ProCredit Holding AG (PCZ) Earnings Call Transcript & Summary

Welcome to everybody on this call on the fourth quarter and full year results of 2021 of the ProCredit Group. My name is Gabriel Schor. I'm a member of the ProCredit Holding Management Board. As usual, I'm joined by Christian, Christian Dagrosa, Head of Finance Reporting and Controlling of our group. We plan some 14 minutes to cover today's presentation, which has been available since early today on our web page. We will, of course, 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. Ladies and gentlemen, it's clear that today's presentation has 2 main themes. The first is the very strong performance of the group in 2021. The second is what does the devastating war in Ukraine mean for the outlook of the group. We will cover both topics in detail. You can imagine it's not easy personally for all of us to discuss good results as business as usual against the background on what our colleagues in Ukraine are going through. But exactly in this context, it is important also to highlight our confidence that the strong fundamentals we demonstrated at the end of 2021 mean the group is well-placed to manage a difficult situation created by the war in Ukraine. We actually want to cover the implication of the war in Ukraine at the end of today's presentation. Christian will do it. But since it is at the forefront of everybody's mind, I wanted to make some opening remarks. Our reflection on Ukraine are at different levels. First and foremost, we are concerned about the need to protect the life of our staff and their families. Then, there is the short and midterm impact on group results. And there are the strategic reflection on what these significant geopolitical shift may mean for our countries of operation. At the moment, we are naturally very focused on the safety of our staff and their families and on maintaining basic banking operation for our clients in Ukraine. The whole ProCredit Group has rallied around to provide accommodation for staff and family members outside Ukraine as required. As an example, around 30 staff members and their family, that is 150 people, half of which are children, they are currently living in the ProCredit Academy here in Weschnitz in Germany. Our Ukrainian managers are in touch with all their employees. We speak with our local team daily and assess the impact of the developing situation on group risk daily, as mentioned. Most of our staff are now working from safer, decentralized location in and outside Ukraine. It goes beyond words to see the remarkable resilience and commitment of our staff as they keep banking operation going despite the incredibly challenging conditions. Basic banking operation in terms of payment, cash withdrawals and client communication are being maintained. Liquidity is being well managed and we are working very closely with the National Bank of Ukraine, which continues to respond professionally to prevailing conditions. Whilst group results short-term will clearly suffer significantly as a consequence of the situation in Ukraine, we do remain confident about achieving our mid-term targets. This confidence is based on the solid and improving performance of most ProCredit Banks we saw in 2021 despite the prevailing pandemic conditions. In this turn, let me cover the highlights of our performance in 2021 before Christian covers financial aspects and the situation in Ukraine in detail. Let me therefore move to Slide 3, which summarizes the strong full year result of 2021. Generally, we overachieved against our guidance for the year despite the ongoing impact of the pandemic in the countries we operate. Our net profit leverage doubled compared to 2020 to reach EUR 79.6 million in 2021 corresponding to a return on equity of 9.7%, which is above the increased guidance range of 8% to 9.5%, and for the first time since we set this target in line with our mid-term guidance of 10% return on equity. Cost income ratio further improved to 64.2%, supported by encouraging margin development and continued cost control. It is worth noting that all ProCredit Bank made a positive financial contribution in 2021 and all regional segments saw a strong improvement in financial performance relative to 2020. The good financial performance was driven by continued strong business development, steady margin and robust loan portfolio quality. The growth in customer loans was 12.8% over the year, above our guidance of about 10%. Customer deposits grew by 13.1%, with this increase being driven by low-margin site and FlexSave deposit. That helped us to maintain steady net interest margin year-on-year. Loan portfolio quality is routinely a highlight of our performance, if I may say so. But given 2 years of pandemic condition, it is particularly reassuring that portfolio quality remained quite so robust, supported by our carefully selected client and well-trained staff. Stage 3 loans accounted for only 2.3% of our portfolio, down from 2.6% at the end of 2020. Net write-offs were only 0.1%. The cost of risk was 12 basis points and does not include meaningful releases from the pandemic treatment provisions. We continue to enjoy prudent capitalization, comfortably above regulatory requirements. CET1 ratio at 14.1% further increased against quarter 4 '20 by 80 basis points and well above regulatory requirements. Leverage ratio comfortable at 9.3%. The CET1 ratio does not include the quarter 4 profit, and originally planned dividend are still deducted. Regarding dividends, you will be aware that we disbursed 2 dividend payments in '21 in order to fulfill our dividend policy and disbursed 1/3 of profits for the financial year '19 and '20. We have decided not to disburse dividend this year based on the profit of '21. It is understandable that given the very high uncertainty around the exceptional situation in Ukraine, it is prudent to build a certain capital and liquidity buffer and observe how the situation develops. The group liquidity position is currently also comfortably above minimum regulatory requirements. All in all, we look at our 2021 results as a confirmation of our long-term impact-oriented business model. In the current context of significant geopolitical uncertainty, we do believe our approaches are resilient and a meaningful one. The way we work with clients, particularly in difficult times like pandemic or now in Ukraine, is effective and embedded in our business model. Our strong results through the economic cycle provide a firm foundation to manage the challenges created by the war in Ukraine, we believe. The resilience of our business model is summarized in Slide 4 where you can see our results were broadly ahead of guidance even in an environment dominated by the pandemic. Growth in the loan portfolio was 12.8% over the year. Adjusted for currency effects, growth was just over 10%, which is in line with our expectations. With a return on equity of 9.7%, the group exceeded its guidance for the financial year and achieved a medium-term target of approximately 10%. The cost income ratio decreased by 3.8 percentage points to 64.2%, slightly better than the guidance of around 65%. The common equity Tier 1 capital ratio fully loaded as of the end of '21 stood at 14.1%. It means 80 basis points, 8 0 basis points, above the level of 2020. As I have already mentioned, the one negative note is that given the war in Ukraine, we cannot immediately share the success of 2021 with our shareholder with a dividend based on the profit of '21. On Slide 5, you can see in the top graphic the EUR 670 million growth in our customer loan portfolio over the year. There has been growth in all loan categories with stronger demand in working capital loans with maturities up to 3 year as SME rebuilt capacities to respond to demand in the wake of the pandemic. All ProCredit Bank contributed to the overall increase of the group loan portfolio. Whilst competition is picking up again, we do believe we are still growing ahead of competitors and increasing market share in our core SME