ProCredit Holding AG (PCZ) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Q3 2024 Results Conference Call. I'm Sandra, the Chorus Call operator. I would like to remind you that all participants have been in a listen only mode. The conference is being recorded and will be published on the ProCredit Holding website in the Investor Relations section. The presentation will be followed by Q&A session. [Operator Instructions]. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Hubert Spechtenhauser. Please go ahead, sir.

Thank you to EQS for organizing this call, and a warm welcome to everybody on this call on the quarter 3 results of 2024 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 plan some 30 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 warning to pay particular attention to the cautionary statements regarding forward-looking comments that you will find at the end of the results presentation. We have the usual structure to today's call. I will take you through the sections covering the highlights of the first 9 months as well as our outlook. Christian will in between, take you through the details of our financial results, credit risk and asset quality indicators as well as developments in the group balance sheet and capital. We are now 9 months into our updated business strategy, which we presented at our Capital Markets Day in March. Once again, I would like to take the first minutes of today's conference call to show the good progress we have made on the key strategic issues that are central to our path towards achieving our medium-term goals. In the beginning of the year, we laid out ambitious growth targets for all our banks, but in particular, for some of our smaller banks for which we see the most scaling potential. We also underlined our goal to grow the loan portfolio in a granular way that is predominantly in our lower volume segments of micro enterprises with loans of around EUR 100,000, small enterprises with loans of up to EUR 750,000 as well as private clients. And we also explained that we aim for this growth to be funded by local deposits and that also in this area, we would prioritize granularity and therefore, aim to increase the share of deposits from private clients to more than 50%. In quarter 3, we continue to deliver very tangible results on all these strategic priorities. Our top line growth of 9% or EUR 557 million means that in only 9 months, we already accomplished some 15% of our medium-term growth path, which is to lead us to a loan portfolio size of more than EUR 10 billion. Approximately 64% of our growth came from the lower volume segments. We want these lower volume loans to make up at least 50% of our loan portfolio in the medium term, so up about 10 percentage points from the levels at the beginning of this year. As of September, their share already increased by more than 2 percentage points. Further, it is worth noting that much of the top line growth has been contributed by our smaller banks with loan portfolios below EUR 500 million. In Albania and Moldova, loans grew by more than 20%. In Bosnia, Georgia and Romania, we achieved growth rates between 10% and 14%. And in terms of deposits, some 60% of our EUR 566 million deposit growth came from a highly granular private client base. In this segment, we achieved a growth of 10.4% and the share of deposits from private clients in total deposits also increased by 2 percentage points since the beginning of the year. The top line growth is strong in spite of obvious headwinds from Ukraine, where we want to maintain the loan portfolio at around the current size of roughly EUR 500 million and Ecuador, where the macroeconomic conditions have further deteriorated in the course of this year. We'll have more on that later. But in brief, in our core markets, we are firmly on track to achieving our ambitious medium-term targets. Now let me continue by briefly summarizing our usual highlight slide. I will not dwell on the business growth figures as we just covered them in detail. Christian will, of course, provide details on financials, but I can already preempt that our return on equity of 11.3% was well within our expectations for this year as our business growth increasingly drives operating income, while we are making good progress with our strategic investments in growth catalysts. These strategic investments, as expected, have led to visible cost increases and to a more elevated cost/income ratio of 65.7%. The cost of risk remained at a relatively low level of 8 basis points as portfolio quality is strong, characterized by a low share of defaulted loan ratio of 2.3%. Most of you will have noticed our guidance update on our KPIs, portfolio growth, cost-income ratio and return on equity from November 5. I will summarize the new guidance at the end of this presentation. Our considerations were primarily guided by our expectations for a short-term income tax hike in Ukraine, headwinds from Ecuador, accelerated strategic investments in line with our updated group strategy and the strong loan growth in the first 9 months. In spite of the headwinds that will likely result in a return on equity at the lower end of our original targeted corridor for this year, more precisely around 10%, we are nonetheless very pleased with the overall development that sees us ahead of strategic projects while maintaining good levels of profitability, comfortable capitalization and strong asset quality indicators. Moving on. Again, I will not dwell too much on the next 2 slides, given that the business growth was amply covered at the beginning. The graphic at the top shows the good top line growth of 9% as well as strong growth rates in the lower volume segments, 8% for the more mature small enterprise segment and 35% for micro enterprises and 25% for private individuals, based obviously on relatively smaller base values. Notwithstanding, we obviously also continue to develop our portfolio of loans to medium-sized enterprises, which will naturally remain central to our strategy and our positioning in our markets. Here, we grew by slightly more than 5%. Our green loan portfolio is at 4%, currently growing less strongly than the overall loan portfolio. There are several dynamics at play, including tightened classification criteria for energy efficiency loans or loans to private clients, as we have elaborated on also in our last quarterly calls. Overall, we are well positioned in our markets for the niche of smaller renewable energy projects between 3 and 5 megawatts and start observing a bigger pipeline of projects building up. Thus, we are optimistic for the further growth of green loans as one key element of our overall growth ambitions. Turning to Slide 5. You see the continued success in our deposit strategy. In the overall growth of EUR 566 million, we have managed to reduce concentrations without which the top line figure would have been even stronger. Also, we have been able to reduce close to EUR 150 million in more expensive and long-term funds since the beginning of the year on account of this good deposit growth. Some 60% of the deposit growth came from private individuals, underlining that there already is a strong foundation in place for our updated retail strategy, which we intend to further enhance over the next few years. Many of these enhancement projects designed to maximize automization and optimize customer experience are underway, but not yet implemented. Hence, there is still plenty of upside potential to the good performance in retail so far. It should be noted that term deposits continue to dominate the growth pattern, but we tailor these instruments prudently with the typically short maturities as interest rates have already come down and might well continue. Our deposit-to-loan ratio stands at 115% and has increased by around 4 percentage points year-on-year. Let us move to the broader economic outlook for our region. The global macroeconomic and political environment remains tense in light of the ongoing conflict in Ukraine, which affects our group directly and the Middle East as well as prevailing tensions in the Indo-Pacific. The outcome of the U.S. elections might rather add to the level of uncertainty for the broader geopolitical landscape, but it is certainly premature to draw any conclusions at this stage. The outlook for our core region in Eastern Europe remains very positive, with GDP expected to expand by an average 3% to 4% per annum and an inflation rate that is back in check at low 2% to 3% rates, depending on the country. EU accession talks, which have taken a new dynamic since the outbreak of the Ukrainian war provide an obvious but still uncertain upside to our region. The increasing economic and political significance of our region is palpable in the form of increasing foreign direct investment flows, booming real estate sectors and broad-scale formalization and digitalization efforts. It is worth noting that the difference between the growth outlook for Eastern Europe and the euro area remains quite significant. For Ukraine, we generally see good economic growth estimates, some 4% to 5% per annum for 2026 onwards, but certainly, the further development of the war is decisive for the country. Our bank shows a good operational and financial development with further improved loan portfolio quality and profitability at currently 34%. In Ecuador, I mentioned it earlier, we are facing significant headwind from a catastrophic drought that is limiting agricultural output and triggering a severe energy crisis in a country whose energy mix is highly reliant on hydropower installations. Daily power cuts cause severe disruptions to the everyday life and economic production. Tight liquidity in the banking sector and a significant deteriorated security situation adds to what is and has essentially been since the COVID outbreak in 2020, a very challenging market environment. This concludes the first part of our presentation. You will now hear from Christian more details on the group results and regional performance.

