Grenke AG (0R97.IL) Earnings Call Transcript & Summary

Good day, and welcome to the GRENKE AG Full Year Results 2021 Conference Call. For your information, this conference is being recorded. [Operator Instructions] At this time, I would like to hand the call over to Anke Linnartz. Please go ahead.

Good morning, ladies and gentlemen. Welcome to our today's call. My name is Anke Linnartz. I'm Head of IR at GRENKE. And with me today are Michael Bücker, our CEO; and Dr. Sebastian Hirsch, our CFO. Just before we lead into things, I would like to let you know that this call is being recorded and will be archived on our website. We will start off with the presentation by Michael Bücker and Dr. Sebastian Hirsch, and are going to have a Q&A session right after the presentations. I stop here, and I pass the call on to Michael Bücker.

Yes. Welcome, ladies and gentlemen, to the presentation of our results for the 2021 financial year. And before diving right into numbers, I would like to start by giving you an update on where we stand at the moment on a few central topics. First, a few weeks ago, in February, the German Federal Financial Supervisory Authority, so-called BaFin, announced that it had officially finalized its institution-related measures as part of special audit of GRENKE Group that took place between autumn 2020 and spring 2021. Second, during those audits, we proactively developed a set of comprehensive initiatives to address the shortcomings in general. And I'm pleased to say that the implementation of these initiatives for our further development is progressing well. So overall, I feel, and this is perhaps the most important news of all, GRENKE is indeed returning to normality. And as a testimony to this is, and this is my third point, we provided a powerful boost to our business in the final quarter of the last year throughout the global sales of [indiscernible]. And this momentum has been ongoing as far as we can tell, throughout the first quarter of 2022, despite the recent developments in Ukraine. That said, we feel we are generally quite resilient currently to these, yes, sad developments in Europe. Any direct or indirect effects would be minimal for us. First and foremost, we have essentially no business in Russia or Ukraine. In terms of a potential indirect impact, higher inflation rates could actually imply higher end-of-life values. However, our solid funding mix, including the refinancing via our GRENKE Bank, provides us strong and secure financing throughout times of crisis. And history shows us that under such circumstances, it is possible to raise pricing on financial faster than the increase in deposits and funding rates. This now brings me to the result of our 2021 financial year. Despite challenging circumstances, we managed to increase our value and strong profitability during this past financial year. Overall, we achieved new leasing business volume of EUR 1.7 billion. And as we have pointed out, the fourth quarter of 2021 was already significantly above the previous year. The consolidated group net profit for 2021 was EUR 95 million and this includes an extraordinary profit of EUR 23 million due to the sale of our minority stake in viafintech. Without this extraordinary item, our net profit last year would have been EUR 72 million. And in view of the extraordinary circumstances, both internally due to the multitude of audits and externally due to the influences of COVID and the global supply difficulties, we feel that this is a very good result and shows how robust our business model is. And as you will hear in a minute, we achieved all our communicated targets in all 3 categories: new leasing business, net profit and equity ratio. I would also like to take this opportunity to let you know that the process of acquiring the franchise companies is ongoing. As we have already stated, the leasing companies operating outside of Germany are fully consolidated in our financial statements. Following the conclusion of our respectable financial year 2021 and the end of the BaFin investigations, we now want to conclude the negotiations on the franchise acquisitions by end of the year. And with that, I would like to hand over to our Chief Financial Officer, Dr. Sebastian Hirsch, who will now explain all the figures for the past financial year to you in detail. Over to you, Sebastian.

