ProCredit Holding AG (PCZ) Earnings Call Transcript & Summary

Thank you to EQS for organizing this call, and welcome to everybody on this call on the 2019 results of the ProCredit Group. My name is Gabriel Schor, I'm a member of the ProCredit Holding Management Board. Today, as usual, I'm joined by Christian Dagrosa, who will take you through the financial sections of this presentation. We plan some 40 minutes to cover today's presentation, which has been available since early today on our website. As usual, we will give sufficient time for any questions you may have. Let me also provide you with the usual warning to pay particular attention to the cautionary statements regarding forward-looking comments that you will find at the end of the results presentation. Firstly, let me structure today's call. Since we are talking today in the shadow of COVID-19, it is not easy to hit the right tone and provide you with the right level of information. We have structured this presentation around 2 linked -- very linked topics: the 2019 full year and fourth quarter results on the ProCredit -- of the ProCredit Group on the one hand; and our outlook for 2020 and our approach to the COVID-19 pandemic on the other. Perhaps a few words to COVID-19 upfront. Here, let me reassure you that at this stage, we are not experiencing noteworthy disruptions. We have been able to respond quickly to ensure the health and safety of our staff and clients. Furthermore, generally, we see ourselves well positioned to manage the operational, credit and liquidity risks inherent in the situation our clients and markets are facing. Good stuff and good understanding of the individual situation of clients are, above all, important strengths in managing volatility. We will come back to the details in the context of our outlook for 2020. Let me, at this stage, turn to our performance in 2019. Reflecting on our results in 2019, it's important with a view to understanding the 2020 outlook for the ProCredit Group. In these terms, I make no apology for looking at our 2019 results through the prism of where we stand today. Slide 2 summarizes the highlight for the full year 2019. We achieved good business growth with our target SMEs across most banks. Over the year, the loan portfolio grew by EUR 448 million or 10.3%. Some 30% of this growth was from green loans, reinforcing our impact focus. Good growth also meant that net interest income increased by 4.5% over the year. The level of default loan portfolio improved again in quarter 4, now standing at 2.5%, supporting a strong release of provisions in the quarter. Our coverage ratio of the default portfolio stands at 89%. 2019 as a whole and in the second half of the year in particular was notable for the strong growth we have achieved in deposits. As you know, complementary to the expansion of our Hausbank for SME business concept has been the execution of our ProCredit Direct strategy. Over the year, our deposits base grew by 14.2%, that is well ahead of our loan portfolio. Our deposits loan ratio improved from 87% to 90%. Generally, expanding deposits in a cost-effective manner to diversify our funding sources and support the growth in our loan portfolio was a key strategic priority for the group for 2019, and we see it as a breakthrough to have increased our deposits-to-loan ratio in a year we saw strong loan growth. Again, the comfortable liquidity levels achieved at the end of the year provide a reassuring funding base as we look forward in 2020. At the same time as achieving good loan and deposit growth, we completed important group consolidation projects over the year, which will help us to focus on core operations this year. Specifically, we completed the sale of ProCredit Bank Colombia and the restructuring efforts in ProCredit Bank Albania, largely related to the sale and write-down of fixed assets. In January this year, we also completed the buyout of minority shares in ProCredit Bank Ukraine, bringing ProCredit holding participation in all ProCredit banks to 100%. This consolidation efforts came with significant one-off costs, which impacted our 2019 earnings but will not impact our 2020 earnings. Christian will cover those details. There are some other encouraging developments that need to be highlighted. Solid capital structure is now more valuable than ever. At the end of 2019, our CET1 ratio stood at comfortable 14.1%. Looking forward, we see also some positive capital relief measures in prospect, such as the reduction of our SREP buffer to 2% and EBA recognition of Serbian banking regulation, which will reduce our risk-weighted assets. Respectively, ProCredit will also be a major beneficiary of CRR2 next year, which provides new benefits to SME lenders. Christian will also provide some details about it. We also expanded our relationship with IFI, International Financial Institution in the year. We successfully placed a pioneering green bond with IFC in the amount of $90 million. We expanded by EUR 800 million participation with the InnovFin Guarantee Program of the European Investment Fund to bring it to EUR 1.6 billion. As such, we are one of the program's largest partners. This program brings valuable additional protection and capital release. 12% of our total loan portfolio is backed by a high-quality financial guarantee. Overall, in looking forward to a difficult year, we see good long-lasting relation with International Financial Institution more than ever as a very valuable asset. Lastly, it is worth highlighting that ProCredit Holdings Fitch viability rating was increased from BBB- [sic] ( BB- ) to BB. Slide 3 summarizes where the group stands relative to our 2019 guidance. As described, we achieved good loan growth over the year. Over the year, the loan portfolio grew by 10.3%, which is within the guidance range. We achieved a profit of EUR 54.3 million, which is at the upper end of our guidance. We will go into the financials in detail, but this profit takes into account one-off costs associated with the restructuring efforts I have already mentioned. The steady performance also strengthening fundamentals, particularly in terms of improved net interest income. Very low credit risk costs and broadly stable operating costs. Generally, we have a solid financial base on which to build. We narrowly missed our target to bring our cost/income ratio to below 70%. The ratio was negatively affected by one-off expenses, particularly in quarter 4, such that it stood at 70.5% at the year-end. Our CET1 ratio stood at 14.1% at the end of the year, well above our guidance of above 13% and comfortable even with a more difficult year ahead. Our regulatory minimum Tier 1 capital level now came down after the SREP decision from 10.4% to 10.1%. Finally, we will propose to our shareholders a stable dividend payout of 1/3 of consolidated profits in line with our dividend policy. We have evaluated this recommendation very carefully and foresee comfortable capital levels over the next 12 months. We believe that consistency also towards our shareholders is important, particularly in these uncertain times. We will continue to monitor regulators' expectations very carefully. In summary then, we see that we have made good progress on our key strategic initiatives planned for the year and we have significantly strengthened the foundation of the ProCredit Group business model, which will stand us in good stead for the challenging year that 2020 will be. We can highlight this in a little more detail in the following slides. Slide 4. On Slide 4, you can see the growth in our customer loan portfolio broken down by size of client exposure. Note that this is -- this graphic has been adjusted to reflect the disposal of our activity in Colombia. Most of our growth comes from client with a total exposure with as of above 250,000. These are well-established clients that met our selection criteria for good management and sustainable forward-looking business models. These businesses typically have certain reserve and a fair capacity to respond even to strong macroeconomic turmoil. We are now working with a relatively limited number of solid businesses who will work -- we will work closely with in coming months to support them as they adjust to the prevailing conditions. In 2019, there was limited decline in the portfolio with client exposures below 50,000. The decline in the portfolio range between 50,000 and 250,000, largely to reflect that many of clients simply take larger loans over time. They are migrating to the second segment. Turning to Slide 5. You see that strong growth in the loan portfolio volume was complemented but even stronger growth in deposit volume in 2019. We have been reporting on the rollout of our ProCredit Direct offer, which aims