ProCredit Holding AG (PCZ) Earnings Call Transcript & Summary

Welcome to everybody on the Fourth Quarter and Full Year Results of 2020 for the ProCredit Group. My name is Gabriel Schor. I am a member of the ProCredit Holding Management Board. And as usual, today, I'm joined by Christian Dagrosa, our Head of Finance, Reporting and Controlling. We plan some 40 minutes to cover today's presentation, which has been available since earlier today on our website. As usual, we will give you sufficient time for any questions you may have. Let me also provide you with the usual warning to pay particular attention to the cautionary statement regarding forward-looking comments that you will find at the end of the results presentation. We have the usual structure to today's call. Firstly, I will take you through the section covering the highlights of the year. I would like to focus on the looking back of the year as a whole with a view to then looking forward to our expectation for this year. Christian will take you through the details of our financial results, credit risk and assets, quality indicators as well as development in the group balance sheet and capital. Christian will cover also the quarter 4 results in more detail. Let me, therefore, turn swiftly to Slide 2. This is a summary of the ProCredit performance in 2020. It goes without saying that this pandemic year was a challenging one, with all our markets experienced a significant social disruption and substantial decline of real GDP. As we have reported over the year, we feel particularly in this context that the valuable role of ProCredit banks has been visible, and our financial performance was robust in this context. We were able to grow our business strongly over the year, further strengthening our market position. Our customer loan portfolio grew by 9.5% with core SME clients. Most of this growth was in investments and in green loans, reinforcing our positioning as a reliable partner in the market context to our business lending by all other banks stalled. At the same time, customer deposits grew by 13%, achieves from both business and private clients. Credit risk management was a clear focus over the year, and we were able to maintain good loan portfolio quality. Our long experience in our market and an approach built on well-trained staff and carefully selected clients, came into their own this year. We know each of our clients well and deal with each of one individually. We were promptly able to intensify risk assessment efforts with the onset of the pandemic. All exposures were subject to intensified monitoring over the year, whether or not they were in moratorium. By the end of 2020, the level of credit impaired loans remained steady at 2.6%. Net write-offs remained very low at 0.1%. As expected, the year did see a certain transfer to stage 2 loans as we reassess the risk classification of clients or restructure exposure, most impacted by the pandemic. Credit risk costs were elevated during the year due to this and the deterioration of macroeconomic indicator to use on our provisioning model. However, as indicated at our last call, we were able to end the year below our initial estimation with a cost of risk of 57 basis points. Profit of the year stood at EUR 41 million, representing a return on equity of 5.3%. Our results were positively influenced by an increase in net interest income, achieved despite a slight decline in net interest margin due to the strong growth in our loan portfolio. At the same time, we were able to reduce operating expenses and improve our cost income ratio to 68%. While some of those cost gains reflect corona-driven reduction in travel cost, overall, we can see the scaling potential with the completion of recent restructuring efforts, which means we generate increased income on a stable cost base. As a result, we saw a 10.5% year-on-year increase in the group pretax pre-provision result. The combination of a steady financial result and continued solid capital base means we aim to propose dividends in lines with our group policy. At the end of the year, our CET1 ratio was at 13.3%. The group result for the second half of the year is not yet included in regulatory capital, which corresponds to about 26 basis point in CET1 ratio. Q4 did see a decline in CET1 ratio due to impact of growth, some FX effects and increased liquidity, which Christian will cover in detail. But overall, we feel comfortable with our capital level, particular with a leverage ratio of 9.3%. As you are aware, we have been subtracting our CET 1/3 of 2019 and 2020 profits in line with our group dividend policy. Our proposal is to recommend a disbursement EUR 0.18 per share at the AGM in May this year. This corresponds to 20 basis points of ProCredit's Holding CET1 ratio and thus, to the maximum level of the ECB's recommendation for dividend payment valid until end of September 2021. We then plan an extraordinary shareholder assembly in Q4 of this year and would recommend a further EUR 0.35 per share disbursement provided that at this time this is in line with regulatory recommendations from BaFin and ECB. Overall, we feel that our long-term impact-oriented business model has proven itself this year and provides firm foundations for the future. To this end, we've invested some efforts this year preparing our Group Impact Report, which we titled, "Why Responsible Banking Matters to Us," since we -- we truly believe that our comprehensive commitment to ESG has really underpinned our results this year. Slide 3 summarizes the group -- that the group ended the year in line with our guidance, reflecting the relatively -- relative steadiness of our business model, even in turbulent tiers. At 9.5% loan portfolio growth, is in line with our last guidance of 8% to 10% growth over the year. The 5.3% return on equity is also in line with guidance. Our cost of income stands at 68%, which is a little better than our guidance of around 70% and indicates the improved underlying operational profitability of the group compared to 2019. At 13.3% , our CET ratio is in line with our guidance. And as mentioned, we plan to deliver on our group dividend policy and distribute the accrued 1/3 of profit from '19 and '20 as far as regulatory recommendations allow. I wanted to cover 1 or 2 aspects of context and performance in 2020 in more detail before coming to our guidance for 2021. Firstly, Slide 4 provides an overview of the market environment in our countries of operation. The pandemic situation is in all our countries, continued to be difficult through the end of 2020 and into the beginning of this year. Infection and deaths level are now generally on a par with those in Western Europe. Vaccination programs are moving ahead slowly, particularly in Serbia and Romania, although at a still very moderate pace in the other countries. So the situation in our countries of operation is tense, but nevertheless, relatively stable, with so far measured restrictions to public life in place rather than a return to the complete lockdown, which we had in quarter 2. And people on the whole, we feel, seem to have adjusted somehow to those conditions. So we did not feel a significant worsening of the economic climate at the end of 2020. Moratoria expired in many countries, although some new moratoria have been reintroduced in December '20, in line with EBA guidelines. Overall, the share of our portfolio in moratorium at the end of the year is below 2%. The macroeconomic impact of the pandemic has, of course, been substantial in all our countries of operations, with a medium GDP decline expected to be around negative 5%. Worst affected were countries like Ecuador and Albania and least affected, Serbia. Clearly, the speed and extend the macroeconomic recovery in 2021 is still uncertain, given the concerns about the third wave and virus mutation, more recent GDP estimates, for example, the more recent World Bank Global Economic Prospect report assume at around 3.6%, a slightly weaker medium rebound in 2021. However, strong overall growth prospect for 2021 for our region remain intact, particularly with regards to the second half of the year and underpin our projections for this year. On