Thank you, Hubert, and good afternoon to everyone also from my side, and welcome to our presentation. Let us start our financial summary with a high-level view on operating income and expenses. Operating income has grown by around EUR 130 million or 9.8% year-on-year, driven above all by net interest income, which is up by around EUR 126 million. Clearly, the quarterly development is less dynamic than that with quarter 3 operating income only EUR 1.6 million above the same quarter of the previous year, and we will see the details on this in the upcoming slides. Net income from fees and commissions improved marginally by around 1.8% and income from FX transactions grew by a strong EUR 3.4 million or 17%. Costs increased by approximately EUR 40 million, which is split more or less evenly between personnel and administrative expenses. The increase in personnel expenses of around 21% is primarily driven by higher staff numbers. The average number of staff for the period increased by approximately 14% year-on-year as part of our strategic objectives to grow strongly and increase our footprint in our region in the coming years. Higher average salaries make up for the rest of the gap, accounting primarily for last year's inflationary increases, but also highlighting the increasing wage levels in our countries amid prevailing scarcity of skilled professionals. Administrative costs grew mainly due to investments in the remaining 3 areas that we identified as growth catalysts, IT, marketing as well as our branches. The cost/income ratio stands at 65.7%, which is higher than last year. Hubert will, of course, provide more details to our guidance update on this indicator later. Clearly, we are not concerned with the short-term increase of this indicator but remain highly focused on realizing the balance sheet transformation that we presented during our Capital Markets Day, which we expect will bring the cost/income ratio down in the medium term to a level of 57%. Moving on to net interest income. As I mentioned, net interest income continues to show positive year-on-year dynamics. However, looking at the trajectory of the last 5 quarters, we see net interest income broadly steady at around EUR 90 million in each period. Negative pricing effects in some of our markets as well as higher structural refinancing costs from the green bond issued earlier this year, in quarter 2 reflected partially and in quarter 3 reflected in full are the major factors offsetting otherwise continuously positive volume dynamics. This is reflected in a slowly receding net interest margin, 3.54% in quarter 3 compared to 3.62% in quarter 2. On the level of our banks, net margins are mostly stable, especially in the Southeastern Europe segment. In Eastern Europe, we already absorbed significant rate reductions since last year and expect additional pressure mostly from our Ukrainian business in the form of lower interest rates and higher minimum reserve requirements. In Ecuador, the net margin is at a low level of 2.8% because of capped lending rates, but also because our bank is holding higher levels of liquidity in what is otherwise a very tight market will cover the specifics later on. Let's have a quick look at fee income. Quarter 3 net fee income is at a level of EUR 14.7 million. That is lower than the previous quarter and marginally higher than in the same quarter of last year. While fee income is developing positively, fee expenses continue to be driven by higher expenses for card fees as well as off-balance sheet items, which include credit commitments and fees for guarantee agreements. Moving on to personnel and admin expenses. Quarter-on-quarter, expenses have somewhat stabilized after showing rather linear increases in previous periods, in line with our business strategy. With respect to quarter 2, personnel and admin expenses increased by around EUR 1.8 million. That's an additional 2.4%. This includes the effect of around 130 more staff with respect to quarter 2 as we're nearing the mark of 4,500 head count. The chart at the bottom of the slide details the major drivers of the year-on-year cost increases in the first half year -- in the first 9 months, apologies. Some EUR 30 million, that is approximately 75% of the total increase comes from the areas we identified as strategic growth catalysts, staff, in particular, staff numbers, IT, marketing and our branch network. Personnel expenses, we already covered earlier. Otherwise, we see visibly higher IT costs to externals, mostly in the form of licenses for new software solutions, both for front and back office. Marketing expenses are up as we launched multiple campaigns throughout the year that have helped us achieve the good business growth, especially in the private individual segment and depreciation expenses are up as we opened and modernized several flagship branches in our markets, adding to our visibility as a bank for private clients. Moving on to loss allowances, which have been overall at a low level as the share of Stage 3 loans further improved from an already strong previous quarter level. Loss allowances in quarter 3 amounted to a net release effect of EUR 1.6 million. An increase in Stage 2 provisions has been broadly