to combine an attractive modern banking experience for private client with a scalable approach for the group. In 2019, we saw the fruits of our strategy, and we see this as an important strategic breakthrough. You can see in the graphic that this growth was driven by both SME and private clients. We believe we have made inroads into establishing our reputation as a modern, reliable bank for middle-income clients. We believe deposit growth reflects both the strength of our Internet platform and the strength of our people, both aspects. Our digital approach on our good staff will be very important this year. The digital approach means an efficient, scalable approach. Right now, it also means stability and safety since we have an effective mechanism for communicating with clients without physical contact. Our good staff have been central to building savings and account turnover from private and business clients. Our business client adviser has been working effectively with our SME clients to drive account turnover and their owner to build savings, which together have been driving higher fee income and deposits volume. In looking forward to 2020, this means we have good relations with our clients and good visibility of a clients' businesses as a whole. Our people understand our clients' businesses. This individual client knowledge and having BCA that can find specific and intelligent solution for individual clients that would be very important. On Slide 6, you can see that our important green loan portfolio also continues to develop well, reinforcing our positioning with innovative SMEs. In 2019, growth of green loans represents more than 30% of the group's total portfolio growth. As of the end 2019, the portfolio pricing loans enable investments in energy efficiency, renewable energy and other environmental-friendly activity represent 16.6% of the total group portfolio. The portfolio grew by 6.2% in quarter 4 and 17.4% over the year. There was strong increase by some 36% in renewable energy share due to photovoltaic and biogas investment in Bulgaria and Ukraine. These clients have a relatively steady income stream. The portfolio quality of our green portfolio is particularly good. The default rate is only 0.6%, indicated that these are typically robust businesses with good management. Slide 7 summarizes our impact report, which is, of course, published in parallel with our financial annual report and which reinforces our commitment to sustainability and impact. Clearly, our impact positioning is more important today than ever. As the Hausbank for SME, we have a little role to play in supporting our clients to manage this year as effectively as possible to avoid default whenever possible. Sustainability is also about taking the long-term view. And this brings me to looking forward to 2020 on how we see the prospects of the year. On Slide 8, let me start with this slide, which outlines our immediate response to the pandemic and strategically where we stand in terms of managing potential risks. The top 2 boxes highlight that we have promptly put in place measures to ensure health and safety of staff and client and thereby, business continuity. We have quickly implemented home office arrangement for the bulk of our staff in all ProCredit institutions, the benefits of having a very slim branch structure. And a proven digital platform for most client-facing and back-office routine transaction are, in these days, more obvious than ever before as it has helped in an effectively limiting physical contact from our client interaction. Group-wide, business operations have overall been straightforward to maintain. We have also responded promptly in terms -- wider risk management as we move into what will be a challenging and dynamic year for our client. Here, we can draw on our many years' experience, in our market and in managing well volatile -- high volatility. Most of our managers went through the 2008 financial crisis with us. At this stage, we do not have strong negative trends to report, and we feel in a good position to respond to risk as they emerged. If we take credit risk management, generally our approach to credit risk management is built around close communication with our client, combined with effective portfolio monitoring and appropriate group-wide standard when it comes to loan restructuring and default management procedures. It is not yet clear how deeply our countries in which we operate will be impacted by the COVID-19 pandemic. Developments in economic terms are not yet dramatic but clearly, the impact will be strong. However, we can move forward from a position of strength. Our loan portfolio quality is currently very high. We have limited number of very carefully selected clients. We do not have higher exposure in high-risk categories nowadays. For example, hotels or travels, they account for about -- sorry, 4%. And transport and logistics, they account only about 5% of our total portfolio. 20% of our loan portfolio is in the relatively robust agricultural sector. We have insignificant exposure to automotive production or supply and to oil and gas production or supply. We also have experienced staff who can work with clients to restructure exposure very effectively. Similarly, for liquidity and funding risk management, our starting point is a solid one. Emerging market depositors can react nervously when banking sectors are under stress. We have not yet experienced strong movements in deposits volume. Our deposit-to-loan ratio strengthened over 2019. We ended the year with an LCR of 198%. Our positioning in the market is linked to German solidity. We have good communication with our clients, we have strong relation with international financial institution, as mentioned, and we are exploring opportunities for additional funding to support client with short-term bridge financing requests. Generally, therefore, we feel well prepared for managing the year proactively. Let me at this point turn to Slide 9 and the outlook for the ProCredit Group in 2020. Based on our solid performance in 2019, in normal times, we will -- we would, of course, be presenting improved prospects for 2020. Clearly, in the light of the COVID-19 pandemic, we are living in all but normal times. In these terms, it is difficult to say anything with confidence about the outlook for our market and for our performance. Nevertheless, we feel it is very important to share with you our current assessment. Overall, we expect the economies in which we work to be impacted with something of a lag to Western European market, with a peak probably in the second half of the year. We do not expect our markets to grow in 2020 and expect a recovery from 2021. We expect the SME sector will need, in the first phase, moratoria and restructuring. Defaults will rather follow at the later stage. In this context, for ProCredit, we still see a certain potential to grow. Particularly as our clients seek shorter-term bridge fundings, there will be some clients that expand our new market condition and we may win certain good clients from weaker banks as well as larger banks that they are not close enough to their SME clients. There has also been good growth so far this year, in the first 2 months of this year. Therefore, we foresee growth in a low single-digit range, assuming there is no strong currency volatility. We anticipate a positive return on equity, although at a lower level than in 2019. We have built significant credit risk cost buffer into our projections in order to accommodate, above all, restructuring effort, which will be a focus on 2020. Our estimation of cost of risk, but please be aware that it is quite difficult to assess it at the moment. Our estimation on cost risk is around 50 to 75 basis points. Our financial projections take into account the absence of the one-off costs, which strongly impacted our results in 2019. We expect that our cost base can be kept relatively stable. Therefore, we anticipate our cost income ratio will remain relatively stable. We aim to keep our CET1 ratio above 13%. We keep the dividend distribution policy in place, although it may be a lower profit base compared to 2019. Generally, we believe now in the time -- is the time for taking the long-term view for clients, for shareholders and for the societies in which we work. We will not see 2020 in isolation of the mid- and long-term imperative for clients and our banks. We remain confident in the midterm prospects for our markets and for group performance, and explicitly confirm our medium-term target. We managed the financial crisis of 2008 with relatively high level of stability, and our approach will be similar now. And now I will hand over to Christian to cover the financial aspects of the results.