Yes. Thank you, Michael, and a warm welcome also from my side. As we are back to normal, as Michael mentioned, but at the same time, it's certainly a balancing act because of the war in Ukraine, but we can still proudly look back to a successful and solid financial year 2021. And we have worked a lot over the last 2 years to create a strong starting point for our future development, and we will start that today. But let's first look back to the financial figures 2021. I would like to start with the new business development and especially in leasing, our strongest and most important segment, as you are aware of. In course of the year, after a slight start, we see that here in the first 3 quarters, we had a huge acceleration in the fourth quarter of 2021. Of course, the year was affected by the COVID pandemic and the second half of the year also by the supply chain bottleneck. But the strong rebound in Q3 led new leasing business up by 22% compared to Q4 2022, means nearly EUR 100 million on top of that level. And compared with Q3 2021, we saw an increase by roughly EUR 150 million. Since the beginning of the COVID pandemic, you are aware of that back in March 2020 until Q3 '21, we focused strongly on risk reduction and a selective sales approach. That means that we avoided new business with customers from certain industry sectors, avoided doing new business with higher credit scores and higher risk and more thoroughly focused on small tickets -- on very small tickets, which are more profitable. And in Q4, we went back to our, let's say, more or less normal business, taking higher ticket sizes in average, taking a bit more risk and so we got an acceleration in new business. And most important for us on the next slide, you can see that is our development in contribution margin. That is the main driver for our operating income of the future, and that's why we are very focused on that contribution margin development. Of course, during the pandemic, as I mentioned before, we focused on very small tickets, on a very diverse risk selection, a careful business, and that's why CM2 margin here, the upper line was in some quarters above 18%. But let us start at the chart on the bottom. Here, the development of average ticket size. In 2019, at peak, it was roughly EUR 9,000. During the pandemic, it came down, as I described, because of the focus on very small tickets. In Q4, it went up, and we would like to come back to a higher average ticket size, but less than EUR 10,000. I will come back later to that. The second important line here, the brown line, is our expected credit loss. That's the expected credit loss, we are calculating for each request, for each leasing contract, and we are able to managing that, to measuring that and pricing in that in our contribution margin and the leasing contract at the end of the day. We see here that the expected credit loss is down to 4.5% compared to 5.6%, 5.7% in the pre-pandemic level. And that is directly affecting our contribution margin 1, because for the risk taking regarding a risk premium, repricing in the risk premium and that we see in our contribution margin 1. So it's one driver why contribution margin 1 in '21 was 11.4%. But we have also to take in account the rising funding costs roughly 50 basis points in interest rates, means for a duration of 4 years, means average lifetime of a leasing contract of 4 years and because of the duration -- the amortization, sorry, the duration is roughly 2 years. We talk about roughly 100 basis points in the contribution margin 1. And in a normal environment, we are able to pass through that higher funding cost to our clients into the leasing context. It's always a question of time. But take into account, in Q4, we accelerated our new business at the same time. And now we are willing to passing through higher funding costs to our leasing business, as always in the past. And our CM2 remained at a strong level, 17.6%, above the 17% in 2019, which is a very good level for our business. And I would like to take the opportunity and set chart to give you a small outlook, a bit flavor what is the structure of our steering the business, of controlling our business in the future. And what are the, let's say, levels we would like to achieve within our new business acceleration over the next quarters on a midterm outlook. Let's start again on the bottom. The average ticket size will remain above 10 -- lower than EUR 10,000. So we would stick and stay in the small ticket environment, that's quite important. Of course, the EUR 9,000 level is a good and healthy level for our business with a bit more volume. With increasing also direct business, we will see an increase at that average ticket size. At the same time, as we did in Q4, we would like to succeed to taking a bit more risk, to taking more risk, pricing setting. We are knowing of our clients. We are knowing the objects. We are knowing the payment behavior. So our instruments to measuring risk are very good and very valid to doing that in pricing setting our contribution margin and leasing contracts. And that will bring us at the end to CM1 level of roughly 12% with today's circumstances, a level above 12% when we are able to passing through the higher funding costs, as I mentioned, our funding costs will normalize. So we assume from a midterm run to coming back on a CM1 level as it was pre the pandemic. And to take into account again, that's direct linked to the expected credit loss when we are more risk taking, we were getting and pricing in the risk premium and that will drive also CM1 ratio. And overall, we guess that a 17% CM2 level as it was in 2019 is a very good fund to accelerating business on the one hand and to being profitable in the future on the other hand. And of course, we are aware of that we need also on the second part of our P&L to look into the cost to having a scalable business and costs should not rise in the same way like new business will rise. That's the only way to maintain our strong profitability. Our solid financial strength we had, we have and we will have into the future because that strength was one of the keys for our successful financial years during the financial crisis. And so we would like to look to our P&L. Looking to that, I have to point out 1 figure that's the impact on viafintech sale, you are aware of that, with a net impact of roughly EUR 23 million. The figures and net interest income are in line with our expectations because leasing receivables went down because of the lower new business during the pandemic. And also profit of new business and service business more driving by running contracts -- by the number of running contracts are a bit less down than the interest income. The costs are -- raised higher as it was in the year before, especially driven by the first half of the year because of the extraordinary audits and the extraordinary costs, extra audits and also some extraordinary impacts in the first half of the year in the personnel costs. And we would like to go forward, as I mentioned before, with scaling our business and taking care for a good and healthy cost-income ratio. Overall, that brings us to the net profit of 95.2% within the viafintech sale. So let's now look a bit more deeper into the settlement of claims and risk provisions on that chart. Here we see the perspective from the balance sheet for end of December last year, and you are aware of the 3 stages we have in accordance to IFRS 9. Stage one, there is a 12-month expected credit loss calculated and booked as a risk provision; and stage two is a full-time expected credit loss for the rest term, the residual term of a leasing contract; and in stage three, all contracts are booked like a damage. And the smaller portion here, the EUR 20.5 million is for running contracts, means contracts which are not terminated. They are full running. They're also paying but there was in the past terms payment more than 90 days. And so it's like a damage and the green portion here of the bar in stage three. That is for our bad debts for the nonperforming loans. So the structure is quite careful in respect of the situation because of the pandemic of the macroeconomic parameters, all that things are reflected there. So we have a very good ratio for risk provisioning. And I would like to point out another thing here, the payment behavior over the last year of our clients was very strong. We have a missed payment rate over the last quarters of 4%. It's less than a normal rate pre the pandemic, that was 5%. And in April 2020, with start in the pandemic, we had the peak there of roughly 10% missed payment rate. Since that we are there in a more or less normal environment, solid, robust and valid portfolio we are having. That brings me to the loss rate and the goal was to having a loss rate less than 2%. The loss rate here now was 1.6% for the last year is a result of that what I described, the very good payment behavior, a robust portfolio. And of course, we saw that 2 slides before, the expected credit loss for the new business portfolio is lower than before the crisis, and that overall brings us to that lower expected -- sorry, lower loss rate as expected at the beginning of the year and also the outlook is there nearly in that range for our existing portfolio and also taking into account the new business we would like