Slide 5, you can see in the top graphic, the EUR 457 million growth in our customer loan portfolio in more detail. I wanted to highlight here again, firstly, that our loan, our strong lending to business clients occurred in the context where overall business lending stalled. Our anti-cyclical behavior in these terms was very visible in our market. We experienced strong growth in all our regional segments. In Eastern Europe, significant devaluation in the Ukrainian hryvnia and Georgian lari meant the region did not grow in euro terms. Secondly, growth came almost entirely from investments and green loans, suggesting that we continue to meet the real need in the market. Even in difficult times, there are some SMEs that are investing and expanding and they need a good bank to help and accompany them to do so. So we remained true to our impact orientation by supporting vital growth sector in an economic downturn. In the lower graphic of this side, you see the continued strong growth of green loans portfolio. This portfolio grew by some 24% over the year. We made good progress towards medium-term targets for green loans of 20% of total loan portfolio. We mentioned in our last call that renewable energy is growing particularly strong with, for example, our Bulgarian bank financing energy communities increase. So also, we feel our market position here in this segment is stronger. We believe that we have developed good expertise in an area, which is important from an impact and a business potential perspective. Financially, this segment is interesting, particularly and above all, because of its very hard portfolio quality. The default rate of green loan portfolio was at 0.62 percentage points lower than for our total loan portfolio. Turning to Slide 6. You see that strong growth in loan portfolio over the year has been complemented by strong growth in deposits. Year-on-year, we grew by EUR 565 million, a 13% increase. This was achieved mostly with business clients, but also with private clients. Encouraging is that we increased the share of site and FlexSave deposit to 68%, will in the positive impact on interest rate expenses. We believe that our success -- sorry, we believe that our success in deposits reflects the growing appeal of our ProCredit direct digital banking approach. Being well ahead of the shift to digital curve and having virtually no disruptions to regular banking activities and the pandemic condition has been a great strength for ProCredit this year and it has been recognized in the market. Our marketing efforts have put emphasis on the transparency and fairness of our standard flat fee structure for our integrated set of online services in markets, which are currently pushing fee income with higher and in transparent pricing, we believe that our approach is not only ethically right but will support customer acquisition, customer loyalty and grow fee income over the long term, which brings me to Slide 7 and our impact -- on our Impact Report. As mentioned, we also published today our fourth yearly Impact Report. These describes our comprehensive commitment to ESG priority on what makes ProCredit different in these terms. There is much of a hype nowadays around ESG so that we decided it was important to analyze the credibility of ProCredit more and more carefully. Therefore, this year's report is a bit different. It takes a more critical look at simple ESG metrics and rather aims to set ProCredit apart by looking more deeply at how ESG is enshrined in our bank operations and motivations. The report also covers a range on nonfinancial indicators and presents sustainability goals and progress in the context of the UN's ESG goals. Let me spend a moment on this slide because we truly believe, let me repeat, we do think it is central to understand and to central for our results. Our focus on SME and supporting the real economy and our aversion to the aggressive consumer finance, which otherwise is a feature of our market, is particularly important for local economies in difficult times like now. We believe the fact that we grew strongly during the pandemic when other banks effectively stopped business lending will help smooth the negative economic impact of the pandemic. The second aspect I would like to highlight is a deep commitment to having a positive environmental and climate impact. I have already covered the importance of our green loan portfolio and the strong growth in our renewable energy portfolio. The report describe other important aspects of our environmental management framework, including the comprehensive environmental and social risk assessment all our clients are subject to. What is important to reinforce here is our unique focus on SME, a sector typically neglected in the context of environmental impact. With our approach, we reach more enterprises and create wider awareness on environmental norms. We have also made progress on our target to become carbon neutral as a group in the midterm. In 2020, we reduced our CO2 output by some 46%. The third differentiating component of ProCredit to highlight, again, particularly in the context of this year is our staff and the way we develop staff. As you already know, we do not incentivize our staff with short-term targets or bonuses, but rather vesting them through responsibility and invest strongly in their training. Particularly in such a difficult year, their judgment has been central, be it, for example, in adjusting risk management procedures or taking the right decision with disbursement or restructuring. We highlight a few other indicators on this slide, which makes ProCredit banks different to other banks, like gender parity in our management structure or the very flat salary structure of our banks. Generally, we have been impressed with how our staff and our clients have adjusted to the challenges of working under pandemic condition. It is this quality of our staff, which has helped us to manage the current crisis relatively effectively so far and why we look forward with this -- with confidence. Speaking about confidence, Slide 8 summarizes the outlook of the ProCredit group's performance. Our outlook for 2021 is broadly positive. It's won based on our experience in 2020, despite the continued uncertainty around the course of the pandemic. The lessons learned last year have reinforced our faith in our way of banking. Relationship banking with a focus on SME, combined with a very transparent digital banking model, is a sustainable and attractive business model, both in good and difficult years. In concrete terms, trusting then we see the projected economic recovery in the course of 2021, we continue to see good opportunities for further grow of the loan portfolio of about 10% and expect that we will be able to final this growth mostly through local source deposits. In financial terms, we have tried to be as concrete as possible about our guidance, despite the high level of uncertainty about the exact path of the pandemic and how swiftly economic recovery will occur. Based on what we know today, we expect the cost income ratio to further improve to between 65% and 68% as we see meaningful scaling effect based on growing the loan portfolio, recovering fee income and broadly stable operating expenses. We expect the cost of risk to continue to be elevated in 2021 with respect to pre-pandemic year and to be at a similar but somewhat lower level than in 2020. Naturally, the cost of risk is a factor of higher uncertainty since the exact path of the pandemic will have a relevant influence on the level of further restructuring and potential default. Depending, in particular, on the cost of risk, we anticipate a return on equity between 6% and 7.5% in 2021. We plan for a steady CET1 capital ratio of about 13% and a leverage ratio of about 9%. Based on this steady performance and risk profile, we plan to continue to deliver on our group dividend policy and disburse 1/3 of the annual group profit. As we continue to expand our business operations and credit risk costs normalize, we remain confident about our midterm targets. With this, let me hand over to Christian to cover the financial aspects of the group results in more detail.

