ProCredit Holding AG (PCZ) Earnings Call Transcript & Summary

Welcome to everybody on this call on the quarter 4 results for the ProCredit Group. My name is Hubert Spechtenhauser. I'm the Chairman of the Management Board. As always, I'm joined by Christian Dagrosa, our Chief Financial Officer. We aim to spend some 40 minutes to cover today's presentation, which has been available since earlier 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 warnings to pay 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 Slide 1 and outline today's call. I will cover the highlights before Christian addresses the financial performance and major risk indicators in more detail. I will then close the presentation with some remarks on our outlook. From whichever perspective we look at the year 2023, it has been a successful one [ through and through ]. Our balance sheet grew by more than 10%, thanks above all to a strong development of our deposits of almost EUR 1 billion. In many banks, loans grew in excess of 5% amid challenging macroeconomic and political conditions. The portfolio development on the group level looks more muted due to a targeted and logical reduction of loans in Ukraine, a challenging market environment in Ecuador and to some extent, also negative foreign exchange effects. Our financial performance is at an historic high, characterized by a net profit well in excess of EUR 100 million, which provides an attractive basis for our intended dividend distribution this year. Cost efficiency has improved markedly, and liquidity, capital and credit risk indicators have all improved visibly. But the year was not only successful in financial terms. In September, we finalized the change in legal form of ProCredit Holding and successfully transformed into a joint stock corporation. Our bank in Ukraine achieved robust results, managing a return on equity of 28%, achieving a strong deposit growth amid challenging market conditions and significantly improving credit quality, all while providing critical support to Ukrainian SMEs. In Kosovo, we inaugurated our ProEnergy solar park, which will generate clean energy for close to 500 households and thereby contribute to the clean development of the region. ProCredit Bank Ecuador became the first bank in the group to publish its very own impact report with a particular focus on gender and diversity and equity. On the back of these good results, we have spent a better part of last year rethinking our goals and our vision for ProCredit in our markets. The result of these deliberations to which managers of all credit entities participated is an updated group business strategy, which we will present in greater depth during our second Capital Markets Day tomorrow. In a nutshell, in the coming years, we want to significantly increase our footprint in our markets in order to enhance profitability and resilience of the group and broaden our positive impact in the region. Let me turn to Slide 2 and the highlights of the year 2023. Our group achieved a result of EUR 113.4 million, which corresponds to a return on equity of 12.2%. Operating income shows an increase of 21.4% year-on-year as all regular revenue streams developed very positively. The cost/income ratio improved visibly by more than 4 percentage points and is at a good level of 59.9 percentage points. All our banks in Southeastern and Eastern Europe, including the bank in Ukraine contributed positively to the results. Some of them show in part significant improvements in profitability and cost efficiency, and almost all of them account for solid 2-digit return on equity figures. The strong development in our P&L was combined with resilient, impact-oriented development of our balance sheet. Our loan portfolio increased by 1.9% year-on-year, which includes a targeted reduction in Ukraine of around EUR 85 million as well as some negative foreign exchange effects. Portfolio quality has improved, above all in Ukraine, but also to a smaller extent on the level of the other banks. This performance has supported an overall moderate cost of risk of 25 basis points, which was mainly driven by strengthened management overlays. Our CET1 ratio increased by a strong 0.8 percentage points to 14.3%. In this figure, we reflect interim profits as of September 2023, net of 1/3 for our anticipated dividend payout. Let me turn to Slide 3 to summarize how we performed relative to guidance. Our updated guidance for 2023 foresaw lower to 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 what was still an unsettled macroeconomic environment for the most part of the year. We continue to put strong focus on profitable growth with smaller business clients and with green loans and achieved in many banks, especially in Southeastern Europe, good growth figures well above 5%. We updated our return on equity guidance twice in the course of the year as adverse assumptions underlying our original projection, in particular with respect to the ongoing war in Ukraine did not materialize. In December, we then confirmed our 12% target in spite of the enactment of a onetime bank tax in Ukraine, which triggered some EUR 10 million of additional tax charges in quarter 4. The return on equity was finally at 12.2% and would have surpassed the 13% mark in the absence of the bank tax. Our cost/income ratio of 59.9% is at the