to settle. On that, now I would like to make another point in accordance to the NPL ratio. I know that many guys of you are calculating that looking to our balance sheet. And when you look to the gross NPL ratio, we are talking today about roughly 10% gross nonperforming loans in -- compared to the overall loans we have without risk provisioning. And we think that, that is the peak during the impact of the pandemic or because of the impacts of the pandemic. And there, we will see more or less a normal level over the next quarter. It depends a bit on the new business development, of course. And to compare that with the last financial crisis we saw in our books, 2009, there, we had an NPL ratio of roughly 14%. So that again, shows us that it is a very robust portfolio. And our instruments, we did -- our action we took was very successful, especially the deferral program we implemented. Only roughly 15% of the former 50,000 leasing contracts was a deferral were -- became a damage. So rest of that is fully paid back or now in the payback program. So only 15%, and I think that's a quite successful thing to helping small, medium enterprises to come through the crisis. Yes. And also in our cash flow statement, you see that the cash flow, the payment from lessee is quite stable compared to the fiscal year 2020 here, the EUR 2.3 billion. Overall, we're having a net cash flow taking into account the leasing, cash flow and the repayments of refinancing of roughly EUR 1 billion. It's a strong substance we had and we have in our portfolio. So we are able to fulfilling all our repayments for funding because of our existing portfolio and the repayments from leasing. Overall, the cash flow here of operating business slightly negative with roughly EUR 72 million, but because of the strong liquidity we had at the beginning of '21, and we have at the end of '21, it's not really a matter with EUR 850 million. We have a very strong liquidity position looking into the future and going further for new business. On the next slide, we see a bit more about -- several views to our capital ratios. Here, 4 of them, the most important, the first balance sheet. On the left side, you know that 16% is a long-term target of GRENKE. It was always the case. We are talking today about 19% capital ratio, quite strong and enough buffer to our target ratio. That's the IFRS balance sheet. So second bar, the blue one here, we call that economic capital. There, we include and add to our IFRS equity, our embedded value. I will come back to that later. But from that perspective, we're talking about an economic ratio of roughly 23%, quite strong structure in our business. The next one, you know that Michael mentioned that the supervision-related regulatory capital ratio. There, we're talking about a capital ratio of roughly 19.8%, roughly 20%. And we have to take into account here the full Tier 1 capital ratio, we estimate it 10.5% the overall assets, that's including the SREP adjustment we're talking about of -- 1.5 basis points. And the 2.5 we pointed out here, that is a capital conservation buffer as it was in the previous periods, and that brings us to 13% overall capital. So the 10.5% is Tier 1 capital ratio, we have to fulfill. And overall capital ratio is 13%. But you see that here, there's enough space to 20% to going forward with our new business goals. And last but not least, Standard & Poor's related capital ratio. It's quite good linked to the requirements for -- from the supervision. Our goal here is roughly 15% risk-adjusted capital because that is one of the main drivers and most important things for our BBB+ rating, not the only one, but one of the most important. And here, we talk about roughly 21% per end of December last year, so also a very strong ratio and enough buffer. Yes. And I talked about the embedded value on the previous slide, and I would like to give you a bit more flavor and combine that with the projection of our portfolio -- of our existing portfolio. So we are talking here only about the existing, subtle portfolio without new business, each new business, we are settling -- we settled it over the last 2.5 months, will come on top, what I'm talking about now. Here, we see our leasing receivables in the bars over the next 5 years, starting with 2022 from the existing leasing portfolio. And in the bars, you see several colors and we split the bars into the new business years where the leasing receivables is from means when the contract offset leasing contract behind the leasing receivable was solid. So the smallest portion is 2017 because it's a long time ago when we're talking about a 2 years' duration in the portfolio and the biggest bar is 2021, and that will run down in that we see here. And overall, and that's a quite important information and message linked to the embedded value there is, an interest income settled of roughly EUR 600 million. And for that calculation, we implemented a loss rate of 1.5% as the long-term average and something like a long-term goal for our loss rate in a normal environment. And so that EUR 600 million is contracted interest payment, you will not see on our balance sheet today because that interest rate, which is responsible for that interest income is the discount rate for our leasing receivables, and so the net present value of our leasing receivable shown in the book under IFRS reflecting that internal interest yield. And the next important part on the bottom here is our funding. And as you know, our funding mix, we will come to that on the next slide. Here, we split it out the bars because of that funding mix on the yields, like in the upper chart, here we're talking about senior unsecured and bonds in the blue one, grey one deposit business in GRENKE Bank and the asset-based funding in the green. And that is directly linked to our leasing receivables. As always, no maturity transformation. You see that in the chart. It's one of our most important principles in treasury business. And here, our contracted roughly EUR 150 million interest expenses on that book. That's contracted because it's more or less fixed income. There's no interest change affecting our business because we're having a fixed interest rate in our funding or we are covered by derivates for that. So that is more or less fixed expense we settled for the existing business. And that it all brings us to roughly EUR 450 million outstanding interest income. It's a hidden value. It's an embedded value. You can call it like you want. And that is one of the main portion of our embedded value. The embedded value per end of last year, EUR 1.6 billion. The main portion here, the interest income, as I mentioned, of course, you have to add a bit risk provisioning, but because of the expected credit loss we had to balance under IFRS 9, it's not a huge portion. We have to add the outstanding service business and, of course, the administration costs for rundown for settling that portfolio overall EUR 1.6 billion, including our equity and including the tax impact on the outstanding income. And that means from our numbers of shares today, EUR 34.4 per share. That's a subtle value in our book, we have without new business, each new business will come on top, EUR 34.4 per share, our embedded value per end of the last year. And I talked about the funding mix, you know the chart and it's quite important for us to having several pillars and several instruments in that funding boxes that was one of the main drivers for our success over the last 2 years also in that crisis to being aware of the capital market and senior unsecured funding and bond funding to having asset-based programs, here is the green box in place, but also our GRENKE Bank very good access to liquidity, a very cheap access to liquidity. One of our main competitive advantages, especially in not that easy times and the capital market when you have no access to the bond market when there is no liquidity in the bond market. So that's a very important pillar of our funding brought us a good liquidity position during the last 2 years, and we would like to succeed that. And that brings me to my last chart today. I look to the landscape of GRENKE, especially looking here to our franchise companies. So it's a landscape, you see GRENKE more or less across the globe, and also the franchisees are more or less across the globe. We're talking from Sydney and the range to Vancouver, so very wide. And so also the takeover is quite complex. We're talking about several countries. And Michael mentioned that we would like to take over the company. The year -- we would like to fulfill that. And after the ending of the BaFin process with the measures action they took, after today's presenting the full year's result for 2021, that is a focus for us to doing that despite accelerating our operating new business to fulfilling our results. As we see here, the global footprint of GRENKE is driven by GRENKE subsidiaries by established market and also by our franchisees. So it's a future way of growth and especially the long-term growth will be driven by our established markets by -- or today's core markets, but also by the newer markets we are in with our franchisees, especially the U.S. market, as Michael mentioned that. So -- but now we would like to come to the short-term outlook, Michael, and I would like to hand over to you.