Yes. Thank you very much, Gabriel, and good afternoon to everyone also from my side, and welcome to our presentation. As always, in the next couple of slides, we will look more closely at the financial performance of the group and go through all the relevant financial captions and key figures and also cover the major risk indicators as well as our group's capitalization. Let us start with the year-on-year view. Our net interest income shows an increase with respect to the previous year, plus EUR 7 million compared to 2019, in spite of the negative pricing effect from base rate cuts that we have seen throughout this year and that we have already discussed in our quarter 2 and quarter 3 analyst calls. As expected, our provision expenses increased significantly from the very low levels of the previous years to EUR 28.6 million in this year. Of course, we've seen this amount of deterioration of the overall macroeconomic outlook reflected due to which the average expected loss in our performing portfolio increased. But new provisions also came from stage transfers, particularly from stage 1 into stage 2, which are foremost result of our intensified client monitoring during the pandemic, which in some cases, resulted in restructurings and lower risk classifications. Net fee income came down by some EUR 4.6 million compared to last year, which reflects the market reduction in transaction business that we have observed, especially during the first months of the pandemic and also some lower income from account maintenance fee. The net result of other operating income remained broadly stable with respect to 2019, and operating expenses are down by EUR 4 million, in spite of the slightly higher staff numbers that we recorded in this year. Clearly, the travel restrictions led to some reduction in expenses from business travels. But also other items unrelated to the pandemic, we managed to reduce costs. The stability of the cost base over the past years in light of the steady annual 2-digit business growth we are achieving consistently, underlines the good potential for scalability of our business model. The net profit of EUR 41.4 million, was EUR 12.9 million below the previous year and corresponds to a return on equity of 5.3%. In times of the pandemic and the increased cost of risk, we consider it as a good result that speaks strongly for the solidity of the business model and the resilience of our loan portfolio also in times of the mere macroeconomic stress. The cost income ratio further improved from 70.5% last year to 68% in 2020, a good first step towards increased cost efficiency post our restructuring phase. Not taking into account the increase in provision expenses and in spite of the negative implications of the pandemic on profitability, reduced margins, lower net fee income, our operating result increased compared to last year by EUR 7.6 million or close to 10%, very much in line with our loan portfolio growth. Lastly, at the bottom of the table, we see that the book value per share dropped slightly by approximately EUR 0.30, in spite of the steady profitability in this year, mostly due to negative FX effects and their impact on the translation reserve in our equity. Let's move to Slide 11. Net interest income shows a positive trend year-on-year, as I said, with almost 4% growth, mainly driven by our strong loan portfolio growth of 9.5%. Quarter-on-quarter, the effects from the base rate cuts in most markets in which we operate become a little more visible with the main effect seen here in the quarter to dip. The minor drop in quarter 4 of some 10 basis points is mainly related to the continued repricing of loans related to the base rate cuts as well as high excess liquidity driven by the strong deposit growth in quarter 4, which Gabriel already mentioned, which increases the denominator of the net interest margin calculation. Overall, however, we are encouraged to see that the quarterly net interest income is stable or increasing in almost all our banks. Provision expenses in quarter 4 were around EUR 7.5 million and correspond to an annualized cost of risk of 57 basis points. This is very much in line with the provision expenses we have seen throughout the year as well as the annual cost of risk of also 57 basis points. In this fourth quarter, we have performed, as announced another update of macroeconomic parameters in line with the IMF macroeconomic data released in October 2020. This added some EUR 11 million in provisions. Provisions driven by changes in credit risk, particularly stage transfers, were close to 0 in this quarter, as provisions from restructurings and other Stage 2 events were offset by our annual model history extension. This means our model history was extended by another year of good credit risk performance. Recoveries of written-off loans also reduced the quarterly LLP expenses by some EUR 4 million. It is important to point out that thus far, we have not seen any increase in the default loan portfolio as a consequence of the pandemic. Let's move to the net fee income. Our quarter 4 net fee income increased with respect to the third quarter by around EUR 600,000 or 5% and has now again stabilized at a level of close to EUR 13 million per quarter, which is very much in line with what we've seen before the pandemic. Number and volume of transactions have stabilized and income from account maintenance fee has slightly increased with respect to quarter 3, reflecting the growing client base of people that embrace our fully digital banking approach. Let's move to the operating expenses on Slide 14. Here we can follow the development of our cost base, which reduced visibly by more than EUR 4 million compared to 2019. This is in part driven by the much reduced business travels in this pandemic year, which has led to traveling expenses coming down by some EUR 3 million. But even without this effect, the cost base would have remained below the previous year level. And on this note, please bear in mind that we very much continue to invest strongly in IT and our staff. In 2020, for example, we have had training expense of some EUR 6 million, which is basically the same that we had in 2019. In quarter 4, both personnel and administrative expenses increased with respect to quarter 3. In this increase, we see the restructuring expenses from PCB Romania reflected and the write-down of goodwill in ProCredit Bank Ecuador of some EUR 1 million. Both we had already announced in our quarter 3 call. Beyond that, we booked larger provisions for untaken vacation as many of our 3,000-plus employees had not taken their full load of vacation days in this year, particularly also due to the travel restrictions. Those are the main drivers for the increased cost income ratio in quarter 4. Overall, the cost income ratio for 2020, however, was some 2.5 percentage points below the level of 2019, which, despite a lower ROE in 2020, highlights the much improved underlying or structural profitability. We only see a very limited number of one-off effects reflected in our 2020 financial figures, much of which are in one way or another connected with the deteriorated market environment in this pandemic year. This shows that our business model stands on very solid grounds and that we have good