lower end of our updated guidance of 60% to 62%, and our CET1 ratio is at 14.3%, comfortably above our projection. At 8.8%, the leverage ratio is broadly in line with our projection. As already announced, we plan to propose a dividend distribution that is in line with our dividend policy to disperse 1/3 of profits. Slide 4. So some of the important milestones we have achieved this year on the ESG front and also highlights the areas on which we will place particular focus in the coming years. Of course, we have continued working on reducing our Scope 1 and Scope 2 emissions in 2023. We achieved this through office modernization in line with EDGE standards, the gradual replacement of our car fleet with electric vehicles and other measures to reduce energy and water consumption. By 2030, we want to reduce these emissions by 42%. However, the absolute amount of these emissions are, of course, drafted by our Scope 3 emissions, meaning the emissions we finance through our lending operations on the level of our clients. In 2023, we have defined concrete steps to reduce our Scope 3 emissions that will help us achieve our net-zero commitment for 2050. We have identified a comparatively small number of a few hundred business clients who are responsible for 28% of our total loan portfolio emissions. By 2027, we will have engaged with all of these clients on net-zero. This means supporting them in measuring emissions and setting emission targets as well as providing them with the funding and know-how for investing in green technology. As every year, we have summarized our ESG achievements, milestones and goals in an Impact Report, which we published earlier this morning on our website. Moreover, we have added voluntary disclosures in the form of a sustainability report inside the annual report. We encourage you to read these disclosures, which are a group-wide effort and underline the commitment of our staff and our institution as a whole to positive impact. Slide 5 shows the development in customer loans. At a group level, the portfolio increased by EUR 119 million. That includes a reduction in Ukraine of EUR 85 million. The foreign exchange adjusted growth was at approximately 2.3%. Though the absolute growth on group level may not be much, we have achieved good results, shaping the balance sheet in line with our vision for the group. More than 50% of our total loan growth came from the renewable energy loan portfolio, which grew a strong 14.9%. Further, we grew well in investment loans and reduced the share of loans to medium-sized businesses, thus setting some of the groundwork for our updated group business strategy. Slide 6 shows the development in deposits. Building a large and granular deposit base has been a key strategic priority for us in the last 2 years. We still see good potential in the coming years to strengthen our margins by a broader and more granular refinancing structure. Also, in markets in which retail banking is largely unregulated and characterized by aggressive and in transparent market practices, we see distinct potential for positive impact in providing these services to our clients in a responsible, transparent and sustainable way. Since the beginning of the year, our deposits grew by EUR 965 million. That's a strong 15.3% growth rate. This achievement puts us in a good proposition for our ambitious growth targets for the coming years. It also underlines our strong positioning as an SME bank as well as the attractiveness of ProCredit Direct for private individual clients on which we want to further leverage in the years to come. Half of the deposit growth has come from private individual clients' deposits, half from business clients. Our deposit-to-loan ratio is up 13 percentage points year-on-year with positive developments across almost all banks. We are certain that this development will gradually unlock additional potential of our banks to scale business and to optimize margins. The economic outlook of our countries of operation has somewhat improved since the beginning of the year, though the major underlying risk factors, in particular, the war in Ukraine and the risk of widening of the conflict still remains. Inflation has slowed down and expectations for GDP growth has slightly improved, including for Ukraine, for which economists now expect a GDP growth of 2% to 3%, so broadly in line with the region. We expect an overall robust attitude from our clients. A quick view on the challenges they have weathered in the course of the last few years, including COVID, energy shortages, trade restrictions against Russia, persistent inflation and increasing interest rates, clearly underlines their resilience and ability to adapt. Shortage of qualified labor amid continued pressure for immigration remains amongst the biggest concerns for them. More broadly, many of our clients were encouraged by the strengthened international interest in the region. Since last year, we have seen significant increased momentum regarding EU accession and some increase in foreign direct investments. The geopolitical importance and economic potential of our countries of operation and the central role that SMEs play there in remains a driving force behind the impact and financial potential of our group. With these strategic reflections in mind, let me now hand over to Christian.