offset by a partial release of management overlays for banks outside Ukraine. The 9-month loss allowances amount to EUR 4.1 million, driven above all by the growth of the loan portfolio and credit risk events. This has been offset by a EUR 10.4 million reduction in management overlays in the third quarter as well as recoveries from written-off loans in the amount of EUR 9.6 million. The remaining stock of overlays as of September 30, continues to be at a relatively high level of EUR 51.6 million. This number represents more than 25% of the total loan loss provisions on balance sheet. Loan portfolio quality. There is not much to say on that matter other than that we recorded further decrease in the share of loans in Stage 3. The share of Stage 2 loans continues to be at an elevated level in absolute terms as some 50% of our Ukrainian portfolio continues to be reflected in this stage given the significant increase in credit risk criteria that is the major triggering factor for Stage 2 transfer. The level of Stage 3 loans of 2.3% is a remarkably low number for the risk profile of the region and is also back now at the level that we recorded shortly before the war in Ukraine started in quarter 1 '22. Slide 14 shows the structure of our comfortable regulatory capital position. As of September 30, our CET-1 ratio stands at a comfortable level of 14.1%, well above the regulatory requirements of 9.3%. Our core capital increased by EUR 41 million with respect to the end of last year, mostly due to the attribution of quarter 4 '23 and half year 1 '24 results, net of 1/3 of dividend accrual. The effects from the attribution of 2/3 of the quarter 3 '24 results will be visible together with the attribution of quarter 4 '24 results in quarter 1 next year. However, the pro forma CET-1 ratio as of September, including 2/3 of the quarter 3 profit is displayed below and is at 14.4%. The total capital ratio now stands at a comfortable level of 17.3%, obviously, thanks to the successful placement of green Tier 2 notes earlier in April. Risk-weighted assets increased by 6.2%. That is EUR 386 million, which is below the growth rate of our loan portfolio of 9% as we slightly optimized our liquidity plays at central banks and grew more strongly in lower volume segments with typically lower risk weights. Some 70% of the total increase comes from credit risk-weighted assets and operational risk-weighted assets also increased by around EUR 90 million due to the annual recalibration of this number, which is a function of the increased operating income. Let's move on to the regions. In Southeastern Europe, our largest group segment, we achieved a good growth of slightly over 11% with particularly good developments in Albania as well as Kosovo, Bosnia and Bulgaria. The ROE of the segment is at a strong level of 15.9% and the cost/income ratio is at 55%. In Eastern Europe, our portfolio increased by 5.4%, mostly as we continue to limit the size of our Ukrainian exposure. On the other hand, our banks in Georgia and Moldova both achieved strong growth rates of 12% and 22%, respectively. This segment contributed EUR 32 million to the consolidated profit, which corresponds to return on equity of 18.7%. Hubert already alluded to the difficult overall conditions in the Ecuadorian market. The drought and the daily energy cuts are visible in all important economic indicators. And more importantly, they do affect the reality of everybody in the country, private individuals and small- and medium-sized enterprises alike. An illiquid banking sector paired with regulatory caps for lending rates, which is tightening net margins and putting a strain on banking sector profitability. As of September 30, the bank recorded a loss of EUR 8 million, obviously higher than expected and reduced its portfolio by around 4%. While the macroeconomic headwinds remain strong, our team on the ground continues to work hard, and we do expect that the bank's strategic measures, which include shifting the portfolio composition towards loans to smaller enterprises with higher regulatory cap rates will lead to a stabilization of the bank's earnings situation. Some more details on the level of the banks of the segments. In Southeastern Europe, we largely see stable and positive KPIs on the level of almost all banks, but the cost-income ratio has increased in some of our banks due to the significant investments in growth catalysts, all well in line with our expectations. These investments allow our banks to drive business growth as evidenced in the segment's strong top line growth rate, and we expect this to result in significant scaling effects down the road. Similarly, the cost-income ratio and ROE slightly deteriorated in our Eastern European segment. Here, unlike in Southeastern Europe, strongly reduced policy rates have had an additional impact on net margins. As before, these developments are well in line with our expectations and our planning. And on Ecuador, I believe everything has been said. With this, let me conclude our assessment of our group's performance in the first 9 months of 2024 and give the word back to Hubert, who will provide some details on our updated '24 guidance before wrapping up this conference call.