Yes. Thank you, Sebastian. Yes, ladies and gentlemen, as you have just heard, GRENKE delivered all its communicated targets despite the difficult environment we had to face. Also, with our ongoing efforts for excellence and compliance, we think that the issues in this area can clearly now be classified as over or past. And now in the month ahead, we intend to return to strong growth. We aim to deliver sustained double-digit growth again, something that our stakeholders and especially the investors of GRENKE had been accustomed to for decades. And as we continue to invest in our digital and compliance capabilities, our goal in 2022 is to generate a net profit of EUR 75 million to EUR 85 million, a new leasing business in the range of EUR 2 billion to EUR 2.2 billion. And this growth shall continue in the financial years to come. With these targets, we are setting out on our journey well aware that we still have many challenges ahead even in 2022. And that said, we will leave the base camp in 2022 and start the ascend in 2023. And by 2024, we will have proven that we are successfully scaling our business model. And based on the assumption that we will achieve this, we have already set ourselves the next major milestone to double today's level of net profit and new business by 2024. And this target stands, despite the war in Ukraine. We condemn this attack and support the sanctions. As pointed out earlier, fortunately, the conflict has no foreseeable direct impact on our operating business. As a traditional asset financer, you would have been quite resistant to some of those more indirect effects. Our business model and funding mix make us relatively immune to interest rate and inflation increases. And this means we are well prepared to embark on our future path. Clearly, that brings momentum and motivation back into the whole organization and hopefully also leads to some additional excitement with you as investors and analysts. In days like these, this also sends an important message. With our know-how and energy, we have every opportunity to double our business and achieve our targets. Ladies and gentlemen, as I had stated upon my arrival at GRENKE last fall, the details of our growth strategy will be explained shortly at our capital markets update. So I would like to ask you to stay tuned for these details in a few weeks. For this reason, I will now only briefly address the questions of how we want to achieve these targets. In principle, the answer is simple. We will expand our global presence as well as our product portfolio and our service offering. And we can achieve this search in growth by building on GRENKE's historical strengths and USPs, while at the same time, leveraging our business opportunities at a faster pace. And as we will point out, we intend to, again, grow along in line with the projected development of our core markets and feel that in some markets, we can increase our market share even further by building on our traditional strengths, which includes our outstanding proximity to customers above all the freelances and small- to medium-sized enterprises, so-called SMEs, as well as our unique international network of specialized resellers, our distinct industry product and partner know-how, and our unmatched understanding of efficient convenient processes when it comes to the small ticket business. And in the segment of small ticket leasing up to roughly EUR 20,000, we are already financing the operating business of small- and medium-sized enterprises, who make the backbone of the European economy. This has always been our core market. GRENKE is currently operating in 33 countries around the globe. And one of our newest and most promising markets in the medium to long term is the U.S. -- is the U.S.A., the largest leasing market in the world. The sum of all this makes GRENKE unique. And this is a basis for our innovative ideas on how to further develop our business model. Because one thing is sure, our business model is uniquely flexible and scalable. Flexible because it enables us to finance almost any object our customers need for their business. Whereas in the past, this went answering machines, computers and printers and in the future, it will also mean laptops, robotics and 3D printers. Also new objects will also emerge in segments where we already have strong position, such as medical technology. And GRENKE will also be there to support customers in mastering the green transformation. GRENKE's business model can and will continue to be scaled into new market segments and new markets. Yes, ladies and gentlemen, our future growth pillars are flexible new products, smart services and scaling our country presence. Beyond this, we want to ensure that we continue to be highly profitable and intend to do everything possible to defend our cost leadership even with the rapid growth we have planned going forward. And we will continue to digitize our internal processes and streamline them on a systematic basis to ensure their efficiency. Yes. As I mentioned earlier, ladies and gentlemen, the details of our plans will be presented at our first capital markets update on May 13, which you are warmly invited to. Until then, I again ask you for your patience. And you may have noticed that we have set our sights firmly on the future and are leaving the past 2 years behind us. This was a very short but difficult episode in GRENKE's more than 40 years' history of success. And going forward, our focus will be dedicated on 100% to our goal to doubling our profit and new business in 2024. So on that note, I would like to thank you very much for your interest today and attention and give back to Linnartz.