Thank you, Hubert. Let us now look at the financial performance of the group for the full year as well as quarter 4 and the major risk and capital indicators. As always, we report on our bank in Ukraine, though a largely stable situation on the ground and a robust performance of our bank in this year give a little ground for a detailed update. Let us start by looking at the financial results line item by line item, starting with operating income and expenses. Operating income has grown strongly year-on-year as in previous quarters. At year-end, operating income was EUR 73 million above the previous year level. That's 21%. Net interest, net fee and income from FX transactions increased visibly. The 21% increase from this year comes on top of a 21% increase in the previous year. Also, I should note that these are very granular improvements that we see on the level of almost all ProCredit banks showing that our business model does work well in all our markets. Operating expenses increased by EUR 29.6 million. That's around 14%. We do have a dedicated slide for the details, but to preempt, the main cost drivers remain personnel expenses as well as IT and marketing. All in all, our income before tax and loss allowance increased substantially by EUR 43 million or 35%, driving the cost efficiency that is reflected in the 4.1 percentage point improvement in the cost/income ratio to a good level of 59.9%. We recorded a limited number of extraordinary items this year with a net negative effect of approximately EUR 3 million. They mostly relate to negative revaluation effects of derivatives due to FX movements as well as fees for the conversion of the legal form completed in September 2023. Adjusted by these items, the cost/income ratio would have stood at 59.4% and that is 1.4 percentage points below the ratio adjusted by extraordinary items from last year. Let's flip to net interest income. The strongly positive dynamic of the previous quarters has expectedly slowed down quarter 4. Net interest income increased moderately by EUR 3.6 million or 4% with respect to quarter 3, while the net interest margin slightly reduced with respect to quarter 3 by 4 basis points. This is in part due to continued strong deposit base, which increases the denominator of the ratio without adding much to the numerator. Year-on-year, net interest income is up a very strong EUR 73 million or 27% as the net interest margin for the whole group is at 3.6%, 53 basis points above the previous year. While we certainly benefited from the higher interest rates of the last years, we are actively working on structurally consolidating margins through strategic measures aiming at optimizing both sides of the balance sheet. On this point, we will touch again in our medium-term outlook and provide more substantive details during tomorrow's Capital Markets Day. Moving on to fee income. Year-on-year, net fees are up EUR 2.8 million or 5%, especially thanks to a steady expansion of our payment services. We continue to focus on growing our client base, including non-loan SME clients who appreciate our strong regional presence and competitive international payment services. With these clients, we are able to enhance operational performance without driving risk-weighted assets, grow our deposit base and build a strong pipeline for future growth. Year-on-year, we have been able to grow the number of MSME clients by more than 10% to 72,000. And similarly, the number of our private individual clients grew by 7% to close to 190,000. Moving on to personnel and administrative expenses. As I mentioned earlier, our cost base grew by EUR 29.6 million or 13.6%. Inflation was driving prices, particularly in the first half of the year. And in parallel, we've been investing strongly in staff, IT, marketing and our branches in line with our updated group business strategy. Personnel expenses make almost 2/3 of that increase. Year-on-year, the average number of staff has grown by over 10% as we've been building capacity across our group in order to lay the foundation for an ambitious growth path ahead. In addition, high inflation rates and tight labor markets have made it necessary to revise salaries across the group, leading to a 9% increase in the average personnel costs. Beyond that, IT and marketing have been particular areas of our focus. These investments, we consider them necessary as we aim to position ourselves as an attractive bank for private individuals in our markets that will help us drive the balance sheet growth to achieve important scaling effects down the road. Quarter 4 personnel and admin expenses have been somewhat elevated due to seasonal effects. Nonincome taxes play a role in this hike, but also provision for untaken vacations. Compared to quarter 4 '22, the cost base grew rather moderately by EUR 