Thank you, Christian. Last week, we updated our guidance for 3 of our key metrics: loan growth, cost/income ratio and return on equity. On loan growth, we upped our outlook for this year to more than 10%, given the strong business performance realized thus far in the year and the continued positive market sentiment we perceive from our colleagues and the banks and our clients. Fourth quarter business development has historically been a bit more muted due to specificities in the investment cycles of our clients, but we are confident that we will show a top line growth of more than 10% for the year 2024, with most banks showing even higher growth rates. For our cost/income ratio, we now expect a level of approximately 66% as many of our strategic investments we communicated during our Capital Markets Day are ahead of plan. Recruiting, which given the general scarcity of skilled people also in our markets could have been a bottleneck to our growth path is materializing at a faster pace than expected and the group's head count in September is already above our December target. Moreover, we overachieved on our green bond issue earlier in April, both in terms of volume and timing and are reflecting higher IT costs in this financial year. The weak margins in Ecuador meant that positive volume effects on the group level are, to some extent, offset by the weak net interest income trajectory of this bank. With respect to our return on equity guidance, we believe we would have been in a strong position to offset the headwinds from an underperforming bank in Ecuador and the effects from a higher cost/income ratio and still deliver a result well within our guided corridor of 10% to 12%. However, an anticipated tax hike in Ukraine will negatively affect the bank's result by a high single-digit million amount, leading us to now expect a return on equity on the group level of approximately 10%, so around the lower end of our originally guided corridor. We should note that the tax has not yet been signed by President Zelenskyy into law, even though it has been submitted to the presidential office for ratification almost a month ago, meaning that there is still some level of uncertainty in that regard. Of course, this update does by all means not affect our medium-term targets, which include a return on equity outlook of 13% to 14%, excluding any upside from Ukraine. Rather, we feel more confident today about our guidance given the strong and granular growth achieved so far. That reflects precisely what we intended and to achieve with our strategy update and that puts us even slightly ahead of our schedule. Good profitability with important investments in growth catalysts well underway and the successful placement of a Tier 2 bond, which paves the way for substantial growth, all add to the optimism we have for our medium-term outlook. With that in mind, I would now close today's call. Christian and I will now take your questions.