Thank you for your presentations. We are now ready to enter our Q&A session. [Operator Instructions] And the first question comes from HSBC, Johannes Thormann please.

Johannes Thormann, HSBC. Three questions, if I may. First of all, in terms of your net interest margin development, we saw a steep decline in Q4. Is this now the sustainable level? Or do you expect a small recovery or continued trending down of this in the next years -- different mix of the business, probably less risky markets or whatever? And then in this correlation, of course, the loss rate has also come down. And can you elaborate if what you think as a loss rate for the next year is around 160 something we are seeing now back to the 150, which was the historic loss rate? And also in terms of the absolute risk costs, will those risk costs on the top level decline? Or should we still due to the increased asset base, expect to stable or even rising absolute risk cost level? And last but not least, just on the usual thing, tax rate, what is the outlook for the next year, please?

Michael, I would like to take the question for you. Welcome, Mr. Thormann. Good to hear you. First, net interest margin, hope I got you right, you means CM1 margin, and the trident, as I mentioned on the slides, of course, on the year base, not on the quarter base, you're right, it came down. We had 2 impacts, especially in Q4. On the one hand, we accelerated new business. We would like to come back to that, and that was quite important. And at the same time, to going for higher leasing contingencies. It's not that easy possibly to pass through higher funding cost because we had that prior higher funding cost, seeing that higher funding cost and pricing that in our leasing count is on the one hand, but especially in our contribution margin 1. And of course, we have to take into account because of the high liquidity we had on behalf, but the leasing receivables came down because of the lower new business of the previous years. We had also to price in and it's priced in our contribution margin 1. The cost for liquidity, it has to pay 50 basis points on the Bundesbank account. And to give you a bit of flavor in the last year, it was roughly EUR 4 million negative interest rate because of our liquidity. In the year before, it was roughly EUR 3 million. And that's also impacted the CM1 ratio. But with accelerating new business with expansion in volume, we are able to passing that through. We think that also in the today's figures, it will be a bit run. So it's not a question of 1 quarter or 1 month, but we feel comfortable to bring up the level of contribution margin 1 back to the 12%, as I mentioned. And the loss rate came down. That's right. And I think the level we -- of 1.6% is a good -- is a healthy level, not that easy to looking forward because of the overall development and the macroeconomic impacts maybe the Ukraine war could have, should have. But overall, we think that our loss rate is very robust and under normal development, we should see a loss rate nearly in that area, not in the area of 2%, closer to 1.5% as it was in the past. And for the future, it depends on new business because we would like to take more risk, so it will affect also the loss rate a bit, but also the income, the net interest income, the interest income on the other side. So I think the guidance for the loss rate is quite okay in the area of 1.5%. At the absolute level of risk cost, we've seen today, I think, is good. It's careful and with normalizing and macroeconomic parameters, I think that, that should come a bit down. So the ratio of risk provisioning should be a bit less than under today's perspective. But within all the macroeconomic parameters, it's careful but also fair seeing that, but from a long-term run, I think that ratio should be a bit lower than we see today. The tax outlook as always not that easy to say, but 25% roughly is a fair tax rate for our business structure we have for the countries where we are for the last year. We have to take in account viafintech impact because there's only a low tax impact of that, but 25% is a fair number to going forward.

Then Roland Pfänder from ODDO, please.

Two questions from my side, please. Firstly, could you touch on supply chain issues? It looks like that there is a new wave of problems accumulating in the market. Looking at China, for example, do you think you will be impacted by this going forward and what could be the impact there? Second, also looking at the geopolitical situation, what do you think is the investment spending needs or willingness of your clients currently. Do you see any change in late March now?

Okay. Yes. Supply chain, of course, yes, also we are still affected by the supply chain bottle, especially in the IT and also office technology. That's a fact. But as we see in the fourth quarter or now in the first quarter, we are well on track. It's still a problem also for us, but we are managing, I think, really well at the moment. And yes, what -- regarding the crisis, yes, the economic consequences in such times of uncertainty, of course, everything could happen, but we build our assessment under the assumption that there will be no doomsday and no -- yes, so decline in Western economies. And yes, please keep in mind that in an environment where liquidity and financing, you short leasing and asset finance is out of the view of our customers very attractive. And if it comes to investments, you will not go to your bank, you will put your hands from your bank account because that is -- you need it for perhaps better times. So to have liquidity is key and critical. And so it's very important to have products like leasing and renting at the moment more important than ever before.