planning visibility looking forward. In broad terms, we have the restructuring measures in PCB Romania, goodwill impairment in PCB Ecuador, which, needless to say has no impact on our capital and the negative result from the sale of our former Latin American Regional Academy, the net amount of all effects is some EUR 4 million. The restructuring costs in Romania impacted quarter 4 operating costs in particular. Let me elaborate a little more on Romania since the bank reported higher losses than anticipated in 2020. The bank grew by some 20% over the year. But this is -- but this strong result was offset by higher LLP expenses and lower-than-anticipated net interest income due to base rate adjustments in the wake of the pandemic. Therefore, to improve profitability prospects for the bank, noncore branches were closed in quarter 4 and staff number reduced by some 20%. Let's take a look at the contribution of the individual segments to the year-end group results. In Southeastern Europe, we have our 7 banks in around the periphery of the EU zone, Bulgaria, including its operations in Greece, and Romania as the 2 EU-based countries, as well as Serbia, Kosovo, North Macedonia, Bosnia, and Albania. In these countries, we achieved a strong growth of 13% as well as a much improved cost income ratio of 66.7%, which last year still stood at 72%. This positive development is driven by a 6% increase in net interest income and a 3% reduction in the cost base. The segment contributed EUR 31.6 million to the consolidated result. In Eastern Europe, our portfolio did not move much as strong currency effects negatively impacted the solid underlying business-driven growth. Worth highlighting is, nonetheless, the very strong growth in our Moldovan bank of close to 20%, while our banks in Ukraine and Georgia also managed to achieve 2-digit growth, if one were to disregard the negative FX effects. The cost income ratio remained on a good level of 2019 at around 43%, and the ROE came down to 12.3%, mostly driven by the higher provisions. South America remains, of course, our smallest segment, but continues to show very promising growth rates. In 2020, our Ecuadorian loan portfolio grew by 11.3% in euro terms and even 21%, excluding the effects from the depreciation of the U.S. dollar in 2020. Net interest income increased year-on-year by close to 11%, helping to a 9 basis point improvement in the cost-to-income ratio. The year-to-date result of negative EUR 2.2 million, however, is primarily driven by a EUR 4 million increase in provisions. Let me elaborate also here. Clearly, Ecuador was one of the most affected countries by the pandemic and the local economy was further impacted by the sharp decline of the oil price early in 2020. In this challenging yet also attractive market environment, we are continuing to differentiate ourselves as the only Western European bank and the only bank with a fully digital approach towards private individuals. After its intensive restructuring in 2018 and 2019, we can conclude today that 2020 would have been a profitable year if it had not been for the pandemic. Overall, I feel comfortable saying that the bank is well on track for a positive development in 2021, but we'll have to continue to monitor the macroeconomic developments of the country rather closely. You know by now that our group functions comprise the German segment, which includes ProCredit Holding, Quipu and our Academy as well as our bank in Germany. ProCredit Bank Germany continues to play an important role for our group by providing efficient payment, clearing and liquidity support functions. The ProCredit Academy remains temporarily closed due to the pandemic. On this slide here, we wanted to provide some granularity on key performance indicators per bank. I mean, clearly, there is too much information here to go into all the details, but there are 3 points that I would like to highlight. One, most of our banks achieved a 2-digit loan portfolio growth in this year. And for Ukraine and Georgia, as already mentioned, growth in local currency was also well in excess of 10%. Second, our credit impaired loans in most countries are between 1% and 3.5%, and thereby, significantly below the market averages. Thirdly, profitability remains well diversified with many banks of our group with some banks contributing more to overall group results than others, but certainly a very high level of earnings diversification. PCB Bosnia, which was the loss making last year, achieved breakeven in an overall difficult year and with regards to the 3 banks displaying negative results in 2020. The major driver are obviously the higher than expected LLPs, and we are working on improving the results and are very confident of achieving a significant improvement in financial performance of these institutions in 2021. Let us now move to credit risk. On Slide 18, 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 high geographic diversification with only 4 banks accounting for 10% or more of the loan portfolio. And on the right, you see that 94% of our loan portfolio is accounted for by business loans, 99% by business and housing loans for private individuals combined. As you know, we do not engage in any meaningful consumer lending, which in light of the pandemic, we are experiencing to be a distinct advantage. Of our overall loan portfolio, 19% are to agricultural enterprises and a further 23% is comprised to loans -- to companies involved in local production. On Slide 19, we see that loan portfolio quality remains good. In spite of the macroeconomic headwind, net write-offs amounted to only 0.1%, and the default portfolio increased only slightly by 10 basis points to 2.6%. This increase is mainly driven by the new EBA disclosure requirements, which alone led to a 37 basis point decrease in Stage 3 loans in the fourth quarter. The new guidelines require banks as of December 31, 2020, to report loans as defaulted, when their accumulated days and arrears exceed 90 days. Until now only consecutive days and arrears had been taken into account. The impact of this extended definition is approximately 10 basis points. In addition, we early introduced the new requirements under the headline, diminished obligations, which require banks as of January 2021 to classify loans as defaulted if an exposure to fair value is reduced by more than 1% after restructuring measures. The impact here is some 27 basis points, and clearly, many of these exposures are being actively and timely served and repaid. Our coverage ratio, you can see, has increased to 91%. Now let me also shortly elaborate a little further on the development of the Stage 2 portfolio. While it increased from 3.4% in 2019 to 4.9% in 2020, it came down in quarter 4 from a more elevated level of 6.6%. This development in the last quarter is related to model enhancements concerning the introduction of a multiyear PD approach, which affects performing loans that show a significant increase in credit risk with respect to the time of its -- of their origination. We updated this in line with market standards. Unaffected from these measures are restructured loans, loans with more than 30 days in arrears as well as loans with an underperforming risk class. These type of loans have been classified