We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Marius Fuhrberg from Warburg Research.

A couple of them, if I may. First of all, if we look at Europe, we're currently seeing some economic headwinds with many countries actually facing higher solvency rates, whereas you just released some management overlays in your risk position leading to negative risk cost in Q3. Could you give us a little bit of color on that, why you reduced manage overlays and what is your assumption on that going forward and also for Q4 maybe? Second question would be with regards to the additional costs. Is it correct to assume that the personnel or the rise in personnel costs should be sustainable as you quite some step for new customers as well, but looking at especially external IT costs and marketing, how much of these costs have a one-off character and should not be seen in 2025 and further? The next question is on the net interest margin. Considering that the Q2 bond is now fully included also in Q3, is it fair to assume that for Q4 and going forward, a stable net interest margin on the current level should be expected? And lastly, with regards to the tax side in Ukraine, did I get it correctly that this is not yet included in your figures for the Ukrainian profit after tax that you displayed in the presentation? And what is the current tax level that we see in Ukraine?

And I would take the last and the first question which you asked. Let me start with the tax hike in Ukraine. I'm not sure whether I understood exactly your question, but I heard it correctly. But what happened is that the tax rate for this year was supposed to be 25%. And it would now -- should this law pass and be signed by President Zelenskyy, it would increase to 50%, and it's supposed to reduce again to 25% next year. In the quarter 3 results, this tax hike is not yet included. It would be included should it pass in the fourth quarter. And we would expect a high single-digit million amount to become effective in the fourth quarter. So much on the tax hike, if I got your question correctly. On the overlays. The overlays, which we released in quarter 3 have been driven by the banks outside of Ukraine. In Ukraine, we only and exclusively had kind of an organic release due to the fact that the portfolio reduced. Outside of Ukraine, we released by slightly more than EUR 10 billion. And we have actually to continuously assess the justification of the existence of overlays. And in the course of this year, also after lengthy discussions with our banks and with our auditors, we came to the conclusion that the underlying risk, which justified these overlays did no more apply. And please keep in mind that we still have a substantial stock of overlays, which remains at a relatively high level of EUR 51.6 million and which represents more than 25% of the total loan loss provisions of the group. So we feel comfortable with this release of the overlays. Does that answer your questions?

Yes, that's very good. Maybe one follow-up on the overlays. Do you think that you're done with releasing overlays by large so no similar effect for Q4 should be, right?

Say it again?

So we should not expect a similar effect for Q4 from a release of overlays as you have done this process once now, is it correct?

Yes, that understanding is correct. There is no indication for the time being of any further releases. But we have to, as I said, continuously reassess the existing stock of overlays, but there is no indication for further releases in the fourth quarter.

