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

So ladies and gentlemen, welcome to our full year results conference here in Frankfurt. Welcome also to those of you joining us on our webcast. Thanks for your time. Thanks for coming. We are really pleased to have you here. And given that markets are really turbulent, this means even more to us. Thank you. My name is Anke Linnartz, I'm Head of IR at GRENKE. And I'm here today with Dr. Sebastian Hirsch, our CEO and Interim CFO. As always, we will start with a presentation, and we'll have time for Q&A right afterwards. So let's get started. Dr. Hirsch, the floor is yours.

Thank you, Anke. And warm welcome also from my side, especially here in Frankfurt, but also in the webcast. We appreciate that you take the time to join us today. Many of you know that I've been with GRENKE for quite some time. And if I remember correctly, recently, it was about 18 years ago when I started my first job at GRENKE. Now almost 2 decades later, I'm very pleased that the Supervisory Board has placed its trust in me and appointed me as CEO. In my new role, I will continue to work hard and with all my strength to further fuel GRENKE's success story. I would like to thank our former CEO, Michael Bucker, for the time he spent together leading the company. Almost always, we shared the same opinion. Just when it comes to soccer, we rooted for different teams. And some of you know, I am a passionate soccer player, which is why I firmly believe in the power of teams. Together with my colleagues, Isabel Rosler and [ Drew ] Christ and the entire GRENKE team, we will expand our position as a leading provider in small ticket leasing globally. So where do we stand today? We got a lot of stuff done. And I will present you some of our operational highlights of 2022. Leasing is on rise. And more than this, the range of objects available for leasing is continuously expanding, in line with megatrends. Just imagine the potential contribution to our portfolio growth through climate-friendly lease objects such as wall boxes and photovoltaic systems. We left the franchise model behind and are now pursuing growth in leasing markets through our own subsidiaries. As of today, we had acquired 8 franchise companies and intend to acquire the remaining companies by mid of 2023. Last year, GRENKE was rated by Fitch for the first time. We received that investment-grade rating of BBB with a stable outlook. I'm pleased that another renowned, well-known rating agency has awarded us an investment-grade rating and has recognized the strength of our business model, along with the rating of Standard & Poor's with BBB+ is stable since years. In response to the short seller attack, GRENKE dedicated more than 18 months towards resolving the issues and rebuilding trust. Also last year, we made further advancements in the areas of anti-money laundering, compliance and internal audit. And I'm very happy to say our efforts were recognized and awarded the third place by the DVFA corporate governance rating for SDAX companies. So let's now move on to review our guidance over the last year. We mastered the past financial year successfully and achieved our targets for the financial year. First, we generated new leasing business of EUR 2.3 billion and group earnings of EUR 84.2 million, so reaching the upper end of our guidance range for both. Our equity ratio remains higher than our self-imposed target level, while our cost/income ratio is close to our updated guidance. With recording a loss rate of 1.3% in 2022, we outperformed the guidance range of 1.4% to 1.7%. Contribution margin 2 is quite important and will remain our central management tool. In '22, it came in at 16.1% compared to our midterm target of 17%. To sum it up, we delivered on our targets and have a strong base to build upon. Please move with me to Slide 6. We have put together a slide that you might recall from our Capital Markets Update last year. And the dark line here divides the bars into current portfolio below and new business above the line. The bars below the line represent what we already recorded, it's locked in. The bars above the line represents expected growth of our portfolio for the next years and the basis for our future earning expressed as CM2. EUR 3.2 billion is what we expect to generate from our new business over the next 5 years. Given that this number was EUR 2.7 billion 1 year ago, it clearly shows how rapidly our portfolio is growing; in my opinion, a really strong development. And where does that growth come from? So ladies and gentlemen, we ranked third in our core market, Germany, France and Italy, in terms of market shares, market shares of the total leasing market. With approximately 10% market share, we are amongst the strongest players, and the global addressable market volume is huge. North America and Australia, as our future core markets, account for more than 30 million small/medium enterprises, while our established core market in Europe count 25 million small/medium enterprises. And just take in account that in Europe, every second SME uses leasing to finance its business. Today, we are talking about 660,000 customers in our portfolio, means 660,000 customers with a running contract at GRENKE, and there is also a huge potential. Just imagine the growth if only each 6 of our existing small medium enterprise customer would lease another object. This would lead to more than 100,000 new contracts with an average of EUR 9,000. This ultimately means EUR 1 billion in new leasing business. As you can see, our new business is on rise. Now let me share with you already today a sneak peek into our Q1 new business figures of '23. We see a strong development in profitability, as indicated earlier. CM2 of new business is rising, and we expect our CM2 margin in Q1 '23 to outperform full year '22 CM of 16.2%. So we are on the right track, ladies and gentlemen. We will further increase the level -- our level of digitalization, as it's crucial for our growth. The main purpose of our program is cost reduction, cost reduction in the operational management of our business. This is a base for scaling the business going forward. The success of our small-scale business model, from the potential lessee's initial application to the disposal of the leased asset at the end, can only fully unfold through highly automated digital and intelligent processes. This is a way to deliver more value to our customers while scaling our business to an even greater extent. It's therefore crucial for us to deploy the best possible process technology along our entire value chain. To ensure digital excellence across all our processes, we will invest EUR 45 million to EUR 50 million in our digital infrastructure over the next 3 years. And only with this -- with these investments, we will be able to structurally and sustainably achieve profit growth that exceeds our new business growth. You see here on the bars, in '25, we will achieve breakeven for that program. In 2027, we will have earned back our investments. We will predominantly spend money on digital integration. We will invest in digital integration and enhance our data handling through cloud technology. By the end of '24, we will benefit from the modern IT architecture based on the transformation to cloud. So previously planned investments in hardware for technical infrastructure across the globe are thereby finally not necessary any longer. By end of '25, we will have completed all investments in full automation and digitalization of processing along the entire value chain. So Plug'n'Lease will become reality. And the leasing request in terms of a customer journey will be a non-event: noiseless, smooth, simply lease and use. Over the last couple of years, I've been often asked, Sebastian, what is the best way to evaluate GRENKE's performance? My answer always the same, CM2 and cost/income ratio. But today, we would like to give you a better understanding of how we look at our business. For that purpose, we have prepared a framework for you that includes 3 main KPIs: CM2 margin, cost/income ratio and equity ratio. All of these KPIs are directly linked to our return on equity, a KPI you use. The challenge is that our business is based on a portfolio of leasing contracts with an average lease term of about 4 years and, therefore, moving on KPI in the direction of the respective target level, lead to an increase of return on equity at the end of the day. Later on, I would like to show you how this framework and the underlying KPIs will help you to effectively look at our guidance. What we have made available for you is here scenario calculation and some sensitivities, but we will come back later to this. Let's first, however, take a closer look to our performance in the financial year 2022. In '22, we saw strong effects of our acceleration in new business. Our leasing new business grew substantially every quarter. In total, we increased leasing new business by over 38% to a total of EUR 2.3 billion, hitting the top end of our improved guidance. At the same time, we experienced a sharp rise in interest rates throughout the past 6 quarters, especially in the area of 2- to 4-years' duration. Here, we saw an increase of over 370 basis points since Q4 2021. That's the blue line on that chart. As you know, the interest rate development has a direct impact on our CM2 margin. While we saw a decline in our CM2 margin in the same period, the good news is that we are able to maintain it at a robust level. Throughout the entire year, we were able to adjust our leasing contracts' conditions, continuously passing on the rising interest rates to our customers, but always with a time lag impact of about 1 quarter. And we expect to continue passing on the higher interest rates in our new business contracts while maintaining our strong growth path in new business. With regards to our P&L shown here on that chart of the financial year '22, our new business volume led to a net interest income of about EUR 345 million, which is a slight decline compared to the previous year due to the smaller portfolio, 2020 and '21. Profit of new and service business increased by 5.7%. Our costs increased by 17.6%. And the key factor there, higher expenses for staff as we changed our remuneration model, our Total Reward System, to reduce variable [ pack ] and took measures to support our employees in dealing with ongoing high inflation. Overall, this results in a cost/income ratio of 55.2% for '22. And this relative increase is, however, temporary, reflecting the adjustments in our cost structure as well as the income contribution of our overall leasing portfolio, and is expected to normalize in the long run. Settlement of claims and risk provisioning in the loss rate, very stable, 1.3%, and the overall risk provisioning on the P&L perspective is down by 16% to EUR 120 million. So in '22, we achieved an operational result of EUR 98 million, and the decline compared to the previous year is mainly based on the one-off effect, may you remember, of the sale of our shares in viafintech last year -- or it was '21 -- of around EUR 23 million impact in 2021. Also, higher staff costs, as I mentioned, and increased expenditure for currency translation differences. Our other financial results of EUR 13 million were mainly based on improved market valuation of derivative financing instruments for interest rate hedges, which we expect to neutralize over the lifetime, we talked about [ per 9M ] also. So in all, we reached earnings before taxes of EUR 111 million with a net profit of EUR 84.2 million, and we reached our upper end of the guidance. And this corresponds to EUR 1.75 earnings per share. As one of the cornerstones of our business, I would like to also provide you with an update on our funding mix shown on that slide. Senior unsecured continued to contribute slightly more than half of our overall non-equity funding volume. Deposit at GRENKE Bank, quite important, continue to be the second important pillar by 20% to our funding. And also asset-backed securities and instruments are stable and account for around 18% of our funding. Quite important for each of that funding boxes for the whole funding in all is that we are avoiding maturity transformation, so our funding is matched to our assets, to our leasing receivables at the end of the day. So ladies and gentlemen, after having presented our strong financial results of 2022, let's shift gears. I want to provide you to know and to invite you what are the underlying economics of our leasing business and how we measure our performance. And we call it GRENKE Performance System, GPS. This will help to understand why we guide CM2 margin, why equity ratio is important and cost/income ratio. These 3 factors play a crucial role if you want to analyze our company, potential performance for the future, or as some of you measure it for a return on equity. I will now explain in more detail how you can derive an approximate return on equity from our reported figures and how changes in one of these factors might affect the return on equity. Important is the following slides are to illustrate our thoughts, and we are also steering internally with that slides. They do not reflect our actual return on equity because it's a model and only shows the possible return on equity for 1-year portfolio that in total based on roughly 4 years, and it's based on our leasing business. Nonetheless, we will work with 2022 financial ratios, to ensure that you can get to know the principles and assumptions which form the baseline of our calculation. So let's jump in of it. So at first, to get a better understanding, all the figures we see now, all the bars, are based on an NAV of 100. So that's our base unit, to talk about a net acquisition value of a portfolio of a single leasing contract of a matter of 100. And we start here to creating our return -- our earnings before taxes with our CM2 16.1% based on 100 because of the 16.1% CM2 margin in 2022. And as I mentioned before, cost/income ratio is important for us. So we would like to deal with cost/income ratio in that model, too. That means we have to adjust our CM2 by the risk because the income in the cost/income ratio is before risk. So to multiply our income with cost/income ratio to get in the cost, we're adjusting CM2 with 5.5 expected credit loss as the base of the last year new business portfolio, and that brings us to a CM2 before risk. That's the base for our cost calculation here with the cost/income ratio in that scenario of 2022, 55.2%. Brings us to 11.9 costs, we have to reduce also the expected credit loss, means the risk at the end of the day. And so from CM2 before risk, minus costs and risk, we are on an earnings before tax level. And may, if you know, that level is based on whole lifetime calculation. Our CM2 is always based on an average 4 years of leasing portfolio. And so also the 4.2 earning before taxes on a full lifetime of a leasing portfolio of a leasing contract. And to bring that in the right line for return on equity, we need our duration, and the duration is roughly 2.5 years for new business portfolio. May you ask why 2.5 years and not 2 when we're talking about roughly 4 years average lease term, initial lease term? So just to take in account that we have a residual value at the end and some leasing contracts are running an extension. So the effective duration in our leasing portfolio is not 2 years, it's 2.5 years, quite important to guiding that bridge to switch from a total earnings before tax to an earning before tax per year. And that's our average during the lifetime of a leasing contract means for 100 net acquisition value, 16.1% CM2. The assumption is that the cost/income ratio over the lifetime will be stable with 55.2%, that will bring us each year in average 1.67 earnings before tax. The second part of a return on equity is equity. So the question now, what is the portion of equity which is required for making that leasing contract or that leasing portfolio always based on the 100? So starting point here is the 100, our net acquisition value, we have to add our