ProCredit Holding AG (PCZ) Earnings Call Transcript & Summary

Welcome, and thank you for joining the ProCredit Holding Full Year 2022 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Hubert Spechtenhauser. Please go ahead, sir.

Welcome to everybody. On this call on the 2022 financial results for the ProCredit Group. My name is Hubert Spechtenhauser, I am the Chairman of the Management Board. I'm joined by Christian Dagrosa, who, as planned, became a member of the Management Board at the beginning of this year as our Chief Financial Officer. We aim to spend some 40 minutes to cover today's presentation which has been available since early today on our website. 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. With this, let us turn to the performance of the group. I will cover the highlights and the broad developments in our business over the year before Christian addresses the group results and regional performance, and I close the presentation with our outlook. It is a particularly turbulent time for global banking sectors. But today, you will hear from us consistent messages to those you have heard over the past 12 months. Our attention in 2022 was in particular focused on: firstly, managing the direct consequences of the war in Ukraine; secondly, strengthening the resilience and profitability in the banks outside of Ukraine, and thirdly, continuing to strengthen our corporate structure and impact-oriented capital markets presence. The Russian invasion of Ukraine clearly created deep disruption for the people of Ukraine, our regions of operation and strongly impacted our results in 2022. We continue to work with our Ukrainian colleagues with a tremendous sense of admiration and pride as they continue to ensure that the bank and our clients can operate as normally as possible. Loan loss provisions in Ukraine have had a significant negative impact on group results. Beyond Ukraine, the performance of ProCredit Banks have been significantly stronger than in prior years despite the difficult operating environment created by inflation and high energy prices. Therefore, despite ongoing uncertainty, we look forward with confidence about the potential of our markets and of our banks, and we therefore announce a confident and improved midterm guidance of, for example, a return on equity of 12%, up from the previous guidance of 10%. We believe we will combine improved financial performance with continued strong impact. The recent positive news that EBRD intends to expand its equity engagement with the group puts emphasis on the Paris agreement and the green transition for our countries of operation. In the current geopolitical context, we see it as more important than ever to help strengthen the resilience and sustainability of the SME sector in our regions. I should also add upfront that the recent banking sector turmoil, triggered by the collapse of the Silicon Valley Bank has had no significant impact on our operations or liquidity position to date. Our highly diversified and granular deposit base remains stable. We see our close client relations and our highly conservative approach to managing excess liquidity as key strengths in this context. With these opening remarks, let me now turn to the highlights of the year in figures. Slide 2 summarizes the key aspects of our full year performance. Resilient is a good summary. We achieved strong financial results in all banks outside of Ukraine. However, these were countered by the EUR 86.7 million in provisioning costs built for our Ukrainian operations. We achieved a full year result of EUR 16.5 million, representing a return on equity of 1.9%. The group net interest income of EUR 340 million in 2022 was up by more than 21%, which highlights the positive dynamic in the financial fundamentals of the group. Our net interest margin improved over the year by 0.2 percentage points to 3.1%, in quarter 4 it stood at 3.3%. Group costs also increased over the year with inflationary and strategic investment, disinflation and strategic investments in staff, IT and marketing needed in particular to drive our retail strategy. There were also significant one-off impacts related to the war in Ukraine. Without these nonrecurring costs, our cost-income ratio would have been 60.8%, close to our previous midterm guidance level. In the end, the group closed the year with a cost-income ratio of 64%. Excluding the results of our Ukrainian operations, the group return on equity was 7.8%. This resilient group financial result was supported by steady operational results with good growth and portfolio quality loans and strong deposit growth. Beyond Ukraine, the group loan portfolio grew by 6.9%, and portfolio quality remained steady over the year with the default portfolio continuing to account for only 2.4% of the portfolio. The high group credit risk cost of 174 basis points for the year were driven largely by the situation in Ukraine. Without which the credit risk costs would have been only 33 basis points, a little up on the 13 basis points of 2021. Group deposits grew by a strong 13.5%. Underlining the continued emphasis we place on the resilience of our liability structure and our digital banking offer for private clients. All in all, the encouraging trends in group positioning and financials provide a firm basis for a positive outlook for the group. For 2023, we are cautiously optimistic, notwithstanding current global uncertainty. Assuming that the war in Ukraine is ongoing, but does not dramatically deteriorate, we anticipate to improve our return on equity to be between 6% and 8%. Midterm, we are confident we can achieve around 12% return on equity as we further benefit from scale effects and the impact of our Ukrainian operations becomes more neutral. We analyzed a range of scenarios for development in Ukraine for our midterm guidance, covering the spectrum from a potential write-down through to significant upside potential should reconstruction efforts begin sooner rather than later. Important is that we believe we can achieve our midterm target with or without our Ukrainian