2.4 million or 3.5%, but that is also due to more relevant extraordinary items recorded in quarter 4 '22. Adjusted by one-offs, the quarter 4 '23 cost base is about 14% higher than in quarter 4 '22, in line with the increase that we see in this line item for the entire year. The quarter 4 '23 cost/income ratio adjusted by extraordinary items is approximately 2 percentage points below the adjusted ratio for Q4 '22. Moving on to loss allowances. Year-to-date, we see total loss allowances in the amount of EUR 15.5 million, which corresponds to a cost of risk of 25 basis points. About 1/3 of this amount came from our Ukrainian portfolio. And overall, it is worth noting that the loan portfolio performed very, very strongly this year. Regular through-the-year stage transfers on the level of the group have added only around EUR 16 million to total loss allowances this year, and this has been almost entirely offset by recoveries of written-off loans in the amount of around EUR 14 million. In quarter 4, we conducted our annual review of parameters, including the revision of management overlays and the implementation of model enhancements. In this instance, we added approximately EUR 10 million of model provisions compared to quarter 3. This figure includes a release of provisions from the update of macroeconomic parameters as the overall outlook for our region has improved with low inflation numbers and slightly more optimistic GDP expectations. Also included in this amount are new management overlays in the amount of around EUR 17 million, which account for the continued geopolitical uncertainty related to the ongoing conflict in Ukraine. This means that the full year impact of model effects on our loss allowance is EUR 13.5 million. The total stock of management overlays, which were first booked in 2022 in the wake of the Russian invasion of Ukraine to account, on the one hand, for uncertainties of parameters used for the expected credit loss model. And on the other hand, also for uncertainties related to the macroeconomic and political development of the region grew by EUR 22 million to EUR 62 million. These overlays give the group an adequate buffer for any potential deterioration of the situation related to the war in Ukraine. Moving on to our credit risk indicators. As I just hinted, too, portfolio quality has remained remarkably strong, both in and outside Ukraine throughout the course of the year, which continues to be marked by geopolitical uncertainty. As of December, the share of defaulted loans reduced by 0.6 percentage points to a good level of 2.7%, including the Ukrainian portfolio. Excluding Ukrainian loans, the share of default is at a strong 2.3%. The share of Stage 2 loans increased by 1.8 percentage points, especially as we move the larger part of the Ukrainian agricultural portfolio into Stage 2 as a consequence of the termination of the grain deal. This portfolio continues to perform well also because Ukraine has managed to create a safe zone for ships around its major airports. However, risks to Ukraine's exporting capabilities prevail also with regards to the overland routes into EU countries as local farmers protest Ukrainian imports. In other banks, Stage 2 loans increased mostly on the basis of portfolio assessment, not so much due to specific deteriorations on the level of the clients. For example, we moved an amount of approximately EUR 55 million into Stage 2 to account for interest rate risk on the level of the client given the higher interest rate environment. Let's move on to capital. Our CET1 ratio stands at a good level of 14.3%. That is 0.8 percentage points above the previous year figure. CET1 capital increased above all due to the attribution of the interim 9-month profit. And from this amount, 1/3 has been deducted as we intend to propose to this year's general assembly a dividend distribution that is in line with our dividend policy. The attribution of the quarter 4 '23 results net of dividends would add an additional 0.4 percentage points to our capital adequacy, bringing the pro forma CET1 ratio to 14.7%. Risk-weighted assets increased only moderately by EUR 106 million or 1.7% against the background of a balance sheet growth of more than 10%. This was achieved mainly through a variety of risk-weighted asset efficiency measures, which have helped reduce risk-weighted asset density by 5.4 percentage points to a level of 63.6%. In these efficiency measures -- in total, these efficiency measures reduced risk-weighted assets by some EUR 440 million, which contributed around 93 basis points to our CET1 ratio. We do remain further committed and aim to improve our risk-weighted asset density towards below 60% in the medium term. Our capital ratios were negatively impacted by the downgrade of Ecuador sovereign rating, which