Let me add, Marius, to your other 2 questions on the costs. Indeed, the IT and let's start maybe with the IT costs. There are obviously certain implementation costs that do have a one-off character. I would nonetheless not presume that these costs will go down because obviously, we'll have next year certain licensing costs that are -- that will affect the full year P&L that in this year only affected the half year P&L. So I think in our Capital Markets Day, we made it clear that costs would -- that investments would be done in '24 and '25. Certainly, we will -- we have performed many of the investments in '24 already. And in our year-end call, we provide more details about what has been done so far and what the expectation should be for 2025 before we then enter really into the phase of the strategy where we want to see the scaling effects, meaning 2026 and onwards. On marketing, these are campaigns. So obviously, these are continued investments. They will be performed on a need basis. And they do help us indeed significantly with the growth. This is evidenced by the performance in this year. And naturally, this is something that can be regulated should we ever see the need that yes, that growth is sufficient. But at this stage, I would also not expect a reduction in the marketing budget for the next years. On the net interest margin, indeed, so the Tier 2 bond is fully priced in, in the third quarter. That's around EUR 3 million interest expense on a quarterly level. Going forward, we see right now net interest margins stable in most of our banks in Southeastern Europe. Biggest pressure right now is rather coming from Ukraine. We would caution nonetheless that right now, there are repricing dynamics that affect above all the income from cash and cash equivalents negatively. This we managed to offset with positive volume effects on the loan portfolio side. How -- what the run rate for the net interest margin will be going forward depends a lot on how quick and how substantial interest rates will continue to decline. There are buffers in our -- in the pricing of our loans that can sustain certain reductions. But if interest rates were to decline very strongly in the course of the next quarters, then also the loan portfolio might be negatively repriced. Of course, we are also seeing deposit refinancing rates coming down, and that will -- that obviously has the potential to offset negative effects to a broad extent.

The next question comes from Milosz Papst from Edison Group.

You already touched upon the cost/income ratio and the cost on the IT and marketing side this year and next year. But I just wonder, are you able to give us an indication in terms of what would be the delta like the impact on the cost/income ratio for next year compared to your original assumptions of the fact that you brought some of the investment forward? Of course, I'm not expecting you to provide the guidance in absolute terms for the cost/income ratio for next year. But just can you give us some rough indication of what do you think may be the reduction compared to your original assumptions for next year because of the -- some of those investments being brought forward? That is my first question. Secondly, on Ecuador, are you able to give us some color on the capital ratios of the Ecuadorian Bank and the balance sheet headroom there? And also if you have any further exposure to the bank beyond its equity, I mean, via group funding.

So indeed, on the cost-income ratio, naturally, we will have more information in March when we will provide a short-term guidance on this indicator. For now, what we can say is naturally that we're trying to offset future cost increases at least, if not surpassed them by positive volume effects from the business development affecting net interest income and net fees. But I think at this point, it's a bit premature to make a projection on next year. As otherwise, the indicator for us in the short term is not hugely significant in the context of the updated business strategy that we presented, where we rather have a clear focus on guiding the indicator medium term, which is what we achieved through the balance sheet transformation and the scaling effects. On Ecuador, your sorry, Milosz, could you repeat the question on Ecuador?

Can you the local banks, right, capital ratios and the balance sheet headroom and also if you have any exposure beyond just the equity of the bank, I mean, via group funding?

Yes, yes, indeed. We do have some cross-border finance, which has, however, in the year reduced heavily, and we plan to continue to reduce that exposure. At this point, I don't have the number in front of me, but it is a mid-2-digit million amount that we have in terms of exposure to the bank.

Any buffers in terms of capital ratios versus there? Can you on that?

The -- obviously, they have local capital ratios. So right now, the buffers are in excess of 2 percentage points. And we think at this point is sufficient. We do have a subordinated loan outstanding to the bank, which still has a very long maturity and which could at all times be converted into equity and strengthen the CET-1 ratio if required.

The next question comes from Knud Hinkel from Pareto Securities.

I have 3 questions. First of all, I will give it another try with regard to the cost/income ratio in '25. Would you say that it's possible that it will be higher than in Q3 this year? So -- or should we have seen the peak now in Q3 and in Q4. So that would be my question on cost/income ratio. Second question, Ecuador, you laid out the measures that you have taken. How long will it take for things to get better there? Is it something that will occur next couple of quarters? Or will it be a very long-term effort that you're undertaking there? And third question, you already talked on your outlook on GDP inflation. What about currencies? My understanding is that you're funding yourself locally, but you still have a certain translation risk with regard to your equity. What's your outlook there? As you think that inflation risk is contained, don't you see a significant risk regarding currencies?