Thank you, Gabriel, and hello to everyone also from my side. As usual, at this stage of the presentation, I will provide you with some detail to the group's financial performance of the year. We start with the usual view on Q4 and full year results and a comparison with previous year's figures. Our net interest income increased visibly year-on-year. We had a strong volume-driven increase in interest income of almost 12%, which was partially offset by higher interest expenses. Overall, the net interest margin remained stable throughout the year at around 3.1%. The net release and provisions, which resulted particularly in the fourth quarter, was slightly below the previous year's figure. We saw continued improvement in portfolio quality and strong recoveries of written off loans as both provide a solid foundation to maintaining credit risk costs low. Net fee income remained on the previous year level, while fee income from private clients came down slightly, which we managed to offset by increasing fee income from business clients. The net result of other operating income remained broadly stable. Some of this year's negative one-off effects, which Gabriel already mentioned and which were considered in our projection for the year-end, are reflected in this position, but they were largely offset by an increase in income from foreign exchange transactions. Operating expenses increased with respect to the previous year, which reflects stronger investments in marketing and IT, expenses from fixed asset write-downs and a minor increase in personnel expenses. The bottom line of EUR 54.3 million is on the level of the previous year and corresponds to an ROE of 6.9%. As Gabriel mentioned, the result was at the upper end of our guided corridor, which broadly reflects the lower-than-anticipated loan loss provisioning expenses. The result of discontinued operations relates foremost to our Colombian subsidiary which was finally sold and deconsolidated in October 2019. The Q4 result, therefore, includes an additional negative impact of EUR 5.3 million, which comes from the realization of negative equity reserves. Regarding the 4 key performance indicators, we see the overall strong portfolio growth of 10.3% and a slight increase in the cost/income ratio. The reduced return on equity of 6.9% as a result of the higher equity base and the share of our default portfolio reduced further to 2.5%, while the coverage of this portfolio remained at a high level of almost 90%. The book value per share continues to show a very positive trend, as it now stands at EUR 13.5 per share which represents a EUR 1 or 8% increase with respect to 2018. So this concludes this broad overview, and we can now dive into the quarterly development of the major financial captions and indicators. Moving to Slide 12. The net interest income remained on a strong level in the fourth quarter compared to the third quarter. This was -- this level was well above the previous quarters, Q1 and Q2. As explained in our last call in November, Q3 net interest income included some positive one-off effects of around EUR 1 million, which explains the relative stagnancy of Q4 net interest income with respect to the previous quarter. The overall positive development can foremost be explained by a strong increase in interest income, EUR 31 million with respect to the last year, driven by steady good growth in the loan portfolio and reduced margin pressure. At the same time, interest expenses increased EUR 23 million year-on-year, reflects the higher volumes of long-term funding required during the transition phase of our direct banking strategy. We are convinced that generally and in the medium term, continued growth in site deposits and savings accounts are to positively impact interest expenses and the net interest margin. Moving on to Slide 13 and provisioning expenses. The fourth quarter saw a net release of provisioning expenses of EUR 5.7 million. This was driven by another decline of our default portfolio, 20 basis points or EUR 9 million in absolute terms, recoveries from written off loans of almost EUR 4 million and the reduction of the statistical expected losses driven by improved credit risk model parameters. Certainly, these figures reflect the generally favorable macroeconomic environment in our markets over the past years, but they're also a logical result from our conservative approach towards credit risk. Slide 14 shows the development of net fee income over the year. Since the introduction of our private client strategy last year, the number of private clients, particularly those with very small non-active deposits, has been reducing as we enforce direct banking rigorously throughout the network and abolished cash transactions from our branches fully. Our focus lies with private individuals who fully embrace electronic banking channels. With these clients, we can grow the volume of business per client, and we can leverage on our lean, efficient and transparent banking operations. This strategy-driven decline in the number of clients has resulted in a reduction in fee income from private clients, which we managed to offset by steady increase in fee income from business clients. Slide 15 shows the development of our operating expenses. The quarter 4 increase in the cost/income ratio is foremost a result of the one-off effects mentioned earlier. Other than that, we do see higher personnel expenses with respect to Q3 coming from an increased number of staff, particularly in our IT company, Quipu, as well as in ProCredit Holding. Turning to Slide 16. In 2019, we concluded all foreseeable restructuring measures in our banks. Foremost, this includes the disposal of our former Colombian subsidiary, which resulted in a loss of EUR 1.9 million. The profit-and-loss statement was further negatively affected by some EUR 5.3 million, resulting from the deconsolidation