increases the risk weight for most asset classes within the bank. Further, increases in market and operational risks are reflected under other RWA effects. Market risk increased in line with the equity positions of our banks, which leads to higher open currency position on group level and operational risk-weighted assets increased due to the higher operating income on a consolidated basis, which forms the basis of calculating this figure according to the standardized approach. Let's move to the segments to then close with our deep dive on Ukraine. Our banks in Southeastern Europe have achieved a very convincing result. Their contribution to the consolidated profit was a strong EUR 95 million, averaging a return on equity of 14.1%. The cost/income ratio of 54% is well below our group medium-term target of around 57% and underlines the cost efficiency potential of our group. Our 2 Eastern European banks in Georgia and Moldova contributed close to EUR 23 million to the consolidated result, each bank recorded a return on equity of 16%. And our Ecuadorian bank recorded a loss of EUR 2.6 million amid continued difficult macroeconomic circumstances. And ProCredit Bank Ukraine achieved an overall strong result of EUR 17.7 million, which includes a onetime tax charge of approximately EUR 10 million, which was booked in quarter 4 2023. This result corresponds to return on equity of 28%. Looking closer into the segment, our Southeastern Europe banks' financial performance has improved both structurally as well as in absolute terms. The net interest margin increased by 75 basis points to a good level of 3.3%. And was the major driver behind the 32% increase in operating income. Net fees were up by 5% and income from FX transactions by 20%. On a bank level, return on equity and cost/income ratio improved or remained at strong year levels with just 2 exceptions. In Eastern Europe, operating income is up 12%, and the cost/income ratio is at a strong level of 44%, which is 7.2 percentage points below the previous year. Our banks in Georgia and Moldova increased their result contribution by around 20%. And with Ukraine's strong profit contribution of EUR 18 million to the segment, the ROE stands at a good level of 20%. Ecuador's KPIs are shown at the bottom right corner of this slide. I already pointed out the interim loss of -- the full year loss of EUR 2.6 million, which has come after the bank had shown some rather promising dynamics in previous years. In the current environment of strongly increased international lending rates, the stagnant lending rate caps in the country have led to a significantly reduced net interest margin for the entire banking sector. We are steering against this difficult regulatory environment by focusing our disbursements on lower volume segments with higher lending caps. Now let's move on to Ukraine. In terms of banking operations, there is little new to report. The loan portfolio reduced by some EUR 85 million in this year as we still limit our business to a large extent to existing clients outside the conflict area. Still, it should be noted that our banks supported Ukraine SMEs with some substantial loan disbursements in 2023, only that the net figure is, of course, characterized by continued repayments and write-offs. Deposits grew by EUR 98 million or 15%, which has brought the deposit-to-loan ratio to a good level of 143%. That's an increase of 38 basis points with respect to December '22. Staff numbers are up by 9%, which shows our commitment to doing business in the country as to our continued investments in our front-end applications and our digital client onboarding process. Energy efficiency investments into our Ukrainian headquarters have made it the first office building in the country to receive the internationally claimed EDGE certification. For those interested, we added a special slide on our building certification in the annex of this presentation. Overall, the bank has performed strongly in 2023, thanks to the focused work of our colleagues on the ground. I already highlighted the bank's good profit of more than EUR 17.7 million, which corresponds to an ROE of 28%. Our portfolio in Ukraine now accounts for just about 8% of our group loan portfolio compared to 13% before the war. The share of defaulted loans reduced strongly by 4.6 percentage points to 7.3% as the bank continues to recover and write-off exposures, including in occupied areas. Loans in the red zone reduced by 50% in the course of the financial year to the very manageable level of around EUR 20 million or 4%. Capitalization and liquidity indicators have remained at comfortable levels throughout the year. Now let me give the word back to Hubert for a quick view on our new guidance, which will present in greater detail tomorrow as well as some closing remarks.