segment. It goes without saying that we continue to maintain strict client selection and credit risk criteria and we continually improve our ESG policy standard. In the lower graphic of this slide, we see the most visible manifestation of our impact perspective. The continued strong growth of green loan portfolio, which at the end of the year stood at EUR 1.1 billion or 19% of our portfolio. Slide 6 shows the corresponding good development in deposits, which increased by EUR 643 million or 13.1% over the year. This growth was achieved mostly with business clients, but private clients volume also grew well, which is a valuable strategic breakthrough. The share of site and FlexSave deposits increased to 71%, supporting our positive margin development. Our digital approach to private client and transaction banking is now well established and provided a notable strength through this pandemic years and especially now in the situation in Ukraine. We do believe this approach provides a firm base for continued steady growth in cost-effective customer deposits. At this point, let me turn to Slide 7 and the important topic of our impact report, which we publish simultaneously with our financial statement. Despite, indeed, especially in the light of the challenges created by the war of Ukraine, it is better that we do not lose sight of the critical long-term importance of sustainability and addressing the climate change. This continues to be center to the ProCredit business model and a priority going forward. This busy slide, indeed it's a bit busy, but reflects how busy we are on those topics at the time. I would strongly recommend you to read our impact report for more details and depth analysis. It is worthwhile doing so. Maybe just to highlight a couple of key points on this slide. The first block title, Impact to Business. As you know, we always emphasize that our primary impact is achieved by serving carefully selected SME in way that supports that growth but minimize the risk of default and bankruptcy due to over-indebtedness. Here, a key indicator of success is the growth metric, combined with a very high loan portfolio quality. As an illustration of the ESG selection criteria, we have highlighted this year our decision not to fund photovoltaic projects with panels sourced in China Xinjiang region since there is a high risk of their being linked to forced labor production facilities. In the second block titled Environmental Responsibility, we highlight our commitment to green finance and the net zero transition. We have calculated as our green loan portfolio saves over 300 kilotons of CO2 equivalent. In '21, 2021, we have incorporated the EU green taxonomy and the so-called partnership for current accounting financials approaches. We incorporate it into our thinking and specialty reporting. In the third block, we highlight our long-term comprehensive commitment to staff development. Our commitment to staff can best be seen in the way we are now supporting our Ukrainian staff and their families. It is moving to see that this commitment is reciprocal in the way in which our staff in turn supporting us in Ukraine. Simply to illustrate our commitment to having a positive environmental impact, let me turn to Slide 8. The ProCredit Group is currently conducting an e-mobility campaign across all ProCredit Banks. We have installed 207 public electric vehicle chargers on the main highways across basically all ProCredit countries of operation and developed an app which helps users to easily locate these chargers. We're simultaneously running a campaign for e-car financing. E-cars and charging facilities are still a new concept in our countries. So our campaign is strikingly innovative, particularly given the sharp focus on energy that the crisis with Russia has created. This approach reinforces that we do see good growth opportunities in green loans and significant value in being a pioneer in this market. Generally, we see good growth opportunities and looking forward also given the macroeconomic outlook for most of our countries of operation as we can see on Slide 9. Updated macro prognosis for Ukraine and our Eastern European region are not available yet. First, estimation for Ukraine indicates a decline of GDP of at least 10% in '22. It is also too soon to assess spillover effects in country like Georgia and Moldova. However, the outlook for South Europe or the South European and in Latin America both -- from both regions, the outlook remains positive. While the COVID infections rate remain high, supply chains are still suffering disruptions and inflation is increasing, industrial indices are positive and macroeconomic recovery is projected to continue. For example, if you look at the lower left-hand graphic, the expected annual GDP growth in our countries of operation in Southeastern Europe, which accounts 70% of our assets, is 4.5% for this year, 4.1% for next and 3.6% in the subsequent 3 years. So although there's surely a degree -- a high degree of uncertainty about the macroeconomic outlook, it is generally positive. At the same time, our sense is that our regional operation has gained some geopolitical importance as shown by intensified discussion on EU exception for many of the countries in which we work. In these terms, international investment will continue, we believe, and the role of specialty SME banking group actually grows in importance. So what does it all mean for the outlook for the ProCredit Group? On our last call, we were confident on while being able to initially consolidate profitability at levels in line of our current midterm target with potential upside in subsequent years, clearly, the situation in Ukraine changes this short-term outlook. However, it is just too early at this stage to provide narrow guidance for the key metrics of the financials here in 2022. Our focus is now on supporting our colleagues and clients in Ukraine as best as we can, whilst at the same time, working with our remaining bank to continue the strong trajectory shown in '21. In these terms, we do expect the loan portfolio of many ProCredit Banks to continue to grow by around 10%, although the consolidated growth will likely be below the level of '21. We see particular growth potential in the energy efficiency and renewable energy sector. The share of green loan is, therefore, expected to continue to grow. We expect that return on equity will decrease significantly compared to the previous year and that the cost income ratio will increase visibly. For the CET1 ratio and leverage ratio, we see potential for a stronger decline in '22 as compared to the strong capital level at the end of '21. In the medium term, we continue to see potential for around 10% growth in the total loan portfolio, a cost income ratio of below 60% and a return on equity of about 10%. We believe we can achieve these medium-term goals even without the financial contribution from Ukraine. And therefore, we announced the confirmation of our medium-term outlook. An announcement of any updated medium-term guidance is postponed until further visibility of the effects from the war in Ukraine are clear. In summary, you have heard, so to say, a two-tone soundtrack from me this afternoon. One, of confidence about the financial and impact performance of the group in '21 and about the positive outlook for most of our countries of operations. Nevertheless, there is a much more muted tone driven by the concern about Ukraine and the significant uncertainty about its implication for the group and the regions in which we work. Overall, though, we look forward with confidence. Strategically, the current developments only reinforce our commitment to our way of responsible banking in the regions we operate. We see the role of ProCredit Group of banks as more important than ever as we have able grounded confidence about delivering good financial results in the medium term. And with this note, let me hand over to Christian to present in more details on the financial aspect and about the situation in Ukraine.