of the unit in Q4. This effect comes from the realization of negative reserves, which were already reflected in the group's equity position. The overall effect of EUR 7.2 million on profit came out slightly higher than what we originally projected, mostly because these equity reserves developed negatively in the course of 2019. In Albania, we sold fixed assets from closed branches at a loss of EUR 700,000. In addition, we consider the write-down of our head office of more than EUR 2 million in the fourth quarter of the year, which reflects the increase in unused spaces in the building after significantly streamlining operations over the past few years. The overall effect of EUR 2.8 million was in line with our projection. Also in Q4, we wrote down EUR 2 million in Romanian goodwill, which was broadly in line with projection. The write-down reflects the weaker-than-expected performance of the bank in 2019 and the negative short-term outlook. The Romanian bank tax did not affect us in 2019, and its removal was announced in early 2020. We also moved up the modernization of our head office in Kosovo, which resulted in a write-down of existing building structures of around EUR 1.9 million. This effect was not considered to that extent in our projection. Our Q4 loan loss provisioning expenses were a net release of EUR 5.7 million, which resulted from further quality -- from further portfolio quality improvements, continued recoveries from written off loans and a positive effect from updated credit risk model parameters. Overall, the loan loss provision expenses for the entire year only increased mildly with respect to 2018. In our conservative projection from last year, we certainly considered a more marked increase. Slide 17 presents the annual result of EUR 54.3 million by regional segment. In Southeastern Europe, we have our 7 banks in and around the periphery of the EU zone. In 2019, all Southeastern European banks experienced a solid growth of around 10%. Finalizing the aforementioned restructurings in the last quarter was a major milestone for this segment as overall profitability continued to be constrained in 2019, also due to the underperformance of 2 banks. Overall, the segment contributed EUR 38.4 million to the net income based on an elevated cost income ratio of 72%. Our Eastern Europe segment comprised our banks in Ukraine, Georgia and Moldova. Portfolio grew by more than 10% in 2019, similarly to Southeastern Europe. Margins continue to be structurally higher in this segment and a return on equity of 17.5% remains strong. South America is our smallest segment, comprising the ProCredit Bank in Ecuador with only 6% of group loan portfolio. 2019 marked the first year for this bank after an extensive and truly remarkable transformation period. ProCredit Bank Ecuador is now the country's only digital and cash-free bank and therefore provides a strong case study for a strategy shift. The portfolio grew a very strong 26.7% in 2019, more than any other bank in our group. The net interest margin of 5.3% of the segment is attractive and even increasing, driving higher net interest income compared to 2018. Portfolio quality also continues to improve. The bank achieved a positive operating result in 2019, but net income remained negative due to higher tax expenses, which came in part from the write-down of a deferred tax asset. Our group functions, as you know, comprise the German segment, which includes ProCredit Holding, Quipu and our Academy as well as our bank in Germany. ProCredit Bank Germany continues to expand efficient payments, clearing and liquidity support functions for the group. On Slide 18, we see key performance indicators such as portfolio growth, share of impaired loans and net profit per bank. We do see high net level -- sorry, high levels of net profit in our banks in Ukraine, Kosovo and Bulgaria as well as solid profitability in Georgia, Moldova and Macedonia. Our banks in Albania and Georgia saw relatively high losses in 2019. In Albania, a large part of the result was driven by the write-down of fixed assets which we already talked on. In Romania, refinancing costs remain very high, and the bank's portfolio will need to reach critical mass before breaking even. With respect to the loan portfolio, all of our banks managed good growth in 2019 with the exception of our banks in Georgia and Albania as well as Kosovo, which already has a market leader position in their market. In all banks, impaired loans remain at levels that are well below the banking sector averages. Moving on to Slide 19. Maintaining and building good asset quality and diversification has always been a high priority for us. Our low default levels are central to our associate responsible positioning and are key to good profitability especially in a tight margin environment that we live in today. We have always placed great importance on making sure that growth does not come at the expense of credit risk. And as Gabriel already mentioned, as the world braces itself for economic downturn and high uncertainty, we believe we are well prepared to manage the situation effectively, both for us and our clients. On Slide 20, we see the high level of diversification in our loan portfolio, both in terms of geographic coverage and industry sector. On the left, you see the good geographic diversification with 4 banks accounting for 10% or more of the portfolio. 