Well. I would take the question on the cost/income ratio quarter 3 and quarter 4 this year. We do expect to see now some scaling effects kicking in. and that over time, this will lead to a reduction of the cost/income ratio. We are indeed, and that's the most important thing, committed to the medium-term target of reaching a cost-income ratio in the medium term in the region or below 57%. And we would expect cost-income ratio now to have reached the peak now this quarter, next quarter, maybe first quarter of next year and then to flatten out and then to start converging towards this medium-term target. On Ecuador, to continue, it is very difficult to say how long things will take. Ecuador is, if you look at the situation of the country, a combination of issues. #1 , the country has had a very difficult macroeconomic situation since COVID that was -- since COVID time, that was also highlighted at the time by extremely low vaccination rates, which shows that public administration also was not tackling the issue in the right way. We had a substantial degree of political uncertainty. We have now a President in charge, which though is facing again to be re-elected in -- or he is expected to be re-elected, but he's facing elections in February. If we look at the overall security situation, the current government is trying to get a hold on the security situation, though overall, the country is showing a high degree of security issues due to gang crime associated also with drug trafficking. So that will take time. If you look at the more pronounced issue, which we mentioned before, the extreme drought this year, which led to power cutoffs, we expect that indeed to become better very soon. They are dependent on hydropower installations. The rainy season is in the process of starting. There has already been rain. So that has been improved to a certain extent. So the overall situation is a combination of issues, which makes it very difficult to operate for any business, including our bank in such a market. We, as a bank, have a specific issue. And that's that the regulator in Ecuador does, and they have been doing so for a long period of time, does impose certain ceilings on how -- what interest rates you can charge depending on client segments, primarily defined by the turnover of the clients. And in particular, in the segment of medium clients or bigger small clients, you do have ceilings, which currently are not far away, ceilings on or lending caps -- on lending cap rates, which are not far away from refinancing costs. So we have been shifting our portfolio now over quite some time from medium exposures to substantially smaller exposures where cap rates are substantially higher. This process, and that's actually the one process which is in our hands and which we can steer is showing progress, though it takes several months to really translate into a positive contribution of the bank because shifting the balance sheet and going to a more granular lending base does take time, in particular, in an environment where liquidity is tight and where it's also not so easy to exit major clients. In particular, you could exit the best clients, but you would have a negative selection of your clients if you were to exit most too aggressively the medium portfolio just to enter in the smaller segments, but we are implementing that and one can see actually this gradual shift happening month-after-month, quarter-after-quarter, though it will still take some time to really materialize in the P&L. So very difficult to answer the question, how long will it take to solve issues in Ecuador really very much depends on which kind of issues we talk about, the ones which are in our hands, we are working on and executing on and our management in place does that fairly successfully.

Let me add also conclude on what has been achieved in Ecuador so far because year-to-date, we see a portfolio reduction of EUR 9 million, but that includes a significant shift in portfolio. We have grown in the micro segment, which has significantly higher cap rates by EUR 23 million. That means a reduction of the SME portfolio of more than EUR 30 million. So this is a type of balance sheet transformation that we're performing month-after-month, which yields small progress in the average interest rate of the loan portfolio and also the average rate of the liabilities is, in fact, reducing. The problem is also that the market is highly illiquid at this stage, and there are also a lot of less regulated institutions in the market for which reason our bank is keeping a comparatively high liquidity buffer to also be prepared against market shocks, which obviously also then negatively affects the net margin of the bank. You had a last question also on FX, which are indeed very, very difficult to predict. In this year, we've had most negative FX effects actually from Ukraine, which as of September, our revaluation reserve from Ukraine reduced by around EUR 6.8 million. There have also been positive FX effects, mostly in the Albanian market. Whether this is a significant risk or not, I would definitely say no. Our currency positions on the levels of the banks are closed. On the group level, the open currency position equals the amount of the equity position of the holding in the banks. So there is a constant revaluation, which almost does not affect our capital ratios because essentially risk-weighted assets are repriced if they are in foreign currency together with the local equity. So the impact is very, very limited on business and on capital.

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Hubert Spechtenhauser for any closing remarks.

Thank you all for your interest and participation in our analyst call covering our 9 months results 2024. We hope to have given you as much transparency as possible. If you have any additional questions, please do not hesitate to contact Nadine. The next scheduled conference call will take place when we publish our financial year 2024 results on March 27 next year. Thank you once again for your participation.

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