpose of calculating its RWA, which led to a €120m reduction, according to management.
Finally, the introduction of CRR II in 2021 brings an extension of the SME support factor (SME SF) to exposures above €1.5m at 0.85. This should reduce PCB’s RWA (and thus support its capital ratios) given that 30% of its loan book at end-March 2020 represented loans with a volume above €1.5m. That said, we acknowledge that credit exposures up to €1.5m for these loans were already previously subject to an SME SF of 0.7612 and SME loans disbursed by PCB rarely exceed €5.0m. The recently introduced higher guarantee cover for working capital needs as part of the InnovFin SMEG COVID-19 measures (80% vs 50% previously) is only applicable to new loan disbursements and should thus have a limited positive impact on PCB’s RWA.
In conjunction with the short-term slowdown in loan book growth (as discussed above), we estimate the above factors will translate into CET-1 ratios of 14.1% in FY20e and 14.3% in FY21e (see Exhibit 17). Management has guided that CET-1 will be above 13% in FY20. We expect PCB’s total CAR to reach 15.8% in FY20e and FY21e. We estimate that PCB’s capital ratios at end-FY20 can support loan book growth of 15% pa until FY24 (excluding any retained earnings or translation reserve impact) compared to our current loan book growth forecast of 9% pa.
Exhibit 17: PCB’s historical and prospective capital ratios vs regulatory requirements
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Source: ProCredit, Edison Investment Research. Note: As PCB’s Tier-1 ratio is in line with CET-1 ratio, we have excluded CET-1 capital from the chart.
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Profitability below peers but likely to be resilient
NIM compressing in recent years
PCB’s NIM has been under pressure in recent years, mostly due to its repositioning from higher-risk (but also higher-margin) microloans to the segment for SME loans with a higher volume and to some extent also because of the competitive environment amid low interest rates. As a result, its NIM declined to 3.1% at end-March 2020 compared to 5.5% in FY15. As discussed above, this reflects a higher margin in EE (4.5%) and Ecuador (5.2%) compared to SEE (2.5%).
Before the COVID-19 outbreak, management highlighted that these margin pressures had abated and were not expected to continue. While management’s working assumption is still for stable margins in FY20, the company also flagged a high level of uncertainty around margins in the near term. We note that PCB may seek additional external funding to secure incremental liquidity and/or raise the interest rate on customer deposits (thus increasing its cost of funding) due to reduced cash inflow from its loan book (due to the credit moratoria) and potentially also deposits outflows (in case these materialise). However, we note that the group’s LCR is 181%, which is visibly above the regulatory requirement of 100%.
We also note potential pressures on margins resulting from central bank interest rate cuts. As a result, we have pencilled in a slight NIM decline to 3.0% in FY20e, followed by a stable margin year-on-year in FY21e and a gradual rebound in subsequent years (see Exhibit 18). This should be assisted by recovering customer deposits growth (as mentioned above).
Exhibit 18: PCB’s historical and forecast NIM at group level
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Source: ProCredit, Edison Investment Research
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CIR likely to remain close to 70% this year
Although the company’s business streamlining process, involving branch network and headcount reductions and the disposal of selected businesses in South America and Africa, was largely completed in FY19, this has not been reflected in PCB’s CIR at end-2019. The ratio at group level stood at 70.5% in FY19 compared with 69.7% in FY18 and management’s initial intension to reduce it below 70% in FY19.
This was the result of certain one-time charges associated with the business restructuring, including: €2.0m goodwill write-down in Romania booked in Q419; c €0.7m loss from sale of fixed assets coupled with a €2.1m write-down of head office in Albania; and a €1.9m write-down of the head office in Kosovo in Q419. We estimate that after adjusting for these one-offs, PCB’s CIR would have been around 68.2%.
Recurring operating expense last year was driven by increased marketing spending to promote PCB’s direct banking offer, as well as some growth in headcount. In Q120, marketing expenses declined, while personnel costs continued to grow together with the number of staff. In conjunction with the absence of non-recurring items described above, this translated into an improved CIR at 64.6% in Q120.
This year, the bank intends to further increase headcount to attract new SME customers who appreciate PCB’s long-term approach to customer relationships, especially in the current tough market environment. While the lockdown is likely to result in reduced travel expenses (which were normally c €5m pa), we understand the company has largely exhausted the cost-optimisation potential following the completion of its cost-cutting measures last year. Consequently, management expects a broadly stable cost base in FY20 and guided to a stable CIR at around 70% in FY20, while still committing to the mid-term target of below 60% (we have conservatively assumed c 61% for FY24 driven by growing interest and fee income, see Exhibit 19).