operations which now account for less than 10% of group loans. Our midterm guidance assumes no short-term solution but also no strong further deterioration in the conflict in Ukraine and neighboring countries. Christian will come back to this. We see potential for improvement in capital markets presence and we combine improved financial performance, high development impact with a stronger capital market profile as we convert into a joint-stock corporation with excellent support of our core shareholders we are on track with this conversion process. In this context, we are encouraged by EBRD's decision to work towards joining the ProCredit core shareholder group and significantly expand its equity participation. We see EBRD as a strong partner and a likely further engagement as a significant vote of confidence. We share with EBRD, regional expertise and strong commitment to combining commercial success with high development impact. We also share a commitment to the green transition and alignment with the goals of the Paris Agreement. 50% of group loan portfolio growth in 2022 was accounted for by green loans, which now exceeds 20% of our loan portfolio. ProCredit joined the Net-Zero Alliance in 2022 and commits to associated emission reductions. 2022 was a year characterized by deeply troubling geopolitical developments. As such, our focus was not only on steadying our financial results and ensuring effective risk management, but also on our commitment to socially responsible banking. With that, let me turn to Slide 3. This is not a slide I will dwell on in detail, but I would highly recommend you take the time to read the group impact report, which we published simultaneously with our annual report. As you are aware, impact orientation lies at the core of what we do. It is a central motivating force for staff, managers and shareholders alike. Our desire to have a positive social, economic and environmental impact is embedded in our socially responsible approach to banking. More than 90% of our loans are to business clients. Local agricultural and production enterprises represent some 40% of our business loan portfolio. Our house-bank approach to these clients means we can support them in volatile markets. I think the way we have supported our colleagues and our clients in Ukraine this year testifies to our approach and commitment to have a positive development impact. Our Ukrainian colleagues have maintained close contact with clients throughout the conflict. Even in those areas, directly impacted by the fighting. 50% of our clients in Ukraine are involved in agriculture. Here, we have been particularly attentive to enable working capital loans where prudent. Our IT software company, Quipu was quick to move our Ukrainian bank's IT infrastructure to a location in Germany so that digital banking services could be maintained without interruption. We enabled most staff and their families to leave Ukraine at the beginning of the conflict and are supporting them as each family decides on the best arrangement for their situation going forward. Otherwise, I would highlight on this slide, progress in our net-zero efforts. In 2022, we joined the Net-Zero Banking Alliance, and we are part of the task force on climate-related financial disclosures. As already mentioned, our green loan portfolio now represents more than 20% of the group loan portfolio. At the same time, as a group, we have managed to cut our own emissions by almost 50% since 2018 by modernizing premises, installing photovoltaic capacities, replacing fuel engine cars with electric vehicles and raising awareness among staff about energy and resource [ cost ]. You will also find in our impact report a lot of attention devoted to the unique way in which we recruit and invest in the staff and managers who are the backbone of our success. In the wake of the pandemic, we have been -- we have again been able to intensify recruitment and training efforts group-wide. In the context of inflation and competitive employment market, we have adjusted salaries somewhat in 2022 to secure key staff and manager retention. We remain committed to paying fair salaries without bonuses. Providing a rewarding value-driven work environment remains the main tool to promote staff loyalty and motivation. Let me turn to Slide 4. To summarize how we performed relative to guidance. Our updated guidance for 2022 foresaw medium single-digit growth in our loan portfolio as we adjusted guidance downwards to reflect declines in the loan portfolio in Ukraine and slower growth in the more unsettled economic environment. We put a stronger focus on profitable growth with smaller business clients and with green loans and ended the year with a growth of 3.1%, FX adjusted, the figure would have been 4% and without the portfolio decline in Ukraine would have been 6.9%. We achieved a return on equity of 1.9% which is clearly substantially below the 9.7% we achieved in 2021. We are though encouraged that the group, excluding Ukraine, achieved a return on equity of 7.8%, an improvement on last year. With regard to our cost-income ratio at 64%, we ended the year above our guided range. However, as mentioned, without one-off effects related to the war in Ukraine, we would have achieved a cost-income ratio of 60.8%. Our CET1 ratio at the end of December stands at 13.5% and the leverage ratio at 8.9%. As such, our capital ratios are comfortable and in line with guidance. As already announced, we do not plan to propose to distribute a dividend this year based on 2022 profits. As a prudent measure given our ongoing -- given the ongoing uncertainty. We plan to return to our dividend policy to disperse 1/3 of profits next year. In summary, it is clear that the group result is strongly impacted by prudent provisions in Ukraine this year. However, the business and financial performance and prospects of banks outside of Ukraine are strong. Furthermore, the current developments only reinforce our commitment to our way of responsible banking in our regions of operations. Slide 5 shows the development in our core