as Stage 2 before, and they continue to be classified at -- as Stage 2. Now the real year-on-year increase in Stage 2 loans is around EUR 180 million and is predominantly driven by restructurings, which added EUR 80 million as well as exposures with an underperforming risk class, which added another EUR 48 million of exposure into Stage 2. In quarter 4, there was an increase in restructured loans of around EUR 15 million and an increase of exposures with an underperforming risk class of around EUR 16 million. As we mentioned in earlier calls, we performed our extensive client-based monitoring through which we derive new risk classes on all loans, including those in moratorium. Now clearly, risk management was a major factor and focus in this year. Our portfolio quality has remained very stable during the macroeconomic downturn, and this is mainly due to our client-based approach towards managing credit risk. Our well-trained business client advisers oversee a manageable number of carefully selected business clients. All investment loans, that is the large majority of our loan portfolio, are well collateralized, typically with real estate or financial guarantees. Importantly, precisely because we know our clients so well, we were able to perform and intensified monitoring for our entire portfolio in this year. This means that risk classifications have been updated considering the impact of the pandemic on our clients. This has enabled us to identify credit risk at an early stage, restructure where necessary and where the prospects of economic recovery are positive and classify loans as Stage 2 or Stage 3, regardless of whether the client has requested a moratorium or not. Our loan loss provision expenses were strongly affected by the macroeconomic parameter updates in April and October, which all in all led to an increase in provisions of around EUR 19 million. Beyond that, changes in credit risk, particularly transfers from Stage 1 into Stage 2, added some EUR 17 million. In this amount, we also see a positive effect from our annual model review reflected. And lastly, recoveries from written-off loans were at a good level of around EUR 11 million, despite the macroeconomic downturn. The overall cost of risk of 57 basis points was, as Gabriel already mentioned, slightly below our original projection of 75 basis points. Yes, you're used to this slide by now, and obviously, it is more relevant today than ever before. You can see that the large part of our collateral consists of mortgages and additional 16% is accounted for by cash and high-quality financial guarantees, which mainly result from the InnovFin initiative and other guarantee programs provided by the European Investment Fund. In this graph, we do not include any state guarantee schemes nor are they considered in our provisioning. Yes, at this point, I always conclude our presentation, emphasizing again the very simple balance sheet, capital and funding structure of our group by showing the development of our CET1 ratio in the fourth quarter. So here on Slide 23, we see our very straightforward asset structure and its development over the course of the last 12 months. The increase in total assets is driven primarily by the growth of the loan portfolio, along with some increase in cash and cash equivalents, either to central banks or to other banks. The increase in liabilities is above all driven by customer deposits, notably site deposits. Other financing such as loans and debt securities also increased in netted terms, though clearly less pronounced. The group's equity reduced by EUR 24 million with negative FX effects that impact our translation reserve as well as the purchase of minority shares in ProCredit Bank Ukraine earlier in January 2020, both offset the effect of increased retained earnings through the financial result. On Slide 25, this slide shows the structure of our comfortable regulatory capital position. By now, most of you are already familiar with our simple capital structure, 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. As of year-end, our CET1 ratio stands at 13.3%, well above the regulatory requirements. Our core capital reduced slightly with respect to last year, driven by the same effects on the group equity that I just explained. In our core capital, we currently only consider the group's profits as of June 2020, the half year 2 profit, net of 1/3 of dividend retention of approximately EUR 14 million will be recognized in our core capital after the general assembly in May. Obviously, the dividend retention is also applied to the 2019 year-end and the 2020 half year result, in line with our dividend policy. This corresponds right now to a total of around EUR 25 million or 46 basis points of our CET1 ratio. Risk-weighted assets increased only slightly with strong loan growth, largely offset by various regulatory changes as well as FX effects. In quarter 4, risk-weighted assets increased comparatively strongly with respect to the quarter 3 level as a strong increase in deposits led to a higher exposure towards central banks that are mostly weighted at 100% according to the standardized CRR approach of calculating risk-weighted assets. And lastly, we see our leverage ratio of 9.3%. This remains a feature that really distinguishes us from many other banking groups who account for substantially lower ratios. Let us move quickly to Slide 26, where we see the various effects on our CET1 ratio in the last quarter. The impact of risk-weighted assets from the loan portfolio was some 0.2 percentage points. This figure includes the previously mentioned impact from the new EBA disclosure requirements of default. This added some EUR 18 million in risk-weighted assets. Also, we saw a strong increase in liquid assets in quarter 4, driven by the good growth in deposits mentioned earlier. Like I said, in the standard risk-weighted asset approach provided by CRR, many of our central bank exposures, with the exception of those in Germany, Bulgaria and Romania and in part, also Serbia, must be weighted at 100%. In quarter 4, the central bank balances weighted at 100%, increased by EUR 87 million and now make up EUR 417 million of our total credit risk-weighted assets. This led to a reduction of our CET1 ratio of around 0.3%. We also see the effect of the strong currency devaluation in quarter 4, the Ukrainian hryvnia in particular, but also Georgian lari and Moldovan leu, all depreciated along with the U.S. dollar by 10% or more in this year, more like 5% in quarter 4, reducing the translation reserve in our core capital. Lastly, and this is more of a technical point, in previous years, our end of year capital ratios always included the quarter 3 profits. In this year, we only see the half year 1 profits attributed to our core capital. The effect of attributing half year to profits, less the routine dividend accrual of 1/3 of profits amounts to EUR 14 million or approximately 0.3 percentage points in CET1 ratio. So the CET1 ratio, including all 2020 profits, would amount to 13.6%. The half year 2 profits will be recognized in CET1 capital after the AGM in May. This concludes our assessment of the group's performance in the year 2020. Thank you very much for listening. Gabriel and I would now take your questions.