93% of our loan portfolio is accounted for by business loans, 99% by business and housing loans combined. For our overall loan portfolio, 20% are to agricultural enterprises and a further 23% to companies involved in local production. We are encouraged that these sectors, which are particularly important for the sustainable development of local economies and particularly now in the economic recovery of the markets, are strongly represented in our portfolio. On Slide 21, we show that our loan portfolio is also diversified by size and currency. The left-hand pie chart shows the loan portfolio structure by exposure size. It shows an overall granular portfolio with the largest share coming from exposure sizes above EUR 1.5 million. These exposures, however, rarely ever exceed the EUR 5 million mark. Smaller exposures remain equally important as they generally provide higher margins and lower risk weights for capital requirements. The right-hand pie chart shows that 55% of our loan portfolio is in euro. As you know, we keep our local FX position as far as possible closed. That means we fund local currency lending with local currency deposits. We have an open FX position only at the level of the group due to the equity position, which we have to hold in local currency in our banks. Moving on. As you can see on Slide 22, loan portfolio quality remains a highlight of our overall performance. In 2019, the volume of Stage 3 credit loans -- credit impaired loans improved by an additional 60 basis points from 3.1% to 2.5%. The net write-off ratio of 0.3% remains a distinctive feature of our banking group as other banking groups routinely outperform write-offs of their nonperforming portfolios. Our good loan portfolio quality is a product of the strong focus the group puts on the selection of clients and how we work with them. It also underlines our commitment to sustainable and responsible banking, particularly in a low-margin environment, which has pushed many other banks into high-margin, noncollateralized and subprime lending practices. Our consistently convincing performance in the field of credit risk is supported by strong Central standards and monitoring tools, as well as a rigorous focus on our core competence, SME lending. We believe that this focus, in combination with our careful selection of clients and uncompromised and collateral requirements, provide a strong foundation for the upcoming challenges. The coverage of credit impaired loans remained at a high level of almost 90%, a figure that does not take into consideration the generally high collateralization of our loans. The total volume of our collaterals, which are mostly mortgages but also financial guarantees, particularly from the EIF, is currently at EUR 3.7 billion. With this, let me conclude by summarizing the simple balance sheet, capital and funding structure of the group, which you already know. Slide 24 shows our simple and stable asset structure and its development in 2019. The asset side of our balance sheet is dominated by loans to customers. Assets have increased in line with the portfolio growth, but also liquid funds grew strongly, contributing to a very comfortable liquidity situation. On the liability side, we see the very strong increase in deposits, more than EUR 500 million overall with growth from both SME and private clients. Other funding sources provide longer-term maturities. The increase in debt securities relates primarily to our U.S. -- to our $90 million green bond issue, the increase in equity results from the year-to-date profits minus dividend payment and an increase in the translation reserves. The increase in other liabilities relates mostly to the introduction of IFRS 16 in 2019. On Slide 26, we see that our liquidity position is comfortable with a liquidity coverage ratio of 198%, well above the regulatory requirement of 100%. Highly liquid assets increased by more than EUR 260 million in this year, which reflects above all the strong growth in deposits. Slide 27 shows the structure of our comfortable regulatory capital position. Our capital structure is simple: All Tier 1 capital consists of CET1 capital. The risk-weighted asset structure of the group remains simple and standard models are used. Risk-weighted assets are dominated by credit risk. Currency risk is, in essence, the local currency position that we hold as a holding company. Operational risk-weighted assets came down significantly, reflecting the sale of our banks in recent years. At year-end, we had a strong CET1 ratio of 14.1%, well above our minimum Tier 1 capital ratio of 10.4%. We have a very comfortable leverage ratio of 10.8%. This high leverage ratio reflects the very simple nature of our balance sheet. The minor decrease in the CET1 ratio reflects the increase in risk-weighted assets from credit risk caused by the portfolio growth. There was a decrease in total capital ratio due to the early repayment of subordinated debt. The total capital level remains at a comfortable 15.7%, well above our total capital ratio requirement of 13%. Going forward, it is worth mentioning that our group will benefit from a reduction in asset requirements of 50 basis points effective immediately, as Gabriel already indicated. Furthermore, the EBA's equivalent acknowledgment of Serbian banking regulation will allow us to weigh the exposure of the Serbian -- to the Serbian Central Bank at 0%, reducing credit risk-weighted assets by at least EUR 120 million, also effective immediately. Lastly, and also as mentioned earlier, we will gain further capital relief in 2021 from the previously mentioned introduction of CRR2 and the expansion of the SME factor to exposures above EUR 1.5 million, which, as we saw earlier, represent more than 30% of our portfolio. Overall, we consider the capital situation to be very comfortable, also in light of the more subdued economic environment that we are bracing for right now. That completes our assessment of the 2019 performance. Given the current circumstances and the high level of uncertainty for global markets, providing you with information on our current risk profile in this environment, as well as on our ongoing measures to prepare ourselves for a looming downturn, was a clear focus of this presentation. Clearly, we are facing a very dynamic situation. On this note, I suggest we move on to questions.