business, customer loan portfolio growth. Our loan portfolio grew by EUR 183 million or 3.1% in 2022. However, the volume of our Ukraine loan portfolio declined strongly over the year, driven by ongoing repayments on loans and the devaluation of the hryvnya. If you exclude this impact, the loan portfolio grew by 6.9%. In this year, we focused loan portfolio growth more on our core small business clients, which are using the full spectrum of our banking services as well as on green loans to support our SME clients respond to higher energy prices. The green loan portfolio grew by a strong 9% over the year, accounting for more than half of the growth in our loan portfolio. With this, we exceeded our target of at least 20% of the group loan portfolio being green loans. Loan portfolio quality remains higher than for the portfolio as a whole. Our success in these market segments reflects the investments we have made in expertise as well as the growing interest in energy efficiency and renewable energy. Products in our countries of operation remains far less energy efficient than in the euro area. Investment in energy efficiency by SMEs is now more than ever central to competitiveness and net-zero efforts. We see good growth opportunities going forward. Slide 6 shows the corresponding good development in deposits which have increased year-on-year by EUR 748 million or some 13.5% based on strong client relationships and the appeal of our digital approach. Year-on-year, growth was achieved mostly with business clients, although private clients' deposits also increased visibly, reflecting progress in our continued strategic priorities, to consolidate our digital private client offer and positioning. By the end of the year, private clients accounted for some 43% of the deposit volume and our SME clients 47%. Our deposit base is thereby a well-diversified, granular, one which we aim to continue to strengthen. It is worth noting that even in these turbulent last few days, there has been no noticeable movement in the deposit base in any ProCredit bank suggesting confidence from and good relation with our diversified deposit clients. Recent market developments only reinforce us in our commitment to our deposit and private client strategy. Year-on-year growth in deposit is well ahead of loan portfolio growth as the group puts more strategic focus on the deposit-to-loan ratios, particularly in those banks where the deposit-to-loan ratio is below 100%. The group deposit-to-loan ratio increased significantly by 9% -- by 9 percentage points to 103%. The share of site and FlexSave deposits increased year-on-year supporting a positive margin development. However, we anticipate term deposits will also develop growing faster -- growing forward as deposit markets become more interest rate sensitive and we do observe a deposit expense increase visibly in some markets. A robust deposit base is important as volatility and interest expense increase. Whilst we anticipate an increase in deposit expense going forward, there are good opportunities to respond on the lending rate side. Most banks are therefore increasing their marketing and IT expenses somewhat to increase our profile as an attractive savings and service bank amongst target private clients. Our software subsidiary, Quipu will continue to invest in the development and rollout of innovative remote identification and signature technologies as well as m-banking, e-banking, payment and e-wallet solutions. As we look forward, Slide 7 shows that the macroeconomic outlook for our countries of operation remains resilient, although, of course, uncertainty has been introduced by the war, higher energy prices and inflation as well as the downturn in demand in the Eurozone. We expect that in 2022, GDP in our Southeastern and Eastern European regions, excluding Ukraine, grew by some 3.5% with projections for 2023 a little lower at about 3% and a midterm outlook of close to 4%. Even in countries like Bulgaria and Serbia, which are strongly dependent on Russian energy supplies, the GDP forecast for 2023 are firm at around 3%. The outlook for the Ukrainian economy, of course, continues to be strongly negative. Inflation was on average about 11% last year in our countries of operation, although this is expected to come back down to -- in 2023 to the 5% range and to below 3% the year after, depending on country. Central Banks reacted in 2022 with tightening monetary policy and increased base rates. Despite generally positive expected GDP development, the downside risks are clear, and we are looking prudently at credit risk in all countries. At this stage, spillover effects from Ukraine to Georgia and Moldova are relatively limited but we monitor the situation carefully. Generally, in these volatile conditions, our business client advisers work, particularly close with our SME clients as they adapt to developments and we monitor how they respond to higher costs and changes in supply and demand chains. As such, we believe that our value as a specialist SME bank comes into its own in these challenging times. Overall, we believe the prospects for all our regions to be robust. We see that our regions of operation are gaining geopolitical importance and international investments will continue with EU support likely to intensify. In achieving improved macroeconomic alignment and integration as well as greater energy efficiency, SMEs will play a pivotal role. In summary, you hear confidence about the business and financial performance and prospects outside of Ukraine. In Ukraine, we are managing the situation tightly in the short term and continue to see midterm prospects. Strategically, the role of our specialized SME banking group across our regions is recognized to be more important than ever and we believe there to be significant opportunities for our clients and in the emerging international interest and support for our countries of operation. We see our view as confirmed by EBRD's decision to invest more strongly in ProCredit. With these business developments in mind, let me now hand over to Christian.