industry direct cost, that's incremental cost, and the 103 here called as net investment, that is a net investment under IFRS. It's our starting point for the leasing receivable. So that is the amortization block over the lifetime, including the residual value, and that's quite important here to go forward, and in an annual basis, we have 103 net investment. And in that 103 net investments is 9 residual value, and 94 that is amortization part of the leasing installments. And to bridge that now into a yearly view, we have to take care of what is the real tied asset at the end of the day, during the whole lifetime of a portfolio of a leasing contract, so you can divide the 94 by 2, and the 9 is constantly tied asset during the whole lifetime. And that brings us to our leasing receivables on average over the lifetime of 56, that's the average leasing receivables over the lifetime. And we would like to deal with our equity ratio on the balance sheet. So we need an adjustment from leasing receivable to balance sheet. So leasing receivables is the denominator in our balance sheet, and we can add 25%. It's quite stable over the years because of cash, because of some intangible assets, because of some infrastructure and so on, and means for 56 average leasing receivables, we will see roughly 70 balance sheet because of the multiplier 1.25. And that brings us to an average balance sheet over the lifetime of the 100 initial NAV of 70. And now we are ready to deal with the equity ratio, and we took also the equity ratio per end of last year was 20.8%. That means for 100 new business with a stable equity ratio of 20.8%, under that assumptions, that means it is like a tied equity in average of 14.6%. And that [ boths ] together the return, the earning before tax and the equity that results in the return on equity before tax of 11.4%. And quite important is to see here CM2 on the 1 hand, cost/income ratio on the other hand, and equity, and that are very important parameters to go in conversation with you and also going in conversation with our managing directors, with our sales guys, to say hey, why is 17% CM2 margin a good level? Why is that a good target? With that model, we can explain internally why it is a good target, and we can also explain externally why it is a good target. So it's like a bridge, it's like a translation between internal view and external view. And the huge power I see in that model is that we can covering our internal view on our CM2 because it's quite important and successful, and we will find the right translation to talk to you, to the capital market in terms of return on equity. On the next slide, we switched a bit the parameters because the question is then, hey, 11.4%, that's based on the new business '22. Looking at the balance sheet, the return on equity before tax is between 8% and 9%. And what does it mean for the future, looking into the future with that model? And there, we switched separately each parameter, first CM2 margin. As I mentioned before, we would like to go forward with a CM2 margin closer to 17%, and it looked very good at the moment in the first quarter '23. And the shift of 100 basis points in CM2 margin means also a shift of 100 basis points in return on equity. And so it's quite important to covering a better contribution margin than last year. We can explain that internally with that mechanism. So it's important to stay on the parallel to passing through higher interest rates to the market. The second parameter also very important because we're investing in digitalization. We're investing in digital excellence, we would like to reaching a better operational excellence, and at the end of the day, a better cost/income ratio. And a switch of cost/income ratio of minus 300 basis points means a cost/income ratio of 52.2%, results in 180 basis points better return on equity. So there's also a huge leverage to covering more efficiency in our leasing business to getting the better digital excellence. And that's the way we would like to go through: better cost/income ratio, and at the end of the day, that will result in better return on equity. And last but not least, equity ratio. May you will ask well, what's about equity ratio, how would you like to steer your equity ratio? It's quite easy. To achieving our targets in new business growth that will bring us over the next years a lower equity ratio because we have enough space, enough room in our equity to getting more new business to widening our balance sheet at the end of the day. And so a more efficient capital allocation will bring us a lower equity ratio. And if we are closer to our goal of 16 -- or our minimum target level here is 16.8, so that means minus 400 basis points results in 280 basis points better return on equity. So all that 3 parameters and indicators, may vectors, you can call it like you want, are very important, and we took and will take the right action on each of it. So expanding and further growth will become, or will result in a better and more efficient equity ratio. Widening our CM2 margin will result in a better CM2 margin at the end of the day, and we will see a better return on equity and also more cost efficiency will bring us better return on equity. And on this slide, you see 2 metrics on the left hand with 20% equity ratio. And there, you can see in what direction we move from cost/income ratio, on the one hand, CM2 margin and, on the other hand, the way is clear. And the path is clear, we would like to move from at the bottom left to the top right, sets the way. And on the right hand, you see the same metrics with an equity ratio of 16%. So over the next years, we would like to move into a better return on equity, at first in the structure of our new business. And in the second step, also, you will see that better return on equity on our balance sheet and on our P&L. So let me take a look together into the future, what's about the outlook. And I would like to share with you the guidance for '23 and '24. We expect an increase of new business of EUR 2.6 billion to EUR 2.8 billion in '23. And we continue to aim for leasing new business of around EUR 3.4 billion in 2024, a quite important parameter to having a more efficient equity ratio. With our portfolio expanding, we expect also our profit reached EUR 80 million to EUR 90 million for that year for '23, and EUR 120 million in '24. This already accounts for our digital investment, which I introduced earlier. That's important to reflect that right. On the long-term standing guidance on our equity ratio, which continues to remain at above 16%, this ensures good lending possibilities in the financial market. So with our growth, we will come closer to the 16%, of course, but we would like to cover equity ratio from a long-term run above the target. In light of our digital investment program over the upcoming years, our cost-income ratio is expected to remain slightly above the 55% mark in '23. In '24, we expect to drive this down again to below 55%, below 55% as a midterm target. On the long run, we would like to go below 50%. Given the high quality of our current portfolio and continuously strong payment behavior of our customers, we aim for a loss rate in '23 and '24 of 1.5% or less. And for '23 and '24, we aim for a contribution margin to close to 17%, as I mentioned before. But again, it depends on the further dynamics in interest environment. But at the moment, as I mentioned, it looks good. So to summarize today's things and what we talked about, I would like to say 4 important things. First, we delivered on our targets in the last quarters, in the last year. Second, we have clear and ambitious goals. Third, each of these goals is linked to our return on equity, and you can deal with that with new GPS. That's quite important to steering internally on the one hand and also to measuring externally and to evaluate the company. And fourth, we took the investment necessary to achieve these goals from short term and also from a long-term run. So thank you very much, and now we are ready for your questions.