Thank you, Gabriel, and good afternoon to everyone also from my side, and welcome to our presentation. Mindful of time, I also want to say a few personal words at the beginning and reiterate some of Gabriel's messages about our colleagues in Ukraine. The aggressions against Ukraine touch us at ProCredit primarily on the personal and emotional level. Colleagues that we would meet on a regular basis several times a year to strategize, to discuss and learn and socialize are now in very acute danger. Given these exceptionally challenging circumstances, it is beyond remarkable how everyday banking operations have remained basically uninterrupted since the beginning of the war and ensuring exactly that our colleagues provide an important contribution to the Ukrainian state and the Ukrainian people, who now more than ever rely on a steadfast banking sector. Their calmness and their resolve in this very difficult situation are an inspiration for us all. And for that, I'm extending my sincerest gratitude and admiration. We prepared special slides on Ukraine that I will cover in just a few minutes. And as Gabriel said, that it's difficult to just go on and talk about business and finance, but the events in Ukraine should also not overshadow the fact that 2021 has been a very successful year for the ProCredit Group, in which we have managed to achieve some very important milestones. Let us start maybe with the results at a glance slide, starting with net interest income, which has -- which shows a strong increase of EUR 20.5 million with respect to the previous year. That's an increase of more than 10%. Our net interest margin is basically steady against the previous year and has shown a very positive quarter-on-quarter dynamics throughout the year. And we'll look into the details in just a few minutes. Net fee income stands EUR 3.5 million above the previous year figure. That is more than 7%. Our fee income from transactions and cards has grown steadily since last year and is also the major driver behind this positive development. Much like in the net interest income, the quarter-on-quarter dynamics of net fee income are also encouraging. Personnel and administrative expenses are up just about 5% with higher staff expenses being the major driver. Some one-off effects are included in that increase. Otherwise, the cost base remains broadly stable and continues to enable meaningful scaling effects. Our provision expenses reduced with respect to last year somewhat expectedly by EUR 22 million because, clearly, last year's provision expense were affected by macro provisions that we had booked to reflect a more subdued macroeconomic outlook in light of the COVID-19 pandemic. In quarter 4, we performed a minor update of model parameters, but basically refrained from releasing the great bulk of provisions that were built during the pandemic. The relatively low provision expenses in 2021 are therefore not a result from structural releases, but from real improvements in our portfolio quality indicators as well as steady recoveries from written-off loans. The cost of risk stands at 12 basis points compared to 56 basis points last year. As always, I will cover our portfolio indicators in some more detail later in the presentation. The consolidated profit of EUR 79.6 million is EUR 38 million above the previous year and corresponds to a return on equity of 9.7%. The cost income ratio also improved by almost 4 percentage points on the back of the improved net interest and net fee income. The book value per share increased by EUR 1.30 and is now at EUR 14.5. I think that covers the highlights and we can now move on to the details of the most relevant developments. Our net interest income shows a continued quarter-on-quarter increase of EUR 2.6 million after already increasing significantly in quarter 2 as well as quarter 3. At almost EUR 61 million, the quarter 4 net interest income now stands 19% above the 2020 level. All our banks are showing encouraging quarter-on-quarter and year-on-year trends, which shows that margins are stable throughout our network. We also continue to make steady improvements in our funding structure, increasing the share of site and FlexSave deposits, particularly through the increasing popularity of ProCredit Direct in our markets. The net interest margin in quarter 4 is at 3.0%, and thereby, higher than the figure for the full year of 2.86%; and has also been steadily increasing from the level of quarter 1, which was 2.6%. Year-on-year, the increase in net interest income is of more than EUR 20 million or 10%, and that is the major driver behind our group's improved cost efficiency in this year. Moving on to provision expenses. We continue to see overall low levels of expenses, which in quarter 4 correspond to a cost of risk of around 22 basis points. Let me repeat again, that this development is not driven by structural releases of provisions in any meaningful way. In light of the continued macroeconomic uncertainty, we have added conservative judgment to our macroeconomic parameters in quarter 4. And in light of the recent events in Ukraine and the mounting macroeconomic uncertainty, we feel validated in this prudent approach. Our quarter 4 net fee income increased by around EUR 800,000 or 6.2% against quarter 3, that lifts the full year figure EUR 3.5 million above the previous year. Our transaction and card business has recovered fully since last year where the performance was more subdued due to imposed trade and travel restrictions in light of the COVID-19 pandemic, driving a substantial growth in fee income now of around EUR 7 million. Fee expenses also increased due to the higher transaction volume, but also due to the steady expansion of guarantee programs such as InnovFin. Strategically, these programs play an important role for us. As you all know, they help us optimize risk-weighted asset density and support long-term credit risk -- long-term low credit risk expenses. Personnel and administrative expenses increased in total by EUR 7.8 million with respect to quarter 3. This increase includes a onetime contribution of EUR 2.2 million that was made to some -- yes, around about 80 staff members in 4 of our banks in recognition of their exceptional efforts over the last years. Other than that, we incurred additional expenses for year-end marketing campaigns as well as other expenses that seasonally just tend to fall into quarter 4. Our full year cost/income ratio is now at 64.2%, which is 3.8 percentage points better than the previous year. And it also means that we have made good progress towards our medium-term target of below 60%. Let me also give you a brief follow-up on the litigations that were occurring in the Serbian banking sector. These have, of course, affected our local bank, both operationally and financially. After the positive Supreme Court ruling in mid-September, almost all cases that followed