ProCredit Holding — On track to scale the business further

Below we present a summary of PCB’s Q121 results compared to Q120. Net profit in Q121 was €15.6m (up 13.8% y-o-y), implying an annualised ROE of 7.9% versus 7.0% in Q120. Following a solid set of Q121 figures, management confirmed its FY21 guidance of loan portfolio growth of c 10% (in line with its mid-term target) and an ROE between 6.0% and 7.5%, assuming a still elevated cost of risk, though below the FY20 level. PCB still targets a CIR of 65–68% and expects a CET1 ratio of 13% (versus 13.3% in FY20).

Despite Q1 being a relatively quiet season normally, PCB was able to grow its customer loan book by a solid 3% (or €158m) versus end-2020 to €5.4bn. This compares with Q120 and Q119 sequential growth of 0.9% and 2.0%, respectively. Contrary to last year however, this was largely driven by working capital loans (€91m) followed by investment loans (€34m) and green loans (€33m). Having said that, we note that PCB classifies all loans with a maturity of up to three years as working capital loans. However, some of these may in fact be investment loans with a shorter maturity. We note that credit moratoria (ie deferrals of loan repayment) had a negligible impact on Q121 growth as these expired in several countries of PCB’s operations in Q420. Consequently, only 2% of PCB’s portfolio was under moratoria at end-December 2020 and less than 2% at end-March 2021.

Management highlighted that all ProCredit banks except Germany contributed to the loan book expansion with growth rates of 2% or more. All banks in the Southeastern Europe (SEE) segment grew their loan books by 2–4% during the quarter (particularly Romania and Albania), while in the Eastern Europe segment growth stood at 4.6% q-o-q, largely driven by positive fx effects (though constant currency growth was also positive). The loan book in Ecuador increased by 8.8%, in part due to the appreciation of the US dollar. PCB’s green loan book grew by 3.4% versus end-2020 to c €1.0bn and now represents 18.8% of the total loan book (versus PCB’s mid-term target of 20%). While the pace of growth was below previous quarters, management highlighted that it expects growth to again accelerate in the coming quarters.

At the same time, PCB continued to attract new deposits with Q121 growth of 2.5% (after an increase of c 13% in FY20), compared with a 1.7% decline in Q120. Similar to last year, the increase in deposits came mostly from sight and savings deposits, which together make up 69% of PCB’s deposit base (up 5pp versus Q120). Interestingly, more than half of the Q121 growth (or €65m) came from private individual customers.

Q121 loss allowances stood at €3.6m (versus €7.5m in Q420 and €6.9m in Q120), translating into an annualised cost of risk of 27bp. However, we note that this includes a €1.3m positive effect from the change in the allocation of interest accrual for loans in arrears for more than 90 days from net interest income to loss allowances from Q121 onwards. After adjusting for this, PCB’s cost of risk was still relatively low at 37bp in Q121, below Q120 and FY20 level of 57bp.

Provisions in Q121 were primarily driven by stage 3 loans (€4.6m) and loan book growth (€1.8m). Consequently, the share of credit-impaired loans (stage 3 loans) in PCB’s loan book increased slightly to 2.7% (from 2.6% at end-2020), while the share of stage 2 loans was down to 4.6%, from 4.9% at end-2020 (though there was an increase in restructuring processes). This is in line with our expectations that FY21 loss allowances will be mainly attributable to transfers from stage 2 to stage 3. On average, the credit quality of the green loan portfolio remains above the total loan book, though we note that there was an uptick in the default rate to 1.0% at end March 2021 from 0.6% at end 2020. PCB did not perform an update of its macroeconomic assumptions, given that the new International Monetary Fund’s (IMF) forecasts released in April 2021 indicate a more moderate GDP contraction across PCB’s countries of operations, but also a slightly lower rebound in 2021. We underline the continued strong recoveries of written off loans, which in Q121 stood at €3.2m (versus €11.2m in FY20). PCB’s coverage of the impaired portfolio was down slightly to 88.9% at end March 2021 versus 91.4% at end 2020, but remains solid.