Yes. Thank you for your presentation, Dr. Hirsch. This was really interesting and a lot of information. So I guess there will be a lot of questions.So first of all, we ask our guests here in Frankfurt for their questions. And we have a microphone ready for you. So would you be so kind as to briefly state your name. And the first question, I think, comes from Mr. Pfänder. Thank you.

I would like to come back on your digitalization initiative. You showed that you are going to invest around EUR 50 million in the next years. Could you speak about the operational risk to this? So is this amount you flagged at risk to increase? For example, did you already sign on the companies which might help GRENKE to go this way? So what are the execution risks along the line you're planning to execute on that? And secondly, you also showed efficiency gains in the next years. I would be interested what is going into this number. Are these expected cost savings or also revenue items? I at least would assume that if it's up and running the system, you should also be able to accelerate top line growth. Is there anything also feeding into this number?

Yes. Thank you. At first, expenses we show in the investment volume over 3 years, it's, let's say, our best guess at the moment. So it's not each contract signed. It's -- we have a plan. It's a road map. We call it internally digital moves. And we would like to go forward with that digital move step by step, because you can't do anything at the same time, and you should do that step by step. So I would like to say roughly 1/3 is locked in and more or less fixed in terms of cost. The rest, that's our best guess assumption at the moment. Could be better, it could be a bit lower, it could be a bit higher, but that's the thing we have to deal with. But it's not that we sign, let's say, EUR 45 million contract with the company or something like that. And in terms of efficiency gains, we show here our cost savings, cost savings for sales and administration. Of course, the program will also spend on top line. The digitalization -- better digitalization will also spend on how can you deal with the market, how fast are you able to deliver new products made to markets, how fast can you may expand in newer markets and so on. But the cost savings here or the efficiency savings is only cost, so without any bottom line impact.