[Operator Instructions] The first question is by Milosz Papst, Edison Group.

I've got a couple of them. Firstly, you have highlighted that your net interest margin was slightly down in the last quarter due to excess liquidity from strong deposits growth. Doesn't mean that you find it more difficult to deploy the liquidity you get from your expanding deposit bases in new loans or whether some other factors influencing new liquidity in the quarter?

Thank you for your question, first of all, Milosz. Generally, this is a seasonal effect. We always see liquidity increase rather strongly in quarter 4. That's why we highlighted this point, in particular. But to give you some sense of our approach towards liquidity management, we pool mostly or some of our excess liquidity through our group-wide liquidity management center here in Frankfurt, which is then placed at the bonus bank account of PCB Germany. However, our banks also have to hold some of their excess liquidity with their respective central banks as they need to establish certain limits as to how much exposure they can have to foreign entities. Excess liquidity that is placed at central banks is largely weighted at 100%, as I mentioned. And this is mainly the implication of the use of the standardized CRR approach. So we see that some -- yes, 10% of our total credit risk-weighted assets relate to central bank balances. Typically -- to be more precise on your question is, we have temporary hikes of excess liquidity. And then what usually happens in the first half year is that we use this excess liquidity to further stimulate the growth in our loan portfolio.

Okay. That's very helpful. And the second question will be you've highlighted that the impact of the SME support factor on your risk-weighted assets was EUR 140 million. But I understand that this is the amount, which was already recognized in the second quarter. And I remember that in the previous call, you've flagged that you also expect an additional impact of around EUR 110 million to EUR 120 million in subsequent 12 months. So does it mean that there was no additional impact in the second half, and we should expect this additional impact to materialize this year?

Yes, exactly. We never -- or let's say, I think we always communicated that we would expect this additional impact to happen in 2021. The current timeline is around June. I think, by the half year figures, we should be able to reflect this in our figures. And yes, this will be around EUR 100 million in risk-weighted assets reduction from the full implementation of the SME -- of the new SME supporting factor.

Okay. Perfect. Perfect. And my last question would be, given that you -- quickly about your midterm targets of the proportion of green loans and total loan book, do you intend to communicate a new midterm target anytime soon?