PCB’s net interest income was down 3.2% y-o-y to €49.3m in Q121, primarily due to the reduction in base interest rates in countries where PCB operates, as well as the €1.3m effect discussed above, which however was earnings neutral. As a result, Q121 NIM stood at 2.7% versus 3.1% in Q120 and 2.8% in Q420. We note however, that the NIM contraction was primarily visible in Ukraine, while other regional banks were largely able to offset the effect of rate cuts and reported a stable NIM y-o-y. Recently, NIM in Ukraine also stabilised and we note that the local central bank increased the base rate by 50bp in March 2021 and 100bp in April 2021 (from 6% to 7.5%), flagging that further rate hikes are likely given the high rate of inflation (8.4% in April 2021). Net interest income also declined versus end-2020 by c 3.0% (or €1.5m), which reflects the above-mentioned accounting effect, as well as a €1.1m calendar effect (lower number of days in the quarter). This was partially offset by loan book growth, with the net impact of loans and liabilities pricing remaining broadly neutral versus Q420.

Net fee and commission income was flat y-o-y at €12.0m in Q121 despite overall business growth, as customer transaction activity has not fully recovered to pre-COVID levels. Having said that, income from payment and card services went up versus Q120 by €0.5m, but was offset by lower account maintenance fees and higher fee and commission expenses.

Q121 CIR was 64.8% versus 64.6% in Q120, marginally below management’s FY21 guidance of 65–68%. This is despite the above-mentioned change in interest accrual recognition having a 1.3pp negative impact on the ratio. Operating expenses decreased in Q121 by c 2.5% y-o-y to €40.7m, assisted primarily by c €0.8m of cost savings at PCB Romania (mostly due to last year’s restructuring), as well as a €0.7m decline in travel expenses. This was only partially offset by provisions for legal expenses of €0.4m for litigations in Serbia booked by PCB in conjunction with the local supreme court ruling related to loan processing fees in the Serbian banking sector. PCB’s management estimates that the total maximum risk associated with these litigations stands at €2.0m (which we estimate would have a minor €0.03 per share impact on PCB’s value). Personnel expenses increased only slightly by 2% y-o-y to €21.0m despite an 8% headcount expansion across the group in FY20.

PCB’s CET-1 ratio stood at 13.2% at end-March 2021, down slightly (by 5bp) from end-2020 due to loan book growth, which was partially offset by a c €50m reduction in the €87m excess liquidity placed in local central banks in Q420 amid strong deposit growth, as well as a slight improvement in translation reserves amid favourable fx changes in Q121. The ratio does not include PCB’s H220 profits which will be recognised in the regulatory capital in Q221 (adding c 25bp) and that one-third of PCB’s 2019 and 2020 profits (representing 46bp) was already deducted from the regulatory capital in line with management’s dividend proposal and PCB’s dividend policy. Management sees relatively limited impact from the implementation of Basel IV in 2023, given that PCB does not use internal models for the calculation of risk-weighted assets.

Given PCB’s solid Q121 figures and the reiterated management guidance, we have made only minor changes to our net income forecasts, with the c 3% increase primarily being a function of reduced operating expenses assumptions, encouraged by PCB’s good cost control, in particular the cost savings from restructuring in Romania.

In Q221, we expect PCB to post a net income of €13.2m (vs €8.0m in Q220), with a net interest margin of 2.7% (stable vs Q121), cost of risk at 43bp and a CIR at 66.2%.

Our PCB fair value estimate remains at €11.20 per share, which currently implies c 28% upside potential. While PCB has one of the lowest FY20 ROEs in its peer group (5.3%), it also trades at one of the lowest price to book value (P/BV) ratios (0.7x) and as a result is positioned below the regression line in our P/BV-ROE landscape (see Exhibit 4). We note that the group is quite scattered across the P/BV-ROE map making the regression line somewhat less reliable. We believe this may be due to several non-financial factors, such as a different degree of political risk perceived by investors. We focus on FY20 numbers due to the low R-squared value of the regression line that is based on FY21e P/BV and ROE estimates for PCB and its peers, suggesting limited reliability (see Exhibit 5).