Okay. Next question from Mr. Fuhrberg.

Marius Fuhrberg from Warburg Research. Also on the digitalization program, I think that your speed in your decision-making for the leasing contracts was always one of your core strengths, and now you say that you want to become even quicker. So could you give us a little bit more detail on which process steps will become even more digitized, and where the efficiency gains lie in the whole process? And the second question, once you implemented every steps of this program, where do you expect the CIR to be afterwards? Because I think that this is what this should be a more sustainable effect then. And maybe a third one also on this program. What is the current level of server and hardware costs that you are yet to get rid of with the program?

Yes. Thank you for your question. I would like to start with the last one. Maybe check the number in more in detail, but it's roughly EUR 8 million to EUR 10 million is the hardware cost, that's also part of the cost of the -- is the extra investment means we save also the cost for the today's infrastructure. We have and you have today hardware in place. You will go into cloud. You have 2 years parallel systems, and it costs money. It's roughly EUR 8 million to EUR 10 million, is at a double impact. And after 2 years when you implement the cloud fully, then you will not further need new investments or the new write-off of hardware. The second question was what is the cost-income ratio. Let's say, at the end of the day, after that investment program, it's not that easy to say because cost-income-ratio is always both cost and income. And may I would like to give another answer was, that program from a long-term run and when you like to go to plan like a steady state at GRENKE, my steady-state scenario is 12% growth in new business and 6% in costs. Sets the operational leverage we would like to cover with our power in the organization, with our power in the business model and with that digitalization program. And the cost/income ratio then is more or less a result of that. So we would like to -- from a long-term run and from the today's mechanism less than 50%, yes. But I think the, let's say, steady state approach is a bit easier and a bit more clear to say 12% new business growth on 6% cost growth. And the first question, one of the most important things is instant decision. And when you talk about instant decision or we then use to take in account 2 things, the one hand is what is the real process of the market. Is it made possible or would you like to have a full instant decision, means a decision by a machine at the end of the day? Or it's a technical solution for instant decision. And I would like to have that we are able to be in technical able, having an instant decision means a decision in between seconds. If you go for it in each market, in each case, that's another question. May it's good to having people involved to taking care for a decision to making the final check, whatever. And in terms of instant decision, there's also one huge leverage because when you talk about credit decision, everybody is talking about what's about the yes. And we would like to go for it. I say no. So most leverage I see is a fast no. And may you know our acceptance rate is roughly 75%. So in 25% of the case, we say no. And to having there a very fast no is also very efficient to having that may buy a machine, whatever, then may or would like to look later on that, or may I ask a colleague or whatever, or may I can switch a parameter, a bit lower lease term, a bit longer lease term, whatever. So also, the fast no in the process of instant decisioning is very, very important. And there's a huge leverage also in the fast yes, of course. And that instant decision process will bring us to a leasing decision in between seconds and not in between some minutes.

So Mr. Lukesch, do you still have a question then?

Tobias Lukesch from Kepler Cheuvreux. I would like to touch on 3 topics, if I may. First, on Q4 P&L development. Secondly, again, on the digital excellence program; and thirdly, on capital management and payouts. I would go one by one, if okay for you. So on the Q4 P&L line items, could you please elaborate on the strong increase of the profit from the new business and also on the losses from disposals, which have been -- or which have shown basically a significant increase or shift from the positive 9 months development?

Yes, both with fluctuation over the year in the new business, it's because of the strong new business we achieved over the whole year, at the end, especially in Q4. And that's why also the incremental cost of new business arising in some -- the IDC, we saw before in the calculation. And it's always linked to the Q4 performance, and that's why the new business gains are rising. And from a balance sheet perspective, it's always at the end of the year in Q4, you go to, let's say, recalculate the full year. So then we see the full year results also for gains and losses and disposals for new business. And then you say, okay, the full year result, minus 9, and that's your Q4. It's a bit different in Q1, Q2 and Q3, you go from more or less for each quarter, and in the last quarter, you know everything about the calculation and then especially that both figures, there can be some fluctuation. We saw that also over the last years. And in terms of losses of disposal, it's also the same. We see that some contracts are running longer, some contracts or more contracts going in retention. And then we have also the valuation impact that you have contracts running off. You see the high depreciation of the write-off of the residual value and the longer-running retention bring over the time the earnings. So there's a time lag. We discussed them all, I think, 2, 3 years ago. And as always when there's retention a bit longer, then you see that light, slightly negative impact.

No deterioration basically in the asset prices? So it's...

No, no, no.

And secondly, again, on the digital excellence program, you have touched on it maybe on the number EUR 8 million to EUR 10 million, so I get that correctly. So you mean that's an impact over 2 years, so not per annum, but EUR 8 million to EUR 10 million within 2 years of this kind of running these programs like in parallel?