To be honest, we wanted to see how this year goes. Obviously, we expect the green loan portfolio to continue to show significantly better growth rates than the rest of our loan portfolio. Typically around, yes, I would say, twice the growth rate of the loan portfolio compared to the base portfolio. If that was -- if that is how it happens, we should reach the 25%, which would be like the next logical target, if you like, in around 3 years, but this is not an official communication. This is just pure mathematics. We will possibly come out with a new midterm guidance as we see that the renewable energy portfolio is taking now more traction. We have invested a lot in resources. Over the past years, we've had a first really strong increase now in 2020 and we want to see how 2021 develops in this context, and then we will talk again about new targets.

The next question is by Philipp Häßler of Pareto Securities.

Yes, Philipp Häßler from Pareto. I have 3 questions as well. Firstly, on your dividend plans, particularly the EUR 0.35 you want to pay out in Q4, I would like to know whether you've already discussed this with the regulator and how he sees those plans? Then secondly on -- where is it -- yes, on the commission income, which was -- which has recovered quite nicely during Q4, the highest level during 2020. Can we see this as a good run rate for 2021? Or would this be too optimistic? And last but not least, maybe you can comment a little bit on the development of asset quality in 2021, how do you expect Stage 3 loans to develop? And do you expect additional model-based risk provisions? Maybe you can elaborate a little bit on this.

Thank you, Philipp. Referring to the dividend question, how should I begin. Let -- first, keep in mind what we mentioned already that through 2020, we have all-time deducted 1/3 of our profit on 2019 and '20 from our core capital dividend. Thereby, we are making our intentions very transparent and very clear referring to this topic, including the supervisory authorities. Having said that, we will, of course, align our intention in '21 with the prevailing recommendation from the regulator. We will see how their opinion and position is going to be after September. But it's clear presented and transparently.

Then let me add to the other questions, Philipp, unless you have a follow-up on the dividend?

Sorry, maybe on the dividend. So you haven't yet talked to the regulator. So it's your plan, and then you'll see how the recommendations on the ECB they will develop and then you'll discuss this in Q4?

Yes, Philipp, but nevertheless presenting our results as we are doing it now, we present our plans, but we're going to talk -- wait and see what their communication is indeed.

Then on the commission income, yes, I think the quarter 4 is a good proxy for what we could expect as an average -- really as an average net fee income. Keep in mind though, that quarter 1 is usually more depressed. This is more of a seasonal effect, especially in January in Eastern Europe, this is sort of the prolonged Christmas season. We usually see very, very little business activity. This goes also into February, which then is also a shorter month. So Q1 may well come in below that level. But going forward, I think we have seen that this quarter 4 level is really the -- yes, at least the pre-pandemic level that we used to work on, and we hope that this remains at least stable, if not, that it increases in line with our loan portfolio growth. On the third question, yes, asset quality, how do we expect portfolio quality to develop in 2021? We saw that last year, I think more than half of our loan loss provision expenses were driven by the update from macro parameters. The smaller part of expenses was driven by actual risk events such as defaults or restructurings. In 2021, we expect risk events to certainly be the more dominant driver of risk expenses rather than parameter updates. As of today, we continue to see an elevated number of restructuring cases on a monthly basis. And in our assumptions, we also budget in for a slight increase in default. Though let me be clear that as of today, we are not observing these defaults. We are working together with some clients that have liquidity problems to restructure. But as of today, we have no indication that default is actually increasing. Beyond that, the macro parameters that played a significant role in 2020, they will -- they may continue to play some role in 2021, but certainly not as strong as last year. We are waiting for the new IMF update, which will come in April. We will build this in our model. It is possible that there is some negative effect from this as the last outlook from October maybe was a little more optimistic than what the prevailing outlook is. But I don't have an indication on this -- on how this will exactly affect our figures, and this will really much depend on the variation of each specific indicator in each country for our operations. So this is broadly the setup. Certainly, a continued increase in Stage 2, possibly a slight increase in Stage 3 and some minor macro impact that is at least budgeted in our guidance on the cost of risk. And lastly, the recoveries, yes, in 2021 and 2020, they were certainly at a steady level of slightly above EUR 11 million in spite of the macroeconomic downturn. So clearly, I mean, the conditions for recoveries are not optimal. They were not optimal in 2020. They will not be optimal in 2021. But we are confident also for 2021 to achieve a level similar as that of 2020.

The next question is by Marius Fuhrberg of Warburg Research.

Basically just one left as well on the risk side. Did I get you right that in Q4, you had to put significantly higher cost due to the EBA model adjustment and that this differs from the actual development of your portfolio where you see quite good recovery? And maybe another one on the risk going forward, if we assume that once the vaccination growth -- or in long term -- the population is becoming higher in summer, and we will see some recovery in the economies, how fast would you think you could return to more normalized risk levels in 2021? And is it correct if I assume that in 2021, you do not have to revaluate your whole portfolio by that much than -- but rather that your risk costs are driven by your new business?

Thank you, Marius, for your questions. Let's start with the new EBA disclosure requirements. So the increase in our default loan portfolio in -- as of September 30, we had a 2.3%. With the introduction of these new disclosure requirements, this increased by 37 basis points, which means, yes, the factor in Q4, our -- organically, our default loan portfolio reduced slightly. And on top, we have these 37 basis points. These new defaulted loans, they, however, were not a significant driver of credit risk expenses. Let me shortly explain you why. The larger part are so-called diminished obligations, that means we structured loans, who -- due to the restructuring, whose fair value reduced by more than 1%, these loans or at least the larger loans of this pool are so-called SII loan. So they are significant in their exposure. So one does an individual assessment of the chances of recovery of the loans and since they are not formal defaulted, so they're still servicing their loans and still repaying, this assessment is usually quite positive. So it did not result in a significant increase in provisions, merely a higher default rate that we have to disclose now. Then help me again, Marius, sorry, the second question was on the vaccinations?