have now been ruled in favor of our bank or are being withdrawn. The 2021 figures were nonetheless influenced negatively by the litigations in an amount of approximately EUR 2.6 million, and we have a remaining stock of EUR 2.5 million in provisions, which we expect should be released in the future on a case-by-case basis. Let's take a look at the contribution of the individual segments to the full year group results. And as indicated, you can see here that all regional segments and all banks have contributed positively to our results. In Southeastern Europe, we achieved a good growth of almost 9%, as well as a significantly improved cost income ratio of 63.9%. This positive development is driven by an 11% increase in pre-provision income against the 6% increase in operating costs. The segment added some EUR 48 million to the consolidated result, to which all banks made a positive contribution. In Eastern Europe, our portfolio grew a strong 22%, which was driven both by solid underlying business development, but also by significant positive currency effects, specifically in Georgia and Ukraine. The segment contributed EUR 39 million to the consolidated profit, and that corresponds to a segment return on equity of around 18%. South America, which is our Ecuadorian Bank, continues to show very good growth trends, 32% for the year 2021. Also this year was in part driven by the appreciation of the U.S. dollar against the euro, but also the business-driven growth was well above 15%. The bank managed a small profit also as the country is slowly recovering from the more pronounced impact the pandemic had over the past 21 months. Our group functions comprise the German segment. That, of course, includes ProCredit Holding, Quipu, 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. Let's move on to the key figures of each individual ProCredit Bank. On this slide. We compiled some KPIs of our banks. In the interest of time, let us not go through this slide in detail, but simply focus on the key messages. All banks achieved meaningful growth rates and contributed positively to the group's financial results, including those that were still loss-making in the last years, such as Romania, Albania and Ecuador. Serbia's results in this year were certainly more subdued than in previous years, also in part due to litigations that I mentioned earlier. But our managers are looking at 2022 with optimism despite the growing global macroeconomic uncertainty. Our banks' default rates are, as most of you already know, significantly below the levels of the respective banking sectors. Let us move to credit risk and our capital position. On Slide 20, we see the high level of diversification in our loan portfolio, both in terms of geographic coverage and industry sector. There have not been any material movements in these pie charts over the past years, which is a reflection of our stable business strategy. Of our overall loan portfolio, some 40% are to agricultural enterprises and companies involved in local production. Consumer loans, as you know, play only a small role and are reflected in the pie piece named investment and other loans. However, the majority of these exposures are loans for housing renovations, including rooftop, portable tile installations, or other energy efficiency measures. On Slide 21, we see the overall positive development of our loan portfolio quality indicators, which are underlying to the relatively low cost of risk that isn't printed into our business model and that once again materialized in this year. Our default portfolio improved by 0.3 percentage points to a level of 2.3%. Our portfolio in stage 2 also declined actually even more markedly by 1.3 percentage points as more and more clients we had identified as potentially problematic have successfully navigated their companies through the pandemic. Restructuring activities have been at an overall low level in 2021. Our net write-offs continue to be at very low levels, just as they have been last year during the pandemic and the years before. These low write-offs are a distinct feature of our group and show that our low default rates come from prudent loan originations rather than systemic write-downs of underperforming loans. Moving on to regulatory capital. As of quarter 4, our CET1 and T1 ratios stand at 14.1%. That is well above the regulatory requirements of 8.2% and 10.1%, respectively. Our core capital increased by EUR 86 million since the beginning of the year, mainly due to the attribution of half year 2020 as well as September 2021 profit to core capital. It is also worth highlighting that as of now, some EUR 20.7 million remain subtracted from CET1 capital for dividend purposes. Adding these amounts to our core capital would increase capital ratios by around 37 basis points. In addition, quarter 4 profits of EUR 17.6 million have yet not been attributed to the core capital. Also here, this amount would add approximately 31 basis points to capital ratios, while the full amount -- sorry, would add 31 basis points to capital ratios. All in all, capital ratios could further increase by close to 70 basis points in this year by adding back retained dividend accruals and attributing quarter 4 profits. Let's move to Slide 23, where we see the major effect on our CET1 ratio in this year. The good loan portfolio growth of EUR 670 million is the major factor behind risk-weighted asset growth. This has been offset in part by the second phase introduction of the new SME factors provided by CRR II, and the application of the new guarantees for SME loans in the context of the DCFTA program, all of that already happened earlier in quarter 2. The translation reserves improved mainly as a consequence of currency appreciation of the Ukrainian hryvnia and the Georgian lari, which, however, has also accelerated the growth of risk-weighted assets on the other side. The attribution of profits net of the 1/3 for dividend purposes added 1 percentage point to our CET1 ratio, bringing the total up to 14.1% at end of December. At this point, let me conclude our presentation by providing an update on where we stand, where all banks stand in terms of operations in Ukraine. Gabriel already mentioned how our Academy in Fürth is now, at least for the time being, home to close to 30 staff and some 120 family members of theirs. As this number continues to grow, we will rent additional spaces in the surroundings to make sure we can accommodate everyone. As of today, some 70% of our 328 staff in Ukraine are actively working as they connect to the bank systems from multiple locations in and outside Ukraine. Due to their efforts, banking operations have continued relatively smoothly given the circumstances. As a digital bank, our physical presence in Ukraine is relatively small, accounting to 5 branches in the entire country. After the pandemic, our digital approach to banking is once again