ProCredit Holding — Quality of credit portfolio remains high

PCB reported a healthy Q221 net income of €20.7m, significantly above our estimate of €13.2m and Q220 net profit of €8.0m. It implies an annualised ROE of 10.2% in Q221 versus 4.0% in Q220, with annualised ROE in H121 of 9.1% versus 5.5% in H120.

PCB maintains its solid loan book growth, which in Q221 stood at 4.5% q-o-q (bringing H121 growth to 7.7%). This is above the loan book momentum reported in Q221 by Erste Group (+2.5% q-o-q, with corporate lending up 1.9%) and Raiffeisen Bank International (+2.4%). All of PCB’s local banks have contributed to this expansion with growth rates of 4.5% or more in H121, with banks in Romania, North Macedonia and Bulgaria posting growth of more than 6%. Working capital loans were the main driver, with an increase of c 8% in Q221 (according to our estimates). We note that in this category, PCB recognises all loans with a maturity of up to three years, even though some of them may actually be investment loans with shorter maturity. Green loans also continue to be an important contributor, being up by c 6.0% q-o-q in Q221 (9.5% in H121) and now representing 19.1% of PCB’s loan book (close to its mid-term target of 20%). We estimate that the FX impact on PCB’s loan book growth in Q221 (from the Ukrainian hryvnia, Georgian lari and US dollar) was very minor, while it contributed c 1pp to H121 growth overall. Loans in moratoria represented less than 1% of PCB’s loan book at end-June 2021.

PCB’s customer deposit base remained stable in Q221 (translating into a 2.5% increase in H121) which, according to PCB’s management, was due to a strategic reduction in more expensive wholesale funds (implemented when PCB was experiencing a particularly comfortable liquidity position at the end of Q121), offsetting the solid rise in private client sight deposits. Based on management’s comment during the Q221 analyst call, we understand that it sees scope for further optimisation of the interest cost on its customer deposit base as the share of sight and FlexSave deposits continues to increase (it stood at 68% at end-June 2021, up 3.5pp y-o-y). At end-June 2021, PCB’s customer loans to deposits ratio stood at 110% versus 105% at end-2020 and 111% at end-June 2020.

PCB posted a positive P&L impact from the reduction in loss allowances to €0.9m in Q221 (versus an €8.8m expense in Q220), bringing the H121 expense for loss allowances to €2.7m (versus €15.7m in H120). This implies an H121 annualised cost of risk of just 10bp (versus 64bp in H120), which is broadly in line with Erste Group (10bp in H121) and below Raiffeisen Bank International (23bp), whose provisioning was affected by EU sanctions on Belarus. The share of credit-impaired loans in PCB’s gross loan book was down to 2.5% at end-June 2021 from 2.7% at end-March 2021, while the share of stage 2 loans declined to 4.4% at end-June 2021 from 4.6% at end-March 2021. The default rate for PCB’s loan portfolio remains particularly low at 1.0%. Importantly, PCB’s provisioning in H121 was not influenced by model parameters despite the more positive macroeconomic outlook. The IMF recently updated its GDP forecasts for emerging and developing Europe to 4.9% in FY21 (versus 4.6% previously) and 3.6% FY22 (versus 3.9% previously). However, this is not yet reflected in PCB’s risk models. According to PCB, updating these parameters would result in the release of c €4.0m in provisions (management highlighted that it will consider doing this at the time of FY21 results). Moreover, the company experienced higher recoveries of written-off loans in H121 at €7.1m compared to €4.3m in H120. At end-June 2021, the ratio of allowances to credit-impaired loans stood at a safe 90.8%.

PCB’s net interest income improved by 10.0% y-o-y to €53.9m in Q221, driven by loan book momentum and stable y-o-y NIM at 2.9%, assisted by all regional banks. It was particularly supported by the interest rate hikes in Eastern Europe, with the National Bank of Ukraine recently raising its main interest rate by 50bp to 8% in July 2021 and the National Bank of Georgia raising its refinancing rate by 50bp to 10% in August 2021 (each of these central banks has increased interest rates by 200bp in total in 2021 ytd). Ukraine and Georgia combined made up 19% of PCB’s loan book at end-June 2021. The NIM was further assisted by the growing share of sight deposits and the reduction in excess liquidity built up in Q420. Nevertheless, management highlighted continued margin pressure as competition in the regional markets has picked up again.

Net fee and commission income rose by 13.8% y-o-y to €12.1m in Q221, broadly in line with our estimate of €12.2m. This was supported by the recovery in money transfer and card volumes, with PCB’s net fees from payment services up 10.0% y-o-y to €9.5m in H121 and net fees from debit/credit cards up to €0.7m in H121 versus -€0.3m in H120. This was partially offset by higher payments for guarantee schemes (eg InnovFin), with expenses for letters of credit and guarantees up to €1.5m versus €0.9m in H120.