Then Marius Fuhrberg from Warburg Research, please.

Yes. Couple of questions from my side. First one, you showed us that your credit loss went -- or developed downwards over time, especially over the past quarters. Could you elaborate a little bit on that? So is it more changed macroeconomic assumptions? Or is it that you see -- or like macro risk indicators from the portfolio that -- related to that? Secondly, on the risk provisioning you built in 2020, this you already just sold some of that, that was not needed because your contracts became healthy again or do you still carry forward an amount of that? Or was that actually levied for losses? And the third question from myself would be with regards to the implemented processes and measures after the [indiscernible]. Did those implementations affect your cost income ratio in the long run? Or do you think that this kind of dissolves in the ongoing, yes, just business?

Yes, I would like to go to answer the question. Thank you, Mr. Fuhrberg, for the question. And yes, credit losses declined and it's not really a macroeconomic assumption, it's more micro looking to our portfolio as I tried to mention. We had a very stable payment behavior of our clients talking about missed payment rate of 4%, less than the pre-pandemic level of 5%. Also, the cash flow we saw is quite stable. So our portfolio is quite robust and also the new portfolio, it means a new business over the last 2 years because of the risk-selective sales approach we did is quite healthy. And so we did not see any trouble in terms of bad debt damages as I said over the last year. So it was more or less like it was expected. And the level of risk provision when you look to that, it's nearly the same. It's -- for bad debt, it's a bit more. And for some cases, we dissolve for, especially the deferrals we had and which are running now successful. On the other hand, for the bad debt, we had a bit more risk provisioning at the end of the day. So it's more or less stable, I would like to say. And as I mentioned before, we are careful also in 2021 because of the overall pandemic impact and also the macroeconomic environment. It's not that easy to looking forward that, and that's why we are sticking to a more or less careful risk provisioning also in '21. And the long-term impact because of processes and action we took after the special audits, I think from a long-term run, that will not impact our cost/income ratio. But of course, we have to invest in structure and processes. And from a year's basis, I would like to say, roughly EUR 3 million to EUR 5 million that cost to being more careful; and compliance, being very careful; in anti-money laundering, that's quite important. But it was a question of time because GRENKE was big in 2019, we would like to come back to the EUR 3 billion level. So other big company as a company under supervision and a stock listed company, it's a need to fulfilling that. So from a long-term run, that will not affect the cost income ratio really.

Okay. Thank you. So we have another question from Deutsche Bank, Mengxian Sun.

So also several questions from my side. The first one is the new business development in the first quarter. Could you give us some early indicator how the new business has evolved in this quarter? And second question is on your interest rate sensitivities, could you provide us a ballpark figure, how -- what your net interest income develops if there is 100 bps interest rate increase? And the last question is you mentioned there is a large number of the funding has been addressed. And so what is the remaining part that has not been addressed in your process?

I will take the question number one. Yes, new business in the first quarter is well on track, like it was in the last quarter of last year. So our figures, we will bring on at our investors day for the first quarter. So it's a little bit early for it, but we're really good on the way. And we see at the moment nothing through the crisis or regarding the crisis. So it's well ongoing.

Yes. And in terms of interest income, the second question, with higher funding costs, as I mentioned before, it was also the case in the past that with rising interest rates, first net interest margin, I mean CM1 came down and over time, it's leveled on the same level than before. So the CM1 ratio overall is quite stable and we are comfortable to pass that through, so that will not, from a long term run, impact the net interest income ratio from the P&L perspective on the long-term run. And otherwise, if we would like to calculate it, as I mentioned, roughly 50 basis points is the higher interest rate we are calculating and we are calculated in Q4 for our CM1 margin and then you can also, if you would like, calculate that scenario, add that from the P&L perspective, it's 50 basis points on the former yields and rates we had for our funding. The third question, I'm not 100% sure if I'm right, so I would like to ask you back. I got the point that you would like to ask about funding which has not been addressed, what's the meaning of the question, can you repeat that, please?

Yes, it's regarding to the BaFin funding -- findings. So at the very -- at the beginning of the slide that you said a large part of the findings has been already addressed and you take some measurement. And I'm just wondering what the remaining part that you have to do?

Okay. It's -- all the measurements are more or less a process. It's not a one-off measurement to say, okay, I'm doing that now and then it's over. It's more or less a process to implement processes for compliance for money laundering prevention, Mengxian, and that is ongoing. And of course, you need also like a cyclic when you will have your internal audit, then internal audit has also to go through all the new processes to the new business. We did under our new processes, and that will need a time and like a sequence of a year or 1.5 years. So everything is ongoing. There's no measurement, no action outstanding. So everything is ongoing, is under process and, so there is nothing which is not addressed.

So we established a new compliance concept. We hired high-quality people. And yes, we implemented things into the company, but that is ongoing through 2022. We're on the way.