Thank you, Hubert, for this introduction. In this second part of the presentation, we will take a closer look at the financial performance of the group in '22 as well as the major risk and capital indicators before then looking at segment performance and doing our usual deep dive on Ukraine. Later on, I will give the word back to Hubert, who will close our presentation by walking you through our updated guidance. You will see that we did some work on our slide deck, adding a few graphs that help illustrate the most significant developments and drivers of the main financial line items and indicators. The full P&L view that you may be used to from previous calls can now be found in the annex of this presentation. Let us start with the high-level view on cost-income ratio. Operating income increased strongly year-on-year by EUR 58 million or 20.6% due to improvements in all revenue streams and on the level of all ProCredit banks outside Ukraine. In fact, the average year-on-year increase of operating income per bank, not including Ukraine, was 28%. Comparing the 2 fourth quarters of 2021 and 2022, we see a very similar development with operating income increasing 20.4%. And also against quarter 3 '22, there has been a good 7% increase, which underlines the continued positive dynamic of our major income drivers. On the other side, personnel and administrative expenses increased year-on-year by EUR 36.5 million or 20.2% and resulting in a total year-on-year increase in profit before tax and loan loss provisions of EUR 21.4 million. That's 21% on the level of the group. The increase is at least in part driven by a variety of one-off effects, mostly related to the war in Ukraine. The net amount of one-offs amounts to some EUR 10.2 million which accounts for about 1/3 of the total increase. Comparing the last quarters of 2021 and 2022, we see a slightly stronger increase in costs than in the year-on-year view which is also entirely related to the same one-off items. I will give you the details on the one-offs later on. Otherwise, cost increases are mainly driven by higher salaries, investments in marketing and IT as well as inflationary pressures affecting a broad range of cost items. As a result of these developments, the cost-income ratio improved only slightly year-on-year. But excluding one-off items, the adjusted cost-income ratio is, as Hubert mentioned, at a good level of just above 60% and thereby in the range of our medium-term target of the last year. Let's move on. Net interest income continues to improve on a quarter-on-quarter basis, mostly due to continued positive pricing effects related to base rate increases, but also positive volume effects. The net interest margin climbed from 2.9% in the first quarter of the year to 3.3% in quarter 4, driving a EUR 12.4 million increase. That's 20.6% in net interest income between the 2 periods. And also against quarter 3, we see a strong growth of EUR 5.4 million or 8%, which shows that at least for now, our banks continue to benefit from the high interest rates. The strong dynamic of net interest income is also a reflection of our prudent asset and liability structure. Loans are primarily variably priced, bonds are mostly short term with maturities of less than 12 months, which protects us against strong movement of interest rates. Liabilities are dominated by deposits, which again show a healthy split between current, savings and term deposits with maturities of usually more than one year. For the global banking sector, the last days have been turbulent, triggered by insolvency of the Silicon Valley Bank and further exacerbated by the developments around Credit Suisse. In the face of this increasing volatility in banking markets, our daily deposit movements continue to show a high level of stability. Year-on-year, net interest income increased strongly by EUR 42.6 million or 19.2%. This is almost in equal terms driven by net growth and pricing effects. Moving on to fee income. Quarter 4, net fee income increased by EUR 0.5 million against quarter 3. That's an increase of 3.5% and also stands visibly above the level of all previous quarters. We do not see strong volatility in this position, rather a gradual growth over the past quarters, which is a reflection of our simple business strategy and steady expansion of our client base. Year-on-year, we see an increase of EUR 3.9 million, driven by higher income in all categories. Moving on to personnel and admin expenses in quarter 4. These expenses increased with respect to the previous quarter rather visibly by EUR 14.2 million. About half of this increase relates to one-off items related to the war in Ukraine. This is highlighted by the 9-percentage point difference between the stated and adjusted quarter 4 cost-income ratio that you can see in the upper chart. The other half of the increase can be split between seasonal effects related to closing year-end financials as well as structural cost increases that are indeed in part driven by inflationary pressures. The year-on-year increase in expenses of EUR 36 million includes EUR 11.8 million in costs that are a result from the war of aggression against Ukraine. In our quarter 3 analyst call, we highlighted additional legal consulting and audit fees as the major source of these one-time expenses. In quarter 4, these type of expenses were close to nil as most projects around analyzing the risk situation around Ukraine and potential implications for the group have been finalized. Rather, the cost increase in quarter 4 comes from the recognition of a EUR 6.2 million onetime write-down of fixed assets in Ukraine, predominantly buildings and land as the war lead to a reduction in Ukrainian real estate prices. It should be noted though that none of our premises have been damaged in any meaningful way since the war began. Beyond that, reflected in net other operating income are some nonrecurring positions in our view, on the expense side, EUR 1.9 million, mostly write-down of goodwill. And on the income side, EUR 3.5 million from fair value effect on derivatives. This, in some, brings the net extraordinary items of 2022 to a negative EUR 10.2 million. Following the chart in the bottom left corner, we can, therefore, conclude that the increases in depreciation of EUR 8.7 million as well as legal and consulting fees of EUR 7 million are indeed primarily related to nonrecurring cost items. Personnel expenses increased as basically all our institutions made inflationary adjustments to salaries on top of the annual salary review. The EUR 4.5 million increase in marketing expenses is distributed broadly equally across all ProCredit banks. We aim to further solidify our positioning as a leading SME bank in our markets, and build on our brand as a safe, digital and transparent bank for private individuals. Moving on to loss allowances. Loss allowances in quarter 4 amounted to EUR 25.4 million and thereby broadly in line with what we had seen in the previous 2 quarters. Given the continued volatile environment caused by the war in Ukraine, we have been prudent in our provisioning throughout the entire year, shoring up provisions through additional management overlays. That means manual adjustments to the IFRS 9 model output to account for the increased uncertainties related to geopolitical tensions, the rise of inflation and energy prices and supplies. The full year provisioning expenses amounted to EUR 104.6 million, of which EUR 86.7 million fall on our Ukrainian portfolio. The amount also includes a release of EUR 16.4 million in management overlays that were added during the COVID year 2020 to account for certain macroeconomic risks, which ultimately did not materialize. To reflect the more volatile macroeconomic and geopolitical environment today, we build up new management overlays in the amount of EUR 39.6 million. That means a net increase of EUR 20 million in overlays considering the release of COVID overlays. EUR 28.9 million, so more than 70% of these new overlays fall on banks outside Ukraine of which a larger part is focused on banks and countries whose economies would likely suffer more pronouncedly from a further escalation of the war in Ukraine or from future energy supply shocks. The overlays are a result from attributing higher occurrence probabilities to our adverse scenarios and simulating additional stress to our PDs and LGDs based on historical observations. With some EUR 18 million in provisions, the full year cost of risk of banks