[Operator Instructions] The first question is from Andreas Markou, Berenberg.

I have one regarding your geographical exposure. So, given the situation with the virus, will you actually rethink your strategy in terms of the different geographies you're best in? For example, would you consider potentially selling your subsidiary in Ecuador or in some other countries to maybe offset the pressure from the virus?

Let me take this, Andreas. I think the situation as it is, is evolving and still very dynamic. So in principle, no, we are not rethinking the structure of our banks as a -- especially not as a response mechanism to the current environment. We will continue to make strategic decisions simply based on the outlook that we see in the individual markets. And as long as we see potential, which is the case for Ecuador, as we outlined, 2019 has been actually a very promising year, particularly for this bank. We are currently not thinking of selling any of our banks.

Okay. But again, you said that FY '19 was a promising year. But if I look at the numbers, it was loss-making again. So maybe if you explain a little bit?

Yes, it was loss-making. Like we said, the bank basically managed to break even in terms of profit before tax. The tax expenses are always -- have always been an issue in Ecuador, especially in this year because we rolled down deferred tax assets of a sizable amount. This is also a one-off effect that we will not have to incur in 2020. The bank is now free of any of these assets. The net interest margin right now is at 5.3%, which is very, very strong and provides ample opportunity for profitability in 2020. Growing there, especially at the pace that we're doing now, will leverage profitability at a greater pace than probably in any other bank right now. So based on this and the other statements that Gabriel Schor gave in previous calls, taking into account the high quality of staff, the big effort that we made into restructuring the banks and to bringing it into well, virtually the only digital and cash-free bank in the market, we will certainly take a more long-term view on the bank and see how it develops.

The next question is from Philipp Häßler, Pareto Securities.