So then from Kepler Cheuvreux, Mr. Lukesch, please.

Three questions from my side as well, please. First, regarding the '24 targets, what amount do you see volume of leased assets, lease receivables basically attached to that? And what is the equity ratio you would expect in '24 based on the plan? And maybe linked to that question and you mentioned the franchise company acquisition, maybe you can give us a ballpark number or a range at least where you see the impact on the equity ratio. Secondly, on the visible value risk, I was just wondering, in your annual report, you stated that this has increased or basically, you widened the range from last year, 5.5% to 15.5% to 1% to 25.5%. I was just wondering like what an impact this has and especially with regards to the lower loss rate of 1.5% or the 1.4% to 1.7% guidance you are giving and how this matches also with regards to the acceptance rate, maybe you can again, guide us a bit through the thinking of applications, which are then accepted. Now the level is for the first time at 50%, I think even and how this channel to your loss assumption that you basically have going forward? And the very last one on the margin. And I'm very sorry if I didn't catch that properly with the first question. I think in the past, you were quite convinced that you could pass through the higher funding costs and then you could basically increase the asset margin. Do I understood that correctly that you still try to pass it through, but that there are doubts with regard to the next 1 to 2 years?

Yes, maybe I'll start the last question and go in the other direction. At first, in terms of funding costs, there are no doubt, especially for the long term -- longer term run to passing that through, it's always an exercise more or less from a short-term run talking about months because you would like to accelerate significantly our new business and has to pass through higher funding costs at the same time, and that is an exercise, but we are doing that. We started that in Q4 and also in the running quarter. And we are confident that, that will happen, and we are able to do that. And so there's no doubt from a long-term run over the -- for the next 2 years. The lower loss rate, 1.5%. And I hope I got the second question right. There were many things and many numbers or KPIs in that in terms of the acceptance rate. Of course, when we're looking to our acceptance, our acceptance rate in terms of the request, we're steering the business for -- on the base of our contribution margin calculation. You know that for each request, we are calculating that contribution margin 1, expected credit loss contribution margin 2, and that's one of the main decision-maker for that. So of course, the acceptance rate and, let's say, the risk appetite, the risk we would like to take and we price and will affect also the loss rate at the end of the day. But as I mentioned, we would like to come back to a risk level of 5.5% roughly and that will mean that at the end of the day, a loss rate as it was in the past, roughly 1.5% looking to the P&L at the end of the day. But today, in the new business, the expected credit loss is lower with roughly 4.5%. And the long-term targets or what is linked through the KPIs, and I think we will give them more flavor on the Capital Market Day, but looking to that 2 figures you mentioned, when we look to the leased assets value, an important figure, especially for the number of running contracts, it's clear calculating that we will have a volume of leased assets above EUR 10 billion with that growth we have, with that accelerating of new business over the next 3 years. And from an equity perspective, it's not that easy to looking forward. But when you take that in account, the new business development and our strong profitability, we have a stable payout ratio of roughly 25%, and then you can say that it will be an equity of roughly 18%, and that includes the impact of the franchisees, and that's also not that easy to point out. But 18%, I think, from a long-term run could be from a balance sheet side. From the today's knowing we have, from the funding structure we have, a fair calculation.

I would like to [indiscernible] interest rates and the inflation. In my point of view, higher inflation rates may actually be a boost to some of our products. We're able to safely swap from one asset to the other even if prices are rising, in the meantime. So for us, as owners in such cases, please do not forget that asset ownership historically was a very sound, perhaps the best way to protect against inflation. So we see us in a really good position about this topic.

Maybe if you could touch on the residual value risk statement you put in the annual report, what should that tell us? Is that just like a range for a couple of handful assets? Or has there been a major shift basically with regards to that?

Yes, there's no major shift. We're always checking our residual value approach, especially for the leasing receivables and under IFRS, and that become more and more detailed over the last years -- became more and more detailed and also will become more and more detailed because we have a lot of experiences over the last 2 years in several countries. So in -- 5 years ago, it was more a portfolio approach overall, and we are going now more and more detail reflecting several things for object categories for several markets. And that's why we see there a bit of migration on a portfolio approach. The average is not the same, but the range is wider. And so we are more in detail meeting the expected residual value for each single leasing receivables, but from a portfolio perspective, there's no change.

So now we'd like to move on to Dr. Norbert Kalliwoda, please.

Yes, please, can you give us some advice if you would be an analyst in regards of change in working capital and change in CapEx towards the end of 2022 or some words about your current liabilities and noncurrent liabilities to have some more feelings, how this year should go for you?

Yes, I think that's a good idea to look on the chart. We talked about the embedded value because there you see also the rundown of our receivables, the asset type on the one hand, but also on the liabilities. And so the first blocks in the year 2022, that's the development for the current year. We're talking about roughly EUR 1 billion we have to pay because of our liability development, but we have also a strong cash flow because of our existing portfolio. So the picture there will be the same as it was in the last years, means in need of new funding is a question of new business, and for the existing funding, we are covered by our own cash flow, yes. And on that chart, you see how the development over the next years and also in the Q1 to Q4 in 2022 will be.

We have a question from Pareto, Dr. Häßler.