outside Ukraine was at a steady yet due to the overlay slightly elevated level of 33 basis points, isolating the effect from the release of COVID management overlays on the one end, and the addition of new management overlays on the other, we see a normalized cost of risk of around 10 basis points, which is close to the average of the last 5 years. Moving on. We see that this structurally low cost of risk of our banks mirrors the steadily low share of defaulted loans in our banks outside Ukraine amid a write-off ratio that is consistently close to 0. Year-on-year, the share of stage 3 loans increased from 2.3% to 3.3% due to stage transfers in Ukraine. Overall, the share of defaulted loans in Ukraine increased because of the war from just about 1.5% to 12%. Not considering the Ukrainian portfolio, the share of stage 3 remains steady at a level of 2.4%, which is significantly below the level of the banking sectors in which we operate. Stage 2 loans also increased markedly by 3.7 percentage points due to prudent stage transfers within our Ukrainian portfolio. As of December 22, 34% of our loans in Ukraine are in stage 2 as the substantial deterioration of the macroeconomic conditions also outside the war zone triggered a significant increase in credit-risk criteria defined by IFRS 9. Our Stage 2 loans in Ukraine have an average coverage of 13% and the vast majority of these loans are being served normally. Our stage 3 coverage ratio increased significantly year-on-year by 12 percentage points. This reflects the fact that in part because of our management overlays, our coverage ratio for defaulted loans in Ukraine is at a very high level of 85%. Moving on to capital. Our CET1 ratio stands at 13.5%, well above the regulatory requirements of 8.3% and some 0.6 percentage points below the previous year figure. Risk-weighted assets increased more markedly than usually EUR 486 million since the beginning of the year, besides the portfolio growth of EUR 183 million. This development is mainly impacted by the sovereign downgrade of Ukraine, resulting in higher risk weight of 150% for all exposures against the Ukrainian state including Central Bank balances. This effect would be reversed, of course, with the Ukrainian sovereign were to be adjusted back to a minimum B- rating. CET1 capital increased by EUR 28 million, mostly because of the attribution of quarter 4 '21 profits. It does not yet include, however, any part of the full year profits of 2022 which amounted to EUR 16.5 million. This will have a positive impact on capital adequacy in the future of approximately 27 basis points. Now let's move to the segments and our deep dive on Ukraine. Our banks in Southeastern Europe continue to achieve very good results. Their contribution to the consolidated profit was EUR 62.5 million. That's an increase of EUR 14.7 million compared to last year. The return on equity improved significantly to a sound level of 10.1%, and the cost-income ratio dropped by 6.1 percentage points, well below the 60% mark. For our 2 Eastern European banks in Georgia and Moldova, the contribution to the consolidated result also increased by a strong 26% from EUR 15.3 million to EUR 19.6 million (sic) [ EUR 19.3 million ]. This corresponds to return on equity of 15.6% and a solid cost-income ratio of 49%. And South America, where our Ecuadorian Bank achieved a profit of EUR 2.3 million that corresponds to a return on equity of 4.4%. The cost-income ratio also improved by 6 percentage points. The group performance, excluding the negative contribution from ProCredit Bank Ukraine was overall strong. The return on equity of 7.8% is 0.9 percentage points above the previous year figure and the cost-income ratio, excluding Ukraine of 66.2% may be higher than on the consolidated level, but it is indeed also showing a marked improvement against the previous year of 3 percentage points which underlines the progress made towards higher underlying profitability. And at last, our Ukrainian bank contributed obviously negatively to the group result by EUR 52 million due to the aforementioned provisioning expenses of EUR 86.7 million. Now let us take a deeper look into the performance of our segments and the banks therein, as I mentioned, profitability of our largest segment in Southeastern Europe improved visibly both structurally as well as in absolute terms. Higher net interest income on the back of overall stable margins helped achieve a 21% increase in operating income year-on-year with costs increasing only slightly, the cost-income ratio, therefore, improved by 6 percentage points to a level of 58%. Credit risk costs increased from 18 basis points to 35 basis points that's EUR 7.7 million, mostly due to the management overlays that I covered earlier. In spite of this increase and the return on equity of the segment improved visibly from 8.4% to 10.1%. We see the return on equity and the cost-income ratio per bank in the table in the bottom right-hand chart, both these indicators improved or stayed at their previous good levels in all banks of this segment. Now moving on to Eastern Europe. We see a marked increase in operating income of EUR 15.3 million in Georgia and Moldova alone. For Ukraine, operating income remained stable at EUR 49 million. The cost-income ratio of Georgia and Moldova improved by 2.5 percentage points but on a full segment basis, deteriorated mostly because of the aforementioned write-offs of fixed assets in Ukraine. In spite of this effect, the full segment's profit before provisions and taxes increased by EUR 3 million or 6.6%. Our bank in Georgia is showing results that are broadly in line with the previous year, with a good return on equity of 16% and a cost-income ratio below 50%. And in Moldova, our smallest bank of the group, results improved visibly with respect to the last year as scaling effects continue to materialize and credit risk costs remain low. Also, the bank is temporarily benefiting from higher base rates in the country. We also illustrated Ecuador on this slide, even though it is obviously a separate segment in itself. I already highlighted the improved cost-income ratio as well as the profit of just above EUR 2 million. Let's move on to Ukraine, for which we again prepared a special slide summarizing the main events of the year and the current situation on the ground. In terms of operations, there's fairly little new to report with respect to our quarter 3 analyst presentation, we are mostly relieved that after more than one year of this senseless war of aggression, all our staff remain in good health. Of our 11 mobilized colleagues, one sustained an injury from which he will make a full recovery. Otherwise, our staff only suffered from the destruction of some of their personal property due to the indiscriminate bombardments that have taken place in the last month. The resulting power outages that have been covered in some detail by international media have not caused any meaningful disruptions to our operations. In 2022, our portfolio in Ukraine reduced by EUR 174 million. That's more than 20%. This is in part driven by FX effects and in part by ongoing repayments of clients whilst new loans are only being disbursed at a very limited capacity. Since our quarter 3 '22 call, we merged the yellow and orange zones of our map into one common yellow zone because the risk profile of clients in these areas have proven to be rather homogeneous. The share of portfolio in green zone increased by 8 percentage points since our last presentation, and the portfolio in the red zone amortized by approximately EUR 13 million or 18%. Overall, we closed the year with a share of impaired loans of 11.9%, which is an increase of more than 10 percentage points from the -- from before the war. The total provisioning expenses of EUR 86.7 million, as I cited earlier, corresponds to 15% of our total loan portfolio in the country and include management overlays of more than EUR 10 million. Our coverages are at reassuring levels with total provisions covering 16% of the total loan portfolio, 154% of portfolio in the red zone and 130% of portfolio in default. Loans in default have an average direct coverage of around 85%. Throughout the conflict our bank's liquidity position has remained steady and capital buffers remain at a comfortable level of 5 percentage points. With this, I close the financial and segment overview. Let me now hand over back to Hubert, who will share with you our new short- and medium-term outlook.