Thank you, Christian. I don't want to preempt too many of our talking points for tomorrow's Capital Markets Day. So we'll only shortly summarize our new short- and medium-term outlook and hope many of you will tune in tomorrow for our presentation of the greater strategic context of this guidance. Of course, responsible lending will remain at the very center of all our future business activities. We feel a strong sense of responsibility towards the societies in which we work and not only want to foster economic growth through our operations, but also environmental protection, social justice, democracy and free speech. We believe that this fundamental approach makes us unique in the banking sectors in which we operate, which explains why the coming years we want to significantly broaden our footprint in the region to enhance our positive impact and strengthen our business. In our updated strategy, we target growth rates similar to the ones we achieved in the years before the war in Ukraine. For 2024, we want to grow by 10%, taking into account that our banks in Ukraine and in Ecuador will likely not contribute significantly due to the specific context of these countries. For the medium term, we will strive for even higher growth rates that should help us reach a portfolio size on the group level of at least EUR 10 billion. We aim for this ambitious growth to broaden our positive impact and to realize the important scaling potential to enhance resilience and profitability. We aim for higher granular growth patterns on both sides of the balance sheet that should help us strengthen margins at a critical time when interest rates might well start coming down again. In order to achieve this, establishing ourselves as an attractive and responsible bank for private individuals in our markets will be one of our key priorities for the coming years so that resilient growth in SME loans will be supported and complemented by granular retail deposits and loans. To get there, we foresee substantial investments in staff, IT, marketing as well as selectively in our network. With these investments in mind, we want to maintain our profitability broadly on the good level recorded in 2023 and target return on equity of 10% to 12% for 2024, assuming a cost of risk of up to 40 basis points. The cost/income ratio may increase because of these investments temporarily to approximately 63%. In the medium term, we target a return on equity of 13% to 14%, which reflects scaling effects and consolidated margins, which are ultimately reflected in a cost/income ratio of around 57%. In these projections, we assume a cost of risk of 30 to 35 basis points. We expect our CET1 ratio to be above 13% at the end of the year, and the leverage ratio at approximately 9%. For the coming years, we hold firm to our dividend policy of distributing 1/3 of consolidated profits to our shareholders. With that said, and some of the key elements of our strategy update tease up ahead of tomorrow's Capital Markets Day, let me conclude this presentation. Christian and I would now take your questions. Kindly bear in mind that we would like to focus our Q&A session on our performance in 2023 and our updated outlook and today, not address questions on our updated business strategy in great detail, given that we have our Capital Markets Day in the dedicated presentation on this topic tomorrow.