proving to be crucial, ensuring continuity in our services even under extremely adverse circumstances. Our clients' access to their accounts remains uninterrupted, and they can continue to use their cards for payments and cash withdrawals both in and outside Ukraine. Thanks to our group internal software company, Quipu, we have managed to mirror all relevant databases from our Ukrainian bank, essentially building a backup data center here in Germany to protect us against any potential destruction of our Ukrainian data centers. Quipu is also ensuring that card transactions are being processed as the national service provider encountered technical difficulties. That too is now being done outside Ukraine. Quipu is now also the backup option for card processing for other banks in Ukraine. Also, we managed to relocate our Ukrainian call center to Germany, which allows us to stay in touch with our clients and answer to their requests at all times. The liquidity situation of the bank remains steady, and a large part of the bank's cash reserve is placed with our ProCredit Bank in Germany. In the first few days after the invasion, we observed a reduction in deposits from legal entities, some of which was related to donations to the Ukrainian Defense Fund, business deposits have stabilized since then in March. Deposits from private individuals have increased since February 24 by around EUR 12 million, which underlines the confidence Ukrainian citizens have in our bank. To provide additional stability to the banking sector, the National Bank of Ukraine has provided additional liquidity lines to all banks operating in Ukraine. We have not yet seen the need to draw on the roughly EUR 60 million that have been committed to our bank. We would also like to note that we work with a number of international financial institutions, funding partners in Ukraine, we have been very proactive in offering support. Our business client advisers are reaching out to our clients to discuss the situation of their businesses. Though lending remains restricted at this time for obvious reasons, we want to support our clients as best we can. We believe that particularly our agricultural clients, who form almost 50% of our loan portfolio in Ukraine, will play an important role in securing basic supplies to the Ukrainian people in the weeks and months to come. It is clearly premature to make any meaningful assessment on portfolio quality at this stage. We certainly feel very comfortable with our clients, most of which we have built very strong relationships over the past years. But nonetheless, it is clear that we should brace for a marked increase in the default portfolio in the course of 2022. The share of defaulted loans in our bank in Ukraine was at 1.6% before the war. That is even lower than what we have on group average. The coverage of this default loan portfolio stood at 179%. Earlier this month, we, like most other banks in the market, granted an automatic 1-month moratorium to all clients. The bank's capitalization is solid, 5.2 percentage points above local regulatory requirements. If we now turn to Slide 26, the final slide of our presentation today, to reflect again on what these developments mean for the group. At the moment, we are focused on maintaining banking operations in Ukraine, while securing the safety of colleagues and their families. This is central simply from a human point of view, as well as for the well-being of our group. How the conflict will develop and what the political and macroeconomic fallout will be are obviously impossible to foresee at the moment. In turn, it is not possible to somehow quantify the operational and financial consequence for our bank, and thus, for the group. We have analyzed the impact of a range of stress scenarios on group profitability, liquidity and capital, including expropriation in Ukraine and significantly adverse conditions in our remaining banks. The group's capital position is solid in all of these scenarios, even without capital strengthening measures. Were the bank to default, we do see certain group liquidity risks, which currently we are working to address. Having said that, in the present situation, our bank is showing a high level of stability and resilience. To mention the key facts. Our equity position in Ukraine is EUR 130 million. The bank has a loan portfolio of EUR 757 million, accounting for around 13% of the group loan portfolio and adding 14.8% of the group's risk-weighted assets. The bank contributed about 27% to profit generated by the group banks. As such, ProCredit Bank Ukraine is a significant subsidiary, and the group will feel the loss of its recent strong positive contribution. Nevertheless, Gabriel has already described our medium-term confidence in group results even in the absence of a contribution from Ukraine. The key factors underpinning this confidence are summarized. As such, the ProCredit Group comprises 12 banks, with the large majority of assets not directly impacted by the war in Ukraine. We have spent sufficient time today outlining why we believe that the performance of most of these banks improved in 2021 with prospects for further improvement in many. The group has no exposure to Russian banks, no Russian subsidiary and no banking activities in Russia. So there is no direct impact from resolved international sanctions against the Russian Federation on the ProCredit Group. Furthermore, there is only a limited number of clients of the ProCredit Banks in Southeastern and Eastern Europe, which have meaningful business relationships with Russian entities. The good performance of the group in 2021 means we are well placed to manage the challenges presented in Ukraine. Particularly important is the comfortable capital position with 14.1% CET1 ratio against 8.2% regulatory requirements and 9.3% leverage ratio, which is well above the banking sector averages, and will be further strengthened once we allocate quarter 4 profits and dividend deductions of the 3 first quarters of '21 to our capital. Therefore, we confirm our group target for the medium term even in a scenario without contribution from ProCredit Bank Ukraine. That is we believe, midterm, we can achieve a growth of the loan portfolio of around 10% per annum, a cost/income ratio of below 60%, and a return on equity of about 10%. In summary, whilst our scenario in relation to Ukraine has a significant negative impact on group results in the short term, at this stage, we do not see the medium-term prospects of the group to be fundamentally threatened. In these terms, we are all focused on supporting our Ukrainian colleagues as best we can, whilst at the same time not losing sight of growing our core business and building the financial strength across the rest of the group. I want to thank you for your attention. The presentation is now concluded. And Gabriel and I would now like to take your questions.