Thank you, Christian. In conclusion, let me end with our short- and medium-term outlook. Slide 22 highlights the strong track record we have been achieving results in line with guidance since our stock exchange listing. We also made significant progress toward meeting our prior medium-term guidance, highlighted by the strong growth in loan portfolio we achieved over the years in line with the 10% annual growth rate guided and to return on equity of 9.7% we achieved in 2021, broadly in line with the 10% guidance. Strategic initiatives now in place give us further confidence to now enhance our midterm guidance. On loan portfolio growth, given the strong market position we have now established in most markets, we are going to put even more emphasis on profitable growth. On profitability, as outlined in today's presentation, we see strong trends in underlying financial performance, which gives us confidence in improved prospects even without the former strong profit contribution from Ukraine. We have not yet achieved our guided cost-income ratio of below 60% but even here, we see good progress if we exclude one-off effects resulting from the war in Ukraine. We achieved in 2022, the target of 20% of our loan portfolio being in green loans. We continue to see good opportunities for growth. Although there is very considerable uncertainty in macroeconomic and banking sector trends at the moment, we wanted to guide as concretely as possible for 2023 and midterm based on the assumptions outlined on this slide. Slide 23 provides our outlook for 2023. We aim for single mid-digit growth in loan portfolio. This includes some further decline in the loan portfolio in Ukraine and excludes foreign exchange effects. We aim to focus growth in particular on our core small business loan portfolio. We foresee a return on equity in the range of 6% to 8%, assuming a 0 net profit contribution from Ukraine. Our cost-income ratio is expected to stay on a similar level to 2022. This projection includes a conservative estimate of the impact of inflation on personnel and administrative costs and consider some one-off costs associated with the envisioned change of the legal form of the company. We aim to keep our CET1 capital ratio above 13% and our leverage ratio at around 9%. At the same time, we plan to return to the group dividend policy to disperse 1/3 of group profits of the year 2023. Turning to Slide 24. You see our confident midterm outlook. We see continued steady loan growth potentially in our core SME and green sectors in all markets to drive medium- to single-digit group growth rates. As credit risk costs should stabilize and we continue to profit from scale effects, we see the potential for a return effect on equity of about 12% midterm. This assumes a cost of risk of between 25 to 30 basis points, which takes into account ongoing macroeconomic uncertainty, but clearly not a significant expansion of conflict in Europe. As we grow the loan portfolio, whilst maintaining steady margins, we see good opportunities to bring our cost-income ratio below 60% to about 57%. We are committed to combining the improved financial performance with continued strong commitment to our impact mission. On these terms, we aim to increase the share of green loans to 25% of our portfolio. More broadly, we hope our bank in Ukraine can play a valuable role as soon as international stabilization and recovery initiatives are possible. Equally, we look forward to supporting our SME clients to grow, formalize and contribute to sustainable regional development in our Eastern European and the West Balkan countries of operation as they accelerate their EU accession efforts. We are very conscious of the prevailing challenging context, but we are also confident in our long-term experience in working in volatile countries and bringing on the opportunities while managing risk intelligently. I shall end on this positive note. This concludes our assessment of our group performance in 2022 and the financial year 2023 and medium-term outlook. Christian and I would now take your questions. Please note -- one last remark. Please note that we will be holding an analyst workshop tomorrow to provide more color for analysts on the plans to achieve these midterm targets. But we are also happy to take any questions that should be addressed at this stage. Thank you.