Yes, because in that 2 years, you will have, let's say, 2x run costs in IT, and after that 2 years, you will have then other run costs for cloud, for the new system, but you will not have the [ froze ] around because of the previous system. And in that 2 years, that impact is like a parallel impact and only for that 2 years, yes.

Okay. So it's a EUR 4 million to EUR 5 million per year, basically?

EUR 45 Million?

EUR 4 million to EUR 5 million, up to EUR 5 million.

No, no, it's roughly EUR 8 million to EUR 10 million per year. Yes, yes.

Okay. And is there any split you may provide with regards to initiatives, products or services, which are covered by the first EUR 15 million you have planned for '23?

The most important thing is a cloud transformation, because all the other technical things are based on the new technologies. That is the most important thing for that year.

Okay. And thirdly, on the capital management and the payouts, by when do you expect you would hit the 16% equity ratio given the planned leasing business growth you have in mind, given the development of balances of cash and cash equivalents you see basically in the balance sheet? And thirdly, with regards to the loss ratio you expect for this time?

An equity ratio when we, let's say, run forward with our new business planning of 16%, I see in '25, may '26 year, but not earlier, and '25 should be a bit more closer to 17% from our plannings, and in '26, that's the level where you see the 16% or very close to 16%.

And would that imply a kind of flattish development of cash and cash balances, basically? Are you at the level where you think now you have a run rate?

Yes. The level today is quite fair to assume. May could be a bit more, a bit less, but the level we have today is quite fair.

And I guess on the loss rate, you would potentially be again in a range of 1.4% to 1.7%, kind of, or?

From a long-term run an average of 1.5% is fair. And from today's perspective, I see more 1.3% to 1.6%, but of course, you can also say 1.3% to 1.7%, it's okay. But the average of 1.5% from a long-term run is fair for our portfolio. It's quite stable over the last years when you see the average. And looking forward with today's business, we write for short-term run 1.3%, but from a long-term run 1.5% is okay, yes.

So then we had a question from Mengxian Sun from Deutsche Bank.

This is Mengxian Sun from Deutsche Bank. And also 3 questions from my side. The first one is that if we look at your asset book that we see the recovery is already ongoing, but the NII hasn't showed a positive trend here yet. So the question is, when do we expect NII to come back to positive growth again? And the second question is on your provisioning. So if I look at the Stage 3 provisioning in this quarter, it decreased by a substantial extent higher than the average level. So are there any write-backs in this quarter regarding to the provision? And the last question is also regarding to the IT budget and competition landscape. Thank you very much for sharing with us the information that you are third largest players in Germany, France and Italy. And can you share with us a little bit information about the largest players? And how do you see with the IT investment, how can you increase your competitive advantage with it?

Yes. May I start with the last question, the largest player if I'm right is BNP. It's always bank-based, BNP Paribas, it's the largest. And the second one, do we get it?

Give us a minute.

Yes. But it's always the same. It's the players around us, the bigger one is that's always a bank-dependent leasing company. In terms of NII, I see the growth that year because you are right, on the one hand, it depends on the leasing receivables. So what is about the growth of leasing receivables we saw last year that the leasing receivables are growing again, but you have also the impact of the years 2020, 2021 in the portfolio. We expect that we will reach per end of that year, beginning next year at the level of 2019 in the leasing receivables. And that is the base for growing in net interest income, and that should be the case that year. And in terms of risk provisioning and Level 3, Level 2, there was no extraordinary impact or something like that. There was one thing that we took care for some receivables, which were with a risk provision of 100%, so some bad debts. It's more technical in terms of our -- how we go forward with a bad debt collection. And in our local accounting, we always look that we take care for, let's say, in the best case, bad debt collection. So we take care for bad debts in our accountings and may going for a write-off of 100, but you have a gross receivable of 100 and also risk provisioning of 100. And that we switched a bit because of the NPL situation. And in some cases, it was a long term and then you switch. And you see that also in the balance sheet and the gross bad debt is lower, but also the risk provisioning is lower. But there was no extraordinary impact in terms of missed payments and extra write-offs or something like that.

So we have the answer ready. Okay. So there were further questions. I think Dr. Häßler, please?

Philipp Häßler from Pareto. I have 2 questions, please. Firstly, on the other interest revenue, which was quite strong in Q4 with EUR 8 million. Was there one -- was it due to a one-off or just to the higher interest rates? And if it was due to the higher interest rates, maybe you can give us an idea how this will develop in 2023? And then on the funding strategy, funding via unsecured senior funding is quite expensive currently and will probably stay. So to what extent can you further increase the share of deposit funding? Currently, I think it's around 25%. What do you see there as the upper limit?

Yes, first in the other interest income, there was an extraordinary impact, that's right. And it was linked to a repeat -- repayment of VAT from the government. And there, it was 10 years ago. And that is not the VAT repayment. It's interest on that VAT repayment and it was roughly EUR 7 million. It has nothing to do with the higher interest rates or something like that. And in terms of funding mix, on the one hand, yes, we can go for more deposit business, may 30, we have always said 1/3 could be fair, may could also be 40% possible, but we would like to stick in all our pillars because market environment changes nearly each year. And it's important to having the deposit business, to having ABCP funding and to having senior unsecured funding, and having as best as we can in each box, a wide range of instruments. So it's not the goal to have tomorrow, 30% or 40% deposit business. It depends on market environment. The GRENKE Bank is a very important player. And when you ask me, what is a theoretically possible share that I would like to say, may 40% to 50%. But from our point of view, we would like to take care that each box is important, and we would like to play in each box. So I think the level of 25% to 30% is fair and a very good and healthy level for us.