Philipp Häßler from Pareto Securities. I have a number of questions, please. Firstly, the impact from COVID-19. Do you expect any other impact apart from the impact on risk provisions, i.e., on loan growth or on funding costs? In particular, do you expect funding costs to increase? And also on risk costs, you are saying you expect 50 to 75 basis points. Could you perhaps elaborate how much of this will come from higher defaults and also how much from a model adjustments? Then secondly, on the deposits, if I'm not mistaken, around 40% of your deposit comes from current accounts. Could you perhaps provide some more details on your term deposits? Are those shorter or longer maturities? And on the cost outlook in the annual report, you are writing that you expect a slight increase year-on-year for 2020. You had included some one-offs in the '19 costs. So why a slight increase and not a stable or a decline?

Philipp, I got all your questions except for the very last one. Maybe you could repeat that?

The cost outlook you gave, you are saying that you expect a slight increase for 2020 in your annual report. But you had included one-offs, I think, of EUR 4 million or even EUR 6 million if -- I don't know where the goodwill write-down was accounted for, whether it's in cost or in other operating expenses. So if I exclude those EUR 4 million, then I'm a little bit surprised that you still expect a slight increase.

Understood. Okay. Then I will start from the beginning, impact from COVID-19 other than the risk provisions. So on the loan growth, we already gave a statement, right, that this will likely be in the lower single-digit percent range. This basically takes into account that naturally, we expect larger investment loans or also smaller investment loans, the demand for such loans to reduce sharply. At the same time, we expect that many of our SME clients will require bridge financing, which we will assess on an individual basis. This is where it helps to be really close to our clients. On the other effects, I think there is nothing that is truly material worth talking about, except for credit risk. I mean, surely, we could talk about higher funding costs, possibly our feeling is that the margin environment is so uncertain. And you could speculate a lot about macroeconomic developments and potential responses from regulators, which will then impact margins. Surely, we will try to even further increase the high level of liquidity that we just have, simply because it enables us to be more flexible and to more actively respond to additional funding needs and also to take advantage of opportunities that in such an environment will always come. So possibly, I could say that there is an increased funding cost volume driven, but I wouldn't want to speculate on margins as of now. On the DDA structure, they are mostly long term. We generally do not offer DDAs below 1 year. So most DDAs have a horizon of 1 to 3 years. On the cost outlook for 2020, you are right, 2019 did include some of the write-down of fixed assets, but some other effects are included in the net other operating income. For example, the goodwill is included in net other operating income. It is not considered an administrative costs. Same goes for the modernization expenses of our Kosovo headquarter, the EUR 2 million. Also, these expenses are considered in net other operating income. What we do have in the administrative expenses is the write-down of the Albania building, which is some EUR 2 million. And also some other write-downs of fixed assets that were not so material that we also did not talk on or mark as a one-off, we really focused on the larger effects. But based on this, we expect it to be stable because there will be, in fact, some increase in personnel expenses that we foresee generally. As in 2019, we increased staff, 2020 will be similar. We will have to -- especially in light of the evolving events right now, we will try to increase staff in key positions to make sure that business continuity is secured at all times.

May I come back to the credit? The risk costs you expect for the current year, will this come mainly from higher defaults or also from model adjustments?

Yes, correct. So the -- Dr. Schor already mentioned a little how the dynamics -- what kind of dynamics we expect. So in most markets, regulators will likely perform or more make allowance for moratoria, which probably will not have any impact on loan loss provision expenses. This is in line with the ESMA opinion that moratoria do not automatically signify a significant increase of credit risk, which would be the most predominant trigger for stage transfer. The -- we do then expect to -- for restructurings to increase maybe towards the end of the second quarter, certainly in the third quarter. And then in the last quarter, there may be an increase of the default rate, but the restructurings are naturally designed to avoid default as much as possible. So in this 50 to 75 basis point increase, we consider both in terms of timing default in Q4 and increase in Stage 2 in Q2 and Q3. To give you an idea, the expected losses in each of the stages, you can also deduct them from our disclosure notes, our IFRS notes. In Stage 1, we have around 0.7%; in Stage 2, 4.7%; and in Stage 3, I think, around 55%.

The next question is from Andreas Schäfer, Bankhaus Lampe.

So just one follow-up question on your cost/income ratio on guidance, roughly 70%. So assuming a slight loan growth and a slight increase in expenses, does it mean that your net interest margin should trend towards 3%? Or do you expect it to be slightly above the 3% level?

The working assumption is that net interest margin will remain broadly stable, which I would characterize at 3% to 3.1%. This is also underlined now by the early development in this year, January and February. Like I said, addressing Philipp's question before, there is a high degree of margin uncertainty or more on the response to this macroeconomic environment. And this could adversely affect margins -- adversely also positively. I think at this stage, there's just too much uncertainty to speculate on this. But yes, we do foresee some loan growth, broadly stable net interest margin and a minor increase in operating expenses.

The next question is from Tobias Lukesch, Kepler Cheuvreux.