[Operator Instructions] And the first question is from Milosz Papst, Edison Group.

Firstly, I just wanted to confirm what was the loan collateral mix at ProCredit Bank Ukraine prior to the invasion in terms of mortgages, financial guarantees, et cetera. And if you have any indication in terms of the loss -- mortgage collateral due to physical damage at this stage? And secondly, are we able to just roughly indicate what's the proportion of your loan book provided to borrowers located in territories which are currently under the control of Russian forces or Russian expatriates? So in particular, the breakaway republics and the southern regions?

Indeed, Milosz, on the first question, I must say I do not have the information at hand. As we said, 50% of our loan portfolio are to agricultural clients. Now there is a specificity about Ukrainian law that up until recently also has not allowed farmers to own land. So therefore, there's also -- the land can there usually not be pledged. So what we have in collateral in Ukraine is mostly a mix of financial guarantees. We mentioned DCFTA before. As for the agricultural portfolio goes, mostly highly specialized farming equipment. This goes for the agricultural portfolio. And for the remaining portfolio, it is mostly mortgages. Now, yes, as we said during the presentation, as of now, we don't have a lot of details about credit risk on the ground. That includes also that we don't have any information on the loss of collateral. As of now, what I can say is that nothing material has been reported to us, and our BCAs, or business client advisers, are indeed increasingly in touch with our loan clients, and we will continue to dialogue with them and also continuously try to assess credit risk. But certainly, we will have more news on credit risk in Ukraine in the quarters to come, and hopefully also with the war activities residing that we also might be able then to start again on-site visits. On the portfolio mix in the country, so basically in the areas that were controlled by separatists over the past years, those are parts of the districts Luhansk and Donetsk. Here, we have just around EUR 17 million in loan portfolio of the EUR 757 million. So at around about 2%. Otherwise, yes, I don't have any information about the areas that are currently under direct threat or control of the Russian Federation, as also here the situation remains very dynamic.