So I just see that we have received one question from a participant on the webcast. And the question is touching the ROE and whether the 15% we saw in the past would be possible again. So this is the question of whether the new cost/income ratio will -- or has to be considered a burden on it?

Yes, that's right, we talked about the metrics, may on one of our pages there in the blue areas, you can see what it could be is the new future, and the 11% is more on the upper end on the left hand, and we would like to move on the bottom -- sorry, on the left hand and we would like to move on the right hand on the top. And that is more than 11%. It's at the end stage, more than 15%. So the next step should be having a return on equity of more than 10% and the level after is to achieving an return on equity of more than 15%. And the first step, as I mentioned before, is to covering that in our new business portfolio with the structure and the KPIs we provided you today. But 11% is not the new normal. With our guidance of that year and the current equity, we will see a level like this year, for '23, that's for sure, but it's not the new normal. It's just a question of time and delivering new business figures.

So then we have another question in the room from Mr. Fuhrberg, please.

One follow-up, also on the ROE, you just mentioned that you want to move up to the top right hand of your graph here. And given that you want to achieve an equity ratio of 16% by 2026, I think it was, and that your cost-income ratio should also improve by then due to the digitalization program, is it your target to achieve an ROE of more than 20% by, let's say, 2027 then? That would be one question. And the second one, just an update question on the market entry in the U.S.A. I think to mention that -- or to remind that you started in Arizona with your business. How are things going there? And do you already consider moving into another state and/or how does your expansion plans proceed in the U.S.A.?

Yes. First, I think important is to make the next steps to today, we're talking about an ROE of 8% to 9%, looking to the balance sheet. On the new business level, we saw 11%. And to go in the direction of trends, that's quite important. The parameters are more or less in our hands, CM2, cost-income ratio and equity. And with that parameters, we are able to steer that in the right direction. And if we talk in 3 or 4 years, about more than 20% or not, then maybe we can talk in 2 years. I think important for us is now to go that way to going forward and to move in the right direction. And the right direction is closer to 15% and then closer to 20% in terms of ROE. And that depends on moving in the right direction on each of the KPIs I presented to you. Second one, U.S.A. is going well. It's always the same when you start in a new market. And of course, the U.S. market is quite huge. It's important to go out, to talking to dealers, winning dealers and that the colleagues in Arizona are doing their development is absolutely on plan. And we are also planning to opening the second branch, the second company in the U.S. That will be in Illinois, in Chicago, and that's in the planning process, and we will do that year.

Okay. So time is flying as always. We have time for another question from our webcast, which is again touching on the fact why a quick decision is so important, when you compare deciding in a few seconds in contrast to deciding a few minutes? So why we benefit from this quick decision?

Yes. On the, why it's important, a quick decision? So in our business, it's no leasing -- no lessee, sorry, is waking up in the morning and say, Hey, today, I go for a leasing contract and nobody is waking up in the morning and say today, I go for leasing contract with GRENKE. So may small medium enterprise entrepreneur, whatever is waking up and say hey, I need to go to invest in IT, I need to go to invest in whatever infrastructure and talking to a dealer or reseller. And then the reason I say, hey, may you can buy it or you can lease it. And then it's a question of time and a question of seconds. When you can provide the reseller, the lessee in between seconds, hey, that's our offer. You can lease it for 100 per month, 4 years, take it or leave it, that is very, very important because nobody would like to wait. And it's the base for our business. Today, it's not important, but may tomorrow to implement our business idea also like online shop or something like that because there is also a question of seconds. Some dealers are working with online shops more and more. And that's why nobody of our clients is really asking for leasing. They are asking to taking an investment, taking an object, and we would like the clients to lease the object. And that's why speed is that important in our business.

Yes. Thank you. So given that we have time to talk in here in the room, I would prefer to answer another question from our webcast participants. And this is regarding the debt market in H1 and whether we are willing to tap into the public market again. Everything that we can elaborate on this would be helpful. So duration, size, anything we might be willing to or able to share would be helpful.

Yes, it's one opportunity. It's one opportunity in our planning, absolutely. The type of funding means duration and the best way duration between 2 and 5 years because that's the duration of our new business portfolio, and we would like to cover the maturities of the asset, as I described before. And size, it depends on new business volume on the one hand, but it depends also on the market on the other hand. To going public, it was the one that you know, it should be a minimum EUR 200 million. It could also be more. So that's one opportunity again to doing that. It depends on market environment. We have also other boxes and pillars in our funding. And if the market is working and willing, then we are ready to go for it.

Thank you. So I think there was another question from Mr. Pfänder.