Yes. I mean, rather on the economic recovery and how fast you would be able to get back to more novel risk cost levels?

Right. I think it is premature at this point to talk about the normalization as we simply do not have the visibility. The -- just give you a sense that there is a lot of complaint about how the vaccine rollout works in Germany. In most of the countries of our operations, the vaccine rollout is well behind Germany. So it is even slower. That's why we are -- even though our guidance was concrete to the point and also maybe in some way optimistic, there is really this big caveat of uncertainty, lack of visibility with regards to the vaccine rollout, with regards to the economic recovery. So I think, certainly for this year, I would expect sort of a steady elevated level of risk costs as we work our way through the portfolio, talk to clients, restructure where we see economic recovery on a client level to be likely, and this will drive risk costs for sure.

Okay. But 2021, would rather be affected by the new business, but I mean, you have already re-evaluated your existing portfolio, haven't you?

Indeed, yes, we have done this, but this re-evaluation is not a onetime process. To be precise, we do this every year. This is part of the annual monitoring. Every year, we do this monitoring. What was special in 2021 is that we did this monitoring in a very shortened period of time in around 6 to 8 months. We went through the entire portfolio rather than wait for the entire 12 to sometimes 13, 14 months. So this was what was really different in 2020. In 2021, we will do the same exercise again, and we'll have to see what comes out of this.

But in any case, '21 is not going to be a normalized year. The cost of risks are going continue to be elevated, as we said, similar to 2020, slightly lower. So we will -- normalization, as you put it, is going to happen later of this year.

[Operator Instructions] [ Thomas Rica of KFW ].

Congratulation for this really awesome and good numbers in such a difficult year. So I really want to congratulate for credit to these results. I have one question regarding the CET. We've seen slow but steady decrease in the CET1 over the time. For the last year, the goal was -- objective was to keep it above 13%. Now it's around 13%. So I see you decrease that one, at least slightly. And your -- still has a cross loan portfolio growth of 10%, which is really -- which is awesome and is explained, of course, the decrease in the CET1. But I ask myself is when would be the time that you would want and need to exercise or authorize capital, which we all agreed on in one of, I don't know, 2 or 3 years ago on the shareholder assembly? So especially in the light of that you want to keep to the dividend policy of 1/3 of the profit and to make a second dividend payout later this year, so what are the plans on the capital structure, on the usage of the authorized capital? And how do you see and evaluate the market right now for doing such a thing if you take this into contemplation?

Thank you, [ Rica ], first of all, for the well wishes and then also for the question. Indeed, yes, the CET1 has reduced in this year by 0.8 percentage points, mostly in the fourth quarter, driven by what we mentioned, the excess liquidity. And you're right, in our guidance, we have changed the wording. But I would advise you to not interpret this as a target rate, but mainly really as a year of end -- end of year guidance that we give for the CET1 ratio. So our guidance for 2020 was that, at the end of 2020, our CET1 ratio would be above 13%, which it was at 13.3%. And our guidance for the end of 2021 is that it will be approximately 13%, which could be slightly above 13%, could be slightly below, but certainly not anywhere close to 12%. Overall, we are still talking about levels that are very comfortable above our current capital requirements. And we continuously evaluate any types of opportunities. But right now, we have no concrete plans on any transactions.

How would you evaluate the market at the moment in these difficult pandemic times to do such things, if you would at all contemplate this option?

Since we're not contemplating it, I wouldn't dare to give an opinion on how the market is right now.

There is a follow-up by Milosz Papst. Do you want to take the question or do you want to speak your outro now?

No, absolutely. I want to take a question.

Milosz Papst of Edison Group again.

I've got one follow-up question, if I may. When I look at your results by country, I just noticed that you've seen a significant decline in profit in Kosovo, right? Because I think last year it was around EUR 21.5 million, now it's EUR 13.2 million. I presume it's largely due to loss allowances and the most subdued loan book growth but I just wanted -- factors influencing comfortable performance?

Yes, Milosz. Indeed, you -- your observation is entirely right. And indeed, the major driver is really an EUR 11 million increase in loan loss provisions. It is not that the portfolio in 2020 was significantly or more significantly touched than in other banks. It is -- but in 2019, we had a net release of provisions in Kosovo. For various reasons, it is one of the banks that have gone through a more pronounced transformation in 2018 and 2019. When it comes to reduction of very small loans, this had a positive impact in 2019. And now in 2020, obviously, loan loss provision expenses are elevated due to the pandemic, not more than in other ProCredit banks, but this is really the major driver.

There are no further questions. I'll hand over you -- back to you, Mr. Schor.

Thank you. Thank you. Then let me thank you all for your interest and participation in our call today, covering our fourth quarter results. We hope to have given you as much transparency as possible. If you have any additional questions, please do not hesitate to contact us, Christian or Nadine. And the next scheduled conference will take place with the quarter 1 results on May 12, if I well remember. Thank you, again, for your participation, and you all have a good day. Thank you.