Philipp Häßler from Pareto. I have 3 questions, please. Firstly, could you give us the one-off costs for 2021, which were related to the special audits and share other stuff like this? Secondly, on your funding plans for the current year, I understand that you expect to pass on higher funding costs, but nevertheless, I'd be curious to know what funding plans do you have for the current year? And how do you expect your spread to develop? And last but not least, on your new business target, which is quite confident from my point of view with the current year, at least 18% growth. Do you see countries or products where do you see particularly large growth? Or is it more or less well spread over product and countries? Maybe you could elaborate on this.

Okay. I would like to take the first 2 questions. First, the cost related to the special audit in '21, roughly EUR 10 million, it's not that easy to point it directly out what are the direct cost because of that special audit, but as you mentioned in the past, it was roughly EUR 15 million, EUR 5 million in 2020 and roughly EUR 10 million in '21. Yes, the funding plan for '22, you know our funding mix. So we have the best flexibility we could have, especially at that time. And of course, looking forward, with rising new business, the plan is to go into the capital market and going for bond. To be honest, at the moment it's not that easy because of the overall situation because of the Ukraine war, but we are confident that over the year, we are able to doing that to making a band maybe 2 for that year. That is the plan. But also expanding the asset-based funding because it's quite important, especially for market with foreign currencies. There's no currency transformation, foreign exchange transformation, Nordic -- maturity transformation that we would like to write and also GRENKE Bank is an important access for us. And I think it was roughly 1/3 of our funding. We are well prepared for that. So at the end of the day -- that is a bit the plan. But at the end of the day, as always, we have to decide in terms of the market and what is possible at the market. And in terms of credit spread, I assume that after the next bond we have to do -- we would like to do and that will be successful. I believe that. And then we will see normal credit spreads as it was pre the pandemic and as it is normal for a BBB+ rated financial institution like we are.

Okay. Then I take the question number three. And I'd like to put it perhaps in 3 parts. First, for me it was -- in times like these, I think our service and our type of financing is essential and yes, and more important than ever before because leasing and renting is liquidity saving. And I said it before, in difficult times, liquidity is critical and key. That means more important than ever. Second, I think, is we see also a long-term trend in leasing. And this long-term trend we see and where we are building on will not fade. Leasing is a growth market and especially asset finance in ESG and health-type assets will grow significantly. And as a market leader, we will have benefits from these developments, and this will be able to grow also our share. And second is I think we have a different situation in countries like Germany and countries like France, Spain or Italy. We'd like to expand our market share. And in the new countries like the U.S. or Australia, yes, we like to go and to grow into the markets. Interested product lines will be ESG, health products, et cetera.

Now from Warburg Research, Mr. Fuhrberg, please.

Yes. Just 1 follow-up from my side. You just mentioned the U.S. market and -- I mean the importance for the growth in the long run. Could you give us a brief update on how things develop over there since you started? And what's your trajectory in the market?

Yes. I will give you a short update. U.S. started 2 years ago. So it's a quite young company, and it's always the case. Of course, the last 2 years were not that easy also not in the U.S. market and the first exercise, always going out winning dealers, building up a dealer relationship and the dealer network, not only working with 1, 2 dealers because we would like to be diverse from the very beginning on. And that happened in the U.S. And we know that the product, the services working, the GRENKE product is working, the credit decision -- the fast credit decision for small ticket is working. And it's also a niche like in Europe, like in other countries, we know that. Of course, the U.S. market is a big ticket market, but our focus on small ticket is absolutely a need for that environment. There are small/medium enterprises investing via leasing. And so our product is working, our service is working. And now we have to do the next steps there to expand our dealer network, to expand our relationships and going forward to expand the volume and all.

Now we have a question from Roland Pfänder from ODDO.

Two follow-ups, please. Could you maybe elaborate a little bit on the needed investment spend on your corporate structures? For example, if I understand correctly, you want to grow more intensively into U.S. So what CapEx is needed in the midterm for this plan? And secondly, looking at the current year, could you give us an overview of the cost step-up linked to, for example, wage inflation or other cost items, which will bring up costs for the current year?

Of course, the investment needed for entering new markets in our business is not that low -- not that high, sorry. It was also not that high in the past because we are going not in a new market with a big bang. So we are building up our dealer portfolio. We're using our global software. We are using our approach, measuring risk and then becoming better and better using our own data, our own experiences. So there's not a huge investment we did, and we will do for developing a market. And with growing the business, of course, you need some sales costs, you need some marketing plans, but that's in line with our normal market. So there is no extra big or huge investment for developing these new markets. And to -- looking to the cost impact because of inflation, that's nearly the same like for each company -- for each of us. Of course, we will see higher costs because of the inflation that will impact our staff costs at the end of the day that will impact the things we have to pay, but we have not that big or a huge impact of commodities or something like that. So we will see that and you will see there an impact of, let's say, 5% to 6% in minimum because of that inflation. Yes, that's right, but I think that's quite normal and that's a normal development of the market prices.

Thank you. So as there are no further questions, I think we can wrap it up right here. So this concludes our today's call. Thank you very much for joining us. If questions bring to your mind after the session, please e-mail to us. And just to remind you, our new business figures are due on April 5. Have a great day, and best luck. You may disconnect now. Thank you, and goodbye.