The next question is from Marius Fuhrberg, Warburg Research.

First one is on the green loan portfolio. The growth in this portfolio came down slightly compared to previous years, even though it's still above group level in general. Do you expect this to increase again so that the share of the total portfolio shall increase more to like 25%? Or what is your long-term assumption for that? The second one is for the 2022 guidance. I mean, it's hard to assess, but you still assume that return on equity is clearly below 2021 level, yet you think that you end up with a positive return on equity in 2022. And the third question, of course, again on the Ukraine. One scenario or the worst case scenario, in my view, is that the Ukraine -- or that the Russian win the war and that they basically seize your bank in Ukraine. But could you give us an update on what would happen if Ukraine remains a state overall at the end of the war and remains independent, but your assets there or the assets of your customers, and also the collateral might be destroyed, so that the Ukrainian bank ends up with significant negative capital. So what would happen in such a scenario?

On the green loan portfolio, indeed, the growth in 2021 has been, yes, around 11.5%. That is less than the compound average growth rate that we have shown over the past 5 years, which is north of 25%. Look, Gabriel mentioned this, and it's also spelled out a bit in more detail in the impact report is that, especially in these days, where many banks jump on the wagon of impact and reporting on impact and reporting on green lending, we have resolved really to take an even more differentiated approach to analyze what is real impact, what is the true impact? Is it just providing green loans or do we have to look at green loans also in more detail? And here, 1 very important example is the one that Gabriel mentioned, is that photovoltaic loans for us, we look clearly where the panels come from that are used in small and large-scale photovoltaic projects, and found that many suppliers do get their panels directly from regions in Northwestern China, where there is a high likelihood simply that these panels have been produced under forced labor. Now if we try to assess whether building photovoltaic with these panels has a positive impact, for us, it's a clear question -- it's a clear answer that even though we are doing something for the environment for long-term energy self-sufficiency, it is simply unacceptable to use these materials knowing that they have been produced under forced labor. So this is one example also why a significant portion of our pipeline of renewable energy projects had to be postponed -- had to be rediscussed with our clients. We are working, as of today, still on talking to clients, explaining to them the problem that we see, and hoping that they rethink and hoping that they find other suppliers that are not critical from this point of view. This has certainly been a setback in the green loan portfolio. So whether we continue to grow at 25% or whether we continue to grow at more like 10%, like the loan portfolio has grown over the past years, at this stage, I cannot really say. What I can say is that building the green loan portfolio remains a strategic priority for us and we will always push this growth over the growth of the remaining loan portfolio. But we have been conscious in not giving a hard target as of now. On your second question, indeed, worst case scenario would be an expropriation in Ukraine. If Ukraine remains, what will happen, indeed, assets would likely deteriorate. So, for one, the Ukrainian regulator has imposed or basically has accepted moratoria in Ukraine as measures that would not affect credit quality. So if a loan, if an exposure under moratoria is in arrears, then from a credit risk point of view, this would not be in arrears. This is, however, the local accounting treatment. What this means for IFRS is probably that we will very soon see a marked increase in Stage 2 loans, because these loans from IFRS perspective will be in arrears, and we will start provisioning simply in simple terms. So this will affect group profitability, but it will not necessarily directly impact the profitability of the ProCredit Bank Ukraine in local accounting terms. And here, I think there is an important distinction that the local regulator is very likely to provide the set of rules necessary for banks to not be over-indebted simply because of asset deterioration driven by the war. However, coming back, what this means for the group is, indeed, an increase in default is almost unavoidable. And this year, a marked impact on the profitability, equally unavoidable. And now you ask me, do we still expect a positive ROE for this year? We have, on purpose, not articulated a clear expectation. If you were to ask me, could it be that the ROE is negative in this year, I would say, yes, that is a possibility.