[Operator Instructions] Our first question comes from Philipp Häßler with Pareto Securities.

I have a few questions, please. Firstly, on the net interest income, which was once again very strong in Q4, slightly below Q3. If looking at the margin, maybe you can share your thoughts about the outlook for the current year. What do you expect for net interest income? Then also on the risk costs up to 40 bps you expect for 2024. So I assume the 40 bps would be more realistic if you had to increase risk provisions in Ukraine? And if not, probably it would be somewhat around the 2023 level. Am I right in assuming this? And then maybe on Ukraine, the 28% ROE, very impressive for 2023. To what extent did the Ukraine benefit from the release of risk provisions, i.e., what normalized ROE, do you think is realistic for the Ukraine assuming a normalized risk provisions? Although in this environment, this is probably unrealistic to assume, but maybe you can share some thoughts on this.

Thank you, Mr. Häßler. If okay for you, I would take the first question on the net interest income and kindly ask Christian to take the 2 questions on cost of risk and specifically on Ukraine. On the net interest income, as you will have seen in our presentation, we, in essence, saw a continuous improvement of the net interest income over the last 5 quarters, basically increasing the net interest margin by roughly 10 basis points quarter-after-quarter. We reached a -- for the full year a net interest margin of 3.6%, which is a historic high for us. In the fourth quarter, we were at 3.8%. And we have, in this context, certainly benefited to a certain extent by the overall increased absolute interest rates, but we have seen also that in the fourth quarter, this net interest margin started to flatten out. It actually reduced by 4 basis points. Now I would not want to overstate or overemphasize 4 basis points or a single quarter, but it shows that we can't extrapolate on that basis and that we have to work under the assumption that net interest margin will either stabilize or over time, slightly decrease. What's important for us is to get across the message that we have already, last year, undertaken many efforts to stabilize and to support margins both on the asset and on the liability side by making sure that our portfolio gets more granular. And that, in particular, local deposits contribute more to the refinancing of the group and in particular, that local deposits coming from retail investors contribute very substantially to that. That has been achieved in 2023. Actually, our deposits grew by an impressive EUR 900 -- close to EUR 1 billion, and we increased our deposit-to-loan ratio substantially. And we want to continue in this direction also in the years to come. So we do assume that over time now, the absolute interest rate level might decrease that also might lead to a marginal reduction of our net interest margin, but we will continue to focus on supporting the margins on both sides of the balance sheet with structural measures. If that answers your question, I would hand over to Christian.

Yes.

Philipp, on the risk costs, I would say, indeed, the 40 basis points is an estimate that is rather on the conservative side, especially considering that we did increase management overlays in this year by EUR 22 million and have, therefore, built additional buffers for potential downside scenarios. However, let us not forget that even though the outlook for our region has improved, as Hubert covered in his presentation, we are still living through a time of intense global geopolitical and macroeconomic tension. We prefer to be cautious and would rather give an update in the course of the year if we were to overperform on this end. Indeed, let me say, at this stage, we have no concrete knowledge of any risk events that would justify a cost of risk of 40 basis. It is rather an articulation of a cautious planning approach and to say the way we should read the guidance is ROE 10% to 12%. And that means that up to 40 basis points, we would reach an ROE of around 10% in our calculation. On Ukraine and the result that the bank has achieved 28% ROE, the bank did not have any net release of provisions. Indeed, the result of Ukraine includes loss allowances in the amount of EUR 5.5 million. That corresponds to a cost of risk of around 100 basis points. And also, let us not forget that the bank recorded a onetime tax charge of around EUR 10 million in quarter 4, without which the return on equity would have been well above the 30% threshold. So the bank is -- we've always highlighted this is operating fine. Operationally, we are still serving SMEs in the country, mostly existing SMEs. We are still facilitating transaction business to our export-oriented SME clients. So there is a strong foundation for income generation that is supported by relatively high interest rates in the country. Indeed, in 2022, when we built provisions for Ukraine, the fact that provision expenses today are at relatively mild levels of around EUR 5 million simply underlines that we've been prudent and cautious in booking provisions in 2022. And in this year, we should also note that the EUR 5.5 million of loss allowances, they are primarily driven by additional management overlays for Ukraine in the amount of EUR 13 million, which means that actually, there would have been an organic release of provisions simply through the good repayments of clients, including defaulted clients as well as the improved macroeconomic outlook of the country.

So that means that we can calculate with an ROE around at least 30% for the current year, assuming that the risk provisions won't increase significantly?

Yes. I mean, also for Ukraine, we calculate cautiously given the risk factors. So it's -- we don't have clearly defined to what extent the 40 basis points would fall on Ukraine or in other banks. This has left a bit vague on purpose, I should say, because the war indeed, or the situation could escalate into many different directions. But for Ukraine, we certainly don't expect an increase in the loan book. There is also continued reduction of interest rates from the central banks. The policy rate at the beginning of the year was at 25%. It is now below 15%. So this also reduces the bank's income generation, and we cautiously assumed a relatively small 2-digit million amount for Ukraine in this guidance, which would be a neutral contribution to the overall ROE?