[Operator Instructions] First question comes from Marius Fuhrberg from Warburg Research.

Yes. Basically, 2 questions from my side. First one, it's probably easier, I guess, what is the extra proportion of variable loans in your loan portfolio? And the second on -- in the guidance for 2023, you mentioned that this includes risk costs of up to 70 basis points but given the rather or -- the already high coverage ratio, especially in the Ukraine and the substantial risk provisioning that you've already done in this area, what is your decision on where this is coming from also, as you mentioned, that you do not expect a substantial improvement, but also now worsening of the situation in Ukraine. And therefore, I'm wondering a little bit on the 70 basis points with the expectation for 2023.

Thank you, Marius, for the question. First of all, on variable loans, it's somewhere north of 60%. The exact number I will give you tomorrow. On the guidance. Our LPs, our basic approach is that we want to consider all risks early on as we identify and see them. And our provisioning in 2022 does represent this approach in our view. What does it mean for 2023? We think that 2022 has created a prudent basis. The coverage ratios and also the level of management overlays reflect this in our view. However, for 2023, there's unfortunately still a relatively high level of uncertainty on loss allowances. The attack on Ukrainian infrastructure are just one example why it is still difficult to assess as long as the war is still ongoing. Our stress scenarios, of course, also take into account an extension of the war to further areas of the country or even to further countries of operation. So further provisioning will much depend on the further development of the war. But assuming that fighting will be contained to the currently contested areas and assuming that the macroeconomic impact of the war on the country is currently adequately estimated. We think that a very large share of credit losses arising from this conflict has already been reflected in 2022 rather than in 2023. Still we cautiously plan with up to 70 basis points, which -- and really, this is important to note, we believe is a cautious number at this stage. And we deliberately formulated up to so hopefully, we can end up with a number lower than that.

Okay. And maybe to clarify on that. The guidance you gave of 6% to 8%, does the lower boundary of 6%, also -- or other way around, does the upper end of the guidance also reflect the 70 basis points? Or would you be able to achieve ROEs of north of 8% if the risk cost would be like, yes, more like 30 basis points or so.

Yes, there are obviously more variables than risk costs. The 6% indeed, that corresponds to the 70 basis points in our scenario. But there are obviously more variables. We are living in a dynamic interest rate environment that can influence significantly our net interest income. We're also living in a high inflation environment that can drive costs. We think we have been overall conservative in our projections on all these ends. But indeed for now, as the overall framework is still dictated by the war we remain on the cautious side with this guided corridor.

The next question comes from Milosz Papst from Edison Group.

Firstly, I just wanted to touch upon the impact of the Russian strike on the energy infrastructure in Ukraine. What you've highlighted, obviously, it had a limited impact on your branch network. But what do you see in terms of the impact on your clients, have they been flexible in terms of countering this with diesel engines and -- sorry, diesel generators and so have been generally resilience with this respect? Secondly, you've highlighted that the deposit-to-loan ratio improved at the group level. Can you also just briefly talk us through whether you were able to improve this ratio for countries where you felt this is most needed. I can see, for instance, the ratio improved in Ecuador, which you've highlighted last year as one of your focus like regions with this respect. And finally, can you give us an indication on the expected headcount growth for this year?