Yes. One follow-up, please. Could you talk a little bit about your CM2 margin development in the case for, let's say, a larger funding exercise in senior unsecured? I guess, yes, it's much more costly in this year, maybe even than last year and your cheaper funding is running off. So is your CM2 margin maybe even in these quarters below that what we saw last year and recovering just later? Or how do you see that?

At first, when we -- or may know the last question, the CM2 margin over the last weeks, developed very good, and we were presented in 2 weeks our new business figures, and we can -- or I can say that the CM2 margin will be better than the average of last year because we are able to pass it through our higher interest rates. And looking to our CM2 and the interest rate we use to calculate it, we're always taking each day, the current market environment of interest rates. On the one hand, we're taking our credit spreads of our form of funding, of our existing funding, that's right, but we're taking the current market environment each day. So that's very sensitive in terms of changing interest rates, means when there's a change in interest rates because of an ECB decision or whatever, that's on the next day reflected in our CM2. It's not based that we say, okay, what is our cost of funding of the past? We like to say what is our cost of funding if we would like to fund that leasing contact today with today's interest yield curve. Of course, with our credit spreads also [ from past ] because that's at the end of the day, something like the best notice, but we're asking each day what is the refinancing cost and it's theoretically what could be the refinancing cost for that contract today. So again, there's a high sensitivity and it's not that we took only the fixed rates of the past and when bond is running off, then everything is changing.

Okay. So we're trying not to overrun more than 5 minutes, which is why we have time for a last question and Mr. Lukesch, please?

Yes one or two, if I may. On the competition and just on the funding costs you just mentioned, I was wondering, you mentioned that main competitors remain bank-dependent leasing companies. So expecting that they should have a direct or indirect funding advantage compared to you. How do you see the competition in pricing development basically? What have you seen over the last months? And how are you expecting to this going forward? And secondly, a second one, a very quick one, if I may. On the deposits, you mentioned the 25% to 30% share of deposit funding. I mean how fast are you planning to reach that? Could that be reached by the end of the year already?

May the last one. So it's not a really a goal is of portion of funding at GRENKE Bank is at the end of the day, a result of what other opportunities are at the market. So it could be that we have a level of 25% per end of the year, it could also be at a stable 20% if you are having as a possibility to going for bonds, quite efficient with 2, 3, whatever, bigger issues. Then may the deposit business will be a bit lower. If you see, hey, the deposit business is developing very good, may the bond market is not that easy, then the share or the portion of GRENKE Bank will be a bit higher. In terms of pricing, that's very interesting -- it was very interesting last year because as ECB started rising interest rates, not each competitor started rising leasing conditions, especially in Q3 and with beginning of Q4, it was not really clear. But then in November and December, each competitor across the globe in each market go for higher leasing conditions, higher interest rates. So it was not a question of pricing. And the second one, in our business, as I mentioned before, speed is much more important than pricing. It's not that the lessee is compare okay, I pay 100 and may then there I pay 99. And the lessee is not waiting to compare it. So when you are fast and say it costs 100, may you say, okay, I go on net rating for a bank-dependent competitor. Okay, may in 10 minutes, I will get a second offer. So that's very important again, the speed in our business. It's not surprise and not only surprise to the competitors. That depends more on the dealer and there also the speed is quite important.

Okay. Good. So a last, last question from you.

I just wonder why you give us in this matrix your potential return on equity, your potential cost-income ratio. And then it is so far out that it's even not an intermediate goal for you. So what is the sense of it?

The sense of it is to combine our internal figures with, let's say, common capital market figure return on equity. And to combine what does it mean 17% contribution margin to -- what does it mean 55% cost-income ratio or may 52%. That's important to getting the sensitivity. What will happen if we switch our parameters and we move our contribution margin too from 16% to 17%. What will happen if we move our cost-income ratio from 55% to 52%, whatever? And what will happen?

49% and 49%, I mean where is it 49? Would it ever be? I mean, what is it?

In the past, we had a cost-income ratio below 50%.

Yes, but you don't give us any perspective whether you really want to reach that and when?

Yes, we give the perspective to go step by step to reach first. We started our digital excellence program and has to invest, of course, there the cost-income ratio is 55%, a bit higher over the next year or that year. After that year, we will come less than 55%. And from a long-term run, we will reach a cost-income ratio less than 50%, but we have to move forward. And it's more, let's say, an instrument to steering the parameters and see what could happen and may you can also deal with 52.5% or whatever with the parameters. You can deal with 17% contribution margin too. We had that in the past. We will see the figures in 2 weeks from new business. And return on equity and the equity portion, that's a question of the growth speed. So you are right, the cost-income ratio of 49%, it's a long-term run, both parameters equity ratio and the parameter contribution margin 2. It's more a short-term run. And to answer your question, how will the pause in that metrics may first, we will see a better contribution margin 2. With the growth, we will see a more efficient capital allocation. And with our digital excellence program, the cost-income ratio will move down.

Okay. Thank you. I think this was extremely helpful, explaining this. So thank you for the question. This concludes our conference here in Frankfurt. Thank you very much for coming. Thanks for your support. And yes, have a pleasant day in Frankfurt. Thank you.

Thank you.