The next questions will be announced by Nadine Frerot.

Thank you. As some of our analysts are traveling to be able to participate in the Capital Markets Day today, I have received a few questions via e-mail. The first questions come from Marius Fuhrberg from Warburg Research. The first question is, is it fair to assume that recoveries from written-off loans were mainly allocated to the Ukrainian portfolio? And furthermore, in which regions do you plan to grow stronger again in 2024, assuming the situation in Ukraine remains unchanged? The last 2 questions are, have deposits rates gone up by a similar amount compared to regular debt? With regards to the strong midterm guidance, how much of the portfolio growth should stem from SME loans? And what is the rationale behind accelerating growth?

Very good. I think I will take this one. Let me first tackle the first question on the recoveries of written-off loans. Here, indeed, it is not the case that Ukraine was the major contribution simply because not so many loans were written off in Ukraine. So the total recoveries of written-off loans were EUR 13.7 million to which Ukraine contributed around EUR 2.2 million, so that's around 15%. On the question on deposits. This is also the one that I would take before I would pass the question on to Hubert. Have deposit rates grown more strongly than the rate of wholesale funds, I assume, is the question. No. Indeed, the cost of our customer funds increased by around 0.6 to 0.7 percentage points in this year. This compares to a stronger increase in the weighted average interest rate of loans to SMEs, so of the overall loan book. And is also lower than the increase in the weighted average interest rate from most structural wholesale funds, if you like. The reason is that the deposits increased in all product categories. For sight deposits, for example, we do not -- typically they do -- typically do not bear any interest. It should be noted that the increase in PI deposits was a bit more strongly on the TDA side that is obvious in the current interest rate environment, private individual clients do seek some return on their investment. But also here, one should note that in 2023, we've been very prudent in only extending TDAs to -- for very relatively short time horizons, meaning we are relatively well hedged against the downturn of interest rate level here. Now Hubert, the question to you would be, in which areas do we expect to grow in the coming years, assuming that Ukraine would remain broadly stable?

Well, Mr. Fuhrberg, I'm happy to take that question or the questions on growth. Let me first say that we do see growth potential actually in all of our markets in Southeastern and Eastern Europe that is driven by the fact that these markets, number one, grow way more strongly than say, for example, Western Europe and that the penetration by banking products in these markets still continues to be substantially lower if you compare to Western Europe. Please also bear in mind that in some of these markets, we still do not have the critical size. And therefore, we want to reach critical size by growing, in particular, some of the smaller banks. For 2024, we do foresee a growth rate of roughly 10%, and we aspire to higher growth rates in the year thereafter. The institutions or the institution has proven in the past before the war in Ukraine that such growth rates in the region of 10% to 15%, well doable for our institution. What we aim for is, as we said, a balance sheet north of EUR 10 billion. We are now roughly -- that's a substantial increase compared to now by roughly 60%. But what's even more important than the simple growth in absolute terms is that we also aim for a more granular composition of the balance sheet on both sides that applies both to loans and to liabilities, and that does also entail a certain shift, less emphasis, relatively speaking, on medium or, in our terms, bigger clients and more emphasis on small -- very small clients on the business side, but also a higher emphasis on private individuals. So we do, as I said, aim for a growth in all our markets in Southeastern and Eastern Europe. And we would also foresee this shift to more granularity and also in the contribution of the individual client groups.

Ladies and gentlemen, thank you all for your participation. As this was our last question, I turn the conference back over to Hubert Spechtenhauser for any closing remarks.

Thank you for your interest and participation in our analyst call covering our quarter 4 2023 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 quarter 1 results on May 13, 2024. If you want to dial in virtually to our Capital Markets Day tomorrow, you can find the registration and access link directly on our Investor Relations website. Thank you again for -- thank you once again for your participation. Thank you.