Yes. Also, 3 questions from my side, if I may. Firstly, touching again on the business impact. Could you maybe elaborate a bit how you see that the various governments, and it's actually quite hard to keep track of all the initiatives in all the various countries, how you see different programs to be sufficient in the various countries? Overall, thank you very much for that very clear guidance on the cost of risk, also with regards to the quarterly development that you see. This is very helpful at that stage. Secondly, touching on the potential NIM pressure. I mean in Germany, for example, we have seen that deposit rates go even up. So there seems to be a rush for liquidity right now from banks. So just wanted to double check if you may have seen some impact, some other patterns over the last couple of days basically with banks. And also, if you would be prepared to increase your deposit rate -- yes, further and maybe like where would be the kind of threshold where you say, okay, for margin reasons, if you can't hold the 3%, it's like is the 2.5% still acceptable? And lastly on the dividend policy, I mean, correct me if I'm wrong, but I have the impression that you were quite determined in keeping your current dividend policy and also intention to pay the dividend, also the 2019 dividend. I mean, over the last days, also today, there is a lot of lobbying going on in the banking sector with regulators, with politicians. It seems like that there's -- at the end of the day or -- let's put it that way, if banks, regulators, politicians would come up with a way in which banks go the way that they either cut or postpone dividends, would you join that initiative? Or is that kind of DPS proposal set in stone?

Thank you. Can you hear me?

Very good.

Okay. We had some technical problems. But now it's fine. Referring to your first question. Surely, as you said, there -- it's difficult to track record about what's happening in all the proposals in the different countries. Yes, there are a lot of stocks talks about presentation, proposal of program. It's a bit premature to see and to assess those issues. We are in talk. We were having an approach from some international financial institutions. They are thinking also supporting our countries and discussing conditions would make sense or what not. Yes, there are proposal talks in all our countries. There are limitation, therefore, because we don't know exactly the details, very difficult to assess now if they are going to be sufficient. What we do feel in the different countries on international is an openness and willingness to support the real sector who are looking for ways. There are some limitation. But this openness is what we do feel. And therefore, in those, we see those constructive attitude supporting the measure. When having more detail, what's going to happen at which level, we may -- can answer your -- the second part of your question. But for the time being, this opens on just keeping in mind the real sector is at the center of all the considerations. It sounds to us an important element for the future, about details we are going to see -- details in the further months, we'll give you more information if needed. Referring to the dividend policy, yes, we are determined, if you like. Yes, we are perceiving the discussions we are around. We are taking very seriously consideration of the regulators. Nevertheless, they send a very profound analysis on strategy, what would happen with us taking in account all the risks coming forward, analyzing our -- the capital levels we are going to have in the last -- in the next 2 months. We think, from our point of view, we consider and we feel very secure and comfortable continuing with our policy. If things are changing, whether around legally, we are going to be forced so surely, we're going to deal with it in a careful way. And we're going to act very carefully, but -- and the responsibly way. Based on our analysis, we feel secure. We are going to fulfill the limits we have in the next 12 months. And therefore, based on that, we think continuing with our consistent policy, it is important. When discussion will turn and take a different direction, we will see. For the time being, we are very, very conscious of our decision, we would like to go forward with it.

Let me address, Tobias, your second question on the rates. So adjusting deposit rates would typically be a decision that will be taken on an individual bank level. We would not consider this as a group-wide measure. And it would only be, well, done in such ways you describe it, as a blanket measure in an extreme stress scenario, which currently we simply do not see at all and also the likelihood for it happening right now, not given. Let me give you some background on this, some things that also Gabriel mentioned. First of all, our history in the banks, we have a strong history in the countries where we are, people who have high confidence in us as a bank. We rely on the German solidity that we represent in these markets, on the one hand. Also historic events, we will always sometimes in some instances, the last banks to be open when there was a liquidity rush on banks. I'm reminded of the financial crisis naturally 2007, '08, '09, but also more concrete scenarios such as the Russian invasion into Georgia. In all of these examples, our branches were, at some point, the last ones to remain open. And this is what will now certainly help us maintain high confidence from our customers in us as a bank. So the more likely measure that we will take is attract additional funding, if necessary, really from the IFI market, from our IFI partners here in Frankfurt, but also internationally on a holding level, which will then allow us to support banks in case of liquidity need. But right now, more also from a point of view that we will build additional liquidity to support clients in short term need of liquidity.

At the moment, we have no further questions. [Operator Instructions] We have no further questions. So I would like to hand back to you, gentlemen, for some closing remarks.

Thank you all for your interest and participation in our analyst call covering 2019 results and outlook for the year. We hope to have given you as much transparency as possible. We will put strong focus in 2020 on transparent and timely communication as we see how the clients and countries in which we work are impacted, and what this means for the ProCredit Group. If you have any additional questions, please do not hesitate to contact Christian, Helen or Nadine. The next scheduled conference call will take place when we publish our Q1 results on 14th of May, 2020. Thank you once again for your participation. Stay safe.