Exhibit 19: PCB’s CIR at group level
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Source: ProCredit, Edison Investment Research
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Return on equity: Affected by cost of risk but should still be positive in FY20
PCB’s return on equity was somewhat below its local peers at c 7–8% over the last three years compared to its Austrian peers (Raiffeisen Bank International and Erste Group) at c 10–13% and local peers at c 15–25% (although this is in local currencies and is therefore subject to FX risk for international investors). However, it is important to highlight PCB’s very stable returns, with the company remaining profitable in each year since 2005 (even during the GFC in 2008/09 at c 4%, see Exhibit 20) with an average ROE around 9%. In particular, the company’s ROE remained ahead of the peer average over 2011–14, when the regional banking sectors faced high-risk provisions and NPL ratios. Nevertheless, PCB’s ROE has lagged its peers during the expansionary phase of regional economies (and throughout the whole cycle). However, we note that the last seven years have been a period of business realignment (as outlined earlier).
Exhibit 20: PCB’s historical ROE vs peers
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Source: Company accounts, Refinitiv. Note: Local peers include BRD, Banca Transilvania, TBC Bank, Bank of Georgia, OTP Bank, Bulgarian American Credit Bank, KomerčnI Bank and Moneta Bank. Austrian international peers include Erste Group and Raiffeisen Bank International.
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Management’s intension is to improve PCB’s ROAE to c 10% in the medium term. This compares with earlier targets of above 12% (communicated back in 2013) and 10–12% (shared in 2014). We have examined the main factors behind PCB’s lower ROE by looking at its key performance indicators versus Raiffeisen Bank International, Erste Group and OTP Bank (due to a somewhat similar regional footprint) reported for FY19 (see Exhibit 21).
Based on the exhibit below, we conclude that that PCB’s profitability versus the three banking groups may be lower due to 1) higher RWA as a percentage of total assets (78% vs c 50% for Austrian peers and 69% for OTP Bank), which we understand may be due to a higher risk weight of mortgages on commercial versus residential real estate, higher risk weight of corporate vs retail loans, as well as the lack of EBA equivalence acknowledgement for some of PCB’s countries of operation (which means that most of PCB’s liquid assets have a 100% weighting, as opposed to some of its peers), 2) a higher CIR at 70% vs c 60% for peers (although we note PCB’s Q120 ratio was 64.6%) and 3) a higher customer loans to deposits ratio (although we note that PCB’s NIM is higher).
Still, we forecast that PCB will be able to reach the 10% ROE target by growing its portfolio by c 9% pa over multiple years and expanding its customer deposit base at a mid- to high-single digit rate while keeping growth in operating costs at a limited level (following the efficiency measures introduced in recent years).
Exhibit 21: KPI comparison – PCB vs closest international peers
FY19 |
ProCredit |
Raiffeisen |
Erste Group |
OTP Bank |
Net interest margin |
3.1% |
2.4% |
2.2% |
4.1% |
Net fee and commission income as % of total assets |
0.8% |
1.2% |
0.8% |
1.7% |
Cost Income ratio |
70% |
57% |
59% |
58% |
Effective tax rate |
20% |
23% |
18% |
11% |
Customer loans as % of total assets |
70%* |
60% |
65% |
59%** |
Cash (incl. with central banks) as % of total assets |
16% |
16% |
4% |
9% |
Customer deposits as % of total liabilities |
74% |
70% |
77% |
85% |
Equity to total assets |
12% |
9% |
8% |
11% |
Customer loans to deposits |
111% |
95% |
92% |
78% |
RWA to total assets |
78% |
51% |
48% |
69% |
CET-1 ratio |
14.1% |
13.9% |
13.7% |
13.9% |
ROE |
6.9% |
11.0% |
10.0% |
20.6% |
Total assets (€m) |
6,698 |
152,200 |
245,693 |
60,616 |
Source: Company accounts, Edison Investment Research calculations. Note: *68.2% when adjusted for one-off items; **52.7% on an adjusted basis.
For FY20e, management guides to an ROAE below FY19 (affected particularly by a higher cost of risks as discussed earlier in the note), though still positive. We estimate it at 4.0% in FY20e (broadly in line with the GFC level) and 5.2% in FY21e.
Dividend policy: Targeting a payout ratio of 33%
PCB’s general dividend policy is to pay out one-third of its profits to shareholders, which translated into a board proposal to pay €0.30 per share from FY19 earnings. However, in response to the COVID-19 outbreak, the European Central Bank and BaFin have released a recommendation to banks to withhold any dividend payout and share buybacks at least until 1 October 2020. Consequently, PCB’s management (after a discussion with the supervisory board) decided to postpone the decision with respect to dividend payments until Q420. In our forecasts, we assume that PCB will pay the above dividend in Q420.