Okay. But to be a bit more precise on this, I mean, let's say, you have EUR 130 million of equity there in the local bank, what happens is, let's say, 50% of the loan portfolio is basically destroyed, but you still end up owing the bank after the war, and so then you would have to face this loss in sort of a level in the group. Is that correct? Or is there also some kind of a mix in there?

Indeed, this would be the short-term impact. However, if we're really talking about half the loan portfolio, then of course, also from a local perspective, one would say that the banking business would no longer be viable. And then we would be de facto in the stress scenario in the worst case scenario that you described, where we would simply lose the bank in Ukraine. And there again, the maximum losses that we, as a group, can suffer are basically the equity position that the ProCredit Holding has in the bank in Ukraine, along with potentially any kind of debt that was provided to the bank in Ukraine.

Okay, that was the point that I was looking for. And could you give us an update on how much the debt is that you provide to the Ukrainian bank?

Yes, that's around EUR 48 million. So that is debt provided by ProCredit Holding, and to some extent also by ProCredit Bank Germany.

The next question is from Philipp Häßler, Pareto Securities.

Firstly, on the dividend decision, so that you don't plan to pay dividend. Was this also influenced by the regulator? Or was this your decision? And am I right in assuming that this time, unlike 2 years ago, it's not a postponement, but it's a cancellation of the dividend?

It was, Philipp, our decision. We are fully aligned with the regulator. The regulator is informed what we are doing. But it was our decision because of precaution, as we say, to build up some buffer in terms of liquidity and capital, just observing the situation. Aligned, informed with the regulator, but it was our decision.

And am I right in assuming that this time it's not a postponement, but it's a cancellation?

Yes. You are assuming right.

Okay. Then on the macro base risk provisions, you have hinted that you have -- but they're still existing. Maybe you could remind us what the level is and what was the release in 2021.

Indeed, Philipp, the calculation is not always so straightforward as in what has been added and what will be released as the provisions are dynamic. They continue to evolve as on the one hand macroeconomic parameters are changed, and also, on the other hand, as every year we feed the model with new historical data of the performance of our own loan portfolio. So it's not a straightforward question as in how much has been added and how much is still there, how much can be released, as we need to observe on a quarter-to-quarter basis. What I can say is that what has been released in 2021 of these provisions is negligible. It's basically nothing. And the large bulk of the provisions that we built in 2020 were driven, let's say, by the macroeconomic deterioration.

Okay. And then coming back to the Ukraine, just to make sure I understood it. So in worst case scenario, you would have to write off EUR 180 million. This is equity and debt, correct?

That's correct, yes.

And if we don't assume a worst case scenario, so hopefully, the war ends soon, but your customers, as you're very strongly in the agricultural sector, for them it will be probably quite a big problem that they are not able to start showing. So am I right in assuming that there crop failure could be a big problem for your customers and then ultimately you as the lender?

Look, yes, I mean, in the war, many things can happen. That is clear. I would maybe also phrase it a bit positively in the sense that the fact that 50% of our loan portfolio are to agricultural clients, clearly, these clients are less likely to be impacted by the mere destruction of the war. You're absolutely right. They can, of course, also be adversely affected. For example, there has been shortages of fuel across the country. You need fuel to operate tractors. You also rightly pointed out that in March and April, agriculture clients typically need to buy seeds in order to be able to have a harvest in summer or autumn. These challenges, specifically those, are currently being discussed and addressed by our bank, also in discussions with the Ukrainian Central Bank, as well as the Ministry of Agriculture, to see how can these clients be supported specifically in these times.

But in the end, their ability to repay the loan or pay interest on the loan depends on the harvest, that's correct, right?

Yes. In broad terms, that's what it depends on. Absolutely correct.

Those were all my questions...

Philipp, let me also mention that supporting the agricultural sector, it has strong political importance in the country. Therefore, it's not only the NBU, the central bank discussing, they have been providing liquidity, but also the state, they are discussing now about providing a credit guarantee fund that supports some international institutions because of the topic which has consequences of the whole world production. They are strongly involved in seeing how they can support and this should be mentioned. Yes, there is risk there, as Christian mentioned, as you asked, but there's a critical and political important support in this sector. Therefore, there are a lot of activities exactly now that are taking shapes over how to support it and how to cover those risks.

Thank you all for your participation and questions. I'd like to hand the call back over to your host, Mr. Schor, for any additional or closing remarks. Thank you.

Let me simply thank you all for your interest and the participation in this call covering the financial results of '21, in special and difficult times, if I may say so. We hope having given you as much transparency and visibility as possible for us. If you do have any additional questions, please don't hesitate to call us, Christian, Hellen, and Nadine any time. The next conference call will take place when we publish our quarter 1 results in May '22. Thank you, all of you, once again, and good luck, all the best.