PCB’s cost income ratio reached 64.0% in Q221 versus 68.5% in Q220 on the back of higher income (excluding change in loss allowances) combined with moderate c 4% y-o-y growth in personnel and administrative expenses. We note that PCB’s Q221 figures include a seasonal increase in operating costs associated with Bulgarian deposit insurance expenses, although the expense was lower y-o-y at c €1.5m (c 2.3pp of Q221 CIR) compared to €3.5m in Q220. On the other hand, PCB incurred €2.9m of expenses for provisions and settlements for class actions against Serbian banks (including ProCredit Bank Serbia) related to loan processing fees. This is above the maximum of €2.0m previously flagged by management in its Q121 earnings call.

PCB’s CET1 ratio increased to 13.7% at end-June 2021 from 13.3% at end-2020, remaining well above the regulatory requirement of 8.2%. It now includes the entire FY20 results (following the first-time recognition of H220 profits), adjusted for the €20.6m dividend payment of €0.35 per share in Q421 (reducing the CET1 ratio by 38bp). The company intends to distribute this additional dividend on top of the €0.18 per share already paid in Q221, with the aggregate dividend translating into a 6.9% dividend yield currently (although we note that this is paid from FY19 and FY20 earnings). At the same time, the CET1 ratio at end-June 2021 excludes H121 earnings, which will be reflected from Q321 (after deducting a one-third dividend accrual).

The CET1 ratio increase also reflected a €100m reduction in risk-weighted assets (RWA) from the second phase of new SME support factors introduction (in line with earlier management comments, see our previous note), as well as the application of Deep and Comprehensive Free Trade Area (DCFTA) guarantees. Furthermore, the rise versus end-2020 was supported by the reduction in excess liquidity placed at local central banks in Q420, as well as the positive development of the translation reserve on the back of the Ukrainian hryvnia and Georgian lari appreciation. According to management, the application of the standardised approach will result in a relatively limited impact from Basel IV implementation in 2023. The company’s total capital ratio (TCR) was 15.1% at end-June 2021 (versus 14.7% at end-2020 and the regulatory requirement of 12.6%).

On the back of PCB’s Q221 results, which were above our expectations (driven by a lower cost of risk, higher loan book growth and slightly higher NIM, among other things) and the resulting upward revision of PCB’s management guidance for the year, we have raised our FY21 net income forecast by c 30% to €70.0m. This is predominantly a function of 1) lower FY21 cost of risk assumptions (19bp versus 41bp previously), 2) higher gross loan book growth expectations (13.7% versus 10.7% previously) and 3) slightly higher NIM forecast (2.8% versus 2.7% previously). Consequently, we expect PCB to achieve an FY21 ROE of 8.7% versus management guidance of 8.0–9.5%. One of the main risk factors to our forecasts remains the potential impact of a new COVID-19 wave, especially given that the share of fully vaccinated people across most of PCB’s countries of operations, while picking up, remains visibly below Western Europe (c 5–25% except for Serbia at 41% versus the EU average of 54%, according to Our World in Data).

We have applied a minor downward adjustment to our net income forecast for FY22 to €75.5m, pencilling in a higher cost of risk at 33bp (versus 25bp previously), as we assume that some of the credit quality deterioration will be pushed into 2022. Our earnings forecasts for FY23 and beyond remain broadly unchanged.

In Q321, we expect PCB to post net income of €16.9m (versus €11.7m in Q320), with a net interest margin of 2.9% (broadly stable versus Q221 and Q320), a cost of risk of 26bp and a CIR of 65.2%.

Based on our FY21 forecasts for PCB, it is currently trading at the lowest FY21e P/BV ratio in its peer group at c 0.5x (versus the peer average of 1.2x based on Refinitiv consensus). We believe this is only partially justified by its lower ROE, which we forecast at 8.7% in FY21 (compared to the peer average of 12.1%, including Erste Group at 8.8% and Raiffeisen Bank International at 7.1%). A regression line based on FY21e P/BV and ROE estimates for PCB (Edison) and its peers (Refinitiv) implies an FY21e P/BV ratio for PCB of 1.06x. However, the low R-squared value of this regression line suggests limited reliability. A similar comparison based on actual FY20 figures (with a visibly higher R-squared, see Exhibit 4) implies an FY21e P/BV ratio of 0.84x. We blend this with the 1.06x ratio implied by the capital asset pricing model to arrive at a fair value multiple of 0.95x, which we use in our implied price to tangible book value method. Together with the upward revision of our FY21 forecasts highlighted above, this translates into our new PCB fair value estimate of €12.60 per share compared with €11.20 previously, representing c 64% upside potential to PCB’s current share price.