Well, on your question regarding Ukraine, there is obviously a very differentiated picture. If you don't look specifically to the red -- to what is shown in red in our map, in the red zone, we basically have provisioned most of our -- or virtually, all of our clients. In the other zones, economic activity is still going on. It's very diversified. It really depends on the clients, on their location and on the business activity they have, as you will probably know, 50% approximately of our portfolio in Ukraine is agriculture that is not so much dependent on energy. It is much more dependent on logistics and on access to ways to export the product they produce. So overall, it is a very differentiated picture in the so-called green zone and also in the yellow zone. On the deposit-to-loan ratio, if I may. we have also there made improvement in virtually all banks in our universe, in particular, the banks which had the lowest cost income -- the lowest deposit-to-loan ratio, we made progress over the last year. We increased overall to north of 100%, and we will continue to work on this in the year to come.

Adding to this, Milosz, we have basically 2-digit percentage increases on the deposit-to-loan ratio in virtually all banks with the exceptions of Kosovo and Bulgaria, which are very liquid banks with deposit-to-loan ratio above 100% and Albania, the deposit-to-loan ratio increased by only, if I can say that, 4%, 4 percentage points. Your last question was on the headcount of the group? Did I get this right?

Yes, correct.

That increased from 3,178 to 3,437.

And what are expectations roughly for this year, just a ballpark estimate?

Yes. We expect that staff numbers will continue to increase in '23 moderately in a single percentage range and then flatten out.

The next question comes from Philipp Häßler from Pareto Securities.

I have 3 questions, please. Firstly, can you give some guidance for the outlook the net interest margin development in the current year. Do you see some pressure on the funding side? Or are you relatively comfortable that the margin that we saw in Q4 will continue and the current year, can we take this as a run rate for the current year? Then on the personnel expenses. Q4 personnel expenses were up quite significantly. I guess that was due to inflationary effect. How do you see inflation develop in the current year? And what will be the impact on personnel costs? And here, again, the question is the Q4 figure a good run rate for the current year for the quarters? And then the last question, maybe you could give some details on the deposit insurance systems in the Southern and Eastern European countries, which are not part of the EU.

Thank you, Philipp, for your questions. On the net interest margin, indeed, it has had a very positive dynamic in -- throughout the year, starting from 2.9% in the beginning to 3.3% at the end. In our short-term guidance, we -- to be on the more cautious end. We have not factored in the recent rate hikes that came in just a few days ago from the United States and also from the ECB. So what we are also still factoring in is, of course, that the deposit rates will eventually catch up because our loan portfolios are largely variably priced. We have been benefiting so far, and we do expect that there will also be a more pronounced repricing in 2023. But as you can hear the interest rate environment remains dynamic, and it is difficult to project. This is what we underlined in our base case at least. Your second?

Sorry. Sorry, the line was partially -- I didn't fully understand you. So you expect the 3.3% as a good run rate for 2023 or not?

It will be a good run rate, certainly in the beginning, but we -- in our short-term guidance, we factored in a slight decline in the net interest margin for the entire year. I think your second question was on personnel expenses, which in quarter 4 were elevated compared to quarter 3. Quarter 4 always has some one-off effects in terms of also personnel expenses because we built provisions for untaken vacations on the level of the bank -- on the level of the banks. So it's a slightly elevated run rate for the year 2023 or especially for the first quarter, the truth lies somewhere indeed between quarter 3 and quarter 4. We have adjusted salaries across the group on the level of all institutions besides the usual performance-based increases. We also made inflationary adjustments, but indeed, quarter 4 is slightly elevated. You will need to help me again with the third question.

I was wondering whether you could give us some details on the deposit insurance systems, which are in place in the Eastern European countries, Southern Eastern European countries, which are not part of the EU.

Anything in particular, Philipp, that you -- because it's very different from country to country. There are insurance schemes in place in all countries. Typically, what is insured are amounts, I would say, in the 5-digit range. So not quite the EUR 100,000 that you would know from the euro area, amount slightly below that, but of course, also the average balance of private individuals is slightly below that. All our banks contribute to the deposit insurance scheme. This is a cost that is reflected in our net other operating income and is indeed one of the major cost drivers of this -- within this position. But maybe there's something in particular that you want me to dive into?

No, no, that's fine. Do you have perhaps a figure what on average the portion of insured deposits are? Or can't you provide such a figure?

This, I would need to get back to you on this as I don't have on hand now. It is also relatively different from country to country, I assume.

Gentlemen so far there are no more questions. Would you like to add some closing remarks?

Yes, thank you for all your questions and for your participation in our analyst call, covering our 2022 financial year results. We hope to have given you as much transparency as possible. If you have any additional questions, please do not hesitate to contact Christian or Nadine. The next scheduled conference call will take place when we publish our Q1 results on 15th of May 2023. Again, thank you for your participation.

The conference is now concluded, and you may disconnect.